Bally Total Fitness Of Toledo 10Q 2005 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the period ended September 30, 2005

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-13997

BALLY TOTAL FITNESS HOLDING CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		36-3228107
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)

8700 West Bryn Mawr Avenue, Chicago, Illinois (Address of principal executive offices)		60631 (Zip Code)

Registrant’s telephone number, including area code:

(773) 380-3000

SEE TABLE OF ADDITIONAL REGISTRANTS

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of November 29, 2005, there were 37,940,480 shares of the registrant’s common stock outstanding.

TABLE OF ADDITIONAL REGISTRANTS


	Jurisdiction of	I.R.S. Employer
Exact Name of Additional Registrants	Incorporation	Identification Number

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

The address for service of each of the additional registrants is c/o Bally Total Fitness Holding Corporation, 8700 West Bryn Mawr Avenue, 2^nd Floor, Chicago, Illinois 60631, telephone 773-380-3000. The primary industrial classification number for each of the additional registrants is 7991.

BALLY TOTAL FITNESS HOLDING CORPORATION

INDEX


		Page
		Number

FORWARD-LOOKING STATEMENTS
PART I. FINANCIAL INFORMATION
Item 1.	Financial statements:
	Condensed consolidated balance sheets (unaudited) September 30, 2005 and December 31, 2004		1
	Consolidated statements of operations (unaudited) Three months ended September 30, 2005 and 2004		2
	Consolidated statements of operations (unaudited) Nine months ended September 30, 2005 and 2004		3
	Consolidated statements of stockholders’ equity (deficit) and comprehensive income (loss) (unaudited) Nine months ended September 30, 2005		4
	Consolidated statements of cash flows (unaudited) Nine months ended September 30, 2005 and 2004		5
	Notes to condensed consolidated financial statements (unaudited)		7
Item 2.	Management’s discussion and analysis of financial condition and results of operations		24
Item 3.	Quantitative and qualitative disclosures about market risk		32
Item 4.	Controls and Procedures		33

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		34
Item 3.	Defaults Upon Senior Securities		35
Item 4.	Submission of Matters to a Vote of Security Holders		35
Item 5.	Other information		35
Item 6.	Exhibits		36
SIGNATURE PAGE			38
Certification of the Chief Executive Officer
Certification of the Chief Financial Officer
Certification of the CEO and CFO

FORWARD-LOOKING STATEMENTS

Forward-looking statements in this Quarterly Report on Form 10-Q including, without limitation, statements relating to the Company’s plans, strategies, objectives, expectations, intentions, and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, among others, the following:


	•	the outcome of the SEC and Department of Justice investigations;

	•	the disclosure by the Company’s management and independent auditors of the existence of material weaknesses in internal controls over financial reporting;

	•	general economic and business conditions;

	•	competition;

	•	success of operating initiatives, advertising and promotional efforts;

	•	existence of adverse publicity or litigation (including various stockholder litigations) and the outcome thereof and the costs and expenses associated therewith;

	•	acceptance of new product and service offerings;

	•	changes in business strategy or plans;

	•	availability, terms and development of capital;

	•	ability to satisfy long-term obligations as they become due;

	•	business abilities and judgment of personnel;

	•	changes in, or the failure to comply with, government regulations;

	•	ability to remain in compliance with, or obtain waivers under, the Company’s loan agreements and indentures;

	•	ability to maintain existing or obtain new sources of financing, on acceptable terms or at all, to satisfy the Company’s cash needs and obligations; and

	•	other factors described in this Quarterly Report on Form 10-Q and prior filings of the Company with the SEC.

PART I: FINANCIAL INFORMATION


Item 1.	Financial Statements

The Company is filing this Quarterly Report on Form 10-Q for the three-month period ended September 30, 2005. Following the Company’s issuance in April 2004 of its financial statements for the year-ended December 31, 2003, reflecting certain changes in its accounting methods and in accounting principles and a restatement of its accounting for prepaid dues, the United States Securities and Exchange Commission (“SEC”) commenced an investigation. On August 19, 2004, the Audit Committee authorized an investigation of certain aspects of past financial statements filed by the Company. The Audit Committee investigation uncovered errors in the Company’s accounting and the Audit Committee determined that the Company’s financial statements for the years ended December 31, 2000, 2001, 2002, 2003 and the first quarter of 2004 should be restated and should no longer be relied upon. The Company issued press releases on November 16, 2004 and February 8, 2005 with respect to the findings of the Audit Committee’s investigation and included the press releases as exhibits to its current reports on Form 8-K filed with the SEC on November 16, 2004 and February 9, 2005.

The Company previously made public its need to review the Audit Committee’s report before it could complete its Annual Report on Form 10-K for the year ended December 31, 2004 and its Quarterly Reports on Form 10-Q for the periods ended June 30, 2004, September 30, 2004 and subsequent periods. The Annual Report on Form 10-K for the year ended December 31, 2004 was filed on November 30, 2005.

BALLY TOTAL FITNESS HOLDING CORPORATION

Condensed Consolidated Balance Sheets

(In thousands)


			September 30			December 31
			2005			2004

			(Unaudited)
ASSETS
Current assets:
	Cash		$	12,763		$	19,177
	Deferred income taxes			—			471
	Other current assets			33,975			30,239

		Total current assets		46,738			49,887
Property and equipment, less accumulated depreciation and amortization of $754,599 and $713,222				335,217			361,863
Goodwill, net				41,732			41,698
Trademarks, net				9,537			9,933
Intangible assets, less accumulated amortization of $22,759 and $21,565				6,706			7,909
Other assets				46,165			28,279

			$	486,095		$	499,569


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	47,425		$	51,373
	Income taxes payable			1,702			1,399
	Deferred income taxes			681			—
	Accrued liabilities			97,351			111,226
	Current maturities of long-term debt			15,707			22,127
	Deferred revenues			325,403			323,271

		Total current liabilities		488,269			509,396
Long-term debt, less current maturities				743,816			737,432
Deferred rent liability				102,874			101,911
Deferred income taxes				800			1,637
Other liabilities				29,940			21,580
Deferred revenues				583,786			601,889

Total liabilities				1,949,485			1,973,845

Stockholders’ equity (deficit)				(1,463,390	)		(1,474,276	)

			$	486,095		$	499,569

See accompanying notes to condensed consolidated financial statements.

BALLY TOTAL FITNESS HOLDING CORPORATION

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)


		Three Months Ended
		September 30

		2005			2004

Net revenues:
	Membership services	$	245,375		$	247,048
	Retail products		12,366			12,594
	Miscellaneous		4,012			5,140

			261,753			264,782
Operating costs and expenses:
	Membership services		177,553			180,307
	Retail products		13,133			12,168
	Advertising		13,241			13,597
	General and administrative		22,579			18,024
	Depreciation and amortization		16,488			17,713

			242,994			241,809

Operating income			18,759			22,973
Interest expense			(21,421	)		(16,730	)
Foreign exchange gain			1,141			879
Other, net			133			(62	)

			(20,147	)		(15,913	)

Income (loss) before income taxes			(1,388	)		7,060
Income tax provision			(259	)		(213	)

Net income (loss)		$	(1,647	)	$	6,847

Basic income (loss) per common share		$	(0.05	)	$	0.21

Diluted income (loss) per common share		$	(0.05	)	$	0.21

See accompanying notes to condensed consolidated financial statements.

BALLY TOTAL FITNESS HOLDING CORPORATION

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)


		Nine Months Ended
		September 30

		2005			2004

Net revenues:
	Membership services	$	754,574		$	732,533
	Retail products		40,251			42,048
	Miscellaneous		12,664			14,720

			807,489			789,301
Operating costs and expenses:
	Membership services		546,195			561,057
	Retail products		40,561			40,399
	Advertising		45,795			49,352
	General and administrative		62,844			49,857
	Depreciation and amortization		50,397			52,232

			745,792			752,897

Operating income			61,697			36,404
Interest expense			(60,588	)		(49,266	)
Foreign exchange gain			1,187			473
Other, net			272			(232	)

			(59,129	)		(49,025	)

Income (loss) before income taxes			2,568			(12,621	)
Income tax provision			(776	)		(638	)

Net income (loss)		$	1,792		$	(13,259	)

Basic income (loss) per common share		$	0.05		$	(0.40	)

Diluted income (loss) per common share		$	0.05		$	(0.40	)

See accompanying notes to condensed consolidated financial statements.

BALLY TOTAL FITNESS HOLDING CORPORATION

Consolidated Statement of Stockholders’ Equity (Deficit) and Comprehensive Income (Loss)

(In thousands, except share data)

(Unaudited)


																Accumulated
	Common Stock															Other			Total
													Common			Comprehensive			Stockholders’
			Par		Contributed		Accumulated			Unearned			Stock in			Income			Equity
	Shares		Value		Capital		Deficit			Compensation			Treasury			(Loss)			(Deficit)

Balance at December 31, 2004		34,013,805	$	347	$	647,367	$	(2,106,391	)	$	(1,567	)	$	(11,635	)	$	(2,397	)	$	(1,474,276	)
Net income								1,792												1,792
Cumulative translation adjustment																	(631	)		(631	)
Restricted stock activity		580,000		6		3,384					1,567									4,957
Issuance of common stock under stock purchase and option plans		28,328				93														93
Shares issued to senior note holders		1,438,427		14		4,661								—						4,675

Balance at September 30, 2005		36,060,560	$	367	$	655,505	$	(2,104,599	)	$	—		$	(11,635	)	$	(3,028	)	$	(1,463,390	)

See accompanying notes to condensed consolidated financial statements.

BALLY TOTAL FITNESS HOLDING CORPORATION

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


			Nine Months Ended
			September 30

			2005			2004

CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income (loss)		$	1,792		$	(13,259	)
	Adjustments to reconcile to cash provided by operating activities —
		Depreciation and amortization, including amortization included in interest expense		54,543			54,691
		Change in operating assets and liabilities		(38,050	)		(4,087	)
		Deferred income taxes, net		315			315
		Loss on write-off of assets		78			822
		Foreign currency translation gain		(1,187	)		(473	)
		Stock-based compensation		4,957			1,008

	Cash provided by operating activities			22,448			39,017
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases and construction of property and equipment			(24,648	)		(38,561	)
	Proceeds from sale of land			1,455			—
	Acquisitions of business, net of cash acquired			—			(117	)

	Cash used in investing activities			(23,193	)		(38,678	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Net borrowings under revolving credit agreement			18,688			34,000
	Net repayments of other long-term debt			(13,867	)		(23,760	)
	Debt issuance and refinancing costs			(10,944	)		(251	)
	Proceeds from issuance of common stock under stock purchase and option plans			93			593

	Cash provided by (used in) financing activities			(6,030	)		10,582

Increase (decrease) in cash				(6,775	)		10,921
Effect of exchange rate changes on cash balance				361			629
Cash, beginning of period				19,177			13,640

Cash, end of period			$	12,763		$	25,190

See accompanying notes to condensed consolidated financial statements.

BALLY TOTAL FITNESS HOLDING CORPORATION

Consolidated Statements of Cash Flows — (continued)

(In thousands)

(Unaudited)


		Nine Months Ended
		September 30

		2005			2004

SUPPLEMENTAL CASH FLOWS INFORMATION:
Changes in operating assets and liabilities:
	(Decrease) increase in other current and other assets	$	(8,424	)	$	17,303
	Decrease in accounts payable		(3,988	)		(6,082	)
	Increase in income taxes payable		303			784
	Decrease in accrued and other liabilities		(9,970	)		(7,261	)
	Decrease in deferred revenues		(15,971	)		(8,831	)

Change in operating assets and liabilities		$	(38,050	)	$	(4,087	)

Cash payments for interest and income taxes were as follows —
	Interest paid	$	53,773		$	47,584
	Interest capitalized		(198	)		(898	)
	Income taxes paid, net		158			911
Investing and financing activities exclude the following non-cash transactions —
	Acquisition of property and equipment through capital leases/borrowings	$	390		$	4,651
	Payments of consents with common stock		4,675			—

See accompanying notes to condensed consolidated financial statements.

BALLY TOTAL FITNESS HOLDING CORPORATION

Notes to Condensed Consolidated Financial Statements

(All dollar amounts in thousands, except share data)

(Unaudited)


Note 1	Basis of presentation

The accompanying condensed consolidated financial statements include the accounts of Bally Total Fitness Holding Corporation (the “Company”) and the subsidiaries that it controls. The Company, through its subsidiaries, is a commercial operator of 412 fitness centers at September 30, 2005 concentrated in 29 states and Canada. Additionally, as of September 30, 2005, 23 clubs were operated pursuant to franchise and joint venture agreements in the United States, Asia, Mexico, and the Caribbean. The Company operates in one industry segment, and all significant revenues arise from the commercial operation of fitness centers, primarily in major metropolitan markets in the United States and Canada. Unless otherwise specified in the text, references to the Company include the Company and its subsidiaries. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the SEC on November 30, 2005.

All adjustments have been recorded which are, in the opinion of management, necessary for a fair presentation of the condensed consolidated balance sheet of the Company at September 30, 2005, its consolidated statements of operations for the three months and nine months ended September 30, 2005 and 2004, its consolidated statement of stockholders’ equity (deficit) and comprehensive income (loss) for the nine months ended September 30, 2005, and its consolidated statements of cash flows for the nine months ended September 30, 2005 and 2004.

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which require the Company’s management to make estimates and assumptions that affect the amounts reported therein. Actual results could vary from such estimates.


	Seasonal factors

The Company’s operations are subject to seasonal factors and, therefore, the results of operations for the nine months ended September 30, 2005 and 2004 are not necessarily indicative of the results of operations for the full year.


	Market risk

The Company has entered into interest rate swap agreements whereby the fixed interest commitment on $200,000 of outstanding principal on the Company’s 9.875% Senior Subordinated Notes due 2007 was swapped for a variable rate commitment based on the LIBOR rate plus 6.01%.

Note 2 Debt

At September 30, 2005 the Company had $20,000 of borrowings and $14,034 of letters of credit outstanding under the $100,000 revolving credit facility. The amount available under the revolving credit facility is reduced by any outstanding letters of credit which are limited to $30,000. At September 30, 2005, the average rate on borrowings under the revolving credit and term loan facility was 8.10%.

On July 13, 2005 the company commenced the solicitation of consents to extend the original waivers of defaults obtained on December 7, 2004 from holders of its 10¹/2% Senior Notes due 2011 and 9⁷/8% Senior Subordinated Notes due 2007 (“Noteholders”) under the indentures governing its Senior Subordinated Notes

BALLY TOTAL FITNESS HOLDING CORPORATION

Notes to Condensed Consolidated Financial Statements — (continued)

(All dollar amounts in thousands, except share data)

(Unaudited)

and its Senior Notes following the expiration of the waiver of the financial reporting covenant default on July 31, 2005. The notices commenced a 30-day cure period. The delivery of the notices also commenced a 10-day cure period after which a cross default would have occurred under the Company’s Credit Agreement.

Effective August 9, 2005, our lenders consented to extend the 10-day period after which a cross default would occur to August 31, 2005.

Effective August 24, 2005 the Company further amended the Credit Agreement to permit payment of consent fees to the holders of the Senior Subordinated Notes and the Senior Notes, to exclude certain expenses from the computation of various financial covenants and to reduce the required interest coverage ratio for the period ending March 31, 2006 and limits revolver borrowings under the Credit Agreement if the Company’s unrestricted cash exceeds certain levels.

On August 24 and August 30, the Company received consents from holders of a majority of its Senior Subordinated Notes and its Senior Notes, respectively, to amend the indentures governing the notes extending the waiver period until November 30, 2005 of any default arising under the financial reporting covenants in the indentures from failure to timely file its consolidated financial statements with the SEC.

On November 1, 2005 the Company completed a consent solicitation of those holders of the Senior Subordinated Notes who were not party to the August 24, 2005 consent agreement. Fees paid for these consents to the Noteholders consisted of cash payments of $4,866 and issuance of 1,903,206 shares of unregistered Common Stock. The solicitation agent was issued 232,000 shares of unregistered Common Stock as compensation for services rendered, while the lenders under the Credit Agreement were paid $2,926 for their consents and amendment.

As of September 30, 2005, the Company was in compliance with the terms of the Credit Agreement.

The Company’s unrestricted Canadian subsidiary was not in compliance with the terms of its credit agreement at September 30, 2005. As a result, the outstanding amount of $2,912 has been classified as current.

BALLY TOTAL FITNESS HOLDING CORPORATION

Notes to Condensed Consolidated Financial Statements — (continued)

(All dollar amounts in thousands, except share data)

(Unaudited)


Note 3	Deferred Revenue


		For the nine months ended September 30, 2005

		Balance at							Balance at
		December 31,		Cash		Revenue			September 30,
		2004		Additions		Recognized			2005

Deferral of receipts from financed members:
	Initial term payments	$	542,886	$	251,627	$	(259,209	)	$	535,304
	Down payments		105,482		41,138		(42,660	)		103,960
Deferral of receipts representing advance payments:
	Paid-in-full membership fees collected upon origination		124,884		31,770		(33,920	)		122,734
	Advance payments of periodic dues and membership fees		130,399		312,241		(321,751	)		120,889
Deferral of receipts for personal training services			21,509		101,827		(97,034	)		26,302

		$	925,160	$	738,603	$	(754,574	)	$	909,189


		For the nine months ended September 30, 2004

		Balance at							Balance at
		December 31,		Cash		Revenue			September 30,
		2003		Additions		Recognized			2004

Deferral of receipts from financed members:
	Initial term payments	$	535,392	$	257,511	$	(250,060	)	$	542,843
	Down payments		111,656		42,206		(44,391	)		109,471
Deferral of receipts representing advance payments:
	Paid-in-full membership fees collected upon origination		135,082		25,022		(33,248	)		126,856
	Advance payments of periodic dues and membership fees		145,938		301,487		(311,275	)		136,150
Deferral of receipts for personal training services			19,818		97,476		(93,559	)		23,735

		$	947,886	$	723,702	$	(732,533	)	$	939,055


Note 4	Membership Services Revenue


	Three Months Ended				Nine Months Ended
	September 30,				September 30,

	2005		2004		2005		2004

Membership	$	212,184	$	215,640	$	657,540	$	638,974
Personal training		33,191		31,408		97,034		93,559

	$	245,375	$	247,048	$	754,574	$	732,533


Note 5	Income (loss) per Common Share

Income (loss) per share is computed in accordance with SFAS No. 128,“Earnings per Share.”Basic income (loss) per share is computed on the basis of the weighted average number of common shares outstanding. Diluted income per share is computed on the basis of the weighted average number of common

BALLY TOTAL FITNESS HOLDING CORPORATION

Notes to Condensed Consolidated Financial Statements — (continued)

(All dollar amounts in thousands, except share data)

(Unaudited)

shares outstanding plus the effect of outstanding stock options and warrants using the “treasury stock” method.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,

	2005		2004		2005		2004

Weighted average number of common shares outstanding		33,334,240		32,870,301		33,085,668		32,807,239
Effect of outstanding stock options and warrants		487,042		301,535		447,719		496,797

Diluted weighted average number of common shares outstanding		33,821,282		33,171,836		33,533,387		33,304,036

Options 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		5,324,223		4,218,306		5,324,223		3,978,306
Range of exercise price per share:
High	$	36.00	$	36.00	$	36.00	$	36.00
Low	$	3.63	$	4.97	$	3.63	$	6.04


Note 6	Income Taxes

At September 30, 2005 the Company had approximately $670,000 of federal net operating loss carryforwards and approximately $5,896 of alternative minimum tax (“AMT”) credit carryforwards. The AMT credits can be carried forward indefinitely, while the tax loss carryforwards begin to expire in 2011 and fully expire in 2025. In addition, the Company has substantial state loss carryforwards, which begin to expire in 2005 and fully expire in 2025. Based on the Company’s past performance and the expiration dates of its carryforwards, the ultimate realization of all of the Company’s deferred tax assets cannot be assured. Accordingly, a valuation allowance has been recorded to reduce deferred tax assets to a level, which, more likely than not, will be realized. In accordance with Statement of Financial Accounting Standards No. 109,“Accounting for Income Taxes,”the Company will continue to review and evaluate the valuation allowance. At September 30, 2005 the Company’s deferred tax asset, net of valuation allowance and deferred tax liability, is nil.


Note 7	Stock Plans

Stock-based Compensation Plans

The Company accounts for its stock-based compensation plans, described in the Company’s 2004 Annual Report on Form 10-K, using the intrinsic value method and in accordance with the recognition and measurement principles of APB Opinion No. 25,“Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based employee compensation cost related to option plans was reflected in net income (loss), as all options granted under those plans had an exercise price equal to or greater than the fair market value of the underlying common stock on the date of grant. The Company has recorded compensation expense related to the restricted stock grants which vest over time. The following table illustrates, in accordance with the provisions of Statement of Financial Accounting Standards No. 148,“Accounting for Stock–Based Compensation–Transition and Disclosure,” the effect on net loss and loss per share if the

BALLY TOTAL FITNESS HOLDING CORPORATION

Notes to Condensed Consolidated Financial Statements — (continued)

(All dollar amounts in thousands, except share data)

(Unaudited)

Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation,”to stock-based employee compensation.


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2005			2004			2005			2004

Net income (loss), as reported		$	(1,647	)	$	6,847		$	1,792		$	(13,259	)
	Plus: stock-based compensation expense included in net loss		618			134			4,952			1,074
	Less: stock-based compensation expense determined under fair value based method		(1,270	)		(1,366	)		(6,952	)		(5,143	)

Pro forma net gain (loss)		$	(2,299	)	$	5,615		$	(208	)	$	(17,328	)

Basic loss per common share
	As reported	$	(0.05	)	$	0.21		$	0.05		$	(0.40	)
	Pro forma		(0.07	)		0.17			(0.01	)		(0.53	)
Diluted loss per common share
	As reported	$	(0.05	)	$	0.21		$	0.05		$	(0.40	)
	Pro forma		(0.07	)		0.17			(0.01	)		(0.53	)

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.


	Equity Inducement Plan

On March 8, 2005, the Company adopted an Inducement Plan (“Plan”) as a means of providing equity compensation in order to induce individuals to become employed by the Company. The Plan provides for the issuance of up to 600,000 shares of the Company’s Common Stock in the form of stock options and restricted shares, subject to various restrictions. As of November 30, 2005, 385,000 restricted shares and stock options covering an additional 153,000 shares have been granted. The restricted shares vested in May and September 2005 under the terms of the Plan’s change in control provision, which provides for accelerated vesting in the event of a change in control. For these purposes, a change in control was defined as an Acquiring Person becoming the Beneficial Owner of Shares representing 10% or more of the combined voting power of the then-outstanding shares other than in a transaction or series of transactions approved by the Company’s Board of Directors. The acquisition on September 6, 2005 by Pardus Capital Management L.P. constituted such a change in control. In the three-month and nine months ended September 30, 2005, $618 and $1,015, respectively, in compensation was reported as general and administrative expense related to these time-based awards.


Note 8	Guarantees

The Company guarantees the lease on one fitness center, as part of a joint venture with Holmes Place, Plc. The lease has a 15-year term that began in May 2002, with current annual rental (subject to escalation) of $1,611. The Company believes that it does not have any obligation to perform under the guarantee as of September 30, 2005.

BALLY TOTAL FITNESS HOLDING CORPORATION

Notes to Condensed Consolidated Financial Statements — (continued)

(All dollar amounts in thousands, except share data)

(Unaudited)


Note 9	Investigations, Disputes and Legal Proceedings

In February 2005, the Company announced that the Audit Committee of its Board of Directors had completed its investigation into various accounting issues. The Audit Committee investigation was led by Bingham McCutchen LLP, who consulted with accounting experts PricewaterhouseCoopers LLP and Marshall Wallace. In addition, in connection with its representation of the Company in the SEC investigation, Latham & Watkins LLP conducted an inquiry into the circumstances associated with the restatement of the prepaid dues account in the financial statements for 2003 and reported to the Audit Committee on the results of that inquiry. The Audit Committee investigation identified accounting errors, attributed responsibility for these errors to the Company’s former CEO and CFO and found improper conduct on the part of the Company’s then Controller and Treasurer. The Controller and Treasurer were subsequently terminated. The investigation also indicated that there were deficiencies in internal controls over financial reporting. See Item 9A of the Annual Report on Form 10-K for the year ended December 31, 2004 for more complete details of management’s evaluation and report on Internal Controls Over Financial Reporting.

Costs incurred as a result of the Audit Committee investigation, costs of restating and auditing previously released financial statements, costs of the 2004 audit, costs of cooperating with the various government agencies investigating matters discussed in the press release, attorneys’ and other professional fees advanced by the Company to various current and former Company officers, directors and employees, as provided in the Company’s by-laws, subject to the undertaking of the recipients to repay the advanced fees should it ultimately be determined by a court of law that they were not entitled to be indemnified, and related class action litigation are reflected in “general and administrative” expenses in the Consolidated Statements of Operations. These costs consist of legal and other professional fees. The Company received payments of $3,200, $600 and $400 in June 2005, July 2005 and September 2005, respectively, for reimbursement of costs incurred pursuant to the Company’s director and officer insurance policy.

On August 6, 2003, the Company filed a Demand for Arbitration with the American Arbitration Association asserting claims against Household Credit Services (II), Inc. and Household Bank (SB), N.A. (collectively, “Household”). The Demand asserted claims for breach of contract and requested damages in excess of $34 million, an accounting and a declaratory judgment regarding the rights and responsibilities of the parties.

Household filed an answering statement and counterclaim seeking $5.3 million in damages from the Company and a declaration that the Company should share in future losses under the credit card program in an unspecified amount. The Company denied the allegations in the counterclaim. Hearings were held before a panel of arbitrators in June and September 2004.

On May 12, 2005, the arbitration tribunal overseeing the proceeding awarded damages to each party, resulting in a net award to the financial institution in the amount of approximately $14,300. On August 2, 2005, the Federal District Court for Northern Illinois affirmed the award to Household and entered a judgment against the Company. The Company paid Household $14,884 and satisfied the judgment, including interest, in full on August 18, 2005.

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, various governmental bodies investigate customer complaints. 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.

BALLY TOTAL FITNESS HOLDING CORPORATION

Notes to Condensed Consolidated Financial Statements — (continued)

(All dollar amounts in thousands, except share data)

(Unaudited)

In addition, the Company is, and has been in the past, named as defendants in a number of purported class action lawsuits based on alleged violations of state and local consumer protection laws and regulations governing the sale, financing and collection of membership fees. To date the Company has successfully defended or settled such lawsuits without a material adverse effect on our financial condition or results of operation. However, the Company cannot provide assurances that we will be able to successfully defend or settle all pending or future purported class action claims, and the Company’s failure to do so may have a material adverse effect on its financial condition or results of operations.


Note 10	Crunch Purchase Agreement

On September 16, 2005, the Company entered into a Purchase Agreement to sell all of its health clubs operating under the Crunch Fitness^sm brand along with four additional health clubs operating under different brands in the San Francisco, California market as well as the Gorilla Sports^sm brand, for a total purchase price of $45,000, subject to certain purchase price adjustments including, but not limited to, adjustments for taxes, insurance and rent. The Company retains all pre-closing liabilities associated with these health clubs. Closing of the transaction is subject to a number of significant closing conditions set forth in the Purchase Agreement, including consent to the transfer and release of the Company’s guarantee obligations by the lessors under the various leases for the facilities to be sold. While negotiations with all landlords are ongoing and we continue to diligently pursue obtaining these consents, the limited progress made to date in securing consents raises substantial doubt about the ability of both parties to successfully close the transaction. Furthermore, under the Purchase Agreement, either the Company or the purchaser may terminate the transactions if the closing has not occurred by December 31, 2005. There can be no assurance that the closing conditions will be satisfied prior to that date or that the transactions will close.


Note 11	Subsequent Events

Adoption of Rights Plan

On October 17, 2005, the Company entered into a consent agreement with its lenders under its Credit Agreement to permit the Company to enter into Rights Plan Transactions (as defined). On October 18, 2005, the Company’s Board of Directors adopted a Stockholder Rights Plan (“Rights Plan”), authorized a new class and issuance of up to 100,000 shares of Series B Junior Participating Preferred Stock, and declared a dividend of one preferred share purchase right (the “Right”) for each share of Common Stock held of record at the close of business on October 31, 2005. Each Right, if and when exercisable, entitles its holder to purchase one one-thousandth of a share of Series B Junior Participating Preferred Stock at a price of $13.00 per one one-thousandth of a Preferred Share subject to certain anti-dilution adjustments.

The Rights Plan provides that the Rights become exercisable only after a triggering event, including a person or group acquiring 15% or more of the Company’s Common Stock. The Company’s Board of directors is entitled to redeem the Rights for $0.001 per Right at any time prior to a person acquiring 15% or more of the outstanding Common Stock. Should a person or group acquire more than 15% of the Company’s Common Stock, each Right will entitle its holder to purchase, at the Right’s then-current exercise price and in lieu of receiving shares of preferred stock, a number of shares of Common Stock of Bally having a market value at that time of twice the Right’s exercise price. In the same regard, the Rights of the acquiring person or group will become void and will not be exercisable. If Bally is acquired in a merger or other business combination transaction not approved by the Board of Directors, each Right will entitle its holder to purchase, at the

BALLY TOTAL FITNESS HOLDING CORPORATION

Notes to Condensed Consolidated Financial Statements — (continued)

(All dollar amounts in thousands, except share data)

(Unaudited)

Right’s then-current exercise price and in lieu of receiving shares of preferred stock, a number of the acquiring company’s common shares having a market value at that time of twice the Right’s exercise price.

The Rights Plan will terminate on July 15, 2006 unless the issuance of the Rights is ratified by Company stockholders prior to that time. The Board of Directors presently intends to submit the Rights Plan to stockholders for ratification prior to July 15, 2006, unless previously redeemed, exchanged or otherwise terminated. If the stockholders ratify the Rights at that meeting, the expiration date will be October 18, 2015, subject to stockholder ratification every subsequent two years no later than July 31st of the applicable year beginning 2008.

Net Operating Loss Carryforwards

Due to equity transactions that occurred in 2005, an ownership change for purposes of IRC Section 382 may have occurred. If an ownership change did occur, under the provisions of IRC Section 382 the utilization of some of the previously disclosed net operating loss and tax credit carryforwards may be significantly limited. As described in Note 6, a valuation allowance has been provided to reduce the related deferred tax asset to nil.

Insurance Lawsuit

On November 10, 2005, two of the Company’s excess directors and officers liability insurance providers filed a complaint captionedTravelers 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,Case No. 05 C 6441, in the United States District Court for the Northern District of Illinois. The complaint alleges that financial information included in the Company’s applications for certain directors and officers liability insurance policies was materially false and misleading. Plaintiffs request the Court to declare two of the Company’s excess policies for the year 2002-2003 void, voidable and/or subject to rescission, and to declare that the exclusions and/or conditions of a separate excess policy for the year 2003-2004 bar coverage with respect to certain of the Company’s claims. The Company intends to vigorously defend the action.

Amendments to Employment Agreements

In November 2005, the Company amended the employment contracts with Mr. Toback, President and Chief Executive Officer, Mr. Carl J. Landeck, SVP and Chief Financial Officer, Mr. Marc D. Bassewitz, SVP and General Counsel, Mr. Harold Morgan, SVP and Chief Administrative Officer, and Mr. James A. McDonald, SVP and Chief Marketing Officer to (i) include specific language regarding Company-provided disability insurance memorializing the Company’s standard policy and (ii) eliminate an exception from the definition of “Change of Control” for issuances of equity by the Company. These amendments became effective only upon the filing of the Annual Report on Form 10-K for the year ended December 31, 2004.

Director Compensation

In 2005, the Company increased the stipend for non-employee directors serving as committee chairmen from $2 to $7.5 per year. In addition, as of the date of this filing, the following additional compensation for non-employee directors became effective: (i) for the 2005 year, an additional $50 cash retainer; (ii) the Audit Committee chairman stipend will be raised to $25; (iii) subject to stockholder approval of an equity compensation plan, for years ending after December 31, 2005, an annual grant of $30 of equity compensation

BALLY TOTAL FITNESS HOLDING CORPORATION

Notes to Condensed Consolidated Financial Statements — (continued)

(All dollar amounts in thousands, except share data)

(Unaudited)

in the form of restricted stock and/or options; and (iv) subject to stockholder approval of an equity compensation plan, a grant of $20 of restricted stock in 2006 and 2007.

Engagement of J.P. Morgan Securities Inc.

On November 29, 2005, the Company engaged J.P. Morgan Securities Inc. to advise the Company, together with The Blackstone Group, in exploring strategic alternatives, including potential equity transactions or the sale of businesses or assets.


Note 12	Condensed Consolidating Financial Statements

Condensed consolidating financial statements present the accounts of Bally Total Fitness Holding Corporation (“Parent”), and its Guarantor and Non-Guarantor subsidiaries, as defined in the indenture to the Bally Total Fitness Holding Corporation 10¹/2% Senior Notes due 2011 (“the Notes”) issued in July 2003. The Notes are unconditionally guaranteed, on a joint and several basis, by the Guarantor subsidiaries including substantially all domestic subsidiaries of the Parent. Non-Guarantor subsidiaries include Canadian operations and special purpose entities for accounts receivable and real estate finance programs.

As defined in the indenture to the Notes, Guarantor subsidiaries include:

59^th Street Gym LLC; 708 Gym LLC; Ace LLC; Bally Fitness Franchising, Inc.; Bally Franchise RSC, Inc.; Bally Franchising Holdings, Inc.; Bally Total Fitness Corporation; Bally Total Fitness International, Inc.; Bally Total Fitness of Missouri, Inc.; Bally Total Fitness of Toledo, Inc.; Bally’s Fitness and Racquet Clubs, Inc.; BFIT Rehab of West Palm Beach, Inc.; Connecticut Coast Fitness Centers, Inc. (N/K/A Bally Total Fitness of Connecticut Coast, Inc.); Connecticut Valley Fitness Centers, Inc. (N/K/A/ Bally Total Fitness of Connecticut Valley, Inc.); Crunch LA LLC; Crunch World LLC; Flambe LLC; Greater Philly No. 1 Holding Company; Greater Philly No. 2 Holding Company; Health & Tennis Corporation of New York; Holiday Health Clubs of the East Coast, Inc.; Holiday Health & Fitness Centers of New York, Inc. (N/K/A Bally Total Fitness of Upstate New York, Inc.); Holiday Health Clubs and Fitness Centers, Inc. (N/K/A Bally Total Fitness of Colorado, Inc.); Holiday Health Clubs of the Southeast, Inc. (N/K/A Bally Total Fitness of the Southeast, Inc.); Holiday/ Southeast Holding Corp.; Holiday Spa Health Clubs of California (N/K/A Bally Total Fitness of California, Inc.); Holiday Universal, Inc. (N/K/A Bally Total Fitness of the Mid-Atlantic, Inc); Crunch Fitness International, Inc.; Jack La Lanne Fitness Centers, Inc. (N/K/A Bally Total Fitness of Greater New York, Inc.); Jack La Lanne Holding Corp.; Manhattan Sports Club, Inc. (N/K/A Bally Sports Clubs, Inc.); Mission Impossible, LLC; New Fitness Holding Co., Inc.; Nycon Holding Co., Inc.; Physical Fitness Centers of Philadelphia, Inc. (N/K/A Bally Total Fitness of Philadelphia, Inc.); Providence Fitness Centers, Inc. (N/K/A Bally Total Fitness of Rhode Island, Inc.); Rhode Island Holding Company; Scandinavian Health Spa, Inc. (N/K/A Bally Total Fitness of the Midwest, Inc.); Scandinavian US Swim & Fitness, Inc. (N/K/A Bally Total Fitness of Minnesota, Inc.), Soho Ho LLC; Sportslife, Inc. (N/K/A Crunch Fitness International, Inc.); Sportslife Gwinnett, Inc. (N/K/A Crunch Fitness International, Inc.); Sportslife Roswell, Inc. (N/K/A Crunch Fitness International, Inc.); Sportslife Stone Mountain, Inc. (N/K/A Crunch Fitness International, Inc.); Sportslife Town Center II, Inc. (N/K/A Crunch Fitness International, Inc.); Tidelands Holiday Health Clubs, Inc.; U.S. Health, Inc.; and West Village Gym at the Archives LLC.

The following tables present the condensed consolidating balance sheets at September 30, 2005 and December 31, 2004, the condensed consolidating statements of operations for the three months and nine months ended September 30, 2005 and 2004, and the condensed consolidating statements of cash flows for the nine months ended September 30, 2005 and 2004.

BALLY TOTAL FITNESS HOLDING CORPORATION

Notes to Condensed Consolidated Financial Statements — (continued)

(All dollar amounts in thousands)

(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET


			September 30, 2005

						Guarantor			Non-Guarantor						Consolidated
			Parent			Subsidiaries			Subsidiaries			Eliminations			Total

ASSETS
Current assets:
	Cash		$	—		$	11,399		$	1,364		$	—		$	12,763
	Other current assets			—			32,617			1,358			—			33,975

		Total current assets		—			44,016			2,722			—			46,738
Property and equipment, net				—			317,627			17,590			—			335,217
Goodwill, net				—			40,199			1,533			—			41,732
Trademarks, net				6,507			2,568			462			—			9,537
Intangible assets, net				—			5,939			767			—			6,706
Investment in and advances to subsidiaries				(740,439	)		221,315			—			519,124			—
Other assets				32,566			9,534			4,065			—			46,165

			$	(701,366	)	$	641,198		$	27,139		$	519,124		$	486,095


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	—		$	47,113		$	312		$	—		$	47,425
	Income taxes payable			—			1,702			—			—			1,702
	Deferred income taxes			—			681			—			—			681
	Accrued liabilities			22,395			66,082			8,874			—			97,351
	Current maturities of long-term debt			7,735			2,730			5,242			—			15,707
	Deferred revenues			—			319,366			6,037			—			325,403

		Total current liabilities		30,130			437,674			20,465			—			488,269
Long-term debt, less current maturities				731,894			4,623			7,299			—			743,816
Net affiliate payable				—			519,046			57,989			(577,035	)		—
Other liabilities				—			131,255			2,359			—			133,614
Deferred revenues				—			572,574			11,212			—			583,786

Stockholders’ equity (deficit)				(1,463,390	)		(1,023,974	)		(72,185	)		1,096,159			(1,463,390	)

			$	(701,366	)	$	641,198		$	27,139		$	519,124		$	486,095

BALLY TOTAL FITNESS HOLDING CORPORATION

Notes to Condensed Consolidated Financial Statements — (continued)

(All dollar amounts in thousands, except share data)

CONDENSED CONSOLIDATING BALANCE SHEET


			December 31, 2004

						Guarantor			Non-Guarantor						Consolidated
			Parent			Subsidiaries			Subsidiaries			Eliminations			Total

ASSETS
Current assets:
	Cash		$	—		$	18,726		$	451		$	—		$	19,177
	Other current assets			—			29,365			1,345			—			30,710

		Total current assets		—			48,091			1,796			—			49,887
Property and equipment, net				—			342,946			18,917			—			361,863
Goodwill, net				—			40,157			1,541			—			41,698
Trademarks, net				6,507			2,875			551			—			9,933
Intangible assets, net				—			6,953			956			—			7,909
Investment in and advances to subsidiaries				(743,351	)		221,315			—			522,036			—
Other assets				14,248			10,859			3,172			—			28,279

			$	(722,596	)	$	673,196		$	26,933		$	522,036		$	499,569


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	—		$	49,965		$	1,408		$	—		$	51,373
	Income taxes payable			—			1,399			—			—			1,399
	Accrued liabilities			21,403			83,247			6,576			—			111,226
	Current maturities of long-term debt			11,899			3,382			6,846			—			22,127
	Deferred revenues			—			317,197			6,074			—			323,271

		Total current liabilities		33,302			455,190			20,904			—			509,396
Long-term debt, less current maturities				718,378			10,097			8,957			—			737,432
Net affiliate payable				—			577,456			58,012			(635,468	)		—
Other liabilities				—			122,769			2,359			—			125,128
Deferred revenues				—			590,610			11,279			—			601,899

Stockholders’ equity (deficit)				(1,474,276	)		(1,082,926	)		(74,578	)		1,157,504			(1,474,276	)

			$	(722,596	)	$	673,196		$	26,933		$	522,036		$	499,569

BALLY TOTAL FITNESS HOLDING CORPORATION

Notes to Condensed Consolidated Financial Statements — (continued)

(All dollar amounts in thousands, except share data)

(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS


		Three Months Ended September 30, 2005

					Guarantor			Non-Guarantor						Consolidated
		Parent			Subsidiaries			Subsidiaries			Eliminations			Total

Net revenues:
	Membership services	$	—		$	235,962		$	9,413		$	—		$	245,375
	Retail products		—			12,019			347			—			12,366
	Miscellaneous		—			3,606			406			—			4,012

			—			251,587			10,166			—			261,753
Operating costs and expenses:
	Membership services		—			170,116			7,437			—			177,553
	Retail products		—			12,781			352			—			13,133
	Advertising		—			12,949			292			—			13,241
	General and administrative		1,215			21,032			332			—			22,579
	Depreciation and amortization		—			15,771			717			—			16,488

			1,215			232,649			9,130			—			242,994

Operating income (loss)			(1,215	)		18,938			1,036			—			18,759
Equity in net income of subsidiaries			19,687			—			—			(19,687	)		—
Interest expense			(20,629	)		(404	)		(947	)		559			(21,421	)
Foreign exchange gain			—			—			1,141			—			1,141
Other, net			510			115			67			(559	)		133

			(432	)		(289	)		261			(19,687	)		(20,147	)

Income (loss) before income taxes			(1,647	)		18,649			1,297			(19,687	)		(1,388	)
Income tax provision			—			(259	)		—			—			(259	)

Net income (loss)		$	(1,647	)	$	18,390		$	1,297		$	(19,687	)	$	(1,647	)

BALLY TOTAL FITNESS HOLDING CORPORATION

Notes to Condensed Consolidated Financial Statements — (continued)

(All dollar amounts in thousands, except share data)

(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS


		Three Months Ended September 30, 2004

					Guarantor			Non-Guarantor						Consolidated
		Parent			Subsidiaries			Subsidiaries			Eliminations			Total

Net revenues:
	Membership services	$	—		$	237,683		$	9,365		$	—		$	247,048
	Retail products		—			12,233			361			—			12,594
	Miscellaneous		—			4,694			446			—			5,140

			—			254,610			10,172			—			264,782
Operating costs and expenses:
	Membership services		—			172,265			8,042			—			180,307
	Retail products		—			11,833			335			—			12,168
	Advertising		—			13,355			242			—			13,597
	General and administrative		957			16,505			562			—			18,024
	Depreciation and amortization		—			17,233			480			—			17,713

			957			231,191			9,661			—			241,809

Operating income (loss)			(957	)		23,419			511			—			22,973
Equity in net income of subsidiaries			21,711			—			—			(21,711	)		—
Interest expense			(14,601	)		(1,590	)		(2,671	)		2,132			(16,730	)
Foreign exchange gain			—			—			879			—			879
Other, net			694			30			1,346			(2,132	)		(62	)

			7,804			(1,560	)		(446	)		(21,711	)		(15,913	)

Income before income taxes			6,847			21,859			65			(21,711	)		7,060
Income tax provision			—			(213	)		—			—			(213	)

Net income		$	6,847		$	21,646		$	65		$	(21,711	)	$	6,847

BALLY TOTAL FITNESS HOLDING CORPORATION

Notes to Condensed Consolidated Financial Statements — (continued)

(All dollar amounts in thousands)

(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS


		Nine Months Ended September 30, 2005

					Guarantor			Non-Guarantor						Consolidated
		Parent			Subsidiaries			Subsidiaries			Eliminations			Total

Net revenues:
	Membership services	$	—		$	725,496		$	29,078		$	—		$	754,574
	Retail products		—			39,183			1,068			—			40,251
	Miscellaneous		—			11,313			1,351			—			12,664

			—			775,992			31,497			—			807,489
Operating costs and expenses:
	Membership services		—			524,169			22,026			—			546,195
	Retail products		—			39,527			1,034			—			40,561
	Advertising		—			44,861			934			—			45,795
	General and administrative		3,256			58,648			940			—			62,844
	Depreciation and amortization		—			48,201			2,196			—			50,397

			3,256			715,406			27,130			—			745,792

Operating income (loss)			(3,256	)		60,586			4,367			—			61,697
Equity in net income of subsidiaries			61,976			—			—			(61,976	)		—
Interest expense			(58,326	)		(1,087	)		(2,719	)		1,544			(60,588	)
Foreign exchange gain			—			—			1,187			—			1,187
Other, net			1,398			229			189			(1,544	)		272

			5,048			(858	)		(1,343	)		(61,976	)		(59,129	)

Income before income taxes			1,792			59,728			3,024			(61,976	)		2,568
Income tax provision			—			(776	)		—			—			(776	)

Net income		$	1,792		$	58,952		$	3,024		$	(61,976	)	$	1,792

BALLY TOTAL FITNESS HOLDING CORPORATION

Notes to Condensed Consolidated Financial Statements — (continued)

(All dollar amounts in thousands)

(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS


		Nine Months Ended September 30, 2004

					Guarantor			Non-Guarantor						Consolidated
		Parent			Subsidiaries			Subsidiaries			Eliminations			Total

Net revenues:
	Membership services	$	—		$	704,486		$	28,047		$	—		$	732,533
	Retail products		—			40,876			1,172			—			42,048
	Miscellaneous		—			13,350			1,370			—			14,720

			—			758,712			30,589			—			789,301
Operating costs and expenses:
	Membership services		—			539,280			21,777			—			561,057
	Retail products		—			39,365			1,034			—			40,399
	Advertising		—			48,418			934			—			49,352
	General and administrative		2,871			45,472			1,514			—			49,857
	Depreciation and amortization		—			50,672			1,560			—			52,232

			2,871			723,207			26,819			—			752,897

Operating income (loss)			(2,871	)		35,505			3,770			—			36,404
Equity in net income of subsidiaries			30,054			—			—			(30,054	)		—
Interest expense			(42,425	)		(5,245	)		(7,840	)		6,244			(49,266	)
Foreign exchange gain			—			—			473			—			473
Other, 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	)

BALLY TOTAL FITNESS HOLDING CORPORATION

Notes to Condensed Consolidated Financial Statements — (continued)

(All dollar amounts in thousands)

(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS


			Nine Months Ended September 30, 2005

						Guarantor			Non-Guarantor						Consolidated
			Parent			Subsidiaries			Subsidiaries			Eliminations			Total

CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income		$	1,792		$	58,952		$	3,024		$	(61,976	)	$	1,792
	Adjustments to reconcile to cash provided —
		Depreciation and amortization, including amortization included in interest expense		3,250			49,097			2,196			—			54,543
		Change in operating assets and liabilities		(4,957	)		(33,372	)		279			—			(38,050	)
		Changes in net affiliate balances		—			(58,473	)		40			58,433			—
		Other, net		4,957			393			(1,187	)		—			4,163

		Cash provided by operating activities		5,042			16,597			4,352			(3,543	)		22,448
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases and construction of property and equipment			—			(23,892	)		(756	)		—			(24,648	)
	Proceeds from sale of land			—			1,455			—			—			1,455
	Investment in and advances to subsidiaries			(3,543	)		—			—			3,543			—

		Cash used in investing activities		(3,543	)		(22,437	)		(756	)		3,543			(23,193	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Net borrowings under revolving credit agreement			18,688			—			—			—			18,688
		Net repayments of other long-term debt		(9,336	)		(1,487	)		(3,044	)		—			(13,867	)
		Debt issuance and refinancing costs		(10,944	)		—			—			—			(10,944	)
		Stock purchase and options plans		93			—			—			—			93

		Cash used in financing activities		(1,499	)		(1,487	)		(3,044	)		—			(6,030	)
Increase (decrease) in cash				—			(7,327	)		552			—			(6,775	)
Effect of exchange rate changes on cash balances				—			—			361			—			361
Cash, beginning of year				—			18,726			451			—			19,177

Cash, end of year			$	—		$	11,399		$	1,364		$	—		$	12,763

BALLY TOTAL FITNESS HOLDING CORPORATION

Notes to Condensed Consolidated Financial Statements — (continued)

(All dollar amounts in thousands)

(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS


			Nine Months Ended September 30, 2004

						Guarantor			Non-Guarantor						Consolidated
			Parent			Subsidiaries			Subsidiaries			Eliminations			Total

CASH FLOWS 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			—			54,691
		Change in operating assets and liabilities		691			(5,534	)		756			—			(4,087	)
		Changes in affiliate balances		—			(16,528	)		1,186			15,342			—
		Other, net		1,008			1,137			(473	)		—			1,672

		Cash provided by (used in) operating activities		(10,411	)		60,056			4,084			(14,712	)		39,017
CASH 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 FINANCING ACTIVITIES:
	Net borrowings under revolving credit agreement			34,000			—			—			—			34,000
	Net 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			—			—			—			593

		Cash provided by (used in) financing activities		25,123			(10,579	)		(3,962	)		—			10,582

Increase in cash				—			10,799			122			—			10,921
Effect of exchange rate changes on cash balances				—			—			629			—			629
Cash, beginning of year				—			13,394			246			—			13,640

Cash, end of year			$	—		$	24,193		$	997		$	—		$	25,190


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Executive Summary of Business

Bally is the largest publicly-traded commercial operator of fitness centers in North America in terms of number of members, revenues and square footage of its facilities. As of September 30, 2005, we operated 412 fitness centers collectively serving approximately 3.6 million members. These 412 fitness centers occupied a total of 12.6 million square feet.

Our fitness centers are concentrated in major metropolitan areas in 29 states, the District of Columbia and Canada, with more than 350 fitness centers located in the top 25 metropolitan areas in the United States and Canada. As of September 30, 2005, we operated fitness centers in over 45 major metropolitan areas representing 63 percent of the United States population and over 16 percent of the Canadian population. Members electing multiple center access are required to make larger monthly payments than those who select a single club membership.

Concentrating our clubs in major metropolitan areas has the additional benefits of (i) providing our members access to multiple locations to facilitate achieving their fitness goals; (ii) strengthening the Bally Total Fitness® brand awareness; (iii) leveraging national advertising; (iv) enabling the Company to develop promotional partnerships with other national or regional companies; and (v) more cost effective regional management and control by leveraging our existing operations in those markets.

Historically, Bally memberships in most markets required a two or three year commitment from the member with payments comprised of an initiation fee, interest, and monthly dues. Since late 2003, we have expanded these offers to include “pay-as-you-go” membership options that provide greater flexibility to members. In late 2004, we developed and implemented a new membership plan, our Build Your Own Membership (“BYOM^SM”) program. The BYOM program simplifies the enrollment process and enables members to choose the membership type, amenities and pricing structure they prefer.

We have three principal sources of revenue:

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, non-obligatory term membership monthly payments were substantially discounted from the initial obligatory term monthly payment levels. Following the nationwide 2005 implementation of our new BYOM pricing plan, monthly payments in the renewal phase of membership carry a smaller or no discount to the initial period monthly payment level. Our members may also choose to purchase a membership prepaid 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 94 percent of total revenue for the nine months ending September 30, 2005 and 93 percent for the nine months ending September 30, 2004. Membership services revenue is recognized at the later of when membership services fees are collected or earned. Membership services fees collected but not yet earned are included as a deferred revenue liability on the balance sheet.

2) We generate revenue from the sales of products at our in-fitness center retail stores including Bally-branded and third-party nutritional products, juice bar nutritional drinks and fitness-related convenience products such as clothing. Revenue from product sales represented approximately 5 percent of total revenue for the nine months ended September 30, 2005 and 2004.

3) The balance of our revenue 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.

Our operating costs and expenses are comprised of the following:

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.

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.

We evaluate the results of our fitness centers on a two-tiered segment basis (comparable and non-comparable) depending on how long the fitness centers have been open at the measurement date. We include a fitness center in comparable fitness center revenues beginning on the first day of the 13^th full calendar month of the fitness center’s operation, prior to which time we refer to the fitness center as an a non-comparable fitness center and, therefore, an element of non-comparable revenue.

We measure performance using key operating statistics such as profitability per club, per area and per region. We also evaluate average revenue per member and fitness center operating expenses, with an emphasis on payroll and comparable fitness center revenue growth. We use fitness center cash contribution, cash revenue and EBITDA to evaluate overall performance and profitability on an individual fitness center basis. In addition, we focus on several membership statistics on a fitness center-level and system-wide basis. These metrics include growth of fitness center membership base and growth of system-wide members, fitness center number of workouts per month, fitness center membership sales mix among various membership types and fitness center retention.

Our primary sources of cash are enrollment fees and monthly dues paid by our members and sales of products and services, primarily personal training. Because enrollment fees and monthly dues are recognized over the later of when such payments are collected or earned, cash received from enrollment fees and monthly dues will often be received before such payments are recognized in the Consolidated Statement of Operations.

Our primary capital expenditures relate to the construction of new fitness centers and upgrading and expanding our existing fitness centers. The construction and equipment costs for a new fitness center approximates $3.5 million, on average, which varies based on the costs of construction labor, as well on the planned service offerings and size and configuration of the facility as well as on the market.

Most of our operating costs are relatively fixed, but compensation costs, including sales compensation costs, are variable based on membership origination and personal training sales trends. Because of the large pool of relatively fixed operating costs and the minimal incremental cost of carrying additional members, increased membership origination and better membership retention lead ultimately to increased profitability. Accordingly, we are focusing on member acquisition and member retention as key objectives.

We believe our substantially fixed operating cost structure and stable maintenance capital expenditure requirements will result in relatively predictable cash requirements for the next few years.

We believe we are well positioned to benefit from continued growth in club membership, which, according to the IHRSA’sIndustry Data Survey of the Health and Fitness Club Industry, increased 4.8% in 2004 and 8.5% in 2003. Conversely, increased competition, including competition from very small fitness centers (less than 3,000 square feet), will require us to continue to reinvest in our facilities to remain competitive. Furthermore, price discounting by competitors, particularly in competitive markets, may negatively impact our membership growth and/or our yield-per-member. Our principal strategies are to improve member origination and retention and to maintain/increase yield-per-member by enhancing customer service, promoting and improving our products and services and improving operating efficiencies. We believe the BYOM program provides a unique opportunity to combine a customized membership offering with this expanded service philosophy.

Critical Accounting Policies

The Company’s significant accounting policies are discussed in the Notes to the Consolidated Financial Statements that are included in the Company’s 2004 Annual Report on Form 10-K that is filed with the Securities and Exchange Commission. In most cases, the accounting policies utilized by the Company are the only ones permissible under GAAP for businesses in its industry. However, the application of certain of these policies requires significant judgment or a complex estimation process that can affect the results of operations and financial position of the Company, as well as additional information provided in its related footnote disclosures. The Company bases its estimates on historical experience and other assumptions that it believes are reasonable. If actual amounts are ultimately different from previous estimates, the revisions are included in the Company’s results of operations for the period in which the actual amounts become known. The accounting policies and estimates that can have a significant impact on the operating results, financial position and footnote disclosures of the Company are described in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2004 Annual Report on Form 10-K.

Results of Operations

The following table sets forth key operating data for the periods indicated (in thousands except per member and number of fitness centers data):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,

	2005		2004		2005		2004

Net revenues
Membership	$	212,184	$	215,640	$	657,540	$	638,974
Personal training		33,191		31,408		97,034		93,559

Membership services revenue		245,375		247,048		754,574		732,533
Retail products		12,366		12,594		40,251		42,048
Miscellaneous		4,012		5,140		12,664		14,720

Net revenues		261,753		264,782		807,489		789,301
Operating costs and expenses
Membership services		177,553		180,307		546,195		561,057
Retail products		13,133		12,168		40,561		40,399
Advertising		13,241		13,597		45,795		49,352
Information technology		5,681		5,415		17,373		14,256
Other general and administrative		16,898		12,609		45,471		35,601
Depreciation and amortization		16,488		17,713		50,397		52,232

		242,994		241,809		745,792		752,897

Operating income	$	18,759	$	22,973	$	61,697	$	36,404


	Three Months Ended				Nine Months Ended
	September 30,				September 30,

	2005		2004		2005		2004

Operating data
Average monthly membership revenue per member	$	19.10	$	19.31	$	19.70	$	19.17
Average number of members during the period		3,704		3,723		3,708		3,704
Number of members at end of period		3,676		3,708		3,676		3,708
Number of members joined during period		270		271		951		911
Fitness centers operating at end of period		412		414		412		414

Summary of Revenue Recognition Method

The Company’s stated strategy is to grow the number of members by increasing new member acquisition and improving member retention. The Company also intends to grow product and services revenue.

Membership services revenue, which includes personal training as well as membership revenue, is recognized at the later of when received or earned. See Note 3, Deferred Revenue.

Personal training services are generally provided shortly after payment is received by the company, which results in a relatively low and constant deferred revenue liability balance. As a result, personal training revenues recognized are relatively consistent with the level of cash received.

Cash collected for membership revenues, on the other hand, is deferred and recognized on a straight-line basis over periods generally ranging up to 20 years based on the expected member attrition and cash collection patterns using historical trends, with the vast majority of membership revenues being recognized over six years or less. As a result, membership revenue recognized in the current period is largely attributable to the amortization of previously deferred cash receipts from prior periods up to 20 years earlier. Decreasing attrition will result in more cash collected as well as lengthening the amortization period, while increasing attrition would decrease cash collection but accelerate the recognition of deferred revenue. Going forward, we will monitor actual retention and cash collection patterns and record any adjustments necessary to reflect the impact of changes in such patterns on a quarterly basis. Due to the above factors, cash collected for membership revenue during a period has little impact on revenue recognized during such period. As a result, management considers both the cash collected for membership services as well as the revenue recognized in evaluating the Company’s results of operations.


	Comparison of the Three Months Ended September 30, 2005 and 2004

Our operations are subject to seasonal factors and, therefore, the results of operations for the three months ended September 30, 2005 and 2004 are not necessarily indicative of the results of operations for the full year.

Net revenues for the three months ended September 30, 2005 were $261.8 million compared to $264.8 million in 2004, a decrease of $3.0 million (1%). The decrease in net revenues resulted from the following:


	•	Membership revenue decreased to $212.2 million from $215.6 million in 2004, a decrease of $3.4 million (2%) from the prior year. The decrease in membership revenue in the current year is primarily the result of a 1% decrease in the average number of members to 3.7 million for the 2005 quarter.

	•	Cash collections of membership revenue during the three months ended September 30, 2005 were $238.5 million, an increase of $8.9 million (3.9%). This increase is primarily the result of more members choosing the pay-as-you-go membership plan. See Note 3 to the Condensed Consolidated Financial Statements, Deferred Revenue.


	•	Personal training revenue increased to $33.2 million from $31.4 million in 2004, an increase of $1.8 million (6%), primarily reflecting the Company’s emphasis on growth in personal training services.

	•	Retail products revenue decreased to $12.4 million from $12.6 million in 2004, a decrease of $.2 million (2%), due to reduced sales volume.

	•	Miscellaneous revenue decreased to $4.0 million in 2005 from $5.1 million in 2004. This was due to a reduction in sponsorship revenue.

Operating costs and expenses for the three months ended September 30, 2005 were $243.0 million compared to $241.8 million during 2004, an increase of $1.2 million (.5%). This increase resulted from the following:


	•	Membership services expenses for the three months ended September 30, 2005 decreased $2.7 million (1%) from 2004, reflecting increases in occupancy and insurance costs offset by a reduction in personnel costs as a result of the Company’s cost reduction initiatives. Membership services expenses also declined as a percentage of revenue from the comparable period.

	•	Retail products costs and expenses for the three months ended September 30, 2005 increased $0.9 million (7%) from 2004. This was due to a write-down of retail inventory.

	•	Advertising expenses for the three months ended September 30, 2005 decreased $.4 million (3%) from 2004, as a result of cost controls and improved purchasing efficiencies with a new media firm.

	•	Information technology expenses for the three months ended September 30, 2005 increased $.3 million (5%) from 2004, as a result of costs associated with improved controls, the Sarbanes-Oxley Act of 2002 compliance and security enhancements.

	•	Other general and administrative expenses for the three months ended September 30, 2005 increased $4.3 million (34%) from 2004, primarily as a result of costs incurred in connection with the investigations and litigation related to the restatement of the Company’s financial statements, as well as an increase in insurance costs.

	•	Depreciation expense for the three months ended September 30, 2005 decreased $1.2 million (7%) to $16.5 from 2004, reflecting reduced capital expenditures, the impact of asset impairments and an increasing 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.

Operating income for the three months ended September 30, 2005 decreased $4.2 million (18%) to $18.8 million as compared to the prior year. Operating income margin declined from 8.7% of net revenues to 7.2% in 2005. Decreases in the number of members and miscellaneous revenues were partially offset by reductions in membership services operating expenses.

Interest expense for the three months ended September 30, 2005 increased $4.7 million to $21.4 million due primarily to a higher average effective rate as a result of increases in general interest rate levels and the replacement of the Company’s accounts receivable securitization with a higher average rate term loan during the fourth quarter of 2004 and to a lesser extent an increase in the average debt outstanding during 2005 as compared to 2004.

Due to the items described above, net income declined by $8.5 million to a loss of $1.6 million for the three months ended September 30, 2005 compared to income of $6.9 million for 2004.


	*Comparison of the Nine Months Ended September 30, 2005 and 2004*

Net revenues for the nine months ended September 30, 2005 were $807.5 million compared to $789.3 million in 2004, an increase of $18.2 million (2%). The increase in net revenues resulted from the following:


	•	Membership revenue increased to $657.5 million from $639.0 million in 2004, an increase of $18.5 million (3%) from the prior year. The increase in membership revenue in the current year is the result of a 3% increase in the average monthly membership revenue per member to $19.70 for 2005.

	•	Cash collections of membership revenue during the nine months ended September 30, 2005 were $636.8 million, an increase of $10.6 million (2%). This increase is primarily the result of more members choosing the pay-as-you-go membership plan, Note 3, Deferred Revenue.

	•	Personal training revenue increased to $97.0 million from $93.6 million in 2004, an increase of $3.4 million (4%), primarily reflecting the Company’s emphasis on growth in personal training services.

	•	Retail products revenue decreased to $40.3 million from $42.0 million in 2004, a decrease of $1.7 million (4%), due to reduced sales volume.

	•	Miscellaneous revenue decreased to $12.7 million in 2005 from $14.7 million in 2004, a decrease of $2.0 million (14%), primarily due to lower sponsorship revenue.

Operating costs and expenses for the nine months ended September 30, 2005 were $745.8 million compared to $752.9 million during 2004, a decrease of $7.1 million (1%). This decrease resulted from the following:


	•	Membership services expenses for the nine months ended September 30, 2005 decreased $14.9 million (3%) from 2004 due to a reduction in personnel costs as a result of the Company’s cost reduction initiatives, partially offset by increases in occupancy and insurance costs.

	•	Retail products costs and expenses for the nine months ended September 30, 2005 increased $.2 million from 2004. This was due to a write down of retail inventory.

	•	Advertising expenses for the nine months ended September 30, 2005 decreased $3.6 million (7%) from 2004 as a result of planned reductions in media spending and improved purchasing efficiencies with a new media firm.

	•	Information technology expenses for the nine months ended September 30, 2005 increased $3.1 million (22%) from 2004 as a result of costs associated with improved controls, the Sarbanes-Oxley Act of 2002 compliance and security enhancements.

	•	Other general and administrative expenses for the nine months ended September 30, 2005 increased $9.9 million (28%) from 2004, primarily as a result of costs incurred in connection with the investigations and litigation related to the restatement of the Company’s financial statements, increase in insurance costs, and costs related to the vesting of restricted stock.

	•	Depreciation expense for the nine months ended September 30, 2005 decreased $1.8 million (3%) from 2004, reflecting reduced capital expenditures, the impact of asset impairments and an increasing 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.

Operating income for the nine months ended September 30, 2005 increased $25.3 million to $61.7 million as compared to the prior year, a 70% increase. Operating income margin improved from 4.6% to 7.6% of net revenues. The increase primarily reflects an increase in membership revenue and a decrease in membership services expenses attributable to the Company’s cost reduction initiatives, partially offset by an increase in general and administrative expenses due to the investigations and restatement as described above.

Interest expense for the nine months ended September 30, 2005 increased $11.3 million to $60.6 million of which approximately $10.0 million is due to a higher average effective rate as a result of increases in general interest rate levels and the replacement of the Company’s accounts receivable securitization with a higher average rate term loan during the fourth quarter of 2004. The balance of the increase is a result of higher average debt outstanding during 2005 as compared to 2004.

Due to the items described above, net income (loss) improved by $15.0 million to $1.8 million for the nine months ended September 30, 2005.


	Liquidity and Capital Resources

Cash flows from operating activities were $22,448 in the first nine months of 2005, compared to $39,017 in the 2004 period. The following table is a summary of our cash flow statement, comparing the three months and nine months ended September 30, 2005 and 2004 (in thousands):


	Three Months Ended						Nine Months Ended
	September 30						September 30

	2005			2004			2005			2004

Cash provided by operating activities	$	(10,953	)	$	5,076		$	22,448		$	39,017
Cash used in investing activities	$	(10,172	)	$	(11,651	)	$	(23,193	)	$	(38,678	)
Cash provided by (used in) financing activities		4,293			19,386			(6,030	)		10,582

Increase (decrease) in cash and equivalents	$	(16,832	)	$	12,811		$	(6,775	)	$	10,921

The Company requires substantial cash flows to fund its capital spending and working capital requirements. We maintain a substantial amount of debt, the terms of which require significant interest payments each year. We currently anticipate our cash flow and availability under our $100 million revolving credit facility will be sufficient to meet our expected needs for working capital and other cash requirements for at least the next 12 months. However, changes in terms or other requirements by vendors including our credit card payment processor, could negatively impact cash flows and liquidity. We do not know whether our cash flow and availability under the revolving credit facility will be sufficient to meet our needs in 2007 when our $300 million 9⁷/8% Senior Subordinated Notes are due. If any such events were to occur, we may need to raise additional funds through public or private equity or debt financings. There is no assurance that any such funds will be available to us on favorable terms or at all. If such funds are unavailable to us, we may default on our Senior Subordinated Notes, our Senior Notes and our senior credit facility. In addition, if such funds are unavailable, we may not be able to operate our business. In addition, upon a default under our senior credit facility whether directly or as a result of a cross-default to other indebtedness, we will not be able to draw on the revolving credit facility.


	Debt

At September 30, 2005 the Company had borrowings of $20 million and $14 million of letters of credit outstanding under the $100 million revolving credit facility. The amount available under the revolving credit facility is reduced by any outstanding letters of credit which are limited to $30 million. At September 30, 2005, the average rate on borrowings under the revolving credit and term loan facility was 8.10%.

On July 13, 2005 the Company commenced the solicitation of consents to extend the original waivers of defaults obtained on December 7, 2004 from holders of its 10¹/2% Senior Notes due 2011 and 9⁷/8% Senior Subordinated Notes due 2007 (“Noteholders”) under the indentures governing its Senior Subordinated Notes and its Senior Notes following the expiration of the waiver of the financial reporting covenant default on July 31, 2005. The notices commenced a 30-day cure period. The delivery of the notices also commenced a 10-day cure period after which a cross default would have occurred under the Company’s Credit Agreement.

Effective August 9, the Company entered into a consent, effective as of August 9, 2005, with its lenders under the Credit Agreement to extend the 10-day period after which a cross default would occur to August 31, 2005.

Effective August 24, 2005, the Company further amended the Credit Agreement to permit payment of consent fees to the holders of the Senior Subordinated Notes and the Senior Notes, to exclude certain expenses from the computation of various financial covenants and to reduce the required interest coverage ration for the period ending March 31, 2006 and limits revolver borrowings under the Credit Agreement if the Company’s unrestricted cash exceeds certain levels.

On August 24 and August 30, the Company received consents from holders of a majority of the Senior Subordinated Notes and its Senior Notes, respectively, to amend the indentures governing the notes extending the waiver period until November 30, 2005 of any default arising under the financial reporting covenants in the indentures from failure to timely file its consolidated financial statements with the SEC.

On November 1, 2005 the Company completed a consent solicitation of those holders of the Senior subordinated Notes who were not party to the August 24, 2005 consent agreement. Fees paid for these consents to the Noteholders consisted of cash payments of $4.9 million and issuance of 1,903,206 shares of unregistered common Stock. The solicitation agent was issued 232,000 shares of unregistered Common Stock as compensation for services rendered, while the lenders under the Credit Agreement were paid $2.9 million for their consents and amendment.

As of September 30, 2005, the Company was in compliance with the terms of the Credit Agreement.

One of the Company’s unrestricted Canadian subsidiaries was not in compliance with the terms of its credit agreement at September 30, 2005. As a result, the outstanding amount of $2.9 million has been classified as current.

Risk Factors

This Quarterly Report should be read in conjunction with those certain risk factors disclosed in our Annual Report on Form 10-K for the year ending December 31, 2004.


Item 3.	*Quantitative and Qualitative Disclosures about Market Risk*

Interest Rate Risk and Market Risk

The Company is exposed to market risk from changes in the interest rates on certain of its outstanding debt. The outstanding loan balance under its bank credit facility bears interest at variable rates, based upon prevailing short-term interest rates in the United States and Europe. Based on the average outstanding balance of these variable rate obligations for the 9 months ended September 30, 2005, a 100 basis point change in rates would have changed interest expense for the period by approximately $1.4 million.

The Company has entered into interest rate swap agreements whereby the fixed interest commitment on $200 million of outstanding principal on the Company’s 9.875% Senior Subordinated Notes due 2007 was swapped for a variable rate commitment based on the LIBOR rate plus 6.01% (10.35% at September 30, 2005). A 100 basis point change in the interest rate on the portion of the debt subject to the swap would change interest expense by $1.5 million for the nine month period.

Foreign Exchange Risk

The Company has operations in Canada, which are denominated in local currency. Accordingly, the Company is exposed to the risk of future currency exchange rate fluctuations, which is accounted for as an adjustment to stockholders’ equity until realized. Therefore, changes from reporting period to reporting period in the exchange rates between the Canadian currency and the U.S. Dollar have had and will continue to have an impact on the accumulated other comprehensive income (loss) component of stockholders’ equity reported by the Company, and such effect may be material in any individual reporting period. In addition, exchange rate fluctuation will have an impact on the U.S. dollar value realized from the settlement of intercompany transactions.


Item 4.	*Controls and Procedures*

Disclosure Controls and Procedures

This Evaluation of Disclosure Controls and Procedures should be read in conjunction with Item 9AControls and Procedures, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC on November 30, 2005.

As previously reported, on March 25, 2004 we were notified by Ernst & Young LLP (“E&Y”), our principal accountant, that it had resigned. E&Y’s resignation became effective on May 10, 2004 with the filing with the SEC of the Quarterly Report on Form 10-Q for the quarter ending March 31, 2004. Following the Company’s issuance in April 2004 of its financial statements for the year-ended December 31, 2003, reflecting certain changes in its accounting methods and in accounting principles and a restatement of its accounting for prepaid dues, the United States Securities and Exchange Commission commenced an investigation. On August 19, 2004, the Audit Committee authorized an investigation of certain aspects of past financial statements filed by the Company. The Company’s Audit Committee investigation uncovered errors in the Company’s accounting and the Audit Committee determined that the Company’s financial statements for the years ended December 31, 2000, 2001, 2002 and 2003 should be restated and should no longer be relied upon. The Company issued press releases on November 16, 2004 and February 8, 2005 with respect to the findings of the Audit Committee’s investigation and included the press releases as exhibits to its current reports on Form 8-K filed with the SEC on November 16, 2004 and February 9, 2005. We decided to delay the filing of this Report on Form 10-Q until this matter was resolved.

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required financial disclosure.

Our management, under the supervision and with the participation of our CEO and CFO, has completed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the quarter ended September 30, 2005. Based on our evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, which included consideration of certain material weaknesses disclosed in our Annual Report on Form 10-K for the year ended December 31, 2004, and our inability to file this Quarterly Report on Form 10-Q within the statutory time period, our management, including our CEO and CFO, concluded that as of September 30, 2005, the Company’s disclosure controls and procedures were not effective. In light of the material weaknesses, in 2005, we implemented additional analyses and procedures to ensure that the financial statements we issue are prepared in accordance with GAAP and are fairly presented in all material respects. The Company has performed the additional analyses and procedures with respect to this Quarterly Report on Form 10-Q. Accordingly, we believe that the condensed consolidated financial statements (unaudited) included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company’s financial position, results of operations and cash flows for the periods presented.

Changes in Internal Controls over Financial Reporting (ICFR)

No changes in the period ended September 30, 2005; see Item 9A — Controls and Procedures in the Annual Report on Form 10-K for the year ended December 31, 2004 for a discussion of controls and procedures for the Company.

PART II. OTHER INFORMATION


Item 1.	*Legal Proceedings*

Litigation


	*Arbitration Action with Household*

On May 12, 2005, the arbitration tribunal overseeing the proceeding awarded damages to each party, resulting in a net award to the financial institution in the amount of approximately $14.3 million. On August 2, 2005, the Federal District Court for Northern Illinois affirmed the award to Household and entered a judgment against the Company. The Company paid Household $14.9 million and satisfied the judgment, including interest, in full on August 18, 2005.


	*Other*

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 will not have a material adverse effect on the financial condition or results of operations of the Company. In addition, from time to time, various governmental bodies investigate customer complaints. In the opinion of management, none of these other complaints or investigations currently pending will have a material adverse effect on our financial condition or results of operations.

In addition, we are, and have been in the past, named as defendants in a number of purported class action lawsuits based on alleged violations of state and local consumer protection laws and regulations governing the sale, financing and collection of membership fees. To date we have successfully defended or settled such lawsuits without a material adverse effect on our financial condition or results of operation. However, we cannot assure you that we will be able to successfully defend or settle all pending or future purported class action claims, and our failure to do so may have a material adverse effect on our financial condition or results of operations.


Item 2.	*Unregistered Sales of Equity Securities and Use of Proceeds*

Recent Sales of Unregistered Securities

On September 8, 2005, 1,438,427 shares of the Company’s common stock, par value $.01 were issued as payment of a consent fee with respect to the Company’s Senior Subordinated Notes. Such shares were issued without registration under the Securities Act of 1933, as amended (“Securities Act”), in reliance upon the exemption from registration provided by Section 4(2) thereof. The persons to whom such shares were issued represented to the Company that they are “accredited investors” (as defined under Rule 501 of Regulation D).

On November 9, 2005, 464,773 shares of the Company’s common stock, par value $.01 were issued as payment of a consent fee with respect to the Company’s Senior Subordinated Notes. Such shares were issued without registration under the Securities Act, in reliance upon the exemption from registration provided by

Section 4(2) thereof. The persons to whom such shares were issued represented to the Company that they are “accredited investors” (as defined under Rule 501 of Regulation D).

On November 10, 2005, the Company entered into a Stock Grant Agreement with Deutsche Bank Securities Inc. (“Deutsche Bank”) whereby the Company agreed to issue 232,000 shares of common stock to Deutsche Bank in satisfaction of the consent solicitation agent fee owed to Deutsche Bank in connection with the above-mentioned consent solicitations. Such shares were issued without registration under the Securities Act in reliance upon the exemption from registration provided by Section 4(2) thereof. Deutsche Bank certified to the Company that it is an “accredited investor,” (as defined under Rule 501 of Regulation D).

On November 28, 2005, the Company entered into a Stock Purchase Agreement with Deutsche Bank pursuant to which 409,314 shares of the Company’s common stock were issued to Deutsche Bank in exchange for $1,432,600, which equals the consent fee the Company paid in cash to holders of the 9⁷/8% senior subordinated Notes due 2007 in connection with the consent solicitation. Such shares were issued without registration under the Securities Act in reliance upon the exemption from registration provided by Section 4(2) thereof. Deutsche Bank certified to the Company that it is an “accredited investor,” (as defined under Rule 501 of Regulation D).

Repurchases of Common Stock

The Company does not regularly repurchase shares nor does the Company have a share repurchase program.


Item 3.	*Defaults Upon Senior Securities*

None


Item 4.	*Submission of Matters to a Vote of Security Holders*

On July 13, 2005, the Company commenced a solicitation of consents seeking an extension through October 31, 2005 of the waivers under the indentures governing its 9⁷/8% Senior Subordinated Notes due 2007 and 10¹/2% Senior Notes due 2011 with respect to its inability to provide current financial statements. On August 24, 2005, certain beneficial owners of $155,829,000 in aggregate principal amount of the 9⁷/8% Senior Subordinated Notes due 2007 consented to the extension of the waiver through November 30, 2005. On August 25, 2005, the Company terminated the consent solicitation of the holders of the 9⁷/8% Senior Subordinated Notes due 2007. On August 30, 2005, the Company received the necessary consents from the holders of the 10¹/2% Senior Notes due 2011 to a waiver extension through November 30, 2005. On October 18, 2005, the Company commenced a follow-on consent solicitation to holders of the 9⁷/8% Senior Subordinated Notes due 2007, which closed on November 1, 2005. The vote totals for the consents are set forth on the following table:

Principal Amount

Notes

Outstanding ($)

Voted For ($)

Voted Against ($)

Abstained ($)

9⁷/8% Senior Subordinated Notes due 2007

299,764,000

277,810,000

N/A

21,954,000

10¹/2% Senior Notes due 2011

235,000,000

228,870,000

N/A

6,130,000


Item 5.	*Other Information*

None


Item 6.	*Exhibits*

(a) Exhibits:


2	.1	Purchase Agreement, dated September 16, 2005, among Bally Total Fitness Holding Corporation, Bally Total Fitness Corporation, Crunch Fitness International, Inc., Health & Tennis Corporation of New York, Inc., Jack La Lanne Fitness Centers, Inc., Soho Ho, LLC, Crunch L.A. LLC, 708 Gym, LLC, West Village Gym at the Archives LLC, 59th Street Gym, LLC, Flambe LLC, Ace, LLC, Crunch World, LLC, Crunch CFI, LLC, and AGT Crunch Acquisition LLC (incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K, file no. 001-13997, dated September 19, 2005).

4	.1	Supplemental Indenture, dated as of September 2, 2005, among Bally Total Fitness Holding Corporation and U.S. Bank National Association, as trustee for the Registrant’s 10¹/2% Senior Notes due 2011 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, file no. 001-13997, dated September 7, 2005).

4	.2	Supplemental Indenture, dated as of September 2, 2005, among Bally Total Fitness Holding Corporation and U.S. Bank National Association, as trustee for the Registrant’s 9⁷/8% Senior Subordinated Notes due 2007 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, file no. 001-13997, dated September 7, 2005).

10	.1	Consent dated as of August 9, 2005, under the Credit Agreement, dated as of November 18, 1997, as amended and restated as of October 14, 2004, as amended by the First Amendment and Waiver dated March 31, 2005, among Bally Total Fitness Holding Corporation, a Delaware corporation, the lenders parties thereto, JPMorgan Chase Bank, N.A., as agent for the lenders, Deutsche Bank Securities, Inc., as syndication agent, and LaSalle Bank National Association, as documentation agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, file no. 001-13997, dated as of August 12, 2005).

10	.2	Second Amendment and Waiver dated as of August 24, 2005, under the Credit Agreement, dated as of November 18, 1997, as amended and restated as of October 14, 2004, among Bally Total Fitness Holding Corporation, the lenders parties thereto, JPMorgan Chase Bank, N.A., as agent for the lenders, Deutsche Bank Securities, Inc., as syndication agent, and LaSalle Bank National Association, as documentation agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, file no. 001-13997, dated as of August 25, 2005).

10	.3	Consent Agreement dated as of August 24, 2005 by and between Bally Total Fitness Holding Corporation and Special Value Bond Fund II, LLC, Special Value Absolute Return Fund, LLC, Special Value Opportunities Fund, LLC and Special Value Expansion Fund, LLC. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, file no. 001-13997, dated November 14, 2005).

10	.4	Consent Agreement dated as of August 24, 2005 by and between Bally Total Fitness Holding Corporation and Cascade Investment, LLC (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, file no. 001-13997, dated November 14, 2005).

10	.5	Consent Agreement dated as of August 24, 2005 by and between Bally Total Fitness Holding Corporation and Arrow Investment Partners (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, file no. 001-13997, dated November 14, 2005).

10	.6	Consent Agreement dated as of August 24, 2005 by and between Bally Total Fitness Holding Corporation and Bill & Melinda Gates Foundation (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, file no. 001-13997, dated November 14, 2005).

10	.7	Consent Agreement dated as of August 24, 2005 by and between Bally Total Fitness Holding Corporation and Everest Capital Limited as agent for HFR ED Advantage Master Trust, Everest Capital Event Fund, LP, GMAM Investment Funds Trust II and Everest Capital Senior Debt Fund, LP (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K, file no. 001-13997, dated November 14, 2005).



31	.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

31	.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

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.

SIGNATURE PAGE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	BALLY TOTAL FITNESS HOLDING
	CORPORATION
	Registrant


	By:	/s/ Carl J. Landeck



	Carl J. Landeck
	Senior Vice President, Chief Financial Officer
	(principal financial officer)

Dated: November 30, 2005

Positive
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Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

Bally Total Fitness Of Toledo Inactive 10-Q2005 Q3 Quarterly report

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