##### Table of Contents



FORM 10-Q
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 (Mark One)þ
    
    Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the period ended September 30, 2004oro
    
    Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 001-13997
 BALLY TOTAL FITNESS HOLDING CORPORATION
  Delaware
    
    36-3228107(State or other jurisdiction of incorporation)
    
    (I.R.S. Employer Identification No.)8700 West Bryn Mawr Avenue, Chicago, Illinois
    
    60631(Address of principal executive offices)
    
    (Zip Code)
 (773) 380-3000
  o þ
 þ o
 o þ




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




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BALLY TOTAL FITNESS HOLDING CORPORATION
 INDEX
 PageNumberForward-Looking
StatementsPART I. FINANCIAL INFORMATIONItem 1. Financial statements:Condensed
consolidated balance sheets (unaudited)
    
    
    1September 30, 2004 and December 31, 2003Consolidated
statements of operations (unaudited)
    
    
    2Three months ended September 30, 2004 and 2003Consolidated statements of operations (unaudited)
    
    
    3Nine months ended September 30, 2004 and 2003Consolidated
statement of stockholders equity (deficit) and comprehensive
income (loss)(unaudited)
    
    
    4Nine months ended September 30, 2004Consolidated statements of cash flows (unaudited)
    
    
    5Nine months ended September 30, 2004 and 2003Notes
to condensed consolidated financial statements (unaudited)
    
    
    7Item 2. Managements discussion and analysis of financial condition and results of operations
    
    
    38Item 3. Quantitative and qualitative disclosures about market risk
    
    
    55Item 4. Controls and Procedures
    
    
    55PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    57Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    58Item 3. Defaults Upon Senior Securities
    
    
    58Item 4. Submission of Matters to a Vote of Security Holders
    
    
    58Item 5. Other information
    
    
    59Item 6. Exhibits and reports on Form 8-K
    
    
    59SIGNATURE PAGE
    
    
    60Certification of the Chief Executive OfficerCertification of the Chief Financial OfficerCertification of the CEO and CFO




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##### Table of Contents



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




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BALLY TOTAL FITNESS HOLDING CORPORATION
Condensed Consolidated Balance Sheets
 September 30
    
    
    December 312004
    
    
    2003(Unaudited)
    
    
    (As RestatedSee Note 2)ASSETSCurrent assets:Cash
    
    $
    25,190
    
    
    $
    13,640Deferred income taxes
    
    
    144
    
    
    
    Other current assets
    
    
    31,629
    
    
    
    33,856Total current assets
    
    
    56,963
    
    
    
    47,496Property and equipment, less accumulated depreciation
and amortization of $697,704 and $650,077
    
    
    383,475
    
    
    
    392,900Goodwill, net
    
    
    41,645
    
    
    
    41,659Trademarks, net
    
    
    10,166
    
    
    
    10,599Intangible assets, less accumulated amortization
of $21,090 and $19,664
    
    
    8,588
    
    
    
    10,009Deferred income taxes
    
    
    
    
    
    
    90Other assets
    
    
    30,236
    
    
    
    45,593$
    531,073
    
    
    $
    548,346LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    57,314
    
    
    $
    62,864Income taxes payable
    
    
    784
    
    
    
    Deferred income taxes
    
    
    
    
    
    
    836Accrued liabilities
    
    
    119,639
    
    
    
    129,406Current maturities of long-term debt
    
    
    18,890
    
    
    
    25,393Deferred revenues
    
    
    332,787
    
    
    
    338,005Total current liabilities
    
    
    529,414
    
    
    
    556,504Long-term debt, less current maturities
    
    
    726,688
    
    
    
    704,678Deferred rent liability
    
    
    102,627
    
    
    
    101,396Deferred income taxes
    
    
    1,205
    
    
    
    Other liabilities
    
    
    21,826
    
    
    
    20,995Deferred revenues
    
    
    606,268
    
    
    
    609,881Total liabilities
    
    
    1,988,028
    
    
    
    1,993,454Stockholders
equity (deficit)
    
    
    (1,456,955
    )
    
    
    (1,445,108
    )$
    531,073
    
    
    $
    548,346
  1




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BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Operations
 Three months endedSeptember 302004
    
    
    2003(As RestatedSee Note 2)Net revenues:Membership services
    
    $
    247,048
    
    
    $
    231,451Retail products
    
    
    12,594
    
    
    
    14,138Miscellaneous
    
    
    5,140
    
    
    
    4,376264,782
    
    
    
    249,965Operating costs and expenses:Membership services
    
    
    180,307
    
    
    
    178,399Retail products
    
    
    12,168
    
    
    
    14,597Advertising
    
    
    13,597
    
    
    
    11,712General and administrative
    
    
    18,024
    
    
    
    12,869Depreciation and amortization
    
    
    17,713
    
    
    
    19,611241,809
    
    
    
    237,188Operating income
    
    
    22,973
    
    
    
    12,777Interest expense
    
    
    (16,730
    )
    
    
    (15,929
    )Foreign exchange gain
    
    
    879
    
    
    
    766Other, net
    
    
    (62
    )
    
    
    (1,965
    )(15,913
    )
    
    
    (17,128
    )Income (loss) from continuing operations before
income taxes
    
    
    7,060
    
    
    
    (4,351
    )Income tax provision
    
    
    (213
    )
    
    
    (283
    )Income (loss) from continuing operations
    
    
    6,847
    
    
    
    (4,634
    )Discontinued operations
    
    
    
    
    
    
    (166
    )Net income (loss)
    
    $
    6,847
    
    
    $
    (4,800
    )Basic income (loss) per common share:Income (loss) from continuing operations
    
    $
    0.21
    
    
    $
    (0.14
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )Net income (loss) per common share
    
    $
    0.21
    
    
    $
    (0.15
    )Diluted income (loss) per common share:Income (loss) from continuing operations
    
    $
    0.21
    
    
    $
    (0.14
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )Net income (loss) per common share
    
    $
    0.21
    
    
    $
    (0.15
    )
  2




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BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Operations
 Nine months endedSeptember 302004
    
    
    2003(As RestatedSee Note 2)Net revenues:Membership services
    
    $
    732,533
    
    
    $
    695,914Retail products
    
    
    42,048
    
    
    
    43,753Miscellaneous
    
    
    14,720
    
    
    
    13,955789,301
    
    
    
    753,622Operating costs and expenses:Membership services
    
    
    561,057
    
    
    
    538,274Retail products
    
    
    40,399
    
    
    
    44,479Advertising
    
    
    49,352
    
    
    
    43,093General and administrative
    
    
    49,857
    
    
    
    37,645Depreciation and amortization
    
    
    52,232
    
    
    
    59,776752,897
    
    
    
    723,267Operating income
    
    
    36,404
    
    
    
    30,355Interest expense
    
    
    (49,266
    )
    
    
    (44,784
    )Foreign exchange gain
    
    
    473
    
    
    
    2,746Other, net
    
    
    (232
    )
    
    
    (3,785
    )(49,025
    )
    
    
    (45,823
    )Loss from continuing operations before
income taxes
    
    
    (12,621
    )
    
    
    (15,468
    )Income tax provision
    
    
    (638
    )
    
    
    (849
    )Loss from continuing operations
    
    
    (13,259
    )
    
    
    (16,317
    )Loss from discontinued operations
    
    
    
    
    
    
    (2,680
    )Loss before cumulative effect of change in accounting principle
    
    
    (13,259
    )
    
    
    (18,997
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (626
    )Net loss
    
    $
    (13,259
    )
    
    $
    (19,623
    )Basic and diluted loss per common share:Loss from continuing operations
    
    $
    (0.40
    )
    
    $
    (0.50
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.08
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (0.02
    )Net loss per common share
    
    $
    (0.40
    )
    
    $
    (0.60
    )
  3




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BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statement of Stockholders Equity (Deficit) and
Comprehensive Income (Loss)
 AccumulatedCommon stock
    
    
    
    
    
    
    Accum-
    
    
    
    
    
    
    
Common
    
    
    other
    
    
    TotalPar
    
    
    Contributed
    
    
    ulated
    
    
    Unearned
    
    
    
Stock in
    
    
    Comprehensive
    
    
    stockholdersShares
    
    
    value
    
    
    capital
    
    
    deficit
    
    
    compensation
    
    
    
treasury
    
    
    income(loss)
    
    
    deficitBalance at December
31, 2003(Restated See Note 2)
    
    
    34,035,734
    
    
    $
    347
    
    
    $
    647,832
    
    
    $
    (2,076,135
    )
    
    $
    (3,760
    )
    
$
(11,635
    )
    
    $
    (1,757
    )
    
    $
    (1,445,108
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,259
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,259
    )Cumulative translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (189
    )
    
    
    (189
    )Restricted stock activity
    
    
    (107,500
    )
    
    
    (1
    )
    
    
    (904
    )
    
    
    
    
    
    
    1,913
    
    
    
    
    
    
    
    
    
    
    
    1,008Issuance of common
stock under stock purchase
and option plans
    
    
    112,071
    
    
    
    1
    
    
    
    592
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    593Balance at September 30,
2004
    
    
    34,040,305
    
    
    $
    347
    
    
    $
    647,520
    
    
    $
    (2,089,394
    )
    
    $
    (1,847
    )
    
    $
    (11,635
    )
    
    $
    (1,946
    )
    
    $
    (1,456,955
    )
  4




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BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Cash Flows
 Nine months endedSeptember 302004
    
    
    2003(As RestatedSee Note 2)CASH FLOWS FROM OPERATING ACTIVITIES:Loss before cumulative effect of change in accounting principle
    
    $
    (13,259
    )
    
    $
    (18,997
    )Adjustments to reconcile to cash provided by operating activities Depreciation and amortization, including amortization
included in interest expense
    
    
    54,691
    
    
    
    62,487Changes in operating assets and liabilities
    
    
    (4,087
    )
    
    
    23,776Deferred income taxes, net
    
    
    315
    
    
    
    308Write-off of debt issuance costs
    
    
    
    
    
    
    2,562Loss on write-off of assets
    
    
    822
    
    
    
    Loss on disposal of discontinued operations
    
    
    
    
    
    
    1,699Foreign currency translation gain
    
    
    (473
    )
    
    
    (2,746
    )Stock-based compensation
    
    
    1,008
    
    
    
    381Cash provided by operating activities
    
    
    39,017
    
    
    
    69,470CASH FLOWS FROM INVESTING ACTIVITIES:Purchases and construction of property and equipment
    
    
    (38,561
    )
    
    
    (38,591
    )Other
    
    
    (117
    )
    
    
    (501
    )Cash used in investing activities
    
    
    (38,678
    )
    
    
    (39,092
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net borrowings under revolving credit agreement
    
    
    34,000
    
    
    
    (49,500
    )Net repayments of other long-term debt
    
    
    (23,760
    )
    
    
    36,727Debt issuance and refinancing costs
    
    
    (251
    )
    
    
    (9,790
    )Proceeds from issuance of common stock under
stock purchase and option plans
    
    
    593
    
    
    
    697Cash
provided by (used
in) financing activities
    
    
    10,582
    
    
    
    (21,866
    )Increase in cash
    
    
    10,921
    
    
    
    8,512Effect of exchange rate changes on cash balance
    
    
    629
    
    
    
    (222
    )Cash, beginning of period
    
    
    13,640
    
    
    
    12,127Cash, end of period
    
    $
    25,190
    
    
    $
    20,417
 See accompanying notes to
condensed consolidated financial statements. 5




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BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statements of Cash Flows  (continued)
 Nine months endedSeptember 302004
    
    
    2003(As RestatedSee Note 2)SUPPLEMENTAL CASH FLOWS INFORMATION:Changes in operating assets and liabilities:Decrease in other current and other assets
    
    $
    17,303
    
    
    $
    4,784Increase
(decrease) in accounts payable
    
    
    (6,082
    )
    
    
    2,681Increase (decrease) in income taxes payable and deferred income taxes
    
    
    784
    
    
    
    (1,114
    )Increase (decrease) in accrued and other liabilities
    
    
    (16,092
    )
    
    
    17,425Change in operating assets and liabilities
    
    $
    (4,087
    )
    
    $
    23,776Cash payments for interest and income taxes
were as follows Interest paid
    
    $
    47,584
    
    
    $
    30,477Interest capitalized
    
    
    (898
    )
    
    
    (844
    )Income taxes paid, net
    
    
    911
    
    
    
    1,698Investing and financing activities exclude the following
non-cash transactions Acquisitions of property and equipment
through capital leases/borrowings
    
    $
    4,651
    
    
    $
    4,192
  6




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




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BALLY TOTAL FITNESS HOLDING CORPORATION  Notes to Condensed Consolidated Financial Statements  (continued)
 Asset
retirement obligations
 Accounting for Asset
Retirement Obligations
 Note 2 Restatements and Reclassifications
  (a)
    
    Restatements arising from the findings of the investigation conducted by the audit
committee of the Board of Directors; and(b)
    
    Other corrections of errors in prior periods.
  Condensed Consolidated Balance SheetAs of December 31, 2003AsReported
    
    
    
    
    
    
    
    
    
    
    RestatedReference
    
    2003
    
    
    Adjustments
    
    
    Reclassifications
    
    
    2003ASSETSCurrent assets:Cash
    
    
    
    $
    14,410
    
    
    
    
    
    
    
    
    
    
    $
    13,640(b)(xviii)
    
    
    
    
    
    
    (46
    )(b)(xix)
    
    
    
    
    
    
    (724
    )Installment
contracts receivable, net
    
    
    
    
    258,550
    
    
    
    
    
    
    
    
    
    
    
    (a)(i)
    
    
    
    
    
    
    (262,427
    )(a)(v)
    
    
    
    
    
    
    3,877Other current assets
    
    
    
    
    39,707
    
    
    
    
    
    
    
    (2,262
    )
    
    
    33,856(b)(xiii)
    
    
    
    
    
    
    (1,939
    )(b)(xiv)
    
    
    
    
    
    
    (2,287
    )(b)(xviii)
    
    
    
    
    
    
    1,454(b)(xviii)
    
    
    
    
    
    
    139
 8




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BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Condensed Consolidated Balance SheetAs of December 31, 2003AsReported
    
    
    
    
    
    
    
    
    
    
    RestatedReference
    
    2003
    
    
    Adjustments
    
    
    Reclassifications
    
    
    2003ASSETS
 CONTINUEDOther current
assets  continued(b)(xix)
    
    
    
    
    
    
    767(b)(xx)
    
    
    
    
    
    
    (1,723
    )Total current assets
    
    
    
    
    312,667
    
    
    
    (262,909
    )
    
    
    (2,262
    )
    
    
    47,496Installment contracts
receivable, net
    
    
    
    
    230,809
    
    
    
    
    
    
    
    
    
    
    
    (a)(i)
    
    
    
    
    
    
    (230,809
    )Property and
equipment, cost
    
    
    
    
    1,221,586
    
    
    
    
    
    
    
    (1,035
    )
    
    
    1,042,977(b)(iii)
    
    
    
    
    
    
    68,271(b)(v)
    
    
    
    
    
    
    (17,151
    )(b)(vii)
    
    
    
    
    
    
    (176,516
    )(b)(xi)
    
    
    
    
    
    
    (30,198
    )(b)(xii)
    
    
    
    
    
    
    (12,543
    )(b)(xiii)
    
    
    
    
    
    
    (6,348
    )(b)(xv)
    
    
    
    
    
    
    (8,856
    )(b)(xvii)
    
    
    
    
    
    
    1,080(b)(xviii)
    
    
    
    
    
    
    2,034(b)(xix)
    
    
    
    
    
    
    2,653Accumulated depreciation
    
    
    
    
    (597,134
    )
    
    
    
    
    
    
    
    
    
    
    (650,077
    )(b)(iii)
    
    
    
    
    
    
    (128,399
    )(b)(v)
    
    
    
    
    
    
    6,973(b)(vii)
    
    
    
    
    
    
    54,195(b)(xi)
    
    
    
    
    
    
    8,572(b)(xii)
    
    
    
    
    
    
    1,362
 9




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Three Months Ended September 30, 2003AdjustmentsAs
    
    
    IncreaseReference
    
    Reported
    
    
    (Decrease)
    
    
    Reclassifications
    
    
    RestatedNet revenues:Membership services
    
    
    
    $
    223,016
    
    
    
    
    
    
    
    
    
    
    $
    231,451(a)(i)
    
    
    
    
    
    $
    21,354
    
    
    $
    19,436(b)(i)
    
    
    
    
    
    
    (30,891
    )(b)(ii)
    
    
    
    
    
    
    (1,900
    )(a)(v)
    
    
    
    
    
    
    363(b)(xviii)
    
    
    
    
    
    
    73Retail products
    
    
    
    
    14,138
    
    
    
    
    
    
    
    
    
    
    
    14,138Miscellaneous
    
    
    
    
    4,349
    
    
    
    
    
    
    
    
    
    
    
    4,376(a)(v)
    
    
    
    
    
    
    53(b)(ix)
    
    
    
    
    
    
    (26
    )241,503
    
    
    
    (10,974
    )
    
    
    19,436
    
    
    
    249,965Operating costs and expenses:Membership services
    
    
    
    
    179,661
    
    
    
    
    
    
    
    
    
    
    
    178,399(a)(ii)
    
    
    
    
    
    
    530(a)(v)
    
    
    
    
    
    
    161(b)(iii)
    
    
    
    
    
    
    578(b)(iv)
    
    
    
    
    
    
    (2,351
    )(b)(ix)
    
    
    
    
    
    
    77(b)(xii)
    
    
    
    
    
    
    531(b)(xiii)
    
    
    
    
    
    
    (285
    )(b)(xvi)
    
    
    
    
    
    
    99(b)(xvii)
    
    
    
    
    
    
    (456
    )(b)(xix)
    
    
    
    
    
    
    (146
    )Retail products
    
    
    
    
    13,924
    
    
    
    
    
    
    
    
    
    
    
    14,597(b)(xiv)
    
    
    
    
    
    
    673Advertising
    
    
    
    
    11,935
    
    
    
    
    
    
    
    
    
    
    
    11,712(b)(x)
    
    
    
    
    
    
    (223
    )General and administrative
    
    
    
    
    11,230
    
    
    
    
    
    
    
    
    
    
    
    12,869(b)(iv)
    
    
    
    
    
    
    (5
    )(b)(v)
    
    
    
    
    
    
    1,051(b)(xiii)
    
    
    
    
    
    
    (198
    )(b)(ix)
    
    
    
    
    
    
    5(b)(xvii)
    
    
    
    
    
    
    (32
    )(b)(xix)
    
    
    
    
    
    
    818
 14




---



##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Three Months Ended September 30, 2003AdjustmentsAs
    
    
    IncreaseReference
    
    Reported
    
    
    (Decrease)
    
    
    Reclassifications
    
    
    RestatedOperating costs and expenses  continued:Depreciation and amortization
    
    
    
    
    19,276
    
    
    
    
    
    
    
    
    
    
    
    19,611(b)(iii)
    
    
    
    
    
    
    3,984(b)(v)
    
    
    
    
    
    
    (480
    )(b)(vi)
    
    
    
    
    
    
    695(b)(vii)
    
    
    
    
    
    
    (4,455
    )(b)(viii)
    
    
    
    
    
    
    1,601(b)(xi)
    
    
    
    
    
    
    (738
    )(b)(xii)
    
    
    
    
    
    
    (124
    )(b)(xv)
    
    
    
    
    
    
    18(b)(xix)
    
    
    
    
    
    
    (166
    )236,026
    
    
    
    1,162
    
    
    
    
    
    
    
    237,188Operating income (loss)
    
    
    
    
    5,477
    
    
    
    (12,136
    )
    
    
    19,436
    
    
    
    12,777Finance charges earned
    
    
    
    
    19,436
    
    
    
    
    
    
    
    (19,436
    )
    
    
    Interest expense
    
    
    
    
    (15,651
    )
    
    
    
    
    
    
    
    
    
    
    (15,929
    )(a)(iv)
    
    
    
    
    
    
    (147
    )(a)(v)
    
    
    
    
    
    
    (255
    )(b)(iii)
    
    
    
    
    
    
    222(b)(xiii)
    
    
    
    
    
    
    (30
    )(b)(xix)
    
    
    
    
    
    
    (68
    )Foreign exchange gain (loss)
    
    (b)(xviii)
    
    
    
    
    
    
    766
    
    
    
    
    
    
    
    766Other, net
    
    
    
    
    (2,858
    )
    
    
    
    
    
    
    
    
    
    
    (1,965
    )(b)(xix)
    
    
    
    
    
    
    893927
    
    
    
    1,381
    
    
    
    (19,436
    )
    
    
    (17,128
    )Income (loss) before income
taxes
    
    
    
    
    6,404
    
    
    
    (10,755
    )
    
    
    
    
    
    
    (4,351
    )Income tax provision
    
    
    
    
    (1,537
    )
    
    
    
    
    
    
    40
    
    
    
    (283
    )(b)(xx)
    
    
    
    
    
    
    1,214Loss from continuing operations
before cumulative effect of
changes in accounting principles
    
    
    
    
    4,867
    
    
    
    (9,541
    )
    
    
    40
    
    
    
    (4,634
    )Loss from discontinued operations
    
    
    
    
    (126
    )
    
    
    
    
    
    
    (40
    )
    
    
    (166
    )Net income (loss)
    
    
    
    $
    4,741
    
    
    $
    (9,541
    )
    
    $
    
    
    
    $
    (4,800
    )
 15




---



##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Nine Months Ended September 30, 2003AdjustmentsAs
    
    
    IncreaseReference
    
    Reported
    
    
    (Decrease)
    
    
    Reclassifications
    
    
    RestatedNet revenues:Membership services
    
    
    
    $
    689,253
    
    
    
    
    
    
    
    
    
    
    $
    695,914(a)(i)
    
    
    
    
    
    $
    51,915
    
    
    $
    56,798(a)(v)
    
    
    
    
    
    
    1,822(b)(i)
    
    
    
    
    
    
    (91,814
    )(b)(ii)
    
    
    
    
    
    
    (11,902
    )(b)(xvii)
    
    
    
    
    
    
    (158
    )Retail products
    
    
    
    
    43,753
    
    
    
    
    
    
    
    
    
    
    
    43,753Miscellaneous
    
    
    
    
    14,018
    
    
    
    
    
    
    
    
    
    
    
    13,955(a)(v)
    
    
    
    
    
    
    219(b)(ix)
    
    
    
    
    
    
    (513
    )(b)(xix)
    
    
    
    
    
    
    231747,024
    
    
    
    (50,200
    )
    
    
    56,798
    
    
    
    753,622Operating costs and expenses:Membership services
    
    
    
    
    545,450
    
    
    
    
    
    
    
    
    
    
    
    538,274(a)(ii)
    
    
    
    
    
    
    (473
    )(a)(v)
    
    
    
    
    
    
    767(b)(iii)
    
    
    
    
    
    
    (3,600
    )(b)(iv)
    
    
    
    
    
    
    (1,056
    )(b)(ix)
    
    
    
    
    
    
    77(b)(xii)
    
    
    
    
    
    
    705(b)(xiii)
    
    
    
    
    
    
    (234
    )(b)(xvi)
    
    
    
    
    
    
    (143
    )(b)(xvii)
    
    
    
    
    
    
    (1,939
    )(b)(xix)
    
    
    
    
    
    
    (1,280
    )Retail products
    
    
    
    
    42,459
    
    
    
    
    
    
    
    
    
    
    
    44,479(b)(xiv)
    
    
    
    
    
    
    2,020Advertising
    
    
    
    
    43,999
    
    
    
    
    
    
    
    
    
    
    
    43,093(b)(x)
    
    
    
    
    
    
    (114
    )(b)(xvii)
    
    
    
    
    
    
    (792
    )General and administrative
    
    
    
    
    33,334
    
    
    
    
    
    
    
    
    
    
    
    37,645(b)(iv)
    
    
    
    
    
    
    (186
    )(b)(v)
    
    
    
    
    
    
    2,997(b)(xiii)
    
    
    
    
    
    
    (131
    )(b)(ix)
    
    
    
    
    
    
    5(b)(xvii)
    
    
    
    
    
    
    (182
    )(b)(xix)
    
    
    
    
    
    
    1,808
 16




---



##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Nine Months Ended September 30, 2003AdjustmentsAs
    
    
    IncreaseReference
    
    Reported
    
    
    (Decrease)
    
    
    Reclassifications
    
    
    RestatedDepreciation and amortization
    
    
    
    
    57,918
    
    
    
    
    
    
    
    
    
    
    
    59,776(b)(iii)
    
    
    
    
    
    
    11,960(b)(v)
    
    
    
    
    
    
    (1,439
    )(b)(vi)
    
    
    
    
    
    
    2,685(b)(vii)
    
    
    
    
    
    
    (13,366
    )(b)(viii)
    
    
    
    
    
    
    4,803(b)(xi)
    
    
    
    
    
    
    (2,225
    )(b)(xii)
    
    
    
    
    
    
    (372
    )(b)(xv)
    
    
    
    
    
    
    300(b)(xix)
    
    
    
    
    
    
    (488
    )723,160
    
    
    
    107
    
    
    
    
    
    
    
    723,267Operating income (loss)
    
    
    
    
    23,864
    
    
    
    (50,307
    )
    
    
    56,798
    
    
    
    30,355Finance charges earned
    
    
    
    
    56,798
    
    
    
    
    
    
    
    (56,798
    )
    
    
    Interest expense
    
    
    
    
    (43,572
    )
    
    
    
    
    
    
    
    
    
    
    (44,784
    )(a)(iv)
    
    
    
    
    
    
    (442
    )(a)(v)
    
    
    
    
    
    
    (1,274
    )(b)(iii)
    
    
    
    
    
    
    669(b)(xiii)
    
    
    
    
    
    
    (69
    )(b)(xix)
    
    
    
    
    
    
    (96
    )Foreign exchange gain (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,746(b)(xviii)
    
    
    
    
    
    
    2,746Other, net
    
    
    
    
    (4,678
    )
    
    
    
    
    
    
    
    
    
    
    (3,785
    )(b)(xix)
    
    
    
    
    
    
    8938,548
    
    
    
    2,427
    
    
    
    (56,798
    )
    
    
    (45,823
    )Income (loss) before income taxes
    
    
    
    
    32,412
    
    
    
    (47,880
    )
    
    
    
    
    
    
    (15,468
    )Income tax provision
    
    
    
    
    (7,779
    )
    
    
    
    
    
    
    236
    
    
    
    (849
    )(b)(xx)
    
    
    
    
    
    
    6,694
 17




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Nine Months Ended September 30, 2003AdjustmentsAs
    
    
    IncreaseReference
    
    Reported
    
    
    (Decrease)
    
    
    Reclassifications
    
    
    RestatedIncome (loss) from continuing operations
before cumulative effect of
changes in accounting principles
    
    
    
    
    24,633
    
    
    
    (41,186
    )
    
    
    236
    
    
    
    (16,317
    )Loss discontinued operations
    
    
    
    
    (2,444
    )
    
    
    
    
    
    
    (236
    )
    
    
    (2,680
    )Income (loss) before cumulative
effect of changes in
accounting principles
    
    
    
    
    22,189
    
    
    
    (41,186
    )
    
    
    
    
    
    
    (18,997
    )Cumulative effect of changes
in accounting principles
    
    
    
    
    (15,579
    )
    
    
    
    
    
    
    
    
    
    
    (626
    )(a)(iii)
    
    
    
    
    
    
    20,282(b)(xix)
    
    
    
    
    
    
    (409
    )(b)(xx)
    
    
    
    
    
    
    (4,920
    )Net income (loss)
    
    
    
    $
    6,610
    
    
    $
    (26,233
    )
    
    $
    
    
    
    $
    (19,623
    )
 (a)
    
    Restatements Arising from the Findings of the Audit Committee Investigation
  (i)
    
    Accounting for membership revenue in accordance with Staff Accounting
Bulletin No. 101The Audit Committee determined that the Company improperly
implemented Staff Accounting Bulletin (SAB) No. 101 in a prior period.
Specifically, after the Companys adoption of SAB 101, revenue was recognized
over the average contractual life of twenty-two months. As a part of this
restatement, the Company has modified its membership revenue recognition
methodology such that membership revenue is earned on a straight-line basis
over the longer of the initial membership term or the estimated membership
life. The impact of this change resulted in an increase in deferred revenue
and an increase in accumulated deficit of $1,024,135 as of January 1, 2003, a
decrease in installment accounts receivable of $500,190 as of September 30,
2003, respectively, and an increase in membership services revenue of $21,354 and
$51,915 for the three and nine months ended September 30, 2003, respectively.(ii)
    
    Expense membership acquisition costs when incurredThe Audit Committee
determined that the Company improperly accounted for membership acquisition
costs by improperly deferring certain costs in 2002 and prior. The impact of
this change resulted in an increase in accumulated deficit and an decrease in
deferred membership origination costs of $120,484 as of January 1, 2003 and an
increase in membership services expenses of $530 for the three months ended
September 30, 2003 and a decrease in membership services expenses of $473 for
the nine months ended September 30, 2003.(iii)
    
    Adoption of cash basis for recoveries of unpaid dues on inactive
membershipsThe Audit Committee determined that the Company should have
adopted the cash basis for recoveries of unpaid dues on inactive memberships
prior to 2003. The impact of this change resulted in a decrease in
cumulative effect of changes in accounting principles of $20,282 for
the nine months ended September 30, 2003.
 18




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION  Notes to Condensed Consolidated Financial Statements  (continued)
 (iv)
    
    Unrecorded payment obligationsThe Audit Committee identified that the
Company had improperly accounted for $22,000 of face amount repayment
obligations due in 2015 or later on membership contracts sold by a subsidiary
before Bally acquired it in the late 1980s. The impact of this change resulted
in an increase in accumulated deficit and other liabilities of $4,860 as of
January 1, 2003 and an increase in interest expense of $147 and $442 for the
three and nine months ended September 30, 2003, respectively.(v)
    
    Sales of future receivablesAs a result of adopting accounting for revenue
in accordance with SAB No. 101, the Company had to amend its accounting treatment
of the sale of receivables from the sale of financial assets pursuant to SFAS
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities to debt treatment in
accordance with Emerging Issues Task Force (EITF) Issue
No. 88-18, Sale of Future Receivables. The impact of this change resulted in
a decrease in deferred revenue and an increase in long term debt of $29,802 as
of January 1, 2003. The change had no impact on net loss for the three and
nine months ended September 30, 2003. However, the change increased membership
services revenue $363 and $1,822, miscellaneous revenue $53 and $219,
membership services expenses $161 and $767 and interest expense $255 and $1,274 for the
three and nine months ended September 30, 2003, respectively.
 (b)
    
    Correction of Errors
  (i)
    
    Accounting for membership revenue for multiple element
arrangements  The Company enters into contracts that
include a combination of (i) health club services,
(ii) personal training services, and (iii) nutritional
products. The Company improperly separated these multiple element
arrangements into multiple units of accounting resulting in premature
recognition of early delivered nutritional products and personal
training services. As a part of this restatement, the Company has
modified its membership revenue recognition policy to treat these
arrangements as single units of accounting and recognize revenue for
these arrangements on a straight-line basis over the later of when
collected or earned. The impact of this adjustment resulted in
an increase in accumulated deficit and deferred revenue of $191,966 as of
January 1, 2003. In addition, for the three and nine months ended September
30, 2003, this adjustment resulted in a decrease in membership services revenue
of $30,891 and $91,814, respectively.(ii)
    
    Accounting for prepaid personal training
servicesIn prior periods, the Company
inappropriately estimated deferred revenue related to personal training
services that had been paid for but not yet earned. The impact of this
correction was an increase in accumulated deficit and deferred revenue of
$12,744 as of January 1, 2003. In addition,
for the three and nine months ended September 30, 2003, this
correction resulted in a decrease in membership services revenue of $1,900 and
$11,902, respectively.
 19




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION  Notes to Condensed Consolidated Financial Statements  (continued)
 (iii)
    
    Lease accountingLike other companies with significant leasehold
improvements, in early 2005 the Company performed a review of our accounting policies
and practices with respect to leases. As a result of this internal review, the Company
concluded that certain of our historical methods of accounting for leases with
escalating rental obligations, tenant improvement allowances and of determining
lives used in the calculation of depreciation of leasehold improvements were
not in accordance with U.S. generally accepted accounting principles.
 a.
    
    In prior periods, the Company did not recognize rent expense on club leases with
escalating rental obligations using the required straight-line rent method. For
purposes of calculating straight-line rent expense (and depreciating leasehold
improvements (see below)), we use the contractual lease term, beginning on the
rent commencement date.b.
    
    In prior periods, the Company reflected tenant allowances as a reduction to property
and equipment on the Condensed Consolidated Balance Sheets and amortized these
amounts, and the related leasehold improvements, to depreciation expense in the
Consolidated Statements of Operations. Additionally, the Company reflected tenant
allowances as a component of cash flows from investing activities in the
Consolidated Statements of Cash Flows. The Company has determined that Financial
Accounting Standards Board (FASB) Technical Bulletin No. 88-1, Issues
Relating to Accounting for Leases", requires these allowances to be recorded as
deferred rent liabilities on the Condensed Consolidated Balance Sheets and
requires these allowances to be amortized as a reduction to rent expense on the
Consolidated Statements of Operations. Additionally, these rules require tenant
allowances to be reflected as a component of cash flows from operating
activities in the Consolidated Statements of Cash Flows.c.
    
    Historically, the Company depreciated leasehold improvements over the contractual
term of the lease. The Company also depreciated leasehold improvements acquired
subsequent to store opening, such as remodels, over the contractual term of the
lease. In both instances, optional renewal periods were included in the
contractual term of the lease if renewal was reasonably assured at the time the
asset was placed in service. The Company has concluded that such leasehold improvements
should be depreciated over the lesser of the assets economic life, with a
maximum of 15 years, or the contractual term of the lease, excluding all
renewal options. The Companys club leases generally have a term
of 10 to 15 years and provide options to renew for between 5 to 15 additional
years.The impact of the changes related to lease accounting were an increase in
accumulated deficit of $151,836, in goodwill of $353, in deferred rent
liability of $105,063, in accrued liabilities of $344 and long term
liabilities of $1,483 and decreases in property and equipment, net of $52,211
and long term debt of $6,912 as of January 1, 2003. In addition, for the three
and nine months ended September 30, 2003, there was a decrease
in interest expense of $222 and $669, and increases in depreciation expense of
$3,984 and $11,960. For the three months ended September 30, 2003,
there was an increase in membership services expenses of $578 and a
decrease of $3,600 for the nine months ended September 30, 2003.
 (iv)
    
    Self-insurance liabilitiesThe Company concluded that our previous methodologies
for estimating our self-insured workers compensation, health and life and
general insurance claims resulted in a net understatement of our self-insured
liabilities. The impact of this adjustment was a decrease in accrued
liabilities of $794 and an increase in other liabilities and accumulated
deficit of $6,446 and $5,652, respectively, as of January 1, 2003. In
addition, for the three and nine months ended September 30, 2003, there was a
decrease in membership services expense of $2,351 and $1,056 and general and
administrative expense of $5 and $186, respectively.(v)
    
    Deferred expense recognition for IT servicesThe Company improperly deferred
recognition of internal and external costs incurred to develop internal-use
computer software. The impact of this adjustment was an increase in
accumulated deficit of $9,754, a decrease in property, plant and equipment cost
of $14,856 and a decrease in accumulated depreciation of $5,102 as of January
1, 2003. In addition, for the three and nine months ended September 30, 2003,
there was an increase in general and administrative expense of $1,051 and $2,997 and
a decrease in depreciation expense of $480 and $1,439, respectively.
 20




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION  Notes to Condensed Consolidated Financial Statements  (continued)
 (vi)
    
    Valuation of goodwillThe Company incorrectly calculated the amount of
consideration paid in certain acquisitions due to the use of improper dates for
valuing the common stock issued. In addition, the Company did not identify all
intangible assets acquired in certain acquisitions (see Identification of
separately identifiable assets apart from goodwill).Further, the Company concluded
that our practice of amortizing goodwill over 40 years was inconsistent with
the maximum reasonably likely duration of material benefit from the acquired
goodwill. The Company did not properly apply the
guidance in FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and Assets to be Disposed Of to measure the amount of
impairment losses. In addition, we determined conditions at various dates
which indicated the carrying amounts of fixed assets were impaired, but
determined that impairment analyses had not been performed even though trigger
events were present. As a result, the Company performed the impairment analyses not
previously completed for the periods being restated and recorded impairment
adjustments as applicable. The impact of these adjustments was an increase in
accumulated deficit of $129,650 and a decrease in goodwill as of
January 1, 2003. The impact of these adjustments was an increase
in depreciation and amortization expense of $695 and $2,685 for the
three and nine months ended September 30, 2003(vii)
    
    Valuation of fixed assetsThe Company determined that the Company did not
properly apply the guidance in FASB Statement No. 121 to measure the amount of
impairment losses. And we determined conditions at various dates which
indicated the carrying amounts of fixed assets were impaired, but determined
that impairment analyses had not been performed even though trigger events were
present. As a result, the Company performed the impairment analyses not previously
completed for the periods being restated and recorded impairment adjustments as
applicable. The impact of these adjustments was an increase in accumulated
deficit of $119,578 and a decrease in property and equipment, net as of
January 1, 2003. In addition, this correction resulted in a decrease in
depreciation and amortization of $4,455 and $13,366 in the three and
nine months ended September 30, 2003, respectively.(viii)
    
    Identification of separately identifiable assets apart
from goodwillThe Company
concluded that our previous method of allocating the excess of the purchase
price over the fair market value of assets acquired to goodwill resulted in an
overstatement of goodwill. Specifically, in applying APB 16, Business
Combinations, we should have allocated a portion of the excess to certain
separately identifiable intangible assets: a) Membership Relationswhich
represents the fair market value of relationships with existing members as of
the acquisition date: b) Non-compete Agreementswhich represents the fair
market value of the non-competition agreement with the seller of the company: c) Trade namewhich represents the fair market value of the trade names
associated with the acquired operations, and; c) Leasehold Rightswhich
represents the estimate of the favorable and unfavorable lease agreements in
place as of the acquisition date. The impact of this correction
resulted in a decrease of goodwill and non-compete agreements and an
increase in membership relations, trade name and leasehold rights of
$14,651, $29, $5,943, $1,600 and $7,138, respectively, as of January
1, 2000. In addition, the impact of this correction on the three
and nine months ended September 30, 2003 was an increase in depreciation and
amortization of $1,601 and $4,803, respectively. Further, the Company concluded that our
practice of amortizing goodwill over 40 years was inconsistent with the maximum
reasonably likely duration of material benefit from the acquired goodwill.(ix)
    
    Escheatment obligationsThe Company determined that the liability for the
potential escheatment of certain payroll-related and supplier-related checks was
understated. The impact of this adjustment was an increase in accumulated
deficit of $1,644 and an increase in accounts payable of $792 and accrued
liabilities of $852 as of January 1, 2003. In addition, for the three and nine
months ended September
 21




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION  Notes to Condensed Consolidated Financial Statements  (continued)
 30, 2003, this adjustment resulted in a decrease in
miscellaneous revenue of $26 and $513, and increases in membership processing
expenses of $77 and $77, and general and administrative expenses of $5 and $5,
respectively.(x)
    
    Capitalized advertisingThe Company determined that our previous method of
deferring recognition of production costs over the estimated life of the
advertising resulted in an overstatement of capitalized advertising and that
the cost of advertising should be expensed no later than the first time the
advertising takes place. The impact of these adjustments was an increase in
accumulated deficit and a decrease in other current assets of $2,786 as of
January 1, 2003. For the three and nine months ended September 30, 2003, these
adjustments resulted in a decrease in advertising expense of $223 and $114,
respectively.(xi)
    
    Capitalized maintenanceThe Company improperly deferred recognition of internal
compensation costs incurred in conjunction with the build out of various clubs.
These payments should have been recorded as expense when services were
rendered, rather than deferred and recorded as an expense in later periods.
The impact of these adjustments was an increase in accumulated deficit and a
decrease in property and equipment, net of $24,589 as of January 1, 2003. In
addition, for the three and nine months ended September 30, 2003, these
adjustments resulted in a decrease in depreciation expense of $738 and $2,225,
respectively.(xii)
    
    Presale costsThe Company determined that our previous method of deferring rent
costs associated with club leases during the construction period resulted in an
overstatement of leasehold improvements and that the rent costs during the
construction period should be expensed as paid. The impact of these
adjustments was an increase in accumulated deficit and a decrease in property
and equipment, net of $10,214 as of January 1, 2003. In addition, for the
three and nine months ended September 30, 2003, these adjustments resulted in
an increase membership services expense of $531 and $705 and a decrease in
depreciation expense of $124 and $372, respectively.(xiii)
    
    Other capitalized costsAs part of the
restatement, the Company determined that
other capitalized costs, none of which were individually significant, should
have been expensed as paid. The impact of these adjustments was an increase in
accumulated deficit and a decrease in other current assets, property and
equipment, net and accounts payable of $9,867, $4,156, $5,979 and $268,
respectively, as of January 1, 2003. In addition, for the three and nine
months ended September 30, 2003, these adjustments resulted in a decrease in
membership services expenses of $285 and $234, and a decrease in general and
administrative of $198 and $131, and an increase in interest expense
of $30 and $69, respectively.(xiv)
    
    Retail InventoryThe Company determined that the recorded value of retail
inventories were overstated, primarily as a result of differences in physical
count and as a result of incorrect accounting for cost of goods sold. The
impact of these adjustments is an increase in accumulated deficit and a
decrease in other current assets of $1,693 as of January 1, 2003. In addition,
these adjustments resulted in an increase in retail product expenses of $673
and $2,020 for the three and nine months ended September 30, 2003,
respectively.(xv)
    
    Equipment inventoryThe Company determined that the Companys accounting for
equipment trade-ins resulted in an overstatement of the cost basis of the
Companys investment in exercise equipment. The impact of these adjustments is
an increase in accumulated deficit and property and equipment, net, of $1,565
as of January 1, 2003. In addition, these adjustments resulted
in an increase in depreciation and amortization expense of $18 and $300 for the three and nine
months ended September 30, 2003, respectively.(xvi)
    
    Asset impairmentThe Company assessed its long-lived assets for
indicators of impairment based on operational performance. Impairment was
determined by comparing projected undiscounted cash
 22




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION  Notes to Condensed Consolidated Financial Statements  (continued)
 flows to be generated by
the asset to its carrying value. For identified impairments, a loss was
recorded equal to the excess of the assets net book value over the assets
fair value. The impact of this correction for the three months ended
September 30, 2003 was an increase in membership services expense of $99 and
for the nine months ended September 30, 2003, a decrease in membership services
expenses of $143.(xvii)
    
    Period-end accruals and other out of period items The Company
identified obligations that were not properly accrued for as of the end of an
accounting period. As part of the restatement, these out of period items are
being recognized in the period in which the underlying transaction occurred.
The impact of these adjustments was an increase in accumulated deficit, other
current assets, property and equipment, other current assets, accounts payable
and accrued liabilities of $4,721, $431, $238, $594 and $3,821,
respectively, as of January 1, 2003. In addition, these adjustments resulted
in decreases in membership services and general and administrative expenses of
$456, and $32, respectively, for the three months ended September 30, 2003 and,
for the nine months ended September 30, 2003, decreases in
membership services, advertising, and general and administrative expense of $1,939, $792, and $182,
respectively. In addition, these adjustments resulted in an increase of $73 and a decrease of $158 in
membership services revenue for the three and nine months ended
September 30, 2003.(xviii)
    
    Foreign exchange gain (loss) The Company determined gains and losses
from various foreign currency transactions, such as those relating to
management fees and, although not significant, the settlement of foreign
receivables or payables, were not properly accounted for in prior periods. The
impact of these adjustments was to increase accumulated deficit, cash
and accrued liabilities $3,043, $176 and $1,633, respectively, and
to decrease other current assets, property and equipment, net, goodwill,
deferred income taxes, other assets, accounts payable, deferred income taxes,
accounts payable, current maturities of long term debt, long-term debt, other
liabilities and accumulated other comprehensive income $136, $1,311,
$241, $5, $16, $88, $176, $459 and $2,082, respectively, as of January 1, 2003. In
addition, these adjustments resulted in foreign exchange gains of $766 and
$2,746 for the three and nine months ended September 30, 2003, respectively.(xix)
    
    Other As part of the restatement, other adjustments were identified,
none of which were individually significant. The impact of these adjustments
was to increase accumulated deficit by $6,031, cash by $1,065 other assets by
$10,261, accrued liabilities by $8,861, current maturities of long term debt by
$630, long term debt by $692 and contributed capital by $1,213 and to decrease
trademark by $259, other current assets by $740, property and equipment, net by
$2,176, intangible assets (net) by $2,786 as of January 1, 2003. For the three
and nine months ended September 30, 2003, these adjustments decreased
membership services expense $146 and $1,280, depreciation and amortization
expenses $166 and $488 and other, net by $893 and $893 and increased general
and administrative expenses $818 and $1,808 and interest expense $68
and $96, respectively. In addition, these adjustments resulted in an
increase in miscellaneous revenue of $231, an increase to cumulative
effect of changes in accounting principles of $409 and for the nine months ended
September 30, 2003.(xx)
    
    Effect of restatement on income tax accounts As a part of
the restatement and in accordance with SFAS No. 109 Accounting for
Income Taxes, the Company reviewed the likelihood of realizing a
future benefit from the related restatement adjustments. As a result
of this review, the Company increased its valuation allowance for the
net effect of the tax benefits resulting from the restatement
adjustments and determined that the valuation adjustment originally
reversed in 2003 should be restated back to the period recognized.
Associated with this valuation adjustment, the Company decreased
paid-in-capital for the unrealized benefit associated with the
Companys stock option and stock purchase plans that was taken in
2001. In addition, the Company reviewed the Companys actual and
contingent tax liabilities for the restatement period and increased
its contingency reserve, accordingly. The impact of these adjustments
was an increase in accumulated deficit of $2,521 and a decrease to
paid-in-capital of $4,000 as of December 31, 2003. The income
statement effect was a decrease to income tax expense of $1,214 and
$1,774 for the three and nine months ended September 30, 2003.
  Changes
to the Consolidated Statement of Cash Flows
 Cash
provided by operating activities:As reported
    
    $
    38,087As restated
    
    
    69,470Restatement adjustment
    
    
    31,383Cash used in investing activities:As reported
    
    
    (32,009
    )As restated
    
    
    (39,092
    )Restatement adjustment
    
    

(7,083
    )Cash
provided by (used in) financing activities:As reported
    
    
    2,416As restated
    
    
    (21,866
    )Restatement adjustment
    
    
    (24,282
    )


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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION  Notes to Condensed Consolidated Financial Statements  (continued)
 Note 3
Debt
   Note 4
Deferred Revenue
 For the Nine Months Ended September 30, 2004Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    Cash
    
    
    Revenue
    
    
    September 30,2003
    
    
    Additions
    
    
    Recognized
    
    
    2004(As
RestatedSee Note 2)Deferral of
receipts from financed
members:Initial term payments
    
    $
    535,391
    
    
    $
    257,511
    
    
    $
    (250,060
    )
    
    $
    542,842Down payments
    
    
    111,656
    
    
    
    42,206
    
    
    
    (44,391
    )
    
    
    109,471Deferral of
receipts representing advance payments:Paid-in-full membership fees collected upon
origination
    
    
    135,082
    
    
    
    25,022
    
    
    
    (33,248
    )
    
    
    126,856Advance payments of periodic dues
and membership fees
    
    
    145,939
    
    
    
    301,487
    
    
    
    (311,275
    )
    
    
    136,151Deferred of receipts for personal training services
    
    
    19,818
    
    
    
    97,476
    
    
    
    (93,559
    )
    
    
    23,735$
    947,886
    
    
    $
    723,702
    
    
    $
    (732,533
    )
    
    $
    939,055
 For the Nine Months Ended September 30, 2003Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    Cash
    
    
    Revenue
    
    
    September 30,2002
    
    
    Additions
    
    
    Recognized
    
    
    2003(As
Restated See Note 2)Deferral of
receipts from financed
members:Initial term payments
    
    $
    507,691
    
    
    $
    259,688
    
    
    $
    (236,691
    )
    
    $
    530,688Down payments
    
    
    117,189
    
    
    
    39,961
    
    
    
    (42,716
    )
    
    
    114,434Deferral of receipts representing advance payments:Paid-in-full membership fees collected upon
origination
    
    
    146,353
    
    
    
    22,727
    
    
    
    (30,107
    )
    
    
    138,973Advance payments of periodic dues
and membership fees
    
    
    150,649
    
    
    
    313,752
    
    
    
    (312,853
    )
    
    
    151,548Deferred of receipts for personal training services
    
    
    14,301
    
    
    
    79,397
    
    
    
    (73,547
    )
    
    
    20,151$
    936,183
    
    
    $
    715,525
    
    
    $
    (695,914
    )
    
    $
    955,794
 24




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 Note 5
Income (loss) per Common Share
 Earnings per Share
 Three months ended
    
    
    Nine months endedSeptember 30
    
    

September 302004
    
    

2003
    
    

2004
    
    

2003Weighted
average number of common shares outstanding
    
    
    32,870,301
    
    
    
    32,662,634
    
    
    
    32,807,239
    
    
    
    32,632,527Effect of
outstanding stock options and warrants
    
    
    301,535
    
    
    
    1,008,041
    
    
    
    496,797
    
    
    
    582,601Diluted
weighted average number of common shares outstanding
    
    
    33,171,836
    
    
    
    33,670,675
    
    
    
    33,304,036
    
    
    
    33,215,128Options and
warrants excluded from the computation of diluted weighted average
number of common shares because the exercise prices were greater than
the average market prices of the common stock
    
    
    4,218,306
    
    
    
    2,975,594
    
    
    
    3,978,306
    
    
    
    2,975,594Range of
exercise price per share:High
    
    $
    36.00
    
    
    $
    36.00
    
    
    $
    36.00
    
    
    $
    36.00Low
    
    $
    4.97
    
    
    $
    12.00
    
    
    $
    6.04
    
    
    $
    12.00
 Note 6 Income Taxes
 Accounting for Income
Taxes
 Note 7 Stock Plans
 Accounting for Stock Issued to
Employees" Accounting for StockBased CompensationTransition and
Disclosure" Accounting for
Stock-Based Compensation,
 25




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION  Notes to Condensed Consolidated Financial Statements  (continued)
 Three months ended
    
    
    Nine months endedSeptember 30
    
    
    September 302004
    
    
    2003
    
    
    2004
    
    
    2003(As Restated
    
    
    
    
    
    
    (As RestatedSee Note 2)
    
    
    
    
    
    
    See Note 2)Net income (loss) as reported
    
    $
    6,847
    
    
    $
    (4,800
    )
    
    $
    (13,259
    )
    
    $
    (19,623
    )Plus: stock-based compensation expense
included in net loss
    
    
    134
    
    
    
    242
    
    
    
    1,074
    
    
    
    439Less: stock-based compensation expense
determined under fair value based method
    
    
    (1,366
    )
    
    
    (2,446
    )
    
    
    (5,143
    )
    
    
    (6,614
    )Pro forma net income (loss)
    
    $
    5,615
    
    
    $
    (7,004
    )
    
    $
    (17,328
    )
    
    $
    (25,798
    )Basic income
(loss) per common shareAs reported
    
    $
    0.21
    
    
    $
    (0.15
    )
    
    $
    (0.40
    )
    
    $
    (0.60
    )Pro forma
    
    
    0.17
    
    
    
    (0.21
    )
    
    
    (0.53
    )
    
    
    (0.79
    )Diluted
income (loss) per common shareAs reported
    
    $
    0.21
    
    
    $
    (0.15
    )
    
    $
    (0.40
    )
    
    $
    (0.60
    )Pro forma
    
    
    0.17
    
    
    
    (0.21
    )
    
    
    (0.53
    )
    
    
    (0.79
    )
  Note 8 Guarantees
   Note 9 Stockholders Equity (Deficit) Preferred Stock:
   Note 10
Legal Proceedings
 
    
    Between May and July 2004, ten putative securities class actions, now consolidated and
designated In re Bally Total Fitness Securities Litigationwere filed in the United States District
Court for the Northern District of Illinois against the Company and certain of its former and
current officers and directors. Each of these substantially similar lawsuits alleged that the
defendants violated Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934, as amended
(the 1934 Act), as well as the associated Rule 10b-5, in connection with the Companys proposed
restatement. The class period set forth in these lawsuits begins on either May 17 or August 3,
1999, depending on the particular lawsuit, and ends for all lawsuits on April 28, 2004.On March 15, 2005, the Court appointed a lead plaintiff and on May 23, 2005 the Court
appointed lead plaintiffs counsel. By stipulation of the parties, the consolidated lawsuit has
been stayed pending restatement of the Companys financial statements. The Court has ordered
plaintiffs to file an amended consolidated complaint on or before December 30, 2005. The Court has
also ordered that any motion to dismiss the amended consolidated complaint be filed on or before
January 23, 2006. It is not yet possible to determine the ultimate outcome of these actions.
    
    On September 17, 2004, a lawsuit captioned Jack Garrison and Deane Garrison v. Bally Total
Fitness Holding Corporation, Lee S. Hillman and John W. Dwyer, CV 04 1331, was filed in the United
States District Court for the District of Oregon. The plaintiffs alleged that the defendants
violated certain provisions of the Oregon Securities Act, breached the contract of sale, and
committed common-law fraud in connection with the acquisition of the plaintiffs business in
exchange for shares of Bally stock.On April 7, 2005, all defendants joined in a motion to dismiss two of the four counts of
plaintiffs complaint, including plaintiffs claims of breach of contract and fraud. On August 17,
2005, Magistrate Judge Jelderks issued proposed findings and conclusions that would, if adopted by
the District Court, grant the motion to dismiss plaintiffs claims for breach of contract and fraud
against all parties. Plaintiffs filed objections to those aspects of the Magistrate Judges
recommendation that were contrary to their positions. The parties have fully briefed these
objections and are awaiting decision. Motions for summary judgment are due on December 31, 2005.
It is not yet possible to determine the ultimate outcome of this action.
    
    The Company is also involved in various other claims and lawsuits incidental to its business,
including claims arising from accidents at its fitness centers. In the opinion of management, the
Company is adequately insured against such claims and lawsuits, and any ultimate liability arising
out of such claims and lawsuits should not have a material adverse effect on the financial condition
or results of operations of the Company. In addition, from time to time, customer complaints are
investigated by various governmental bodies. In the opinion of management, none of these other complaints
or investigations currently pending should have a material
adverse effect on our financial condition or results of operations.
  Note 11 Subsequent Events
 2004 Consent
Solicitations
  2004
Term Loan and Revolving Credit Agreement
  Securitization
  Audit Committee Investigation Findings
  26




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##### Table of Contents



Department of Justice Investigation
  Equity Inducement Plan
 Lawsuit in Massachusetts  Fit Tech Inc., et al. v. Bally
Total Fitness Holding Corporation, et al.,
 Amendment and Waiver
 Stockholder Derivative Lawsuits in Illinois Federal Court
 Vesting of Restricted Stock under the 1996 Long-Term Incentive Plan
 Arbitration Award
 2005 Consent Solicitation
 27




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##### Table of Contents



Crunch Purchase Agreement  sm sm
 Adoption of Rights Plan
   Net Operating Loss Carryforwards
 Insurance Lawsuit  Travelers Indemnity Company and ACE American Insurance
Company v. Bally Total Fitness Holding Corporation; Holiday Universal, Inc, n/k/a Bally Total
Fitness of the Mid-Atlantic, Inc; George N. Aronoff; Paul Toback; John W. Dwyer; Lee S. Hillman;
Stephen C. Swid; James McAnally; J. Kenneth Looloian; Liza M. Walsh; Annie P. Lewis, as Executor of
the Estate of Aubrey C. Lewis, Deceased; Theodore Noncek; Geoff Scheitlin; John H. Wildman; John W.
Rogers, Jr.; and Martin E. Franklin,
 Amendments to Employment Agreements
 Director Compensation
 Engagement of J.P. Morgan Securities Inc.
 Note 12 Condensed Consolidating Financial Statements
 1 2
  28




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##### Table of Contents



29




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION  Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED
CONSOLIDATING BALANCE SHEET
 September 30, 2004Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalASSETSCurrent assets:Cash
    
    $
    
    
    
    $
    24,193
    
    
    $
    997
    
    
    $
    
    
    
    $
    25,190Other current assets
    
    
    
    
    
    
    30,754
    
    
    
    1,019
    
    
    
    
    
    
    
    31,773Total current assets
    
    
    
    
    
    
    54,947
    
    
    
    2,016
    
    
    
    
    
    
    
    56,963Net property
and equipment, at cost
    
    
    
    
    
    
    366,587
    
    
    
    16,888
    
    
    
    
    
    
    
    383,475Goodwill
    
    
    
    
    
    
    40,170
    
    
    
    1,475
    
    
    
    
    
    
    
    41,645Trademarks
    
    
    6,507
    
    
    
    2,968
    
    
    
    691
    
    
    
    
    
    
    
    10,166Intangible assets, net
    
    
    
    
    
    
    7,242
    
    
    
    1,346
    
    
    
    
    
    
    
    8,588Investment in and advances
to subsidiaries
    
    
    (838,778
    )
    
    
    221,315
    
    
    
    
    
    
    
    617,463
    
    
    
    Other assets
    
    
    10,393
    
    
    
    8,811
    
    
    
    11,032
    
    
    
    
    
    
    
    30,236$
    (821,878
    )
    
    $
    702,040
    
    
    $
    33,448
    
    
    $
    617,463
    
    
    $
    531,073LIABILITIES AND STOCKHOLDERS
EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    
    
    
    $
    57,055
    
    
    $
    259
    
    
    $
    
    
    
    $
    57,314Income taxes
payable
    
    
    
    
    
    
    784
    
    
    
    
    
    
    
    
    
    
    
    784Accrued liabilities
    
    
    19,773
    
    
    
    93,207
    
    
    
    6,659
    
    
    
    
    
    
    
    119,639Current maturities
of long-term debt
    
    
    13,633
    
    
    
    912
    
    
    
    4,345
    
    
    
    
    
    
    
    18,890Deferred revenues
    
    
    
    
    
    
    326,662
    
    
    
    6,125
    
    
    
    
    
    
    
    332,787Total current liabilities
    
    
    33,406
    
    
    
    478,620
    
    
    
    17,388
    
    
    
    
    
    
    
    529,414Long-term debt, less current
maturities
    
    
    601,671
    
    
    
    12,792
    
    
    
    112,225
    
    
    
    
    
    
    
    726,688Net affiliate payable
    
    
    
    
    
    
    576,825
    
    
    
    (46,703
    )
    
    
    (530,122
    )
    
    
    Other liabilities
    
    
    
    
    
    
    124,200
    
    
    
    1,458
    
    
    
    
    
    
    
    125,658Deferred revenues
    
    
    
    
    
    
    594,892
    
    
    
    11,376
    
    
    
    
    
    
    
    606,268Stockholders equity (deficit)
    
    
    (1,456,955
    )
    
    
    (1,085,289
    )
    
    
    (62,296
    )
    
    
    1,147,585
    
    
    
    (1,456,955
    )$
    (821,878
    )
    
    $
    702,040
    
    
    $
    33,448
    
    
    $
    617,463
    
    
    $
    531,073
 30




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##### Table of Contents



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




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)     CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
 Three Months Ended September 30, 2004Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet revenues:Membership
services
    
    $
    
    
    
    $
    237,683
    
    
    $
    9,365
    
    
    $
    
    
    
    $
    247,048Retail products
    
    
    
    
    
    
    12,233
    
    
    
    361
    
    
    
    
    
    
    
    12,594Miscellaneous
    
    
    
    
    
    
    4,694
    
    
    
    446
    
    
    
    
    
    
    
    5,140
    
    
    
    254,610
    
    
    
    10,172
    
    
    
    
    
    
    
    264,782Operating costs and expenses:Membership
services
    
    
    
    
    
    
    172,265
    
    
    
    8,042
    
    
    
    
    
    
    
    180,307Retail products
    
    
    
    
    
    
    11,833
    
    
    
    335
    
    
    
    
    
    
    
    12,168Advertising
    
    
    
    
    
    
    13,355
    
    
    
    242
    
    
    
    
    
    
    
    13,597General and administrative
    
    
    957
    
    
    
    16,505
    
    
    
    562
    
    
    
    
    
    
    
    18,024Depreciation and amortization
    
    
    
    
    
    
    17,233
    
    
    
    480
    
    
    
    
    
    
    
    17,713957
    
    
    
    231,191
    
    
    
    9,661
    
    
    
    
    
    
    
    241,809Operating
income (loss)
    
    
    (957
    )
    
    
    23,419
    
    
    
    511
    
    
    
    
    
    
    
    22,973Equity in net income (loss)
of subsidiaries
    
    
    21,711
    
    
    
    
    
    
    
    
    
    
    
    (21,711
    )
    
    
    Interest expense
    
    
    (14,601
    )
    
    
    (1,590
    )
    
    
    (2,671
    )
    
    
    2,132
    
    
    
    (16,730
    )Foreign
exchange gain
    
    
    
    
    
    
    
    
    
    
    879
    
    
    
    
    
    
    
    879Other, net
    
    
    694
    
    
    
    30
    
    
    
    1,346
    
    
    
    (2,132
    )
    
    
    (62
    )7,804
    
    
    
    (1,560
    )
    
    
    (446
    )
    
    
    (21,711
    )
    
    
    (15,913
    )Income (loss) before income taxes
    
    
    6,847
    
    
    
    21,859
    
    
    
    65
    
    
    
    (21,711
    )
    
    
    7,060Income tax provision
    
    
    
    
    
    
    (213
    )
    
    
    
    
    
    
    
    
    
    
    (213
    )Net income
    
    $
    6,847
    
    
    $
    21,646
    
    
    $
    65
    
    
    $
    (21,711
    )
    
    $
    6,847
 32




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)     CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
 Three
Months Ended September 30, 2003Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet revenues:Membership
services
    
    $
    
    
    
    $
    222,881
    
    
    $
    8,570
    
    
    $
    
    
    
    $
    231,451Retail products
    
    
    
    
    
    
    13,801
    
    
    
    337
    
    
    
    
    
    
    
    14,138Miscellaneous
    
    
    
    
    
    
    4,033
    
    
    
    343
    
    
    
    
    
    
    
    4,376
    
    
    
    240,715
    
    
    
    9,250
    
    
    
    
    
    
    
    249,965Operating costs and expenses:Membership
services
    
    
    
    
    
    
    171,194
    
    
    
    7,205
    
    
    
    
    
    
    
    178,399Retail products
    
    
    
    
    
    
    14,289
    
    
    
    308
    
    
    
    
    
    
    
    14,597Advertising
    
    
    
    
    
    
    11,211
    
    
    
    501
    
    
    
    
    
    
    
    11,712General and administrative
    
    
    899
    
    
    
    11,649
    
    
    
    321
    
    
    
    
    
    
    
    12,869Depreciation and amortization
    
    
    
    
    
    
    19,493
    
    
    
    118
    
    
    
    
    
    
    
    19,611899
    
    
    
    227,836
    
    
    
    8,453
    
    
    
    
    
    
    
    237,188Operating income (loss)
    
    
    (899
    )
    
    
    12,879
    
    
    
    797
    
    
    
    
    
    
    
    12,777Equity in income (loss) from continuing
operations of subsidiaries
    
    
    10,254
    
    
    
    
    
    
    
    
    
    
    
    (10,254
    )
    
    
    Interest expense
    
    
    (12,770
    )
    
    
    (2,330
    )
    
    
    (2,807
    )
    
    
    1,978
    
    
    
    (15,929
    )Foreign
exchange gain
    
    
    
    
    
    
    
    
    
    
    766
    
    
    
    
    
    
    
    766Other, net
    
    
    (1,219
    )
    
    
    23
    
    
    
    1,209
    
    
    
    (1,978
    )
    
    
    (1,965
    )(3,735
    )
    
    
    (2,307
    )
    
    
    (832
    )
    
    
    (10,254
    )
    
    
    (17,128
    )Income (loss) from continuing
operations before income taxes
    
    
    (4,634
    )
    
    
    10,572
    
    
    
    (35
    )
    
    
    (10,254
    )
    
    
    (4,351
    )Income tax provision
    
    
    
    
    
    
    (283
    )
    
    
    
    
    
    
    
    
    
    
    (283
    )Income (loss) from continuing operations
    
    
    (4,634
    )
    
    
    10,289
    
    
    
    (35
    )
    
    
    (10,254
    )
    
    
    (4,634
    )Loss from discontinued operations
    
    
    (166
    )*
    
    
    
    
    
    
    (166
    )
    
    
    166
    
    
    
    (166
    )Net income (loss)
    
    $
    (4,800
    )
    
    $
    10,289
    
    
    $
    (201
    )
    
    $
    (10,088
    )
    
    $
    (4,800
    )
 
 *
    
    Equity in amounts from subsidiaries related to discontinued
operations and cumulative effect of changes in accounting principles. 33




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)     CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
 Nine Months Ended September 30, 2004Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet revenues:Membership
services
    
    $
    
    
    
    $
    704,486
    
    
    $
    28,047
    
    
    $
    
    
    
    $
    732,533Retail products
    
    
    
    
    
    
    40,876
    
    
    
    1,172
    
    
    
    
    
    
    
    42,048Miscellaneous
    
    
    
    
    
    
    13,350
    
    
    
    1,370
    
    
    
    
    
    
    
    14,720
    
    
    
    758,712
    
    
    
    30,589
    
    
    
    
    
    
    
    789,301Operating costs and expenses:Membership
services
    
    
    
    
    
    
    539,280
    
    
    
    21,777
    
    
    
    
    
    
    
    561,057Retail products
    
    
    
    
    
    
    39,365
    
    
    
    1,034
    
    
    
    
    
    
    
    40,399Advertising
    
    
    
    
    
    
    48,418
    
    
    
    934
    
    
    
    
    
    
    
    49,352General and administrative
    
    
    2,871
    
    
    
    45,472
    
    
    
    1,514
    
    
    
    
    
    
    
    49,857Depreciation and amortization
    
    
    
    
    
    
    50,672
    
    
    
    1,560
    
    
    
    
    
    
    
    52,2322,871
    
    
    
    723,207
    
    
    
    26,819
    
    
    
    
    
    
    
    752,897Operating
income (loss)
    
    
    (2,871
    )
    
    
    35,505
    
    
    
    3,770
    
    
    
    
    
    
    
    36,404Equity in net income (loss)
of subsidiaries
    
    
    30,054
    
    
    
    
    
    
    
    
    
    
    
    (30,054
    )
    
    
    Interest
expense
    
    
    (42,425
    )
    
    
    (5,245
    )
    
    
    (7,840
    )
    
    
    6,244
    
    
    
    (49,266
    )Foreign
exchange gain
    
    
    
    
    
    
    
    
    
    
    473
    
    
    
    
    
    
    
    473Other, net
    
    
    1,983
    
    
    
    61
    
    
    
    3,968
    
    
    
    (6,244
    )
    
    
    (232
    )(10,388
    )
    
    
    (5,184
    )
    
    
    (3,399
    )
    
    
    (30,054
    )
    
    
    (49,025
    )Income (loss) before income taxes
    
    
    (13,259
    )
    
    
    30,321
    
    
    
    371
    
    
    
    (30,054
    )
    
    
    (12,621
    )Income tax provision
    
    
    
    
    
    
    (638
    )
    
    
    
    
    
    
    
    
    
    
    (638
    )Net income (loss)
    
    $
    (13,259
    )
    
    $
    29,683
    
    
    $
    371
    
    
    $
    (30,054
    )
    
    $
    (13,259
    )
 34




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)     CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
 Nine
Months Ended September 30, 2003 (Restated Note 2)Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalNet revenues:Membership
services
    
    $
    
    
    
    $
    670,097
    
    
    $
    25,817
    
    
    $
    
    
    
    $
    695,914Retail products
    
    
    
    
    
    
    42,620
    
    
    
    1,133
    
    
    
    
    
    
    
    43,753Miscellaneous
    
    
    
    
    
    
    12,891
    
    
    
    1,064
    
    
    
    
    
    
    
    13,955
    
    
    
    725,608
    
    
    
    28,014
    
    
    
    
    
    
    
    753,622Operating costs and expenses:Membership
services
    
    
    
    
    
    
    517,652
    
    
    
    20,622
    
    
    
    
    
    
    
    538,274Retail products
    
    
    
    
    
    
    43,491
    
    
    
    988
    
    
    
    
    
    
    
    44,479Advertising
    
    
    
    
    
    
    41,867
    
    
    
    1,226
    
    
    
    
    
    
    
    43,093General and administrative
    
    
    2,699
    
    
    
    33,978
    
    
    
    968
    
    
    
    
    
    
    
    37,645Depreciation and amortization
    
    
    
    
    
    
    58,670
    
    
    
    1,106
    
    
    
    
    
    
    
    59,7762,699
    
    
    
    695,658
    
    
    
    24,910
    
    
    
    
    
    
    
    723,267Operating loss
    
    
    (2,699
    )
    
    
    29,950
    
    
    
    3,104
    
    
    
    
    
    
    
    30,355Equity in income (loss) from
continuing operations of
subsidiaries
    
    
    22,014
    
    
    
    
    
    
    
    
    
    
    
    (22,014
    )
    
    
    Interest expense
    
    
    (35,085
    )
    
    
    (7,861
    )
    
    
    (7,813
    )
    
    
    5,975
    
    
    
    (44,784
    )Foreign
exchange gain
    
    
    
    
    
    
    
    
    
    
    2,746
    
    
    
    
    
    
    
    2,746Other, net
    
    
    (547
    )
    
    
    (1,672
    )
    
    
    4,409
    
    
    
    (5,975
    )
    
    
    (3,785
    )(13,618
    )
    
    
    (9,533
    )
    
    
    (658
    )
    
    
    (22,014
    )
    
    
    (45,823
    )Income
(loss) from continuing operations before income taxes
    
    
    (16,317
    )
    
    
    20,417
    
    
    
    2,446
    
    
    
    (22,014
    )
    
    
    (15,468
    )Income tax provision
    
    
    
    
    
    
    (849
    )
    
    
    
    
    
    
    
    
    
    
    (849
    )Income
(loss) from continuing operations
    
    
    (16,317
    )
    
    
    19,568
    
    
    
    2,446
    
    
    
    (22,014
    )
    
    
    (16,317
    )Discontinued
operationsLoss from discontinued operations
    
    
    (981
    )*
    
    
    
    
    
    
    (981
    )
    
    
    981
    
    
    
    (981
    )Loss on
disposal
    
    
    (1,699
    )*
    
    
    
    
    
    
    (1,699
    )
    
    
    1,699
    
    
    
    (1,699
    )Loss from
discontinued operations
    
    
    (2,680
    )
    
    
    
    
    
    
    (2,680
    )
    
    
    2,680
    
    
    
    (2,680
    )Income (loss) before cumulative
effect of changes in accounting
principles
    
    
    (18,997
    )
    
    
    19,568
    
    
    
    (234
    )
    
    
    (19,334
    )
    
    
    (18,997
    )Cumulative effect of changes
in accounting principles
    
    
    (626
    )*
    
    
    (626
    )
    
    
    
    
    
    
    626
    
    
    
    (626
    )Net loss
    
    $
    (19,623
    )
    
    $
    (18,942
    )
    
    $
    (234
    )
    
    $
    (18,708
    )
    
    $
    (19,623
    )
 
 *
    
    Equity in amounts from subsidiaries related to discontinued operations and
cumulative effect of changes in accounting principles. 35




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)
 CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
 Nine Months Ended September 30, 2004Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalCASH FLOW
FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (13,259
    )
    
    $
    29,683
    
    
    $
    371
    
    
    $
    (30,054
    )
    
    $
    (13,259
    )Adjustments to reconcile to
cash provided Depreciation and amortization,
including amortization
included in interest expense
    
    
    1,149
    
    
    
    51,298
    
    
    
    2,244
    
    
    
    
    
    
    
    54,691Changes in operating assets
and liabilities
    
    
        691
    
    
    
        (5,534
    )
    
    
        756
    
    
    
    
    
    
    
        (4,087
    )Changes in net affiliate
            balances
    
    
    
    
    
    
        (16,528
    )
    
    
        1,186
    
    
    
        15,342
    
    
    
    Other, net
    
    
        1,008
        
    
    
        1,137
    
    
    
        (473
    )
    
    
        
    
    
    
        1,672Cash
provided by (used in) operating activities
    
    
        (10,411
    )
    
    
        60,056
    
    
    
        4,084
    
    
    
        (14,712
    )
    
    
        39,017CASH FLOWS FROM INVESTING ACTIVITIES:Purchases and construction
of property and equipment
    
    
    
    
    
    
    (38,561
    )
    
    
    
    
    
    
    
    
    
    
        (38,561
    )Acquisitions of businesses,
            net of cash acquired and other
    
    
    
    
    
    
        (117
    )
    
    
    
    
    
    
    
    
    
    
        (117
    )Investment in and advances to subsidiaries
    
    
    (14,712
    )
    
    
        
    
    
    
    
    
    
    
    14,712
    
    
    
        Cash used in investing activities
    
    
        (14,712
    )
    
    
        (38,678
    )
    
    
    
    
    
    
        14,712
    
    
    
        (38,678
    )CASH FLOWS FROM FINANCING
            ACTIVITIES:Net borrowings under
            revolving credit agreement
    
    
        34,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
        34,000Net
repayments of other
long-term debt
    
    
        (9,219
    )
    
    
        (10,579
    )
    
    
        (3,962
    )
    
    
    
    
    
    
        (23,760
    )Debt issuance and refinancing costs
    
    
        (251
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
        (251
    )Stock purchase and options plans
    
    
        593
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
        593Cash provided by (used in) financing activities
    
    
    25,123
    
    
    
    (10,579
    )
    
    
    (3,962
    )
    
    
    
    
    
    
    10,582Increase in cash
    
    
    
    
    
    
        10,799
    
    
    
        122
    
    
    
    
    
    
    
        10,921Effect of exchange rate changes on cash balances
    
    
    
    
    
    
    
    
    
    
    629
    
    
    
    
    
    
    
    629Cash, beginning of year
    
    
    
    
    
    
        13,394
    
    
    
        246
    
    
    
    
    
    
    
        13,640Cash, end of year
    
    $
    
    
    
    $
        24,193
    
    
    $
        997
    
    
    $
    
    
    
    $
        25,190
 36




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Notes to Condensed Consolidated Financial Statements  (continued)     CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
 Nine months ended September 30, 2003 (restated)Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    ConsolidatedParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalCASH FLOWS FROM OPERATING ACTIVITIES:Income (loss) before cumulative effect of changein accounting principle
    
    $
    (18,997
    )
    
    $
    19,568
    
    
    $
    (234
    )
    
    $
    (19,334
    )
    
    $
    (18,997
    )Adjustments to reconcile to cash provided -Depreciation and amortization, including amortizationincluded in interest expense
    
    
    1,503
    
    
    
    57,843
    
    
    
    3,141
    
    
    
    
    
    
    
    62,487Changes in operating assets and liabilities
    
    
    9,189
    
    
    
    13,973
    
    
    
    614
    
    
    
    
    
    
    
    23,776Changes in net affiliate balances
    
    
    
    
    
    
    (10,358
    )
    
    
    23,468
    
    
    
    (13,110
    )
    
    
    Other, net
    
    
    2,613
    
    
    
    308
    
    
    
    (717
    )
    
    
    
    
    
    
    2,204Cash provided by (used in) operating activities
    
    
    (5,692
    )
    
    
    81,334
    
    
    
    26,272
    
    
    
    (32,444
    )
    
    
    69,470CASH FLOWS FROM INVESTING ACTIVITIES:Purchases and construction of property and equipment
    
    
    
    
    
    
    (38,069
    )
    
    
    (522
    )
    
    
    
    
    
    
    (38,591
    )Acquisitions of businesses, net of cash acquired and other
    
    
    
    
    
    
    
    
    
    
    (501
    )
    
    
    
    
    
    
    (501
    )Investment in and advances to subsidiaries
    
    
    (32,444
    )
    
    
    
    
    
    
    
    
    
    
    32,444
    
    
    
    Cash used in investing activities
    
    
    (32,444
    )
    
    
    (38,069
    )
    
    
    (1,023
    )
    
    
    32,444
    
    
    
    (39,092
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net repayments under revolving credit agreement
    
    
    (49,500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49,500
    )Net borrowings (repayments) of other long-term debt
    
    
    94,786
    
    
    
    (35,006
    )
    
    
    (23,053
    )
    
    
    
    
    
    
    36,727Debt issuance and refinancing costs
    
    
    (7,847
    )
    
    
    
    
    
    
    (1,943
    )
    
    
    
    
    
    
    (9,790
    )Stock purchase and options plans
    
    
    697
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    697Cash provided by (used in) financing activities
    
    
    38,136
    
    
    
    (35,006
    )
    
    
    (24,996
    )
    
    
    
    
    
    
    (21,866
    )Increase in cash
    
    
    
    
    
    
    8,259
    
    
    
    253
    
    
    
    
    
    
    
    8,512Effect of exchange rate changes on cash balances
    
    
    
    
    
    
    
    
    
    
    (222
    )
    
    
    
    
    
    
    (222
    )Cash, beginning of year
    
    
    
    
    
    
    11,919
    
    
    
    208
    
    
    
    
    
    
    
    12,127Cash, end of year
    
    $
    
    
    
    $
    20,178
    
    
    $
    239
    
    
    $
    
    
    
    $
    20,417
 37




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
  Restatements and Reclassifications
   Executive Summary of Business
     38




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##### Table of Contents



1)
    
    Our primary revenue source is membership services revenue derived from the operation of
our fitness centers. Membership services revenue includes amounts paid by our members in the
form of enrollment fees and monthly membership and dues payments. It also includes revenue generated from sales of
personal training services provided.Currently, most of our members choose to purchase their memberships under our multi-year value plan by paying an initial enrollment fee and by making monthly payments throughout the term of their membership.
Monthly payments under our value plan are generally fixed during an
initial obligatory payment period, for up to three years pursuant to retail installment contracts. After the initial obligatory period of membership, our members enter the non-obligatory renewal period of membership
and continue to make monthly payments to maintain membership privileges. Under sales methods in effect during
2004, membership monthly payments were substantially discounted from the initial obligatory term
monthly payment levels. Following the nationwide 2005 implementation
of our new Build Your Own Membership pricing plan, as
described in the Annual Report on Form 10-K for the year ended
December 31, 2004.  Monthly payments in the renewal phase of membership carry a smaller or no discount to the initial period monthly
payment level. Our members may also choose to purchase a prepaid membership for
periods up to three years. Members choosing our
pay-as-you-go membership payment option make month-to-month non-obligatory payments after paying an initial enrollment fee. Ongoing membership dues for members in renewal periods may be paid
monthly or annually or may be prepaid for multiple future periods.Our membership services revenue is generally collected as cash
    on a basis that does not conform to its basis of revenue
    recognition, resulting in the deferral of significant amounts
    received early in the membership period that will be recognized
    in later periods. This recognition methodology is a consequence
    of our long history of offering membership programs with higher
    levels of monthly or total payments during the initial period of
    membership, generally for periods of up to three years, followed
    by discounted payments in the subsequent renewal phase of
    membership. Our revenue recognition objective is to recognize an even amount of
    membership revenue from our members throughout their entire term
    of membership, regardless of the payment pattern. As a result,
    we make estimates of membership term length on a composite group
    basis of all members joining in a period, and set up separate
    amortization pools based on estimated total group membership
    term length averages. Estimated term lengths used to create the
    separate amortization term groups for revenue recognition are
    based on historical average membership terms experienced by our
    members.Membership services revenue related to members who maintain
    their membership for periods beyond the initial term of
    membership is deferred as collected and recognized on a
    straight-line basis over the estimated term of total membership.
    Our historical evaluation of members who have joined since 1996
    resulted in a determination that approximately 35% of originated
    monthly payment revenue from our members is subject to deferral
    to be recognized over their entire term of membership. As a
    result, we defer all collections received from members in this
    group, and recognize as membership service revenue these amounts
    based on five amortization pools with amortization periods of 39
    months to 245 months, representing composite average membership
    terms of membership of between 37 months and 360 months.
    Membership services revenues that have been prepaid in their
    entirety for the initial term of membership are recognized in a
    similar manner, except that the estimate of the group expected
    to remain a member for only the initial period of membership is
    amortized over 36 months. Based on the historical attrition
    patterns of members who pay their membership in full upon
    origination, approximately 69% of such membership revenue
    relates to members who maintain their membership beyond the
    initial three-year period of membership, which is amortized
    using the same five amortization pools as described for monthly
    collections.We evaluate the actual attrition patterns of all of our deferred
    revenue pools on a quarterly basis and make adjustments from our
    historical experience to take into account actual attrition by
    origination month groups. As we determine that our new estimated
    attrition is different than the initial estimate based on
    historical patterns, we recognize as a change in accounting
    estimate a charge or credit to membership services revenue in
    the period of evaluation to cumulatively adjust past recognition
    and future deferred revenue amounts. Under our deferred revenue
    methodology, an increase in membership attrition rates will
    result in an increase in revenue in the period of adjustment as
    it is determined that amounts previously deferred to future
    periods of membership no longer need to be deferred.
    Alternatively, a decrease in membership attrition rates can
    reduce membership services revenue as it is determined that
    amounts previously considered earned are required to be deferred
    for recognition in future periods.Membership services revenue comprised approximately 93 and 92
percent of total revenue for the nine months ending
September 30, 2004 and 2003, respectively.
 Membership services revenue is recognized at the later of when
membership services fees are collected or earned. Membership services
fees collected but not yet earned are included as a deferred revenue
liability on the balance sheet.2)
    
    We generate revenue from the sales of products at our in-fitness center retail stores
including Bally-branded and third-party nutritional products, juice bar nutritional drinks
and fitness-related convenience products such as clothing. Revenue from product sales
represented approximately five percent and six percent of total revenue in the nine months ended September 30
2004 and 2003, respectively.3)
    
    The balance of our revenue (approximately 2 percent for each of the nine months ended
September 30, 2004 and 2003) primarily consists of
franchising revenue, guest fees and specialty programs such as martial arts programs. We
also generate revenue through granting concessions in our facilities to operators offering
wellness-related services such as physical therapy, from sales of Bally-branded products by
third-parties, and from weight management programs. Revenue from sales of in-club
advertising and sponsorships is also included in this category, which we refer to as
miscellaneous revenue.
  1)
    
    Membership services expenses consist primarily of salary, commissions, payroll
taxes, benefits, rent, real estate taxes and other occupancy costs, utilities, repairs
and maintenance, supplies, administrative support and communications to operate our
fitness centers as well as the costs to operate member processing and collection centers.
The centers provide contract processing, member relations, billing and collection
services.2)
    
    Retail products expenses consist primarily of the cost of
products sold as well as the payroll and related costs of dedicated retail associates.3)
    
    Advertising expenses consist of our marketing department, media and advertising
costs to support fitness center membership growth as well as the growth of our brand.4)
    
    General and administrative expenses include costs relating to our centralized
support functions, such as information technology, accounting, treasury, human resources,
procurement, real estate and development and senior management. General and
administrative also includes professional services costs such as legal, consulting and
auditing as well as expenses related to the various accounting investigations.
 39




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##### Table of Contents



5)
    
    Depreciation and amortization expenses represent primarily the depreciation on our fitness
centers, including amortization of leasehold improvements. Owned buildings are
depreciated over 35 years and leasehold improvements are amortized on the straight-line
method over the lesser of the estimated useful lives of the improvements, or the
remaining non-cancelable lease terms.
 th
      Industry Data Survey of the Health and Fitness Club Industry,
 40




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##### Table of Contents





Critical Accounting Policies






Membership Services Revenues:








41



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##### Table of Contents



Accounting for Revenue Arrangements with Multiple
Deliverables






Self-Insurance Costs:




42



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##### Table of Contents





Valuation of Long-Lived Assets:




Valuation of Goodwill:




Intangible
Assets:


Stock Option Plans: Accounting for Stock-Based Compensation


43



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##### Table of Contents





Results of Operations




Three months ended
    
    Nine months endedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(As
RestatedSee Note 2)
    
    
    
    (As
RestatedSee Note 2)Net revenuesMembership
    
    $
    215,640
    
    
    $
    206,794
    
    
    $
    638,974
    
    
    $
    622,367Personal training
    
    
    31,408
    
    
    
    24,657
    
    
    
    93,559
    
    
    
    73,547Membership services revenue
    
    
    247,048
    
    
    
    231,451
    
    
    
    732,533
    
    
    
    695,914Retail products
    
    
    12,594
    
    
    
    14,138
    
    
    
    42,048
    
    
    
    43,753Miscellaneous
    
    
    5,140
    
    
    
    4,376
    
    
    
    14,720
    
    
    
    13,955Net revenues
    
    
    264,782
    
    
    
    249,965
    
    
    
    789,301
    
    
    
    753,622Operating costs and expensesMembership services
    
    
    180,307
    
    
    
    178,399
    
    
    
    561,057
    
    
    
    538,274Retail products
    
    
    12,168
    
    
    
    14,597
    
    
    
    40,399
    
    
    
    44,479Advertising
    
    
    13,597
    
    
    
    11,712
    
    
    
    49,352
    
    
    
    43,093Information technology
    
    
    5,415
    
    
    
    3,661
    
    
    
    14,256
    
    
    
    11,028Other general and administrative
    
    
    12,609
    
    
    
    9,208
    
    
    
    35,601
    
    
    
    26,617Depreciation and amortization
    
    
    17,713
    
    
    
    19,611
    
    
    
    52,232
    
    
    
    59,776241,809
    
    
    
    237,188
    
    
    
    752,897
    
    
    
    723,267Operating income
    
    $
    22,973
    
    
    $
    12,777
    
    
    $
    36,404
    
    
    $
    30,355Operating dataAverage monthly membership revenue per member
    
    $
    19.31
    
    
    $
    18.76
    
    
    $
    19.17
    
    
    $
    19.14Average number of members during the period
    
    
    3,723
    
    
    
    3,674
    
    
    
    3,704
    
    
    
    3,613Number of members at end of period
    
    
    3,708
    
    
    
    3,684
    
    
    
    3,708
    
    
    
    3,684Number of members joined during period
    
    
    271
    
    
    
    241
    
    
    
    911
    
    
    
    747Fitness centers operating at end of period
    
    
    414
    
    
    
    415
    
    
    
    414
    
    
    
    415 Summary
of revenue recognition method
     44




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##### Table of Contents



Comparison of the Three Months Ended September 30, 2004 and
2003
   
    
    Membership revenue increased to $215.6 million from $206.8
    million in 2003, an increase of $8.8 million (4%) from the
    prior year. The increase in membership revenue in the current
    year is the result of a 1% increase in the average number of
    members to 3.723 million members for 2004 driven by an increase
in new member sign-ups in 2004 as well as a 3%
    increase in the average monthly membership revenue per member to
    $19.31 for 2004.
    
    Cash collections of membership revenue during the three
months ended September 30, 2004 was $206 million, an increase of $1
million from the three months ended September 30, 2003.  This
increase is the result of an increase in advance payments of dues and
membership fees partially offset by a decrease in cash received from
initial term monthly payments.  See Note 4, Deferred Revenue.
    
    Personal training revenue increased to $31.4 million from
    $24.7 million in 2003, an increase of $6.7 million (27%), primarily
    reflecting the Companys emphasis on and continued growth
    in personal training services.
    
    Retail products revenue decreased to $12.6 million from $14.1
    million in 2003, a decrease of $1.5 million (11%), primarily
    reflecting lower retail sales in the Companys fitness
    centers due in part to the elimination of the sale of
ephedra-based products.
    
    Miscellaneous revenue increased to $5.1 million in 2004 from
    $4.4 million in 2003 primarily due to an increase in specialty
program revenues from our martial arts program.
  
    
    Membership services expenses for the three months ended
    September 30, 2004 increased $1.9 million from 2003, reflecting
    increases in occupancy and insurance costs.
    
    Retail products costs and expenses for the three months ended
    September 30, 2004 decreased $2.4 million (17%) from 2003 as a
    result of lower retail sales in the Company's fitness centers.
    
    Advertising expenses for the three months ended September 30,
    2004 increased $1.9 million (16%) from 2003, reflecting increases
in media spending and consumer research to drive new member
enrollments and to adjust for the impact of inflation on advertising
which had not been increased in the past several years.
    
    Information technology expenses for the three months ended
September 30, 2004 increased $1.8 million (48%) from 2003 primarily
as a result of costs associated with improved controls, compliance
and security enhancements necessary to comply with the Sarbanes-Oxley
Act of 2002. Information technology spending for 2004 was
approximately 2.0% of total revenues as compared to approximately
1.5% during 2003.
    
    Other general and administrative expenses for the three months
    ended September 30, 2004 increased
    $3.4 million (37%) from 2003,
    primarily as a result of costs incurred in connection with the
    investigations and litigation related to the restatement of the
    Companys financial statements, as well as an increase in
    insurance costs.
    
    Depreciation and amortization expenses for the three months ended September 30,
    2004 decreased $1.9 million (10%) from 2003 reflecting the
    relatively high proportion of the Companys facilities that
    are in excess of 15 years old, which is the longest period over
    which the Company depreciates its leasehold improvements.
 45




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##### Table of Contents











Comparison of the Nine Months Ended September 30, 2004 and
2003





    
    Membership revenue increased to $639.0 million from $622.4
    million in 2003, an increase of $16.6 million (3%) from the
    prior year. The increase in membership revenue in the current
    year is the result of a 2% increase in the average number of
members to 3.70 million members for 2004 driven by an increase in new
member sign-ups in 2004.
    
    Cash collections of membership revenue during the nine months
ended September 30, 2004 was $626 million, a decrease of $9.9 million
(2%) from the nine months ended September 30, 2003. This decrease is
the result of a decrease in advance payments of dues and membership
fees. See Note 4, Deferred Revenue.
    
    Personal training revenue increased to $93.5 million from
$73.5
    million in 2003, an increase of $20.0 million (27%),
    primarily reflecting the Companys emphasis on and
    continued growth in personal training services.
    
    Retail products revenue decreased to $42.0 million from $43.7
    million in 2003, a decrease of $1.7 million (4%), primarily
    reflecting lower retail sales in the Companys fitness
    centers due in part to the elimination of the sale of
ephedra-based products.
    
    Miscellaneous revenue increased to $14.7 million in 2004 from
    $13.9 million in 2003 primarily due to an increase in specialty
program revenues from our martial arts program.
 46




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##### Table of Contents




    
    Membership services expenses for the nine months ended
September 30, 2004 increased $22.8 million (4%) from 2003, due
to increases in
    occupancy and insurance costs, offset by a reduction in personnel
costs as a result of the Companys cost reduction initiatives.
    
    Retail products costs and expenses for the nine months ended
    September 30, 2004 decreased $4.1 million (9%) from 2003 as
a result of lower retail sales in the Companys fitness centers.
    
    Advertising expenses for the nine months ended September 30,
    2004 increased $6.3 million (14%) from 2003 reflecting increases
in media spending and consumer research to drive new member
enrollments and to adjust for the impact of inflation on advertising
which had not been increased in the past several years.
    
    Information technology expenses for the nine months ended
    September 30, 2004 increased $3.2 million (29%) from 2003
primarily as a result of costs associated with improved controls,
compliance and security enhancements necessary to comply with the
Sarbanes-Oxley Act of 2002. Information technology spending for 2004
was approximately 1.8% of total revenues as compared to 1.5% during
2003.
    
    Other general and administrative expenses for the nine months
    ended September 30, 2004 increased
    $9.0 million (34%) from 2003,
    primarily as a result of costs incurred in connection with the
    investigations and litigation related to the restatement of the
    Companys financial statements as well as one-time charges,
and an increase in insurance costs.
    
    Depreciation expense for the nine months ended September 30,
    2004 decreased $7.5 million (13%) from 2004 reflecting the
    relatively high proportion of the Companys facilities that
    are in excess of 15 years old, which is the longest period over
    which the Company depreciates its leasehold improvements.
    47




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION  Managements Discussion and Analysis of Financial Condition and  Results of Operations  (continued)
 Liquidity and Capital Resources
  Three
months endedSeptember 30
    
    

Nine
months endedSeptember 302004
    
    
    2003
    
    
    2004
    
    
    2003(As restated
    
    
    (As restatedSee Note 2)
    
    
    See Note 2)Cash provided by operating activities
    
    $
    5,076
    
    
    $
    15,923
    
    
    $
    39,017
    
    
    $
    69,470Cash used in investing activities
    
    
    (11,651
    )
    
    
    (15,174
    )
    
    
    (38,678
    )
    
    
    (39,092
    )Cash provided by (used in) financing activities
    
    
    19,386
    
    
    
    4,173
    
    
    
    10,582
    
    
    
    (21,866
    )Increase in cash
    
    $
    12,811
    
    
    $
    4,922
    
    
    $
    10,921
    
    
    $
    8,512
  Debt
 1 2
  Consent
Solicitations
  48




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION  Managements Discussion and Analysis of Financial Condition and  Results of Operations  (continued)
 Risk Factors Relating to the Company
  Weaknesses in the Companys internal controls and procedures could have a material adverse effect
on the Company.
     49




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION  Managements Discussion and Analysis of Financial Condition and  Results of Operations  (continued)
  We are uncertain of our ability to obtain additional financing for our future capital needs. If we
are unable to obtain additional financing, we may not be able to continue to operate our business.
  Any adverse outcome of investigations currently being conducted by the SEC or the U.S. Attorneys
Office could have a material adverse impact on us, on the trading prices of our securities, and on
our ability to access the capital markets.
  The impact of ongoing purported class action and derivative litigation may be material. We are also
subject to the risk of additional litigation and regulatory action in connection with the
restatement of our consolidated financial statements and in the ordinary course of business. The
potential liability from any such litigation or regulatory action could adversely affect our
business.
  50




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION  Managements Discussion and Analysis of Financial Condition and  Results of Operations  (continued)
      Other
litigation risks
  The continuing time, effort and expense relating to internal and external investigations, the
restatement of historical financial statements and the development and implementation of improved
internal controls and procedures may have an adverse effect on our business.
  51




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##### Table of Contents



Non-compliance with Payment Card Industry Data Standards could adversely affect our business.
  We may not be able to attract or retain a sufficient number of members to maintain or expand the
business.
  We
are subject to risks associated with implementation of the new
business initiatives.
  52




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
Management's Discussion and Analysis of Financial Condition and
Results of Operations  (continued)
 The positive results achieved from introducing the products and services during recent years may
not continue in the future.
  We may not be able to continue to compete effectively in each of our markets in the future.
  We are subject to extensive government regulation. Changes in these regulations could have a
negative effect on our financial condition and operating results.
  
    
    general rules and regulations of the FTC, state and local consumer protection
agencies and state statutes that prescribe provisions of membership contracts and that
govern the advertising, sale, financing and collection of membership fees and dues;
    
    state and local health regulations; and
    
    federal regulation of health and nutritional supplements.
  53




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION  Management's Discussion and Analysis of Financial Condition and  Results of Operations  (continued)
   Our trademarks and trade names may be misappropriated or subject to claims of infringement.
  If we do not retain our key personnel or fail to attract and retain other highly skilled employees
our business may suffer.
  54




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Interest Rate Risk and Market Risk
   Foreign Exchange Risk
  
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
 Item 9A
Controls and Procedures
    55




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##### Table of Contents



Changes in Internal Controls over Financial Reporting (ICFR)
  56




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##### Table of Contents



PART II. OTHER INFORMATION Item 1. Legal Proceedings LITIGATION In re Bally Total Fitness Securities Litigation
  Jack Garrison and Deane Garrison v. Bally Total
Fitness Holding Corporation, Lee S. Hillman and John W. Dwyer
   57




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
     
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
   Votes
    
    VotesNominees
    
    cast for
    
    withheldJames F. McAnally
    
    
    27,286,687
    
    
    
    3,651,724John W. Rogers, Jr.
    
    
    27,286,687
    
    
    
    3,486,666
 58




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
 
 Item 5. Other Information
  
 Item 6. Exhibits and reports on Form 8-K
 (a)
    
    Exhibits:
 Exhibit 10.1
    
    Employment Agreement effective as of January 1, 2004,
between the Company and Paul A. Toback (incorporated by
reference to the Companys Current Report on Form 8-K,
file no. 001-13997, dated August 24, 2004).
 Exhibit 31.1 Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, filed herewith.Exhibit 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, filed herewith.Exhibit 32.1 Certification of the Chief Executive Officer and Chief 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.
 59




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##### Table of Contents



BALLY TOTAL FITNESS HOLDING CORPORATION
 
 
 SIGNATURE PAGE
  BALLY TOTAL FITNESS HOLDING CORPORATIONRegistrantBy:

/s/
Carl J. LandeckCarl J. LandeckSenior Vice President,  Chief Financial Officer
(principal financial officer)  60