##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
 for the quarterly period ended June 30, 2007
 or
 o
    
    Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
 Commission file number: 001-13997
 BALLY TOTAL FITNESS HOLDING CORPORATION
  Delaware
    
    36-3228107(State or other jurisdiction of incorporation)
    
    (I.R.S. Employer Identification No.)8700 West Bryn Mawr Avenue, Chicago, Illinois
    
    60631(Address of principal executive offices)
    
    (Zip Code)
   þ o
  o þ o
 o þ




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##### 



TABLE OF ADDITIONAL REGISTRANTS
 Jurisdiction of
    
    I.R.S. EmployerExact Name of Additional Registrants
    
    Incorporation
    
    Identification NumberBally Fitness Franchising, Inc.
    
    Illinois
    
    36-4029332Bally Franchise RSC, Inc.
    
    Illinois
    
    36-4028744Bally Franchising Holdings, Inc.
    
    Illinois
    
    36-4024133Bally Sports Clubs, Inc.
    
    New York
    
    36-3407784Bally Total Fitness Corporation
    
    Delaware
    
    36-2762953Bally Total Fitness International, Inc.
    
    Michigan
    
    36-1692238Bally Total Fitness of California, Inc.
    
    California
    
    36-2763344Bally Total Fitness of Colorado, Inc.
    
    Colorado
    
    84-0856432Bally Total Fitness of Connecticut Coast, Inc.
    
    Connecticut
    
    36-3209546Bally Total Fitness of Connecticut Valley, Inc.
    
    Connecticut
    
    36-3209543Bally Total Fitness of Greater New York, Inc.
    
    New York
    
    95-3445399Bally Total Fitness of the Mid-Atlantic, Inc.
    
    Delaware
    
    52-0820531Bally Total Fitness of the Midwest, Inc.
    
    Ohio
    
    34-1114683Bally Total Fitness of Minnesota, Inc.
    
    Ohio
    
    84-1035840Bally Total Fitness of Missouri, Inc.
    
    Missouri
    
    36-2779045Bally Total Fitness of Upstate New York, Inc.
    
    New York
    
    36-3209544Bally Total Fitness of Philadelphia, Inc.
    
    Pennsylvania
    
    36-3209542Bally Total Fitness of Rhode Island, Inc.
    
    Rhode Island
    
    36-3209549Bally Total Fitness of the Southeast, Inc.
    
    South Carolina
    
    52-1230906Bally Total Fitness of Toledo, Inc.
    
    Ohio
    
    38-1803897BTF/CFI, Inc.
    
    Delaware
    
    36-4474644Greater Philly No. 1 Holding Company
    
    Pennsylvania
    
    36-3209566Greater Philly No. 2 Holding Company
    
    Pennsylvania
    
    36-3209557Health & Tennis Corporation of New York
    
    Delaware
    
    36-3628768Holiday Health Clubs of the East Coast, Inc.
    
    Delaware
    
    52-1271028Holiday/Southeast Holding Corp.
    
    Delaware
    
    52-1289694Jack La Lanne Holding Corp.
    
    New York
    
    95-3445400New Fitness Holding Co., Inc.
    
    New York
    
    36-3209555Nycon Holding Co., Inc.
    
    New York
    
    36-3209533Rhode Island Holding Company
    
    Rhode Island
    
    36-3261314Tidelands Holiday Health Clubs, Inc.
    
    Virginia
    
    52-1229398U.S. Health, Inc.
    
    Delaware
    
    52-1137373




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##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Quarterly Report on Form 10-Q for the Period Ended June 30, 2007
TABLE OF CONTENTS
 PageNumberINTRODUCTORY STATEMENT
    
    
    1FORWARD-LOOKING STATEMENTS
    
    
    2PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Consolidated Balance Sheets as of June 30, 2007 (Unaudited) and December 31, 2006
    
    
    4Consolidated Statements of Operations (Unaudited) for the Three Months Ended June 30, 2007 and 2006
    
    
    5Consolidated Statements of Operations (Unaudited) for the Six Months Ended June 30, 2007 and 2006
    
    
    6Consolidated Statement of Stockholders Deficit and Comprehensive Income (Unaudited) for the Six
Months Ended 
June 30, 2007
    
    
    7Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2007 and 2006
    
    
    8Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    9Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    35Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    52Item 4. Controls and Procedures
    
    
    52PART II. OTHER INFORMATION
    
    
    53Item 1. Legal Proceedings
    
    
    53Item 1A. Risk Factors
    
    
    55Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    55Item 3. Defaults Upon Senior Securities
    
    
    55Item 4. Submission of Matters to a Vote of Security Holders
    
    
    57Item 5. Other Information
    
    
    57Item 6. Exhibits
    
    
    57SIGNATURE PAGE




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##### 



INTRODUCTORY STATEMENT
      
    
    The Companys financial and liquidity positions have been
deteriorating and are expected to continue to deteriorate. This
situation reflects several factors discussed in this Form 10-Q.
    
    The Company reported losses from continuing operations for the first
six months of 2007 and for the years 2002 through 2005; income from
continuing operations for 2006 was modest. Impairment charges in 2006
associated with goodwill and long-lived assets were $39.8 million and
were $62.9 million in the three-year period 2004 through 2006. The
primary drivers of these impairment charges are the declining
projections of future operating cash flow.
    
    The Companys revenue recognition policies require the deferral of a
majority of membership cash payments to be recognized in subsequent
periods over the expected membership term of members. As a result,
revenue recognition does not reflect current cash collection trends.
Additionally, the level of our deferred revenue is highly sensitive to
changes in estimated membership term. Negative attrition expectations
result in downward adjustments of deferred revenue which are reflected
in larger amounts of recognized revenue. The Companys change in
estimated term length effected in the fourth quarter of 2006 resulted
in a reduction of deferred revenue of $71.0 million and increased
reported revenue by the same amount. Through June 30, 2007,
adjustments of estimated term length have resulted in reductions in
deferred revenue and increased reported revenue by $6.6 million.
 1




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##### 




    
    The Companys total membership cash collections declined in the first
six months of 2007 and in each quarter of 2006 when compared to the
prior year levels. Total 2006 membership cash collections were $757.6
million, down $25.4 million from 2005 collections of $783.0 million.
Approximately $10.9 million (43%) of the year-over-year decline in
total membership cash collections occurred in the fourth quarter of
2006. Cash collections for the three and six months ended June 30,
2007 were $168.8 million and $350.6 million, respectively, down $18.0
million and $30.8 million, respectively, from the 2006 periods.
    
    The Companys primary markets have become more competitive, with
competitors opening new fitness centers. At the same time, the
Companys ability to invest in its fitness centers has been
constrained by its deteriorating financial and liquidity condition.
 FORWARD-LOOKING STATEMENTS
    
    
    the outcome of our Chapter 11 Cases and consummation of our Amended Plan under the
current terms or at all;
    
    the length of time it will take us to complete the restructuring contemplated by the
Amended Plan;
    
    the effect of any alternative proposals for competing plans of reorganization;
    
    the success of our Amended Plan and the outcome of the restructuring in general;
    
    the ability to maintain existing or obtain new sources of debt or equity financing, on
acceptable terms or at all, to satisfy our cash needs and obligations;
    
    the response of creditors, customers and suppliers, including financial intermediaries
such as credit card payment processors, to the matters discussed herein, particularly as
those matters relate to liquidity and the Amended Plan, and the presence of an explanatory
paragraph in the audit report on our consolidated financial statements for the year ended
December 31, 2006, indicating that substantial doubt exists as to our ability to continue
as a going concern;
    
    the effect of material weaknesses in internal control over financial reporting on our
ability to prepare financial statements and file timely reports with the Securities and
Exchange Commission (the SEC) or as required by our debt agreements;
    
    the success of operating initiatives, advertising and promotional efforts to attract and
retain members;
    
    competition, including the ongoing effect of increased competition from well-financed
competitors and our limited ability to invest in capital improvements due to our
constrained liquidity and overall financial condition;
    
    the acceptance of our product and service offerings;
    
    changes in business strategy or plans;
 2




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##### 




    
    the refusal of our suppliers to provide key products and services, or any requirement by
suppliers that we change the terms and conditions associated with these products and
services;
    
    the outcome of SEC and Department of Justice investigations;
    
    the existence of adverse publicity or litigation (including stockholder litigation and
insurance rescission actions), the outcome thereof and the costs and expenses associated
therewith;
    
    the changes in, or the failure to comply with, government regulations;
    
    the ability to attract, retain and motivate highly skilled employees, including a
permanent Chief Executive Officer and Chief Financial Officer;
    
    the business abilities and judgment of personnel;
    
    general economic and business conditions; and
    
    other factors described in this Form 10-Q, including the risk factors identified in Item
1A  Risk Factors, and prior filings of the Company with the SEC, including the Annual
Report on Form 10-K for the year ended December 31, 2006.
 3




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##### 



PART I. FINANCIAL INFORMATION
 Item 1. Financial Statements
 BALLY TOTAL FITNESS HOLDING CORPORATION
 Condensed Consolidated Balance Sheets
  June 30
    
    
    December 312007
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash
    
    $
    70,761
    
    
    $
    34,799Prepaid expenses
    
    
    16,918
    
    
    
    18,937Other current assets
    
    
    21,331
    
    
    
    21,479Current assets of discontinued operations held for sale
    
    
    
    
    
    
    1,118Total current assets
    
    
    109,010
    
    
    
    76,333Property and equipment, less accumulated depreciation and amortization of
$574,579 and $571,381
    
    
    234,392
    
    
    
    244,052Goodwill, net
    
    
    19,734
    
    
    
    19,734Trademarks, net of accumulated amortization of $528 and $528
    
    
    6,507
    
    
    
    6,507Intangible assets, net of accumulated amortization of $9,595 and $9,527
    
    
    345
    
    
    
    413Deferred financing costs, net of accumulated amortization of $38,940 and $28,661
    
    
    21,085
    
    
    
    27,922Other assets
    
    
    20,306
    
    
    
    17,442Non-current assets of discontinued operations held for sale
    
    
    
    
    
    
    4,368$
    411,379
    
    
    $
    396,771LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    46,714
    
    
    $
    49,197Income taxes payable
    
    
    1,604
    
    
    
    1,430Accrued liabilities
    
    
    121,305
    
    
    
    115,435Current maturities of long-term debt
    
    
    800,782
    
    
    
    513,913Deferred revenues
    
    
    261,586
    
    
    
    274,399Current liabilities of discontinued operations held for sale
    
    
    
    
    
    
    5,424Total current liabilities
    
    
    1,231,991
    
    
    
    959,798Long-term debt, less current maturities
    
    
    10,498
    
    
    
    247,434Deferred rent liability
    
    
    83,569
    
    
    
    83,215Deferred income taxes
    
    
    1,698
    
    
    
    1,925Other liabilities
    
    
    50,904
    
    
    
    42,746Deferred revenues
    
    
    430,284
    
    
    
    449,653Non-current liabilities of discontinued operations held for sale
    
    
    
    
    
    
    12,422Stockholders deficit
    
    
    (1,397,565
    )
    
    
    (1,400,422
    )$
    411,379
    
    
    $
    396,771
  4




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##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Operations
 Three months endedJune 302007
    
    
    2006Net revenues:Membership services
    
    $
    221,000
    
    
    $
    230,727Retail products
    
    
    9,070
    
    
    
    10,916Miscellaneous
    
    
    5,390
    
    
    
    4,443235,460
    
    
    
    246,086Operating costs and expenses:Membership services
    
    
    155,182
    
    
    
    162,787Retail products
    
    
    8,741
    
    
    
    10,353Marketing and advertising
    
    
    13,249
    
    
    
    16,007General and administrative
    
    
    33,700
    
    
    
    20,675Net gain on sale of land and building
    
    
    (174
    )
    
    
    (872
    )Depreciation and amortization
    
    
    10,734
    
    
    
    12,908221,432
    
    
    
    221,858Operating income
    
    
    14,028
    
    
    
    24,228Interest expense, net
    
    
    (27,716
    )
    
    
    (26,120
    )Other, net
    
    
    708
    
    
    
    166(27,008
    )
    
    
    (25,954
    )Loss from continuing operations before income taxes
    
    
    (12,980
    )
    
    
    (1,726
    )Income tax provision
    
    
    (438
    )
    
    
    (501
    )Loss from continuing operations
    
    
    (13,418
    )
    
    
    (2,227
    )Discontinued operations:Income (loss) from discontinued operations
    
    
    (19
    )
    
    
    1,494Gain on disposal
    
    
    21,195
    
    
    
    Gain from discontinued operations
    
    
    21,176
    
    
    
    1,494Net income (loss)
    
    $
    7,758
    
    
    $
    (733
    )Basic income (loss) per common share:Loss from continuing operations
    
    $
    (0.33
    )
    
    $
    (0.06
    )Income from discontinued operations
    
    
    0.52
    
    
    
    0.04Net income (loss)
    
    $
    0.19
    
    
    $
    (0.02
    )Diluted income (loss) per common share:Loss from continuing operations
    
    $
    (0.33
    )
    
    $
    (0.06
    )Income from discontinued operations
    
    
    0.52
    
    
    
    0.04Net income (loss)
    
    $
    0.19
    
    
    $
    (0.02
    )
  5




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Operations
 Six months endedJune 302007
    
    
    2006Net revenues:Membership services
    
    $
    439,794
    
    
    $
    461,258Retail products
    
    
    18,781
    
    
    
    22,259Miscellaneous
    
    
    10,300
    
    
    
    8,914468,875
    
    
    
    492,431Operating costs and expenses:Membership services
    
    
    317,651
    
    
    
    327,463Retail products
    
    
    17,488
    
    
    
    21,063Marketing and advertising
    
    
    32,539
    
    
    
    34,545General and administrative
    
    
    55,829
    
    
    
    41,509Net gain on sale of land and building
    
    
    (349
    )
    
    
    (872
    )Depreciation and amortization
    
    
    21,489
    
    
    
    26,372444,647
    
    
    
    450,080Operating income
    
    
    24,228
    
    
    
    42,351Interest expense, net
    
    
    (53,468
    )
    
    
    (49,090
    )Other, net
    
    
    1,217
    
    
    
    284(52,251
    )
    
    
    (48,806
    )Loss from continuing operations before income taxes
    
    
    (28,023
    )
    
    
    (6,455
    )Income tax provision
    
    
    (278
    )
    
    
    (702
    )Loss from continuing operations
    
    
    (28,301
    )
    
    
    (7,157
    )Discontinued operations:Income (loss) from discontinued operations
    
    
    (35
    )
    
    
    719Gain on disposal
    
    
    21,195
    
    
    
    38,375Gain from discontinued operations
    
    
    21,160
    
    
    
    39,094Net income (loss)
    
    $
    (7,141
    )
    
    $
    31,937Basic income (loss) per common share:Loss from continuing operations
    
    $
    (0.69
    )
    
    $
    (0.18
    )Income from discontinued operations
    
    
    0.52
    
    
    
    1.00Net income (loss)
    
    $
    (0.17
    )
    
    $
    0.82Diluted income (loss) per common share:Loss from continuing operations
    
    $
    (0.69
    )
    
    $
    (0.18
    )Income from discontinued operations
    
    
    0.52
    
    
    
    1.00Net income (loss)
    
    $
    (0.17
    )
    
    $
    0.82
  6




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##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Stockholders Deficit and Comprehensive Income
 AccumulatedCommon
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common
    
    
    Other
    
    
    TotalShares
    
    
    Par
    
    
    Contributed
    
    
    Accumulated
    
    
    Stock in
    
    
    Comprehensive
    
    
    StockholdersOutstanding
    
    
    Value
    
    
    Capital
    
    
    Deficit
    
    
    Treasury
    
    
    Income (loss)
    
    
    Deficit(In thousands, except share data)Balance at December 31, 2006
    
    
    41,286,512
    
    
    $
    420
    
    
    $
    691,631
    
    
    $
    (2,072,051
    )
    
    $
    (11,635
    )
    
    $
    (8,787
    )
    
    $
    (1,400,422
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,141
    )
    
    
    
    
    
    
    
    
    
    
    (7,141
    )Cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,937
    
    
    
    8,937Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,796Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,061
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,061Forfeiture of restricted stock
    
    
    (65,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at June 30, 2007
    
    
    41,221,512
    
    
    $
    420
    
    
    $
    692,692
    
    
    $
    (2,079,192
    )
    
    $
    (11,635
    )
    
    $
    150
    
    
    $
    (1,397,565
    )
  7




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##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Cash Flows
 Six months ended June 302007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (7,141
    )
    
    $
    31,937Gain on disposal and income (loss) from discontinued operations
    
    
    (21,160
    )
    
    
    (39,094
    )Loss from continuing operations
    
    
    (28,301
    )
    
    
    (7,157
    )Adjustments to reconcile to cash provided by operating activitiesDepreciation and amortization, including amortization included in interest expense
    
    
    31,900
    
    
    
    35,993Changes in operating assets and liabilities
    
    
    (8,535
    )
    
    
    (21,095
    )Deferred income taxes, net
    
    
    172
    
    
    
    179Loss (gain) on sale of assets
    
    
    228
    
    
    
    (484
    )Realized gain on sale/leaseback transaction
    
    
    (349
    )
    
    
    Stock-based compensation
    
    
    1,061
    
    
    
    1,798Cash provided by discontinued operations
    
    
    1,125
    
    
    
    1,097Cash provided by (used in) operating activities
    
    
    (2,699
    )
    
    
    10,331CASH FLOWS FROM INVESTING ACTIVITIES:Purchases, advances on and construction of property and equipment
    
    
    (26,261
    )
    
    
    (18,850
    )Proceeds from sale of discontinued operations
    
    
    19,042
    
    
    
    45,490Proceeds from sales of equipment
    
    
    130
    
    
    
    1,979Cash provided by (used in) discontinued operations
    
    
    (147
    )
    
    
    1,289Cash provided by (used in) investing activities
    
    
    (7,236
    )
    
    
    29,908CASH FLOWS FROM FINANCING ACTIVITIES:Net borrowings (repayments) under credit agreement
    
    
    51,500
    
    
    
    (36,811
    )Repayments of other long-term debt
    
    
    (2,536
    )
    
    
    (6,117
    )Debt issuance and refinancing costs
    
    
    (3,505
    )
    
    
    (3,751
    )Proceeds from issuance of common stock under stock option plans
    
    
    
    
    
    
    277Proceeds from sale of common stock
    
    
    
    
    
    
    5,600Cash used in discontinued operations
    
    
    (206
    )
    
    
    (2,088
    )Cash provided by (used in) financing activities
    
    
    45,253
    
    
    
    (42,890
    )Increase (decrease) in cash
    
    
    35,318
    
    
    
    (2,651
    )Effect of exchange rate changes on cash balance
    
    
    644
    
    
    
    353Cash, beginning of period
    
    
    34,799
    
    
    
    17,454Cash, end of period
    
    $
    70,761
    
    
    $
    15,156SUPPLEMENTAL CASH FLOWS INFORMATION:Changes in operating assets and liabilities:(Increase) decrease in other current and other assets
    
    $
    (741
    )
    
    $
    5,487Increase (decrease) in accounts payable
    
    
    2,349
    
    
    
    (8,630
    )Increase in income taxes payable
    
    
    71
    
    
    
    254Increase (decrease) in accrued liabilities
    
    
    18,056
    
    
    
    (643
    )Increase in other liabilities
    
    
    3,891
    
    
    
    3,465Decrease in deferred revenues
    
    
    (32,161
    )
    
    
    (21,028
    )Change in operating assets and liabilities
    
    $
    (8,535
    )
    
    $
    (21,095
    )Cash payments for interest and income taxes were as follows Interest paid
    
    $
    26,354
    
    
    $
    39,883Interest capitalized
    
    
    (108
    )
    
    
    (367
    )Income taxes paid, net
    
    
    35
    
    
    
    276Investing and financing activities exclude the following non-cash transactions Reclassification of unearned compensation balance to contributed capital
    
    $
    
    
    
    $
    5,534Payments of consents with common stock
    
    
    
    
    
    
    17,488Stock issued to agent
    
    
    
    
    
    
    98Property disposal related to sales/leaseback transaction
    
    
    8,973
    
    
    
    
  8




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##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements
 Note 1 Basis of Presentation and Going Concern
   Accounting for
the Impairment or Disposal of Long-Lived Assets
    Planned reorganization and bankruptcy filing
   9




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##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
    Financial
Reporting by Entities in Reorganization under the Bankruptcy Code
 Seasonal factors
  Market risk
   10




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##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Fair value of financial instruments
  Note 2 Discontinued operations
   June 30,
    
    
    December 31,2007
    
    
    2006Prepaid expenses and other current assets
    
    $
    
    
    
    $
    1,118Property and equipment, net
    
    
    
    
    
    
    3,745Intangible assets, net
    
    
    
    
    
    
    562Other long-term assets
    
    
    
    
    
    
    61Total assets of discontinued operations held for sale
    
    $
    
    
    
    $
    5,486Deferred rent
    
    $
    
    
    
    $
    4,956Deferred revenue
    
    
    
    
    
    
    12,890Total liabilities of discontinued operations held for sale
    
    $
    
    
    
    $
    17,846
  Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue
    
    $
    5,556
    
    
    $
    8,545
    
    
    $
    13,890
    
    
    $
    22,053Income (loss) from discontinued operations
before income taxes
    
    
    (19
    )
    
    
    1,494
    
    
    
    (35
    )
    
    
    725Income tax provision
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Income (loss) from discontinued operations
    
    
    (19
    )
    
    
    1,494
    
    
    
    (35
    )
    
    
    719Gain on disposal of discontinued operations
    
    
    21,195
    
    
    
    
    
    
    
    21,195
    
    
    
    38,375Income from discontinued operations
    
    $
    21,176
    
    
    $
    1,494
    
    
    $
    21,160
    
    
    $
    39,094
 11




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note 3 Commitments and Contingencies
 Operating leases:
 Litigation:
 Securities and Exchange Commission Investigation
  Department of Justice Investigation
  Putative Securities Class Actions
 In re Bally Total Fitness Securities Litigation
 Makor Issues & Rights v. Tellabs
 Stockholder Derivative Lawsuits in Illinois Federal Court
  12




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
  Individual Securities Action in Illinois
 Levine v. Bally Total Fitness Holding Corporation, et
al.
 Insurance Lawsuits
 Travelers Indemnity Company and ACE American Insurance
Company v. Bally Total Fitness Holding Corporation; Holiday Universal, Inc. n/k/a Bally Total
Fitness of the Mid-Atlantic, Inc; George N. Aronoff; Paul Toback; John W. Dwyer; Lee S. Hillman;
Stephen C. Swid; James McAnally; J. Kenneth Looloian; Liza M. Walsh; Annie P. Lewis, as Executor of
the Estate of Aubrey C. Lewis, Deceased; Theodore Noncek; Geoff Scheitlin; John H. Wildman; John W.
Rogers, Jr.; and Martin E. Franklin,
 RLI Insurance Company v. Bally Total Fitness Holding Corporation;
Holiday Universal, Inc.; George N. Aronoff; Paul Toback; John H. Dwyer; Lee S. Hillman; Stephen C.
Swid; James McAnally; J. Kenneth Looloian; Liza M. Walsh; Annie P. Lewis, as Executor of the Estate
of Aubrey C. Lewis, Deceased; Theodore Noncek; Geoff Scheitlin; John H. Wildman; John W. Rogers,
Jr.; and Martin E. Franklin,
 13




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Great American Insurance Company
v. Bally Total Fitness Holding Corporation, ab initio
 Other
    Note 4 Debt
  w Facility
  14




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
  Forbearance Agreements
     15




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
      Cash Collateral and DIP Facility
    16




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
    Other Secured Debt
  Liquidity
  17




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note 5 Deferred Revenue
  Six months ended June 30, 2007Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    Cash
    
    
    Revenue
    
    
    June 30,2006
    
    
    Additions
    
    
    Recognized
    
    
    2007Deferral of receipts from financed members:Initial contract term payments
    
    $
    408,796
    
    
    $
    81,185
    
    
    $
    (110,416
    )
    
    $
    379,565Down payments
    
    
    80,263
    
    
    
    19,868
    
    
    
    (22,203
    )
    
    
    77,928Deferral of receipts representing advance payments:Paid-in-full membership fees collected upon origination
    
    
    101,546
    
    
    
    22,730
    
    
    
    (19,578
    )
    
    
    104,698Advance payments of periodic dues and membership fees
    
    
    117,654
    
    
    
    53,942
    
    
    
    (61,347
    )
    
    
    110,249Receipts collected and earned without deferral during period
    
    
    
    
    
    
    172,833
    
    
    
    (172,833
    )
    
    
    Deferral of receipts for personal training services
    
    
    15,793
    
    
    
    57,054
    
    
    
    (53,417
    )
    
    
    19,430$
    724,052
    
    
    $
    407,612
    
    
    $
    (439,794
    )
    
    $
    691,870
 Six months ended June 30, 2006Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    Cash
    
    
    Revenue
    
    
    June 30,2005
    
    
    Additions
    
    
    Recognized
    
    
    2006Deferral of receipts from financed members:Initial contract term payments
    
    $
    515,159
    
    
    $
    114,231
    
    
    $
    (136,161
    )
    
    $
    493,229Down payments
    
    
    97,510
    
    
    
    24,972
    
    
    
    (26,315
    )
    
    
    96,167Deferral of receipts representing advance payments:Paid-in-full membership fees collected upon origination
    
    
    106,712
    
    
    
    17,360
    
    
    
    (18,017
    )
    
    
    106,055Advance payments of periodic dues and membership fees
    
    
    119,697
    
    
    
    60,039
    
    
    
    (59,140
    )
    
    
    120,596Receipts collected and earned without deferral during period
    
    
    
    
    
    
    164,742
    
    
    
    (164,742
    )
    
    
    Deferral of receipts for personal training services
    
    
    16,402
    
    
    
    58,825
    
    
    
    (56,883
    )
    
    
    18,344$
    855,480
    
    
    $
    440,169
    
    
    $
    (461,258
    )
    
    
    834,391SAB 108 transitional deferred revenue adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,709
    )$
    828,682
 Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements,
 18




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note 6 Income (loss) per Common Share
 Earnings per Share
 Three months ended June 30,
    
    
    Six months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Weighted average number of common shares
outstanding
    
    
    40,731,449
    
    
    
    40,190,279
    
    
    
    40,724,892
    
    
    
    38,944,691Effect of outstanding stock options and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted weighted average number of shares
outstanding
    
    
    40,731,449
    
    
    
    40,190,279
    
    
    
    40,724,892
    
    
    
    38,944,691Options 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
    
    
    3,929,177
    
    
    
    1,618,840
    
    
    
    3,929,177
    
    
    
    1,618,840Range of exercise prices per share:High
    
    $
    36.00
    
    
    $
    36.00
    
    
    $
    36.00
    
    
    $
    36.00Low
    
    $
    2.30
    
    
    $
    2.91
    
    
    $
    2.30
    
    
    $
    2.91
 Note 7 Income Taxes
      19




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Accounting for Uncertainty
in Income Taxes
 Note 8 Share-based Payments
 Share-Based Payment Accounting for Stock-based Compensation Accounting for Stock Issued to
Employees
  Stock-Based Compensation Plans
    20




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
    Stock Options
  WeightedAverageWeighted
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateExercise
    
    
    Term
    
    
    IntrinsicNumber of Shares
    
    
    Price
    
    
    (Years)
    
    
    ValueOutstanding at December 31, 2006
    
    
    3,386,426
    
    
    $
    13.34Granted
    
    
    Exercised
    
    
    Forfeited
    
    
    (69,496
    )
    
    
    4.03Canceled
    
    
    (123,454
    )
    
    
    11.71Outstanding at June 30, 2007
    
    
    3,193,476
    
    
    
    13.50
    
    
    
    5.0
    
    
    $
    Exercisable at June 30, 2007
    
    
    2,809,238
    
    
    $
    14.60
    
    
    
    4.6
    
    
    $
    
  Three months ended
    
    Six months endedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Weighted average grant-date fair value of stock options granted
    
    $
    
    
    
    $
    4.30
    
    
    $
    
    
    
    $
    4.42Total intrinsic value of stock options exercised
    
    $
    
    
    
    $
    149
    
    
    $
    
    
    
    $
    276
    21




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Restricted Stock
   WeightedAverageGrant DateNumber of
    
    FairShares
    
    ValueOutstanding at December 31, 2006
    
    
    568,250
    
    
    $
    6.90Vested
    
    
    (60,000
    )
    
    
    7.01Forfeited
    
    
    (65,000
    )
    
    
    6.75Outstanding at June 30, 2007
    
    
    443,250
    
    
    
    6.91
  Note 9 Guarantees
    Note 10 Sale/Leaseback Transactions
 Accounting for Leases.
 22




---



##### 





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


Note 11 Subsequent Events


Non-payment of Interest and Forbearance Agreement  Planned Reorganization and Chapter 11 Bankruptcy Proceeding
     
    
    The Company would issue up to $247,337.5 of 13% Senior Second Lien Notes (the New
Senior Second Lien Notes) to holders of the Senior Notes, who will receive, in exchange
for their total claims (including unpaid interest), their pro rata share of the New
Senior Second Lien Notes in addition to a fee equal to 2% of the principal amount of the
Senior Notes. The maturity of, and subsidiary guarantees for, the New Senior Second Lien
Notes would be the same as for the Senior Notes.
    
    The Company would issue up to $200,000 of 15-5/8% Senior Subordinated Notes due 2013
(the New Senior Subordinated Notes) to holders of the Companys Senior Subordinated
Notes who will receive their pro rata share of the New Senior Subordinated Notes. These
notes bear interest at 15-5/8% if paid-in-kind and 14% if paid in cash, at the Companys
option upon satisfaction of a toggle covenant of $200,000 minimum cash EBITDA and
$75,000 minimum liquidity. Such holders would also receive their pro rata share of a
cash payment of $123,500 (which includes unpaid interest).
    
    Holders of the Companys existing common stock and the holders of certain other
claims treated as equity in bankruptcy would receive $16,500 in the aggregate.
  
    
    Holders of the Companys Senior Notes would receive the same consideration as under
the Amended Plan, except that the rate of interest on the New Senior Second Lien Notes
would be 12-3/8% per annum.
    
    The Company would issue up $80,000 of 13-5/8% Subordinated Notes due 2013 and $70,000
of 13-5/8% Junior Subordinated Notes due 2013 (collectively, the New Subordinated
Notes) to holders of the Companys Senior Subordinated Notes. These notes bear
interest at 13-5/8% if paid-in-kind and 11.5% if paid in cash, at the Companys option
upon satisfaction of a toggle covenant of $200,000 minimum cash EBITDA and $75,000
minimum liquidity. The holders of the Senior Subordinated Notes would not receive any
cash payments but would also receive their pro rata
 23




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 share of all of the newly issued common stock in the reorganized Company and the right to
purchase their pro rata share of $90,000 of 13-5/8% Senior Subordinated Notes due 2013,
pursuant to a rights offering (the Rights Offering Senior Subordinated Notes); the
terms of these notes have similar economic terms to those of the New Subordinated Notes,
but will rank senior to the New Subordinated Notes. Certain of the holders of Senior
Subordinated Notes entered into a Subscription and Backstop Purchase Agreement, dated
June 27, 2007, and agreed to backstop the rights offering by purchasing any of the
Rights Offering Senior Subordinated Notes that are not subscribed for upon the expiration
of the offering period.
    
    The Companys existing common stock would be extinguished for no consideration.
  DIP Financing
     Exit Credit Facility
  24




---



##### 



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




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note 12 Condensed Consolidating Financial Statements
     26




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED CONSOLIDATING BALANCE SHEET
 June 30, 2007Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalASSETSCurrent assets:Cash
    
    $
    
    
    
    $
    66,074
    
    
    $
    4,687
    
    
    $
    
    
    
    $
    70,761Other current assets
    
    
    
    
    
    
    37,525
    
    
    
    724
    
    
    
    
    
    
    
    38,249Total current assets
    
    
    
    
    
    
    103,599
    
    
    
    5,411
    
    
    
    
    
    
    
    109,010Property and equipment, net
    
    
    
    
    
    
    226,819
    
    
    
    7,573
    
    
    
    
    
    
    
    234,392Goodwill, net
    
    
    
    
    
    
    19,734
    
    
    
    
    
    
    
    
    
    
    
    19,734Trademarks, net
    
    
    6,507
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,507Intangible assets, net
    
    
    
    
    
    
    345
    
    
    
    
    
    
    
    
    
    
    
    345Investment in and advances to
subsidiaries
    
    
    (585,248
    )
    
    
    221,315
    
    
    
    
    
    
    
    363,933
    
    
    
    Other assets
    
    
    21,088
    
    
    
    17,368
    
    
    
    2,935
    
    
    
    
    
    
    
    41,391$
    (557,653
    )
    
    $
    589,180
    
    
    $
    15,919
    
    
    $
    363,933
    
    
    $
    411,379LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    46,384
    
    
    $
    330
    
    
    $
    
    
    
    $
    46,714Income taxes payable
    
    
    
    
    
    
    1,604
    
    
    
    
    
    
    
    
    
    
    
    1,604Accrued liabilities
    
    
    38,082
    
    
    
    75,268
    
    
    
    7,955
    
    
    
    
    
    
    
    121,305Current maturities of long-term debt
    
    
    798,376
    
    
    
    480
    
    
    
    1,926
    
    
    
    
    
    
    
    800,782Deferred revenues
    
    
    
    
    
    
    261,586
    
    
    
    
    
    
    
    
    
    
    
    261,586Total current liabilities
    
    
    836,458
    
    
    
    385,322
    
    
    
    10,211
    
    
    
    
    
    
    
    1,231,991Long-term debt, less current maturities
    
    
    3,454
    
    
    
    5,185
    
    
    
    1,859
    
    
    
    
    
    
    
    10,498Net affiliate payable
    
    
    
    
    
    
    459,826
    
    
    
    50,166
    
    
    
    (509,992
    )
    
    
    Other liabilities
    
    
    
    
    
    
    130,797
    
    
    
    5,374
    
    
    
    
    
    
    
    136,171Deferred revenues
    
    
    
    
    
    
    430,284
    
    
    
    
    
    
    
    
    
    
    
    430,284Stockholders deficit
    
    
    (1,397,565
    )
    
    
    (822,234
    )
    
    
    (51,691
    )
    
    
    873,925
    
    
    
    (1,397,565
    )$
    (557,653
    )
    
    $
    589,180
    
    
    $
    15,919
    
    
    $
    363,933
    
    
    $
    411,379
 27




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED CONSOLIDATING BALANCE SHEET
 December 31, 2006Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    

Eliminations
    
    
    TotalASSETSCurrent assets:Cash
    
    $
    
    
    
    $
    31,911
    
    
    $
    2,888
    
    
    $
    
    
    
    $
    34,799Other current assets
    
    
    
    
    
    
    39,646
    
    
    
    770
    
    
    
    
    
    
    
    40,416Current assets of discontinued
operations held for sale
    
    
    
    
    
    
    
    
    
    
    1,118
    
    
    
    
    
    
    
    1,118Total current assets
    
    
    
    
    
    
    71,557
    
    
    
    4,776
    
    
    
    
    
    
    
    76,333Property and equipment, net
    
    
    
    
    
    
    234,689
    
    
    
    9,363
    
    
    
    
    
    
    
    244,052Goodwill, net
    
    
    
    
    
    
    19,734
    
    
    
    
    
    
    
    
    
    
    
    19,734Trademarks, net
    
    
    6,507
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,507Intangible assets, net
    
    
    
    
    
    
    413
    
    
    
    
    
    
    
    
    
    
    
    413Investment in and advances to subsidiaries
    
    
    (662,464
    )
    
    
    221,315
    
    
    
    
    
    
    
    441,149
    
    
    
    Other assets
    
    
    27,898
    
    
    
    14,540
    
    
    
    2,926
    
    
    
    
    
    
    
    45,364Non-current assets of discontinued
operations held for sale
    
    
    
    
    
    
    
    
    
    
    4,368
    
    
    
    
    
    
    
    4,368$
    (628,059
    )
    
    $
    562,248
    
    
    $
    21,433
    
    
    $
    441,149
    
    
    $
    396,771LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    48,963
    
    
    $
    234
    
    
    $
    
    
    
    $
    49,197Income taxes payable
    
    
    
    
    
    
    1,284
    
    
    
    146
    
    
    
    
    
    
    
    1,430Accrued liabilities
    
    
    21,957
    
    
    
    77,759
    
    
    
    15,719
    
    
    
    
    
    
    
    115,435Current maturities of long-term debt
    
    
    511,205
    
    
    
    658
    
    
    
    2,050
    
    
    
    
    
    
    
    513,913Deferred revenues
    
    
    
    
    
    
    274,399
    
    
    
    
    
    
    
    
    
    
    
    274,399Current liabilities of discontinued
operations held for sale
    
    
    
    
    
    
    
    
    
    
    5,424
    
    
    
    
    
    
    
    5,424Total current liabilities
    
    
    533,162
    
    
    
    403,063
    
    
    
    23,573
    
    
    
    
    
    
    
    959,798Long-term debt, less current maturities
    
    
    239,201
    
    
    
    5,373
    
    
    
    2,860
    
    
    
    
    
    
    
    247,434Net affiliate payable
    
    
    
    
    
    
    426,151
    
    
    
    61,911
    
    
    
    (488,062
    )
    
    
    Other liabilities
    
    
    
    
    
    
    126,526
    
    
    
    1,360
    
    
    
    
    
    
    
    127,886Deferred revenues
    
    
    
    
    
    
    449,653
    
    
    
    
    
    
    
    
    
    
    
    449,653Non-current liabilities of discontinued
operations held for sale
    
    
    
    
    
    
    
    
    
    
    12,422
    
    
    
    
    
    
    
    12,422Stockholders deficit
    
    
    (1,400,422
    )
    
    
    (848,518
    )
    
    
    (80,693
    )
    
    
    929,211
    
    
    
    (1,400,422
    )$
    (628,059
    )
    
    $
    562,248
    
    
    $
    21,433
    
    
    $
    441,149
    
    
    $
    396,771
 28




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements
 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
 Three months ended June 30, 2007Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    

Subsidiaries
    
    
    Subsidiaries
    
    

Eliminations
    
    
    TotalNet revenues:Membership services
    
    $
    
    
    
    $
    221,000
    
    
    $
    
    
    
    $
    
    
    
    $
    221,000Retail products
    
    
    
    
    
    
    9,070
    
    
    
    
    
    
    
    
    
    
    
    9,070Miscellaneous
    
    
    
    
    
    
    5,390
    
    
    
    
    
    
    
    
    
    
    
    5,390
    
    
    
    235,460
    
    
    
    
    
    
    
    
    
    
    
    235,460Operating costs and expenses:Membership services
    
    
    
    
    
    
    155,596
    
    
    
    (414
    )
    
    
    
    
    
    
    155,182Retail products
    
    
    
    
    
    
    8,741
    
    
    
    
    
    
    
    
    
    
    
    8,741Marketing and advertising
    
    
    
    
    
    
    13,249
    
    
    
    
    
    
    
    
    
    
    
    13,249General and administrative
    
    
    1,669
    
    
    
    32,031
    
    
    
    
    
    
    
    
    
    
    
    33,700Gain on sales of land and buildings
    
    
    
    
    
    
    (119
    )
    
    
    (55
    )
    
    
    
    
    
    
    (174
    )Depreciation and amortization
    
    
    
    
    
    
    10,520
    
    
    
    214
    
    
    
    
    
    
    
    10,7341,669
    
    
    
    220,018
    
    
    
    (255
    )
    
    
    
    
    
    
    221,432Operating income (loss)
    
    
    (1,669
    )
    
    
    15,442
    
    
    
    255
    
    
    
    
    
    
    
    14,028Equity in income from continuing
operations of subsidiaries
    
    
    14,984
    
    
    
    
    
    
    
    
    
    
    
    (14,984
    )
    
    
    Interest expense
    
    
    (27,305
    )
    
    
    (320
    )
    
    
    (729
    )
    
    
    638
    
    
    
    (27,716
    )Other, net
    
    
    572
    
    
    
    539
    
    
    
    235
    
    
    
    (638
    )
    
    
    708(11,749
    )
    
    
    219
    
    
    
    (494
    )
    
    
    (14,984
    )
    
    
    (27,008
    )Income (loss) from continuing operations
before income taxes
    
    
    (13,418
    )
    
    
    15,661
    
    
    
    (239
    )
    
    
    (14,984
    )
    
    
    (12,980
    )Income tax provision
    
    
    
    
    
    
    (438
    )
    
    
    
    
    
    
    
    
    
    
    (438
    )Income (loss) from continuing operations
    
    
    (13,418
    )
    
    
    15,223
    
    
    
    (239
    )
    
    
    (14,984
    )
    
    
    (13,418
    )Income from discontinued operations
    
    
    21,176
    
    
    
    558
    
    
    
    20,618
    
    
    
    (21,176
    )
    
    
    21,176Net income
    
    $
    7,758
    
    
    $
    15,781
    
    
    $
    20,379
    
    
    $
    (36,160
    )
    
    $
    7,758
 29




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements
 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
 Three months ended June 30, 2006Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    

Subsidiaries
    
    
    Subsidiaries
    
    

Eliminations
    
    
    TotalNet revenues:Membership services
    
    $
    
    
    
    $
    230,727
    
    
    $
    
    
    
    $
    
    
    
    $
    230,727Retail products
    
    
    
    
    
    
    10,916
    
    
    
    
    
    
    
    
    
    
    
    10,916Miscellaneous
    
    
    
    
    
    
    4,443
    
    
    
    
    
    
    
    
    
    
    
    4,443
    
    
    
    246,086
    
    
    
    
    
    
    
    
    
    
    
    246,086Operating costs and expenses:Membership services
    
    
    
    
    
    
    163,080
    
    
    
    (293
    )
    
    
    
    
    
    
    162,787Retail products
    
    
    
    
    
    
    10,353
    
    
    
    
    
    
    
    
    
    
    
    10,353Marketing and advertising
    
    
    
    
    
    
    16,007
    
    
    
    
    
    
    
    
    
    
    
    16,007General and administrative
    
    
    1,706
    
    
    
    18,965
    
    
    
    4
    
    
    
    
    
    
    
    20,675Gain on sales of land and buildings
    
    
    
    
    
    
    (872
    )
    
    
    
    
    
    
    
    
    
    
    (872
    )Depreciation and amortization
    
    
    
    
    
    
    12,672
    
    
    
    236
    
    
    
    
    
    
    
    12,9081,706
    
    
    
    220,205
    
    
    
    (53
    )
    
    
    
    
    
    
    221,858Operating income (loss)
    
    
    (1,706
    )
    
    
    25,881
    
    
    
    53
    
    
    
    
    
    
    
    24,228Equity in income (loss) from continuing
operations of subsidiaries
    
    
    24,404
    
    
    
    
    
    
    
    
    
    
    
    (24,404
    )
    
    
    Interest expense
    
    
    (25,555
    )
    
    
    (349
    )
    
    
    (896
    )
    
    
    680
    
    
    
    (26,120
    )Other, net
    
    
    630
    
    
    
    134
    
    
    
    82
    
    
    
    (680
    )
    
    
    166(521
    )
    
    
    (215
    )
    
    
    (814
    )
    
    
    (24,404
    )
    
    
    (25,954
    )Income (loss) from continuing operations
before income taxes
    
    
    (2,227
    )
    
    
    25,666
    
    
    
    (761
    )
    
    
    (24,404
    )
    
    
    (1,726
    )Income tax provision
    
    
    
    
    
    
    (501
    )
    
    
    
    
    
    
    
    
    
    
    (501
    )Income (loss) from continuing operations
    
    
    (2,227
    )
    
    
    25,165
    
    
    
    (761
    )
    
    
    (24,404
    )
    
    
    (2,227
    )Income (loss) from discontinued operations
    
    
    1,494
    
    
    
    1,829
    
    
    
    (335
    )
    
    
    (1,494
    )
    
    
    1,494Net income (loss)
    
    $
    (733
    )
    
    $
    26,994
    
    
    $
    (1,096
    )
    
    $
    (25,898
    )
    
    $
    (733
    )
 30




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
 Six months ended June 30, 2007Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet revenues:Membership services
    
    $
    
    
    
    $
    439,794
    
    
    $
    
    
    
    $
    
    
    
    $
    439,794Retail products
    
    
    
    
    
    
    18,781
    
    
    
    
    
    
    
    
    
    
    
    18,781Miscellaneous
    
    
    
    
    
    
    10,300
    
    
    
    
    
    
    
    
    
    
    
    10,300
    
    
    
    468,875
    
    
    
    
    
    
    
    
    
    
    
    468,875Operating costs and expenses:Membership services
    
    
    
    
    
    
    318,587
    
    
    
    (936
    )
    
    
    
    
    
    
    317,651Retail products
    
    
    
    
    
    
    17,488
    
    
    
    
    
    
    
    
    
    
    
    17,488Marketing and advertising
    
    
    
    
    
    
    32,539
    
    
    
    
    
    
    
    
    
    
    
    32,539General and administrative
    
    
    2,658
    
    
    
    53,164
    
    
    
    7
    
    
    
    
    
    
    
    55,829Gain on sales of land and buildings
    
    
    
    
    
    
    (239
    )
    
    
    (110
    )
    
    
    
    
    
    
    (349
    )Depreciation and amortization
    
    
    
    
    
    
    21,061
    
    
    
    428
    
    
    
    
    
    
    
    21,4892,658
    
    
    
    442,600
    
    
    
    (611
    )
    
    
    
    
    
    
    444,647Operating income (loss)
    
    
    (2,658
    )
    
    
    26,275
    
    
    
    611
    
    
    
    
    
    
    
    24,228Equity in income (loss) from continuing
operations of subsidiaries
    
    
    25,781
    
    
    
    
    
    
    
    
    
    
    
    (25,781
    )
    
    
    Interest expense
    
    
    (52,548
    )
    
    
    (729
    )
    
    
    (1,447
    )
    
    
    1,256
    
    
    
    (53,468
    )Other, net
    
    
    1,124
    
    
    
    878
    
    
    
    471
    
    
    
    (1,256
    )
    
    
    1,217(25,643
    )
    
    
    149
    
    
    
    (976
    )
    
    
    (25,781
    )
    
    
    (52,251
    )Income (loss) from continuing operations
before income taxes
    
    
    (28,301
    )
    
    
    26,424
    
    
    
    (365
    )
    
    
    (25,781
    )
    
    
    (28,023
    )Income tax provision
    
    
    
    
    
    
    (278
    )
    
    
    
    
    
    
    
    
    
    
    (278
    )Income (loss) from continuing operations
    
    
    (28,301
    )
    
    
    26,146
    
    
    
    (365
    )
    
    
    (25,781
    )
    
    
    (28,301
    )Income from discontinued operations
    
    
    21,160
    
    
    
    730
    
    
    
    20,430
    
    
    
    (21,160
    )
    
    
    21,160Net income (loss)
    
    $
    (7,141
    )
    
    $
    26,876
    
    
    $
    20,065
    
    
    $
    (46,941
    )
    
    $
    (7,141
    )
 31




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
 Six months ended June 30, 2006Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet revenues:Membership services
    
    $
    
    
    
    $
    461,258
    
    
    $
    
    
    
    $
    
    
    
    $
    461,258Retail products
    
    
    
    
    
    
    22,259
    
    
    
    
    
    
    
    
    
    
    
    22,259Miscellaneous
    
    
    
    
    
    
    8,914
    
    
    
    
    
    
    
    
    
    
    
    8,914
    
    
    
    492,431
    
    
    
    
    
    
    
    
    
    
    
    492,431Operating costs and expenses:Membership services
    
    
    
    
    
    
    328,365
    
    
    
    (902
    )
    
    
    
    
    
    
    327,463Retail products
    
    
    
    
    
    
    21,063
    
    
    
    
    
    
    
    
    
    
    
    21,063Marketing and advertising
    
    
    
    
    
    
    34,545
    
    
    
    
    
    
    
    
    
    
    
    34,545General and administrative
    
    
    2,989
    
    
    
    38,507
    
    
    
    13
    
    
    
    
    
    
    
    41,509Gain on sales of land and buildings
    
    
    
    
    
    
    (872
    )
    
    
    
    
    
    
    
    
    
    
    (872
    )Depreciation and amortization
    
    
    
    
    
    
    25,897
    
    
    
    475
    
    
    
    
    
    
    
    26,3722,989
    
    
    
    447,505
    
    
    
    (414
    )
    
    
    
    
    
    
    450,080Operating income (loss)
    
    
    (2,989
    )
    
    
    44,926
    
    
    
    414
    
    
    
    
    
    
    
    42,351Equity in income (loss) from continuing
operations of subsidiaries
    
    
    42,518
    
    
    
    
    
    
    
    
    
    
    
    (42,518
    )
    
    
    Interest expense
    
    
    (47,900
    )
    
    
    (693
    )
    
    
    (1,810
    )
    
    
    1,313
    
    
    
    (49,090
    )Other, net
    
    
    1,214
    
    
    
    223
    
    
    
    160
    
    
    
    (1,313
    )
    
    
    284(4,168
    )
    
    
    (470
    )
    
    
    (1,650
    )
    
    
    (42,518
    )
    
    
    (48,806
    )Income (loss) from continuing operations
before income taxes
    
    
    (7,157
    )
    
    
    44,456
    
    
    
    (1,236
    )
    
    
    (42,518
    )
    
    
    (6,455
    )Income tax provision
    
    
    
    
    
    
    (702
    )
    
    
    
    
    
    
    
    
    
    
    (702
    )Income (loss) from continuing operations
    
    
    (7,157
    )
    
    
    43,754
    
    
    
    (1,236
    )
    
    
    (42,518
    )
    
    
    (7,157
    )Income (loss) from discontinued operations
    
    
    39,094
    
    
    
    39,332
    
    
    
    (238
    )
    
    
    (39,094
    )
    
    
    39,094Net income (loss)
    
    $
    31,937
    
    
    $
    83,086
    
    
    $
    (1,474
    )
    
    $
    (81,612
    )
    
    $
    31,937
 32




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
 Six months ended June 30, 2007Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalCASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    (7,141
    )
    
    $
    26,284
    
    
    $
    20,065
    
    
    $
    (46,349
    )
    
    $
    (7,141
    )Adjustments to reconcile to cash provided Depreciation and amortization, including
amortization included in interest expense
    
    
    10,328
    
    
    
    21,147
    
    
    
    425
    
    
    
    
    
    
    
    31,900Changes in operating assets and liabilities
    
    
    16,112
    
    
    
    (19,386
    )
    
    
    (5,261
    )
    
    
    
    
    
    
    (8,535
    )Changes in net affiliate balances
    
    
    
    
    
    
    32,476
    
    
    
    (11,745
    )
    
    
    (20,731
    )
    
    
    Other, net
    
    
    1,061
    
    
    
    161
    
    
    
    (21,270
    )
    
    
    
    
    
    
    (20,048
    )Cash provided by discontinued operations
    
    
    
    
    
    
    
    
    
    
    1,125
    
    
    
    
    
    
    
    1,125Cash provided by (used in) operating activities
    
    
    20,360
    
    
    
    60,682
    
    
    
    (16,661
    )
    
    
    (67,080
    )
    
    
    (2,699
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases and construction of property and equipment
    
    
    
    
    
    
    (26,261
    )
    
    
    
    
    
    
    
    
    
    
    (26,261
    )Proceeds from sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    19,042
    
    
    
    
    
    
    
    19,042Proceeds from sale of equipment
    
    
    
    
    
    
    130
    
    
    
    
    
    
    
    
    
    
    
    130Investment in and advances to subsidiaries
    
    
    (67,080
    )
    
    
    
    
    
    
    
    
    
    
    67,080
    
    
    
    Cash used in discontinued operations
    
    
    
    
    
    
    
    
    
    
    (147
    )
    
    
    
    
    
    
    (147
    )Cash provided by (used in) investing activities
    
    
    (67,080
    )
    
    
    (26,131
    )
    
    
    18,895
    
    
    
    67,080
    
    
    
    (7,236
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net borrowings under credit agreement
    
    
    51,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,500Repayments of other long-term debt
    
    
    (1,275
    )
    
    
    (388
    )
    
    
    (873
    )
    
    
    
    
    
    
    (2,536
    )Debt issuance and refinancing costs
    
    
    (3,505
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,505
    )Cash used in discontinued operations
    
    
    
    
    
    
    
    
    
    
    (206
    )
    
    
    
    
    
    
    (206
    )Cash used in financing activities
    
    
    46,720
    
    
    
    (388
    )
    
    
    (1,079
    )
    
    
    
    
    
    
    45,253Increase in cash
    
    
    
    
    
    
    34,163
    
    
    
    1,155
    
    
    
    
    
    
    
    35,318Effect of exchange rate changes on cash balances
    
    
    
    
    
    
    
    
    
    
    644
    
    
    
    
    
    
    
    644Cash, beginning of period
    
    
    
    
    
    
    31,911
    
    
    
    2,888
    
    
    
    
    
    
    
    34,799Cash, end of period
    
    $
    
    
    
    $
    66,074
    
    
    $
    4,687
    
    
    $
    
    
    
    $
    70,761
 33




---



##### 



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
 Six months ended June 30, 2006Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalCASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    31,937
    
    
    $
    80,213
    
    
    $
    1,399
    
    
    $
    (81,612
    )
    
    $
    31,937Adjustments to reconcile to cash provided Depreciation and amortization, including
amortization included in interest expense
    
    
    9,465
    
    
    
    26,036
    
    
    
    1,569
    
    
    
    
    
    
    
    37,070Changes in operating assets and liabilities
    
    
    (660
    )
    
    
    (18,127
    )
    
    
    (336
    )
    
    
    
    
    
    
    (19,123
    )Changes in net affiliate balances
    
    
    
    
    
    
    (80,509
    )
    
    
    1,732
    
    
    
    78,777
    
    
    
    Other net
    
    
    1,798
    
    
    
    (41,410
    )
    
    
    59
    
    
    
    
    
    
    
    (39,553
    )Cash provided by (used in) operating activities
    
    
    42,540
    
    
    
    (33,797
    )
    
    
    4,423
    
    
    
    (2,835
    )
    
    
    10,331CASH FLOWS FROM INVESTING ACTIVITIES:Purchases and construction of property and equipment
    
    
    
    
    
    
    (18,699
    )
    
    
    (190
    )
    
    
    
    
    
    
    (18,889
    )Proceeds from sale of discontinued operations
    
    
    
    
    
    
    45,052
    
    
    
    
    
    
    
    
    
    
    
    45,052Proceeds from sale of discontinued operations in
escrow
    
    
    
    
    
    
    438
    
    
    
    
    
    
    
    
    
    
    
    438Proceeds from sale of property
    
    
    
    
    
    
    3,307
    
    
    
    
    
    
    
    
    
    
    
    3,307Investment in and advances to subsidiaries
    
    
    (2,835
    )
    
    
    
    
    
    
    
    
    
    
    2,835
    
    
    
    Cash provided by (used in) investing activities
    
    
    (2,835
    )
    
    
    30,098
    
    
    
    (190
    )
    
    
    2,835
    
    
    
    29,908CASH FLOWS FROM FINANCING ACTIVITIES:Net repayments under revolving credit agreement
    
    
    (36,811
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,811
    )Repayments of other long-term debt
    
    
    (5,020
    )
    
    
    (169
    )
    
    
    (3,016
    )
    
    
    
    
    
    
    (8,205
    )Debt issuance and refinancing costs
    
    
    (3,751
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,751
    )Proceeds from sale of common stock
    
    
    5,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,600Proceeds from stock purchase and options plans
    
    
    277
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    277Cash used in financing activities
    
    
    (39,705
    )
    
    
    (169
    )
    
    
    (3,016
    )
    
    
    
    
    
    
    (42,890
    )Increase (decrease) in cash
    
    
    
    
    
    
    (3,868
    )
    
    
    1,217
    
    
    
    
    
    
    
    (2,651
    )Effect of exchange rate changes on cash balances
    
    
    
    
    
    
    
    
    
    
    353
    
    
    
    
    
    
    
    353Cash, beginning of period
    
    
    
    
    
    
    16,238
    
    
    
    1,216
    
    
    
    
    
    
    
    17,454Cash, end of period
    
    $
    
    
    
    $
    12,370
    
    
    $
    2,786
    
    
    $
    
    
    
    $
    15,156
 34




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Executive Summary of Business
    Financial Condition
     35




---



##### 



Liquidity and Capital Resources
  December 31,June 30, 2007
    
    
    2006
    
    
    ChangeCash and equivalents
    
    $
    70.8
    
    
    $
    34.8
    
    
    $
    36.0Unutilized revolving credit facility
    
    
    0.4
    
    
    
    25.8
    
    
    
    (25.4
    )Liquidity before delayed draw term loan
    
    
    71.2
    
    
    
    60.6
    
    
    
    10.6Undrawn delayed draw term loan
    
    
    1.1
    
    
    
    29.1
    
    
    
    (28.0
    )Total liquidity
    
    $
    72.3
    
    
    $
    89.7
    
    
    $
    (17.4
    )
      36




---



##### 



Interest Expense
   Cash Flows
  Change fromSix months ended June 30,
    
    
    Previous2007
    
    
    2006
    
    
    PeriodCash provided by (used in) operating activities
    
    $
    (2.7
    )
    
    $
    10.3
    
    
    $
    (13.0
    )Cash provided by (used in) investing activities
    
    
    (7.2
    )
    
    
    29.9
    
    
    
    (37.1
    )Cash provided by (used in) financing activities
    
    
    45.2
    
    
    
    (42.9
    )
    
    
    88.1Increase (decrease) in cash
    
    $
    35.3
    
    
    $
    (2.7
    )
    
    $
    38.0
 Operating Activities
  Investing Activities and Capital Expenditures
  37




---



##### 



Financing Activities
  Dividend and Other Commitments
  Debt
 Forbearance Agreements
    Extension of Forbearance Agreements
     38




---



##### 



DIP Financing
       Other Secured Debt
  Off-Balance Sheet Arrangements
  39




---



##### 



Critical Accounting Policies
   Managements Discussion and Analysis of Financial Condition and Results of Operations
 Results of Operations
  Three
    
    
    
    
    
    
    ThreeMonths
    
    
    
    
    
    
    MonthsEnded
    
    
    
    
    
    
    Ended
    
    
    
    
    
    
    Change fromJune 30,
    
    
    % of Net
    
    
    June 30,
    
    
    % of Net
    
    
    Previous Period2007
    
    
    revenues
    
    
    2006
    
    
    revenues
    
    
    Dollars
    
    
    %REVENUEMembership
    
    $
    193,560
    
    
    
    82
    %
    
    $
    201,673
    
    
    
    82
    %
    
    $
    (8,113
    )
    
    
    (4
    )%Personal training
    
    
    27,440
    
    
    
    12
    %
    
    
    29,054
    
    
    
    12
    %
    
    
    (1,614
    )
    
    
    (6
    )%Membership services revenue
    
    
    221,000
    
    
    
    94
    %
    
    
    230,727
    
    
    
    94
    %
    
    
    (9,727
    )
    
    
    (4
    )%Retail products
    
    
    9,070
    
    
    
    4
    %
    
    
    10,916
    
    
    
    4
    %
    
    
    (1,846
    )
    
    
    (17
    )%Miscellaneous
    
    
    5,390
    
    
    
    2
    %
    
    
    4,443
    
    
    
    2
    %
    
    
    947
    
    
    
    21
    %Net revenues
    
    
    235,460
    
    
    
    100
    %
    
    
    246,086
    
    
    
    100
    %
    
    
    (10,626
    )
    
    
    (4
    )%OPERATING COSTS AND EXPENSESMembership services
    
    
    155,182
    
    
    
    66
    %
    
    
    162,787
    
    
    
    66
    %
    
    
    (7,605
    )
    
    
    (5
    )%Retail products
    
    
    8,741
    
    
    
    4
    %
    
    
    10,353
    
    
    
    4
    %
    
    
    (1,612
    )
    
    
    (16
    )%Marketing and advertising
    
    
    13,249
    
    
    
    6
    %
    
    
    16,007
    
    
    
    7
    %
    
    
    (2,758
    )
    
    
    (17
    )%General and administrative
    
    
    33,700
    
    
    
    14
    %
    
    
    20,675
    
    
    
    8
    %
    
    
    13,025
    
    
    
    63
    %Gain on sales of land and buildings
    
    
    (174
    )
    
    
    
    
    
    
    (872
    )
    
    
    
    
    
    
    698
    
    
    NMDepreciation and amortization
    
    
    10,734
    
    
    
    4
    %
    
    
    12,908
    
    
    
    5
    %
    
    
    (2,174
    )
    
    
    (17
    )%Total operating costs and expenses
    
    
    221,432
    
    
    
    94
    %
    
    
    221,858
    
    
    
    90
    %
    
    
    (426
    )
    
    
    Operating income
    
    
    14,028
    
    
    
    6
    %
    
    
    24,228
    
    
    
    10
    %
    
    
    (10,200
    )
    
    
    (42
    )%Interest expense
    
    
    (27,716
    )
    
    
    (12
    )%
    
    
    (26,120
    )
    
    
    (11
    )%
    
    
    (1,596
    )
    
    
    (6
    )%Other income (expense), net
    
    
    708
    
    
    
    
    
    
    
    166
    
    
    
    
    
    
    
    542
    
    
    NMLoss from continuing operations before
income taxes
    
    
    (12,980
    )
    
    
    (6
    )%
    
    
    (1,726
    )
    
    
    (1
    )%
    
    
    (11,254
    )
    
    NMIncome tax provision
    
    
    (438
    )
    
    
    
    
    
    
    (501
    )
    
    
    
    
    
    
    63
    
    
    NMLoss from continuing operations
    
    $
    (13,418
    )
    
    
    (6
    )%
    
    $
    (2,227
    )
    
    
    (1
    )%
    
    $
    (11,191
    )
    
    NM
 
 NM  Not meaningful 40




---



##### 



Six
    
    
    
    
    
    
    SixMonths
    
    
    
    
    
    
    MonthsEnded
    
    
    
    
    
    
    Ended
    
    
    
    
    
    
    Change fromJune 30,
    
    
    % of Net
    
    
    June 30,
    
    
    % of Net
    
    
    Previous Period2007
    
    
    revenues
    
    
    2006
    
    
    revenues
    
    
    Dollars
    
    
    %REVENUEMembership
    
    $
    386,377
    
    
    
    83
    %
    
    $
    404,375
    
    
    
    82
    %
    
    $
    (17,998
    )
    
    
    (4
    )%Personal training
    
    
    53,417
    
    
    
    11
    %
    
    
    56,883
    
    
    
    12
    %
    
    
    (3,466
    )
    
    
    (6
    )%Membership services revenue
    
    
    439,794
    
    
    
    94
    %
    
    
    461,258
    
    
    
    94
    %
    
    
    (21,464
    )
    
    
    (5
    )%Retail products
    
    
    18,781
    
    
    
    4
    %
    
    
    22,259
    
    
    
    4
    %
    
    
    (3,478
    )
    
    
    (16
    )%Miscellaneous
    
    
    10,300
    
    
    
    2
    %
    
    
    8,914
    
    
    
    2
    %
    
    
    1,386
    
    
    
    16
    %Net revenues
    
    
    468,875
    
    
    
    100
    %
    
    
    492,431
    
    
    
    100
    %
    
    
    (23,556
    )
    
    
    (5
    )%OPERATING COSTS AND EXPENSESMembership services
    
    
    317,651
    
    
    
    68
    %
    
    
    327,463
    
    
    
    66
    %
    
    
    (9,812
    )
    
    
    (3
    )%Retail products
    
    
    17,488
    
    
    
    4
    %
    
    
    21,063
    
    
    
    5
    %
    
    
    (3,575
    )
    
    
    (17
    )%Marketing and advertising
    
    
    32,539
    
    
    
    7
    %
    
    
    34,545
    
    
    
    7
    %
    
    
    (2,006
    )
    
    
    (6
    )%General and administrative
    
    
    55,829
    
    
    
    12
    %
    
    
    41,509
    
    
    
    8
    %
    
    
    14,320
    
    
    
    34
    %Gain on sales of land and buildings
    
    
    (349
    )
    
    
    
    
    
    
    (872
    )
    
    
    
    
    
    
    523
    
    
    NMDepreciation and amortization
    
    
    21,489
    
    
    
    4
    %
    
    
    26,372
    
    
    
    5
    %
    
    
    (4,883
    )
    
    
    (19
    )%Total operating costs and expenses
    
    
    444,647
    
    
    
    95
    %
    
    
    450,080
    
    
    
    91
    %
    
    
    (5,433
    )
    
    
    (1
    )%Operating income
    
    
    24,228
    
    
    
    5
    %
    
    
    42,351
    
    
    
    9
    %
    
    
    (18,123
    )
    
    
    (43
    )%Interest expense
    
    
    (53,468
    )
    
    
    (11
    )%
    
    
    (49,090
    )
    
    
    (10
    )%
    
    
    (4,378
    )
    
    
    (9
    )%Other income (expense), net
    
    
    1,217
    
    
    
    
    
    
    
    284
    
    
    
    
    
    
    
    933
    
    
    NMLoss from continuing operations before
income taxes
    
    
    (28,023
    )
    
    
    (6
    )%
    
    
    (6,455
    )
    
    
    (1
    )%
    
    
    (21,568
    )
    
    NMIncome tax provision
    
    
    (278
    )
    
    
    
    
    
    
    (702
    )
    
    
    
    
    
    
    424
    
    
    NMLoss from continuing operations
    
    $
    (28,301
    )
    
    
    (6
    )%
    
    $
    (7,157
    )
    
    
    (1
    )%
    
    $
    (21,144
    )
    
    NM
 Key Operating Data
 Membership rollforward and statistics (in thousands, except dollars and fitness center data):
 Three months ended June 30,2007
    
    
    2006
    
    
    change
    
    
    % changeMembers at beginning of period
    
    
    3,453
    
    
    
    3,532
    
    
    
    (79
    )
    
    
    (2
    )%Number of new members joining during the period
    
    
    211
    
    
    
    251
    
    
    
    (40
    )
    
    
    (16
    )%Number of net member drops during the period
    
    
    (269
    )
    
    
    (248
    )
    
    
    (21
    )
    
    
    (8
    )%Members at end of period
    
    
    3,395
    
    
    
    3,535
    
    
    
    (140
    )
    
    
    (4
    )%Average number of members during the period (1)
    
    
    3,424
    
    
    
    3,533
    
    
    
    (109
    )
    
    
    (3
    )%Total membership cash collections
    
    $
    168,786
    
    
    $
    186,814
    
    
    $
    (18,028
    )
    
    
    (10
    )%Average monthly cash received per member (2)
    
    $
    16.43
    
    
    $
    17.62
    
    
    $
    (1.19
    )
    
    
    (7
    )%Fitness centers open at end of period
    
    
    359
    
    
    
    383
    
    
    
    (24
    )
    
    
    (6
    )%
 41




---



##### 



Six months ended June 30,2007
    
    
    2006
    
    
    change
    
    
    % changeMembers at beginning of period
    
    
    3,422
    
    
    
    3,467
    
    
    
    (45
    )
    
    
    (1
    )%Number of new members joining during the period
    
    
    492
    
    
    
    568
    
    
    
    (76
    )
    
    
    (13
    )%Number of net member drops during the period
    
    
    (519
    )
    
    
    (500
    )
    
    
    (19
    )
    
    
    (4
    )%Members at end of period
    
    
    3,395
    
    
    
    3,535
    
    
    
    (140
    )
    
    
    (4
    )%Average number of members during the period (1)
    
    
    3,431
    
    
    
    3,517
    
    
    
    (86
    )
    
    
    (2
    )%Total membership cash collections
    
    $
    350,556
    
    
    $
    381,342
    
    
    $
    (30,786
    )
    
    
    (8
    )%Average monthly cash received per member (2)
    
    $
    17.03
    
    
    $
    18.07
    
    
    $
    (1.04
    )
    
    
    (6
    )%Fitness centers open at end of period
    
    
    359
    
    
    
    383
    
    
    
    (24
    )
    
    
    (6
    )%
 
 (1)
    
    The average number of members for the period is derived by dividing
the sum of the total members outstanding at the beginning and end of
the quarter by two.(2)
    
    Average monthly cash received per member represents cash collections
of membership revenue for the period divided by the number of months
in the period, divided by the average number of members for the
period. Revenues and expenses
   1)
    
    Our primary revenue source is membership services revenue derived from
the operation of our fitness centers. Membership services revenue
includes amounts paid by our members in the form of membership fees,
which include down payments on financed contracts and dues payments.
It also includes revenue generated from provision of personal training
services.Membership services revenue comprised 94% of our revenue for the three and six months ended
June 30, 2007 and 2006. Membership services revenue is recognized at the later of when
membership services fees are collected or earned. Membership services fees collected but not
yet earned are included as a deferred revenue liability on the balance sheet.Currently, the majority of our members choose to purchase their membership under our
multi-year value plan by paying a membership fee down payment to their financed members
contract and by making monthly membership fee payments throughout the obligatory contract
term of their membership. After the obligatory contract term, our members enter the
non-obligatory renewal period of membership and make monthly payments (renewal payments) to
maintain membership privileges. Under sales methods in effect prior to the BYOM program
implementation beginning in late 2004, renewal payments were substantially discounted from
those required in the obligatory period. As BYOM members enter renewal, we anticipate that
these renewal payments will likely carry a smaller discount from the obligatory period
monthly payment level in most markets. Members in our first BYOM markets began entering their
renewal stage in late 2006. Our initial experience with these renewals indicates monthly
renewal payments at levels higher than we have historically experienced, but lower than the
initial obligatory term monthly rate. Beginning in the fourth quarter of 2006, we again began
to offer more significantly discounted renewals on our multi-club access memberships in many
markets.In addition to our multi-year value plan financed membership program, members may choose to
prepay their multi-year membership for periods of up to three years, or may choose
paid-in-full nonrenewable memberships with closed-end contract terms of up to three years.
Month-to-month nonobligatory memberships are also available, which allow a member to pay
monthly non-obligatory dues payments after making an initial membership fee payment at the
start of the membership. Multi-year value plan financed membership contracts, including those
that have been prepaid, are renewable past the initial obligatory contract period, after
which members maintain their membership by making monthly or annual dues payments.Cash collection of membership services revenue generally occurs before the associated
revenue is recognized. This results in the deferral of significant cash collection amounts
received early in the membership period that will be recognized in later periods. This
recognition methodology is a consequence of our long history of offering membership programs
with higher
 42




---



##### 



levels of monthly or total payments during the obligatory period of membership, generally for
periods of up to three years, followed by discounted payments in the subsequent renewal phase
of membership. Our revenue recognition objective is to recognize revenue on a straight-line
basis over the longer of the contractual period or the estimated member term. For the members
expected to maintain membership through renewal periods, we make estimates of membership term
on a composite basis of all multi-year value plan members joining in a monthly period and
establish discrete amortization pools based on estimated group membership term length
averages. Estimated membership term used to create the separate amortization groups for
revenue recognition are based on historical average membership terms experienced by our
members.
 Membership services revenue for our multi-year value plan financed members expected to enter
renewal is deferred as collected. Our historical experience has resulted in a determination
that approximately 37% of originated monthly payments from our members is subject to
deferral, to be recognized over the related estimated membership term. As a result, we defer
all collections received from members expected to enter renewal, and recognize as membership
services revenue these amounts based on five amortization pools with amortization periods of
39 months to 254 months (39 months to 252 months in 2006). These represent average membership
terms of our members in the five amortization pools expected to enter renewal and maintain
membership for periods of between 37 months and 360 months. Memberships whose initial
contract terms have been prepaid in their entirety are recognized in a similar manner, except
that the estimate of the group expected to remain a member for only the obligatory period is
amortized over the length of the contract (generally 36 months). Our historical experience
has resulted in a determination that approximately 59% of such memberships originated (61% in
2006) is subject to deferral, to be recognized over the related estimated membership term
using the same five amortization pools as described for monthly collections of multi-year
value plan financed contracts. These average membership terms are based on estimates that
change over time as we evaluate our membership term experience.We evaluate the estimates of membership term for each of our deferred revenue pools each
quarter and make adjustments to our estimates based on the most recent actual membership term
experience. As we determine that our new estimated membership term should be modified from
the previous estimate, we recognize as a change in accounting estimate a charge or credit to
membership services revenue in the period of evaluation to cumulatively adjust recognized
revenue and deferred revenue. As a consequence of our deferred revenue methodology, an
increase in membership attrition is expected to result in an increase in revenue in the
period of adjustment as it is determined that amounts previously deferred to future periods
should be deferred over a shorter expected period. Alternatively, a decrease in membership
attrition can reduce membership services revenue as it is determined that amounts previously
considered earned are required to be deferred for recognition over a longer expected period.Beginning in the fourth quarter of 2004, we increased contractual renewal rates associated
with our typical membership offering. Historically, when the member reaches renewal, our
business practice is to reduce renewal rates in order to increase retention during the
renewal period. Because we have included a discount in our membership contract and do not
have a demonstrated history of collecting the contractual renewal rate, we use the current
collections of members in renewal to estimate both ultimate collections and the portion
attributable to the initial term.To the extent that actual cash collected in renewal is different from the estimated amount,
revenues in the period of the change in estimate may be materially impacted. If we are
successful in collecting the contractual renewal rate, revenue deferred during the initial
term is expected to decline. If we offer discounts to renewing members that are more
significant than those that have been offered in the past, revenue required to be deferred
during the initial contract term will increase. The potential effects of this change in
estimate may be amplified if, for example, the collections of higher contractual renewal
rates results in a decline in membership retention, which will reduce our estimate of total
membership term, and further reduce the amount of deferred revenue recorded. Changes in
member behavior, competition and our performance may cause actual collected renewal rates to
differ significantly from estimated renewal rates. A resulting change in estimated renewal
rates may have a material effect on reported revenues in the period in which the change of
estimate is made.Our membership mix impacts the amount of revenue that we defer for later recognition, and the
period of time over which it is recognized. Since 2004 we have increased our sales of
month-to-month, nonobligatory add-on, and nonrenewable paid-in-full memberships. These
alternative membership programs result in a lower level of deferred revenue than our
multi-year value plan financed membership plans. Nonobligatory membership programs include
our month-to-month memberships which allow a member to make a membership fee payment,
generally between $99 and $149, and then make monthly dues payments for the membership term
on a nonobligatory basis. Add-on memberships to our multi-year value plan membership
contracts allow added members to maintain membership on a nonobligatory basis by making
monthly payments with no additional down payment requirements. Our nonrenewable memberships
primarily result from our paid-in-full membership option. Nonrenewable members prepay their
membership for contract periods of 12 to 36 months, and then are required to purchase a new
membership after the expiration of the contract membership term to maintain membership. A
shift in membership mix from our multi-year value plan financed membership to month-to-month
and nonrenewable memberships
 43




---



##### 



generally results in a reduction in the deferral of cash collections because the membership
term of month-to-month contracts is much shorter than the membership term of multi-year value
plan financed memberships, and the nonrenewable contract revenue is recognized over the
contract term, which is typically 36 months or less. As a result of these shorter deferral
periods, cash is recognized as revenue more quickly for month-to-month and nonrenewable paid
in full memberships than for our multi-year value plan financed memberships. Our pricing of
add-on memberships typically results in an equal increase to monthly payments required in the
initial term and the renewal term. As a result, to the extent the membership mix shifts to
include more add-on memberships and fewer multi-year value plan members, the amount of
required deferred revenue is expected to decrease.
 Personal training and other services are provided at most of the Companys fitness
centers. Personal training services contracts are either paid-in-full at the point of
origination, or are financed and collected generally over three months after an initial
payment. Collections related to paid-in-full personal training services contracts are
deferred and recognized as personal training services are rendered. Revenue related to
personal training services contracts that have been financed is recognized at the later of
cash receipt or the rendering of personal training services.2)
    
    We generate revenue from the sales of products at our in-fitness
center retail stores, including Bally-branded and third-party
nutritional products, juice bar nutritional drinks and fitness-related
convenience products such as clothing. Revenue from product sales
represented 4% of total revenue for the three and six months ended
June 30, 2007 and 2006.3)
    
    The balance of our revenue (2% for the three and six months ended June
30, 2007 and 2006) primarily consists of franchising revenue, guest
fees and specialty fitness programs. We also generate revenue through
granting concessions in our facilities to operators offering
wellness-related services such as physical therapy and from sales of
Bally-branded products by third-parties. Revenue from sales of in-club
advertising and sponsorships is also included in this category, which
we refer to as miscellaneous revenue.
   1)
    
    Membership services expenses consist primarily of salaries,
commissions, payroll taxes, benefits, rent, real estate taxes and
other occupancy costs, utilities, repairs and maintenance and supplies
to operate our fitness centers and provide personal training. Also
included are the costs to operate member processing and collection
centers, which provide contract processing, member relations, billing
and collection services.2)
    
    Retail products expenses consist primarily of the cost of products
sold as well as the payroll and related costs of dedicated retail
associates.3)
    
    Marketing and advertising expenses consist of our marketing
department, national and local media and production and advertising
costs to support fitness center membership growth as well as the
growth of our brand.4)
    
    General and administrative expenses include costs relating to our
centralized support functions, such as information technology,
accounting, treasury, human resources, procurement, real estate and
development and senior management. General and administrative also
includes professional services expenses such as legal, consulting and
auditing as well as expenses related to the various legal and
accounting investigations.5)
    
    Impairment of goodwill and other intangibles includes the write-down
of the net book value of these assets pursuant to SFAS No. 142. Under
SFAS No. 142, the carrying value of our indefinite life intangible
assets is annually evaluated and compared to the fair value of such
assets. Impairments are recorded when we determine that the net book
value of these assets exceeds their fair value.6)
    
    Asset impairment charges include the write-down of the net book value
of our assets (other than indefinite life intangible assets evaluated
under SFAS No. 142) pursuant to SFAS No. 144. Under SFAS No. 144, the
carrying value of our assets, primarily property and equipment assets,
is evaluated when circumstances indicate that the carrying value may
have been impaired. Asset impairment charges represent the excess of
the carrying value of the assets over their fair value.
 44




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7)
    
    Depreciation and amortization represent primarily the depreciation on
our fitness centers (equipment and buildings, where owned), and
amortization of leasehold improvements. Owned buildings and related
improvements are depreciated over 5 to 35 years and leasehold
improvements are amortized on the straight-line method over the lesser
of the estimated useful lives of the improvements, or the remaining
non-cancelable lease terms. In addition, equipment and furnishings are
depreciated over 5 to 10 years.
     Industry Data Survey of the Health and Fitness Club Industry,
 Summary of revenue recognition method
    45




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46




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47




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Comparison of the Three Months Ended June 30, 2007 and 2006
  
    
    Membership revenue decreased from $201.7 million in the prior year
quarter to $193.6 million in the quarter ended June 30, 2007 representing
a decrease of $8.1 million (4%).
    
    Amortization of previously deferred cash collections, included in the
above decrease in membership revenue, declined by $10.7 million (14%) to $64.0
million in the current year period. Amortization of deferred revenue in our
long-term deferred revenue pools has declined due to the increase in the mix of
nonobligatory membership programs, including add-on memberships added to
multi-year value plan membership programs, month-to-month membership contracts,
the continued increase in our paid-in-full nonrenewable membership programs,
and the year-end 2006 adjustments which reduced beginning deferred revenue in
2007 to adjust for changes in estimated membership term. During the quarter
ended June 30, 2007, we increased revenue recognized by $4.7 million and
decreased deferred revenue to adjust to our current estimate of membership
term. In the prior year quarter, revenue recognized was increased by $8.1
million and deferred revenue decreased to adjust for this estimate resulting in
a decrease in recognition related to our estimate of term length of $3.4
million in the current quarter. It is expected that amortization of our
long-term pools will continue to decline as a result of this membership mix
change. Declines in the recognition through amortization of amounts deferred
from our traditional obligatory membership programs are expected to be offset
in part by increases in recognition of cash collected for nonobligatory
memberships, month-to-month memberships, and paid-in-full nonrenewable
memberships.
    
    Total membership cash collections in the quarter ended June 30, 2007
were $168.8 million versus $186.8 million in the prior year quarter, an $18.0
million (10%) decrease. Gross collections of monthly membership fees and dues
declined from $171.6 million in the prior year quarter to $152.1 in the second
quarter 2007, a $19.6 million (11%) decrease. Total deferrals of gross
collections of monthly membership fees and dues declined from the prior year
period by $24.0 million, resulting in an increase in monthly membership fee
payments and dues recognized of $6.0 million. Prepayments of membership fees
originated increased by $1.4 million to $12.5 million during the quarter, but
were offset by declines in down payments on value plan contracts of $0.5
million, to $7.5 million in the current year quarter. Accelerations of
membership fee collections included in the above change in gross collections of
membership fees were $2.2 million in the current year quarter, versus $5.9
million in the prior year period, a $3.7 million decrease resulting from the
Companys 2006 second quarter direct mail acceleration program that was not
repeated in the current year quarter.
    
    Increases in renewal dues have had a positive impact on average monthly
cash received per member. However, the mix of new member signups has changed
under the BYOM program to include a higher number of one-club memberships,
along with an increase in add-on member signups at discounted monthly rates
relative to primary member monthly rates, and a higher percentage of
nonobligatory month-to-month members, including members added under add-on
programs. In the quarter ended June 30, 2007, new member signups were
approximately
 48




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67% value plan, 18% paid-in-full and 15% month-to-month. In the
year earlier period, new member signups were approximately 72% value plan, 12%
paid-in-full and 16% month-to-month. Membership cash collections have been
negatively affected due to the higher attrition tendency of month-to-month
members, and the lower average monthly rates of the increasing mix of one-club
memberships and discounted family member signups. Because of our historical
attrition patterns, whereby a high percentage of new members drop their
membership during the first twelve months subsequent to joining, a significant
portion of cash collections have historically
been provided by new members early in their membership term. Accordingly, a
decrease in new member pricing (both obligatory and nonobligatory) coupled with
the change in the mix of new membership signups has had a disproportionate impact
on membership cash collections in second quarter 2007 as compared to the 2006
period and will continue to have a negative impact.
 
    
    Personal training revenue decreased to $27.4 million in the second
quarter, 2007 from $29.0 million in 2006, a decrease of $1.6 million
(6%), reflecting the decline in new membership sales from the prior
year.
    
    Retail products revenue decreased to $9.1 million in the second
quarter, 2007 from $10.9 million in 2006, a decrease of $1.8 million
(17%), due primarily to the conversion of lower performing full size
in-club retail stores to a more efficient but lower sales model
integrated with the front desk operation, and reduced workout traffic
in the clubs.
    
    Miscellaneous revenue increased to $5.4 million (21%) in the second
quarter, 2007 from $4.4 million in 2006.
  
    
    Membership services expenses for the three
months ended June 30, 2007 decreased
$7.6 million (5%) from 2006, reflecting
reductions in personnel costs as a result
of our cost reduction initiatives and
utility costs, offset by increases in
occupancy costs (primarily rent) and repair
and maintenance costs.
    
    Retail products expenses, which include
labor costs, for the three months ended
June 30, 2007 decreased $1.6 million (16%)
from 2006, primarily as a result of a
decrease in cost of goods sold from lower
sales and reduced labor costs as a result
of our front desk retail model integration.
    
    Marketing and advertising expenses for the
three months ended June 30, 2007 decreased
$2.8 million (17%) from 2006, primarily
from decreases in media spending and
television production costs.
    
    General and administrative expenses for the three months
ended June 30, 2007 increased $13.0 million (63%) from
2006. This increase is attributable to professional and
legal fees associated with our chapter 11 filing and
incentive compensation accruals.

    
    Depreciation expense for the three months
ended June 30, 2007 decreased $2.2 million
(17%) from 2006, reflecting fewer
depreciable assets resulting from fixed
asset write-offs and impairment charges in
2006.
   Discontinued Operations
  49




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Comparison of the Six Months Ended June 30, 2007 and 2006
  
    
    Membership revenue decreased from $404.4 million in the prior year period
to $386.4 million for the six months ended June 30, 2007 representing a
decrease of $18.0 million (4%).
    
    Amortization of previously deferred cash collections, included in the
above decrease in membership revenue, declined by $21.1 million (14%) to $131.2
million in the current year period. Amortization of deferred revenue in our
long-term deferred revenue pools has declined due to the increase in the mix of
nonobligatory membership programs, including add-on memberships added to
multi-year value plan membership programs, month-to-month membership contracts,
the continued increase in our paid-in-full nonrenewable membership programs,
and the year-end 2006 adjustments which reduced beginning deferred revenue in
the period to adjust for changes in estimated membership term. During the six
months ended June 30, 2007, we increased revenue recognized by $6.6 million and
decreased deferred revenue to adjust to our current estimate of membership
term. In the prior year period, revenue recognized was increased by $16.6
million and deferred revenue decreased to adjust for this estimate resulting in
a decrease in recognition related to our estimate of term length of $10.0
million in the current period. It is expected that amortization of our
long-term pools will continue to decline as a result of this membership mix
change. Declines in the recognition through amortization of amounts deferred
from our traditional obligatory membership programs are expected to be offset
in part by increases in recognition of cash collected for nonobligatory
memberships, month-to-month memberships, and paid-in-full nonrenewable
memberships.
    
    Total membership cash collections for the six months ended June 30, 2007 were
$350.6 million versus $381.3 million in the prior year
period, a $30.8 million (8%)
decrease. Gross collections of monthly membership fees and dues declined from $347.4
million in the prior year period to $313.4 for the first six months ended June 30,
2007, a $34.0 million (10%) decrease. Total deferrals of gross collections of monthly
membership fees and dues declined from the prior year period by $42.9 million,
resulting in an increase in monthly membership fee payments and dues recognized of
$12.1 million. Prepayments of membership fees originated increased by $2.9 million to
$28.5 million during the period, but were offset by declines in down payments on value
plan contracts of $2.2 million, to $16.4 million in the current year period.
Accelerations of membership fee collections included in the above change in gross
collections of membership fees were $5.5 million in the current year period, versus
$9.7 million in the prior year period, a $4.2 million decrease resulting from the
Companys 2006 second quarter direct mail acceleration program that was not repeated in
the current year.
    
    Increases in renewal dues have had a positive impact on average monthly
cash received per member. However, the mix of new member signups has changed
under the BYOM program to include a higher number of one-club memberships,
along with an increase in add-on member signups at discounted monthly rates
relative to primary member monthly rates, and a higher percentage of
nonobligatory month-to-month members, including members added under add-on
programs. In the six months ended June 30, 2007, new member signups were
approximately 69% value plan, 17% paid-in-full and 14% month-to-month. In the
year earlier period, new member signups were approximately 72% value plan, 12%
paid-in-full and 16% month-to-month. Membership cash collections have been
negatively affected due to the higher attrition tendency of month-to-month
members, and the lower average monthly rates of the increasing mix of one-club
memberships and discounted family member signups. Because of our historical
attrition patterns, whereby a high percentage of new members drop their
membership during the first twelve months subsequent to joining, a significant
portion of cash collections have historically been provided by new members
early in their membership term. Accordingly, a decrease in new member pricing
(both obligatory and nonobligatory) coupled with the change in the mix of new
membership signups has had a disproportionate impact on membership cash
collections in the first six months of 2007 as compared to the 2006 period and
will continue to have a negative impact.
    
    Personal training revenue decreased to $53.4 million for the six
months ended June 30, 2007, from $56.9 million in 2006, a decrease of
$3.5 million (6%), reflecting the decline in new membership sales from
the prior year.
 50




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
    
    Retail products revenue decreased to $18.8 million for the six months
ended June 30, 2007 from $22.3 million in 2006, a decrease of
$3.5 million (16%), due primarily to the conversion of lower
performing full size in-club retail stores to a more efficient but
lower sales model integrated with the front desk operation, and
reduced workout traffic in the clubs.
    
    Miscellaneous revenue increased to $10.3 million (16%) for the six
months ended June 30, 2007 from $8.9 million in 2006.
  
    
    Membership services expenses for the six
months ended June 30, 2007 decreased
$9.8 million (3%) from 2006, reflecting
reductions in personnel costs as a result
of our cost reduction initiatives and
utility costs, offset by increases in
occupancy costs (primarily rent) and repair
and maintenance costs.
    
    Retail products expenses, which include
labor costs, for the six months ended
June 30, 2007 decreased $3.6 million (17%)
from 2006, primarily as a result of a
decrease in cost of goods sold from lower
sales and reduced labor costs as a result
of our front desk retail model integration.
    
    Marketing and advertising expenses for the
six months ended June 30, 2007 decreased
$2.0 million (6%) from 2006, primarily from
decreases in media spending and television
production costs.
    
    General and administrative expenses for the six months
ended June 30, 2007 increased $14.3 million (34%) from
2006. This increase is attributable to professional and
legal fees associated with our chapter 11 filing and
incentive compensation accruals.
    
    Depreciation expense for the six months
ended June 30, 2007 decreased $4.9 million
(19%) from 2006, reflecting fewer
depreciable assets resulting from fixed
asset write-offs and impairment charges in
2006.
   Discontinued Operations
  Recently Issued Accounting Standards
 The Fair Value Option for
Financial Assets or Financial Liabilities
 Other Matters
 NYSE Delisting
  51




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Management Changes
   Item 3. Interest Rate Risk and Market Risk
   Foreign Exchange Risk
  Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
 Controls and Procedures
   52




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Changes in Internal Control over Financial Reporting (ICFR)
 Controls and Procedures
 PART II. OTHER INFORMATION
 Item 1. Legal Proceedings
 Litigation
 Securities and Exchange Commission Investigation
  Department of Justice Investigation
  Putative Securities Class Actions
 In re Bally Total Fitness Securities Litigation
 Makor Issues & Rights v. Tellabs
 Stockholder Derivative Lawsuits in Illinois Federal Court
  53




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Individual Securities Action in Illinois
 Levine v. Bally Total Fitness Holding Corporation, et
al.
 Insurance Lawsuits
 Travelers Indemnity Company and ACE American Insurance
Company v. Bally Total Fitness Holding Corporation; Holiday Universal, Inc. n/k/a Bally Total
Fitness of the Mid-Atlantic, Inc; George N. Aronoff; Paul Toback; John W. Dwyer; Lee S. Hillman;
Stephen C. Swid; James McAnally; J. Kenneth Looloian; Liza M. Walsh; Annie P. Lewis, as Executor of
the Estate of Aubrey C. Lewis, Deceased; Theodore Noncek; Geoff Scheitlin; John H. Wildman; John W.
Rogers, Jr.; and Martin E. Franklin,
 RLI Insurance Company v. Bally Total Fitness Holding Corporation;
Holiday Universal, Inc.; George N. Aronoff; Paul Toback; John H. Dwyer; Lee S. Hillman; Stephen C.
Swid; James McAnally; J. Kenneth Looloian; Liza M. Walsh; Annie P. Lewis, as Executor of the Estate
of Aubrey C. Lewis, Deceased; Theodore Noncek; Geoff Scheitlin; John H. Wildman; John W.
Rogers, Jr.; and Martin E. Franklin,
 Great American Insurance
Company v. Bally Total Fitness Holding Corporation, ab initio
 54




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##### 



Other
    Item 1A. Risk Factors
 Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Repurchases of Common Stock
  Item 3. Defaults Upon Senior Securities
  55




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56




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##### 



Item 4. Submission of Matters to a Vote of Security Holders
  Item 5. Other Information
  Item 6. Exhibits
  ExhibitNumber
    
    Name of Exhibit4.1
    
    Senior Notes Supplemental Indenture, dated as of May 22, 2007, among Bally Total Fitness Holding
Corporation, the Guarantors listed on Schedule A thereto and U.S. Bank National Association, as
Trustee (incorporated by reference to Exhibit 10.1 to the Companys Current Report on 8-K, file
no. 001-13997, dated May 29, 2007).4.2
    
    Senior Subordinated Notes Supplemental Indenture, dated as of May 22, 2007, among Bally Total
Fitness Holding Corporation and U.S. Bank National Association, as Trustee (incorporated by
reference to Exhibit 10.2 to the Companys Current Report on 8-K, file no. 001-13997, dated May
29, 2007).10.1
    
    Form of Senior Notes Forbearance Agreement relating to the Companys 10 1/2% Senior Notes due 2011
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on 8-K, file no.
001-13997, dated May 17, 2007).10.2
    
    Form of Senior Subordinated Notes Forbearance Agreement relating to the Companys 9 7/8% Senior
Subordinated Notes due 2007 (incorporated by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K, file no. 001-13997, dated May 17, 2007).10.3
    
    Forbearance Agreement, dated April 5, 2007, under the Amended And Restated Credit Agreement dated
as of October 16, 2006, among the Company, the lenders parties thereto (the Lenders), JP Morgan
Chase Bank, N.A., as agent for the Lenders and Morgan Stanley Senior Funding, Inc., as Syndication
Agent (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K, file
no. 001-13997, dated April 13, 2007).10.4
    
    Form of Restructuring Support Agreement, dated as of June 15, 2007, between the Company and the
holders of its 10 1/2% Senior Notes due 2011 and 9 7/8% Senior Subordinated Notes due 2007 parties
thereto (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K,
file no. 001-13997, dated June 18, 2007).10.5
    
    Form of Subscription and Backstop Purchase Agreement, dated June 27, 2007, between the Company and
the holders of its 9 7/8% Senior Subordinated Notes due 2007 parties thereto (incorporated by
reference to Exhibit 10.2 to the Companys Current Report on Form 8-K, file no. 001-13997, dated
June 27, 2007).10.6
    
    Form of Senior Notes Forbearance Extension relating to the Companys 10 1/2% Senior Notes due 2011
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K, file no.
001-13997, dated July 17, 2007).10.7
    
    Form of Senior Subordinated Notes Forbearance Extension relating to the Companys 9 7/8% Senior
Subordinated Notes due 2007 (incorporated by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K, file no. 001-13997, dated July 17, 2007).10.8
    
    Amendment No. 1 to Forbearance Agreement, dated as of July 16, 2007, by and between the Company,
the Guarantors, the Lenders, JP Morgan Chase Bank, N.A., as agent for the Lenders and Morgan
Stanley Senior Funding, Inc., as Syndication Agent (incorporated by reference to Exhibit 10.3 to
the Companys Current Report on Form 8-K, file no. 001-13997, dated July 17, 2007).
 57




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ExhibitNumber
    
    Name of Exhibit+10.9
    
    Management Services Agreement, dated as of May 4, 2007, among Bally Total Fitness Holding
Corporation, Alpine Advisors LLC and Don R. Kornstein (incorporated by reference to Exhibit 10.55
to the Companys Current Report on Form 10-K, file no. 001-13997, dated June 29, 2007).+10.10
    
    Form of Restructuring Bonus Agreement for Marc Bassewitz and John Wildman (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K, file no. 001-13997, dated
June 1, 2007).+10.11
    
    Form of Restructuring Bonus Agreement for Don R. Kornstein (incorporated by reference to Exhibit
10.2 to the Companys Current Report on 8-K, file no. 001-13997, dated June 1, 2007).+10.12
    
    Interim Management and Restructuring Services Agreement, dated as of June 5, 2007, between Bally
Total Fitness Holding Corporation and AP Services, LLC (incorporated by reference to Exhibit 10.1
to the Companys Current Report on 8-K, file no. 001-13997, dated June 11, 2007).+10.13
    
    Confidential Settlement Agreement and Mutual General Release, dated June 13, 2007, between the
Company and James A. McDonald (incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K, file no. 001-13997, dated June 18, 2007).+10.14
    
    Amendment to Employment Agreement, dated as of June 28, 2007, between the Company and John H.
Wildman (incorporated by reference to Exhibit 10.29 to the Companys Current Report on Form 10-K,
file no. 001-13997, dated June 29, 2007).+10.15
    
    Form of Amended Restructuring Bonus
Agreement for Marc Bassewitz, William Fanelli and John Wildman
(incorporated by reference to Exhibit 10.15 to the
Companys Quarterly Report on Form 10-Q for the period
ended March 31, 2007,
file no. 001-13997, dated September 28, 2007).+10.16
    
    Form of Amended Restructuring Bonus
Agreement for Don R. Kornstein (incorporated by reference to Exhibit 10.16 to the
Companys Quarterly Report on Form 10-Q for the period
ended March 31, 2007,
file no. 001-13997, dated September 28, 2007).10.17
    
    Superpriority Debtor-In-Possession Credit Agreement dated as of August 22, 2007 between the
Company and Morgan Stanley Senior Funding, Inc., as Administrative Agent and as Collateral Agent;
Wells Fargo Foothill, LLC, as Revolving Credit Agent; and The CIT Group/Business Credit, Inc., as
Revolving Syndication Agent (incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K, file no. 001-13997, dated August 27, 2007).10.18
    
    Guaranty and Collateral Agreement dated as of August 22, 2007 between the Company and Morgan
Stanley Senior Funding, Inc., as Administrative Agent and as Collateral Agent; Wells Fargo
Foothill, LLC, as Revolving Credit Agent; and The CIT Group/Business Credit, Inc., as Revolving
Syndication Agent (incorporated by reference to Exhibit 10.2 to the Companys Current Report on
Form 8-K, file no. 001-13997, dated August 27, 2007).10.19
    
    Restructuring Support Agreement dated as of August 17, 2007 between the Company and Liberation
Investments, L.P. and Liberation Investments, Ltd. (incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K, file no. 001-13997, dated August 20, 2007).10.20
    
    Form of Restructuring Support Agreement between and among the Company and Harbinger Capital
Partners Master Fund I, Ltd. and Harbinger Capital Partners Special Situations Fund L.P.; certain
holders of the Companys Senior Notes; and certain holders of the Companys Senior Subordinated
Notes Agent (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K, file no. 001-13997, dated August 16, 2007).10.21
    
    Investment Agreement dated as of August 15, 2007, by and among the Company and Harbinger Capital
Partners Master Fund I, Ltd. and Harbinger Capital Partners Special Situations Fund L.P.
(incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K, file no.
001-13997, dated August 16, 2007).* 31.1
    
    Certification of Chief Restructuring Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.* 31.2
    
    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.* 32.1
    
    Certification of Chief Restructuring Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
 *
    
    Filed herewith.+
    
    Management contract or compensatory plan or arrangement. 58




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SIGNATURE PAGE
  BALLY TOTAL FITNESS HOLDING CORPORATION
                                   
     RegistrantBy:
    /s/ William G. FanelliWilliam G. FanelliDated: September 28, 2007
    
    Senior Vice President, Finance and Corporate
Development
   (principal financial officer)