##### 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 June 30,
2004
 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)
 (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)
June 30, 2004 and December 31, 2003
    
    
    1Consolidated statements of operations (unaudited)
Three months ended June 30, 2004 and 2003
    
    
    2Consolidated statements of operations (unaudited)
Six months ended June 30, 2004 and 2003
    
    
    3Consolidated
statement of stockholders equity (deficit) and comprehensive
income (loss) (unaudited)
Six months ended June 30, 2004
    
    
    4Consolidated statements of cash flows (unaudited)
Six months ended June 30, 2004 and 2003
    
    
    5Notes to condensed consolidated financial statements
(unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    41Item 3. Quantitative and qualitative disclosures about market risk
    
    
    55Item 4. Controls and Procedures
    
    
    55PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    57Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    58Item 3. Defaults Upon Senior Securities
    
    
    58Item 4. Submission of Matters to a Vote of Security Holders
    
    
    58Item 5. Other information
    
    
    58Item 6. Exhibits and reports on Form 8-K
    
    
    58SIGNATURE PAGE
    
    
    59Certification of the Chief Executive OfficerCertification of the Chief Financial OfficerCertification of the CEO and CFO




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##### Table of Contents



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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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
 
 Condensed Consolidated
Balance Sheets
  June 30
    
    
    December 312004
    
    
    2003ASSETS(Unaudited)
    
    
    (As RestatedSee Note 2)Current assets:Cash
    
    $
    12,324
    
    
    $
    13,640Other current assets
    
    
    32,066
    
    
    
    33,856Total current assets
    
    
    44,390
    
    
    
    47,496Property and equipment, less accumulated depreciation
and amortization of $677,635 and $650,077
    
    
    388,219
    
    
    
    392,900Goodwill, net
    
    
    41,634
    
    
    
    41,659Trademarks, net
    
    
    10,310
    
    
    
    10,599Intangible assets, less accumulated
amortization of $20,615 and $19,664
    
    
    8,961
    
    
    
    10,009Deferred income taxes
    
    
    
    
    
    
    90Other assets
    
    
    41,423
    
    
    
    45,593$
    534,937
    
    
    $
    548,346LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    63,433
    
    
    $
    62,864Income taxes payable
    
    
    708
    
    
    
    Deferred income taxes
    
    
    184
    
    
    
    836Accrued liabilities
    
    
    135,246
    
    
    
    129,406Current maturities of long-term debt
    
    
    21,303
    
    
    
    25,393Deferred revenues
    
    
    342,371
    
    
    
    338,005Total current liabilities
    
    
    563,245
    
    
    
    556,504Long-term debt, less current maturities
    
    
    701,030
    
    
    
    704,678Deferred
rent liability
    
    
    102,520
    
    
    
    101,396Deferred income taxes
    
    
    774
    
    
    
    Other liabilities
    
    
    23,986
    
    
    
    20,995Deferred revenues
    
    
    607,033
    
    
    
    609,881Total
liabilities
    
    
    1,998,588
    
    
    
    1,993,454Stockholders
equity (deficit)
    
    
    (1,463,651
    )
    
    
    (1,445,108
    )$
    534,937
    
    
    $
    548,346
  1




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
 
 Consolidated Statements of Operations
   Three months endedJune 302004
    
    
    2003(As RestatedSee Note 2)Net revenues:Membership services
    
    $
    246,498
    
    
    $
    236,670Retail products
    
    
    14,428
    
    
    
    14,559Miscellaneous
    
    
    4,547
    
    
    
    4,824265,473
    
    
    
    256,053Operating costs and expenses:Membership services
    
    
    189,260
    
    
    
    179,781Retail products
    
    
    13,813
    
    
    
    15,054Advertising
    
    
    16,124
    
    
    
    14,532General and administrative
    
    
    15,953
    
    
    
    13,531Depreciation and amortization
    
    
    17,286
    
    
    
    19,665252,436
    
    
    
    242,563Operating income
    
    
    13,037
    
    
    
    13,490Interest expense
    
    
    (16,624
    )
    
    
    (14,250
    )Foreign exchange gain (loss)
    
    
    (459
    )
    
    
    1,029Other, net
    
    
    (56
    )
    
    
    (1,704
    )(17,139
    )
    
    
    (14,925
    )Loss from continuing operations before income taxes
    
    
    (4,102
    )
    
    
    (1,435
    )Income tax provision
    
    
    (212
    )
    
    
    (283
    )Loss from continuing operations
    
    
    (4,314
    )
    
    
    (1,718
    )Loss from discontinued operations
    
    
    
    
    
    
    (2,010
    )Net loss
    
    $
    (4,314
    )
    
    $
    (3,728
    )Basic and
diluted loss per common share:Loss from continuing operations
    
    $
    (0.13
    )
    
    $
    (0.04
    )Discontinued operations
    
    
    
    
    
    
    (0.08
    )Net loss per common share
    
    $
    (0.13
    )
    
    $
    (0.11
    )Diluted
income (loss) per common share:Loss from continuing operations
    
    $
    (0.13
    )
    
    $
    (0.04
    )Discontinued operations
    
    
    
    
    
    
    (0.08
    )Net loss per common share
    
    $
    (0.13
    )
    
    $
    (0.11
    )
  2




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
 
 Consolidated Statements of Operations
   Six months endedJune 302004
    
    
    2003(As RestatedSee Note 2)Net revenues:Membership services
    
    $
    485,485
    
    
    $
    464,463Retail products
    
    
    29,454
    
    
    
    29,615Miscellaneous
    
    
    9,580
    
    
    
    9,579524,519
    
    
    
    503,657Operating costs and expenses:Membership services
    
    
    380,750
    
    
    
    359,875Retail products
    
    
    28,231
    
    
    
    29,882Advertising
    
    
    35,755
    
    
    
    31,381General and administrative
    
    
    31,833
    
    
    
    24,776Depreciation and amortization
    
    
    34,519
    
    
    
    40,165511,088
    
    
    
    486,079Operating income
    
    
    13,431
    
    
    
    17,578Interest expense
    
    
    (32,536
    )
    
    
    (28,855
    )Foreign exchange gain (loss)
    
    
    (406
    )
    
    
    1,980Other, net
    
    
    (170
    )
    
    
    (1,820
    )(33,112
    )
    
    
    (28,695
    )Loss from continuing operations before income taxes
    
    
    (19,681
    )
    
    
    (11,117
    )Income tax provision
    
    
    (425
    )
    
    
    (566
    )Loss from continuing operations
    
    
    (20,106
    )
    
    
    (11,683
    )Loss from discontinued operations
    
    
    
    
    
    
    (2,514
    )Loss before cumulative effect of change in accounting principle
    
    
    (20,106
    )
    
    
    (14,197
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (626
    )Net loss
    
    $
    (20,106
    )
    
    $
    (14,823
    )Basic and
diluted income (loss) per common share:Loss from continuing operations
    
    $
    (0.61
    )
    
    $
    (0.36
    )Discontinued operations
    
    
    
    
    
    
    (0.08
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (0.02
    )Net loss per common share
    
    $
    (0.61
    )
    
    $
    (0.45
    )Diluted
income (loss) per common share:Loss from continuing operations
    
    $
    (0.61
    )
    
    $
    (0.36
    )Discontinued operations
    
    
    
    
    
    
    (0.08
    )Cumulative effect of changes in accounting principles
    
    
    
    
    
    
    (0.02
    )Net loss per common share
    
    $
    (0.61
    )
    
    $
    (0.45
    )
  3




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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, 2003
    
    
    34,035,734
    
    
    $
    347
    
    
    $
    647,832
    
    
    $
    (2,076,135
    )
    
    $
    (3,760
    )
    
    $
    (11,635
    )
    
    $
    (1,757
    )
    
    $
    (1,445,108
    )(Restated See Note 2)Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,106
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,106
    )Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    314
    
    
    
    314Restricted stock activity
    
    
    (92,500
    )
    
    
    (1
    )
    
    
    (603
    )
    
    
    
    
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    
    896Issuance of common
stock under stock
purchase and option plans
    
    
    48,880
    
    
    
    
    
    
    
    353
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    353Balance at June 30, 2004
    
    
    33,992,114
    
    
    $
    346
    
    
    $
    647,582
    
    
    $
    (2,096,241
    )
    
    $
    (2,260
    )
    
    $
    (11,635
    )
    
    $
    (1,443
    )
    
    $
    (1,463,651
    )
  4




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
 
 Consolidated Statements of Cash Flows
   Six months endedJune 302004
    
    
    2003(As RestatedSee Note 2)CASH FLOWS FROM OPERATING ACTIVITIES:Loss before cumulative effect of change in accounting principle
    
    $
    (20,106
    )
    
    
    $
    (14,197
    )Adjustments to reconcile to cash provided by operating activities Depreciation and amortization, including amortization
included in interest expense
    
    
    36,258
    
    
    
    
    42,135Changes in operating assets and liabilities
    
    
    16,275
    
    
    
    
    25,526Deferred income taxes, net
    
    
    212
    
    
    
    
    204Foreign currency translation (gain)/loss
    
    
    406
    
    
    
    
    (1,980
    )Stock-based compensation
    
    
    896
    
    
    
    
    Other
    
    
    
    
    
    
    
    1,859Cash provided by operating activities
    
    
    33,941
    
    
    
    
    53,547CASH FLOWS FROM INVESTING ACTIVITIES:Purchases and construction of property and equipment
    
    
    (26,918
    )
    
    
    
    (23,506
    )Acquisition
of business, net of cash acquired
    
    
    (109
    )
    
    
    
    (412
    )Cash used in investing activities
    
    
    (27,027
    )
    
    
    
    (23,918
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net
borrowings under revolving credit agreement
    
    
    8,000
    
    
    
    
    5,000Net repayments of other long-term debt
    
    
    (16,906
    )
    
    
    
    (30,976
    )Debt issuance and refinancing costs
    
    
    (251
    )
    
    
    
    (458
    )Proceeds from issuance of common stock under
stock purchase and option plans
    
    
    353
    
    
    
    
    395Cash used in financing activities
    
    
    (8,804
    )
    
    
    
    (26,039
    )Increase (decrease) in cash
    
    
    (1,890
    )
    
    
    
    3,590Effect of exchange rate changes on cash balance
    
    
    574
    
    
    
    
    (290
    )Cash, beginning of period
    
    
    13,640
    
    
    
    
    12,127Cash, end of period
    
    $
    12,324
    
    
    
    $
    15,427
  5




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Cash Flows  (continued)
 Six months endedJune 302004
    
    
    2003(As RestatedSee Note 2)SUPPLEMENTAL CASH FLOWS INFORMATION:Changes in operating assets and liabilities:Decrease in other current and other assets
    
    $
    5,688
    
    
    
    $
    4,029Increase in accounts payable
    
    
    51
    
    
    
    
    3,079Increase
(decrease) in taxes payable
    
    
    708
    
    
    
    
    (882
    )Increase in accrued and other liabilities
    
    
    8,310
    
    
    
    
    (416
    )Increase in
deferred revenue
    
    
    1,518
    
    
    
    
    19,716Change in operating assets and liabilities
    
    $
    16,275
    
    
    
    $
    25,526Cash payments for interest and income taxes
were as follows Interest paid
    
    $
    32,023
    
    
    
    $
    26,112Interest capitalized
    
    
    (692
    )
    
    
    
    (453
    )Income taxes
(refund) paid, net
    
    
    (695
    )
    
    
    
    1,245Investing and financing activities exclude the following
non-cash transactions Acquisitions of property and equipment
through capital leases/borrowings
    
    $
    3,341
    
    
    
    $
    4,208
  6




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
 
 Notes to Condensed Consolidated Financial Statements
   Note 1
Basis of Presentation
    Seasonal factors
  Market risk
   7




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements 
(continued)
 Asset Retirement Obligations
 Accounting
for Asset Retirement Obligations
 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.
  8




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
 Condensed Consolidated Balance SheetAs of December 31, 2003AsReported
    
    
    
    
    
    
    Reclass-
    
    
    RestatedReference
    
    2003
    
    
    Adjustments
    
    
    ifications
    
    
    2003ASSETSCurrent assets:Cash
    
    
    
    $
    14,410
    
    
    
    
    
    
    
    
    
    
    $
    13,640(b)(xviii)
    
    
    
    
    
    
    (46
    )(b)(xix)
    
    
    
    
    
    
    (724
    )Installment contracts
receivable, net
    
    
    
    
    258,550
    
    
    
    
    
    
    
    
    
    
    
    (a)(i)
    
    
    
    
    
    
    (262,427
    )(a)(v)
    
    
    
    
    
    
    3,877Other current assets
    
    
    
    
    39,707
    
    
    
    
    
    
    
    (2,262
    )
    
    
    33,856(b)(xiii)
    
    
    
    
    
    
    (1,939
    )(b)(xiv)
    
    
    
    
    
    
    (2,287
    )(b)(xviii)
    
    
    
    
    
    
    1,454(b)(xviii)
    
    
    
    
    
    
    139(b)(xix)
    
    
    
    
    
    
    767(b)(xx)
    
    
    
    
    
    
    (1,723
    )Total current assets
    
    
    
    
    312,667
    
    
    
    (262,909
    )
    
    
    (2,262
    )
    
    
    47,496Installment contracts
receivable, net
    
    
    
    
    230,809
    
    
    
    
    
    
    
    
    
    
    
    (a)(i)
    
    
    
    
    
    
    (230,809
    )Property and equipment, cost
    
    
    
    
    1,221,586
    
    
    
    
    
    
    
    (1,035
    )
    
    
    1,042,977(b)(iii)
    
    
    
    
    
    
    68,271(b)(v)
    
    
    
    
    
    
    (17,151
    )(b)(vii)
    
    
    
    
    
    
    (176,516
    )(b)(xi)
    
    
    
    
    
    
    (30,198
    )(b)(xii)
    
    
    
    
    
    
    (12,543
    )(b)(xiii)
    
    
    
    
    
    
    (6,348
    )(b)(xv)
    
    
    
    
    
    
    (8,856
    )(b)(xvii)
    
    
    
    
    
    
    1,080(b)(xviii)
    
    
    
    
    
    
    2,034(b)(xix)
    
    
    
    
    
    
    2,653Accumulated depreciation
    
    
    
    
    (597,134
    )
    
    
    
    
    
    
    
    
    
    
    (650,077
    )(b)(iii)
    
    
    
    
    
    
    (128,399
    )(b)(v)
    
    
    
    
    
    
    6,973(b)(vii)
    
    
    
    
    
    
    54,195(b)(xi)
    
    
    
    
    
    
    8,572(b)(xii)
    
    
    
    
    
    
    1,362
 9




---



##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
 Condensed Consolidated
Balance Sheet (continued)As of December 31, 2003AsReported
    
    
    
    
    
    
    Reclass-
    
    
    RestatedReference
    
    2003
    
    
    Adjustments
    
    
    ifications
    
    
    2003ASSETSCONTINUEDAccumulated
depreciationcontinued(b)(xiii)
    
    
    
    
    
    
    788(b)(xix)
    
    
    
    
    
    
    (1,748
    )(b)(xv)
    
    
    
    
    
    
    5,953(b)(xviii)
    
    
    
    
    
    
    (639
    )Goodwill
    
    
    
    
    243,244
    
    
    
    
    
    
    
    
    
    
    
    41,659(b)(iii)
    
    
    
    
    
    
    353(b)(vi)
    
    
    
    
    
    
    (201,940
    )(b)(xviii)
    
    
    
    
    
    
    2Trademarks
    
    
    
    
    6,969
    
    
    
    
    
    
    
    
    
    
    
    10,599(b)(vi)
    
    
    
    
    
    
    3,889(b)(xix)
    
    
    
    
    
    
    (259
    )Intangible assets, cost
    
    
    
    
    9,269
    
    
    
    
    
    
    
    
    
    
    
    29,673(b)(vi)
    
    
    
    
    
    
    20,192(b)(xviii)
    
    
    
    
    
    
    212Accumulated amortization
 intangible assets
    
    
    
    
    (7,368
    )
    
    
    
    
    
    
    
    
    
    
    (19,664
    )(b)(vi)
    
    
    
    
    
    
    (12,296
    )Deferred income taxes
    
    
    
    
    1,313
    
    
    
    
    
    
    
    
    
    
    
    90(b)(xx)
    
    
    
    
    
    
    (1,223
    )Other assets
    
    
    
    
    31,925
    
    
    
    
    
    
    
    3,409
    
    
    
    45,593(b)(xvi)
    
    
    
    
    
    
    (2,786
    )(b)(xvii)
    
    
    
    
    
    
    586(b)(xviii)
    
    
    
    
    
    
    17(b)(xix)
    
    
    
    
    
    
    12,442$
    1,453,280
    
    
    $
    (905,046
    )
    
    $
    112
    
    
    $
    548,346
 10




---



##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
 Condensed Consolidated
Balance Sheet (continued)As of December 31, 2003AsReported
    
    
    
    
    
    
    Reclass-
    
    
    RestatedReference
    
    2003
    
    
    Adjustments
    
    
    ifications
    
    
    2003LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    
    
    $
    61,494
    
    
    
    
    
    
    
    
    
    
    
    62,864(b)(ix)
    
    
    
    
    
    
    874(b)(xiii)
    
    
    
    
    
    
    (321
    )(b)(xvii)
    
    
    
    
    
    
    1,137(b)(xviii)
    
    
    
    
    
    
    18(b)(xix)
    
    
    
    
    
    
    (338
    )Deferred income taxes
    
    
    
    
    2,303
    
    
    
    
    
    
    
    
    
    
    
    836(b)(xx)
    
    
    
    
    
    
    (1,467
    )Accrued liabilities
    
    
    
    
    89,638
    
    
    
    
    
    
    
    
    
    
    
    129,406(a)(i)
    
    
    
    
    
    
    16,390(b)(iii)
    
    
    
    
    
    
    5,486(b)(iv)
    
    
    
    
    
    
    (2,002
    )(b)(ix)
    
    
    
    
    
    
    1,979(b)(vi)
    
    
    
    
    
    
    112(b)(xvii)
    
    
    
    
    
    
    5,080(b)(xviii)
    
    
    
    
    
    
    1,130(b)(xix)
    
    
    
    
    
    
    11,593Current maturities of
long-term debt
    
    
    
    
    24,481
    
    
    
    
    
    
    
    
    
    
    
    25,393(b)(xviii)
    
    
    
    
    
    
    256(b)(xix)
    
    
    
    
    
    
    656Deferred revenues
    
    
    
    
    418,897
    
    
    
    
    
    
    
    (311,374
    )
    
    
    338,005(a)(i)
    
    
    
    
    
    
    230,482Total current
liabilities
    
    
    
    
    596,813
    
    
    
    271,065
    
    
    
    (311,374
    )
    
    
    556,504
 11




---



##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Condensed Consolidated
Balance Sheet (continued)As of December 31, 2003AsReported
    
    
    
    
    
    
    Reclass-
    
    
    RestatedReference
    
    2003
    
    
    Adjustments
    
    
    ifications
    
    
    2003LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)-CONTINUEDLong-term debt, less
current maturities
    
    
    
    
    705,630
    
    
    
    
    
    
    
    (955
    )
    
    
    704,678(a)(v)
    
    
    
    
    
    
    3,876(b)(i)
    
    
    
    
    
    
    (4,913
    )(b)(xix)
    
    
    
    
    
    
    513(b)(xviii)
    
    
    
    
    
    
    527Deferred rent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101,396(b)(iii)
    
    
    
    
    
    
    101,396Other liabilities
    
    
    
    
    10,639
    
    
    
    
    
    
    
    1,067
    
    
    
    20,995(a)(i)
    
    
    
    
    
    
    (2,455
    )(a)(iv)
    
    
    
    
    
    
    5,449(b)(iii)
    
    
    
    
    
    
    1,675(b)(iv)
    
    
    
    
    
    
    4,111(b)(xix)
    
    
    
    
    
    
    509Deferred revenue
    
    
    
    
    298,507
    
    
    
    
    
    
    
    311,374
    
    
    
    609,881Common stock
    
    
    
    
    347
    
    
    
    
    
    
    
    
    
    
    
    347Contributed capital
    
    
    
    
    675,335
    
    
    
    
    
    
    
    
    
    
    
    647,832(b)(vi)
    
    
    
    
    
    
    477(b)(xix)
    
    
    
    
    
    
    (23,980
    )(b)(xx)
    
    
    
    
    
    
    (4,000
    )
 12




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements 
(continued)
 Condensed Consolidated
Balance Sheet (continued)As of December 31, 2003AsReported
    
    
    
    
    
    
    Reclass-
    
    
    RestatedReference
    
    2003
    
    
    Adjustments
    
    
    ifications
    
    
    2003LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)-CONTINUEDAccumulated other
comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,757
    )(b)(xviii)
    
    
    
    
    
    
    (1,757
    )Unearned compensation
    
    
    
    
    (28,992
    )
    
    
    
    
    
    
    
    
    
    
    (3,760
    )(b)(xix)
    
    
    
    
    
    
    25,232Treasury stock
    
    
    
    
    (11,635
    )
    
    
    
    
    
    
    
    
    
    
    (11,635
    )Retained deficit
    
    
    
    
    (793,364
    )
    
    
    
    
    
    
    
    
    
    
    (2,076,135
    )(a)(i)
    
    
    
    
    
    
    (737,377
    )(a)(iv)
    
    
    
    
    
    
    (5,449
    )(b)(iii)
    
    
    
    
    
    
    (163,227
    )(b)(iv)
    
    
    
    
    
    
    (2,109
    )(b)(v)
    
    
    
    
    
    
    (10,178
    )(b)(vi)
    
    
    
    
    
    
    (184,681
    )(b)(vii)
    
    
    
    
    
    
    (126,483
    )(b)(ix)
    
    
    
    
    
    
    (2,853
    )(b)(xi)
    
    
    
    
    
    
    (21,626
    )(b)(xii)
    
    
    
    
    
    
    (11,181
    )(b)(xiii)
    
    
    
    
    
    
    (7,370
    )(b)(xiv)
    
    
    
    
    
    
    (2,287
    )(b)(xv)
    
    
    
    
    
    
    (2,903
    )(b)(xvi)
    
    
    
    
    
    
    (2,786
    )(b)(xvii)
    
    
    
    
    
    
    (2,798
    )(b)(xviii)
    
    
    
    
    
    
    1,545(b)(xix)
    
    
    
    
    
    
    (3,529
    )(b)(xx)
    
    
    
    
    
    
    2,521$
    1,453,280
    
    
    $
    (905,046
    )
    
    $
    112
    
    
    $
    548,346
 13




---



##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial
Statements  (continued)
 Consolidated Statement of OperationsThree Months Ended June 30, 2003As
    
    
    
    
    
    
    Reclass-Reference
    
    Reported
    
    
    Adjustments
    
    
    ifications
    
    
    RestatedNet revenues:Membership services
    
    
    
    $
    233,076
    
    
    
    
    
    
    
    
    
    
    $
    236,670(a)(i)
    
    
    
    
    
    
    19,204
    
    
    
    18,479(a)(v)
    
    
    
    
    
    
    567(b)(i)
    
    
    
    
    
    
    (34,175
    )(b)(ii)
    
    
    
    
    
    
    (566
    )(b)(xviii)
    
    
    
    
    
    
    85Retail products
    
    
    
    
    14,559
    
    
    
    
    
    
    
    
    
    
    
    14,559Miscellaneous revenue
    
    
    
    
    4,777
    
    
    
    
    
    
    
    
    
    
    
    4,824(a)(v)
    
    
    
    
    
    
    67(b)(ix)
    
    
    
    
    
    
    (20
    )252,412
    
    
    
    (14,838
    )
    
    
    18,479
    
    
    
    256,053Operating costs and expenses:Membership services
    
    
    
    
    183,761
    
    
    
    
    
    
    
    
    
    
    
    179,781(a)(ii)
    
    
    
    
    
    
    (2,614
    )(a)(v)
    
    
    
    
    
    
    243(b)(iii)
    
    
    
    
    
    
    (1,106
    )(b)(iv)
    
    
    
    
    
    
    (137
    )(b)(xii)
    
    
    
    
    
    
    110(b)(xiii)
    
    
    
    
    
    
    87(b)(xvi)
    
    
    
    
    
    
    56(b)(xvii)
    
    
    
    
    
    
    (238
    )(b)(xix)
    
    
    
    
    
    
    (381
    )Retail products
    
    
    
    
    14,380
    
    
    
    
    
    
    
    
    
    
    
    15,054(b)(xiv)
    
    
    
    
    
    
    674Advertising
    
    
    
    
    14,131
    
    
    
    
    
    
    
    
    
    
    
    14,532(b)(x)
    
    
    
    
    
    
    401General and administrative
    
    
    
    
    11,402
    
    
    
    
    
    
    
    
    
    
    
    13,531(b)(iv)
    
    
    
    
    
    
    (38
    )(b)(v)
    
    
    
    
    
    
    1,044(b)(xiii)
    
    
    
    
    
    
    111(b)(xvii)
    
    
    
    
    
    
    (30
    )(b)(xix)
    
    
    
    
    
    
    1,042
 14




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Consolidated Statement
of Operations (continued)Three Months Ended June 30, 2003As
    
    
    
    
    
    
    Reclass-Reference
    
    Reported
    
    
    Adjustments
    
    
    ifications
    
    
    RestatedOperating costs and expensescontinued:Depreciation and amortization
    
    
    
    
    19,067
    
    
    
    
    
    
    
    
    
    
    
    19,665(b)(iii)
    
    
    
    
    
    
    4,003(b)(v)
    
    
    
    
    
    
    (479
    )(b)(vi)
    
    
    
    
    
    
    971(b)(vii)
    
    
    
    
    
    
    (4,456
    )(b)(viii)
    
    
    
    
    
    
    1,601(b)(xi)
    
    
    
    
    
    
    (738
    )(b)(xii)
    
    
    
    
    
    
    (124
    )(b)(xv)
    
    
    
    
    
    
    23(b)(xix)
    
    
    
    
    
    
    (203
    )242,741
    
    
    
    (178
    )
    
    
    
    
    
    
    242,563Operating income (loss)
    
    
    
    
    9,671
    
    
    
    (14,660
    )
    
    
    18,479
    
    
    
    13,490Finance charges earned
    
    
    
    
    18,479
    
    
    
    
    
    
    
    (18,479
    )
    
    
    Interest expense
    
    
    
    
    (13,936
    )
    
    
    
    
    
    
    
    
    
    
    (14,250
    )(a)(iv)
    
    
    
    
    
    
    (148
    )(a)(v)
    
    
    
    
    
    
    (391
    )(b)(iii)
    
    
    
    
    
    
    223(b)(xiii)
    
    
    
    
    
    
    13(b)(xix)
    
    
    
    
    
    
    (11
    )Foreign exchange gain (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,029(b)(xviii)
    
    
    
    
    
    
    1,029Other, net
    
    
    
    
    (1,704
    )
    
    
    
    
    
    
    
    
    
    
    (1,704
    )2,839
    
    
    
    715
    
    
    
    (18,479
    )
    
    
    (14,925
    )Income (loss) before income taxes
    
    
    
    
    12,510
    
    
    
    (13,945
    )
    
    
    
    
    
    
    (1,435
    )Income tax provision
    
    
    
    
    (3,124
    )
    
    
    
    
    
    
    196
    
    
    
    (283
    )(b)(xx)
    
    
    
    
    
    
    2,645Income (loss) from continuing operations
    
    
    
    
    9,386
    
    
    
    (11,300
    )
    
    
    196
    
    
    
    (1,718
    )Loss from discontinued operations
    
    
    
    
    (1,814
    )
    
    
    
    
    
    
    (196
    )
    
    
    (2,010
    )Net income (loss)
    
    
    
    $
    7,572
    
    
    $
    (11,300
    )
    
    $
    
    
    
    $
    (3,728
    )
 15




---



##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial
Statements  (continued)
 Consolidated Statement of OperationsSix Months Ended June 30, 2003As
    
    
    
    
    
    
    Reclass-Reference
    
    Reported
    
    
    Adjustments
    
    
    ifications
    
    
    RestatedNet revenues:Membership services
    
    
    
    $
    466,237
    
    
    
    
    
    
    
    
    
    
    
    464,463(a)(i)
    
    
    
    
    
    
    30,561
    
    
    
    37,362(a)(v)
    
    
    
    
    
    
    1,459(b)(i)
    
    
    
    
    
    
    (68,474
    )(b)(ii)
    
    
    
    
    
    
    (2,451
    )(b)(xvii)
    
    
    
    
    
    
    (231
    )Retail products
    
    
    
    
    29,615
    
    
    
    
    
    
    
    
    
    
    
    29,615Miscellaneous
    
    
    
    
    9,669
    
    
    
    
    
    
    
    
    
    
    
    9,579(a)(v)
    
    
    
    
    
    
    166(b)(ix)
    
    
    
    
    
    
    (487
    )(b)(xix)
    
    
    
    
    
    
    231505,521
    
    
    
    (39,226
    )
    
    
    37,362
    
    
    
    503,657Operating costs and
expenses:Membership services
    
    
    
    
    365,789
    
    
    
    
    
    
    
    
    
    
    
    359,875(a)(ii)
    
    
    
    
    
    
    (1,003
    )(a)(v)
    
    
    
    
    
    
    606(b)(iii)
    
    
    
    
    
    
    (2,141
    )(b)(iv)
    
    
    
    
    
    
    (742
    )(b)(xii)
    
    
    
    
    
    
    174(b)(xiii)
    
    
    
    
    
    
    51(b)(xvi)
    
    
    
    
    
    
    (242
    )(b)(xvii)
    
    
    
    
    
    
    (1,483
    )(b)(xix)
    
    
    
    
    
    
    (1,134
    )Retail products
    
    
    
    
    28,535
    
    
    
    
    
    
    
    
    
    
    
    29,882(b)(xiv)
    
    
    
    
    
    
    1,347Advertising
    
    
    
    
    32,064
    
    
    
    
    
    
    
    
    
    
    
    31,381(b)(x)
    
    
    
    
    
    
    109(b)(xvii)
    
    
    
    
    
    
    (792
    )General and administrative
    
    
    
    
    22,104
    
    
    
    
    
    
    
    
    
    
    
    24,776(b)(iv)
    
    
    
    
    
    
    (181
    )(b)(v)
    
    
    
    
    
    
    1,946(b)(xiii)
    
    
    
    
    
    
    67(b)(xvii)
    
    
    
    
    
    
    (150
    )(b)(xix)
    
    
    
    
    
    
    990
 16




---



##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial
Statements  (continued)
 Consolidated Statement of Operations (continued)Six Months Ended June 30, 2003As
    
    
    
    
    
    
    Reclass-Reference
    
    Reported
    
    
    Adjustments
    
    
    ifications
    
    
    RestatedOperating costs and expensescontinued:Depreciation and amortization
    
    
    
    
    38,642
    
    
    
    
    
    
    
    
    
    
    
    40,165(b)(iii)
    
    
    
    
    
    
    7,976(b)(v)
    
    
    
    
    
    
    (959
    )(b)(vi)
    
    
    
    
    
    
    1,990(b)(vii)
    
    
    
    
    
    
    (8,911
    )(b)(viii)
    
    
    
    
    
    
    3,202(b)(xi)
    
    
    
    
    
    
    (1,487
    )(b)(xii)
    
    
    
    
    
    
    (248
    )(b)(xv)
    
    
    
    
    
    
    282(b)(xix)
    
    
    
    
    
    
    (322
    )487,134
    
    
    
    (1,055
    )
    
    
    
    
    
    
    486,079Operating income (loss)
    
    
    
    
    18,387
    
    
    
    (38,171
    )
    
    
    37,362
    
    
    
    17,578Finance charges earned
    
    
    
    
    37,362
    
    
    
    
    
    
    
    (37,362
    )
    
    
    Interest expense
    
    
    
    
    (27,921
    )
    
    
    
    
    
    
    
    
    
    
    (28,855
    )(a)(iv)
    
    
    
    
    
    
    (295
    )(a)(v)
    
    
    
    
    
    
    (1,019
    )(b)(iii)
    
    
    
    
    
    
    447(b)(xiii)
    
    
    
    
    
    
    (39
    )(b)(xix)
    
    
    
    
    
    
    (28
    )Foreign exchange gain (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,980(b)(xviii)
    
    
    
    
    
    
    1,980Other, net
    
    
    
    
    (1,820
    )
    
    
    
    
    
    
    
    
    
    
    (1,820
    )7,621
    
    
    
    1,046
    
    
    
    (37,362
    )
    
    
    (28,695
    )Income (loss) before income taxes
    
    
    
    
    26,008
    
    
    
    (37,125
    )
    
    
    
    
    
    
    (11,117
    )Income tax provision
    
    
    
    
    (6,242
    )
    
    
    
    
    
    
    196
    
    
    
    (566
    )(b)(xx)
    
    
    
    
    
    
    5,480Income (loss) from continuing operations
before cumulative effect of
changes in accounting principles
    
    
    
    
    19,766
    
    
    
    (31,645
    )
    
    
    196
    
    
    
    (11,683
    )Loss discontinued operations
    
    
    
    
    (2,318
    )
    
    
    
    
    
    
    (196
    )
    
    
    (2,514
    )Income (loss) before cumulative effect
of changes in accounting principles
    
    
    
    
    17,448
    
    
    
    (31,645
    )
    
    
    
    
    
    
    (14,197
    )Cumulative effect of changes
in accounting principles
    
    
    
    
    (15,579
    )
    
    
    
    
    
    
    
    
    
    
    (626
    )(a)(iii)
    
    
    
    
    
    
    20,282(b)(xix)
    
    
    
    
    
    
    (409
    )(b)(xx)
    
    
    
    
    
    
    (4,920
    )Net income (loss)
    
    
    
    $
    1,869
    
    
    $
    (16,692
    )
    
    $
    
    
    
    $
    (14,823
    )
 17




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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 deferred revenue and an increase in accumulated deficit of
$1,024,135 as of January 1, 2003, a decrease in accounts receivable of $537,875 as of June
30, 2003 and an increase in membership services revenue of $19,204 and
$30,561 for the three
and six months ended June 30, 2003.(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. The impact of this change resulted
in an increase in
accumulated deficit and a decrease in deferred membership origination costs of $120,484 as
of January 1, 2003 and a decrease in membership services
expense of $1,003 and $2,614 for the three and
six months ended June 30, 2003.(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. The impact of this change resulted in a
decrease in cumulative effect of changes in accounting principles of
$0 and $20,282,
respectively, for the three and six months ended June 30, 2003.(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 accumulated deficit and other
liabilities of $4,860 as of January 1, 2003 and an increase in interest expense of $148 and
$295 for the three and six months ended June 30, 2003, respectively.(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 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 impact of this change resulted in a decrease in deferred revenue
and an increase in long term debt of $29,802 as of January 1, 2003. The change had no
impact on net loss for the three and six months ended June 30, 2003. However, the change
increased membership services revenue $567 and $1,459, miscellaneous revenue $67 and $166,
membership services expense $243 and $606 and
interest expense $391 and $1,019 for the three and six months ended June 30, 2003,
respectively.
 18




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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. The impact of
this adjustment resulted in an increase in accumulated deficit and
deferred revenue of $191,966 as of January 1, 2003. In addition, for the three and six
months ended June 30, 2003, this adjustment resulted in a
decrease in membership services
revenue of $34,175 and $68,474, respectively.(ii)
    
    Accounting for prepaid personal training servicesIn prior periods, we inappropriately
estimated deferred revenue related to personal training services that had been paid for but
not yet earned. The impact of this is an increase in accumulated deficit and deferred revenue
of $12,744 as of January 1, 2003. In addition, this correction resulted in a decrease in
membership services revenue of $566 and $2,451 for the three and six months ended June 30,
2003, respectively.(iii)
    
    Lease accountingLike other companies with significant leasehold improvements, in early
2005 the Company performed a review of our accounting policies and practices with respect to leases.
As a result of this internal review, the Company concluded that certain of our historical methods of
accounting for leases with escalating rental obligations, tenant improvement allowances and
methods 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 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 rent 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.
 19




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 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 has 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.
  (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. The impact of this adjustment was a
decrease in accrued liabilities of $794 and an increase in other liabilities and accumulated
deficit of $6,446 and $5,652, respectively, as of January 1, 2003. In addition, for the
three and six months ended June 30, 2003, there was a decrease in membership services expense
of $137 and $742 respectively and a decrease in general and administrative expense of $38 and
$181, respectively.(v)
    
    Deferred expense recognition for IT servicesThe Company improperly deferred recognition of internal
and external costs incurred to develop internal-use computer software. The impact of this
adjustment was an increase in accumulated deficit of $9,754, a decrease in property, plant and
equipment cost of $14,856 and a decrease in accumulated depreciation of $5,102 as of January
1, 2003. In addition, for the three and six months ended June 30, 2003, there was an increase
in general and administrative expense of $1,044 and $1,946 and a decrease in depreciation expense of
$479 and $959, respectively.(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. 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 impact of these adjustments was an increase in accumulated
deficit of $129,650 and a decrease in goodwill as of January 1,
2003. In addition, for the three and six months ended June 30,
2003, there was an increase in depreciation expense of $971 and
$1,990, respectively.(vii)
    
    Valuation of fixed assetsThe Company determined
that it did not properly apply the guidance
in FASB Statement No. 121 to measure the amount of impairment
losses. The Company also 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 impact of these adjustments was an increase in accumulated deficit of $119,578 and a
decrease in property and equipment, net as of January 1, 2003.
In addition, for the three and six months ended June 30,
2003, there was a decrease in depreciation expense of $4,456 and
$8,911, respectively.
 20




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 (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 Opinion (APB) 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; d) Leasehold Rightswhich represents the estimate of the favorable and
unfavorable lease agreements in place as of the acquisition date. The impact of this allocation resulted
in a decrease in goodwill and non-compete agreements and an increase
in membership relations, trade name and leasehold rights of $14,651,
$29, $5,943, $1,600 and $7,138, respectively, as of January 1,
2000. In addition, the impact of this correction was an increase in
depreciation expense of $1,601 and $3,202 for the three and six months
ended June 30, 2003, respectively.(ix)
    
    Escheatment obligationsThe Company determined that the liability for the potential escheatment of
certain payroll-related and supplier-related checks was understated. The impact of this
adjustment was an increase in accumulated deficit of $1,644 and an increase in accounts
payable of $792 and accrued liabilities of $852 as of January 1, 2003. In addition, for the
three and six months ended June 30, 2003, this adjustment resulted in a decrease in
miscellaneous revenue of $20 and $487, respectively.(x)
    
    Capitalized advertisingThe Company determined
that its 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. The impact of these adjustments was an increase in
accumulated deficit and a decrease in other current assets of $2,786 as of January 1, 2003.
In addition, for the three and six months ended June 30, 2003, these adjustments resulted in
an increase in advertising expense of $401 and $109, respectively.(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. The impact of these adjustments was an increase in accumulated
deficit and a decrease in property and equipment, net of $24,589 as of January 1, 2003. In
addition, for the three and six months ended June 30, 2003, these adjustments resulted in a
decrease in depreciation expense of $738 and $1,487, respectively,(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. The impact of these adjustments was an increase in accumulated deficit and a decrease
in property and equipment, net of $10,214 as of January 1, 2003. In addition, for the three
and six months ended June 30, 2003, these adjustments resulted in an increase in membership
services expense of $110 and $174 and a decrease in depreciation expense of $124 and $248,
respectively.(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. The
impact of these adjustments was an increase in accumulated deficit and a decrease in other
current assets, property and equipment, net, and accounts payable of
$9,867, $4,156, $5,979,
and $268, respectively, as of January 1, 2003. In addition, for the three and six months
ended June 30, 2003, these adjustments resulted in an increase in membership services expenses
of $87 and $51, an increase in general and administrative of $111 and $67, and an increase in
interest expense of $13 and $39, respectively.(xiv)
    
    Retail InventoryThe Company determined that the recorded value of retail inventories were
overstated, primarily as a
 21




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##### Table of Contents








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




(xv)
    
    Equipment inventoryThe Company determined that its accounting for equipment trade-ins
resulted in an overstatement of the cost basis of the Companys investment in exercise
equipment. The impact of these adjustments is an increase in
accumulated deficit and a decrease in property
and equipment, net, of $1,565 as of January 1, 2003. In addition, these adjustments resulted
in a decrease in depreciation and amortization expense of $23 and $282 for the three and six months
ended June 30, 2003, respectively.(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 accumulated deficit of
$2,786 at January 1, 2003 and a decrease in other assets of
$2,786. In addition, correction of these errors resulted in an increase
(decrease) in membership services expense of $56 and $(242) for the
three and six months ended June 30, 2003, respectively.(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. The impact of these adjustments was an increase in
accumulated deficit, other current assets, property and equipment, accounts payable and
accrued liabilities $4,721 $431, $238, $594 and $3,821, respectively, as of January 1, 2003.
In addition, these adjustments resulted in decreases in membership services expense of $238
and $1,483 and in general and administrative expenses of $30 and $150 for the three and six
months ended June 30, 2003, respectively. The adjustments also
resulted in a decrease to membership services revenue of $231 and a
decrease in advertising expense of $792 for the six months ended
June 30, 2003.(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. The impact of these adjustments was to increase accumulated deficit,
cash and accrued liabilities $3,043, $176 and $1,633, respectively, and
to decrease other current assets, property and equipment, net, goodwill, other assets, accounts payable, accounts payable, current
maturities of long term debt, long-term debt, other liabilities and accumulated other
comprehensive income $136, $1,311, $241, $5, $16, $88, $176, $459 and $2,082, respectively,
as of January 1, 2003. In addition, these adjustments resulted
in foreign exchange gains of $1,029
and $1,980 for the three and six months ended June 30, 2003, and
an increase in membership services revenue of $85 for the three
months ended June 30, 2003.(xix)
    
    OtherAs part of the restatement, other adjustments were identified, none of which were
individually significant. The impact of these adjustments was to increase accumulated deficit
by $6,031, cash by $1,065 other assets by $10,261, accrued liabilities by $8,861, current
maturities of long term debt by $630, long term debt by $692 and contributed capital by $1,213
and to decrease trademark by $259, other current assets by $740, property and equipment, net
by $2,176, intangible assets (net) by $2,786 as of January 1, 2003. For the three and six
months ended June 30, 2003, these adjustments decreased
membership services expense $381 and $1,134
and depreciation and amortization $203 and $322 and increased general and administrative
$1,042 and $990 and interest expense $11 and $28, respectively. The
adjustments also resulted in an increase to miscellaneous revenue of
$231 and an increase in cumulative effect of changes in accounting
principles of $409 for the six months ended June 30, 2003.(xx)
    
    Effect of restatement on income tax accountsAs
a part of the restatement and in accordance with SFAS No. 109
Accounting for Income Taxes, the Company reviewed
the likelihood of realizing a future benefit from the related
restatement adjustments. As a result of this review, the company
increased its valuation allowance for the net effect of the tax
benefits resulting from the restatement adjustments and determined
that the valuation adjustment originally reversed in 2003 should be
restated back to the period recognized. Associated with this
valuation adjustment, the Company decreased paid-in-capital for the
unrealized benefit associated with the Companys stock option
and stock purchase plans that was taken in 2001. In addition, the
Company reviewed the Companys actual and
contingent tax liabilities for the restatement period and increased
its contingency reserve, accordingly. The impact of these adjustments
was an increase in accumulated deficit of $2,521 and a decrease to
paid-in-capital of $4,000 as of
December 31, 2003. The income statement effect was a decrease to
income tax expense of $2,645 and $560 for the three months and six
months ended June 30, 2003. Changes to the Consolidated Statement of Cash
Flows
 Cash provided by operating activities:As reported
    
    $
    31,377As restated
    
    
    53,547Restatement adjustment
    
    

22,170Cash used in investing activities:As reported
    
    
    (20,611
    )As restated
    
    
    (23,918
    )Restatement adjustment
    
    

(3,307
    )Cash used in financing activities:As reported
    
    
    (7,191
    )As restated
    
    
    (26,039
    )Restatement adjustment
    
    

(18,848
    ) 22




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note 3
Debt
 1 2
 Note 4 Deferred Revenue
 For
the six months ended June 30, 2004Balance at
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    Cash
    
    Revenue
    
    June 30,2003
    
    Additions
    
    Recognized
    
    2004(As restated
see Note 2)Deferral of
receipts from financed members:Initial term payments
    
    $
    535,392
    
    
    $
    171,933
    
    
    $
    (165,408
    )
    
    $
    541,917Down payments
    
    
    111,656
    
    
    
    30,401
    
    
    
    (29,274
    )
    
    
    112,783Deferral of
receipts representing advance payments:Paid-in-full membership fees collected upon
origination
    
    
    135,082
    
    
    
    14,331
    
    
    
    (20,627
    )
    
    
    128,786Advance payments of periodic dues and
membership fees
    
    
    145,938
    
    
    
    203,408
    
    
    
    (208,025
    )
    
    
    141,321Deferral of
receipts for personal training services
    
    
    19,818
    
    
    
    66,930
    
    
    
    (62,151
    )
    
    
    24,597$
    947,886
    
    
    $
    487,003
    
    
    $
    (485,485
    )
    
    $
    949,404
   For
the six months ended June 30, 2003Balance at
    
    
    
    
    
    Balance atDecember 31,
    
    Cash
    
    Revenue
    
    June 30,2002
    
    Additions
    
    Recognized
    
    2003(As restated
see Note 2)
    
    
    
    
    
    (As restated
see Note 2)Deferral of
receipts from financed members:Initial term payments
    
    $
    507,691
    
    
    $
    178,618
    
    
    $
    (161,693
    )
    
    $
    524,616Down payments
    
    
    117,189
    
    
    
    27,456
    
    
    
    (28,385
    )
    
    
    116,260Deferral of
receipts representing advance payments:Paid-in-full membership fees collected upon
origination
    
    
    146,353
    
    
    
    13,842
    
    
    
    (20,065
    )
    
    
    140,130Advance payments of periodic dues and
membership fees
    
    
    150,649
    
    
    
    211,543
    
    
    
    (205,430
    )
    
    
    156,762Deferral of
receipts for personal training services
    
    
    14,301
    
    
    
    53,255
    
    
    
    (48,890
    )
    
    
    18,666$
    936,183
    
    
    $
    484,714
    
    
    $
    (464,463
    )
    
    $
    956,434
 23




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note 5
Income (Loss) per Common Share
 Earnings per Share.
 Three months ended
    
    
    Six months endedJune 30
    
    
    June 302004
    
    
    2003
    
    
    2004
    
    
    2003Weighted average number of common shares
outstanding
    
    
    32,832,526
    
    
    
    32,658,994
    
    
    
    32,775,361
    
    
    
    32,617,224Effect of outstanding stock options and warrants
    
    
    295,230
    
    
    
    434,724
    
    
    
    465,870
    
    
    
    380,648Diluted
weighted average number of common shares outstanding
    
    
    33,127,756
    
    
    
    33,093,718
    
    
    
    33,241,231
    
    
    
    32,997,872Options 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
    
    
    4,427,772
    
    
    
    2,981,291
    
    
    
    4,262,772
    
    
    
    2,981,291Range of exercise price per share:High
    
    $
    36.00
    
    
    $
    36.00
    
    
    $
    36.00
    
    
    $
    36.00Low
    
    $
    4.97
    
    
    $
    12.00
    
    
    $
    6.04
    
    
    $
    12.00
 Note 6
Income Taxes
 Accounting for Income Taxes
 24




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note 7 Stock Plans
 Accounting for Stock Issued to Employees Accounting for StockBased
CompensationTransition and Disclosure Accounting for Stock-Based
Compensation
 Three months ended
    
    
    Six months endedJune 30
    
    
    June 302004
    
    
    2003
    
    
    2004
    
    
    2003(As Restated
    
    
    
    
    
    
    (As RestatedSee Note 2)
    
    
    
    
    
    
    See Note 2)Net loss, as reported
    
    $
    (4,314
    )
    
    $
    (3,728
    )
    
    $
    (20,106
    )
    
    $
    (14,823
    )Plus: stock-based compensation expense
included in net loss
    
    
    684
    
    
    
    175
    
    
    
    940
    
    
    
    197Less: stock-based compensation expense
determined under fair value based method
    
    
    (2,059
    )
    
    
    (2,220
    )
    
    
    (3,777
    )
    
    
    (4,168
    )Pro forma net loss
    
    $
    (5,690
    )
    
    $
    (5,773
    )
    
    $
    (22,943
    )
    
    $
    (18,794
    )Basic and diluted loss per common shareAs reported
    
    $
    (.13
    )
    
    $
    (.11
    )
    
    $
    (.61
    )
    
    $
    (.45
    )Pro forma
    
    
    (.17
    )
    
    
    (.18
    )
    
    
    (.70
    )
    
    
    (.58
    )
  Note 8 Guarantees
  25




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note 9
Legal Proceedings
 Between May and July 2004, ten putative securities class actions, now consolidated and
designated In re Bally Total Fitness Securities Litigationwere filed in the United States District
Court for the Northern District of Illinois against the Company and certain of its former and
current officers and directors. Each of these substantially similar lawsuits alleged that the
defendants violated Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934, as amended
(the 1934 Act), as well as the associated Rule 10b-5, in connection with the Companys proposed
restatement. The class period set forth in these lawsuits begins on either May 17 or August 3,
1999, depending on the particular lawsuit, and ends for all lawsuits on April 28, 2004.On March 15, 2005, the Court appointed a lead plaintiff and on May 23, 2005 the Court
appointed lead plaintiffs counsel. By stipulation of the parties, the consolidated lawsuit has
been stayed pending restatement of the Companys financial statements. The Court has ordered
plaintiffs to file an amended consolidated complaint on or before December 30, 2005. The Court has
also ordered that any motion to dismiss the amended consolidated complaint be filed on or before
January 23, 2006. It is not yet possible to determine the ultimate outcome of these actions.On June 8, 2004, two stockholder derivative lawsuits were filed in the Circuit Court of Cook
County, Illinois, by two Bally stockholders, David Schacter and James Berra, purportedly on behalf
of the Company against Paul Toback, J. Kenneth Looloian, James McAnally and John Rogers, Jr., who
are current directors and/or officers, and Lee Hillman, John Dwyer, Stephen Swid, George Aronoff,
Martin Franklin and Liza Walsh, who are now former officers and/or directors. These lawsuits
allege claims for breaches of fiduciary duty against those individuals in connection with the
Companys restatement regarding the timing of recognition of prepaid dues. The two actions were
consolidated on January 12, 2005. By stipulation of the parties, the consolidated lawsuit has been
stayed pending restatement of the Companys financial statements. Under the current schedule, an
amended consolidated complaint is due 60 days after the restatement. It is not yet possible to
determine the ultimate outcome of these actions.In April 2004, the Division of Enforcement of the SEC commenced an investigation in connection
with the Companys restatement. The Company continues to fully cooperate in the ongoing SEC
investigation. It is not yet possible to determine the ultimate outcome of this investigation.The Company is also involved in various other claims and lawsuits incidental to its business,
including claims arising from accidents at its fitness centers. In the opinion of management, the
Company is adequately insured against such claims and lawsuits, and any ultimate liability arising
out of such claims and lawsuits should not have a material adverse effect on the financial condition
or results of operations of the Company. In addition, from time to time, customer complaints are
investigated by various governmental bodies. In the opinion of management,
none of these other complaints or investigations currently pending
should have a material
adverse effect on our financial condition or results of operations.In
addition, the Company is, and has been in the past, named as defendants in a number of purported
class action lawsuits based on alleged violations of state and local consumer protection laws and
regulations governing the sale, financing and collection of
membership fees. To date the Company has successfully defended or settled such lawsuits without a material adverse effect on our financial
condition or results of operation. However, the Company cannot
provide assurance that it 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.
 26




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note 10 Subsequent Events
 Stockholder
Rights Plan
    2004 Consent
Solicitations
  Credit
Agreement
  2004 Term Loan and Revolving Credit Agreement
  27




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Securitization
  Audit Committee Investigation Findings
  Department of Justice Investigation
  Equity Inducement Plan
 Lawsuit in Massachusetts  Fit Tech Inc., et al. v. Bally
Total Fitness Holding Corporation, et al.,
 28




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Amendment and Waiver
 Stockholder Derivative Lawsuits in Illinois Federal Court
 Vesting of Restricted Stock under the 1996 Long-Term Incentive Plan
 Arbitration Award
 2005 Consent Solicitation
 Crunch Purchase Agreement  SM SM
 29




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Adoption of Rights Plan
   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.
  30




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note 11 Condensed Consolidating Financial Statements
 1 2
  th
  31




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED CONSOLIDATING BALANCE SHEET
 June 30, 2004Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalASSETSCurrent assets:Cash
    
    $
    
    
    
    $
    11,489
    
    
    $
    835
    
    
    $
    
    
    
    $
    12,324Other current assets
    
    
    
    
    
    
    31,083
    
    
    
    983
    
    
    
    
    
    
    
    32,066Total current assets
    
    
    
    
    
    
    42,572
    
    
    
    1,818
    
    
    
    
    
    
    
    44,390Net property and equipment, at cost
    
    
    
    
    
    
    371,456
    
    
    
    16,763
    
    
    
    
    
    
    
    388,219Goodwill
    
    
    
    
    
    
    40,261
    
    
    
    1,373
    
    
    
    
    
    
    
    41,634Trademarks
    
    
    6,507
    
    
    
    3,112
    
    
    
    691
    
    
    
    
    
    
    
    10,310Intangible assets, net
    
    
    
    
    
    
    7,615
    
    
    
    1,346
    
    
    
    
    
    
    
    8,961Investment in and advances to subsidiaries
    
    
    (873,456
    )
    
    
    221,315
    
    
    
    
    
    
    
    652,141
    
    
    
    Other assets
    
    
    10,951
    
    
    
    19,076
    
    
    
    11,396
    
    
    
    
    
    
    
    41,423$
    (855,998
    )
    
    $
    705,407
    
    
    $
    33,387
    
    
    $
    652,141
    
    
    $
    534,937LIABILITIES
AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    
    
    
    $
    62,922
    
    
    $
    511
    
    
    $
    
    
    
    $
    63,433Income taxes payable
    
    
    
    
    
    
    708
    
    
    
    
    
    
    
    
    
    
    
    708Deferred income taxes
    
    
    
    
    
    
    184
    
    
    
    
    
    
    
    
    
    
    
    184Accrued liabilities
    
    
    18,025
    
    
    
    110,881
    
    
    
    6,340
    
    
    
    
    
    
    
    135,246Current maturities of long-term debt
    
    
    15,416
    
    
    
    1,720
    
    
    
    4,167
    
    
    
    
    
    
    
    21,303Deferred revenues
    
    
    
    
    
    
    336,241
    
    
    
    6,130
    
    
    
    
    
    
    
    342,371Total current liabilities
    
    
    33,441
    
    
    
    512,656
    
    
    
    17,148
    
    
    
    
    
    
    
    563,245Long-term debt, less current maturities
    
    
    574,212
    
    
    
    13,747
    
    
    
    113,071
    
    
    
    
    
    
    
    701,030Net affiliate payable
    
    
    
    
    
    
    564,468
    
    
    
    (47,616
    )
    
    
    (516,852
    )
    
    
    Other liabilities
    
    
    
    
    
    
    125,824
    
    
    
    1,456
    
    
    
    
    
    
    
    127,280Deferred revenues
    
    
    
    
    
    
    595,648
    
    
    
    11,385
    
    
    
    
    
    
    
    607,033Stockholders
equity (deficit)
    
    
    (1,463,651
    )
    
    
    (1,106,936
    )
    
    
    (62,057
    )
    
    
    1,168,993
    
    
    
    (1,463,651
    )$
    (855,998
    )
    
    $
    705,407
    
    
    $
    33,387
    
    
    $
    652,141
    
    
    $
    534,937
 32




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED CONSOLIDATING BALANCE SHEET
 December
31, 2003 (Restated see Note 2)Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalASSETSCurrent assets:Cash
    
    $
    
    
    
    $
    13,394
    
    
    $
    246
    
    
    $
    
    
    
    $
    13,640Other current assets
    
    
    
    
    
    
    32,371
    
    
    
    1,485
    
    
    
    
    
    
    
    33,856Total current assets
    
    
    
    
    
    
    45,765
    
    
    
    1,731
    
    
    
    
    
    
    
    47,496Property and equipment, net
    
    
    
    
    
    
    372,621
    
    
    
    20,279
    
    
    
    
    
    
    
    392,900Goodwill, net
    
    
    
    
    
    
    40,188
    
    
    
    1,471
    
    
    
    
    
    
    
    41,659Trademarks, net
    
    
    6,507
    
    
    
    3,401
    
    
    
    691
    
    
    
    
    
    
    
    10,599Intangible assets, net
    
    
    
    
    
    
    8,663
    
    
    
    1,346
    
    
    
    
    
    
    
    10,009Deferred income taxes
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    
    
    
    
    90Investment in and advances to subsidiaries
    
    
    (853,301
    )
    
    
    221,315
    
    
    
    
    
    
    
    631,986
    
    
    
    Other assets
    
    
    12,654
    
    
    
    20,840
    
    
    
    12,099
    
    
    
    
    
    
    
    45,593$
    (834,140
    )
    
    $
    712,883
    
    
    $
    37,617
    
    
    $
    631,986
    
    
    $
    548,346LIABILITIES
AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    
    
    
    $
    62,191
    
    
    $
    673
    
    
    $
    
    
    
    $
    62,864Deferred income taxes
    
    
    
    
    
    
    836
    
    
    
    
    
    
    
    
    
    
    
    836Accrued liabilities
    
    
    20,444
    
    
    
    102,604
    
    
    
    6,358
    
    
    
    
    
    
    
    129,406Current maturities of long-term debt
    
    
    17,189
    
    
    
    3,949
    
    
    
    4,255
    
    
    
    
    
    
    
    25,393Deferred revenues
    
    
    
    
    
    
    332,107
    
    
    
    5,898
    
    
    
    
    
    
    
    338,005Total current liabilities
    
    
    37,633
    
    
    
    501,687
    
    
    
    17,184
    
    
    
    
    
    
    
    556,504Long-term debt, less current maturities
    
    
    573,335
    
    
    
    14,998
    
    
    
    116,345
    
    
    
    
    
    
    
    704,678Net affiliate payable
    
    
    
    
    
    
    591,306
    
    
    
    (45,642
    )
    
    
    (545,664
    )
    
    
    Other liabilities
    
    
    
    
    
    
    120,937
    
    
    
    1,454
    
    
    
    
    
    
    
    122,391Deferred revenues
    
    
    
    
    
    
    598,927
    
    
    
    10,954
    
    
    
    
    
    
    
    609,881Stockholders
equity (deficit)
    
    
    (1,445,108
    )
    
    
    (1,114,972
    )
    
    
    (62,678
    )
    
    
    1,177,650
    
    
    
    (1,445,108
    )$
    (834,140
    )
    
    $
    712,883
    
    
    $
    37,617
    
    
    $
    631,986
    
    
    $
    548,346
 33




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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 June 30, 2004Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet revenues:Membership
services
    
    $
    
    
    
    $
    237,044
    
    
    $
    9,454
    
    
    $
    
    
    
    $
    246,498Retail
products
    
    
    
    
    
    
    14,025
    
    
    
    403
    
    
    
    
    
    
    
    14,428Miscellaneous
    
    
    
    
    
    
    4,047
    
    
    
    500
    
    
    
    
    
    
    
    4,547
    
    
    
    255,116
    
    
    
    10,357
    
    
    
    
    
    
    
    265,473Operating costs and expenses:Membership
services
    
    
    
    
    
    
    182,838
    
    
    
    6,422
    
    
    
    
    
    
    
    189,260Retail
products
    
    
    
    
    
    
    13,465
    
    
    
    348
    
    
    
    
    
    
    
    13,813Advertising
    
    
    
    
    
    
    15,753
    
    
    
    371
    
    
    
    
    
    
    
    16,124General and
administrative
    
    
    957
    
    
    
    14,467
    
    
    
    529
    
    
    
    
    
    
    
    15,953Depreciation
and amortization
    
    
    
    
    
    
    16,737
    
    
    
    549
    
    
    
    
    
    
    
    17,286957
    

    
    
    243,260
    
    
    
    8,219
    
    
    
    
    
    
    
    252,436Operating
income (loss)
    
    
    (957
    )
    
    
    11,856
    
    
    
    2,138
    
    
    
    
    
    
    
    13,037Equity in net income (loss)
of subsidiaries
    
    
    10,278
    
    
    
    
    
    
    
    
    
    
    
    (10,278
    )
    
    
    Interest
expense
    
    
    (14,299
    )
    
    
    (1,809
    )
    
    
    (2,606
    )
    
    
    2,090
    
    
    
    (16,624
    )Foreign
exchange loss
    
    
    
    
    
    
    
    
    
    
    (459
    )
    
    
    
    
    
    
    (459
    )Other, net
    
    
    664
    
    
    
    17
    
    
    
    1,353
    
    
    
    (2,090
    )
    
    
    (56
    )(3,357
    )

    
    
    (1,792
    )
    
    
    (1,712
    )
    
    
    (10,278
    )
    
    
    (17,139
    )Income (loss) before income taxes
    
    
    (4,314
    )
    
    
    10,064
    
    
    
    426
    
    
    
    (10,278
    )
    
    
    (4,102
    )Income tax provision
    
    
    
    
    
    
    (212
    )
    
    
    
    
    
    
    
    
    
    
    (212
    )Net income (loss)
    
    $
    (4,314
    )
    
    $
    9,852
    
    
    $
    426
    
    
    $
    (10,278
    )
    
    $
    (4,314
    )
 34




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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 June 30, 2003 (Restated see Note 2)Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet revenues:Membership revenue
    
    $
    
    
    
    $
    227,988
    
    
    $
    8,682
    
    
    $
    
    
    
    $
    236,670Retail products
    
    
    
    
    
    
    14,156
    
    
    
    403
    
    
    
    
    
    
    
    14,559Miscellaneous
    
    
    
    
    
    
    4,444
    
    
    
    380
    
    
    
    
    
    
    
    4,824
    
    
    
    246,588
    
    
    
    9,465
    
    
    
    
    
    
    
    256,053Operating costs and expenses:Membership
services
    
    
    
    
    
    
    173,603
    
    
    
    6,178
    
    
    
    
    
    
    
    179,781Retail products
    
    
    
    
    
    
    14,714
    
    
    
    340
    
    
    
    
    
    
    
    15,054Advertising
    
    
    
    
    
    
    14,159
    
    
    
    373
    
    
    
    
    
    
    
    14,532General and
administrative
    
    
    900
    
    
    
    12,307
    
    
    
    324
    
    
    
    
    
    
    
    13,531Depreciation
and amortization
    
    
    
    
    
    
    19,030
    
    
    
    635
    
    
    
    
    
    
    
    19,665900
    
    
    
    233,813
    
    
    
    7,850
    
    
    
    
    
    
    
    242,563Operating
income (loss)
    
    (900
    )
    
    
    12,775
    
    
    
    1,615
    
    
    
    
    
    
    
    13,490Equity in
income (loss) from continuing operations of subsidiaries
    
    
    9,865
    
    
    
    
    
    
    
    
    
    
    
    (9,865
    )
    
    
    Interest
expense
    
    
    (11,147
    )
    
    
    (2,715
    )
    
    
    (2,465
    )
    
    
    2,077
    
    
    
    (14,250
    )Foreign
exchange gain
    
    
    
    
    
    
    
    
    
    
    1,029
    
    
    
    
    
    
    
    1,029Other, net
    
    
    464
    
    
    
    (1,701
    )
    
    
    1,610
    
    
    
    (2,077
    )
    
    
    (1,704
    )(818
    )
    
    
    (4,416
    )
    
    
    174
    
    
    
    (9,865
    )
    
    
    (14,925
    )Income (loss) from continuing
operations before income taxes
    
    
    (1,718
    )
    
    
    8,359
    
    
    
    1,789
    
    
    
    (9,865
    )
    
    
    (1,435
    )Income tax provision
    
    
    
    
    
    
    (283
    )
    
    
    
    
    
    
    
    
    
    
    (283
    )Income (loss) from continuing
operations
    
    (1,718
    )
    
    
    8,076
    
    
    
    1,789
    
    
    
    (9,865
    )
    
    
    (1,718
    )Discontinued
operationsLoss from
discontinued operations
    
    
    (311
    )*
    
    
    
    
    
    
    (311
    )
    
    
    311
    
    
    
    (311
    )Loss on
disposal
    
    
    (1,699
    )*
    
    
    
    
    
    
    (1,699
    )
    
    
    1,699
    
    
    
    (1,699
    )Loss from
discontinued operations
    
    
    (2,010
    )*
    
    
    
    
    
    
    (2,010
    )
    
    
    2,010
    
    
    
    (2,010
    )Net income
(loss)
    
    $
    (3,728
    )
    
    $
    8,076
    
    
    $
    (221
    )
    
    $
    (7,855
    )
    
    $
    (3,728
    )
 *
    Equity in amounts from subsidiaries
related to discontinued operations and cumulative effect of changes
in accounting principles.
 35




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED
CONSOLIDATING
STATEMENT OF OPERATIONS
 Six Months Ended June 30, 2004Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Total(In thousands)Net revenues:Membership services
    
    $
    
    
    
    $
    466,803
    
    
    $
    18,682
    
    
    $
    
    
    
    $
    485,485Retail products
    
    
    
    
    
    
    28,643
    
    
    
    811
    
    
    
    
    
    
    
    29,454Miscellaneous
    
    
    
    
    
    
    8,656
    
    
    
    924
    
    
    
    
    
    
    
    9,580
    

    
    
    504,102
    
    
    
    20,417
    
    
    
    
    
    
    
    524,519Operating costs and expenses:Membership services
    
    
    

    
    
    367,015
    
    
    
    13,735
    
    
    
    
    
    
    
    380,750Retail products
    
    
    
    
    
    
    27,532
    
    
    
    699
    
    
    
    
    
    
    
    28,231Advertising
    
    
    
    
    
    
    35,063
    
    
    
    692
    
    
    
    
    
    
    
    35,755General and administrative
    
    
    1,914
    
    
    
    28,967
    
    
    
    952
    
    
    
    
    
    
    
    31,833Depreciation and amortization
    
    
    
    
    
    
    33,439
    
    
    
    1,080
    
    
    
    
    
    
    
    34,5191,914
    

    
    
    492,016
    
    
    
    17,158
    
    
    
    
    
    
    
    511,088Operating income (loss)
    
    
    (1,914
    )

    
    
    12,086
    
    
    
    3,259
    
    
    
    
    
    
    
    13,431Equity in net income (loss) of subsidiaries
    
    
    8,343
    
    
    
    
    
    
    
    
    
    
    
    (8,343
    )
    
    
    Interest expense
    
    
    (27,824
    )
    
    
    (3,655
    )
    
    
    (5,169
    )
    
    
    4,112
    
    
    
    (32,536
    )Foreign exchange loss
    
    
    
    
    
    
    
    
    
    
    (406
    )
    
    
    
    
    
    
    (406
    )Other, net
    
    
    1,289
    
    
    
    31
    
    
    
    2,622
    
    
    
    (4,112
    )
    
    
    (170
    )(18,192
    )

    
    
    (3,624
    )
    
    
    (2,953
    )
    
    
    (8,343
    )
    
    
    (33,112
    )Income (loss) before income taxes
    
    
    (20,106
    )
    
    
    8,462
    
    
    
    306
    
    
    
    (8,343
    )
    
    
    (19,681
    )Income tax provision
    
    
    

    
    
    (425
    )
    
    
    
    
    
    
    
    
    
    
    (425
    )Net income (loss)
    
    $
    (20,106
    )
    
    $
    8,037
    
    
    $
    306
    
    
    $
    (8,343
    )
    
    $
    (20,106
    )
 36




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
 Six
Months Ended June 30, 2003 (Restated see Note 2)Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet revenues:Membership
services
    
    $
    
    
    
    $
    447,216
    
    
    $
    17,247
    
    
    $
    
    
    
    $
    464,463Retail
products
    
    
    
    
    
    
    28,819
    
    
    
    796
    
    
    
    
    
    
    
    29,615Miscellaneous
    
    
    
    
    
    
    8,858
    
    
    
    721
    
    
    
    
    
    
    
    9,579
    
    
    
    484,893
    
    
    
    18,764
    
    
    
    
    
    
    
    503,657Operating costs and expenses:Membership
services
    
    
    
    
    
    
    346,458
    
    
    
    13,417
    
    
    
    
    
    
    
    359,875Retail
products
    
    
    
    
    
    
    29,202
    
    
    
    680
    
    
    
    
    
    
    
    29,882Advertising
    
    
    
    
    
    
    30,656
    
    
    
    725
    
    
    
    
    
    
    
    31,381General and administrative
    
    
    1,800
    
    
    
    22,329
    
    
    
    647
    
    
    
    
    
    
    
    24,776Depreciation and amortization
    
    
    
    
    
    
    39,176
    
    
    
    989
    
    
    
    
    
    
    
    40,1651,800
    

    
    
    467,821
    
    
    
    16,458
    
    
    
    
    
    
    
    486,079Operating income (loss)
    
    
    (1,800
    )
    
    
    17,072
    
    
    
    2,306
    
    
    
    
    
    
    
    17,578Equity in
income (loss) from
continuing operations of subsidiaries
    
    
    11,760
    
    
    
    
    
    
    
    
    
    
    
    (11,760
    )
    
    
    Interest
expense
    
    
    (22,315
    )
    
    
    (5,531
    )
    
    
    (5,006
    )
    
    
    3,997
    
    
    
    (28,855
    )Foreign
exchange gain
    
    
    
    
    
    
    
    
    
    
    1,980
    
    
    
    
    
    
    
    1,980Other, net
    
    
    672
    
    
    
    (1,695
    )
    
    
    3,200
    
    
    
    (3,997
    )
    
    
    (1,820
    )(9,883
    )
    
    
    (7,226
    )
    
    
    174
    
    
    
    (11,760
    )
    
    
    (28,695
    )Income (loss) from continuing
operations before income taxes
    
    
    (11,683
    )
    
    
    9,846
    
    
    
    2,480
    
    
    
    (11,760
    )
    
    
    (11,117
    )Income tax provision
    
    
    
    
    
    
    (566
    )
    
    
    
    
    
    
    
    
    
    
    (566
    )Income
(loss) from continuing
operations
    
    
    (11,683
    )

    
    
    9,280
    
    
    
    2,480
    
    
    
    (11,760
    )
    
    
    (11,683
    )Discontinued
operationsLoss from
discontinued operations
    
    
    (815
    )*
    
    
    
    
    
    
    (815
    )
    
    
    815
    
    
    
    (815
    )Loss on
disposal
    
    
    (1,699
    )*
    
    
    
    
    
    
    (1,699
    )
    
    
    1,699
    
    
    
    (1,699
    )Loss from discontinued operations
    
    
    (2,514
    )
    
    
    
    
    
    
    (2,514
    )
    
    
    2,514
    
    
    
    (2,514
    )Income
(loss) before cumulative effect of changes in accounting principles
    
    
    (14,197
    )
    
    
    9,280
    
    
    
    (34
    )
    
    
    (9,246
    )
    
    
    (14,197
    )Cumulative
effect of changes in accounting principles
    
    
    (626
    )*
    
    
    (626
    )
    
    
    
    
    
    
    626
    
    
    
    (626
    )Net income (loss)
    
    $
    (14,823
    )
    
    $
    8,654
    
    
    $
    (34
    )
    
    $
    (8,620
    )
    
    $
    (14,823
    )
 *
    Equity in amounts from subsidiaries
related to discontinued operations and cumulative effect of changes
in accounting principles.
 37




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION


Notes to Condensed Consolidated Financial
Statements  (continued)


(All dollar amounts in thousands)


(Unaudited)


CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS


|                                                 |                                             |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |        |   |        |         |         |        |         |         |         |  
|------------------------------------------------ | ------------------------------------------- | -------------------------------------------------------------------------------------- | ----------------------------------------------- | --------- | ------------ | ------- | ------------- | ------------ | ------- | ------- | ------------ | ------------ | ------ | ------ | - | ------ | ------- | ------- | ------ | ------- | ------- | ------- | -
|                                                 |                                             | Six months ended June 30, 2004                                                         |                                                
|                                                 |                                             |                                                                                        |                                                
|                                                 |                                             |                                                                                        |                                                 | Guarantor |              |         | Non-Guarantor |              |         |         |              | Consolidated |       
|                                                 |                                             | Parent                                                                                 |                                                 |           | Subsidiaries |         |               | Subsidiaries |         |         | Eliminations |              |        | Total  |  
|                                                 |                                             |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |        |  
|CASH FLOWS FROM OPERATING ACTIVITIES:            |                                             |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |        |   |        |         |         |        |        
|                                                 | Net income (loss)                           |                                                                                        | $                                               | (20,106   | )            |         | $             | 8,037        |         |         | $            | 306          |        |        | $ | (8,343 | )       |         | $      | (20,106 | )      
|                                                 | Adjustments to reconcile to cash provided  |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |        |   |        |         |         |        |         |        
|                                                 |                                             | Depreciation and amortization, including amortization included
    in interest expense |                                                 |           | 1,149        |         |               |              | 33,568  |         |              |              | 1,541  |        |   |        |        |         |        |         | 36,258  |        
|                                                 |                                             | Changes in operating assets and liabilities                                            |                                                 |           | (1,615       | )       |               |              | 16,932  |         |              |              | 958    |        |   |        |        |         |        |         | 16,275  |        
|                                                 |                                             | Changes in net affiliate balances                                                      |                                                 |           |             |         |               |              | (28,695 | )       |              |              | (111   | )      |   |        | 28,806  |         |        |         |        |        
|                                                 |                                             | Other, net                                                                             |                                                 |           | 902          |         |               |              | 206     |         |              |              | 406    |        |   |        |        |         |        |         | 1,514   |        
|                                                 |                                             |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |        |  
|                                                 |                                             |                                                                                        | Cash provided by (used in) operating activities |           |              | (19,670 | )             |              |         | 30,048  |              |              |        | 3,100  |   |        |         | 20,463  |        |         |         | 33,941  |  
|CASH FLOWS FROM INVESTING ACTIVITIES:            |                                             |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |        |   |        |         |         |        |        
|                                                 |                                             | Purchases and construction of property and equipment                                   |                                                 |           |             |         |               |              | (26,918 | )       |              |              |       |        |   |        |        |         |        |         | (26,918 | )      
|                                                 |                                             | Acquisitions of businesses, net of cash acquired and other                             |                                                 |           |             |         |               |              |        |         |              |              | (109   | )      |   |        |        |         |        |         | (109    | )      
|                                                 |                                             | Investment in and advances to subsidiaries                                             |                                                 |           | 20,463       |         |               |              |        |         |              |              |       |        |   |        | (20,463 | )       |        |         |        |        
|                                                 |                                             |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |        |  
|                                                 |                                             |                                                                                        | Cash provided by (used in) investing activities |           |              | 20,463  |               |              |         | (26,918 | )            |              |        | (109   | ) |        |         | (20,463 | )      |         |         | (27,027 | )
|CASH FLOWS FROM FINANCING ACTIVITIES:            |                                             |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |        |   |        |         |         |        |        
|                                                 |                                             | Net borrowings under revolving credit agreement                                        |                                                 |           | 8,000        |         |               |              |        |         |              |              |       |        |   |        |        |         |        |         | 8,000   |        
|                                                 |                                             | Net repayments of other long-term debt                                                 |                                                 |           | (8,895       | )       |               |              | (5,035  | )       |              |              | (2,976 | )      |   |        |        |         |        |         | (16,906 | )      
|                                                 |                                             | Debt issuance and refinancing costs                                                    |                                                 |           | (251         | )       |               |              |        |         |              |              |       |        |   |        |        |         |        |         | (251    | )      
|                                                 |                                             | Stock purchase and options plans                                                       |                                                 |           | 353          |         |               |              |        |         |              |              |       |        |   |        |        |         |        |         | 353     |        
|                                                 |                                             |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |        |  
|                                                 |                                             |                                                                                        | Cash used in financing activities               |           |              | (793    | )             |              |         | (5,035  | )            |              |        | (2,976 | ) |        |         |        |        |         |         | (8,804  | )
|Increase (decrease) in cash                      |                                             |                                                                                        |                                                |           |              |         | (1,905        | )            |         |         | 15           |              |        |        |  |        |         |         | (1,890 | )      
|Effect of exchange rate changes on cash balances |                                             |                                                                                        |                                                |           |              |         |              |              |         |         | 574          |              |        |        |  |        |         |         | 574    |        
|Cash, beginning of year                          |                                             |                                                                                        |                                                |           |              |         | 13,394        |              |         |         | 246          |              |        |        |  |        |         |         | 13,640 |        
|                                                 |                                             |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |        |  
|Cash, end of year                                |                                             | $                                                                                      |                                                |           |              | $       | 11,489        |              |         | $       | 835          |              |        | $      |  |        |         | $       | 12,324 |        
|                                                 |                                             |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |        |  

39



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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION


Notes to Condensed Consolidated Financial
Statements  (continued)


(All dollar amounts in thousands)


(Unaudited)


|                                                 |                                                                              |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |       |   |        |         |         |        |         |         |         |  
|------------------------------------------------ | ---------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ----------------------------------------------- | --------- | ------------ | ------- | ------------- | ------------ | ------- | ------- | ------------ | ------------ | ------ | ----- | - | ------ | ------- | ------- | ------ | ------- | ------- | ------- | -
|                                                 |                                                                              | Six months ended June 30, 2003 (Restated, see Note 2)                                  |                                                
|                                                 |                                                                              |                                                                                        |                                                
|                                                 |                                                                              |                                                                                        |                                                 | Guarantor |              |         | Non-Guarantor |              |         |         |              | Consolidated |       
|                                                 |                                                                              | Parent                                                                                 |                                                 |           | Subsidiaries |         |               | Subsidiaries |         |         | Eliminations |              |        | Total |  
|                                                 |                                                                              |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |       |  
|CASH FLOWS FROM OPERATING ACTIVITIES:            |                                                                              |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |       |   |        |         |         |        |        
|                                                 | Income (loss) before cumulative effect of change in accounting
    principle |                                                                                        | $                                               | (14,197   | )            |         | $             | 9,280        |         |         | $            | (34          | )      |       | $ | (9,246 | )       |         | $      | (14,197 | )      
|                                                 | Adjustments to reconcile to cash provided                                   |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |       |   |        |         |         |        |         |        
|                                                 |                                                                              | Depreciation and amortization, including amortization included
    in interest expense |                                                 |           | 1,355        |         |               |              | 39,334  |         |              |              | 1,446  |       |   |        |        |         |        |         | 42,135  |        
|                                                 |                                                                              | Changes in operating assets and liabilities                                            |                                                 |           | (2,468       | )       |               |              | 26,475  |         |              |              | 1,519  |       |   |        |        |         |        |         | 25,526  |        
|                                                 |                                                                              | Changes in net affiliate balances                                                      |                                                 |           |             |         |               |              | (23,308 | )       |              |              | (2,470 | )     |   |        | 25,778  |         |        |         |        |        
|                                                 |                                                                              | Other, net                                                                             |                                                 |           | 160          |         |               |              | 199     |         |              |              | (276   | )     |   |        |        |         |        |         | 83      |        
|                                                 |                                                                              |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |       |  
|                                                 |                                                                              |                                                                                        | Cash provided by (used in) operating activities |           |              | (15,150 | )             |              |         | 51,980  |              |              |        | 185   |   |        |         | 16,532  |        |         |         | 53,547  |  
|CASH FLOWS FROM INVESTING ACTIVITIES:            |                                                                              |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |       |   |        |         |         |        |        
|                                                 |                                                                              | Purchases and construction of property and equipment                                   |                                                 |           |             |         |               |              | (23,506 | )       |              |              |       |       |   |        |        |         |        |         | (23,506 | )      
|                                                 |                                                                              | Acquisitions of businesses, net of cash acquired and other                             |                                                 |           |             |         |               |              |        |         |              |              | (412   | )     |   |        |        |         |        |         | (412    | )      
|                                                 |                                                                              | Investments in and advances to subsidiaries                                            |                                                 |           | 16,532       |         |               |              |        |         |              |              |       |       |   |        | (16,532 | )       |        |         |        |        
|                                                 |                                                                              |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |       |  
|                                                 |                                                                              |                                                                                        | Cash provided by (used in) investing activities |           |              | 16,532  |               |              |         | (23,506 | )            |              |        | (412  | ) |        |         | (16,532 | )      |         |         | (23,918 | )
|CASH FLOWS FROM FINANCING ACTIVITIES:            |                                                                              |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |       |   |        |         |         |        |        
|                                                 |                                                                              | Net borrowings under revolving credit agreement                                        |                                                 |           | 5,000        |         |               |              |        |         |              |              |       |       |   |        |        |         |        |         | 5,000   |        
|                                                 |                                                                              | Net borrowings (repayments) of other long-term debt                                    |                                                 |           | (6,777       | )       |               |              | (25,563 | )       |              |              | 1,364  |       |   |        |        |         |        |         | (30,976 | )      
|                                                 |                                                                              | Debt issuance and refinancing costs                                                    |                                                 |           |             |         |               |              |        |         |              |              | (458   | )     |   |        |        |         |        |         | (458    | )      
|                                                 |                                                                              | Stock purchase and options plans                                                       |                                                 |           | 395          |         |               |              |        |         |              |              |       |       |   |        |        |         |        |         | 395     |        
|                                                 |                                                                              |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |       |  
|                                                 |                                                                              |                                                                                        | Cash provided by (used in) financing activities |           |              | (1,382  | )             |              |         | (25,563 | )            |              |        | 906   |   |        |         |        |        |         |         | (26,039 | )
|Increase in cash                                 |                                                                              |                                                                                        |                                                |           |              |         | 2,911         |              |         |         | 679          |              |        |       |  |        |         |         | 3,590  |        
|Effect of exchange rate changes on cash balances |                                                                              |                                                                                        |                                                |           |              |         |              |              |         |         | (290         | )            |        |       |  |        |         |         | (290   | )      
|Cash, beginning of year                          |                                                                              |                                                                                        |                                                |           |              |         | 11,919        |              |         |         | 208          |              |        |       |  |        |         |         | 12,127 |        
|                                                 |                                                                              |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |       |  
|Cash, end of year                                |                                                                              | $                                                                                      |                                                |           |              | $       | 14,830        |              |         | $       | 597          |              |        | $     |  |        |         | $       | 15,427 |        
|                                                 |                                                                              |                                                                                        |                                                 |           |              |         |               |              |         |         |              |              |        |       |  

40



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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
      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 memberships 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, term
membership monthly payments were substantially discounted from the initial obligatory term monthly payment levels. Following the
nationwide 2005 implementation of our new Build Your Own
Membership pricing plan, as described in the Annual Report on
Form 10-K for the year ended December 31, 2004, 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 92 percent
of total revenue for the three months ended June 30, 2004 and 2003, 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 6 percent of total revenue in the six months ended
June 30, 2004
and six months ended June 30, 2003.3)
    
    The balance of our revenue (approximately 2 percent for each of the six months ended
June 30, 2004 and June 30, 2003) 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.
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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,
 42




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Critical Accounting Policies
   Membership
Services Revenues:
    43




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Accounting for Revenue
Arrangements with Multiple Deliverables
   Self-Insurance Costs:
  Valuation of Long-Lived Assets:
 44




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Valuation of Goodwill:
  Intangible
Assets:
 Stock
Option Plans: Accounting for Stock
Issued to Employees, Accounting for Stock-Based Compensation.
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Results of Operations
  Three months ended
    
    
    Six months endedJune 30
    
    
    June 302004
    
    
    2003
    
    
    2004
    
    
    2003(as restatedsee
Note 2)
    
    



    
    
    (as restatedsee
Note 2)Net revenuesMembership
    
    $
    213,280
    
    
    $
    211,678
    
    
    $
    423,334
    
    
    $
    415,573Personal training
    
    
    33,218
    
    
    
    24,992
    
    
    
    62,151
    
    
    
    48,890Membership services revenue
    
    
    246,498
    
    
    
    236,670
    
    
    
    485,485
    
    
    
    464,463Retail products
    
    
    14,428
    
    
    
    14,559
    
    
    
    29,454
    
    
    
    29,615Miscellaneous
    
    
    4,547
    
    
    
    4,824
    
    
    
    9,580
    
    
    
    9,579Net revenues
    
    
    265,473
    
    
    
    256,053
    
    
    
    524,519
    
    
    
    503,657Operating costs and expensesMembership services
    
    
    189,260
    
    
    
    179,781
    
    
    
    380,750
    
    
    
    359,875Retail products
    
    
    13,813
    
    
    
    15,054
    
    
    
    28,231
    
    
    
    29,882Advertising
    
    
    16,124
    
    
    
    14,532
    
    
    
    35,755
    
    
    
    31,381Information technology
    
    
    4,524
    
    
    
    3,838
    
    
    
    8,841
    
    
    
    7,367Other general and administrative
    
    
    11,429
    
    
    
    9,693
    
    
    
    22,992
    
    
    
    17,409Depreciation and amortization
    
    
    17,286
    
    
    
    19,665
    
    
    
    34,519
    
    
    
    40,165252,436
    
    
    
    242,563
    
    
    
    511,088
    
    
    
    486,079Operating income
    
    $
    13,037
    
    
    $
    13,490
    
    
    $
    13,431
    
    
    $
    17,578Operating dataAverage
monthly membership revenue recognized per member
    
    $
    19.08
    
    
    $
    19.53
    
    
    $
    19.10
    
    
    $
    19.33Average number of members during the period
    
    
    3,725
    
    
    
    3,613
    
    
    
    3,695
    
    
    
    3,582Number of members at end of period
    
    
    3,738
    
    
    
    3,665
    
    
    
    3,738
    
    
    
    3,665Number of members joined during period
    
    
    298

    
    
    
    255
    
    
    
    640
    
    
    
    506Fitness centers operating at end of period
    
    
    418
    
    
    
    415
    
    
    
    418
    
    
    
    415
 Summary
of revenue recognition method
    Comparison of the Three Months Ended June 30, 2004 and 2003
   
    
    Membership revenue increased to $213.3 million from $211.7 million in 2003, an increase
of $1.6 million (1 %) from the prior year. The increase in membership revenue in the
current year is the result of a 3% increase in the average number of members to 3.725
million members, driven by an increase in new member sign-ups in
early 2004.
    
    Cash collections of membership revenue during the three
months ended June 30, 2004 were $208 million, a decrease of
$7 million (3%) from the three months ended June 30, 2003.
This decrease is the result of a decrease in advance payments of dues
and membership fees partially offset by an increase in cash received
from initial term monthly payments. See Note 4, Deferred Revenue.
    
    Personal training revenue increased to $33.2 million from $25 million in 2003, an
increase of $8.2 million (33%), primarily reflecting the Companys emphasis on and
continued growth in personal training services.
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
    
    Retail products revenue decreased to $14.4 million from $14.6 million in 2003, a
decrease of $.2 million (1%), primarily reflecting lower retail sales in the Companys
fitness centers, due in part to the elimination of the sale of
ephedra-based products.
    
    Miscellaneous revenue decreased to $4.5 million from $4.8 million in 2003.
  
    
    Membership services expenses for the three months ended
June 30, 2004 increased $9.5
million from 2003, primarily reflecting increases in occupancy and
insurance costs as well as increases in sales compensation resulting
from higher membership sales.
    
    Advertising expenses for the three months ended June 30, 2004 increased $1.6 million
(11%) from 2003, reflecting increases in media spending and consumer
research to drive new member enrollments and to adjust for the impact
of inflation on advertising costs which had not been increased in the
past several years.
    
    Information technology expenses for the three months ended
June 30, 2004 increased $.7 million (18%) from 2003 as a result of costs associated with improved controls, compliance
and security enhancements necessary to comply with the Sarbanes-Oxley
Act of 2002.
    
    Other general and administrative expenses for the three months ended June 30, 2004
increased $1.7 million (17%) from 2003, due to severance related
to the termination of our former CFO.
    
    Depreciation expense for the three months ended June 30, 2004 decreased $2.4 million
(12%) from 2003 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.
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##### Table of Contents



Comparison of the Six months Ended June 30, 2004 and 2003
   
    
    Membership revenue increased to $423.3 million from $415.6 million in 2003, an increase
of $7.7 million (2%) from the prior year. The increase in membership revenue in the
current year is the result of a 3% increase in the average number of members to 3.695
million members driven by an increase in new member sign-ups in early
2004.
    
    Cash collections of membership revenue during the six
months ended June 30, 2004 were $420 million, a decrease of
$11.5 million (3%) from the six months ended June 30, 2003.
This decrease is the result of a decrease in advance payments of dues
and membership fees partially offset by an increase in cash received
from initial term monthly payments. See Note 4, Deferred Revenue.
    
    Personal training revenue increased to $62.2 million from $48.9 million in 2003, an
increase of $13.3 million (27%), primarily reflecting the Companys emphasis on and
continued growth in personal training services.
  
    
    Membership services expenses for the six months ended
June 30, 2004 increased $20.9 million (6%) from 2003 due to increases in occupancy and insurance
costs as well as increases in sales compensation as a result of
higher membership sales.
    
    Advertising expenses for the six months ended June 30, 2004 increased $4.4 million (14%)
from 2003 reflecting increases in media spending and consumer
research to drive new member enrollments.
    
    Information technology expenses for the six months ended
June 30, 2004 increased $1.4 million (20%) from 2003 as a result of costs associated with improved controls, compliance
and security enhancements, necessary to comply with the
Sarbanes-Oxley Act of 2002.
    
    Other general and administrative expenses for the six months ended June 30, 2004
increased $5.6 million (32%) from 2003, primarily as a result of
increased insurance, compensation, and professional fee related costs.
    
    Depreciation expense for the six months ended June 30, 2004 decreased $5.6 million (14%)
from 2003 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.
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Liquidity and Capital Resources
  Three months ended
    
    Six months endedJune 30
    
    June 302004
    
    2003
    
    2004
    
    2003(As restated
    
    
    
    
    
    (As restatedSee Note 2)
    
    
    
    
    
    See Note 2)Cash provided by operating activities
    
    $
    20,372
    
    
    $
    20,997
    
    
    $
    33,941
    
    
    $
    53,547Cash used in investing activities
    
    
    (14,094
    )
    
    
    (11,884
    )
    
    
    (27,027
    )
    
    
    (23,918
    )Cash used in financing activities
    
    
    (6,871
    )
    
    
    (8,523
    )
    
    
    (8,804
    )
    
    
    (26,039
    )Increase
(decrease) in cash
    
    $
    (593
    )
    
    $
    590
    
    
    $
    (1,890
    )
    
    $
    3,590
  Debt
  1 2
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Risk Factors Relating to the Company
  Weaknesses in the Companys internal controls and procedures could have a material adverse effect
on the Company.
     50




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We
are uncertain of our ability to obtain additional financing for our
future capital needs. If we are unable to obtain additional
financing, we may not be able to continue to operate our business.
 7 8 1 2
 Any adverse outcome of investigations currently being conducted by the SEC or the U.S. Attorneys
Office could have a material adverse impact on us, on the trading prices of our securities, and on
our ability to access the capital markets.
  The impact of ongoing purported class action and derivative litigation may be material. We are also
subject to the risk of additional litigation and regulatory action in connection with the
restatement of our condensed consolidated financial statements and in the ordinary course of
business. The potential liability from any such litigation or regulatory action could adversely
affect our business.
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Other litigation risks.
  The continuing time, effort and expense relating to internal and external investigations, the
restatement of historical financial statements and the development and implementation of improved
internal controls and procedures may have an adverse effect on our business.
  Non-compliance with Payment Card Industry Data Standards could adversely affect our business.
  We may not be able to attract or retain a sufficient number of members to maintain or expand the
business.
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We
are subject to risks associated with implementation of the new
business initiatives.
  The positive results achieved from introducing the products and services during recent years may
not continue in the future.
  We may not be able to continue to compete effectively in each of our markets in the future.
  53




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We are subject to extensive government regulation. Changes in these regulations could have a
negative effect on our financial condition and operating results.
  
    
    general rules and regulations of the FTC, state and local consumer protection
agencies and state statutes that prescribe provisions of membership contracts and that
govern the advertising, sale, financing and collection of membership fees and dues;
    
    state and local health regulations; and
    
    federal regulation of health and nutritional supplements.
   Our trademarks and trade names may be misappropriated or subject to claims of infringement.
  If we do not retain our key personnel or fail to attract and retain other highly skilled employees
our business may suffer.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Interest Rate Risk and Market Risk
   Foreign Exchange Risk
  
 Item 4. Controls and Procedures
 Disclosure
Controls and Procedures
 Controls and Procedures
 55




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Changes
in Internal Controls over Financial Reporting (ICFR)
  56




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 LITIGATION
 Lawsuit
in Oregon
 Jack Garrison and Deane Garrison v. Bally Total
Fitness Holding Corporation, Lee S. Hillman and John W. Dwyer
  Putative Securities Class Actions
 In re Bally Total Fitness Securities Litigation
  Stockholder Derivative Lawsuits in Illinois State Court
  Securities and Exchange Commission Investigation
  Other
  57




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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, Chief Financial Officer(principal financial officer)
  59