e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Commission file
number: 001-13997
Bally Total Fitness Holding
Corporation
(Exact name of registrant as
specified in its charter)
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Delaware
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36-3228107
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(State or other jurisdiction
of
incorporation)
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(I.R.S. Employer
Identification No.)
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8700 West Bryn Mawr
Avenue, Chicago, Illinois
(Address of principal
executive offices)
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60631
(Zip Code)
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Registrants telephone number, including area code:
(773) 380-3000
SEE TABLE OF ADDITIONAL REGISTRANTS
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Exchange on Which Registered
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Common Stock, par value
$.01 per share
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N/A
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark whether 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 not required to
file reports pursuant to Section 13 or Section 15(d)
of the
Act. Yes: o No: þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large Accelerated
Filer o Accelerated
Filer þ Non-Accelerated
Filer o
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
The aggregate market value of the registrants voting stock
held by non-affiliates of the registrant as of June 30,
2006, was approximately $212 million, based on the closing
price of the registrants common stock as reported by the
New York Stock Exchange at that date. For purposes of this
computation, affiliates of the registrant include the
registrants executive officers and directors as of
June 30, 2006. As of May 31, 2007,
41,257,012 shares of the registrants common stock
were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE: NONE
TABLE OF
ADDITIONAL REGISTRANTS
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Jurisdiction of
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I.R.S. Employer
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Exact Name of Additional Registrants
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Incorporation
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Identification Number
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Bally Fitness Franchising,
Inc.
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Illinois
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36-4029332
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Bally Franchise RSC, Inc.
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Illinois
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36-4028744
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Bally Franchising Holdings,
Inc.
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Illinois
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36-4024133
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Bally Sports Clubs, Inc.
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New York
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36-3407784
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Bally Total Fitness Corporation
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Delaware
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36-2762953
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Bally Total Fitness International,
Inc.
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Michigan
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36-1692238
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Bally Total Fitness of California,
Inc.
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California
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36-2763344
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Bally Total Fitness of Colorado,
Inc.
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Colorado
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84-0856432
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Bally Total Fitness of Connecticut
Coast, Inc.
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Connecticut
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36-3209546
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Bally Total Fitness of Connecticut
Valley, Inc.
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Connecticut
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36-3209543
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Bally Total Fitness of Greater New
York, Inc.
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New York
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95-3445399
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Bally Total Fitness of the
Mid-Atlantic, Inc.
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Delaware
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52-0820531
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Bally Total Fitness of the
Midwest, Inc.
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Ohio
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34-1114683
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Bally Total Fitness of Minnesota,
Inc.
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Ohio
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84-1035840
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Bally Total Fitness of Missouri,
Inc.
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Missouri
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36-2779045
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Bally Total Fitness of Upstate New
York, Inc.
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New York
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36-3209544
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Bally Total Fitness of
Philadelphia, Inc.
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Pennsylvania
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36-3209542
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Bally Total Fitness of Rhode
Island, Inc.
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Rhode Island
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36-3209549
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Bally Total Fitness of the
Southeast, Inc.
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South Carolina
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52-1230906
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Bally Total Fitness of Toledo,
Inc.
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Ohio
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38-1803897
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BTF/CFI, Inc.
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Delaware
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36-4474644
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Greater Philly No. 1 Holding
Company
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Pennsylvania
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36-3209566
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Greater Philly No. 2 Holding
Company
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Pennsylvania
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36-3209557
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Health & Tennis
Corporation of New York
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Delaware
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36-3628768
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Holiday Health Clubs of the East
Coast, Inc.
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Delaware
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52-1271028
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Holiday/Southeast Holding
Corp.
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Delaware
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52-1289694
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Jack La Lanne Holding
Corp.
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New York
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95-3445400
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New Fitness Holding Co., Inc.
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New York
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36-3209555
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Nycon Holding Co., Inc.
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New York
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36-3209533
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Rhode Island Holding Company
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Rhode Island
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36-3261314
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Tidelands Holiday Health Clubs,
Inc.
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Virginia
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52-1229398
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U.S. Health, Inc.
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Delaware
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52-1137373
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The address for service of each of the additional registrants is
c/o Bally
Total Fitness Holding Corporation, 8700 West Bryn Mawr
Avenue, 2nd Floor, Chicago, Illinois 60631, telephone (773)
380-3000. The primary industrial classification number for each
of the additional registrants is 7991.
In this Annual Report on
Form 10-K,
references to the Company, Bally,
we, us, and our mean Bally
Total Fitness Holding Corporation and its consolidated
subsidiaries.
1
BALLY
TOTAL FITNESS HOLDING CORPORATION
2006 ANNUAL REPORT ON
FORM 10-K
TABLE OF
CONTENTS
2
INTRODUCTORY
STATEMENT
The information and discussion in this Annual Report on
Form 10-K
(the
Form 10-K),
should be considered in the context of the following overall
trends and factors:
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The Companys financial and liquidity positions have been
deteriorating and are expected to continue to deteriorate. This
situation reflects several factors discussed in this
Form 10-K.
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The Company does not have sufficient operating cash flows to
meet its expected needs for working capital, capital investment
in operations, interest expense and debt repayments through
December 31, 2007. The Company did not make the interest
payment of $14.8 million due April 16, 2007 on the
$300 million of its
97/8% Senior
Subordinated Notes due 2007 (the Senior Subordinated
Notes); the $300 million principal obligation matures
in October 2007.
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The Company reported losses from continuing operations for the
years 2002 through 2005. Income from continuing operations for
2006 was a modest $5.6 million. Impairment charges in 2006
associated with goodwill and long-lived assets were
$39.8 million and were $62.9 million in the three-year
period 2004 through 2006. The primary drivers of these
impairment charges are the declining projections of future
operating cash flow.
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The Companys revenue recognition policies require the
deferral of a majority of membership cash payments to be
recognized in subsequent periods over the expected membership
term of members. As a result, revenue recognition does not
reflect current cash collection trends. Additionally, the level
of our deferred revenue is highly sensitive to changes in
estimated membership term. Negative attrition expectations
result in downward adjustments of deferred revenue which are
reflected in larger amounts of recognized revenue. The
Companys change in estimated term length effected in the
fourth quarter of 2006 resulted in a reduction of deferred
revenue of $71.0 million and increased reported revenue by
the same amount.
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The Companys total membership cash collections declined in
each quarter of 2006 when compared to the prior year levels.
Total 2006 membership cash collections were $757.6 million,
down $25.4 million from 2005 collections of
$783.0 million. Approximately $10.9 million (43%) of
the year-over-year decline in total membership cash collections
occurred in the fourth quarter of 2006.
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The Companys primary markets have become more competitive,
with competitors opening new fitness centers. At the same time,
the Companys ability to invest in its fitness centers has
been constrained by its deteriorating financial and liquidity
condition.
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FORWARD-LOOKING
STATEMENTS
Forward-looking statements in this
Form 10-K
including, without limitation, statements relating to
(i) our plans, strategies, objectives, expectations,
intentions, and adequacy of resources, (ii) our expectation
that our strategies will enable us to create economic value, and
(iii) the anticipated future performance of our business
are made pursuant to the safe harbor provisions of
Section 21E of the Securities Exchange Act of 1934 (as
amended, the Act or the Exchange Act).
Statements that are not historical facts, including statements
about our beliefs and expectations, are forward-looking
statements. These statements are based on beliefs and
assumptions by our management, and on information currently
available to management. Forward-looking statements speak only
as of the date they are made, and we undertake no obligation to
update publicly any of them in light of new information or
future events. In addition, these forward-looking statements
involve known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievements
to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking
statements.
3
A number of factors could cause actual results to differ
materially from those contained in any forward-looking
statement. These factors include, among others:
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the outcome of our solicitation of consents in favor of our
proposed Joint Prepackaged Chapter 11 Plan of
Reorganization (the Plan of Reorganization) from
holders of our
101/2% Senior
Notes due 2011 (the Senior Notes) and our Senior
Subordinated Notes (together with the Senior Notes, the
Notes) under the proposed terms or at all;
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the length of time it will take us to complete the restructuring
contemplated by the Plan of Reorganization, including the timing
of an eventual court filing;
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the effect of any third party proposals for competing plans of
reorganization;
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the success of our Plan of Reorganization and the outcome of the
restructuring in general;
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the response of creditors, customers and suppliers, including
financial intermediaries such as credit card payment processors,
to the matters discussed herein, particularly as those matters
relate to liquidity and the Plan of Reorganization, and the
presence of an explanatory paragraph in the audit report on our
consolidated financial statements indicating that substantial
doubt exists as to our ability to continue as a going concern;
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the effect of material weaknesses in internal control over
financial reporting on our ability to prepare financial
statements and file timely reports with the Securities and
Exchange Commission (the SEC);
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the success of operating initiatives, advertising and
promotional efforts to attract and retain members;
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competition, including the ongoing effect of increased
competition from well-financed competitors and our limited
ability to invest in capital improvements due to our constrained
liquidity and overall financial condition;
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the outcome of SEC and Department of Justice investigations;
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the existence of adverse publicity or litigation (including
stockholder litigation and insurance rescission actions), the
outcome thereof and the costs and expenses associated therewith;
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the changes in, or the failure to comply with, government
regulations;
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the ability to attract, retain and motivate highly-skilled
employees, including a permanent Chief Executive Officer;
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the business abilities and judgment of personnel;
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general economic and business conditions; and
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other factors described in this
Form 10-K,
including the risk factors identified in
Item 1A Risk Factors and the periodic reports
that we previously filed with the SEC.
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4
AVAILABLE
INFORMATION
Our website address is www.ballyfitness.com. We make
available free of charge on our website our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and all amendments to those reports, as soon as reasonably
practicable after we electronically file or furnish such
materials to the SEC. In addition, we also make available
through our website our press releases, our Code of Business
Conduct, Practices and Ethics, our Corporate Governance
Guidelines, the Charters for the Audit Committee, Nominating and
Corporate Governance Committee and Compensation Committee, as
well as contact information for the Audit Committee, including
an employee hotline and website. These materials are also
available in print to any stockholder upon request. Information
contained on our website is not intended to be part of this
Form 10-K.
Barry R. Elson, our then Acting Chief Executive Officer,
certified to the New York Stock Exchange (the NYSE)
on December 22, 2006 pursuant to Section 303A.12 of
the NYSEs listing standards, that he was not aware of any
violation by the Company of the NYSEs corporate governance
listing standards as of that date. In addition, the
certifications required pursuant to Section 302 of the
Sarbanes-Oxley Act were filed as exhibits to the Companys
Annual Report on
Form 10-K
for the year ended December 31, 2005 and are also filed as
exhibits to this
Form 10-K.
Our executive offices are at 8700 West Bryn Mawr Avenue,
Chicago, Illinois, 60631; our telephone number is
(773) 380-3000.
5
PART I
The information and discussion set forth below should be
considered in the context of the following overall trends and
factors:
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The Companys financial and liquidity positions have been
deteriorating and are expected to continue to deteriorate. This
situation reflects several factors discussed in this
Form 10-K.
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The Company does not have sufficient operating cash flows to
meet its expected needs for working capital, capital investment
in operations, interest expense and debt repayments through
December 31, 2007. The Company did not make the interest
payment of $14.8 million due April 16, 2007 on the
Senior Subordinated Notes; the $300 million principal
obligation matures in October 2007.
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The Company reported losses from continuing operations for the
years 2002 through 2005. Income from continuing operations for
2006 was a modest $5.6 million. Impairment charges in 2006
associated with goodwill and long-lived assets were
$39.8 million and were $62.9 million in the three-year
period 2004 through 2006. The primary drivers of these
impairment charges are the declining projections of future
operating cash flow.
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The Companys revenue recognition policies require the
deferral of a majority of membership cash payments to be
recognized in subsequent periods over the expected membership
term of members. As a result, revenue recognition does not
reflect current cash collection trends. Additionally, the level
of our deferred revenue is highly sensitive to changes in
estimated membership term. Negative attrition expectations
result in downward adjustments of deferred revenue which are
reflected in larger amounts of recognized revenue. The
Companys change in estimated term length effected in the
fourth quarter of 2006 resulted in a reduction of deferred
revenue of $71.0 million and increased reported revenue by
the same amount.
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The Companys total membership cash collections declined in
each quarter of 2006 when compared to the prior year levels.
Total 2006 membership cash collections were $757.6 million,
down $25.4 million from 2005 collections of
$783.0 million. Approximately $10.9 million (43%) of
the year-over-year decline in total membership cash collections
occurred in the fourth quarter of 2006.
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The Companys primary markets have become more competitive,
with competitors opening new fitness centers. At the same time,
the Companys ability to invest in its fitness centers has
been constrained by its deteriorating financial and liquidity
condition.
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General
Bally Total Fitness Holding Corporation is among the largest
full-service commercial operators of fitness centers in North
America in terms of members, revenues and square footage of its
facilities. As of December 31, 2006, through our
subsidiaries, we operated 375 fitness centers concentrated in
26 states and Canada. Additionally, as of December 31,
2006, 35 clubs were operated pursuant to franchise and joint
venture agreements in the United States, Asia, Mexico, and
the Caribbean. We operate fitness centers in over 45 major
metropolitan areas representing 62% of the United States
population and have approximately 3.5 million members. By
clustering our fitness centers in major metropolitan areas, we
are able to offer city-wide and national memberships, providing
more value to members and differentiating ourselves from
mom and pop competitors while achieving operating
efficiencies.
We were incorporated in Delaware in 1983. Since inception, our
business, markets, the services we offer and the way we conduct
our business have changed significantly and are expected to
continue to change and evolve. These changes are primarily the
result of increasing awareness of the need for exercise, weight
control, good nutrition and a healthy lifestyle among adults and
children in the United States. We believe that through more
targeted sales and marketing efforts of our service and product
offerings we can capitalize on the opportunities in our markets,
including the aging of America and generally higher awareness
levels of fitness. For many years our
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target market was the 18- to
34-year old
middle-income segment of the population. In recent years, we
expanded our target market to include 35- to
54-year
olds. Currently, our members range in age from approximately 16
to 80, reflecting our many years in business and diverse
membership base.
In order to better serve these diverse members and address the
growing need for better health and fitness, in 1997 we began
offering members additional products and services, including
personal training, Bally-branded apparel, Bally-branded
nutrition products and, beginning in 2003, a nutrition and
weight management program which emphasizes effective and
sustainable weight loss.
We became a public company in 1996 and have raised capital,
which has been used to acquire new clubs, remodel existing clubs
and purchase additional or replacement equipment. Between 1997
and 2002, we focused on growth through the acquisition and
internal development of new clubs. During that period, we bought
or opened 152 new fitness centers. During the period from 2002
through December 31, 2006, we have acquired or opened 23
clubs and sold or closed 58 clubs.
Beginning in 2003, we changed our focus and our business plan,
scaling back our club expansion plans and focusing on improving
operating margins and cash flows from our existing fitness
centers. We first focused on operating efficiencies, enrolling
more new members by expanding our membership offerings to
include month-to-month and discounted add-on memberships and
improving the retention of new members during their critical
first 30 days of membership, as well as increasing the
training for our employees consistent with the changes in our
focus and business plans. The second phase of our business plan
centered around implementation of our new club operating model,
which calls for each fitness center to be run by a general
manager accountable for the profitability of his or her fitness
center and for cross-training employees to serve in a variety of
positions in our fitness centers so we can achieve optimal
staffing profiles. These changes to our business model, when
combined with competitive conditions in key markets where
well-financed competitors have expanded their operations, have
adversely affected our operating results and cash collections.
The third phase of our business plan, currently being pursued,
is focused on addressing our capital structure in order to
reduce leverage and debt service requirements and improve
liquidity, which would allow us to invest more of our operating
cash flow in fitness equipment for and improvements to our
fitness centers. We have begun divesting non-core assets, by
means that have included, but are not limited to, the sale of
fitness centers. In January 2006, we completed the sale of our
Crunch Fitness business and four other high-end fitness centers
in San Francisco, including the Gorilla Sports brand. In
the fourth quarter of 2006, we entered into three sale/leaseback
transactions involving eight of our fitness centers. In June
2007, we completed the sale of substantially all of our Canadian
operations. We continue to evaluate strategic alternatives to
enhance our liquidity and make necessary investments in our
ongoing business.
We reported a loss from continuing operations for each of the
years 2002 through 2005, and had modest income from continuing
operations in 2006. During the last five years, our primary
markets have become more competitive, with well financed
competitors entering and opening new fitness centers. At the
same time, our ability to invest in our fitness centers has been
constrained by our financial condition, particularly as it
relates to liquidity. These conditions are expected to persist.
We have a substantial amount of debt. As of May 31, 2007,
our total consolidated debt (excluding trade debt) was more than
$811 million. We paid over $79 million in interest in
2006, an amount which would be higher in 2007 based on higher
levels of outstanding debt. This substantial amount of debt
service adversely affected our financial health and business
operations by, among other things, limiting our ability to
obtain additional financing to fund future working capital,
capital expenditures, acquisitions of clubs and other general
corporate requirements; continuing to require that we dedicate a
substantial portion of any cash flows from operations and future
business opportunities to debt service; and increasing our
vulnerability to adverse economic conditions.
Planned
Reorganization
Forbearance
Arrangements
As a result of our deteriorating financial condition and pending
debt requirements, in November 2005 we began considering
strategic alternatives. To this end, the Company engaged JP
Morgan Securities, Inc. and The Blackstone Group to assist the
Company in commencing a process to identify and evaluate
strategic alternatives,
7
including without limitation a sale of substantially all of the
Companys assets. This process, which was conducted under
the direction of the Strategic Alternatives Committee of the
Board, did not result in a strategic transaction. We
subsequently retained Jefferies & Company in February
2007 as our financial advisors. In March 2007, certain holders
of our Senior Notes and Senior Subordinated Notes formed an Ad
Hoc Committee and we began discussions with them with respect to
de-leveraging of our balance sheet. In April 2007 we were
required to make an interest payment of $14.8 million on
our Senior Subordinated Notes. We elected not to make this
interest payment and an event of default occurred under the
Indenture, dated as of December 16, 1998 between the
Company and U.S. Bank National Association, as trustee (the
Senior Subordinated Notes Indenture), which also
triggered an event of default under the Indenture, dated as of
July 2, 2003 between the Company and U.S. Bank
National Association, as trustee (the Senior Notes
Indenture and together with the Senior Subordinated Notes
Indenture, the Indentures).
In April 2007, prior to the Senior Subordinated Note interest
payment date, we entered into a Forbearance Agreement (the
Forbearance Agreement) under the Amended and
Restated Credit Agreement between the Company, JP Morgan Chase
Bank, N.A., as Agent, Morgan Stanley Senior Funding, Inc., as
Syndication Agent, and other Lenders dated October 16, 2006
(the New Facility). Under the Forbearance Agreement,
the Agent and the Lenders agreed to forbear from exercising any
remedies under the New Facility as a result of the cross-default
arising as a result of our failure to make the required interest
payment on the Senior Subordinated Notes, failure to provide
audited financial statements for the fiscal year ended
December 31, 2006 and certain other defaults. The Lenders
also agreed not to exercise cross-default remedies as a result
of defaults under our Senior Notes Indenture and Senior
Subordinated Notes Indenture due to our failure to timely file
our 2006 Annual report on
Form 10-K
and Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2007 with the Securities
and Exchange Commission. The Forbearance Agreement will
terminate on the earlier of July 13, 2007 or the date on
which a default occurs which is not a default covered by the
Forbearance Agreement, any payment of principal or interest is
made on the Senior Subordinated Notes, the commencement of any
enforcement action under the indenture governing either the
Senior Notes or Senior Subordinated Notes, including
acceleration of the Senior Notes or Senior Subordinated Notes,
or upon certain challenges to the validity or enforceability of
the New Facility or the Forbearance Agreement. The Forbearance
Agreement required that we enter into forbearance agreements
with respect to defaults under our public indentures with
holders of at least a majority of our Senior Notes and at least
75% of our Senior Subordinated Notes.
In May 2007, we entered into a Limited Waiver and Forbearance
Agreement (the Senior Notes Forbearance Agreement)
with holders representing over 80% of the aggregate principal
amount outstanding of our Senior Notes. Pursuant to the Senior
Notes Forbearance Agreement, holders of the Senior Notes waived
the cross-default in connection with our failure to make the
required interest payment on the Senior Subordinated Notes and
certain other defaults under the Senior Notes Indenture and
agreed to forbear from exercising any related remedies until
July 13, 2007. Holders of the Senior Notes also consented
to amend certain provisions of the Senior Notes Indenture in
connection with the waiver of the defaults. We agreed to pay a
one-time cash consent fee of $1.25 per $1,000 principal amount
of Senior Notes to holders of the Senior Notes that executed the
Senior Note Forbearance Agreement and consented to the related
amendments to the Senior Notes Indenture.
In May 2007, we also entered into a Limited Waiver and
Forbearance Agreement (the Senior Subordinated Notes
Forbearance Agreement) with holders representing over 80%
of the aggregate principal amount outstanding of our Senior
Subordinated Notes. Pursuant to the Senior Subordinated Notes
Forbearance Agreement, holders of the Senior Subordinated Notes
waived the default in connection with our failure to make the
April interest payment and certain other defaults under the
Senior Subordinated Notes Indenture and agreed to forbear from
exercising any related remedies until July 13, 2007.
Holders of the Senior Subordinated Notes also consented to amend
certain provisions of the Senior Subordinated Notes Indenture in
connection with the waiver of the defaults. We did not pay a
consent fee to holders of the Senior Subordinated Notes in
connection with the Senior Subordinated Notes Forbearance
Agreement.
Solicitation
of Votes on the Plan of Reorganization
On June 27, 2007, we commenced a solicitation of votes on
the Plan of Reorganization from holders of the Senior Notes and
Senior Subordinated Notes. If we receive the requisite votes in
favor of the Plan of Reorganization,
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we intend to file a voluntary prepackaged petition for
reorganization under Chapter 11 of the U.S. Bankruptcy
Code in the U.S. Bankruptcy Court in the Southern District
of New York (the Bankruptcy Court) in late July
2007. Prior to commencement of the consent solicitation, we
entered into a Restructuring Support Agreement with holders of a
majority of the Senior Notes and more than 80% of the Senior
Subordinated Notes, in which the consenting noteholders agreed
to vote in favor of the Plan of Reorganization, on the terms and
conditions specified therein. Under certain circumstances, we
may file for bankruptcy prior to the end of the solicitation
period.
The Plan of Reorganization, which is described in greater detail
below, would, if approved, confirmed and consummated, result in
the cancellation and discharge of all claims relating to the
Senior Subordinated Notes. Each holder of Senior Subordinated
Notes would receive a pro rata share of new subordinated notes
(the New Subordinated Notes) in the principal amount
of approximately 24.8% of their claims, or $80 million, new
junior subordinated notes (the New Junior Subordinated
Notes) in the principal amount of approximately 21.7% of
their claims, or $70 million, non-detachable rights to
participate in a rights offering for new senior subordinated
notes (the Rights Offering Senior Subordinated
Notes) in the principal amount of approximately 27.9% of
their claims, or $90 million, and shares of new common
stock representing 100% of the equity in the reorganized
company. All existing equity would be cancelled for no
consideration.
General
Structure of the Plan of Reorganization
The Plan of Reorganization, if consummated, will achieve a
consensual de-leveraging of our balance sheet and permit us to
become a private company upon emergence from bankruptcy. The
Plan of Reorganization includes, among other things, the
following key terms:
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New Facility. The New Facility would be
unimpaired. As a condition to effectiveness of the Plan of
Reorganization, we will amend and restate (with the consent of
the Lenders) or replace the New Facility with a
$292 million senior secured credit facility, on terms no
less favorable than described in the Plan of Reorganization.
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Senior Notes. We do not intend to make the
cash interest payment due on the Senior Notes on July 15,
2007. The Plan of Reorganization would, if approved, confirmed
and consummated, result in the cancellation and discharge of all
claims relating to the Senior Notes. Each holder of Senior Notes
would receive a pro rata share of new senior notes (the
New Senior Notes) in the principal amount of
$247,337,500 with an interest rate of
123/8%.
The maturity and guarantees of the New Senior Notes would be the
same as for the Senior Notes. Upon effectiveness of the Plan,
holders of the Senior Notes would receive a fee equal to 2% of
the face value of their notes.
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Senior Notes Indenture. The Senior Notes
Indenture would be amended to provide the holders with a
silent second lien on substantially all of our
assets and the assets of our subsidiary guarantors. Under the
amended Senior Note Indenture, we would have a permitted debt
basket for the New Facility of $292 million, with a
reduction for proceeds of asset sales completed after
June 15, 2007 that are used to permanently pay down
indebtedness under the New Facility and are not reinvested in
replacement assets within 360 days after the applicable
asset sale. The amended Senior Note Indenture would also permit
us to issue, in addition to the Rights Offering Senior
Subordinated Notes, an additional $90 million of
pay-in-kind
senior subordinated notes as described more fully under
Rights Offering below, after emergence from
bankruptcy.
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Senior Subordinated Notes. Holders of Senior
Subordinated Notes would receive, in exchange for their claims,
New Subordinated Notes representing approximately 24.8% of their
claims, New Junior Subordinated Notes representing approximately
21.7% of their claims, and shares of common stock representing
100% of the equity in the reorganized company, subject to
reduction for common stock to be issued to holders of certain
other claims. The New Subordinated Notes would mature five years
and nine months after the effective date of the Plan of
Reorganization and would bear interest payable annually at
135/8%
per annum if paid in kind or 12% per annum if paid in cash, at
our option, subject to a toggle covenant based on specified cash
EBITDA and minimum liquidity thresholds.
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Rights Offering. In addition to the
consideration described above, holders of Senior Subordinated
Notes would receive non-detachable rights to participate in a
rights offering of Rights Offering Senior
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Subordinated Notes in principal amount equal to approximately
27.9% of their claims, or $90 million. The Rights Offering
Senior Subordinated Notes would rank senior to the New
Subordinated Notes and New Junior Subordinated Notes but
otherwise have the same terms. Holders of certain other claims
against us will be given the opportunity to participate in the
rights offering, which, if exercised, would generate incremental
proceeds beyond the $90 million to be funded by electing
Senior Subordinated Noteholders.
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Subscription and Backstop Purchase
Agreement. On June 27, 2007, we entered into
a Subscription and Backstop Purchase Agreement with certain
holders of our Senior Subordinated Notes, who have agreed to
subscribe for their pro rata share of Rights Offering Senior
Subordinated Notes and to purchase any Rights Offering Senior
Subordinated Notes not subscribed for in the rights offering. We
have agreed to pay a fee to each backstop provider in the amount
of 4% of its backstop commitment, subject to a rebate of
approximately 80% of such amount if the Plan is consummated.
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Existing Equity. All existing equity would be
cancelled for no consideration.
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We expect to continue normal club operations during the
restructuring process. If we file the Plan of Reorganization, we
would seek to obtain the necessary relief from the Bankruptcy
Court to pay the majority of our employee, trade and certain
other creditors in full and on time in accordance with existing
business terms. Upon effectiveness of the Plan of
Reorganization, we would, among other things, amend our charter
and by-laws and enter into a stockholders agreement and a
registration rights agreement with holders of our common shares.
In addition, our new Board of Directors will consider adopting a
new management long-term incentive plan intended to provide
incentives to certain employees to continue their efforts to
foster and promote our long-term growth objectives.
If we do not receive the necessary votes in favor of the Plan of
Reorganization during the solicitation period, we will evaluate
other available options, including filing one or more
traditional, non-prepackaged Chapter 11 cases.
Financial
Information About Segments
Not applicable.
Business
Strategy
We intend to help our members and prospective members achieve
their health and wellness goals, and increase our revenue,
earnings and cash flow, as well as our profitability, through a
company-wide focus on the following items.
Increase membership through continued addition of new members
and through improved retention of new and existing
members. We offer prospective members the ability
to choose the membership type, amenities and pricing structure
they prefer. Prospective members may choose between our
multiyear value contract, a month-to-month membership or a
paid-in-full
annual or multiyear membership. These membership options are
presented in a simplified sales process, giving prospective
members important choices around membership term, enrollment fee
level and monthly payment amount, as well as scope of membership
(for example, one club, citywide or national). We believe our
membership offerings align with the consumer choice
mandate prevalent in the retail marketplace. We also believe the
choices we offer are an important competitive differentiator in
our market space. Our focus is on improving retention rates
through new and more focused initiatives to fully engage new
members in the full range of our wellness offerings (for
example, nutrition programs and nutrition products, weight loss
and weight management programs, personal training and group
exercise).
Leverage our strong, national Bally Total Fitness
brand. Our Bally Total Fitness and
Bally Sports Club brands continue to receive high
awareness ratings and high marketing recognition from consumers.
We believe that strong marketing support at the local, regional
and national levels, with messages focused on our target (and in
some cases, underserved) market segments is a key to attracting
new and retaining present members. Continuing high-focused
market research is the key, we believe, to understanding our
present members and to identifying geographic markets and
consumer segments that present our best opportunities to add new
members. This market research and the resulting creative
concepts, selectively tested in appropriate markets, helps
maximize the effectiveness of our advertising.
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Grow our ancillary revenues. Our large,
valuable membership base of approximately 3.5 million
members affords us an opportunity to provide members other
value-added products and services to help them achieve their
health and wellness goals and increase our revenue per member.
We offer a comprehensive and extensive list of products and
services to members and, depending on the retail distribution
channel, to nonmembers, at our fitness centers, retail stores
and through other in-store and internet retail channels. These
products and services include Bally-branded nutritional
products; licensed personal exercise equipment; personal
training; group specialty exercise classes; nutrition and weight
management programs; Pilates classes; basic workout apparel,
packaged drinks and other fitness-related convenience products
sold in our retail locations; and our Bally Total Martial Arts
(TMA) program, the nations largest, and
offered in over 40 of our fitness centers. Our national presence
with multiple fitness center locations in numerous population
centers allows us to test market new products and
services and delivery methods, providing important insights into
the best, most profitable ones to offer before a regional or
national rollout. Furthermore, we are pursing other ways to
leverage our large member base with other national brands and
consumer products with the goal of mutually benefiting our
members and the owners of those brands and products, while
further increasing our revenue.
Optimize results from and the investment in our national club
portfolio footprint. We have completed a fitness
center portfolio review and have determined key markets where we
have a leading share and where there is, we believe,
considerable growth opportunity. At the same time, we have
identified potential non-strategic locations. We are now
determining actions from that review. In January 2006, we
completed the sale of the chain of health clubs operated under
the Crunch Fitness brand and certain additional
high-end fitness centers in San Francisco, including the
Gorilla Sports brand. In the fourth quarter of 2006, we entered
into three sale/leaseback transactions involving eight of our
fitness centers. We will consider additional sale/leaseback
transactions as well as the sale of certain other non-core
fitness centers and real estate, to the extent that such sales
would reduce leverage, improve operating efficiencies or reduce
operating costs. In June 2007, we completed the sale of
substantially all of our Canadian operations.
Rationalize and optimize our operating cost structure,
consistent with our revenue initiatives, club portfolio actions
and improving member experience. In order to
improve our profitability, we will continue to focus on our
national, regional and local cost structures, reducing expenses
and improving effectiveness where and when appropriate. To this
end, in 2006, we reduced our workforce; combined certain
functions previously performed in more than one location;
eliminated certain management layers; renegotiated rents
downward, where possible; closed under-performing clubs;
outsourced certain functions; and changed the scale or timing of
certain expenditures compared to plans developed earlier in the
year in order to improve profitability and conserve liquidity.
We also notably improved productivity in certain key business
functions, particularly as they relate to member services. Many
of these actions were initiated in the second half of 2006 and
have already yielded positive results. Actions taken in 2006 are
continuing and will continue during 2007 and beyond, and will be
expanded around similar or new management actions in order to
improve our profitability and liquidity.
Membership
Plans
As noted above, our sales strategy modernized our approach to
sales and improved customer satisfaction both immediately after
new member
sign-up, and
during the membership period, with the goal of improving our
ability to sell memberships, reducing cancellations and
improving member retention. Members have the ability to choose
the type of membership
(paid-in-full,
month-to-month or value plan membership) they prefer. Clearly
presenting membership type and amenities enables the member to
select the combination of services and monthly payment best
suited for their individual circumstances. A monthly paying
member pays a modest enrollment fee at the time of joining and
is given the option to select either a month-to-month plan
membership with the flexibility to discontinue their membership
at any point upon prior notice or a multi-year commitment value
plan membership at a reduced monthly rate.
Paid-in-full
members pay their membership fees in full for a committed period
of time (typically
12-36 months)
upon joining. Members may also add amenities to personalize
their membership. Amenity choices cover a range of options,
including nationwide access to all our clubs, kids club access,
martial arts, nutrition and weight management programs and
personal training. Availability varies by club and requires the
member to pay additional fees, either one-time or monthly. In
addition, members may add family and friends to their membership
in a variety of ways, including at a discount at the point of
sale.
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Enrollment fees represent cash received at time of enrollment
for membership fees from members who choose a month-to-month or
value plan membership. For month-to-month members, the entire
membership fee is typically collected at the time of enrollment,
while value plan member enrollment fees represent a down payment
on the total membership fee. Under our month-to-month plan
memberships, the enrollment fee for joining our Bally Total
Fitness brand fitness centers, excluding limited special offers
and corporate programs, generally ranges from approximately $0
to $249. Under our value plan memberships, the enrollment fee
generally ranges from approximately $0 to $199. Month-to-month
enrollment fees currently average approximately $120 per
membership, and value plan enrollment fees currently average
approximately $70 per membership. In addition, value plan
members may choose to pay a higher or lower enrollment fee if
they agree to pay a correspondingly lower or higher monthly
payment amount. Generally, 30% of new value plan members choose
to pay an enrollment fee of less than $49 by agreeing to ongoing
higher monthly payment amounts.
Monthly payments vary by membership type selected, amenity
levels and by whether additional members have been added to the
membership. Due to the availability of discounted monthly
payments on such add-on contracts, family and friends of primary
joining members may be added at monthly rates generally lower
than those available for the primary member. Generally during
the first two months of 2006, add-on members to value plan
memberships were added as nonobligatory members (who may
discontinue their membership at any point upon prior notice)
while the primary sponsoring member makes payments on an
obligatory basis. During the rest of 2006, we sold both
obligatory and non-obligatory add-ons to value plan members and
believe this will improve the retention of add-on members since
obligatory add-ons experience significantly better retention.
Single membership monthly payments range from approximately $19
for one club membership plans with minimal amenities to $60 for
all club memberships with higher amenity levels. Family add-on
members have been added generally for $19 to $24 per month
during 2006.
Prior to the fourth quarter of 2004, monthly payments were
significantly lower after expiration of the obligatory period
(which was generally 36 months). This practice led to
member retention rates that were higher than the industry
average, but also resulted in lower monthly renewal dues
payments generally ranging from $12 to $19 for the majority of
members who were no longer in their obligatory period. Beginning
in late 2004, our value plan membership agreements generally
have not provided for significantly discounted payments after a
members obligatory period ends. However, some members who
purchase their membership with higher enrollment fees
and/or
higher priced national access memberships do qualify for reduced
renewal dues after their initial obligatory term. A similar
change in renewal pricing has been implemented in our upscale
Bally Sports Clubs locations. Bally Sports Clubs offer
memberships similar to Bally Total Fitness brand clubs in terms
of enrollment fee and monthly payments, but at higher prices,
which generally are $20 per month higher than Bally Total
Fitness clubs within the same market. The Sports Clubs
membership payments vary depending on the membership program
selected and are subject to increases after the obligatory
period.
Members who choose the value plan membership may choose to send
in payments by mail or sign up for an electronic payment option
where the fixed monthly payment is automatically deducted from a
checking, savings or credit card account. Over 93% of
month-to-month members and over 67% of value plan members pay
electronically. Approximately 70% of all our members pay by
making recurring electronic payments. Our experience indicates
that members who choose the electronic funds transfer method of
payment are more likely to make payments than members who do not
choose electronic funds transfer.
Products
and Services
Our fitness center operations provide a unique platform for the
delivery of value-added products and services to our fitness,
wellness and weight loss-conscious members. By integrating
personal training, nutrition products, and our weight management
program into our core fitness center operations, we have
positioned the Company as the total source for all of our
members wellness and fitness needs.
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Personal Training. We offer fee-based personal
training services in most of our fitness centers with
approximately 4,800 personal trainers currently on staff.
Integrating personal training into select membership programs
has helped fuel the growth of this service. All new members are
also offered a free first work-out with a personal trainer as an
important first step toward fitness at the beginning of their
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membership. Personal training package services are also offered
separately, giving customers a full range of personal training
options at the point of sale and beyond. We believe that further
penetration into the existing membership base along with new
personal training programs will continue to provide revenue
growth opportunities in personal training. Our multi-client
personal training sessions (small group personal training) are
more affordable for our members, and on average, have a margin
similar to or greater than
one-on-one
training.
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Bally Total Fitness Retail Stores. Our members
are a captive market of fitness conscious consumers. Our
on-site
retail stores have been designed to provide products most needed
by our members before, during and after their workout. We have
approximately 350 retail locations that sell nutrition
supplements, basic workout apparel, packaged drinks and other
fitness-related convenience products. In approximately 60 of our
highest retail volume fitness centers, our retail stores include
a juice bar offering freshly-made performance and recovery
shakes and supplement-enhanced nutrition drinks. Beginning in
2006, we initiated a retail store conversion plan that converts
our full service retail stores and our lower volume juice bar
stores to a format that integrates our retail product sales into
the front desk resulting in less retail revenue, a situation
expected to continue as the conversion process is completed. At
the same time, this reduces the number of items available for
sale to focus on higher-volume, higher margin products, and
reduces our labor costs. These changes have already improved our
retail operating margins. The conversions also free up space in
the fitness centers, which we then use for exercise studios and
other uses to meet the needs of our members.
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Bally-branded Nutrition Products. Our strong
and well-known brand has allowed us to leverage our reputation,
marketing strength and experience in fitness to expand into the
large market for nutrition and weight loss products. We
currently offer protein powders, energy drinks, energy bars,
snack bars, high protein bars, weight loss products,
multi-vitamins and meal replacement powdered drink mixes. The
Bally nutrition products are categorized into three distinct
product lines: weight loss, Blast for energy, and
Performance for sports and fitness. As a policy, we
require manufacturers and suppliers of our nutrition products to
maintain significant amounts of product liability insurance. To
capitalize on the strength of the Bally brand outside our clubs,
we also distribute our Bally-branded nutrition products in
approximately 3,500 select retail, grocery and drug store
outlets, and at selected internet retailers.
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Nutrition and Weight Management Program. We
offer a comprehensive nutrition and exercise program customized
to an individuals unique metabolism. This program combines
meal plans, grocery lists, recipes, meal replacement bars and
meal replacement shakes to offer a comprehensive weight
management program to all Bally members. Using computer-based or
manual food logging methods, all participants in Ballys
Total Results Weight Loss Solution can track their progress
towards reaching their weight loss goals. Ballys Total
Results Weight Loss Solution allows for the integration of
Bally-branded nutrition products into a comprehensive lifestyle,
health, nutrition and fitness program.
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Martial Arts. The Bally Total Martial Arts
(TMA) program brings martial arts to Bally members
and their children. TMA is the nations largest corporate
martial arts program, currently operating studios in over 40 of
our fitness centers in five states. The program earns revenue
through membership fees, uniform and shoe sales, instructional
materials, belt test fees and tournament fees. We also offer
summer camps to our students at an additional charge. We recruit
the majority of our program instructors directly from
universities in the Republic of Korea. The majority of our
teaching staff are internationally certified through the World
Taekwondo Federation, the official governing body of Taekwondo
worldwide. We plan to continue growing this unique member
offering.
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Members
We define a member as a person whose membership fees or dues are
not delinquent by more than 90 days. Our membership was
approximately 3.485 million as of December 31, 2006,
down approximately 1% from 3.530 million members at
December 31, 2005.
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Sales and
Marketing
We devote substantial resources to marketing and promoting our
fitness centers, products and services. We believe strong
marketing support is important to attracting new members at both
existing and new fitness centers as well as promoting our
various product and service offerings to both new and current
members. We also believe that our sales and marketing efforts
compliment other in-club actions and programs to improve member
retention. The majority of our fitness centers use the branded
mark Bally Total Fitness, including 9 upscale
fitness centers known as Bally Sports Clubs. We
believe the nationwide use of the service mark enhances brand
identity and increases advertising efficiencies.
We operate fitness centers in more than 45 major metropolitan
areas representing approximately 62% of the United States
population with 300 of our fitness centers located in the top 25
metropolitan areas in the United States. Most of these fitness
centers are located near regional, urban and suburban shopping
areas and business districts. This concentration of our fitness
centers in major metropolitan areas increases the efficiency of
our marketing and advertising programs and enhances brand
identity and word-of-mouth marketing. In addition, given our
broad distribution of fitness centers, we are not dependent upon
one customer or group of customers to generate future revenue
opportunities. Our highest-volume fitness center accounted for
approximately 1% of our net revenues during 2006. Additionally,
our market research indicates Bally successfully attracts new
members from a diverse variety of market segments in both urban
and suburban areas.
We advertise primarily on television and, to a lesser extent,
through direct mail, newspapers, telephone directories, radio,
outdoor signage, on-line advertising, and other promotional
activities. Our advertising programs are both national and
local. Our marketing approach and organization, as well as our
creative approach is developed to reach multiple customer
segments in the 18- to
54-year old
demographic. Our national scope of operations also allows us to
effectively use national television advertising at a lower cost
compared to purchasing these spots on a local basis; we believe
this is an important competitive advantage.
Our sales and marketing programs emphasize the benefits of
health, physical fitness, nutrition and exercise by appealing to
the publics desire to lose weight, look and feel better,
be healthier, experience an improved quality of life and live
longer. We believe providing members a solution to their fitness
and nutrition needs, along with flexible membership and payment
plans, our strong brand identity and the convenience of multiple
locations, constitute additional competitive advantages.
Our marketing efforts also include corporate memberships and
in-club marketing programs. We sell corporate memberships
directly to businesses, as well as directly to their employees
through a combination of offsite sales activities and in-club
corporate events. Open houses and other monthly in-club
activities for members and their guests are used to foster
member loyalty and introduce prospective members to our fitness
centers. Referral incentive programs are designed to involve
current members in the process of new member enrollments and
enhance member loyalty. Direct mail and email reminders
encourage renewal of existing memberships.
We also attract membership interest from visitors to our
internet home page at www.ballyfitness.com and continue to
explore ways to use the internet as a customer relationship
management tool. Membership inquiries via the internet have
become an important source of new members. All internet visitors
are encouraged to download a free trial membership, as well as
set an appointment for an initial visit. We also use the
internet to sell Bally goods and services, as well as a one
month trial and, from time to time, month-to-month memberships.
Our members also use our website to review account status and
pay dues.
We continue to leverage the Bally brand through strategic
marketing alliances with key brands. Most recent alliances
include Kraft, Unilever, Discovery Health Channel and Discovery
Health Education, Rite-Aid, Gap Body, Foot Locker, Fitness
Magazine and Real Age. These alliances heighten public awareness
of the Companys fitness centers and provide incremental
revenue via endorsements
and/or
placement fees.
Fitness
Centers and Operations
Site selection. Our objective is to select
highly-visible locations with high traffic volume, household
density and proximity to other generators of retail traffic.
Most of our fitness centers are located near regional, urban and
suburban shopping areas and business districts of major cities.
Since 2003, our strategy for new club development
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has been to add clubs to our largest, most profitable markets to
reinforce our competitive position in those markets, as well as
to take advantage of existing marketing and operating synergies.
Fitness center model. Our current fitness
center model offers those fitness services our members use most
frequently, such as well-equipped cardiovascular, strength and
free weight training areas along with a wide variety of group
exercise classes. These centers, typically 25,000 to
35,000 square feet, have recently averaged approximately
30,000 square feet and cost an average of $3.5 million
to construct, exclusive of purchased real estate. We generally
invest approximately $600,000 in exercise equipment in a model
fitness center.
Fitness center operations. Our overall goal is
to maximize our members experiences by combining exercise
instruction with nutrition guidance to assist our members in
achieving all of their fitness and weight loss objectives. We
believe the most effective way to retain members is by
successfully assisting them in reaching their fitness goals and
experiencing a higher quality of life. We strive to employ
friendly, helpful and fitness informed personnel committed to
providing a high level of customer service, creating an
environment that meets the needs of our members. We staff our
fitness centers with well-trained health, fitness and nutrition
professionals. Onsite personal trainers are available to assist
in the development of a customized training regimen. Our weight
management programs and nutrition products are available at all
of our domestic fitness centers and are becoming an increasingly
important part of our total fitness offering.
Fitness centers vary in size, amenities and types of services
provided. All of our fitness centers contain a wide variety of
progressive resistance, cardiovascular and conditioning exercise
equipment, as well as free weights and stretch areas with small
apparatus equipment. Some fitness centers contain amenities such
as saunas, steam rooms, whirlpools and swimming pools. Older
facilities may contain tennis
and/or
racquetball courts. Most of our fitness centers also include one
or more group exercise studios. Additionally, most of our clubs
now have areas specifically designated for personal training.
Franchises. As of December 31, 2006
pursuant to franchise agreements, five fitness clubs in upstate
New York, one fitness club in Baton Rouge, Louisiana and
one fitness club in Jacksonville, Florida are operating or will
operate in the United States as Bally Total Fitness brand clubs.
Internationally, six fitness clubs operate as Bally Total
Fitness brand clubs pursuant to franchise agreements
one in the Bahamas, three in South Korea and two in Mexico.
Pursuant to a joint venture agreement in which the Company holds
a 35% interest with China Sports Industry Co., Ltd., 22 fitness
centers are operated in China one under a joint
venture agreement and 21 as franchises.
Member
Account Servicing
In addition to having member service representatives at most
locations, member services, collection and new and renewal
member processing activities are handled at our Norwalk,
California national service center, providing continuing
efficiencies and cost savings through centralization of these
high volume activities. Our members can make monthly membership
payments through electronic funds transfer, by mailing a payment
to our national service center, by telephone to a customer
service agent, via the internet and our interactive voice
recognition system (IVR).
All collections for past-due accounts are initially handled
internally by our national service center. We systematically
pursue past-due accounts by utilizing a series of
computer-generated correspondence and telephone contacts. Our
power-dialer system assists in the efficient administration of
our in-house collection efforts. Based on a set period of
delinquency, members are contacted by our collectors. Past due
members are generally denied entry to the fitness centers.
Delinquent accounts are generally written off after 90 days
(for those members who have not made any payments) or
194 days (for those members who have made at least one
payment), depending on delinquency history. Accounts written off
are reported to credit reporting bureaus and selected accounts
are then sold to third-party collection services.
We prioritize our collection approach based on credit scores and
club usage, among other criteria, at various levels of
delinquency. By tailoring our membership collection approach to
reflect a delinquent members likelihood of payment, we
believe we can collect more of our membership receivables at a
lower cost than using outside collection agencies. We use a
national bureau for credit scores.
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Competition
We operate in a fragmented but highly competitive market.
Several of our competitors have access to capital which has
fueled their expansion and growth, including entry into key
markets served by us. In several cases, these competitors have a
more favorable liquidity position than we do. Despite increasing
levels of competition, at this time we remain among the largest
commercial operators of fitness centers in North America in
terms of members, revenues and square footage of our facilities.
We are the largest operator, or among the largest operators, of
fitness centers in every major market in which we operate
fitness centers. Within each market, we primarily compete with
other commercial fitness centers; physical fitness and
recreational facilities established by local governments,
hospitals, and businesses for their employees; the YMCA and
similar organizations; and, to a certain extent, with racquet,
tennis and other athletic clubs, weight-reduction businesses,
and the home-use fitness equipment industry. We also compete, to
some degree, with entertainment and retail businesses for the
discretionary income of consumers in our target markets. In
addition, we face regional competition with increasingly large
fitness companies such as 24 Hour Fitness Worldwide, Inc., L.A.
Fitness, Inc., Town Sports International Holdings, Inc. (NSDQ:
CLUB), Life Time Fitness, Inc. (NYSE: LTM) and Golds Gym
International, Inc. Other competition comes from new small
footprint, lower cost competitors such as Fitness 19, Anytime
Fitness and Planet Fitness. We believe our national brand
identity, nationwide operating experience, membership options,
significant advertising, ability to allocate advertising and
administration costs over all of our fitness centers, customized
fitness offerings, purchasing power and account processing and
collection infrastructure gives us important competitive
advantages in our markets.
Competition has increased in certain markets from national and
regional competitors expanding their scope of operations, and
due to the decrease in the barriers to entry into the market
with financing available from, among others, financial
institutions, landlords, equipment manufacturers, private equity
sources and the public capital markets. We believe several
competitive factors influence success in the fitness center
business, including convenience, price, customer service,
quality of operations, quality and innovative programming as
well as the ability to secure prime real estate. We believe we
benefit from our strong brand identity, our flexible and
affordable membership plans, and our large membership base,
although we have been adversely affected by our lack of capital
and the aging of our facilities, which affects our ability to
compete. We expect the persisting increase in competition from
well-financed competitors to continue to have an adverse effect
on our business. See Item 1A. Risk Factors.
Trademarks
and Trade Names
The majority of our fitness centers use the service mark
Bally Total
Fitness®.
Other facilities operate under the names Bally Sports
Clubssm
and, prior to the June 2007 sale of our Canadian
operations, the The Sports Clubs of
Canada®,
which trademark was assigned to Goodlife Fitness Centres, Inc.,
an Ontario, Canada corporation (Goodlife), in
connection with the sale. The use of our trademarks and service
marks enhances brand identity and increases advertising
efficiencies.
Seasonality
of Business
Historically, we have experienced greater membership
originations in the first quarter and lower membership
originations in the fourth quarter. Club use (as measured by
club visits) by our members is historically higher in the first
quarter and then tends to decrease ratably throughout the
remaining quarters to a low in the fourth quarter. Member visits
are an important driver of our product and service revenue.
Employees
At December 31, 2006, we had approximately
19,200 employees, 8,800 of which were full-time employees.
We are not a party to a collective bargaining agreement with any
of our employees. Although we experience high turnover of
non-management personnel, historically we have not experienced
difficulty in obtaining adequate replacement personnel.
16
Government
Regulation
Our operations and business practices are subject to regulation
at federal, state and local levels. The general rules and
regulations of the Federal Trade Commission (the
FTC) and of other federal, state, provincial and
local consumer protection agencies apply to our franchising,
advertising, sales and other trade practices. State statutes and
regulations affecting the fitness industry have been enacted or
proposed in all of the states in which we conduct business.
Typically, these statutes and regulations prescribe certain
forms and regulate the terms and provisions of membership
contracts, including:
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giving the member the right to cancel the contract, in most
cases, within three business days after signing;
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requiring an escrow for funds received from pre-opening sales or
the posting of a bond or proof of financial responsibility; and,
in some cases,
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establishing maximum prices and terms for membership contracts
and limitations on the financing term of contracts.
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In addition, we are subject to numerous other types of federal
and state regulations governing the sale, financing and
collection of memberships, including, among others, the
Truth-in-Lending
Act and Regulation Z adopted thereunder, as well as state
laws governing the collection of debts. These laws and
regulations are subject to varying interpretations by a large
number of state and federal enforcement agencies and the courts.
We maintain internal review procedures in order to comply with
these requirements and believe our activities are in substantial
compliance with all applicable statutes, rules and regulations.
Under so-called cooling-off statutes in most states
in which we operate, new members of fitness centers have the
right to cancel their memberships for a period of three to
fifteen days after the date the contract was entered into and
are entitled to refunds of any payment made. The amount of time
new members have to cancel their membership contract depends on
the applicable state law. Further, our membership contracts
provide that a member may cancel his or her membership at any
time for qualified medical reasons or if the member relocates a
certain distance away from any Bally fitness center. The
specific procedures for cancellation in these circumstances vary
according to differing state laws. In each instance, the
canceling member is entitled to a refund of prepaid amounts
only. Furthermore, where permitted by law, a cancellation fee is
due upon cancellation, which may offset any refunds owed.
We are a party to some state and federal consent orders. The
consent orders essentially require continued compliance with
applicable laws and require us to refrain from activities not in
compliance with those laws. From time to time, we make minor
adjustments to our operating procedures to remain in compliance
with those consent orders.
Our nutritional products, and the advertising thereof, are
subject to regulation by one or more federal agencies, including
the Food and Drug Administration (the FDA) and the
FTC. For example, the FDA regulates the formulation, manufacture
and labeling of vitamins and other nutritional supplements in
the United States, while the FTC is principally charged with
regulating marketing and advertising claims.
We are subject to state and federal labor laws governing our
relationship with employees, such as minimum wage requirements,
overtime and working conditions and citizenship requirements.
Certain job categories are paid at rates related to the federal
minimum wage. Accordingly, further increases in the minimum wage
would increase labor costs. Our martial arts personnel are
generally foreign nationals with expertise in their field and
are subject to applicable immigration laws and other regulations.
Other
Because of the nature of its operations, the Company is not
required to carry significant amounts of retail inventory either
for delivery requirements to its fitness centers or to assure
continuous availability of goods from suppliers.
17
Recent
Developments
First
Quarter 2007 Operating Trends
Operating trends evident in the business through year end 2006
continued in the quarter ended March 31, 2007. Membership
cash collections declined 6 percent (approximately $12 million)
compared to the 2006 quarter. We had approximately 79,000 fewer
members at March 31, 2007 compared to the year earlier date, a
2% reduction. Further, in the first quarter of 2007, we added
approximately 12% fewer new members than in the year earlier
quarter. The negative effect of the lower volume was only
partially mitigated by higher monthly payment amounts for new
member additions in each membership group (value, month-to-month
and paid-in-full). Lastly, operating expenses in the first
quarter of 2007 were approximately 3% lower than the first
quarter of 2006, reflecting management actions taken beginning
in the fourth quarter of 2006 and continuing into 2007, and
reduced expenses resulting from lower new member originations.
These operating trends have continued through the second quarter
of 2007.
NYSE
Delisting
On May 2, 2007, the NYSE permanently suspended trading of
our common stock and delisted the common stock in accordance
with Section 12 of the Exchange Act and the rules
promulgated thereunder as of June 8, 2007. Since
May 2, 2007, our common stock has been quoted on the Pink
Sheets Electronic Quotation Service.
Sale of
Canada Clubs
On April 24, 2007, our subsidiaries Bally Matrix Fitness
Centre Ltd., an Ontario, Canada corporation
(Matrix), and BTF Canada Corporation, an Ontario,
Canada corporation (BTF, and together with Matrix,
the Sellers), entered into an Asset Purchase
Agreement (the Purchase Agreement) pursuant to
which, among other things, the Sellers transferred five health
clubs and certain related assets located in greater metropolitan
Toronto in Ontario, Canada, to Extreme Fitness, Inc., an
Alberta, Canada unlimited liability corporation (Extreme
Fitness). In addition, on April 20, 2007, the Sellers
entered into an Asset Purchase Agreement with Goodlife to sell
10 additional health clubs located in greater metropolitan
Toronto in Ontario, Canada. The Sellers closed on the agreements
with Extreme Fitness and Goodlife on June 1, 2007,
realizing net cash proceeds of approximately $18 million.
The completion of the transactions resulted in the sale of
substantially all of our Canadian operations.
Management
Changes
Effective May 31, 2007, Barry R. Elson resigned as Acting
Chief Executive Officer of the Company. Mr. Elson is
facilitating a transition of his responsibilities by providing
consulting services for a
90-day
period through August 2007 and by continuing to serve as a
member of our Board of Directors (the Board). The
Board approved a $25,000 monthly stipend to Mr. Elson
for such consulting services. Mr. Elson will not receive
non-employee director fees during the period he is providing
consulting services. We are continuing to search for a permanent
Chief Executive Officer.
Effective May 4, 2007, the Board appointed Don R. Kornstein
to serve as Chief Restructuring Officer responsible for the
oversight and implementation of our restructuring efforts and
exploration of strategic options for the Company.
Mr. Kornstein reports directly to the Companys Board,
of which he is also a member. The Board approved a
$50,000 monthly stipend to Mr. Kornstein in connection
with such services, in addition to the $50,000 monthly
stipend Mr. Kornstein currently receives for his service as
interim Chairman of the Board. Mr. Kornstein will not
receive non-employee director fees during the period he is
receiving either of these monthly stipends.
Effective June 5, 2007, the Board of Directors appointed
Michael A. Feder to serve as our Chief Operating Officer.
Mr. Feder is responsible for oversight and management of
our operations. Mr. Feder succeeds former Chief Operating
Officer John H. Wildman, who remains employed by us as Senior
Vice President, Sales and Interim Chief Marketing Officer. On
June 5, 2007, we entered into an Agreement for Interim
Management and Restructuring Services (the APS
Agreement) with AP Services, LLC, an affiliate of
AlixPartners, LLP (AlixPartners), pursuant to which
Mr. Feder serves as our Chief Operating Officer.
18
On June 13, 2007, we entered into a Confidential Settlement
Agreement and Mutual General Release with James A. McDonald, who
had been employed by us as our Senior Vice President and Chief
Marketing Officer since May 2, 2005, providing for the
termination of Mr. McDonalds employment with us
effective June 29, 2007.
In addition to the factors discussed in Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations, the following factors may affect our
future results. If any of the following risks actually occur,
our business, financial condition or operating results could be
materially adversely affected. In such case, the trading price
of our underlying common stock and public debt could decline and
investors may lose part or all of their investment. Additional
risks and uncertainties, not presently known to us or that we
currently deem immaterial, may also impair our business
operations. As a result, we cannot predict every risk factor,
nor can we assess the impact of all of the risk factors on our
business or the extent to which any factor, or combination of
factors, may impact our financial condition and results of
operations.
We may
not be able to obtain confirmation of the Plan of
Reorganization.
We may not receive the necessary votes in favor of the Plan of
Reorganization during the consent solicitation period. Even if
we receive the requisite consents from creditors, the Bankruptcy
Court must confirm the Plan of Reorganization. A number of
factors could result in the Bankruptcy Court not confirming the
Plan of Reorganization. Even if the Bankruptcy Court determined
that the balloting procedures and results were appropriate, the
Bankruptcy Court could still decline to confirm the Plan of
Reorganization if it found that any of the statutory
requirements for confirmation had not been met, including that
the terms of the Plan are fair and equitable to non-accepting
classes.
We
will not complete the solicitation of votes for the Plan of
Reorganization prior to expiration of applicable forbearance
agreements.
The Forbearance Agreement, the Senior Notes Forbearance
Agreement and the Senior Subordinated Notes Forbearance
Agreement terminate on July 13, 2007, while our prepackaged
bankruptcy solicitation is not scheduled to expire until
July 27, 2007. Upon termination of these forbearance
agreements, events of default will occur under the indentures
governing the Notes and under the New Facility. If such events
of default occur, the lenders under the New Facility and the
Trustee under the indentures or the requisite holders of Notes
could accelerate the related obligations and exercise any
available rights and remedies. While we hope to successfully
complete the prepetition solicitation and obtain confirmation of
the Plan of Reorganization before any enforcement action is
taken by the Lenders or the Trustee or holders of Notes, there
can be no assurance that this will occur on the timetable we
project. In such event, we would be forced to consider
commencing one or more traditional non-prepackaged
reorganization cases under Chapter 11 of the Bankruptcy
Code, which, as set forth below, would be more protracted and
expensive than a prepackaged case.
If we
do not receive confirmation of the Plan of Reorganization, we
may be forced to incur the additional time and expense of more
traditional bankruptcy proceedings.
We maintain a substantial amount of debt, the terms of which
require significant interest payments each year. In 2007, we
have substantial interest payments due on our Senior Notes in
July and interest and principal on the Senior Subordinated Notes
in October, and, in light of our current financial position, we
did not make the $14.8 million interest payment due on the
Senior Subordinated Notes in April 2007 and may not make other
such payments. Moreover, access to the liquidity that might
subsequently become available under the New Facility may be
limited in the future if decreased revenues or increased
expenses limit our ability to comply with the financial
covenants under the New Facility, which we are required to meet
monthly, as described below. In turn, any such events could
negatively impact us, including our relations with members,
vendors, and suppliers with whom we conduct or may seek to
conduct business.
If the Plan of Reorganization is not confirmed and consummated,
our capital structure will remain highly leveraged and we will
be unable to service our debt obligations or to cure the current
defaults thereunder.
19
Accordingly, we would be forced to evaluate other available
options, including filing one or more traditional,
non-prepackaged Chapter 11 cases, which would be more
protracted and, as a result, more expensive than a prepackaged
bankruptcy case.
Even
if we receive confirmation of the Plan of Reorganization we
cannot assure you that we will have sufficient liquidity to meet
all known and unforeseen requirements.
We reported losses from continuing operations for each of the
years 2002 through 2005, and modest income from continuing
operations in 2006 of $5.6 million. We expect to continue
to be affected by increased competition from well-financed
competitors and our own limited ability to invest in capital
improvements, including new fitness equipment, due to our
constrained liquidity and overall financial condition.
We require substantial cash flows to fund capital spending and
working capital requirements. Although our liquidity (cash, the
unused portions of the Delayed Draw Term Loan and the Revolver)
increased by $20.8 million, from $68.9 million to
$89.7 million, during 2006, the increased liquidity at
December 31, 2006 was primarily due to the
$29.1 million unused Delayed Draw Term Loan, which was
available at that date to fund capital expenditures and certain
improvements. Excluding the effect of the Delayed Draw Term
Loan, our liquidity declined $13.3 million in 2006, despite
the net proceeds available from the sale of certain clubs and
the sale/leaseback transactions in 2006, all of which
contributed net proceeds of approximately $33 million after
transaction costs, mandatory debt repayments and excluding funds
held in escrow. Furthermore, we drew $20.5 million under
the Revolver on February 14, 2007 and $19.0 million
under the Delayed Draw Term Loan on March 12, 2007, a
portion of which was used to finance an equipment purchase of
approximately $15.0 million. On June 1, 2007, we
received net proceeds of approximately $18 million from the
sale of substantially all of our health clubs in Canada. As of
June 15, 2007, availability under the facilities was
$1.5 million and liquidity was approximately
$61 million.
Our liquidity may be negatively affected by various items,
including declines in membership revenues, which result in
reduced levels of cash collections; changes in terms or other
requirements by vendors, including our credit card payment
processor; regulatory fines; penalties, settlements or adverse
results in securities or other litigations; future consent
payments to lenders or noteholders, if required; and unexpected
capital requirements. We have been required to provide
additional letters of credit and cash deposits to support
certain vendors, which has reduced our available liquidity.
Although management believes that we have adequate liquidity to
pay our ordinary course trade and employee obligations, there
can be no assurances that we will have sufficient liquidity to
meet our debt or other obligations as and when they become due
in the presence of the unfavorable scenarios described in this
Form 10-K.
If revenue and membership cash collection decreases compared to
2006 get larger, expenses increase or a default occurs under the
New Facility (whether directly or as a result of a cross-default
to other indebtedness) and we do not have or cannot obtain
sufficient liquidity to address any such scenario, we would be
unable to continue operating our business. Furthermore, pursuant
to the New Facility, our depository accounts are subject to
control agreements that give the lenders the right to dominion
over our cash on deposit in control accounts if an event of
default under the New Facility occurs and is continuing.
If we
do not obtain confirmation of the Plan of Reorganization and we
are unable to refinance or extend the maturity of our Senior
Subordinated Notes and as a result our New Facility terminates,
we will not have sufficient liquidity to meet our
obligations.
As of May 31, 2007, we had $235 million of outstanding
Senior Notes; $300 million of outstanding Senior
Subordinated Notes; and $282.2 million in obligations
outstanding under the New Facility, including
$205.9 million under the term loan portion of the New
Facility, $43.6 million under the Revolver (including
$20.1 million in letters of credit utilization), and
$33 million under the Delayed Draw Term Loan.
The Senior Subordinated Notes mature on October 15, 2007.
The New Facility will terminate on October 1, 2007 in the
event that the Senior Subordinated Notes have not been
refinanced on or before October 1, 2007. Further, we have
substantial interest payments due on the Senior Notes in July
2007 and interest and principal on the Senior Subordinated Notes
in October 2007.
We will not have sufficient liquidity if we do not receive the
necessary approvals of the Plan of Reorganization and we are
unable to refinance or restructure the Senior Subordinated Notes
and the New Facility terminates on
20
October 1, 2007 as a result. If this occurs, we will not
have access to cash through the Revolver and the Delayed Draw
Term Loan, and amounts outstanding under the New Facility will
become immediately due and payable. If the lenders do not extend
the maturity of the New Facility or we are unable to obtain
additional liquidity, we will not have sufficient liquidity to
operate our business and will be unable to satisfy the
obligations under the New Facility when due. If such events were
to occur, the trustee under the applicable indenture or the
requisite holders of Notes could accelerate the related
obligations and exercise any other available rights and
remedies, and we would be unable to satisfy those obligations.
In addition, we could determine not to make interest payments
under one or both classes of Notes when due, and the resulting
default would trigger cross-defaults under the other class of
Notes as well as under the New Facility. If such a default were
to occur, the lenders under the New Facility and the trustee
under the applicable indenture or the requisite holders of Notes
could accelerate the related obligations and exercise any other
available rights and remedies, and we would be unable to satisfy
those obligations. As described above, other events, such as
reduced levels of cash collections, changes in vendor terms,
penalties, or unexpected capital requirements, could also affect
our ability to meet our obligations and continue operating our
business.
Without
the protection of the Bankruptcy Court, our inability to comply
with covenants under the New Facility and indentures governing
our Senior Notes and Senior Subordinated Notes could cause our
lenders to accelerate our debt.
The New Facility requires us to meet certain minimum cash EBITDA
and minimum liquidity tests on a monthly basis, as such tests
are defined in the New Facility. If we are unable to comply with
these covenants, a default would occur under the New Facility,
which, if the indebtedness thereunder is accelerated, could also
result in a cross-default under the Indentures. Upon a default
under the New Facility, we would not have access to the Revolver
and the Delayed Draw Term Loan, and the lenders would be
entitled to exercise any available rights and remedies,
including their right to exercise dominion over our cash on
deposits in control accounts.
In addition, the New Facility and the Indentures contain
covenants that include, among other things, timely financial
reporting requirements and restrictions on incurring, making or
entering into additional indebtedness, liens, certain types of
payments (including common stock dividends and redemptions and
payments on existing indebtedness), investments, asset sale and
sale and leaseback transactions. We failed to comply with our
reporting covenants during 2004, 2005, and the first two
quarters of 2006. However, we obtained waivers of the reporting
covenants for those periods and filed the required reports
within the agreed extended period. As we did not file this
Form 10-K
by March 16, 2007, and as a result were unable to file our
quarterly report on
Form 10-Q
for the first quarter of 2007, we have been in default under the
financial reporting covenants under the Indentures. Pursuant to
the New Facility, the cross-default period is 28 days from
any financial reporting default notices received under the
Indentures. In addition, a default occurred under the New
Facility as a result of our failure to deliver certain financial
information, including audited financial statements, to the
lenders by April 2, 2007. On April 12 and May 14,
2007, we entered into forbearance agreements related to these
and other defaults with our lenders under the New Facility and
the requisite noteholders under the Indentures, respectively.
Refer to Item 1 Business Planned
Reorganization for a description of these agreements. There can
be no assurances that we will be able to comply with the
reporting covenants under the New Facility and the Indentures in
the future. If we do not receive the necessary approvals of the
Plan of Reorganization and we are unable to file our periodic
reports on a timely basis, and we cannot obtain additional
consents from our noteholders and lenders and an event of
default or cross-default occurs under the Indentures, the
lenders under the New Facility, the trustee under the applicable
indenture or the requisite holders of Notes could accelerate the
related obligations and exercise any other available rights and
remedies. In such an event, we would be unable to satisfy those
obligations.
Under
the terms of our Plan of Reorganization, we expect our existing
stockholders investment to be extinguished and intend to
become a private company.
If our Plan of Reorganization is confirmed and implemented,
existing common stock will be cancelled and current stockholders
will receive no distribution or other consideration in exchange
for their shares. In connection with the Plan of Reorganization,
we intend to deregister our existing securities under the
Exchange Act and become a private company upon our
emergence from Chapter 11. After such time, our obligation
to file reports and other information under the Exchange Act,
such as
Forms 10-K
and 10-Q,
will be terminated.
21
Our
liquidity position imposes significant risks to our
operations.
Our management has devoted significant time to addressing our
liquidity needs and will continue to do so. We cannot predict
whether we will receive the necessary consents to our Plan of
Reorganization. If we do receive the requisite consents and file
a Chapter 11 case, we cannot predict when the Plan of
Reorganization would be confirmed by the Bankruptcy Court or
when we would emerge from bankruptcy. If our bankruptcy is
protracted, our ability to continue operating in bankruptcy as a
going concern and to emerge from bankruptcy will depend upon
managements ability to balance time and effort dealing
with the reorganization and business operations at the same time
in a prolonged continuation of our Chapter 11 case.
In addition, the timing of our financial restructuring and Plan
of Reorganization may affect our relationships with our
creditors, members, suppliers and employees. We may not be able
to obtain additional financing, either as
debtor-in-possession
or otherwise, on commercially favorable terms. While we expect
to continue normal club operations during our financial
restructuring, member perception of our continued viability may
affect the rate of new memberships and membership renewals.
Because of the public disclosure of our liquidity constraints,
our ability to maintain normal credit terms with our suppliers
may become impaired. We may also have difficulty maintaining our
ability to attract, motivate and retain management and other key
employees. Failure to maintain any of these important
relationships could adversely affect our business, financial
condition and results of operations.
We may
not be able to attract or retain a sufficient number of members
to maintain or expand the business.
During each of the last two fiscal years, our number of members
declined. We had 3,593,000 members on December 31, 2004,
3,530,000 members on December 31, 2005, and 3,485,000
members on December 31, 2006. The profitability of the
Companys fitness centers is dependent, in large part, on
the Companys ability to originate and retain members.
Numerous factors have affected the Companys membership
origination and retention at its fitness centers and that could
lead to a further decline in member origination and retention
rates in the future, including the inability of the Company to
deliver quality service at a competitive cost, the presence of
direct and indirect competition in the areas where the
Companys fitness centers are located, delayed reinvestment
into aging clubs, and the publics level of interest in
fitness and general economic conditions. Additionally, our
announcements regarding the Companys plans to commence a
Chapter 11 bankruptcy case may cause public perception of
the Bally brand to deteriorate, and lead to further membership
declines. As a result of these factors, there can be no
assurance that the Companys membership levels will be
adequate to maintain the business or permit the expansion of its
operations. See Item 1 Business
Business Strategy.
We may
not be able to continue to compete effectively in the
future.
We expect the persisting increase in competition to continue to
have an adverse effect on our business, liquidity, financial
condition and results of operations. In addition, the
constraints on our liquidity have limited our ability to invest
our operating cash flow in improvements to our fitness centers
and address the aging of our facilities, which may affect our
ability to compete. Public perception of our declining
liquidity, financial condition and results of operations, in
particular with regard to our potential failure to meet our debt
obligations, may result in additional decreases in cash
membership revenues (particularly those associated with longer
term membership contracts) and increases in member attrition. In
addition, if liquidity problems persist, our suppliers could
refuse to provide key products and services in the future.
Continuing liquidity concerns could also negatively affect our
relationship with employees by decreasing productivity and
increasing turnover.
We may
lose the ability to deduct net operating loss
carryforwards.
Under federal income tax law, a corporation is generally
permitted to deduct from taxable income in any year net
operating losses carried forward from prior years. On
September 28, 2005, we underwent an ownership
change (a Section 382 Ownership Change)
for purposes of Section 382 of the Internal Revenue Code of
1986, as amended (Section 382).
As a result of the Section 382 Ownership Change in 2005,
the use of our federal tax loss carryforwards from periods
preceding the 2005 Section 382 Ownership Change is subject
to a significant annual limitation under Section 382. We
have net operating loss carryforwards of approximately
$790 million as of December 31, 2006, approximately
$115 million of which are not currently subject to any
annual limitation under Section 382. Our
22
ability to deduct net operating loss carryforwards could be
subject to further limitation if we were to undergo an
additional Section 382 Ownership Change. There can be no
assurances that future restructuring actions by us (including
through a reorganization under Chapter 11) or actions
by third parties, including dispositions of existing
shareholdings, will not trigger a Section 382 Ownership
Change resulting in a significant limitation on our ability to
deduct net operating loss carryforwards in the future.
In connection with confidentiality arrangements between us and
each of Liberation Investment Group, LLC and Pardus European
Special Opportunities Master Fund LP, we have provided each
such stockholder with certain certifications, which enabled
trading in our securities by such stockholders as of the close
of business on March 15, 2007. Any significant trading
activity in our common stock by these stockholders could trigger
a Section 382 Ownership Change.
Non-compliance
with Payment Card Industry Data Standards could adversely affect
our business.
Similar to others in the retail industry, we are currently not
fully compliant with new Payment Card Industry Data Security
Standards. We are working cooperatively with our third party
assessor, our payment processor and our primary credit card
companies to become compliant with these standards and analogous
state law requirements. In late 2007, we will become subject to
monthly fines, which will continue to be assessed until we are
fully compliant. Further, we face the possible loss of our
ability to accept credit cards for the payment of memberships
and/or the
sale of products and services until we are fully compliant. The
inability to accept credit cards would have a material adverse
impact on our business and results of operations.
Weaknesses
in our internal controls and procedures could have a material
adverse effect on us.
Management is responsible for establishing and maintaining
adequate internal control over financial reporting. Our internal
control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
in accordance with U.S. generally accepted accounting
principles (GAAP). In making its assessment of
internal control over financial reporting as of
December 31, 2006, management used the criteria described
in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. A material weakness is a control
deficiency, or combination of control deficiencies that results
in a more than remote likelihood a material misstatement of the
annual or interim financial statements will not be prevented or
detected. These material weaknesses contributed to the
restatements of our consolidated financial statements for 2002
and 2003, the adjustment to accumulated deficit as of
December 31, 2002, and the restatements of the 2005
condensed quarterly financial statements. We cannot assure you
further restatements or adjustments may not be required in the
future.
Management determined that 11 material weaknesses in our
internal control over financial reporting existed as of
December 31, 2006. See Item 9A Controls
and Procedures for a description of these material weaknesses
and the plan for remediation.
Due to the existence of these material weaknesses, management
concluded we did not maintain effective internal control over
financial reporting as of December 31, 2006, based on the
criteria in the Internal Control Integrated
Framework. Further, the material weaknesses identified
resulted in an adverse opinion by our independent registered
public accounting firm on the effectiveness of our internal
control over financial reporting.
We have developed a remediation plan and have begun to implement
remediation measures, each of which is designed to remediate the
material weaknesses in our internal controls over the next two
years (See Item 9A Controls and Procedures). We
cannot assure you as to when the remediation plan will be fully
implemented, nor can we assure you that additional material
weaknesses will not be identified by our management or
independent accountants in the future. We have incurred and will
continue to incur substantial expenses relating to the
remediation of material weaknesses in our internal controls
identified in our management assessment. These expenses may
materially and adversely affect our financial condition, results
of operations and cash flows. In addition, even after the
remedial measures discussed in Item 9A Controls
and Procedures are fully implemented, our internal controls may
not prevent all potential error and fraud, because any control
system, no matter how well designed, can only provide reasonable
and not absolute assurance that the objectives of the control
system will be achieved.
23
Any
adverse outcome of investigations currently being conducted by
the SEC or the U.S. Attorneys Office could have a material
adverse impact on us, on the trading prices of our securities
and on our ability to access the capital markets.
We are cooperating with investigations currently being conducted
by the SEC and the U.S. Attorneys Office. We cannot
currently predict the outcome of either of these investigations,
which could be material. Nor can we predict whether any
additional investigation(s) will be commenced or, if so, the
impact or outcome of any such additional investigation(s). Until
these existing investigations and any additional investigations
that may arise in connection with the historical conduct of the
business are resolved, the trading prices of our securities may
be adversely affected and it may be more difficult for us to
raise additional capital or incur indebtedness or other
obligations. If an unfavorable result occurs in any such
investigation, we could be required to pay civil
and/or
criminal fines or penalties, or be subjected to other types of
sanctions, which could have a material adverse effect on our
operations. Fines, penalties or settlements could also result in
a default under our New Facility. The trading prices for our
securities or our ability to access the capital markets and our
business and financial condition could be further materially
adversely affected.
The
impact of ongoing purported securities class action, derivative
and insurance-related litigation may be material. We are also
subject to the risk of additional litigation and regulatory
action in connection with the restatement of our consolidated
financial statements. The potential liability from any such
litigation or regulatory action could adversely affect our
business.
In 2004, we restated our consolidated financial statements for
the fiscal year ended December 31, 2003 and 2002. In
connection with these restatements, we and certain of our former
officers and directors have been named as defendants in a number
of lawsuits, including purported class action and stockholder
derivative suits and suits by individuals from whom we purchased
health club businesses with shares of our common stock. We
cannot currently predict the impact or outcome of these
litigations, which could be material. The continuation and
outcome of these lawsuits and related ongoing investigations, as
well as the initiation of similar suits and investigations, may
have a material adverse impact on our results of operations and
financial condition.
In addition, we were named as defendants in actions by several
insurers to rescind
and/or to
obtain a declaration that no coverage is afforded by certain of
our excess directors and officers liability insurance policies
for the years in which the class action and derivative claims
were made. We believe that these actions are without merit and
have vigorously defended them and will continue to do so. The
Court granted our motions to dismiss two such lawsuits in 2006
and denied a motion in a similar suit in 2007. Despite the
dismissal of its case, we have not received any payments from
RLI Insurance Company for invoices that we have tendered in
respect of outstanding claims. Moreover, we cannot currently
predict the impact or outcome of the remaining outstanding
litigation, nor can we ensure that we will be able to maintain
both our primary and excess directors and officers liability
insurance policies, the loss of either of which could be
material. The continuation and outcome of these lawsuits, as
well as the initiation of similar suits, may have a material
adverse impact on our results of operations and financial
condition.
As a result of the restatements of our consolidated financial
statements described herein, we could become subject to
additional purported class action, derivative or other
securities litigation. As of the date hereof, we are not aware
of any additional litigation or investigation having been
commenced against us related to these matters, but we cannot
predict whether any such litigation or regulatory investigation
will be commenced or, if it is, the outcome of any such
litigation or investigation. The initiation of any additional
securities litigation or investigations, together with the
lawsuits and investigations described above, may also harm our
business and financial condition.
Until the existing litigation and regulatory investigations, any
additional litigation or regulatory investigation, and any
claims or issues that may arise in connection with the
historical conduct of the business are resolved, it may be more
difficult for us to raise additional capital or incur
indebtedness or other obligations. If an unfavorable result
occurred in any such action, our business and financial
condition could be further adversely affected.
For a further description of the nature and status of these
legal proceedings, see Item 3 Legal Proceedings.
24
We are
subject to various other litigation risks, including class
actions that could have a material adverse impact on
us.
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 operations. 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.
From time to time we are party to various lawsuits, claims and
other legal proceedings that arise in the ordinary course of
business, including claims that may be asserted against us by
members, their guests or our employees. We cannot assure you
that we will be able to maintain our general liability insurance
on acceptable terms in the future or that such insurance will
provide adequate coverage against potential claims.
We are
subject to extensive government regulation. Changes in these
regulations could have a negative effect on our financial
condition and operating results.
Our operations and business practices are subject to federal,
state and local government regulations in the various
jurisdictions where our fitness centers are located and where
our nutritional products are sold, including:
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general rules and regulations of the FTC, state and local
consumer protection agencies and state statutes that prescribe
provisions of membership contracts and that govern the
advertising, sale, financing and collection of membership fees
and dues;
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state and federal wage and labor laws;
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state and local health regulations; and
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federal regulation of health and nutritional supplements.
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We are also a party to several state and federal consent orders.
These consent orders essentially require continued compliance
with applicable laws and require us to refrain from activities
not in compliance with such applicable laws. From time to time,
we make minor adjustments to our operating procedures to remain
in compliance with applicable laws and we believe our operations
are in material compliance with all applicable statutes, rules
and regulations. Our failure to comply with these statutes,
rules and regulations may result in fines or penalties.
Penalties may include regulatory or judicial orders enjoining or
curtailing aspects of our operations. It is difficult to predict
the future development of such laws or regulations, and although
we are not aware of any material proposed changes, any changes
in such laws could have a material adverse effect on our
financial condition and results of operations.
Our
success depends in significant part upon the continuing service
of management and our ability to attract and retain a sufficient
number of qualified personnel to meet our business
needs.
Our success depends in significant part upon the continuing
service and capabilities of our management team. The failure to
retain management could have a material adverse effect on our
business. Our success will be dependent on our continued ability
to attract, retain and motivate highly skilled employees. On
August 11, 2006, we announced the departure of Paul
A. Toback as our Chairman, President and Chief Executive
Officer, and the appointment of Don R. Kornstein as interim
Chairman and Barry R. Elson as Acting Chief Executive Officer.
Effective May 4, 2007, the Board appointed
Mr. Kornstein to serve as Chief Restructuring Officer
responsible for the oversight and implementation of our
restructuring efforts and exploration of strategic options.
Effective May 31, 2007, Mr. Elson resigned as Acting
Chief Executive Officer. Mr. Elson will continue to serve
in a consulting capacity through August 31, 2007.
Messrs. Kornstein and Elson remain as members of the Board
of Directors. The Board of Directors is currently conducting a
search for a permanent Chief Executive Officer. We cannot assure
you that we will be able to identify and hire a permanent Chief
Executive Officer. Even if we are successful at finding and
hiring a suitable Chief Executive Officer, leadership
transitions can be inherently difficult to manage and may cause
disruption to our business or some turnover in our workforce or
management team.
25
We
will continue to incur an indeterminable amount of expense for
support of external investigations and the development and
implementation of improved internal controls and
procedures.
The external investigations into our business practices have
extended over a number of years and we are uncertain when the
investigations will be completed. For as long as the
investigations are ongoing, we will continue to incur
incremental legal and other expenses and our management
personnel and staff will be required to devote time gathering
information and responding to questions raised by persons
conducting the investigations. In addition, remediating our
inadequate internal controls has required substantial time and
effort on the part of our personnel and will continue to do so.
We cannot predict the ultimate cost of the time we will need to
devote to the investigations into and remediation of our
internal control procedures.
Our
trademarks and trade names may be misappropriated or subject to
claims of infringement.
We attempt to protect our trademarks and trade names through a
combination of trademark and copyright laws, as well as
licensing agreements and third-party nondisclosure agreements.
Our failure to obtain or maintain adequate protection of our
intellectual property rights for any reason could have a
material adverse effect on our business, results of operations
and financial condition.
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Item 1B.
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Unresolved
Staff Comments
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None.
Our executive office is located in leased office space
(approximately 70,000 square feet) in an office park in
Chicago, Illinois. We also lease space in Norwalk, California
for our national service center, and Towson, Maryland primarily
for our information systems.
The following table sets forth information concerning the
fitness centers we operate:
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Bally
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Upscale
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Total Fitness
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Branded
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Clubs
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Clubs
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Total
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Total Clubs as of
December 31, 2003
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359
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|
58
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417
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Clubs opened during 2004
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6
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0
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6
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Clubs acquired during 2004
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1
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0
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1
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Clubs closed during 2004
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(7
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)
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(1
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)
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(8
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)
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Converted
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4
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(4
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)
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0
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Total Clubs as of
December 31, 2004
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363
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53
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416
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Clubs opened during 2005
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1
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0
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1
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Clubs closed during 2005
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(7
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)
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(1
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)
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(8
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)
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Converted
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2
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(2
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)
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0
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Total Clubs as of
December 31, 2005
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359
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50
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409
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Clubs opened during 2006
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2
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0
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2
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Clubs closed during 2006
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(5
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)
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(1
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)
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(6
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)
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Clubs sold during 2006
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(4
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)
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(26
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)
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(30
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)
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Converted
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5
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(5
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)
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0
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Total Clubs as of
December 31, 2006
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357
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18
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375
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*
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Clubs operated as of
December 31, 2006
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Owned
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41
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1
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42
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Leased
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316
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17
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333
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Total
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357
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18
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375
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* |
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As of June 1, 2007, we sold 15 of our 16 Canadian clubs. |
26
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Gross square footage as of
December 31:
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2004
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12,667,649
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2005
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12,565,209
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2006
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11,827,536
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The leases for fitness centers we have entered into in the last
five years generally provide for an initial term of
15 years. Most leases include at least one five-year option
to renew and often include two or more such options.
Substantially all of our properties are subject to liens under
the New Facility or other mortgages.
The table below lists the number of clubs we operated at
December 31, 2006 in the top 25 U.S. markets (based on
TV households, as ranked by Nielsen Media Research) and Toronto,
Canada:
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Rank
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Designated Market Area
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Total Clubs
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1
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New York
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35
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2
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Los Angeles
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42
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3
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Chicago
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27
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4
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Philadelphia
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13
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5
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San Francisco-Oakland-San Jose
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13
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6
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Dallas-Ft. Worth
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16
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7
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Boston
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10
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8
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Washington D.C.
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12
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9
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Atlanta
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8
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10
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Houston
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15
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11
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Detroit
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14
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12
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Seattle-Tacoma
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14
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13
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Tampa-St. Petersburg
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4
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14
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Phoenix
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8
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15
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Minneapolis-St. Paul
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7
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16
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Miami-Ft. Lauderdale
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13
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17
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Cleveland
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9
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18
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Denver
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7
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19
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Orlando-Daytona
Beach
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5
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20
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Sacramento-Stockton
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0
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21
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St. Louis
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4
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22
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Pittsburgh
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4
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23
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Portland, OR
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12
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24
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Baltimore
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5
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25
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Indianapolis
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3
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Toronto, Canada
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16
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*
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Sub-total
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316
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All other markets
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59
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Total clubs
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375
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* |
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Sold 15 clubs as of June 1, 2007. |
27
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Item 3.
|
Legal
Proceedings
|
Putative
Securities Class Actions
Between May and July 2004, ten putative securities class
actions, now consolidated and designated In re Bally Total
Fitness Securities Litigation were filed in the United
States District Court for the Northern District of Illinois
against the Company and certain of its former and current
officers and directors. Each of these substantially similar
lawsuits alleged that the defendants violated
Sections 10(b)
and/or 20(a)
of the Exchange Act, as well as the associated
Rule 10b-5,
in connection with the Companys proposed restatement.
On March 15, 2005, the Court appointed a lead plaintiff and
on May 23, 2005 the Court appointed lead plaintiffs
counsel. By stipulation of the parties, the consolidated lawsuit
was stayed pending restatement of the Companys financial
statements in November 2005. On December 30, 2005,
plaintiffs filed an amended consolidated complaint, asserting
claims on behalf of a putative class of persons who purchased
Bally stock between August 3, 1999 and April 28, 2004,
and adding the Companys former outside audit firm,
Ernst & Young LLP as an additional defendant. On
July 12, 2006, the Court granted defendants motions
to dismiss the amended consolidated complaint and dismissed the
complaint in its entirety, without prejudice to plaintiffs
filing an amended complaint on or before August 14, 2006.
An amended complaint was filed on August 14, 2006.
Defendants filed motions to dismiss the amended complaint on
September 28, 2006. On February 20, 2007 the Court
issued a Memorandum Opinion and Order dismissing claims against
all defendants with prejudice. Plaintiffs filed a Notice of
Appeal on March 23, 2007. On April 18, 2007, the Court
granted Plaintiffs unopposed Motion to Suspend Briefing,
suspending briefing pending a ruling by the United States
Supreme Court regarding the Seventh Circuits standard for
pleading scienter in Makor Issues & Rights v.
Tellabs and directing the parties to file position
statements within 14 days of the issuance of the Supreme
Courts decision. The Supreme Courts decision was
issued on June 21, 2007. It is not yet possible to
determine the ultimate outcome of this action.
Stockholder
Derivative Lawsuits in Illinois State Court
On June 8, 2004, two stockholder derivative lawsuits were
filed in the Circuit Court of Cook County, Illinois, by two
Bally stockholders, David Schacter and James Berra, purportedly
on behalf of the Company against Paul Toback, James McAnally,
John Rogers, Jr., Lee Hillman, John Dwyer, J. Kenneth
Looloian, Stephen Swid, George Aronoff, Martin Franklin and Liza
Walsh, who are former officers
and/or
directors. These lawsuits allege claims for breaches of
fiduciary duty against those individuals in connection with the
Companys restatement regarding the timing of recognition
of prepaid dues. The two actions were consolidated on
January 12, 2005. By stipulation of the parties, the
consolidated lawsuit was stayed pending restatement of the
Companys financial statements in November 2005. An amended
consolidated complaint was filed on February 27, 2006. The
Company filed a motion to dismiss on May 20, 2006, directed
solely to the issue of whether plaintiffs have adequately
alleged demand futility as required by applicable Delaware law
in order to establish standing to sue derivatively. Shortly
before oral argument on that motion, the parties executed a
Memorandum of Understanding memorializing a settlement in
principle of all claims. On May 18, 2007, the Court entered
a Preliminary Order provisionally approving the Stipulation of
Settlement subject to notice and a hearing on June 19,
2007. On June 19, 2007, the Court entered a final order
approving the parties settlement and dismissing the action
with prejudice.
Stockholder
Derivative Lawsuits in Illinois Federal Court
On April 5, 2005, a stockholder derivative lawsuit was
filed in the United States District Court for the Northern
District of Illinois, purportedly on behalf of the Company
against certain former officers and directors of the Company by
another of the Companys stockholders, Albert Said. This
lawsuit asserts claims for breaches of fiduciary duty in failing
to supervise properly its financial and corporate affairs and
accounting practices. Plaintiff also requests restitution and
disgorgement of bonuses and trading proceeds under Delaware law
and the Sarbanes-Oxley Act of 2002. By stipulation of the
parties, the lawsuit was stayed pending restatement of the
Companys financial statements in November 2005. An amended
consolidated complaint was filed on February 27, 2006. The
Company filed a motion to dismiss on May 30, 2006, directed
solely to the issues of whether the court has subject matter
jurisdiction and whether plaintiffs have adequately alleged
demand futility as required by applicable Delaware law in order
to establish standing to sue derivatively. On March 27,
2007, the Court entered an order
28
indicating its intention to convert the Companys motion to
a motion for summary judgment and requiring the Company to file
a new motion and brief, which the Company did on April 13,
2007. That motion is currently pending. On June 18, 2007,
the Company and plaintiffs reached an agreement in principle to
resolve the action. It is not yet possible to determine the
ultimate outcome of this action.
Individual
Securities Action in Illinois
On March 15, 2006, a lawsuit captioned Levine v. Bally
Total Fitness Holding Corporation, et al., Case No. 06
C 1437 was filed in the United States District Court for the
Northern District of Illinois against the Company, certain of
its former officers and directors, and its former outside audit
firm, Ernst & Young, LLP. Plaintiffs complaint
alleged violations of Sections 10(b), 18 and 20(a) of the
Exchange Act, SEC
Rule 10b-5,
and the Illinois Consumer Fraud and Deceptive Practices Act, as
well common law fraud in connection with the Companys
restatement. The Court found this action related to the
consolidated securities class action discussed above, and
transferred it to the judge before whom the class action cases
were pending. After defendants filed motions to dismiss the
complaint and after the Court granted motions to dismiss the
class action cases, plaintiff moved for leave to amend its
complaint. On July 19, 2006, the Court denied
plaintiffs motion and ordered completion of briefings on
defendants motions to dismiss on statute of limitations
issues. On September 29, 2006, the Court granted
defendants motion to dismiss plaintiffs
Section 18 claim as untimely, denied the motion as to
Sections 10(b) and 20(a), dismissed Ernst &
Young, LLP as a defendant and granted plaintiff leave to amend
his complaint. An amended complaint was filed on
November 3, 2006. The Company filed a motion to dismiss the
amended complaint on January 5, 2007. On April 2,
2007, the Court granted the Companys motion and dismissed
the case with prejudice. Plaintiff did not file a timely Notice
of Appeal of this dismissal, but instead filed a new action in
the Circuit Court of Cook County, Illinois, Case No. 07 L
4280, asserting only claims for common law fraud and under the
Illinois Consumer Fraud and Deceptive Practices Act. The Company
has not yet answered the complaint. It is not yet possible to
determine the ultimate outcome of this action.
Lawsuit
in Oregon
On September 17, 2004, a lawsuit captioned Jack Garrison
and Deane Garrison v. Bally Total Fitness Holding
Corporation, Lee S. Hillman and John W. Dwyer, CV 04 1331,
was filed in the United States District Court for the District
of Oregon. The plaintiffs alleged that the defendants violated
certain provisions of the Oregon Securities Act, breached the
contract of sale, and committed common-law fraud in connection
with the acquisition of the plaintiffs business in
exchange for shares of Bally stock.
On April 7, 2005, all defendants joined in a motion to
dismiss two of the four counts of plaintiffs complaint,
including plaintiffs claims of breach of contract and
fraud. On November 28, 2005, the District Court granted the
motion to dismiss plaintiffs claims for breach of contract
and fraud against all parties. Motions for summary judgment were
filed on April 21, 2006. On July 27, 2006, the
presiding Magistrate Judge issued proposed Findings and
Conclusions recommending that summary judgment be entered in
favor of all defendants on all remaining claims. The parties
thereafter reached agreement under which plaintiffs would
dismiss their case without appealing the Magistrate Judges
recommendation. The parties executed a final Settlement
Agreement on October 16, 2006, and final judgment
dismissing the action with prejudice was entered on
November 26, 2006.
Lawsuit
in Massachusetts
On March 11, 2005, plaintiffs filed a complaint in the
matter of Fit Tech Inc., et al. v. Bally Total Fitness
Holding Corporation, et al., Case
No. 05-CV-10471
MEL, pending in the United States District Court for the
District of Massachusetts. This action is related to an earlier
action brought in 2003 by the same plaintiffs in the same court
alleging breach of contract and violation of certain earn-out
provisions of an agreement whereby the Company acquired certain
fitness centers from plaintiffs in return for shares of Bally
stock. The 2005 complaint asserted new claims against the
Company for violation of state and federal securities laws on
the basis of allegations that misrepresentations in Ballys
financial statements resulted in Ballys stock price to be
artificially inflated at the
29
time of the Fit-Tech transaction. Plaintiffs also asserted
additional claims for breach of contract and common law claims.
Certain employment disputes between the parties to this
litigation are also subject to arbitration in Chicago.
Plaintiffs claims are brought against the Company and its
former Chairman and CEO Paul Toback, as well as former Chairman
and CEO Lee Hillman and former CFO John Dwyer. Plaintiffs have
voluntarily dismissed all claims under the federal securities
laws, leaving breach of contract, common law and state
securities claims pending. On April 4, 2006, the Court
granted motions to dismiss all claims against defendants Hillman
and Dwyer for lack of jurisdiction. All remaining claims were
dismissed with prejudice pursuant to a confidential stipulation
of settlement, which was filed on November 3, 2006.
Securities
and Exchange Commission Investigation
In April 2004, the Division of Enforcement of the SEC commenced
an investigation in connection with the Companys
restatement. The Company continues to fully cooperate in the
ongoing SEC investigation. It is not yet possible to determine
the ultimate outcome of this investigation.
Department
of Justice Investigation
In February 2005, the United States Justice Department commenced
a criminal investigation in connection with the Companys
restatement. The investigation is being conducted by the United
States Attorney for the Northern District of Illinois. The
Company is fully cooperating with the investigation. It is not
yet possible to determine the ultimate outcome of this
investigation.
Demand
Letters
On December 27, 2004, the Company received a stockholder
demand that it bring actions or seek other remedies against
parties potentially responsible for the Companys
accounting errors. The Board appointed a Special Demand
Evaluation Committee consisting of three independent directors
to evaluate that request. On June 21, 2005, the Company
received a second, substantially similar, stockholder demand,
which the Special Demand Evaluation Committee also evaluated
along with the other stockholder demand. The Special Demand
Evaluation Committee retained independent counsel,
Sidley & Austin LLP, to assist it in evaluating the
demands.
On March 10, 2006, the Companys Board of Directors
accepted the recommendation of its Special Demand Evaluation
Committee that no further action be taken at this time against
any current or former officers or directors of the Company
regarding the matters raised in the two shareholder demand
letters. The Committees recommendation, based on the
report of its independent counsel and adopted by the Board of
Directors, was based on consideration of a variety of factors,
including (i) the nature and strength of the Companys
potential claims; (ii) defenses available to the officers
and directors; (iii) potential damages and resources
available to satisfy any damages award; (iv) the
Companys indemnification and advancement obligations under
its charter, bylaws, and individual agreements;
(v) potential expenses to the Company and potential
counterclaims arising from the pursuit of potential civil
claims; and (vi) business disruption and employee morale
issues.
Insurance
Lawsuits
On November 10, 2005, two of the Companys excess
directors and officers liability insurance providers filed a
complaint captioned Travelers Indemnity Company and ACE
American Insurance Company v. Bally Total Fitness Holding
Corporation; Holiday Universal, Inc. n/k/a Bally Total Fitness
of the Mid-Atlantic, Inc; George N. Aronoff; Paul Toback; John
W. Dwyer; Lee S. Hillman; Stephen C. Swid; James McAnally; J.
Kenneth Looloian; Liza M. Walsh; Annie P. Lewis, as Executor of
the Estate of Aubrey C. Lewis, Deceased; Theodore Noncek; Geoff
Scheitlin; John H. Wildman; John W. Rogers, Jr.; and Martin
E. Franklin, Case No. 05C 6441, in the United States
District Court for the Northern District of Illinois. The
complaint alleged that financial information included in the
30
Companys applications for directors and officers liability
insurance in the
2002-2004
policy years was materially false and misleading. Plaintiff
requested the Court to declare two of the Companys 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 Companys
claims. Firemans Fund, another excess carrier, was allowed to
join in the case on January 4, 2006. Defendants filed
motions to dismiss or stay the proceedings on February 10,
2006. The motion to dismiss was granted on September 11,
2006.
On April 6, 2006, an additional excess directors and
officers liability insurance provider filed a complaint
captioned RLI Insurance Company v. Bally Total Fitness
Holding Corporation; Holiday Universal, Inc.; George N. Aronoff;
Paul Toback; John H. Dwyer; Lee S. Hillman; Stephen C. Swid;
James McAnally; J. Kenneth Looloian; Liza M. Walsh; Annie P.
Lewis, as Executor of the Estate of Aubrey C. Lewis, Deceased;
Theodore Noncek; Geoff Scheitlin; John H. Wildman; John W.
Rogers, Jr.; and Martin E. Franklin, Case
No. 06CH06892 in the circuit court of Cook County,
Illinois, County Department Chancery Division. The complaint
alleged that financial information included in the
Companys applications for directors and officers liability
insurance in the
2002-2003
policy year was materially false and misleading. Plaintiff
requested the Court to declare the Companys excess policy
for the year
2002-2003
void, voidable
and/or
subject to rescission. Defendants filed motions to dismiss or
stay the proceedings on July 10, 2006, and a motion for
advancement of defense costs and to compel interim funding on
October 20, 2006. On November 16, 2006, the Court
granted Defendants motion to dismiss.
On August 22, 2006, the Companys primary directors
and officers insurance provider for the policy years
2001-2002
and
2002-2003
filed a complaint captioned Great American Insurance
Company v. Bally Total Fitness Holding Corporation,
Case No. 06 C 4554 in the United States District Court
for the Northern District of Illinois. The complaint alleged
that financial information included in the Companys
applications for directors and officers liability insurance in
the
2001-2002
and
2002-2003
policy years was materially false and misleading. Plaintiff
requested the Court to declare the Companys primary
policies for those years void ab initio and rescinded,
and to award plaintiff all sums that plaintiff has paid pursuant
to an Interim Funding and Non-Waiver Agreement between the
parties, which consists of the $10 million limit of the
2002-2003
primary policy and additional amounts paid pursuant to the
2001-2002
primary policy. The Company filed a motion to dismiss or stay
the proceedings on October 12, 2006. On April 26,
2007, the Court denied Defendants motion. On June 8,
2007, plaintiff filed a motion for summary judgment, which
motion remains pending. On June 11, 2007, the Company filed
its answer and counterclaims to Great Americans complaint
for rescission, as well as a third-party complaint against RLI
Insurance Company and other third party defendants. It is not
yet possible to determine the ultimate outcome of the insurance
litigation.
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 should not have a material adverse
effect on the financial condition or results of operations of
the Company. In addition, from time to time, customer complaints
are investigated by various governmental bodies. In the opinion
of management, none of these other complaints or investigations
currently pending should have a material adverse effect on our
financial condition or results of operations.
In addition, 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 operations.
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. See Item 1 Business
Government Regulation and Item 1A Risk Factors.
31
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
Annual
Meeting of Stockholders held on December 19, 2006
At the Annual Meeting of Stockholders held December 19,
2006, Don R. Kornstein was reelected as a director of the
Company. Eric Langshur, Barry R. Elson and Charles J. Burdick
continued as directors of the Company after the meeting.
In addition, the Companys proposal to adopt the 2007
Omnibus Equity Compensation Plan was approved and the proposal
to ratify the appointment of KPMG LLP as independent auditor was
approved.
The votes were as follows, with holders of
35,710,851 shares of Common Stock represented in person or
by proxy out of 41,286,512 shares outstanding on the record
date:
|
|
|
|
|
|
|
|
|
Nominee
|
|
Votes Cast For
|
|
Votes Withheld
|
|
Don R. Kornstein
|
|
|
35,206,915
|
|
|
|
503,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposal
|
|
For
|
|
Against
|
|
Abstain
|
|
2007 Omnibus Equity Compensation
Plan
|
|
|
21,446,772
|
|
|
|
958,729
|
|
|
|
71,682
|
|
KMPG LLP as Independent Auditor
|
|
|
35,289,120
|
|
|
|
359,346
|
|
|
|
62,385
|
|
32
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
As of March 31, 2007, our common stock was traded on the
NYSE under the symbol BFT. The following table sets
forth, for the periods indicated, the high and low quarterly
sales prices for a share of our common stock as reported on the
NYSE through May 1, 2007, and on an over-the-counter basis
thereafter.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2005:
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
4.72
|
|
|
$
|
3.06
|
|
Second quarter
|
|
|
3.85
|
|
|
|
2.86
|
|
Third quarter
|
|
|
4.73
|
|
|
|
2.90
|
|
Fourth quarter
|
|
|
7.95
|
|
|
|
4.40
|
|
2006:
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
9.92
|
|
|
$
|
6.14
|
|
Second quarter
|
|
|
9.61
|
|
|
|
6.75
|
|
Third quarter
|
|
|
7.15
|
|
|
|
1.46
|
|
Fourth quarter
|
|
|
2.99
|
|
|
|
1.52
|
|
2007:
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
2.50
|
|
|
$
|
0.52
|
|
Second quarter (through
June 15, 2007)
|
|
|
1.25
|
|
|
|
0.27
|
|
As set forth above in Recent Events, the NYSE has
delisted our common stock. Our common stock continues to be
traded on an over-the-counter basis under the symbol
BFTH and market maker quotations are displayed on
the Pink Sheets Electronic Quotation Service.
As of May 31, 2007, there were 6,846 holders of record of
our common stock.
We have not paid a cash dividend on our common stock since we
became a public company in January 1996 and do not anticipate
paying dividends in the foreseeable future. The terms of our New
Facility restrict us from paying dividends without the consent
of the lenders during the term of the agreement. In addition,
the indentures for our Senior Notes and Senior Subordinated
Notes generally limit dividends paid by us to the aggregate of
50% of consolidated net income, as defined, earned after
January 1, 1998 and the net proceeds to us from any stock
offerings and the exercise of stock options and warrants.
On October 18, 2005, our Board of Directors adopted a
Stockholder Rights Plan (Rights Plan), authorized a
new class of 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, entitled 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 terminated pursuant to its terms on
July 15, 2006.
Repurchases
of Common Stock
We do not regularly repurchase shares nor do we have a share
repurchase program. Furthermore, the terms of our New Facility
generally do not allow us to repurchase common stock without
lender approval. We do not expect to repurchase any of our
common stock in the foreseeable future.
33
Securities
Authorized for Issuance Under Equity Compensation
Plans
The information required by Item 201(d) of
Regulation S-K
is provided under Item 12 Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters Securities Authorized for Issuance Under
Equity Compensation Plans.
COMPARISON
OF 65 MONTH CUMULATIVE TOTAL RETURN*
Among Bally Total Fitness Holding Corporation, The S&P
500 Index
And The Russell 2000 Consumer Discretionary Index
* $100 invested on 12/31/01 in stock or index-including
reinvestment of dividends.
Fiscal year ending December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/01
|
|
|
12/02
|
|
|
12/03
|
|
|
12/04
|
|
|
12/05
|
|
|
12/06
|
|
|
5/07
|
Bally Total Fitness Holding
Corporation
|
|
|
|
100.00
|
|
|
|
|
32.88
|
|
|
|
|
32.47
|
|
|
|
|
19.67
|
|
|
|
|
29.13
|
|
|
|
|
11.36
|
|
|
|
|
3.71
|
|
S&P 500
|
|
|
|
100.00
|
|
|
|
|
77.90
|
|
|
|
|
100.24
|
|
|
|
|
111.15
|
|
|
|
|
116.61
|
|
|
|
|
135.03
|
|
|
|
|
146.87
|
|
Russell 2000 Consumer
Discretionary
|
|
|
|
100.00
|
|
|
|
|
81.69
|
|
|
|
|
116.04
|
|
|
|
|
138.45
|
|
|
|
|
139.50
|
|
|
|
|
160.53
|
|
|
|
|
176.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
Item 6.
|
Selected
Financial Data
|
The information set forth below should be considered in the
context of the following overall trends and factors:
|
|
|
|
|
The Companys financial and liquidity positions have been
deteriorating and are expected to continue to deteriorate. This
situation reflects several factors discussed in this
Form 10-K.
|
|
|
|
The Company does not have sufficient operating cash flows to
meet its expected needs for working capital, capital investment
in operations, interest expense and debt repayments through
December 31, 2007. The Company did not make the interest
payment of $14.8 million due April 16, 2007 on its
Senior Subordinated Notes; the $300 million principal
obligation matures in October 2007.
|
|
|
|
The Company reported losses from continuing operations for the
years 2002 through 2005. Income from continuing operations for
2006 was a modest $5.6 million. Impairment charges in 2006
associated with goodwill and long-lived assets were
$39.8 million and were $62.9 million in the
three-year
period 2004 through 2006. The primary drivers of these
impairment charges are the declining projections of future
operating cash flow.
|
|
|
|
The Companys revenue recognition policies require the
deferral of a majority of membership cash payments to be
recognized in subsequent periods over the expected membership
term of members. As a result, revenue recognition does not
reflect current cash collection trends. Additionally, the level
of our deferred revenue is highly sensitive to changes in
estimated membership term. Negative attrition expectations
result in downward adjustments of deferred revenue which are
reflected in larger amounts of recognized revenue. The
Companys change in estimated term length effected in the
fourth quarter of 2006 resulted in a reduction of deferred
revenue of $71.0 million and increased reported revenue by
the same amount.
|
|
|
|
The Companys total membership cash collections declined in
each quarter of 2006 when compared to the prior year levels.
Total 2006 membership cash collections were $757.6 million,
down $25.4 million from 2005 collections of
$783.0 million. Approximately $10.9 million (43%) of
the year-over-year decline in total membership cash collections
occurred in the fourth quarter of 2006.
|
|
|
|
The Companys primary markets have become more competitive,
with competitors opening new fitness centers. At the same time,
the Companys ability to invest in its fitness centers has
been constrained by its deteriorating financial and liquidity
condition.
|
The following selected financial data reflects certain results
of operations and certain balance sheet data for the years ended
2002 to 2006. The data below should be read in conjunction with,
and is qualified by reference to
35
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations and
the consolidated financial statements and notes thereto included
elsewhere in this report.
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
(In thousands, except per share, per member and fitness
center data)
|
|
|
|
|
|
Statement of Operations
Data(1), (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,059,051
|
|
|
$
|
1,003,841
|
|
|
$
|
974,498
|
|
|
$
|
931,906
|
|
|
$
|
868,853
|
|
|
|
|
|
Impairment of assets, goodwill and
other intangibles
|
|
|
39,720
|
|
|
|
11,335
|
|
|
|
11,724
|
|
|
|
14,325
|
|
|
|
18,095
|
|
|
|
|
|
Interest expense
|
|
|
101,859
|
|
|
|
85,329
|
|
|
|
67,201
|
|
|
|
62,585
|
|
|
|
59,671
|
|
|
|
|
|
Other income (expense), net(3)
|
|
|
(5,836
|
)
|
|
|
958
|
|
|
|
(420
|
)
|
|
|
(108
|
)
|
|
|
165
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
5,564
|
|
|
|
(5,558
|
)
|
|
|
(30,273
|
)
|
|
|
(42,201
|
)
|
|
|
(91,297
|
)
|
|
|
|
|
Income (loss) from continuing
operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share(4)
|
|
$
|
0.14
|
|
|
$
|
(0.16
|
)
|
|
$
|
(0.92
|
)
|
|
$
|
(1.29
|
)
|
|
$
|
(2.84
|
)
|
|
|
|
|
Balance Sheet Data(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
396,771
|
|
|
$
|
495,099
|
|
|
$
|
502,459
|
|
|
$
|
551,236
|
|
|
$
|
658,172
|
|
|
|
|
|
Long-term debt, less current
maturities(5)
|
|
|
247,434
|
|
|
|
756,304
|
|
|
|
737,432
|
|
|
|
704,678
|
|
|
|
721,933
|
|
|
|
|
|
Current maturities of long-term
debt(5)
|
|
|
513,913
|
|
|
|
13,018
|
|
|
|
22,127
|
|
|
|
25,393
|
|
|
|
29,358
|
|
|
|
|
|
Stockholders deficit
|
|
|
(1,400,422
|
)
|
|
|
(1,463,686
|
)
|
|
|
(1,472,125
|
)
|
|
|
(1,442,957
|
)
|
|
|
(1,336,905
|
)
|
|
|
|
|
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total membership cash collections
|
|
$
|
757,630
|
|
|
$
|
783,055
|
|
|
$
|
774,895
|
|
|
$
|
787,176
|
|
|
$
|
807,638
|
|
|
|
|
|
Average monthly membership cash
received per member(6)
|
|
|
17.74
|
|
|
|
18.02
|
|
|
|
17.75
|
|
|
|
18.13
|
|
|
|
19.00
|
|
|
|
|
|
Average number of members(6)
|
|
|
3,559
|
|
|
|
3,622
|
|
|
|
3,639
|
|
|
|
3,618
|
|
|
|
3,543
|
|
|
|
|
|
Number of members at end of period
|
|
|
3,485
|
|
|
|
3,530
|
|
|
|
3,593
|
|
|
|
3,562
|
|
|
|
3,538
|
|
|
|
|
|
Net members added (dropped)
|
|
|
(46
|
)
|
|
|
(62
|
)
|
|
|
31
|
|
|
|
24
|
|
|
|
(10
|
)
|
|
|
|
|
Fitness centers open at end of
period
|
|
|
375
|
|
|
|
409
|
|
|
|
416
|
|
|
|
417
|
|
|
|
410
|
|
|
|
|
|
|
|
|
(1) |
|
The financial data as of December 31, 2006, 2005 and 2004
and for each of the years in the three-year period ended
December 31, 2006 are derived from, and should be read in
conjunction with, the audited consolidated financial statements
of the Company and the notes thereto appearing elsewhere herein.
The financial data as of December 31, 2003 and for the
years ended December 31, 2003 and 2002 is derived from
audited consolidated financial statements issued in conjunction
with the Companys Annual Report on
Form 10-K
for the year ended December 31, 2004. The financial data as
of December 31, 2002 is derived from unaudited consolidated
financial statements not presented separately herein. |
|
(2) |
|
As a result of the sale of Crunch Fitness in 2006, the operating
results of Crunch have been treated as a discontinued operation
for all periods presented. |
|
(3) |
|
In 2006, the Company recorded a $7.7 million loss on debt
extinguishment related to obtaining its New Facility. Other
income and expense items include foreign exchange gains and
losses and interest income. |
|
(4) |
|
The Companys basic and diluted earnings per share are
calculated on the following average number of shares
outstanding: 2006 39,809,395; 2005
34,624,039; 2004 32,838,811; 2003
32,654,738; and 2002 32,163,019. |
|
(5) |
|
At December 31, 2006, the Company classified amounts due on
its Senior Subordinated Notes and its New Facility
(approximately $509 million) as Current maturities of
long-term debt on its Consolidated Balance |
36
|
|
|
|
|
Sheet. This classification is based on the maturity date of
October 15, 2007 for the Senior Subordinated Notes and the
current termination date of October 1, 2007, for the New
Facility. |
|
|
|
(6) |
|
Average monthly membership cash received per member represents
the annual membership cash received for the year divided by 12,
divided by the average number of members for the year. The
average number of members during the year is derived by dividing
the sum of the total members outstanding at the end of each
quarter in the year by four. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion of the financial condition and results
of operations of Bally should be read in conjunction with
Item 8 Consolidated Financial Statements and
Supplementary Data and Item 1A
Risk Factors.
The information and discussion set forth below should be
considered in the context of the following overall trends and
factors:
|
|
|
|
|
The Companys financial and liquidity positions have been
deteriorating and are expected to continue to deteriorate. This
situation reflects several factors discussed in this
Form 10-K.
|
|
|
|
The Company does not have sufficient operating cash flows to
meet its expected needs for working capital, capital investment
in operations, interest expense and debt repayments through
December 31, 2007. The Company did not make the interest
payment of $14.8 million due April 16, 2007 on its
Senior Subordinated Notes; the $300 million principal
obligation matures in October 2007.
|
|
|
|
The Company reported losses from continuing operations for the
years 2002 through 2005. Income from continuing operations for
2006 was a modest $5.6 million. Impairment charges in 2006
associated with goodwill and long-lived assets were
$39.8 million and were $62.9 million in the
three-year
period 2004 through 2006. The primary drivers of these
impairment charges are the declining projections of future
operating cash flow.
|
|
|
|
The Companys revenue recognition policies require the
deferral of a majority of membership cash payments to be
recognized in subsequent periods over the expected membership
term of members. As a result, revenue recognition does not
reflect current cash collection trends. Additionally, the level
of our deferred revenue is highly sensitive to changes in
estimated membership term. Negative attrition expectations
result in downward adjustments of deferred revenue which are
reflected in larger amounts of recognized revenue. The
Companys change in estimated term length effected in the
fourth quarter of 2006 resulted in a reduction of deferred
revenue of $71.0 million and increased reported revenue by
the same amount.
|
|
|
|
The Companys total membership cash collections declined in
each quarter of 2006 when compared to the prior year levels.
Total 2006 membership cash collections were $757.6 million,
down $25.4 million from 2005 collections of
$783.0 million. Approximately $10.9 million (43%) of
the year-over-year decline in total membership cash collections
occurred in the fourth quarter of 2006.
|
|
|
|
The Companys primary markets have become more competitive,
with competitors opening new fitness centers. At the same time,
the Companys ability to invest in its fitness centers has
been constrained by its deteriorating financial and liquidity
condition.
|
37
Accordingly, and in light of the severe financial difficulties
facing the Company, Managements Discussion and Analysis is
presented in the following order:
Executive Summary of Business
Financial Condition
Cash Flows
Capital Requirements and Contractual Obligations
Dividend and Other Commitments
Debt
Off-Balance Sheet Arrangements
Critical Accounting Policies
Results of Operations
Recently Issued Accounting Standards
Executive
Summary of Business
Bally is among the largest full-service commercial operators of
fitness centers in North America in terms of members, revenues
and square footage of its facilities. As of December 31,
2006, we operated 375 fitness centers collectively serving
approximately 3.5 million members. These 375 fitness
centers occupied a total of 11.8 million square feet.
Our fitness centers are concentrated in major metropolitan areas
in 26 states and the District of Columbia, with 300 fitness
centers located in the top 25 metropolitan areas in the United
States. As of December 31, 2006, we operated fitness
centers in over 45 major metropolitan areas representing 62% of
the United States population. In 2006, approximately 69% of new
joining members elected a membership plan allowing multiple club
access, varying between market and nationwide access. Members
electing multiple center access are required to make larger
monthly payments than those who select a single club membership.
At December 31, 2006, 86% of our members had multiple club
access memberships.
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.
Financial
Condition
We reported losses from continuing operations for each of the
years 2002 through 2005. These losses are expected to persist
despite a modest profit from continuing operations in 2006 of
$5.6 million. Further, we expect to continue to be affected
by increased competition from well-financed competitors and our
own limited ability to invest in capital improvements, including
new fitness equipment, due to our constrained liquidity and
overall financial condition. We expect the persisting increase
in competition to continue to have an adverse effect on our
business, liquidity, financial condition and results of
operations. In addition, the constraints on our liquidity have
limited our ability to invest our operating cash flow in
improvements to our fitness centers and address the aging of our
facilities, which may affect our ability to compete. Public
perception of our declining liquidity, financial condition and
results of operations, in particular with regard to our
potential failure to meet our debt obligations, may result in
additional decreases in cash membership revenues (particularly
those associated with longer term membership contracts) and
increases in member attrition. In addition, if liquidity
problems persist, our suppliers could refuse to provide key
products and services in the future. Continuing liquidity
concerns could also negatively affect our relationship with
employees by decreasing productivity and increasing turnover.
The value of our consolidated assets has decreased substantially
from $495.1 million as of December 31, 2005 to
$396.8 million as of December 31, 2006. This decrease
of $98.3 million was due primarily to:
|
|
|
|
|
a $66.9 million net decrease in property and equipment
(capital expenditures less disposals, sale/leaseback
transactions, depreciation and impairment). We limited
investments in capital expenditures to $39.6 million,
|
38
|
|
|
|
|
which were primarily for a scheduled replacement of exercise
equipment. In addition, we recorded an impairment adjustment of
$38.3 million, primarily to write down leasehold
improvements to certain of our fitness clubs to the lower of
their respective carrying or fair values;
|
|
|
|
|
|
a decrease in assets held for sale of $40.2 million
resulting from the sale of Crunch Fitness; $31.8 million of
the proceeds of the sale of these assets was used to make a
mandatory term loan repayment;
|
|
|
|
a $2.3 million decrease in intangible assets, reflecting
both amortization and impairment;
|
|
|
|
a $1.6 million decrease in deferred financing costs, net;
|
|
|
|
a $4.3 million decrease in other long-term assets,
primarily reflecting the write-off of group exercise equipment
resulting from our adoption of SAB 108; offset by
|
|
|
|
a $17.3 million increase in our cash balances.
|
As a result of our deteriorating financial condition and pending
debt requirements, in November 2005 we began considering
strategic alternatives. To this end, we engaged JP Morgan
Securities, Inc. and The Blackstone Group to assist us in
commencing a process to identify and evaluate strategic
alternatives, including without limitation a sale of
substantially all of our assets. This process, which was
conducted under the direction of the Strategic Alternatives
Committee of the Board, did not result in a strategic
transaction. We subsequently retained Jefferies &
Company in February 2007 as our financial advisors. In March
2007, certain holders of our Senior Notes and Senior
Subordinated Notes formed an Ad Hoc Committee and we began
discussions with them with respect to de-leveraging our balance
sheet. In April 2007, we were required to make an interest
payment of $14.8 million on our Senior Subordinated Notes.
We elected not to make this interest payment and an event of
default occurred under the Senior Subordinated Notes Indenture,
which also triggered an event of default under the Senior Notes
Indenture. In April and May 2007, we entered into forbearance
agreements with the Lenders under our New Facility and the
requisite noteholders under the Indentures relating to these and
other defaults, which forbearance agreements expire on
July 13, 2007.
On June 27, 2007, we commenced a solicitation of votes on
the Plan of Reorganization from holders of the Senior Notes and
Senior Subordinated Notes. If we receive the requisite votes in
favor of the Plan of Reorganization, we intend to file a
voluntary prepackaged petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code in the
Bankruptcy Court in late July 2007. Prior to commencement of the
consent solicitation, we entered into a Restructuring Support
Agreement with holders of a majority of the Senior Notes and
more than 80% of the Senior Subordinated Notes, in which the
consenting noteholders agreed to vote in favor of the Plan of
Reorganization, on the terms and conditions specified therein.
Under certain circumstances, we may file for bankruptcy prior to
the end of the solicitation period. The Plan of Reorganization
includes, among other things, the following key terms:
|
|
|
|
|
New Facility. The New Facility would be
unimpaired. As a condition to effectiveness of the Plan of
Reorganization, we will amend and restate (with the consent of
the Lenders) or replace the New Facility with a
$292 million senior secured credit facility, on terms no
less favorable than described in the Plan of Reorganization.
|
|
|
|
Senior Notes. We do not intend to make the
cash interest payment due on the Senior Notes on July 15,
2007. The Plan of Reorganization would, if approved, confirmed
and consummated, result in the cancellation and discharge of all
claims relating to the Senior Notes. Each holder of Senior Notes
would receive a pro rata share of new senior notes (the
New Senior Notes) in the principal amount of
$247,337,500 with an interest rate of
123/8%.
The maturity and guarantees of the New Senior Notes would be the
same as for the Senior Notes. Upon effectiveness of the Plan,
holders of the Senior Notes would receive a fee equal to 2% of
the face value of their notes.
|
|
|
|
Senior Notes Indenture. The Senior Notes
Indenture would be amended to provide the holders with a
silent second lien on substantially all of our
assets and the assets of our subsidiary guarantors. Under the
amended Senior Note Indenture, we would have a permitted debt
basket for the New Facility of $292 million with a
reduction for proceeds of asset sales completed after
June 15, 2007 that are used to permanently pay down
indebtedness under the New Facility and are not reinvested in
replacement assets within 360 days after the applicable
asset sale. The amended Senior Note Indenture would also permit
us to issue, in addition to the Rights Offering Senior
Subordinated Notes, an additional $90 million of
pay-in-kind
senior subordinated notes as described more fully under
Rights Offering below, after emergence from
bankruptcy.
|
39
|
|
|
|
|
Senior Subordinated Notes. Holders of Senior
Subordinated Notes would receive New Junior Subordinated Notes
replacing approximately 21.7% of their claims, New Subordinated
Notes representing approximately 24.8% of their claims and
shares of common stock representing 100% of the equity in the
reorganized company, subject to reduction for common stock to be
issued to holders of certain other claims. The New Subordinated
Notes would mature five years and nine months after the
effective date of the Plan of Reorganization and would bear
interest payable annually at
135/8%
per annum if paid in kind or 12% per annum if paid in cash, at
our option, subject to a toggle covenant based on specified cash
EBITDA and minimum liquidity thresholds.
|
|
|
|
Rights Offering. In addition to the
consideration described above, holders of Senior Subordinated
Notes would receive non-detachable rights to participate in a
rights offering of Rights Offering Senior Subordinated Notes in
principal amount equal to approximately 27.9% of their claims,
or $90 million. The Rights Offering Senior Subordinated
Notes would rank senior to the New Subordinated Notes and New
Junior Subordinated Notes but otherwise have the same terms.
Holders of certain other claims against us will be given the
opportunity to participate in the rights offering, which, if
exercised, would generate incremental proceeds beyond the
$90 million to be funded by electing Senior Subordinated
Noteholders.
|
|
|
|
Subscription and Backstop Purchase
Agreement. On June 27, 2007, we entered into
a Subscription and Backstop Purchase Agreement with certain
holders of our Senior Subordinated Notes, who have agreed to
subscribe for their pro rata share of Rights Offering Senior
Subordinated Notes and to purchase any Rights Offering Senior
Subordinated Notes not subscribed for in the rights offering. We
have agreed to pay a fee to each backstop provider in the amount
of 4% of its backstop commitment, subject to a rebate of
approximately 80% of such amount if the Plan is consummated.
|
|
|
|
Existing Equity. All existing equity would be
cancelled for no consideration.
|
We expect to continue normal club operations during the
restructuring process. If we file the Plan of Reorganization, we
would seek to obtain the necessary relief from the Bankruptcy
Court to pay the majority of our employee, trade and certain
other creditors in full and on time in accordance with existing
business terms. Upon effectiveness of the Plan of
Reorganization, we would, among other things, amend our charter
and by-laws and enter into a stockholders agreement and a
registration rights agreement with holders of our common shares.
In addition, our new Board of Directors will consider adopting a
new management long-term incentive plan intended to provide
incentives to certain employees to continue their efforts to
foster and promote our long-term growth objectives.
If we do not receive the necessary votes in favor of the Plan of
Reorganization during the solicitation period, we will evaluate
other available options, including filing one or more
traditional, non-prepackaged Chapter 11 cases.
Liquidity
and Capital Resources
Our liquidity (cash, the unused portions of the Delayed Draw
Term Loan and the Revolver) increased by $20.8 million,
from $68.9 million to $89.7 million, during 2006. The
increased liquidity at December 31, 2006 was primarily due
to the $29.1 million unused Delayed Draw Term Loan, which
was available at that date to fund capital expenditures and
certain improvements. Excluding the effect of the Delayed Draw
Term Loan, our liquidity declined $13.3 million in 2006,
despite the net proceeds available from the sale of certain
clubs and the sale/leaseback transactions in 2006, all of which
contributed net proceeds of approximately $33 million after
transaction costs, mandatory debt repayments and excluding funds
held in escrow. Furthermore, we drew $20.5 million under
the Revolver on February 14, 2007 and $19.0 million
under the Delayed Draw Term Loan on March 12, 2007, a
portion of which was used to finance an equipment purchase of
approximately $15.0 million. On June 1, 2007, we
received proceeds of approximately $18 million from the
sale of substantially all of our health clubs in Canada. As of
June 15, 2007, availability under these facilities was
$1.5 million and our liquidity was approximately
$61 million, most of which represented cash on hand.
40
The following table summarizes the Companys liquidity (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Change from
|
|
|
|
2006
|
|
|
2005
|
|
|
Previous Year
|
|
|
Cash and equivalents
|
|
$
|
34.8
|
|
|
$
|
17.5
|
|
|
$
|
17.3
|
|
Unutilized revolving credit
facility
|
|
|
25.8
|
|
|
|
51.4
|
|
|
|
(25.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity before delayed draw term
loan
|
|
|
60.6
|
|
|
|
68.9
|
|
|
|
(8.3
|
)
|
Undrawn delayed draw term loan
|
|
|
29.1
|
|
|
|
|
|
|
|
29.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liquidity
|
|
$
|
89.7
|
|
|
$
|
68.9
|
|
|
$
|
20.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We maintain a substantial amount of debt, the terms of which
require significant interest payments each year. In 2007, we
have substantial interest payments due on our Senior Notes in
July and on the Senior Subordinated Notes in October. In light
of our current financial situation, we did not make the interest
payment due on the Senior Subordinated Notes in April 2007 and
may not make other such interest payments. Moreover, access to
the liquidity that might subsequently become available under the
New Facility may be limited if future decreased membership cash
collections or increased expenses limit our ability to comply
with the financial covenants under the New Facility, which we
are required to meet monthly, as described below. In turn, any
such events could negatively impact us, including our relations
with members, vendors, and suppliers with whom we conduct or may
seek to conduct business.
The New Facility requires us to meet certain minimum cash EBITDA
and minimum liquidity tests on a monthly basis, as such tests
are defined in the New Facility. If we are unable to comply with
these covenants, a default would occur under the New Facility,
which, if the indebtedness thereunder is accelerated, could also
result in a cross-default under the Indentures. Upon a default
under the New Facility, unless waived, we would not have access
to the Revolver and the Delayed Draw Term Loan, and the lenders
would be entitled to exercise any available rights and remedies,
including their right to exercise dominion over our cash on
deposit in control accounts.
In addition, the New Facility and the Indentures contain
covenants that include, among other things, timely financial
reporting requirements and restrictions on incurring, making or
entering into additional indebtedness, liens, certain types of
payments (including common stock dividends and redemptions and
payments on existing indebtedness), investments, asset sales,
and sale and leaseback transactions. We failed to comply with
our reporting covenants during 2004, 2005, and the first two
quarters of 2006. However, we obtained waivers of the reporting
covenants for those periods and filed the required reports
within the agreed extended period. As we did not file this
Form 10-K
by March 16, 2007, and as a result were unable to file our
quarterly report on
Form 10-Q
for the first quarter of 2007, defaults occurred under the
financial reporting covenants under the Indentures. Pursuant to
the New Facility, the cross-default period is 28 days from
any financial reporting default notices received under the
Indentures. In addition, as discussed above, a default occurred
under the New Facility as a result of our failure to deliver
certain financial information, including audited financial
statements, to the lenders by April 2, 2007. On
April 12 and May 14, 2007, we entered into forbearance
agreements related to these and other defaults with our lenders
under the New Facility, and the requisite noteholders under the
Indentures, respectively. There can be no assurances that we
will be able to comply with the reporting covenants under the
New Facility and the Indentures in the future. If we are unable
to file our periodic reports on a timely basis and cannot obtain
the requisite approvals of the Plan of Reorganization or
additional consents from our noteholders and lenders and an
event of default or cross-default occurs under the Indentures,
the lenders under the New Facility, the Trustee under the
applicable indenture or the requisite holders of Notes could
accelerate the related obligations and exercise any other
available rights and remedies. In such an event, we would be
unable to satisfy those obligations.
41
Our operating cash flows will not be sufficient to meet our
expected needs for working capital and other cash requirements
through December 31, 2007. On April 16, 2007, we did
not make an interest payment of $14.8 million on our Senior
Subordinated Notes and, as a result, are in default under the
applicable indenture, and as a result of cross-default
provisions, under the other indenture and the New Facility.
Additional interest payments are due on the Senior Notes in July
2007 and interest and principal on the Senior Subordinated Notes
are due in October 2007. Failure to make any of these payments
would permit the Trustee under the applicable indenture (or the
requisite holders of Notes) and the lenders under the New
Facility to declare the respective obligations immediately due
and payable and to exercise any other available rights and
remedies. As noted above, we entered into forbearance agreements
related to the interest payment default and other defaults with
our lenders under the New Facility and the requisite noteholders
under the Indentures that expire on July 13, 2007. Upon
termination of these forbearance agreements, events of default
will occur under the indentures governing the Notes and under
the New Facility. If such events of default occur, the lenders
under the New Facility and the Trustee under the indentures or
the requisite holders of Notes could accelerate the related
obligations and exercise any available rights and remedies.
While we hope to successfully complete the prepetition
solicitation and obtain confirmation of the Plan of
Reorganization before any enforcement action is taken by the
lenders, the Trustee or holders of the Notes, there can be no
assurance that this will occur on the timetable we project. In
such event, we would be forced to consider commencing a
non-prepackaged reorganization case under Chapter 11 of the
Bankruptcy Code, which would be more protracted and expensive
than a prepackaged case.
Our cash flows and liquidity may also be negatively affected by
various items, including declines in membership cash
collections, changes in terms or other requirements by vendors,
including our credit card payment processor; regulatory fines;
penalties, settlements or adverse results in securities or other
litigations; future consent payments to lenders or noteholders,
if required; and unexpected capital requirements. We have been
required to provide additional letters of credit, and cash
deposits to support vendors, which have reduced our available
liquidity. Although management believes that we have adequate
liquidity to pay our ordinary course trade and employee
obligations, there can be no assurances that we will have
sufficient liquidity to meet our debt or other obligations as
and when they become due in the presence of the unfavorable
scenarios described in this
Form 10-K.
If cash revenue decreases compared to 2006 get larger, expenses
increase or a default occurs under the New Facility (whether
directly or as a result of a cross-default to other
indebtedness) and we do not have or cannot obtain sufficient
liquidity to address any such scenario, we would be unable to
continue operating our business. Furthermore, pursuant to the
New Facility, our depository accounts are subject to control
agreements that give the lenders the right to dominion over our
cash on deposit in control accounts if an event of default under
the New Facility occurs and is continuing.
Interest
Expense
Interest expense for the year ended December 31, 2006
increased $16.5 million to $101.9 million as compared
to the prior year, principally due to increased amortization of
deferred financing costs as a result of consent fees paid in
March and April 2006 to obtain waivers from noteholders and
lenders of financial reporting requirements. Amortization of
deferred financing costs was approximately $21.1 million
for the year ended December 31, 2006, a $12.5 million
increase over 2005. The balance of the increase is due to
increases in general interest rate levels, partially offset by
lower weighted average debt outstanding during the year.
Interest expense for the year ended December 31, 2005
increased $18.1 million to $85.3 million, principally
due to higher interest rates ($11.2 million) as a result of
the increase in general interest rate levels plus the full year
impact of the replacement of our accounts receivable
securitization with a higher rate term loan, and an increase in
the amortization of deferred financing costs ($5.1 million)
resulting from fees paid to obtain the wavier of financial
reporting covenants under certain debt agreements.
Of our total debt outstanding of $761.3 million at
December 31, 2006, approximately 54% bears interest at
floating rates. This includes the effect of interest rate swap
agreements, which effectively convert $200 million of
Senior Subordinated Notes into variable rate obligations. Our
interest expense increased during 2006 as a result of the rising
interest rate environment and will continue to increase if
interest rates continue to rise in 2007. Correspondingly, should
rates decrease, we would benefit from the lower rates. Our
interest expense was favorably impacted by the
$37.4 million reduction in our old term loan from the
application of the proceeds from the sale of
42
Crunch Fitness and other assets during 2006. However, our
interest expense in 2007 will increase as a result of the higher
level of debt under the New Facility.
Cash
Flows
The following table summarizes the Companys cash flows for
2006 and 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Change From
|
|
|
|
2006
|
|
|
2005
|
|
|
Prior Year
|
|
|
Cash provided by (used in)
operating activities
|
|
$
|
(4.3
|
)
|
|
$
|
30.7
|
|
|
$
|
(35.0
|
)
|
Cash provided by (used in)
investing activities
|
|
|
28.1
|
|
|
|
(36.2
|
)
|
|
|
64.3
|
|
Cash provided by (used in)
financing activities
|
|
|
(6.7
|
)
|
|
|
3.4
|
|
|
|
(10.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
$
|
17.1
|
|
|
$
|
(2.1
|
)
|
|
$
|
19.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
Net cash used in operating activities totaled $4.3 million
in 2006 compared to cash provided by operating activities of
$30.7 million in 2005. This decrease in cash provided by
operating activities largely resulted from a decrease of
$25.4 million in cash received from memberships compared to
the prior year. Increases in operating costs, principally
occupancy and repair and maintenance costs, severance costs, and
higher audit and professional fees, including costs associated
with the proxy solicitation in January 2006, also negatively
impacted net cash provided by operating activities in the
current year period. Cash interest paid increased
$3.4 million in 2006 compared to the prior year.
Investing
Activities and Capital Expenditures
Net cash provided by investing activities totaled
$28.1 million in 2006 compared to a use of
$36.2 million in 2005. The 2006 period benefited from the
sale of Crunch Fitness ($45.0 million), fourth quarter
sale/leaseback transactions ($14.6 million inclusive of
$1.0 million held in escrow pending certain repairs to the
properties) and property and asset sales ($7.6 million).
Capital expenditures increased $3.6 million to
$39.6 million in 2006 from $36.0 million in 2005. We
opened a club in Carrollton (Dallas), Texas in April 2006 and
Los Angeles, California in September 2006. In 2005, we opened a
club in Huntington Park, California. During 2006 we spent
approximately $7 million on new clubs and $25 million
on existing clubs. Three clubs currently in development are
planned for opening in 2007. During 2007, we expect capital
spending to be approximately $35 - $40 million.
Financing
Activities
Net cash used in financing activities totaled $6.7 million
in 2006 compared to $3.4 million provided by financing
activities in 2005. In October 2006, the Company entered into
the New Facility; proceeds were used to refinance amounts
outstanding under the Amended and Restated Credit Agreement
dated October 14, 2004 between the Company, JP Morgan
Chase Bank, N.A., as Agent, and other Lenders (the Credit
Agreement) and to fund transaction fees. During 2006, the
Company applied $37.4 million of proceeds from the sale of
Crunch Fitness and other assets to repay the term loan pursuant
to the Credit Agreement. Proceeds of $11.5 million (less
$2.5 million remaining in escrow at year end pending the
Company obtaining certain permits for one of the properties
($1.8 million) and effecting certain repairs to the
properties ($0.7 million)) from the interim financing of a
sale/leaseback transaction and $5.6 million from the sale
of Common Stock were received in 2006 and were used to fund:
(i) the cash portion of the consent fees paid to holders of
the Senior Subordinated Notes and the Senior Notes and related
expenses; (ii) fees and expenses relating to the Credit
Agreement amendment and waiver; (iii) additional working
capital; and (iv) capital expenditures.
43
Capital
Requirements and Contractual Obligations
Capital
Requirements
We currently anticipate that future funding needs in the near
term will principally relate to:
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operating expenses relating to our health club facilities;
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capital expenditures, particularly for new clubs, maintenance,
equipment, and information technology;
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interest and scheduled principal payments related to our debt;
and
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other general corporate expenditures.
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Future
Contractual Obligations
The following table sets forth our best estimates as to the
amounts and timing of contractual payments for our most
significant contractual obligations as of December 31, 2006
(in millions). The information in the table reflects future
unconditional payments and is based upon, among other things,
the terms of the relevant agreements, appropriate classification
of items under GAAP currently in effect and certain assumptions,
such as future interest rates. Future events, including
refinancing of our securities, could cause actual payments to
differ significantly from these amounts.
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Payments Due by Period
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Less than
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More than
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Total
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1 Year
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1-3 Years
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4-5 Years
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5 Years
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Interest(1)
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$
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152
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$
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65
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$
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74
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$
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13
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$
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Capital leases
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9
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2
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7
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Operating leases
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1,030
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142
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357
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95
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436
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Long-term debt(2)
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751
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512
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3
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235
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1
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Other long-term liabilities
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29
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4
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12
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2
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11
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Total future contractual
obligations
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$
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1,971
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$
|
725
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$
|
453
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$
|
345
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|
$
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448
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(1) |
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Includes interest on the Senior Subordinated Notes and Senior
Notes at the stated fixed rates. Additionally, we entered into
interest rate swap agreements whereby the fixed interest
commitment on $200 million of outstanding principal on the
Senior Subordinated Notes varies based on the LIBOR rate, the
effect of which has been included based on the valuation at
December 31, 2006. The total interest rate on the swap at
December 31, 2006, was 11.38%. The interest rate on the
term loan and the delayed draw term loan under the New Facility
is variable, and interest payments are based on the average rate
in effect at December 31, 2006, which was 9.70%, and the
contractual payment schedule, excluding any additional draw down
or repayment on the delayed draw term loan and revolving credit.
Interest on the New Facility and Senior Subordinated Notes is
based on maturity dates of October 1, 2007 and
October 15, 2007, respectively. |
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(2) |
|
Assumes the New Facility terminates on October 1, 2007,
pursuant to the early termination provision related to the
refinancing of the Senior Subordinated Notes. |
Dividend
and Other Commitments
We have remaining authorization to repurchase up to
820,400 shares of our common stock on the open market from
time to time. The terms of our New Facility generally do not
allow us to repurchase common stock or pay dividends without
lender approval. We do not expect to repurchase any of our
common stock in the foreseeable future. We have not paid any
cash dividends on our common stock and do not anticipate making
any cash dividend payments in the future.
44
Debt
New
Facility and Credit Agreement
On October 16, 2006, we entered into the New Facility with
a group of financial institutions led by JPMorgan. The New
Facility provides for (i) a term loan in the amount of
$205.9 million, (ii) a delayed-draw term loan facility
in the amount of $34.1 million, and (iii) a revolving
credit facility in the amount of $44.0 million. The
proceeds from the New Facility were used to refinance the
amounts outstanding under the existing Credit Agreement
(discussed below), to pay transaction fees and expenses, and
have been and will be used to fund capital expenditures and
improvements to properties as defined in the New Facility and
provide for additional liquidity. The termination date of the
New Facility is the earlier of (i) 14 days prior to
the maturity of the Senior Subordinated Notes (due
October 15, 2007), including extensions or refinancing or
(ii) October 1, 2010. The current termination date for
the New Facility is October 1, 2007, and as such, amounts
outstanding under the New Facility will become due and owing on
October 1, 2007 and are included as current maturities of
long-term debt on our Consolidated Balance Sheet at
December 31, 2006. The New Facility is secured by
substantially all of our real and personal property, including
member obligations under installment contracts. Our obligations
under the New Facility are guaranteed by most of our domestic
subsidiaries. The New Facility required us to raise
$20 million of additional liquidity by December 31,
2006 from permitted sale/leasebacks, permitted asset sales or
issuances of capital stock. We closed a sale/leaseback
transaction in October 2006 and two additional sale/leaseback
transactions in December 2006, generating approximately
$22.5 million of aggregate proceeds, in order to satisfy
this requirement.
The New Facility contains restrictive covenants that include
minimum monthly cash EBITDA, and minimum monthly liquidity
requirements; and restrictions on use of funds, additional
indebtedness, incurring liens, certain types of payments
(including, without limitation, capital stock dividends and
redemptions, payments on existing indebtedness and intercompany
indebtedness), incurring or guaranteeing debt, investments,
mergers, consolidations, asset sales and acquisitions,
transactions with subsidiaries, conduct of business, sale and
leaseback transactions, incurrence of judgments, and changing
our fiscal year, all subject to certain exceptions. The New
Facility also contains various financial reporting requirements,
including an annual audit opinion, provided that the receipt of
a going concern qualification or exception to such
audit opinion does not violate the terms of the New Facility so
long as we are otherwise in compliance with the New Facility. As
discussed above, covenant non-compliance, absent a waiver by the
lenders, causes us to be unable to access the revolving credit
facility and the delayed draw term loan and, therefore, be
unable to satisfy our obligations and operate our business. In
addition, as a result of not satisfying a covenant, an event of
default could occur under the New Facility and cross-defaults
could occur under the Indentures and holders could accelerate
the obligations under these instruments and we would be unable
to satisfy those obligations.
On April 2, 2007, we failed to comply with certain
financial reporting covenants under the New Facility. On
April 12, 2007, we entered into a Forbearance Agreement
with the lenders under the New Facility. Under this agreement
the lenders agreed to forbear from exercising any remedies under
the New Facility as a result of certain defaults arising from,
among other things, our inability to meet financial reporting
covenants including delivery of audited financial statements for
the fiscal year ended December 31, 2006, and the cross
default arising from the non-payment of interest due
April 16, 2007 on the Senior Subordinated Notes. The
Forbearance Agreement contains restrictions during its term on
additional indebtedness, liens, investments, asset sales and
sale/leasebacks. Furthermore, the agreement required that we
enter into forbearance agreements with respect to defaults under
our public indentures with the holders of at least a majority of
the Senior Notes and at least 75% of the Senior Subordinated
Notes. The Forbearance Agreement will terminate on the earlier
of July 13, 2007 or the date on which (i) a default
occurs which is not a default covered by the Forbearance
Agreement, (ii) any payment of principal or interest is
made on the Senior Subordinated Notes, (iii) the
commencement of any enforcement action under the indenture
governing either the Senior Notes or Senior Subordinated Notes,
including acceleration of the Senior Notes or the Senior
Subordinated Notes, or (iv) upon certain challenges to the
validity or enforceability of the New Facility or the
Forbearance Agreement.
At May 31, 2007, we had $23.5 million in outstanding
borrowings and $20.1 million in letters of credit issued
under the revolving credit facility. The term loan balance under
the new facility was $205.9 million and there was
$33.0 million borrowed on the delayed-draw term loan
facility.
45
Until refinanced by the New Facility, we had in place a Credit
Agreement with a group of financial institutions led by JPMorgan
that provided for a five-year initial amount $175 million
term loan maturing in October 2009 in addition to a
$100 million revolving credit facility expiring in
September 2008. The Credit Agreement was secured by
substantially all of our real and personal property, including
member obligations under installment contracts. The Credit
Agreement contained restrictive covenants that included certain
interest coverage and leverage ratios; restrictions on use of
funds, additional indebtedness, incurring liens, certain types
of payments (including, without limitation, capital stock
dividends and redemptions, payments on existing indebtedness and
intercompany indebtedness), incurring or guaranteeing debt,
investments; mergers, consolidations, sales and acquisitions;
transactions with subsidiaries, conduct of business, sale and
leaseback transactions, incurrence of judgments, and changing
our fiscal year; and requirements with respect to financial
reporting, all subject to certain exceptions. Amounts
outstanding under the Credit Agreement were repaid on
October 16, 2006 using proceeds from the New Facility.
Consent
Solicitations and Forbearance Agreements
On March 14, 2006, we announced that we would not meet the
March 16, 2006 deadline for filing our Annual Report on
Form 10-K
for the year ended December 31, 2005 with the SEC. Although
the delay in filing resulted in defaults of the financial
reporting covenants under the indentures governing our Senior
Subordinated Notes and Senior Notes, it did not constitute an
event of default without delivery of a notice of default and
expiration of a
30-day cure
period. A cross-default under our Credit Agreement would have
occurred 10 days after receipt of such notice.
Additionally, a default would also have occurred under the
Credit Agreement if we did not deliver audited financial
statements for the year ended December 31, 2005 to the
lenders thereunder by March 31, 2006.
On March 24, 2006, we announced that we would seek waivers
of the defaults of the financial reporting covenants under the
indentures governing the Senior Subordinated Notes and the
Senior Notes through a consent solicitation, which was commenced
on March 27, 2006. In connection with the consent
solicitation, we entered into agreements with approximately 53%
of the holders of the Senior Subordinated Notes to consent to
the requested waivers.
On March 30, 2006, we entered into the Third Amendment and
Waiver with the lenders under our Credit Agreement that modified
the definition of Consolidated Interest Expense,
modified permitted dispositions, clarified the definition of
Banking Day, extended the time for delivering the
audited financial statements for the year ended
December 31, 2005 and the unaudited financial statements
for the quarter ended March 31, 2006 until July 10,
2006, extended the time for delivering the unaudited financial
statements for the quarter ending June 30, 2006 until
September 11, 2006, with an option to elect to extend until
October 11, 2006, permitted payment of the consent fees to
the holders of the Senior Subordinated Notes and the Senior
Notes and excluded fees and expenses incurred in connection with
the consent solicitation from the computation of financial
covenants.
On April 10, 2006, we completed the consent solicitations
to amend the indentures governing the Senior Subordinated Notes
and the Senior Notes to waive any default arising under the
financial reporting covenants from a failure to timely file
financial statements with the SEC for the year ended
December 31, 2005 and the quarter ended March 31, 2006
until July 10, 2006, and for the quarter ended
June 30, 2006 until September 11, 2006, with an option
to elect to extend until October 11, 2006.
In connection with these consents, we issued
1,956,195 shares of unregistered common stock and paid
$0.8 million in consent fees to the holders of the Senior
Subordinated Notes and the Senior Notes, paid the lenders under
the Credit Agreement $2.5 million in fees and recorded
$22 million in deferred finance charges as of
March 31, 2006. Additionally, on April 11, 2006, we
entered into stock purchase agreements (the Stock Purchase
Agreements) to sell 400,000 shares of unregistered
common stock to each of Wattles Capital Management, LLC and
investment funds affiliated with Ramius Capital Group, L.L.C.
Proceeds of $5.6 million from the sale of Common Stock were
used to fund: (i) the cash portion of the consent fees paid
to holders of the Senior Subordinated Notes and Senior Notes and
related expenses; (ii) fees and expenses relating to the
Credit Agreement amendment and waiver; and (iii) additional
working capital.
On June 23, 2006, we entered into the Fourth Amendment,
which extends the
10-day
period to 28 days after which a cross-default will occur
upon receipt of any financial reporting covenant default notice
under the indentures
46
governing the Senior Subordinated Notes or Senior Notes for the
third quarter of 2006. We paid the lenders under the Credit
Agreement fees of $0.5 million in connection with the
Fourth Amendment.
On April 12, 2007, we entered into the Forbearance
Agreement under our New Facility. Under the Forbearance
Agreement, the Agent and the Lenders will forbear from
exercising any remedies under the New Facility as a result of
certain defaults. The Forbearance Agreement will terminate on
July 13, 2007, unless earlier in accordance with its terms.
The Forbearance Agreement required that we enter into
forbearance agreements with respect to defaults under our public
indentures with holders of at least a majority of our Senior
Notes and at least 75% of our Senior Subordinated Notes. We paid
the lenders under the New Facility fees of $587,000 in
connection with the Forbearance Agreement.
On May 14, 2007, we entered into the Senior Notes
Forbearance Agreement with holders representing over 80% of the
aggregate principal amount outstanding of our Senior Notes.
Pursuant to the Senior Notes Forbearance Agreement, holders of
the Senior Notes waived certain defaults under the Senior Notes
Indenture and agreed to forbear from exercising any related
remedies until July 13, 2007. Holders of the Senior Notes
also consented to amend certain provisions of the Senior Notes
Indenture in connection with the waiver of the defaults. We paid
a cash consent fee of $279,000 to holders of the Senior Notes
that executed the Senior Note Forbearance Agreement and
consented to the related amendments to the Senior Notes
Indenture.
On May 14, 2007, we also entered into the Senior
Subordinated Notes Forbearance Agreement with holders
representing over 80% of the aggregate principal amount
outstanding of our Senior Subordinated Notes. Pursuant to the
Senior Subordinated Notes Forbearance Agreement, holders of the
Senior Subordinated Notes waived certain defaults under the
Senior Subordinated Notes Indenture and agreed to forbear from
exercising any related remedies until July 13, 2007.
Holders of the Senior Subordinated Notes also consented to amend
certain provisions of the Senior Subordinated Notes Indenture in
connection with the waiver of the defaults. We did not pay a
consent fee to holders of the Senior Subordinated Notes in
connection with the Senior Subordinated Notes Forbearance
Agreement.
We are in the process of implementing new accounting processes
and technologies designed to continue to shorten the time
required to prepare and file our financial statements, along
with improving controls over our accounting and the close
process. We cannot assure you that we will be able to file our
financial statements on time in the future. Failure to do so
will lead to further defaults under the Indentures and the New
Facility and could require us to seek additional consents from
our bondholders and lenders.
Other
Secured Debt
Our unrestricted Canadian subsidiary was not in compliance with
the terms of its credit agreement at December 31, 2006. As
a result, the outstanding amount of $0.2 million has been
classified as current. The amount outstanding on the Canadian
subsidiarys credit agreement was repaid in full on
January 31, 2007. As of March 31, and April 15,
2007, we have not been in compliance with the financial
reporting covenants under two mortgage agreements and certain
capital lease obligations. At May 31, 2007, the amount
outstanding under these agreements was $5.4 million. Upon
filing this
Form 10-K,
we will be in compliance with these agreements.
Off-Balance
Sheet Arrangements
We do not maintain any off-balance sheet arrangements,
transactions, obligations or other relationships with
unconsolidated entities that would be expected to have a
material current or future effect on our financial condition or
results of operations. Pursuant to the sale of Crunch Fitness,
we remained liable on certain leases
and/or lease
guarantees. See Note 18 of Notes to Consolidated Financial
Statements for a discussion of such obligations.
Critical
Accounting Policies
Our consolidated financial statements are prepared in accordance
with U.S. generally accepted accounting principles and
include accounting policies we believe are appropriate to report
accurately and fairly our operating results and financial
position. We apply those accounting principles and policies in a
consistent manner from
47
period-to-period. Our significant accounting policies are
summarized in Note 2 of the Notes to Consolidated Financial
Statements.
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make judgments, estimates and assumptions at a
specific point in time that affect the reported amounts of
certain assets, liabilities, revenues, and expenses, and related
disclosures of contingent assets and liabilities. We base our
estimates on historical experience and other factors we believe
to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of
assets and liabilities not readily obtainable from other
sources. Actual results could differ from those estimates. We
believe the following critical accounting policies are impacted
significantly by judgments, estimates and assumptions used in
the preparation of the Consolidated Financial Statements:
Revenue Recognition: Our principal sources of
revenue include membership services, principally health club
memberships and personal training services, and the sale of
nutritional products. We recognize revenue in accordance with
SEC Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements,
as amended by SEC Staff Accounting Bulletin No. 104,
Revenue Recognition. As a general principle,
revenue is recognized when the following criteria are met:
(i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred and services have been rendered,
(iii) the price to the buyer is fixed or determinable, and
(iv) collectability is reasonably assured. With respect to
health club memberships and personal training, we rely upon a
signed contract between us and the customer as the persuasive
evidence of a sales arrangement. Delivery of health club
services extends throughout the term of membership. Delivery of
personal training services occurs when individual personal
training sessions have been rendered.
We receive membership fees and monthly dues from our members.
Membership fees, which customers often finance, become customer
obligations upon contract execution and after a cooling
off period of three to 15 calendar days depending on
jurisdiction, while monthly dues become customer obligations on
a month-to-month basis as services are provided. Membership fees
and monthly dues are recognized at the later of when collected
or earned.
Membership fees and monthly dues collected but not earned are
included in deferred revenue. The majority of members commit to
a membership term of between 12 and 36 months. The majority
of these contracts are
36-month
contracts. The Companys contracts include a members
right to renew the membership at a discount compared to the
monthly payments made during the initial contractual term. In
late 2004, we discontinued selling the right to a significantly
discounted renewal period. Beginning in the fourth quarter of
2006, we reinstated this feature in certain markets and at
discount levels modestly below the obligatory monthly amount.
Additional members may be added to the primary joining
members contract. These additional members may be added as
obligatory members that commit to the same membership term as
the primary member, or nonobligatory members that can
discontinue their membership at any time.
Membership revenue is earned on a straight-line basis over the
longer of the contractual term or the estimated membership term.
Membership term is estimated on an aggregate basis at time of
contract execution based on historical trends of actual
attrition, and these estimates are updated quarterly to reflect
actual membership retention. Our estimates of membership life
were up to 360 months during 2006, 2005, and 2004. The
table below presents the current member duration distribution of
our members that have continuously maintained membership and
were members as of December 31, 2006, 2005 and 2004.
Reactivation members include members that have experienced
discontinuous periods of membership, having ceased membership to
later return to membership status through our ongoing
reactivation solicitations of expired members. Nonrenewable
members are those which have a definite term of three years or
less and do not have a right to renew their membership at the
conclusion of the term.
48
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Term Age Status of
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At December 31,
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Current Members
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2006
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2005
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2004
|
|
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3 years or less
|
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|
39.2
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%
|
|
|
39.5
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%
|
|
|
38.8
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%
|
4 to 10 years
|
|
|
19.8
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%
|
|
|
21.4
|
%
|
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|
22.5
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%
|
11-20 years
|
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|
14.3
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%
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|
15.7
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%
|
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|
16.5
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%
|
21-30 years
|
|
|
3.8
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%
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|
3.0
|
%
|
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|
2.5
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%
|
Over 30 years
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|
0.6
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%
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|
|
0.5
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%
|
|
|
0.4
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%
|
Reactivation and nonrenewable
|
|
|
22.3
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%
|
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|
19.9
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%
|
|
|
19.3
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%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
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|
As of December 31, 2006 and 2005, the weighted average
membership life for members that commit to a membership term of
between 12 and 36 months was 34 months and 38 months,
respectively. Members with these terms that finance their
initial membership fee have a weighted average membership life
of 33 months and 36 months, respectively at
December 31, 2006 and 2005, while those members that pay
their membership fee in full at point of sale have a weighted
average membership life of 48 months and 57 months at
December 31, 2006 and 2005, respectively. As a result of
our business practice of discounting monthly payments made
during the renewal term when compared to monthly payments made
in the initial contractual term, the estimate of membership term
impacts the amount of revenue deferred in the initial
contractual term. Changes in member behavior, competition, and
our performance may cause actual attrition to differ
significantly from estimated attrition. A resulting change in
estimated attrition may have a material effect on reported
revenues in the period in which it is first identified.
Beginning in the fourth quarter of 2004, we increased
contractual renewal rates associated with our typical membership
offering. Historically, when the member reaches renewal, our
business practice is to reduce renewal rates in order to
increase retention during the renewal period. Because we have
included a discount in our membership contract and do not have a
demonstrated history of collecting the contractual renewal rate,
we use the current collections of members in renewal to estimate
both ultimate collections and the portion attributable to the
initial term.
To the extent that actual cash collected in renewal is different
from the estimated amount, revenues in the period of the change
in estimate may be materially impacted. If we are successful in
collecting the contractual renewal rate, revenue deferred during
the initial term is expected to decline. If we offer discounts
to renewing members that are more significant than those that
have been offered in the past, revenue required to be deferred
during the initial contract term will increase. The potential
effects of this change in estimate may be amplified if, for
example, the collection of higher contractual renewal rates
results in a decline in membership retention, which will reduce
our estimate of total membership term, and further reduce the
amount of deferred revenue recorded. Change in member behavior,
competition and our performance may cause actual collected
renewal rates to differ significantly from estimated renewal
rates. A resulting change in estimated renewal rates may have a
material effect on reported revenues in the period in which the
change of estimate is made.
Members in their non-obligatory renewal period of membership
totaled approximately 62% of total members at December 31,
2006 and 2005, and approximately 61% of total members at
December 31, 2004. Renewal members can cancel their
membership at any time prior to their monthly or annual due
date. Membership revenue from members in renewal includes
monthly dues paid to maintain their membership, as well as
amounts paid during the obligatory period that have been
deferred as described above, to be recognized over the estimated
term of membership, including renewal periods.
Month-to-month members may cancel their membership prior to
their monthly due date. Membership revenue for these members is
earned on a straight-line basis over the estimated membership
life. Membership life for month-to-month members is currently
estimated at between 2 and 67 months, with an average of
15 months as of December 31, 2006, and were estimated
between 4 and 41 months, with an average of 15 months
as of December 31, 2005.
49
Paid-in-full
members who purchase nonrenewable memberships must purchase a
new membership plan to continue membership beyond the initial
contractual term. Such membership fees are deferred and
amortized over the contract term.
Personal training and other services are provided at most of our
fitness centers. Revenue related to personal training services
is recognized when the four criteria of recognition described
above are met, which is generally upon rendering of services.
Personal training services contracts are either
paid-in-full
at the point of origination, or are financed and collected over
periods generally through three months after an initial payment.
Collections of amounts related to
paid-in-full
personal training services contracts, are deferred and
recognized as personal training services are rendered. Revenue
related to personal training contracts that have been financed
is recognized at the later of cash receipt or the rendering of
personal training services.
Sales of nutritional products and other fitness-related products
occur primarily through our in-club retail stores and are
recognized upon delivery to the customer, generally at point of
sale. Revenue recognized in the accompanying consolidated
statement of operations as miscellaneous includes
amounts earned as commissions in connection with a long-term
licensing agreement related to the third-party sale of Bally
branded fitness equipment. Such amounts are recognized prior to
collection based on commission statements from the licensee.
Other amounts included in miscellaneous revenue are recorded
upon receipt and include franchising fees, facility rental fees,
locker fees, late charges and other marketing fees pursuant to
in-club promotion agreements.
We enter into contracts that include a combination of
(i) health club services (which may include two or more
members on a single contract), (ii) personal training
services, and (iii) nutritional and weight management
products. In these multiple element arrangements, health club
services are typically the last delivered service. We account
for these arrangements as single units of accounting because we
do not have objective and reliable evidence of the fair value of
health club services. Under Emerging Issues Task Force Issue
00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables (Issue
00-21)
elements qualify for separation when the services have value on
a stand-alone basis, fair value of the separate elements exists
and, in arrangements that include a general right of refund
relative to the delivered element, performance of the
undelivered element is considered probable and substantially in
our control. We do not have objective and reliable evidence of
the fair value of health club services and as a result, treat
these arrangements as single units of accounting.
Costs related to acquiring members and delivering membership
services are expensed as incurred.
Self-Insurance Costs: We retain risk related
to workers compensation and general liability claims,
supplemented by individual and aggregate stop-loss limits.
Reported liabilities represent our best estimate, using
generally accepted actuarial reserving methods, of the ultimate
obligations for reported claims plus those incurred, but not
reported, for all claims through December 31, 2006 and are
not reduced by amounts covered under our stop-loss coverage.
Receivables are recorded for the excess coverage to be recovered
from the insurance provider. Case reserves are established for
reported claims using case basis evaluation of the underlying
claim data and are updated as information becomes known. The
liabilities for workers compensation claims are accounted
for on a present value basis utilizing a risk-adjusted discount
rate. The difference between the discounted and undiscounted
workers compensation liabilities was approximately
$0.9 million as of December 31, 2006.
The assumptions underlying the ultimate costs of existing claim
losses are subject to a high degree of unpredictability, which
can affect the ultimate liability for such claims. For example,
variability in inflation rates of health care costs inherent in
these claims can affect the amounts realized. Similarly, changes
in legal trends and interpretations, as well as a change in the
nature and method of how claims are settled, can impact ultimate
costs. Although our estimates of liabilities incurred do not
anticipate significant changes in historical trends for these
variables, any changes could affect future claim costs and
currently recorded liabilities.
Valuation of Long-Lived Assets: In accordance
with SFAS No. 144, we monitor the carrying values of
long-lived assets for potential impairment each quarter based on
whether certain trigger events have occurred. These events
include current period losses combined with a history of losses
or a projection of continuing losses or a significant decrease
in the market value of an asset. When a trigger event occurs, an
impairment calculation is performed, comparing projected
undiscounted cash flows, utilizing current cash flow information
and expected growth rates related to specific fitness centers,
to the respective carrying values. If impairment is identified
for long-
50
lived assets to be held and used, we compare discounted
estimated future cash flows to the current carrying values of
the related assets. We record impairment when the carrying
values exceed the discounted estimated future cash flows.
The factors most significantly affecting the impairment
calculation are our estimates of future cash flows. Our cash
flow projections carry several years into the future and include
assumptions on variables such as growth in revenues, our cost of
capital, inflation, the economy and market competition. Any
changes in these variables could have an effect upon our
valuation.
We perform impairment reviews at the club level as opposed to a
review on an area or regional level basis. Use of a different
level could produce significantly different results.
Generally, costs to reduce the carrying values of long-lived
assets are reflected in the Consolidated Statements of
Operations as asset impairment charges. These
charges amounted to $38.3 million, $10.1 million and
$11.5 million in 2006, 2005 and 2004, respectively.
Impairment charges may continue in future years as a result of
investments in clubs in turnaround situations or around new
estimates of future operating cash flows.
Valuation of Goodwill: Goodwill is reviewed
for impairment during the fourth quarter of each year on
December 31, and also upon the occurrence of trigger
events. The reviews are performed at a reporting unit level
defined as one level below our operating regions, effectively
the individual markets in which we operate. Generally, estimated
fair value is based on a projection of discounted future cash
flows, and is compared to the carrying value of the reporting
unit for purposes of identifying potential impairment. Projected
future cash flows are based on managements knowledge of
the current operating environment and expectations for the
future. If potential for impairment is identified, the fair
value of an area is measured against the fair value of its
underlying assets and liabilities, excluding goodwill, to
estimate an implied fair value of the areas goodwill.
Goodwill impairment is recognized for any excess of the carrying
value of the areas goodwill over the implied fair value.
No impairment of goodwill was identified at December 31,
2006, 2005 or 2004.
The annual impairment review requires the extensive use of
accounting judgment and financial estimates. Application of
alternative assumptions and definitions, such as reviewing
goodwill for impairment at a different organizational level,
could produce significantly different results. Similar to our
policy on impairment of long-lived assets, the cash flow
projections used in our goodwill impairment reviews can be
affected by several items such as inflation, the economy and
market competition, which could have an effect upon these
projections.
Valuation of Intangible Assets: In addition to
goodwill, we have recorded intangible assets totaling
$6.8 million for trademarks and $0.7 million for
leasehold rights at December 31, 2006. Balances at
December 31, 2005 were $6.9 million for trademarks,
$2.8 million for leasehold rights and $0.1 million for
membership relations. Leasehold rights are amortized using the
straight-line method over the respective lease periods without
regard to any extension options. We test these assets annually
for impairment. Impairment charges for intangible assets for the
years ended December 31, 2006, 2005 and 2004 amounted to
$1.5 million, $1.2 million and $0.2 million,
respectively.
Stock-Based Compensation Plans: On
January 1, 2006, we adopted the provisions of the Financial
Accounting Standards Board Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123R) to
record compensation expense for our employee stock options and
restricted stock. SFAS No. 123R is a revision of
SFAS No. 123, Accounting for Stock-based
Compensation, (SFAS No. 123) and
supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees,
(APB 25) and its related implementation
guidance. Prior to the adoption of SFAS No. 123R, we
followed the intrinsic value method in accordance with APB 25,
in accounting for our employee stock options. For information
regarding share-based compensation, see Note 15 of the
Notes to Consolidated Financial Statements.
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements: In September 2006, the Securities and
Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(SAB 108). SAB 108 provides guidance
on the consideration of effects of the prior year misstatements
in quantifying current year misstatements for the purpose of a
materiality assessment. The SEC believe registrants must
quantify errors using both a balance sheet (the iron curtain
method)
51
and income statement (the rollover method) approach and evaluate
whether either approach results in quantifying a misstatement
that, when all relevant quantitative and qualitative factors are
considered, is material. The Company adopted the provisions of
SAB 108 in the quarter ended December 31, 2006. As a
result of adopting SAB 108 and electing to use the one-time
transitional adjustment, the Company made an adjustment to the
opening balance of retained deficit of $1.3 million net of
tax. See Note 23 of the Notes to Consolidated Financial
Statements for further details.
Results
of Operations
Key
Operating Data
As a result of the sale of Crunch Fitness in 2006, we have
presented the operating results of Crunch as a discontinued
operation for all prior periods presented. The following table
sets forth key operating data for the periods indicated (dollars
in thousands except per member data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Change from
|
|
|
|
December 31,
|
|
|
% of Net
|
|
|
December 31,
|
|
|
% of Net
|
|
|
Previous Year
|
|
|
|
2006
|
|
|
revenues
|
|
|
2005
|
|
|
revenues
|
|
|
Dollars
|
|
|
%
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
|
|
$
|
881,654
|
|
|
|
83
|
%
|
|
$
|
822,866
|
|
|
|
82
|
%
|
|
$
|
58,788
|
|
|
|
7
|
%
|
Personal training
|
|
|
120,562
|
|
|
|
12
|
%
|
|
|
118,690
|
|
|
|
12
|
%
|
|
|
1,872
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services revenue
|
|
|
1,002,216
|
|
|
|
95
|
%
|
|
|
941,556
|
|
|
|
94
|
%
|
|
|
60,660
|
|
|
|
6
|
%
|
Retail products
|
|
|
42,571
|
|
|
|
4
|
%
|
|
|
47,159
|
|
|
|
5
|
%
|
|
|
(4,588
|
)
|
|
|
(10
|
)%
|
Miscellaneous
|
|
|
14,264
|
|
|
|
1
|
%
|
|
|
15,126
|
|
|
|
1
|
%
|
|
|
(862
|
)
|
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
1,059,051
|
|
|
|
100
|
%
|
|
|
1,003,841
|
|
|
|
100
|
%
|
|
|
55,210
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING COSTS AND
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
|
663,303
|
|
|
|
62
|
%
|
|
|
665,036
|
|
|
|
66
|
%
|
|
|
(1,733
|
)
|
|
|
0
|
%
|
Retail products
|
|
|
40,881
|
|
|
|
4
|
%
|
|
|
49,837
|
|
|
|
5
|
%
|
|
|
(8,956
|
)
|
|
|
(18
|
)%
|
Marketing and advertising
|
|
|
58,185
|
|
|
|
5
|
%
|
|
|
53,549
|
|
|
|
5
|
%
|
|
|
4,636
|
|
|
|
9
|
%
|
Information technology
|
|
|
20,482
|
|
|
|
2
|
%
|
|
|
21,341
|
|
|
|
2
|
%
|
|
|
(859
|
)
|
|
|
(4
|
)%
|
Other general and administrative
|
|
|
72,141
|
|
|
|
7
|
%
|
|
|
64,689
|
|
|
|
7
|
%
|
|
|
7,452
|
|
|
|
12
|
%
|
Gain on sales of land and buildings
|
|
|
(3,984
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
0
|
%
|
|
|
(3,984
|
)
|
|
|
NM
|
|
Impairment of goodwill and other
intangibles
|
|
|
1,462
|
|
|
|
NM
|
|
|
|
1,220
|
|
|
|
NM
|
|
|
|
242
|
|
|
|
20
|
%
|
Asset impairment charges
|
|
|
38,258
|
|
|
|
4
|
%
|
|
|
10,115
|
|
|
|
1
|
%
|
|
|
28,143
|
|
|
|
NM
|
|
Depreciation and amortization
|
|
|
54,209
|
|
|
|
5
|
%
|
|
|
58,415
|
|
|
|
6
|
%
|
|
|
(4,206
|
)
|
|
|
(7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
944,937
|
|
|
|
89
|
%
|
|
|
924,202
|
|
|
|
92
|
%
|
|
|
20,735
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
114,114
|
|
|
|
11
|
%
|
|
|
79,639
|
|
|
|
8
|
%
|
|
|
34,475
|
|
|
|
43
|
%
|
Interest expense
|
|
|
(101,859
|
)
|
|
|
(10
|
)%
|
|
|
(85,329
|
)
|
|
|
(8
|
)%
|
|
|
(16,530
|
)
|
|
|
(19
|
)%
|
Other income (expense), net
|
|
|
(5,836
|
)
|
|
|
0
|
%
|
|
|
958
|
|
|
|
0
|
%
|
|
|
(6,794
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
|
|
|
6,419
|
|
|
|
1
|
%
|
|
|
(4,732
|
)
|
|
|
0
|
%
|
|
|
11,151
|
|
|
|
NM
|
|
Income tax provision
|
|
|
(855
|
)
|
|
|
0
|
%
|
|
|
(826
|
)
|
|
|
0
|
%
|
|
|
(29
|
)
|
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
5,564
|
|
|
|
1
|
%
|
|
$
|
(5,558
|
)
|
|
|
0
|
%
|
|
$
|
11,122
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Change from
|
|
|
|
December 31,
|
|
|
% of Net
|
|
|
December 31,
|
|
|
% of Net
|
|
|
Previous Year
|
|
|
|
2005
|
|
|
revenues
|
|
|
2004
|
|
|
revenues
|
|
|
Dollars
|
|
|
%
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
|
|
$
|
822,866
|
|
|
|
82
|
%
|
|
$
|
798,785
|
|
|
|
82
|
%
|
|
$
|
24,081
|
|
|
|
3
|
%
|
Personal training
|
|
|
118,690
|
|
|
|
12
|
%
|
|
|
108,996
|
|
|
|
11
|
%
|
|
|
9,694
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services revenue
|
|
|
941,556
|
|
|
|
94
|
%
|
|
|
907,781
|
|
|
|
93
|
%
|
|
|
33,775
|
|
|
|
4
|
%
|
Retail products
|
|
|
47,159
|
|
|
|
5
|
%
|
|
|
49,676
|
|
|
|
5
|
%
|
|
|
(2,517
|
)
|
|
|
(5
|
)%
|
Miscellaneous
|
|
|
15,126
|
|
|
|
1
|
%
|
|
|
17,041
|
|
|
|
2
|
%
|
|
|
(1,915
|
)
|
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
1,003,841
|
|
|
|
100
|
%
|
|
|
974,498
|
|
|
|
100
|
%
|
|
|
29,343
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
|
665,036
|
|
|
|
66
|
%
|
|
|
670,737
|
|
|
|
69
|
%
|
|
|
(5,701
|
)
|
|
|
(1
|
)%
|
Retail products
|
|
|
49,837
|
|
|
|
5
|
%
|
|
|
52,190
|
|
|
|
5
|
%
|
|
|
(2,353
|
)
|
|
|
(5
|
)%
|
Marketing and advertising
|
|
|
53,549
|
|
|
|
5
|
%
|
|
|
59,857
|
|
|
|
6
|
%
|
|
|
(6,308
|
)
|
|
|
(11
|
)%
|
Information technology
|
|
|
21,341
|
|
|
|
2
|
%
|
|
|
18,288
|
|
|
|
2
|
%
|
|
|
3,053
|
|
|
|
17
|
%
|
Other general and administrative
|
|
|
64,689
|
|
|
|
7
|
%
|
|
|
57,689
|
|
|
|
6
|
%
|
|
|
7,000
|
|
|
|
12
|
%
|
Impairment of goodwill and other
intangibles
|
|
|
1,220
|
|
|
|
NM
|
|
|
|
234
|
|
|
|
NM
|
|
|
|
986
|
|
|
|
NM
|
|
Asset impairment charges
|
|
|
10,115
|
|
|
|
1
|
%
|
|
|
11,490
|
|
|
|
1
|
%
|
|
|
(1,375
|
)
|
|
|
(12
|
)%
|
Depreciation and amortization
|
|
|
58,415
|
|
|
|
6
|
%
|
|
|
65,890
|
|
|
|
7
|
%
|
|
|
(7,475
|
)
|
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
924,202
|
|
|
|
92
|
%
|
|
|
936,375
|
|
|
|
96
|
%
|
|
|
(12,173
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
79,639
|
|
|
|
8
|
%
|
|
|
38,123
|
|
|
|
4
|
%
|
|
|
41,516
|
|
|
|
109
|
%
|
Interest expense
|
|
|
(85,329
|
)
|
|
|
(8
|
)%
|
|
|
(67,201
|
)
|
|
|
(7
|
)%
|
|
|
(18,128
|
)
|
|
|
(27
|
)%
|
Other income (expense), net
|
|
|
958
|
|
|
|
0
|
%
|
|
|
(420
|
)
|
|
|
0
|
%
|
|
|
1,378
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes
|
|
|
(4,732
|
)
|
|
|
0
|
%
|
|
|
(29,498
|
)
|
|
|
(3
|
)%
|
|
|
24,766
|
|
|
|
NM
|
|
Income tax provision
|
|
|
(826
|
)
|
|
|
0
|
%
|
|
|
(775
|
)
|
|
|
0
|
%
|
|
|
(51
|
)
|
|
|
(7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(5,558
|
)
|
|
|
0
|
%
|
|
$
|
(30,273
|
)
|
|
|
(3
|
)%
|
|
$
|
24,715
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
rollforward and statistics (in thousands, except dollars and
fitness center data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
% Change
|
|
|
Members at beginning of period
|
|
|
3,530
|
|
|
|
3,593
|
|
|
|
(63
|
)
|
|
|
(2
|
)%
|
Number of new members joining
during the period
|
|
|
1,031
|
|
|
|
1,025
|
|
|
|
6
|
|
|
|
1
|
%
|
Number of member drops during the
period
|
|
|
(1,076
|
)
|
|
|
(1,088
|
)
|
|
|
12
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members at end of period
|
|
|
3,485
|
|
|
|
3,530
|
|
|
|
(45
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of members during
the period(1)
|
|
|
3,559
|
|
|
|
3,622
|
|
|
|
(63
|
)
|
|
|
(2
|
)%
|
Average monthly cash received per
member(2)
|
|
$
|
17.74
|
|
|
$
|
18.02
|
|
|
$
|
(0.28
|
)
|
|
|
(2
|
)%
|
Fitness centers open at end of
period
|
|
|
375
|
|
|
|
409
|
|
|
|
(34
|
)
|
|
|
(8
|
)%
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
% Change
|
|
|
Members at beginning of period
|
|
|
3,593
|
|
|
|
3,562
|
|
|
|
31
|
|
|
|
1
|
%
|
Number of new members joining
during the period
|
|
|
1,025
|
|
|
|
987
|
|
|
|
38
|
|
|
|
4
|
%
|
Number of member drops during the
period
|
|
|
(1,088
|
)
|
|
|
(956
|
)
|
|
|
(132
|
)
|
|
|
(14
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members at end of period
|
|
|
3,530
|
|
|
|
3,593
|
|
|
|
(63
|
)
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of members during
the period(1)
|
|
|
3,622
|
|
|
|
3,639
|
|
|
|
(17
|
)
|
|
|
(0
|
)%
|
Average monthly cash received per
member(2)
|
|
$
|
18.02
|
|
|
$
|
17.75
|
|
|
$
|
0.27
|
|
|
|
2
|
%
|
Fitness centers open at end of
period
|
|
|
409
|
|
|
|
416
|
|
|
|
(7
|
)
|
|
|
(2
|
)%
|
|
|
|
(1) |
|
The average number of members during the year is derived by
dividing the sum of the total members outstanding at the end of
each quarter in the year by four. |
|
(2) |
|
Average monthly cash received per member represents cash
collections of membership revenue for the year divided by 12,
divided by the average number of members for the period. |
Revenue
and operating expenses
Bally memberships in most markets historically 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
month-to-month membership options to provide greater
flexibility to members. Beginning in late 2004, we implemented
the Build Your Own Membership (BYOM) program, which
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 membership fees, which include down payments on financed
contracts and dues payments. It also includes revenue generated
from provision of personal training services.
|
Membership services revenue comprised approximately 95%, 94% and
93% of our 2006, 2005 and 2004 revenue, respectively. Membership
services revenue is recognized at the later of when membership
services fees are collected or earned. Membership services fees
collected but not yet earned are included as a deferred revenue
liability on the balance sheet.
Currently, the majority of our members choose to purchase their
membership under our multi-year value plan by paying a
membership fee down payment to their financed members contract
and by making monthly membership fee payments throughout the
obligatory contract term of their membership. After the
obligatory contract term, our members enter the non-obligatory
renewal period of membership and make monthly payments
(renewal payments) to maintain membership
privileges. Under sales methods in effect prior to the BYOM
program implementation beginning in late 2004, renewal payments
were substantially discounted from those required in the
obligatory period. As BYOM members enter renewal, we anticipate
that these renewal payments will likely carry a smaller discount
from the obligatory period monthly payment level in most
markets. Members in our first BYOM markets began entering their
renewal stage in late 2006. Our initial experience with these
renewals indicates monthly renewal payments at levels higher
than we have historically experienced, but lower than the
initial obligatory term monthly rate. Beginning in the fourth
quarter of 2006, we again began to offer more significantly
discounted renewals on our nationwide access memberships in
selected markets.
In addition to our multi-year value plan financed membership
program, members may choose to prepay their multi-year
membership for periods of up to three years, or may choose
paid-in-full
nonrenewable memberships with closed-end contract terms of up to
three years. Month-to-month nonobligatory memberships are also
available, which allow a member to pay monthly non-obligatory
dues payments after making an
54
initial membership fee payment at the start of the membership.
Multi-year value plan financed membership contracts, including
those that have been prepaid, are renewable past the initial
obligatory contract period, after which members maintain their
membership by making monthly or annual dues payments.
Cash collection of membership services revenue generally occurs
before the associated revenue is recognized. This results in the
deferral of significant cash collection amounts received early
in the membership period that will be recognized in later
periods. This recognition methodology is a consequence of our
long history of offering membership programs with higher levels
of monthly or total payments during the obligatory period of
membership, generally for periods of up to three years, followed
by discounted payments in the subsequent renewal phase of
membership. Our revenue recognition objective is to recognize
revenue on a straight-line basis over the longer of the
contractual period or the estimated member term. For the members
expected to maintain membership through renewal periods, we make
estimates of membership term on a composite basis of all
multi-year value plan members joining in a monthly period and
establish discrete amortization pools based on estimated group
membership term length averages. Estimated membership term used
to create the separate amortization groups for revenue
recognition are based on historical average membership terms
experienced by our members.
Membership services revenue for our multi-year value plan
financed members expected to enter renewal is deferred as
collected. Our historical experience has resulted in a
determination that approximately 37% (38% and 35% in 2005 and
2004, respectively) of originated monthly payments from our
members is subject to deferral, to be recognized over the
related estimated membership term. As a result, we defer all
collections received from members expected to enter renewal, and
recognize as membership services revenue these amounts based on
five amortization pools with amortization periods of
39 months to 252 months (39 months to
242 months in 2005, and 39 months to 245 months
in 2004). These represent average membership terms of our
members in the five amortization pools expected to enter renewal
and maintain membership for periods of between 37 months
and 360 months. Memberships whose initial contract terms
have been prepaid in their entirety are recognized in a similar
manner, except that the estimate of the group expected to remain
a member for only the obligatory period is amortized over the
length of the contract (generally 36 months). Our
historical experience has resulted in a determination that
approximately 61% of such memberships originated (68% and 69% in
2005 and 2004, respectively) is subject to deferral, to be
recognized over the related estimated membership term using the
same five amortization pools as described for monthly
collections of multi-year value plan financed contracts. These
average membership terms are based on estimates that change over
time as we evaluate our membership term experience.
We evaluate the estimates of membership term for each of our
deferred revenue pools each quarter and make adjustments to our
estimates based on the most recent actual membership term
experience. As we determine that our new estimated membership
term should be modified from the previous estimate, we recognize
as a change in accounting estimate a charge or credit to
membership services revenue in the period of evaluation to
cumulatively adjust recognized revenue and deferred revenue. As
a consequence of our deferred revenue methodology, an increase
in membership attrition is expected to result in an increase in
revenue in the period of adjustment as it is determined that
amounts previously deferred to future periods should be deferred
over a shorter expected period. Alternatively, a decrease in
membership attrition can reduce membership services revenue as
it is determined that amounts previously considered earned are
required to be deferred for recognition over a longer expected
period.
Beginning in the fourth quarter of 2004, we increased
contractual renewal rates associated with our typical membership
offering. Historically, when the member reaches renewal, our
business practice is to reduce renewal rates in order to
increase retention during the renewal period. Because we have
included a discount in our membership contract and do not have a
demonstrated history of collecting the contractual renewal rate,
we use the current collections of members in renewal to estimate
both ultimate collections and the portion attributable to the
initial term.
To the extent that actual cash collected in renewal is different
from the estimated amount, revenues in the period of the change
in estimate may be materially impacted. If we are successful in
collecting the
55
contractual renewal rate, revenue deferred during the initial
term is expected to decline. If we offer discounts to renewing
members that are more significant than those that have been
offered in the past, revenue required to be deferred during the
initial contract term will increase. The potential effects of
this change in estimate may be amplified if, for example, the
collections of higher contractual renewal rates results in a
decline in membership retention, which will reduce our estimate
of total membership term, and further reduce the amount of
deferred revenue recorded. Changes in member behavior,
competition and our performance may cause actual collected
renewal rates to differ significantly from estimated renewal
rates. A resulting change in estimated renewal rates may have a
material effect on reported revenues in the period in which the
change of estimate is made.
Our membership mix impacts the amount of revenue that we defer
for later recognition, and the period of time over which it is
recognized. Since 2004 we have increased our sales of
month-to-month, nonobligatory add-on, and nonrenewable
paid-in-full
memberships. These alternative membership programs result in a
lower level of deferred revenue than our multi-year value plan
financed membership plans. Nonobligatory membership programs
include our month-to-month memberships which allow a member to
make a membership fee payment, generally between $99 and $149,
and then make monthly dues payments for the membership term on a
nonobligatory basis. Add-on memberships to our multi-year value
plan membership contracts allow added members to maintain
membership on a nonobligatory basis by making monthly payments
with no additional down payment requirements. Our nonrenewable
memberships primarily result from our
paid-in-full
membership option. Nonrenewable members prepay their membership
for contract periods of 12 to 36 months, and then are
required to purchase a new membership after the expiration of
the contract membership term to maintain membership. A shift in
membership mix from our multi-year value plan financed
membership to month-to-month and nonrenewable memberships
generally results in a reduction in the deferral of cash
collections because the membership term of month-to-month
contracts is much shorter than the membership term of multi-year
value plan financed memberships, and the nonrenewable contract
revenue is recognized over the contract term, which is typically
36 months or less. As a result of these shorter deferral
periods, cash is recognized as revenue more quickly for
month-to-month and nonrenewable paid in full memberships than
for our multi-year value plan financed memberships. Our pricing
of add-on memberships typically results in an equal increase to
monthly payments required in the initial term and the renewal
term. As a result, to the extent the membership mix shifts to
include more add-on memberships and fewer multi-year value plan
members, the amount of required deferred revenue is expected to
decrease.
Personal training and other services are provided at most of the
Companys fitness centers. Personal training services
contracts are either
paid-in-full
at the point of origination, or are financed and collected
generally over three months after an initial payment.
Collections related to
paid-in-full
personal training services contracts are deferred and recognized
as personal training services are rendered. Revenue related to
personal training services contracts that have been financed is
recognized at the later of cash receipt or the rendering of
personal training services.
|
|
|
|
2)
|
We generate revenue from the sales of products at our in-fitness
center retail stores, including Bally-branded and third-party
nutritional products, juice bar nutritional drinks and
fitness-related convenience products such as clothing. Revenue
from product sales represented approximately 4% of total revenue
in 2006 and 5% of total revenue in 2005 and 2004.
|
|
|
3)
|
The balance of our revenue (approximately 2% for 2006, 2005 and
2004) primarily consists of franchising revenue, guest fees
and specialty fitness programs. We also generate revenue through
granting concessions in our facilities to operators offering
wellness-related services such as physical therapy and from
sales of Bally-branded products by third-parties. Revenue from
sales of in-club advertising and sponsorships is also included
in this category, which we refer to as miscellaneous revenue.
|
Our primary sources of cash are down payments,
paid-in-full
and monthly membership fees and dues payments made by our
members and sales of products and services, including personal
training. Because down payments, membership fees and monthly
membership dues are recognized over the later of when such
payments are
56
collected or earned, cash from membership fees and monthly
membership dues will often be received before such payments are
recognized as revenue in the consolidated statement of
operations.
Our operating costs and expenses are comprised of the following:
|
|
|
|
1)
|
Membership services expenses consist primarily of salaries,
commissions, payroll taxes, benefits, rent, real estate taxes
and other occupancy costs, utilities, repairs and maintenance
and supplies to operate our fitness centers and provide personal
training. Also included are the costs to operate member
processing and collection centers, which provide contract
processing, member relations, billing and collection services.
|
|
|
2)
|
Retail products expenses consist primarily of the cost of
products sold as well as the payroll and related costs of
dedicated retail associates.
|
|
|
3)
|
Marketing and advertising expenses consist of our marketing
department, national and local media and production and
advertising costs to support fitness center membership growth as
well as the growth of our brand.
|
|
|
4)
|
General and administrative expenses include costs relating to
our centralized support functions, such as information
technology, accounting, treasury, human resources, procurement,
real estate and development and senior management. General and
administrative also includes professional services expenses such
as legal, consulting and auditing as well as expenses related to
the various legal and accounting investigations.
|
|
|
5)
|
Impairment of goodwill and other intangibles includes the
write-down of the net book value of these assets pursuant to
SFAS No. 142. Under SFAS No. 142, the
carrying value of our indefinite life intangible assets is
annually evaluated and compared to the fair value of such
assets. Impairments are recorded when we determine that the net
book value of these assets exceeds their fair value.
|
|
|
6)
|
Asset impairment charges include the write-down of the net book
value of our assets (other than indefinite life intangible
assets evaluated under SFAS No. 142) pursuant to
SFAS No. 144. Under SFAS No. 144, the
carrying value of our assets, primarily property and equipment
assets, is evaluated when circumstances indicate that the
carrying value may have been impaired. Asset impairment charges
represent the excess of the carrying value of the assets over
their fair value.
|
|
|
7)
|
Depreciation and amortization represent primarily the
depreciation on our fitness centers (equipment and buildings,
where owned), and amortization of leasehold improvements. Owned
buildings and related improvements are depreciated over 5 to
35 years and leasehold improvements are amortized on the
straight-line method over the lesser of the estimated useful
lives of the improvements, or the remaining non-cancelable lease
terms. In addition, equipment and furnishings are depreciated
over 5 to 10 years.
|
Given the nature of our revenue and cost structure, we believe
that inflation has not had any material impact on our net
revenues or on our operating expenses.
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 occupancy costs as a
percentage of sales. We use fitness center cash contribution and
cash revenue 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 new membership sales,
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 membership retention.
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 will lead ultimately to increased
profitability. Accordingly, we are focusing on member
acquisition and member retention as key objectives.
A portion of our capital expenditures relates 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 approximate $3.5 million, on
average, which varies based on the costs of construction labor,
as well as on the planned service
57
offerings, size and configuration of the facility and on the
market. Capital expenditures also include fitness equipment,
usually as a replacement for equipment no longer operative at
our fitness centers.
According to the IHRSAs Industry Data Survey of the
Health and Fitness Club Industry, industry wide club
membership grew at a 4.7% compounded annual growth rate from
2000 to 2005. We may be able to benefit from the growth in the
industry, although increased competition, including competition
from very small fitness centers (less than 3,000 square
feet), will require us to reinvest in our facilities to remain
competitive, which we may not be able to do if we do not have
adequate liquidity. Furthermore, price discounting by
competitors, particularly in more competitive markets, may
negatively impact our membership growth
and/or our
average revenue per member. See Item 1A Risk
Factors We may not be able to compete
effectively in the future.
Summary
of revenue recognition method
Our sources of membership revenue include health club
memberships and personal training services. As a general
principle, revenue is recognized when the following criteria are
met: (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred and services have been rendered,
(iii) the price to the buyer is fixed or determinable, and
(iv) collectability is reasonably assured. We rely upon a
signed contract between us and the customer as the persuasive
evidence of a sales arrangement. Delivery of health club
services extends throughout the membership terms. Delivery of
personal training services occurs when individual personal
training sessions have been rendered.
We receive membership fees and monthly dues from our members.
Membership fees, which customers often finance, become customer
obligations upon contract execution and after a cooling
off period of three to fifteen calendar days depending on
jurisdiction, while monthly dues become customer obligations on
a month-to-month basis as services are provided. Membership fees
and monthly dues are recognized at the later of when collected
or earned. Membership fees and monthly dues collected but not
earned are included in deferred revenue. Our total membership
cash collections include all sources of cash for membership,
including membership fees collected upon membership origination,
down payments on multi-year value plan financed membership
contracts and
paid-in-full
membership receipts, monthly collections of membership fee
payments and dues, and amounts collected in advance of the due
date under our acceleration and dues prepayment programs.
Significant portions of our total cash collections are deferred
upon receipt and recognized in future periods. As a result, our
revenue recognition patterns do not reflect our patterns of
total membership cash collections.
A majority of our cash collected for membership revenues is
deferred and recognized on a straight-line basis over the longer
of the contractual term or the estimated membership term. The
majority of members commit to a membership contract term of
between 12 and 36 months. The majority of these contracts
are for 36 months and include a members right to
renew the membership at a discount compared to the payments made
during the initial membership term. As of December 31, 2006
and 2005, the weighted average membership life for members that
commit to a membership term of between 12 and 36 months was
34 months and 38 months, respectively. Members with
these terms that finance their initial membership fee had a
weighted average membership life of 33 months and
36 months, respectively at December 31, 2006 and 2005,
while those members that pay their membership fee in full at
point of sale had a weighted average membership life of
48 months and 57 months at December 31, 2006 and
2005, respectively. Our estimates of membership life were up to
360 months during 2006, 2005 and 2004, although the vast
majority of our membership revenues are recognized over six
years or less.
Members in the non-obligatory renewal period of membership may
cancel their membership at any time prior to their monthly or
annual due date with 30 days written notice. Related
revenue recognized includes monthly dues to maintain their
membership as well as amounts paid during the obligatory period
that have been deferred as described above, to be recognized
over the estimated term of membership, including renewal periods.
Month-to-month members may cancel their membership prior to
their monthly due date. Membership revenue for these members is
earned on a straight-line basis over the estimated member life.
Membership life for month-to-month members is currently
estimated at between 2 and 67 months, with an average of
15 months, as of December 31, 2006, and were estimated
between 4 and 41 months, with an average of 15 months,
as of December 31, 2005. Management believes that
month-to-month memberships have become more appealing to those
consumers who are willing to pay more, and do not want to be
locked into a long-term obligation.
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Personal training services are generally provided shortly after
we receive payment, 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.
We have historically concentrated our membership sales efforts
on multi-year value plan financed obligatory contracts. Our BYOM
membership offer approach added more alternative plans to
prospective new members. These plans included a greater emphasis
on nonobligatory memberships and closed-end contracts that carry
definite terms of membership. Our BYOM approach also included an
increase in renewal dues for our multi-year value plan financed
membership contracts when compared to the value plan financed
contracts prior to BYOM.
The timing of recognition of cash received for memberships and
the level of deferred revenue recognized is a consequence of the
membership type and the amount of discount offered in the
renewal term. Our multi-year value plan financed memberships
with open-ended renewal periods that have carried significant
discounts to initial term membership payment levels have
resulted in the greatest level of deferred revenue. At
December 31, 2006 and 2005, the combination of down
payments and deferred monthly collections of our financed
obligatory memberships and deferred prepayments of membership
fees on our
paid-in-full
obligatory memberships made up 77% and 82%, respectively, of our
total deferred revenue balance. This results from the
requirement to defer higher initial term payments over periods
up to 360 months for those members whose membership term is
greater than the initial obligatory term. Our alternative
membership programs result in a much lower level of deferred
revenue than these membership plans. Nonobligatory membership
programs include our month-to-month memberships, which allow a
member to make a membership fee payment, generally between $99
and $149, and then make monthly dues payments for the membership
term on a nonobligatory basis. We also offer add-on memberships
to our multi-year value plan financed membership contracts,
which allow added members to maintain membership on a
nonobligatory basis by making monthly payments for the add-on
membership term with no additional down payment requirements. At
December 31, 2006 and 2005, approximately 1% of our total
deferred revenue balance related to the deferral of
month-to-month membership fees. Our closed ended nonrenewable
memberships primarily result from our
paid-in-full
membership option. Nonrenewable members prepay their membership
for contract periods of 12 to 36 months, and then are
required to purchase a new membership after the expiration of
the contract membership term to maintain membership. The initial
prepayment of these memberships is deferred and recognized on a
straight-line basis for the duration of the closed contract
period. Unlike our traditional renewable memberships, no
deferred revenue or recognition is required past the contract
term as we have no further obligations to the members following
expiration of the contract term. At December 31, 2006 and
2005, deferred revenue related to these nonrenewable contracts
amounted to approximately 3% and 1%, respectively, of our
deferred revenue.
Estimates of membership term have a significant effect on the
amount and timing of revenue recognition and deferred revenue
for our multi-year value plan financed memberships. Because of
the inability to create predictions on a
member-by-member
basis of ultimate membership term, we make predictions on an
aggregate basis using multiple attrition groups to cover the
continuum of potential membership term. We calculate expected
average membership term for each attrition group based on
historical experience and use it to amortize deferred revenue
over the estimated membership term. As a result, the estimate of
average membership term has a significant impact on revenue
recognition. Because we base our estimates on historical
membership term experience updated quarterly, such estimates are
inherently subject to change. As a result, our revenue is
subject to a high degree of variability dependent on changes of
estimates of membership term.
Several factors have affected our estimates of average
membership term at December 31, 2006 and are expected to
continue to affect our estimates into future periods. Historical
attrition trends in 2006 are reflecting shorter estimated
membership terms than in 2005 and 2004 as a result of several
factors described herein. Capital constraints associated with
our liquidity position have resulted in reduced capital
expenditures in our fitness centers, affecting the membership
experience. Further, increased competition in key markets has
resulted in a higher number of alternatives for our members than
in prior periods, leading to shorter terms of membership. The
late 2004 start of the phased implementation of the BYOM
membership program resulted in an increase in contracted renewal
dues on our multi-year value plan financed memberships to levels
approximating the monthly initial term payment. This change is
expected to have a notable negative impact on the percentage of
multi-year value plan financed members renewing since the prior
significantly discounted renewal dues influenced member
retention in renewal periods. We are monitoring the level of
renewal of these BYOM members in order to determine our business
response.
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Importantly, our response to membership term changes brought
about by increased renewal monthly payment rates may include
concessions to contracted renewal rates in an effort to maintain
membership levels. Also influencing our expectations of future
membership term of our multi-year value plan financed
memberships is the change in mix of memberships sold in recent
periods to more nonobligatory and closed-ended nonrenewable
membership options. The growth in these alternative payment
memberships results in reduced estimated membership of our
multi-year value plan financed memberships, as it is expected
that those members having higher credit scores may be attracted
to these alternatives, resulting in a higher proportion of lower
credit score members purchasing our multi-year value plan
financed membership. Significant in our year-end evaluation of
future membership attrition was our consideration of forecasting
results of expected future cash revenue. This critical
evaluation by our new senior management included estimates of
future membership cash flows that directly result from estimates
of membership retention. Using a more conservative approach to
this forecasting, cash revenue trends were greatly reduced in
our forecast as of December 31, 2006, resulting in a need
to consider the impact of this estimate on our membership term
estimate. As more fully described below, this evaluation led us
to conclude that our prior estimates of membership attrition
should be changed to reflect higher levels of early attrition
coinciding with our projected future operating cash flows. As a
result, based on the influence of these factors on our ongoing
historical membership term experience, we reduced our deferred
revenue balance to reflect these shorter membership term
expectations.
Because our deferred revenue balances that are subject to
adjustment due to membership term estimate changes make up most
of our total deferred revenue balance, changes in expectations
as to estimated membership term can have a significant impact on
our revenue recognized. In periods of decreasing estimated
membership term, deferred revenue is adjusted downward,
representing the decreasing periods over which it is necessary
to spread cash collections of prior periods. Alternatively, in
periods in which estimated membership term is increasing,
deferred revenue is adjusted upward, representing increasing
periods over which prior cash collections are spread. The
changes in deferred revenue are recorded in the period of the
change as the adjustments to revenue are recognized. These
adjustments may produce short-term revenue results that are
counter to the expected impact of our business trends. For
instance, negative trends in attrition reflecting shorter
membership term result in increases in revenue recognized in the
period in which the adjustment to deferred revenue was
determined, while positive trends in membership term have the
opposite effect.
A consequence of our negative business trends and change in
estimated membership term is the reduction in deferred revenue
available to be recognized as membership revenue in future
periods. Our deferred revenue also has declined due to the
change in membership mix, brought about by our alternative
membership programs. As a higher proportion of our members
select nonobligatory and closed-ended nonrenewable membership
programs, the level of deferred revenue has decreased since
these programs do not require the extensive spreading of early
cash collections to extended membership periods that our
traditional committed renewable membership programs have
required. As a result of this change in membership mix, revenue
declines due to reduced amortization from deferred revenue are
replaced with additional cash recognition from monthly dues and
the amortization of our closed-end nonrenewable memberships over
the contract period.
We estimate membership term for contracts originated during each
month. Each quarter we update our estimate of membership term
for each individual monthly origination group to take into
account attrition experience specific to that group. As monthly
sales originations mature, each quarter we monitor the specific
attrition of each group and make adjustments to our estimated
membership term. During the first three years of our multi-year
value plan financed memberships, we closely monitor collection
history and change our estimates of membership term based on
this experience. During the renewal term, we monitor membership
term by reviewing actual membership term experience in each
membership term group. In the fourth quarter of 2006, as a
result of our change in estimate as to membership term length
based on our most recent historical experience, we recorded a
decrease in deferred revenue of $71.0 million and increased
our revenue recognized by the same amount (with a consequent
increase in income from continuing operations and net income of
$71.0 million and income per common share of $1.78).
Based on the continuing trend of membership attrition and our
negative trends in cash membership revenue expected in future
periods, we expect to record additional adjustments to our
deferred revenue to reflect our changed estimates of membership
attrition based on our historical membership term experience.
Historical attrition data has primarily reflected the
consequence of contracted renewal dues that represent a
significant discount to the initial
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term monthly payment level. Our BYOM contracts include renewal
dues that are substantially similar in most cases to the monthly
payment level during the initial term, resulting in the
reduction of the influence of renewal period monthly payment
decreases on member longevity. As a result, it may become more
difficult to predict our estimates of future membership term in
light of this important change in business practices. We also
may need to alter our estimates of future attrition based on our
future actions to retain BYOM members. Because of the phased
roll out of the BYOM membership approach to our markets, and the
distribution of term lengths, we will monitor the early results
of the shorter-term markets to determine the changes in
estimated term length that may be necessary to adjust our
deferred revenue balances. We expect to observe the earliest
indications of overall increases in early attrition as members
in the latter part of their initial committed membership period
increase the default rate, since the influence of discounted
renewal dues has been removed. Such increases will be reflected
in our monitoring of collection rates and other historical
indicators of estimated membership term.
The estimate of our deferred revenue is sensitive to the changes
in membership term estimates. A 1% increase in annual attrition
of our traditional committed multi-year renewable members would
result in a decrease in deferred revenue of approximately
$31 million as of December 31, 2006. Variability in
future estimated membership term results from changes in the
collection pattern of multi-year value plan financed
memberships, actual retention of such members through renewal
term, and membership mix changes resulting in lower deferred
revenue requirements. Membership term changes are influenced by
changes in our business, including increases in competition for
health clubs services, lack of funding of remodeling and needed
capital improvements, changes in consumer tastes and the market
for health club services, and changes in the prices we charge in
renewal periods to maintain membership.
Our 2006 membership term estimate identified that data used in
our analyses had inadvertently included a small number of our
upscale clubs, including those of Crunch Fitness, Pinnacle
Fitness and Gorilla Fitness. Such clubs exhibit a slightly
different attrition profile than our Bally Total Fitness-branded
clubs and as a result we determined that it would have been more
appropriate to exclude these clubs from our attrition analysis.
We also found inadvertent mathematical errors in the weighting
of the attrition of our multiple member add-on contracts, and
those for which an upgrade had been purchased. We corrected
these errors in our attrition study and recomputed our 2004 and
2005 deferred revenue using the revised attrition estimates. We
also identified other offsetting errors in our calculation of
deferred revenue in other deferred revenue pools that, when
combined with the attrition issue, resulted in a net adjustment
to reduce our deferred revenue as of the beginning of 2006 by
$5.7 million. This adjustment has been recorded under the
transitional adoption provisions of Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements as a net adjustment
reducing our opening deferred revenue balance and accumulated
deficit.
Comparison
of the years ended December 31, 2006 and 2005
As a result of the sale of Crunch Fitness in 2006, we have
presented the operating results of Crunch as a discontinued
operation for all prior periods presented. All previously
reported amounts from the statements of operations and balance
sheets have been reclassified in accordance with the reporting
requirements of SFAS No. 144.
Total revenue for the year ended December 31, 2006 was
$1,059.0 million compared to $1,003.8 million in 2005,
an increase of $55.2 million. The increase in total revenue
resulted from the following:
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Our 2006 year-end evaluation of membership attrition trends
required an adjustment to increase our membership revenue and
reduce deferred revenue by $71.0 million to reflect our
current estimated membership term. During the first three
quarters of 2006, we recorded additional revenue of
$24.5 million and reduced deferred revenue by the same
amount to reflect actual attrition experience. In 2005, our
monitoring of specific deferred revenue monthly origination
group estimates increased revenue and reduced deferred revenue
by $9.2 million. On an overall basis, revenue was increased
due to these adjustments to deferred revenue by
$86.3 million in 2006 versus the prior year period. It is
expected that the higher monthly renewal dues payment
requirement of our members since implementing the BYOM
membership plan will result in increases in attrition on these
memberships. As this increase in attrition enters our attrition
experience during the next three years, it is possible that
additional and significant adjustments of our
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membership term estimates will be required and result in
additional adjustments to record membership revenue and reduce
deferred revenue.
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Amortization of deferred revenue in our long-term deferred
revenue pools has declined due to the increase in the mix of
nonobligatory membership programs, including add-on memberships
added to multi-year value plan membership programs,
month-to-month membership contracts, and the continued increase
in our
paid-in-full
nonrenewable membership programs. Such shifts in new membership
mix have resulted in a decrease in originated membership fee
dollars that are deferred into our long-term deferred revenue
pools. As a result, total recognition of revenue through
amortization of previously deferred cash collections into our
long-term deferred revenue pools was $299.7 million in 2006
versus $353.8 million in 2005, a $54.1 million
decrease (15%). It is expected that amortization of our
long-term pools will continue to decline as a result of this
membership mix change, resulting from the decreases in deferred
revenue described above related to the adjustment of attrition
estimates of our long-term pools. Declines in the recognition
through amortization of amounts deferred from our traditional
obligatory membership programs are expected to be offset in part
by increases in recognition of cash collected for nonobligatory
memberships, month-to-month memberships, and
paid-in-full
nonrenewable memberships.
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Total membership cash collections during 2006 were
$757.6 million, a decrease of $25.4 million (3%) from
2005. Gross collections of monthly membership fees and dues
declined from $715.3 million in 2005 to $689.1 million
in 2006, a $26.2 million (4%) decrease. Total deferrals of
these collections declined from 2005 by $58.2 million,
resulting in a net increase in recognized revenue from gross
collections of monthly membership fee payments and dues of
$31.9 million. Decreases in cash collected from membership
fees and dues are a result of declines in the average monthly
payment of memberships sold under BYOM pricing, including an
increase in the mix of add-on members with lower monthly payment
requirements. Prepayments of memberships originated increased by
$8.8 million in 2006 to $54.7 million, offset by a
decrease of $5.9 million in initial down payment on value
plan contacts. Accelerations of membership fee collections,
included in the above change in gross collections of membership
fees, increased $2.6 million to $18.3 million in 2006.
The increase in accelerations of membership fee collections
resulted from programs during the year to target value plan
members which result in discounts to the contracted monthly
obligatory payment in exchange for early payment. We also allow
certain members to reactivate their expired membership at a
discount in order to incent these members to restart their
workout routine (reactivations). We received
$22.4 million and $20.7 million of proceeds from
reactivations during the year ended December 31, 2006 and
2005, respectively. The average monthly cash received per member
includes $0.95 and $0.84 of proceeds from accelerations and
reactivations for the year ended December 31, 2006 and
2005, respectively. Negative trends in our total membership
collections have increased during the year, with over 40% of our
annual decline occurring in the fourth quarter of 2006.
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Increases in renewal dues have had a positive impact on average
monthly cash received per member. However, the mix of new member
signups has changed under the BYOM program to include a higher
number of one-club memberships, along with an increase in add-on
member signups at discounted monthly rates relative to primary
member monthly rates, and a higher percentage of nonobligatory
month-to-month members, including members added under add-on
programs. In the year ended December 31, 2006, new member
signups were approximately 70% value plan, 14%
paid-in-full
and 16% month-to-month. In the year earlier period, new member
signups were approximately 72% value plan, 15%
paid-in-full
and 13% month-to-month. Membership cash collections have been
negatively affected due to the higher attrition tendency of
month-to-month members, and the lower average monthly rates of
the increasing mix of one-club memberships and discounted family
member signups. Because of our historical attrition patterns,
whereby a high percentage of new members drop their membership
during the first twelve months subsequent to joining, a
significant portion of cash collections have historically been
provided by new members early in their membership term.
Accordingly, a decrease in new member pricing (both obligatory
and nonobligatory) coupled with the change in the mix of new
membership signups has had a disproportionate impact on
membership cash collections in 2006 as compared to 2005 and will
continue to have a negative impact.
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Personal training revenue increased to $120.6 million from
$118.7 million in 2005, an increase of $1.9 million
(2%), primarily reflecting our emphasis on growth in personal
training services, which resulted in an 8% increase in sessions
delivered and expansion of new programs such as small group
training.
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Retail products revenue decreased to $42.6 million from
$47.2 million in 2005, a decrease of $4.6 million
(10%), due primarily to the conversion of lower performing full
size in-club retail stores to a more efficient but lower sales
model integrated with the front desk operation, and a 2%
decrease in the average number of members to 3.559 million
members, reducing workout traffic in the clubs.
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Miscellaneous revenue decreased to $14.3 million (6%) in
2006 from $15.1 million in 2005, primarily due to lower
revenue from income producing strategic partnerships and
franchising fees.
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Operating costs and expenses for the year ended
December 31, 2006 were $944.9 million compared to
$924.2 million during 2005, an increase of
$20.7 million (2%). This increase resulted from the
following:
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Membership services expenses for the year ended
December 31, 2006 decreased $1.7 million (nil%) from
2005, reflecting reductions in personnel costs as a result of
our cost reduction initiatives offset by increases in occupancy
costs (primarily utilities) and repair and maintenance costs.
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Retail products expenses, which include labor costs, for the
year ended December 31, 2006 decreased $9.0 million
(18%) from 2005, primarily as a result of a decrease in cost of
goods sold from lower sales and reduced labor costs as a result
of our front desk retail model integration.
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Marketing and advertising expenses for the year ended
December 31, 2006 increased $4.6 million (9%) from
2005, primarily from increases in media spending and television
production costs.
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Information technology expenses for the year ended
December 31, 2006 decreased $0.9 million (4%) from
2005 primarily as a result of reduced use of outside consultants
and lower telecommunication costs partially offset by increased
internal salaries. Information technology expense represented
2.0% and 2.1% of total revenues during 2006 and 2005,
respectively.
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Other general and administrative expenses for the year ended
December 31, 2006 increased $7.5 million (12%) from
2005. Increases were primarily a result of separation costs
associated with our former Chairman and Chief Executive Officer
and former Chief Financial Officer, and costs incurred as a
result of our proxy solicitation, restructuring and ongoing
investigations and litigation related to the restatement of our
financial statements, and an increase in directors fees and
audit costs.
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Gain on sales of land and buildings includes a gain on the March
2006 sale of the land and building relating to a club in Canada
($0.9 million), a gain on the June 2006 sale of a club in
Ohio ($0.9 million) and a gain on the July 2006 sale of a
club in Georgia ($2.4 million) partially offset by a loss
on the sale of a club in Tennessee ($0.2 million).
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Impairment charges related to long-lived assets and other
intangible assets for the year ended December 31, 2006 were
$39.7 million compared to $11.3 million in 2005, an
increase of $28.4 million. The Companys deteriorating
operating performance led to lower projected operating cash
flows at the individual club level, the level at which the
Company measures impairment of long-lived assets. This resulted
in an impairment charge as the carrying value of the long-lived
assets exceeded the lower projected cash flows for many of the
clubs.
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Depreciation expense for the year ended December 31, 2006
decreased $4.2 million (7%) from 2005, reflecting fewer
depreciable assets resulting from fixed asset write-offs and
impairment charges in 2005, along with reduced levels of capital
expenditures in 2006 and prior periods.
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Operating income for the year ended December 31, 2006
increased $34.5 million to $114.1 million as compared
to the prior year. This increase is primarily due to the revenue
increase due to our change in estimate, offset by increases in
expenses for marketing and advertising, general and
administrative, and asset impairment charges, partially offset
by an increase in retail contribution, the gains on the club
sales and lower membership services and depreciation expense.
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Interest expense for the year ended December 31, 2006
increased $16.5 million to $101.9 million as compared
to the prior year, principally due to increased amortization of
deferred financing costs as a result of consent fees paid in
March and April 2006 to obtain waivers from noteholders and
lenders of financial reporting requirements. Amortization of
deferred financing costs was approximately $21.1 million
for the year ended December 31, 2006, a $12.5 million
increase over 2005. The balance of the increase is due to
increases in general interest rate levels, partially offset by
lower weighted average debt outstanding during the year.
In 2006, we recorded a $7.7 million loss on debt
extinguishments related to obtaining the New Facility. Other,
net non-operating income, including primarily foreign exchange
gains and interest income, was $1.8 million for the year
ended December 31, 2006 compared to $1.0 million in
2005.
Comparison
of the years ended December 31, 2005 and 2004
Total revenue for the year ended December 31, 2005 was
$1,003.8 million compared to $974.5 million in 2004,
an increase of $29.3 million (3%). The increase in total
revenue resulted from the following:
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Total membership cash collections during 2005 were
$783.1 million, an increase of $8.2 million (1%) from
2004. Included in total collections were gross collections of
membership fees and dues of $715.3 in 2005 representing an
increase of $4.3 million (1%) over the prior year
collections. Deferrals offsetting gross collections and dues in
2005 were $285.5 million, versus $316.4 million in the
prior year period, representing a decrease in deferrals of
$30.9 million. As a result, net recognition of gross
collections and dues increased by $35.2 million in 2005
resulting from the lower average dues collections on the
increasing proportion of nonobligatory add-on members that were
added during 2004 and 2005 at reduced monthly rates. The
reduction in deferrals against these gross cash receipts
resulted from the reduction of membership fee dollars associated
with our traditional obligatory membership contract, and
increase of nonobligatory dues paying members that have minimal
deferral requirements. Accelerations of membership fees
collected, included in the above gross collections and dues
amount, decreased $3.6 million to $15.6 million,
versus $19.2 million in 2004. The decrease in accelerated
collections of monthly membership fees results from the
elimination in early 2004 of a third party credit card program
that was marketed to members in prior years and provided
accelerations of our financed member balances. The average
monthly cash received per member was $18.02 in 2005 versus
$17.75 in the prior year period. We also received
$20.7 million and $21.9 million of proceeds from
reactivations during the year ended December 31, 2005 and
2004, respectively, included in our total gross collections of
membership fees and dues above. The average monthly cash
received per member includes $0.84 and $0.70 of proceeds from
accelerations and reactivations for year ended December 31,
2005 and 2004, respectively. Initial down payments on originated
monthly payment memberships declined $6.5 million in 2005
to $37.8 million. This decrease was offset in part by an
increase in prepayment of originated membership fees upon
origination of $4.2 million.
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Increases in renewal dues have had a positive impact on average
monthly cash received per member. However, the mix of new member
signups has changed under the BYOM program to include a higher
number of one-club memberships, along with an increase in add-on
member signups at discounted monthly rates relative to primary
member monthly rates, and a higher percentage of nonobligatory
month-to-month members, including members added under add-on
programs. In the year ended December 31, 2005, new member
signups were approximately 72% value plan, 15%
paid-in-full
and 13% month-to-month. In the year earlier period, new member
signups were approximately 80% value plan, 12%
paid-in-full
and 8% month-to-month. As a result, membership cash collections
have been negatively affected due to the higher attrition
tendency of month-to-month members, and the lower average
monthly rates of the increasing mix of one-club memberships and
discounted family member signups. Because of our historical
attrition patterns, whereby a high percentage of new members
drop their membership during the first twelve months subsequent
to joining, a significant portion of cash collections have
historically been provided by new members early in their
membership term. Accordingly, a decrease in new member pricing
(both obligatory and nonobligatory) coupled with the change in
the mix of new membership signups had a disproportionate
negative impact on membership cash collections in 2005 as
compared to 2004.
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Amortization of our long-term deferred revenue pools was
$370.4 million in 2004 and declined to $363.0 million
in 2005, a $7.4 million (2%) decrease. This decrease
resulted from the change in membership mix to an increase in
nonobligatory membership programs, both as add-ons to our
traditional obligatory contract and due to the growth in
month-to-month membership sales. The increase in these
nonobligatory membership sales is expected to continue to
decrease the level of membership fee dollars subject to
long-term deferral. In addition to this decrease in amortization
of our long-term deferred revenue pools, amortization of
previously deferred accelerated collections declined
$8.9 million to $23.8 million in the 2005 period. The
decrease in amortization of prior accelerations is a result of
the elimination of our third party credit card program that was
promoted to members prior to the first quarter of 2004, and
generated higher levels of accelerations in prior periods.
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Personal training revenue increased to $118.7 million from
$109.0 million in 2004, an increase of $9.7 million
(9%), primarily reflecting our emphasis on growth in personal
training services, which resulted in a 9% increase in sessions
delivered.
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Retail products revenue decreased to $47.2 million from
$49.7 million in 2004, a decrease of $2.5 million
(5%), due primarily to the conversion of lower performing full
size in club retail stores to a more efficient but lower sales
model integrated with the front desk operation.
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Miscellaneous revenue decreased to $15.1 million (11%) in
2005 from $17.0 million in 2004, primarily due to a
$1.1 million decrease in sponsorship revenue from income
producing strategic partnerships.
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Operating costs and expenses for the year ended
December 31, 2005 were $924.2 million compared to
$936.4 million during 2004, a decrease of
$12.2 million (1%). This decrease resulted from the
following:
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Membership services expenses for the year ended
December 31, 2005 decreased $5.7 million (1%) from
2004, reflecting a $11.1 million decrease in personnel
costs as a result of our cost reduction initiatives, partially
offset by an $8.2 million increase in occupancy and
insurance costs.
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Retail products expenses, which include labor costs, for the
year ended December 31, 2005 decreased $2.4 million
(5%) from 2004 as a result of the 5% decrease in retail product
revenue described above.
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Marketing and advertising expenses for the year ended
December 31, 2005 decreased $6.3 million (11%) from
2004, primarily due to a planned reduction in media spending
(television and radio advertising) and deferral of production
costs in the fourth quarter of 2005.
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Information technology expenses for the year ended
December 31, 2005 increased $3.1 million (17%) from
2004 primarily as a result of costs associated with implementing
new business initiatives and improved controls and compliance
and security enhancements. Information technology spending for
2005 was approximately 2.1% of total revenues as compared to
1.9% during 2004.
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Other general and administrative expenses for the year ended
December 31, 2005 increased $7.0 million (12%),
primarily as a result of $7.9 million in higher
professional services expenses such as legal, consulting and
auditing and $3.7 million related to the accelerated
vesting of restricted shares, offset by $7.3 million in
insurance claim proceeds. Expenses in 2005 also include the
impact of a $4.6 million write off of equipment in the
fourth quarter of the year.
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Impairment charges related to other intangible assets as well as
asset impairment charges for the year ended December 31,
2005 were slightly less ($0.4 million) than 2004.
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Depreciation expense for the year ended December 31, 2005
decreased $7.5 million (11%) from 2004, reflecting fewer
depreciable assets resulting from the Companys fixed asset
impairment charges in 2004 and prior years, along with lower
levels of capital spending.
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Operating income for the year ended December 31, 2005
increased $41.5 million to $79.6 million as compared
to the prior year. This increase is primarily due to the
$33.8 million increase in membership services revenue and
the reduction in operating expenses mentioned above.
65
Interest expense for the year ended December 31, 2005
increased $18.1 million to $85.3 million, principally
due to higher interest rates ($11.2 million) as a result of
the increase in general interest rate levels plus the full year
impact of the replacement of the Companys accounts
receivable securitization with a higher rate term loan, and an
increase in the amortization of deferred financing costs
($5.1 million) resulting from fees paid to obtain the
waiver of financial reporting covenants under certain debt
agreements.
Other, net non-operating income, including primarily foreign
exchange gains and interest income, was $1.0 million for
the year ended December 31, 2005. For the year ended
December 31, 2004, we had an other, net non-operating loss
of $0.4 million. The other, net non-operating loss in 2004
was comprised primarily of a foreign exchange gain of
$1.6 million offset by a write-off of deferred financing
costs of $1.6 million and our portion of losses related to
a joint venture.
Recently
Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109. This interpretation prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return, and
provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition. We are currently evaluating the impact FIN 48
will have on the Companys financial condition and results
of operations. FIN 48 is effective for public companies for
annual periods that begin after December 15, 2006.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements (FAS 157). This Standard
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands
disclosures about fair value measurements. FAS 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. We have not yet determined the
effect, if any, the adoption of FAS 157 will have on our
financial position, results of operations or cash flows.
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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We are exposed to market risk from changes in the interest rates
on certain of our outstanding debt. The outstanding loan balance
under our New Facility bears interest at variable rates based on
prevailing short-term interest rates in the United States and
Europe. Based on 2006s average outstanding balance of
these variable rate obligations, a 100 basis point change
in interest rates would have changed interest expense in 2006 by
approximately $2.1 million. In September 2003, we entered
into interest rate swap agreements whereby our fixed interest
commitment on $200 million of outstanding principal on our
Senior Subordinated Notes varies based on the LIBOR rate plus
6.01%. A 100 basis point change in the interest rate on the
portion of the debt subject to the swap agreement would change
interest expense on an annual basis by $2.0 million. For
fixed rate debt, interest rate changes affect their fair market
value, but do not impact earnings or cash flows. We presently do
not use other financial derivative instruments to manage our
interest costs.
We maintained operations in Canada until June 1, 2007. Our
Canadian operations have been exposed to the risk of 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 an impact on the accumulated other
comprehensive income (loss) component of stockholders
equity, 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.
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Item 8.
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Consolidated
Financial Statements and Supplementary Data
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Our consolidated financial statements, including the notes to
all such statements, and other information are included in this
report beginning on
page F-1.
66
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
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None.
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Item 9A.
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Controls
and Procedures
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(a)
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Evaluation
of Disclosure Controls and Procedures
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Management of the Company, with the participation of the
principal executive officer and the principal financial officer,
evaluated the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e) of
the Exchange Act), as of December 31, 2006. Based upon this
evaluation, the principal executive officer and the principal
financial officer have concluded that the Companys
disclosure controls and procedures were not effective as of
December 31, 2006 due to the material weaknesses in
internal control over financial reporting described below
(Item 9A(b)).
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(b)
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Managements
Report on Internal Control Over Financial Reporting
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Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in
Rule 13a-15(f)
under the Exchange Act. Because of its inherent limitations,
internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
A material weakness represents a significant deficiency (as
defined in the Public Company Accounting Oversight Boards
Auditing Standard No. 2), or a combination of significant
deficiencies, that results in more than a remote likelihood that
a material misstatement of the annual or interim financial
statements will not be prevented or detected on a timely basis.
Management conducted an assessment of the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2006 based on the framework published by the
Committee of Sponsoring Organizations of the Treadway
Commission, Internal Control Integrated
Framework. Management has identified the following material
weaknesses in the Companys internal control over financial
reporting as of December 31, 2006:
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1.
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Deficiencies in the Companys control
environment. The Company did not maintain an
effective control environment as defined in the Internal
Control-Integrated Framework published by the Committee of
Sponsoring Organizations of the Treadway Commission.
Specifically, the following control deficiencies were identified:
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The Company did not establish and maintain an appropriate
consciousness regarding internal control over financial
reporting and sufficient resources to address and remediate
material weaknesses on a timely basis;
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The Companys finance and accounting resources were
insufficient in number, insufficiently trained, and authority
and responsibility were not properly delegated as of
December 31, 2006. Accordingly, in certain circumstances,
accounting control activities were not performed consistently,
accurately, and timely, and an effective review of technical
accounting matters was not consistently performed;
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Management did not have sufficient and clearly communicated
policies reflecting an appropriate management attitude towards
financial reporting and the financial reporting function, and
did not have sufficient controls in place to ensure the
appropriate selection of and modifications to accounting
policies;
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The Company did not establish effective policies and procedures
to address the risk of management override in the financial
reporting process;
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Management did not have effective processes to ensure that all
relevant information was communicated in a timely manner from
the Companys national service center, property management
department, information technology group, human resources, sales
and marketing, and legal department to the Companys
corporate accounting department; and
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67
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The material weaknesses in Information Technology Program
Development and Change Controls, described below, weakened the
Companys control environment.
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These deficiencies resulted in material misstatements in the
Companys preliminary 2006 annual consolidated financial
statements, which were corrected prior to issuance. These
deficiencies resulted in more than a remote likelihood that a
material misstatement of the Companys annual or interim
financial statements would not be prevented or detected, and
contributed to the development of other material weaknesses
described below.
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2.
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Deficiencies in end-user computing
controls. The Company did not maintain adequate
policies and procedures regarding end-user computing.
Specifically, controls over the access to, and completeness,
accuracy, validity, and review of, certain spreadsheet
information that supports the financial reporting process were
either not designed appropriately or did not operate as designed.
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These deficiencies resulted in material misstatements in the
Companys preliminary 2006 annual consolidated financial
statements, which were corrected prior to issuance. These
deficiencies resulted in more than a remote likelihood that a
material misstatement of the Companys annual or interim
financial statements would not be prevented or detected.
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3.
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Inadequate controls associated with accounting for
revenue. The Company did not maintain effective
policies and procedures related to its accounting for revenue
and did not employ personnel with the appropriate level of
technical knowledge and experience to prepare, document and
review its accounting for revenue to ensure that such accounting
complied with U.S. generally accepted accounting
principles. This lack of effective policies and procedures and
lack of knowledge and experience contributed to the
Companys failure to:
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Select and implement membership revenue accounting policies in
accordance with U.S. generally accepted accounting
principles;
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Effectively perform and document a periodic evaluation of the
reasonableness of assumptions with respect to the deferral of
revenue associated with personal training services;
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Establish procedures to identify and periodically assess
promotional offers to ensure that they were accounted for in
accordance with U.S. generally accepted accounting
principles;
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Establish procedures to identify and periodically assess changes
to the Companys principal member offers to ensure that
they were accounted for in accordance with U.S. generally
accepted accounting principles;
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Establish procedures to identify and assess the operational and
accounting support requirements necessary to record the effects
of new member offers on a timely basis in accordance with
U.S. generally accepted accounting principles;
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Establish procedures to identify and periodically assess revenue
collections and member attrition to ensure any changes or
adjustments were accounted for in accordance with
U.S. generally accepted accounting principles; and
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Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to revenue
recognition were appropriately understood and considered.
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These deficiencies resulted in material misstatements in the
Companys preliminary 2006 annual consolidated financial
statements, which were corrected prior to issuance. These
deficiencies resulted in more than a remote likelihood that a
material misstatement of the Companys annual or interim
financial statements would not be prevented or detected.
68
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4.
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Inadequate controls associated with accounting for fixed
assets. The Company did not maintain effective
policies and procedures related to its accounting for fixed
assets and did not employ personnel with the appropriate level
of knowledge and experience to prepare, document and review its
accounting for fixed assets to ensure that such accounting
complied with U.S. generally accepted accounting
principles. This lack of effective policies and procedures and
lack of knowledge and experience contributed to the
Companys failure to:
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Select and implement fixed asset accounting policies in
accordance with U.S. generally accepted accounting
principles;
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Effectively perform and document procedures to periodically
assess the valuation of fixed assets;
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Effectively perform and document controls related to the ongoing
monitoring of events that might require interim impairment
analysis;
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Effectively perform and document procedures to periodically
review the valuation of capitalized costs incurred prior to the
opening of a fitness center;
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Effectively perform and document a review of fixed asset
depreciation;
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Effectively perform and document procedures to review
capitalizable labor costs;
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Effectively reconcile the subsidiary fixed asset ledger to
consolidated fixed asset information; and
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Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to fixed assets
were appropriately understood and considered.
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These deficiencies resulted in material misstatements in the
Companys preliminary 2006 annual consolidated financial
statements, which were corrected prior to issuance. These
deficiencies resulted in more than a remote likelihood that a
material misstatement of the Companys annual or interim
financial statements would not be prevented or detected.
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5.
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Inadequate controls associated with accounting for goodwill
and other intangible assets. The Company did not
maintain effective policies and procedures related to its
accounting for goodwill and other intangible assets and did not
employ personnel with the appropriate level of knowledge and
experience to prepare, document and review its accounting for
goodwill and other intangible assets to ensure that such
accounting complied with U.S. generally accepted accounting
principles. This lack of effective policies and procedures and
lack of knowledge and experience contributed to the
Companys failure to:
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Select and implement accounting policies in accordance with
U.S. generally accepted accounting principles;
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Effectively identify, and allocate an appropriate portion of the
cost of an acquisition to, identifiable intangible assets in
conjunction with its purchase business combinations;
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Effectively perform and document procedures to periodically
reassess the valuation of goodwill; and
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Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to goodwill and
other intangible assets were appropriately understood and
considered.
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These deficiencies resulted in more than a remote likelihood
that a material misstatement of the Companys annual or
interim financial statements would not be prevented or detected.
69
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6.
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Inadequate controls associated with accounting for
leases. The Company did not maintain effective
policies and procedures related to its accounting for leases and
did not employ personnel with the appropriate level of knowledge
and experience to prepare, document and review its accounting
for leases to ensure that such accounting complied with
U.S. generally accepted accounting principles. This lack of
effective policies and procedures and lack of knowledge and
experience contributed to the Companys failure to:
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Perform and document procedures to ensure that leasehold
improvements were properly depreciated over the lesser of the
economic useful life or the lease term;
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Perform and document procedures to ensure leases were
appropriately accounted for as capital or operating leases;
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Design and perform policies and procedures relating to the
identification, valuation, and disclosure of contingent
liabilities related to lease guarantees; and
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Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to leases were
appropriately understood and considered.
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These deficiencies resulted in material misstatements in the
Companys preliminary 2006 annual consolidated financial
statements, which were corrected prior to issuance. These
deficiencies resulted in more than a remote likelihood that a
material misstatement of the Companys annual or interim
financial statements would not be prevented or detected.
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7.
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Inadequate controls associated with accounting for accrued
liabilities. The Company did not maintain
effective policies and procedures related to its accounting for
accrued liabilities and did not employ personnel with the
appropriate level of knowledge and experience to prepare,
document and review its accounting for accrued liabilities to
ensure that such accounting complied with U.S. generally
accepted accounting principles. This lack of effective policies
and procedures and lack of knowledge and experience contributed
to the Companys failure to:
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Effectively perform and document procedures to periodically
evaluate the reasonableness of assumptions used to estimate
liabilities associated with workers compensation, health care,
and other insured arrangements with retained risk;
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Perform and document procedures to periodically evaluate items
that may meet the definition of unclaimed property, in order to
properly value the Companys escheatment liability;
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Effectively perform and document procedures to reconcile
commission and other payroll related liabilities to supporting
detail;
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Effectively perform and document a review of expenses incurred
in one period and paid in subsequent periods to ensure that the
related accounting is reflected in the appropriate
period; and
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Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to accrued
liabilities were appropriately understood and considered.
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These deficiencies resulted in material misstatements in the
Companys preliminary 2006 annual consolidated financial
statements, which were corrected prior to issuance. These
deficiencies resulted in more than a remote likelihood that a
material misstatement of the Companys annual or interim
financial statements would not be prevented or detected.
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8.
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Inadequate controls associated with accounting for internal
use computer software. The Company did not
maintain adequate policies and procedures or employ sufficiently
knowledgeable and experienced personnel to ensure appropriate
application of Statement of Position (SOP)
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. This lack of effective policies
and procedures and lack of knowledge and experience contributed
to the Companys failure to select and implement software
accounting policies in accordance with U.S. generally
accepted accounting principles, and effectively perform and
document procedures to periodically reassess their valuation.
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70
These deficiencies resulted in more than a remote likelihood
that a material misstatement of the Companys annual or
interim financial statements would not be prevented or detected.
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9.
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Inadequate Information Technology Development and Change
Controls. The Company did not maintain adequate
policies and procedures over the administration of its program
development and change activities nor were existing policies and
procedures consistently applied. Specifically, controls over the
authorization, testing, and validation of applications prior to
being placed into production were either not formalized or not
consistently executed in order to support financial reporting
requirements.
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These deficiencies resulted in material misstatements in the
Companys preliminary 2006 annual consolidated financial
statements, which were corrected prior to issuance. These
deficiencies resulted in more than a remote likelihood that a
material misstatement of the Companys annual or interim
financial statements would not be prevented or detected.
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10.
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Deficiencies in equity compensation monitoring and review
procedures. The Company did not maintain
adequate policies and procedures over the administration of its
equity compensation programs and did not employ personnel with
the appropriate level of knowledge and experience to prepare,
document and review its accounting for the equity compensation
programs to ensure that such accounting complied with
U.S. generally accepted accounting principles.
Specifically, the Company did not have:
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Adequate policies and procedures to identify, periodically
assess, and respond to events that give rise to changes in the
rights or obligations of equity compensation holders; and
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Effective policies and procedures to ensure that the financial
reporting and disclosure obligations related to the acceleration
of vesting and the exercise of expired options were
appropriately understood and considered.
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These deficiencies resulted in more than a remote likelihood
that a material misstatement of the Companys annual or
interim financial statements would not be prevented or detected.
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11.
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Inadequate financial statement preparation and review
procedures. The Company did not maintain
effective policies and procedures related to its financial
statement preparation and review procedures and did not employ
personnel with the appropriate level of knowledge and experience
to ensure that accurate and reliable interim and annual
consolidated financial statements were prepared and reviewed on
a timely basis. Specifically, the Company did not have:
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Effective reconciliation of significant balance sheet accounts;
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Effective reconciliation of subsidiaries accounts to
consolidating financial information;
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Effective reconciliation and conversion of foreign financial
statements to consolidated financial information;
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Policies and procedures relating to the origination and
maintenance of contemporaneous documentation to support key
judgments made in connection with the selection of significant
accounting policies or the application of judgments within its
financial reporting process;
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Policies and procedures related to the identification and
disclosure of subsequent events;
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Policies and procedures related to the review of complex or
unusual transactions;
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Adequate policies and procedures related to the review and
approval of accounting entries;
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Sufficient retention policies with respect to historical
documentation that formed the basis of prior accounting
judgments that have continuing relevance; and
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Effective review of financial statement information, and related
presentation and disclosure requirements.
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71
These deficiencies resulted in material misstatements in the
Companys preliminary 2006 annual consolidated financial
statements, which were corrected prior to issuance. These
deficiencies resulted in more than a remote likelihood that a
material misstatement of the Companys annual or interim
financial statements would not be prevented or detected.
As a result of the aforementioned material weaknesses,
management has concluded that the Company did not maintain
effective internal control over financial reporting as of
December 31, 2006.
KPMG LLP, the Companys independent registered public
accounting firm, has issued an audit report on managements
assessment of the Companys internal control over financial
reporting, which is included herein (Item 9A(e)).
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(c)
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Changes
in Internal Control Over Financial Reporting
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There were no changes in the Companys internal control
over financial reporting that occurred during the fourth quarter
of 2006 that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over
financial reporting other than the completed remediation
discussed in the following paragraphs below.
Completed
Remediation
Each of the material weaknesses identified in our Annual Report
on
Form 10-K
for the year ended December 31, 2005 contained multiple
component elements. During the fourth quarter of 2006, we have
successfully completed remediation of specific elements related
to our Accounting for Leases and Accounting
for Accrued Liabilities material weaknesses, as described
below. All other material weaknesses remain and will be
addressed as we execute our remediation plan for 2007 and 2008.
Accounting
for Leases
The Company has enhanced the policies and procedures related to
recording rent expense on a straight-line basis over the lease
term, when appropriate, and to recording a related deferred rent
obligation, in accordance with U.S. generally accepted
accounting principles (GAAP).
The Company has enhanced the policies and procedures related to
the review and approval of the accounting for landlord
incentives.
Accounting
for Accrued Liabilities
The Company has enhanced the evaluation of liabilities related
to its obligations to former members to refund member fees in
future periods.
The Company discontinued the assignment of membership
receivables to third parties containing recourse provisions in
2003. Therefore, no new procedures were developed to ensure the
proper valuation of such arrangements. Further, the Company has
instituted monitoring procedures to verify on an ongoing basis
that no such arrangements have been made without accounting
awareness. The remaining aspects of this material weakness
related to the proper accounting treatment for complex and
unusual transactions, which is described under the Financial
Statement Preparation and Review Procedures material
weakness.
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(d)
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Continuing
Remediation Efforts to Address Material Weaknesses in Internal
Control Over Financial Reporting
|
Our remediation efforts will continue over the next two years.
While we continue to improve policies and procedures in all
areas with material weaknesses in an ongoing manner, we are
planning for the complete remediation of specific items in 2007
and others in 2008.
72
1) Control Environment
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During 2005 and 2006, the number of personnel positions and
expenditures for the IT and Accounting Departments were
increased. However, attrition negatively impacted our staffing
level in the Accounting Department. We continue to evaluate
staffing needs and organizational structure in both areas.
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The Company is continuing to improve the educational and skills
requirements for positions in its corporate accounting
department. As of May 1, 2007, 71% of corporate accounting
personnel have a degree in accounting, 32% passed the CPA exam
and 29% have a Masters degree.
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The Company is strengthening relationships between the five
Regional Controllers and the Corporate Accounting/Finance
department. The Regional Controllers have direct reporting
responsibility to the Regional Vice Presidents, but will now
also have indirect reporting responsibility to the Vice
President, Corporate Controller.
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In 2006, the Company authorized a new position, Vice
President Financial Reporting, responsible for the
Companys SEC reporting and Sarbanes Oxley compliance. The
position was filled in March 2007.
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The Company has identified five new positions for the Corporate
Accounting department that will be filled in 2007 as qualified
candidates are identified.
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The Company is developing a plan to complete its Accounting
Policies and Procedures Manual (the Accounting
Manual).
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The Company is developing a plan to establish an accounting
training program that will include internal control and
GAAP-related topics.
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The Company is continuing to establish a series of monthly and
quarterly meetings between Accounting and various departments to
foster communication and provide training to the various
departments regarding new transactions that may impact the
accounting treatment.
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The Company is developing a plan to conduct formal performance
evaluations of key personnel.
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2) End-User Computing (spreadsheets)
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The Company is developing a plan to establish policies and
procedures regarding the required controls over spreadsheets and
other end-user applications, including (but not limited to)
development, change control, access control, and record
retention.
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The Company is developing a plan to make an inventory of
spreadsheets and other end-user applications to help determine
the scope and priority of the necessary remediation.
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The Company is developing a plan to conduct an evaluation of
specific end-user applications to develop and execute specific
remediation plans necessary to comply with the above policies
and procedures.
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3) Accounting for Revenue
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The Company has established a revenue accounting group within
the accounting department that includes, a Director, Manager and
related staff. The Company is continuing to train this group and
to transfer institutional knowledge from a previous Controller.
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The Company has developed a revenue model that it believes
complies with GAAP. The model will be maintained by the
Director. The Company has fully documented why this approach
complies with GAAP. The Company is developing a plan to
establish detailed desktop procedures describing its
utilization.
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The Company is developing a plan to further enhance its revenue
recognition methodology, specifically improving the design and
operating effectiveness of certain related controls, including
the reconciliation of the deferred revenue liability balance and
monitoring of actual versus expected collection and attrition
patterns.
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A monthly meeting between operations and accounting to review
new offers, membership programs and pricing has been established
to foster timely communications and to provide detailed
information regarding new transactions that may impact the
accounting treatment.
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The Company has established a comprehensive listing of
promotional offerings. Promotional Matrices will be
created and maintained by the Director Accounting
and Director Pricing.
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The Company is developing a plan to update its policies in
operations and accounting such that no new promotional types are
implemented without accounting knowledge, as evidenced by direct
and formal communication of offering changes to accounting.
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The Company is developing a plan to monitor actual versus
expected collection and attrition patterns and conduct a
quarterly analysis. All inputs into the analysis will be
documented and changes will be approved and adequately supported.
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4) Accounting for Fixed Assets
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The Company is developing a plan to enhance reconciliation
procedures and analyses related to depreciation and fixed asset
accounts, to ensure accounts are reconciled and analyzed on a
timely basis, the reconciliations are independently reviewed,
and outstanding
and/or
reconciling items are resolved timely.
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The Company has converted multiple old existing fixed assets
systems into one new, fixed asset system. We believe this system
will support significant internal control improvements.
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The Company is developing a plan to implement on-going
monitoring of fixed assets to identify and assess potential
impairment events.
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The Company is enhancing its policies and procedures related to
accounting for fixed assets including potential impairment of
such assets. The Company will continue taking cycle counts of
physical inventory of our gym equipment assets.
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The Company is developing a plan to schedule annual
inter-departmental meetings to discuss trends in the useful
lives of assets and accounting implications for the
Companys depreciation policy.
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The Company is developing a plan to establish procedures to
monitor individual clubs on a quarterly basis to identify
possible impairment during the year.
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The Company is developing a plan to revise the accounting policy
to include steps to ensure proper review and approval of
accounting for capitalized spending on new clubs.
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The Company is developing a plan to improve documentation and
required evidence to support fixed asset depreciation, including
analysis of assets not being depreciated.
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The Company is developing a plan to establish policies and
procedures to ensure that disclosure obligations are adhered to
and support is sufficient and available for review.
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5) Accounting for Goodwill and Intangible
Assets
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The Company is developing a plan to document and implement
policy in accordance with generally accepted accounting
principles.
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The Company is developing a plan to establish a detailed
framework/approach to analyzing valuation reports, and to ensure
staff is informed and well trained in performing the analysis.
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The Company is developing a plan to establish detailed
procedures to periodically reassess the valuation of goodwill,
and to ensure staff is informed and well trained in performing
the valuation analysis.
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The Company is developing a plan to establish policies and
procedures to ensure that disclosure obligations are adhered to
and support is sufficient and available for review.
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74
6) Accounting for Leases
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The Company is enhancing its policies and procedures to ensure
that leasehold improvements are properly depreciated over the
lesser of the economic useful life or the lease term and leases
are appropriately accounted for as capital or operating.
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The Company implemented specific templates and analysis models
to ensure office equipment leases were appropriately accounted
for as capital or operating during 2004. During 2005, the
Company began buying, rather than leasing office equipment.
Office equipment leasing activity was not material during 2006.
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The Company is continuing the ongoing maintenance of a standard
agenda for the monthly meetings between accounting and property
management. The agenda includes new landlord incentives,
opening/closing clubs, various written communications from
property management, and any other potential/current issues
during the month that may impact ongoing accounting treatments.
In addition, property management is continuing to provide
accounting with quarterly reports relating to new, amended and
terminated lease activities during each quarter and with monthly
copies of abstracts on lease agreements.
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The Company is developing policies and procedures to ensure that
contingent liabilities related to lease guarantees are
identified, valued and disclosed. The Company is continuing to
review closed club reserves to ensure appropriate application of
U.S. generally accepted accounting principles.
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The Company is continuing to confirm with third parties
(assignee) regarding its remaining guaranteed lease obligations
to ensure that adequate disclosure obligations are adhered to.
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The Company has included reporting, in its quarterly agenda for
the Disclosure Committee, contingent obligations related to
lease guarantees.
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The Company is continuing to maintain, in a centralized file,
all supporting documents relating to disclosure obligations.
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The Company is developing a plan to establish policies and
procedures to ensure that disclosure obligations are adhered to
and support is sufficient and available for review.
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7) Accounting for Accrued Liabilities
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The Company is developing a monitoring program to periodically
review its assumptions with respect to workers compensation,
healthcare, and general liability risk exposures.
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The Company is enhancing the journal entry procedures related to
workers compensation, healthcare, general liability, legal and
other accrued expense liabilities to include adequate supporting
detail and review.
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The Company is enhancing the reconciliation related to workers
compensation, healthcare, general liability, legal and other
accrued expense liabilities to supporting detail, and the timely
review and resolution of reconciling items.
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The Company has included, in its quarterly agenda for the
Disclosure Committee, a listing of key judgments and estimates
recorded with respect to workers compensation, healthcare,
general liability and legal settlement risk exposures.
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The Company is enhancing its procedures to identify, value and
disclose contingent liabilities related to legal claims and
litigation.
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The Company is enhancing the policies and procedures to identify
and value escheatment obligations, including the identification
of escheatable property. The Company engaged a third party to
help value the escheatment obligation.
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The Company is enhancing its journal entry procedures and
reconciliation of commission and other payroll-related
liabilities to supporting detail and the timely resolution of
reconciling items.
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75
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The Company is enhancing its procedures in identifying expenses
accrued in one period and paid in subsequent periods to ensure
that related accounting is reflected in the appropriate period.
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The Company is enhancing its policies and procedures to ensure
that the financial reporting and disclosure obligations related
to accrued liabilities were appropriately understood.
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The Company is continuing to maintain, in a centralized file,
all supporting documents relating to disclosure obligations.
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8) Accounting for Internal Use Computer
Software
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The Company is enhancing its policies and procedures to ensure
appropriate determination, review, adequate supporting
documentation and proper valuation of capitalized expenditures
relating to computer software development for internal use.
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The Company is formalizing the process of reviewing projects for
capitalization.
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The Company is enhancing its user procedures for software
development tracking system to properly capture and report
internal development costs including training of users.
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The Company has instituted monthly meetings between appropriate
Accounting and Technology Development personnel to review
project status.
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9) Information Technology Development and Change
Controls
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The extracts from the membership systems used as inputs into the
deferred revenue model have been extensively tested for accuracy
and completeness by IT, Accounting and Internal Audit during
2006. The extracts used during 2006 were a combination of manual
and automated processes, with the goal of eliminating manual
processes in the creation of extracts used for the deferred
revenue models in the future.
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10) Accounting for Equity Compensation
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The Company has developed a control checklist and is enhancing
its review procedures with respect to equity compensation to
ensure that any events under the equity compensation plans are
communicated timely to the Vice President, Corporate Controller
to ensure that transactions are recorded in accordance with GAAP.
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11) Financial Statement Preparation and Review
Procedures
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The Company is modifying its account reconciliation process to
ensure that accounts are reconciled on a timely basis, each
reconciliation is independently reviewed, any reconciling items
are resolved on a timely basis, and the accuracy of the
underlying supporting detail, or sub ledger, has been
substantiated and independently reviewed. The Company has also
developed a control checklist to ensure that accounting
personnel are complying with the account reconciliation
standards.
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The Company is modifying the journal entry preparation process
to ensure that journal entries have the proper documentation and
are reviewed and approved timely by an independent reviewer.
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The Company is enhancing the recurring journal entry checklist
to ensure that it is a complete list, with the names of assigned
preparer and reviewer. This checklist is reviewed by the
Assistant Vice President of Corporate Accounting. A
non-recurring journal entry list, with dollar amounts, is
generated monthly for review by the Vice President
Corporate Controller.
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The Company is continuing to improve the monthly financial
closing process in order to provide additional time for the
Companys senior managers, Disclosure Committee and counsel
to review the financial statements that will be included in the
Companys
Forms 10-K
and 10-Q and
appropriate disclosures.
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The Company is developing a plan to make a listing of key
judgments and estimates within the accounting area that explains
the basis and support, and include same in the Accounting
Manual. The list will be updated quarterly through an
Accounting Policy Update Meeting.
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76
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The Company is developing a plan to establish a more formalized
process for the identification of subsequent events and complex
or unusual transactions. The Disclosure Committee and various
ongoing management meetings are presently used to identify and
address such topics.
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The Company is developing a plan to clarify procedures related
to the identification and disclosure of subsequent events, and
include it in the Accounting Manual.
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The Company is developing a plan to define complex and unusual
transaction types. These transactions will be reviewed by the
Disclosure Committee quarterly.
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The Company is working with counsel to establish a disclosure
checklist. This checklist will be approved by the Vice
PresidentController each quarter and annually prior to the
10-K and
10-Q
disclosures.
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To further improve internal control over financial reporting,
the Company has committed to increase corporate management
review and oversight of all accounting and financial reporting
functions. The 2007 and 2008 remediation phases will continue to
have assigned responsibility for remediation of key deficiencies
to specific executives to help ensure that new policies and
procedures are implemented to remediate existing material
weaknesses or significant deficiencies. In addition, management
updates the Audit Committee regularly on the progress of the
remediation process.
The continued implementation of the initiatives described above
is among the Companys highest priorities. Management has
discussed the corrective actions and future plans with the Audit
Committee and KPMG and, as of the date of this report,
management believes the actions outlined above should correct
the above-mentioned material weaknesses in the Companys
internal controls over financial reporting. However, there is no
assurance that either management or the independent auditors
will not in the future identify further material weaknesses or
significant deficiencies in the Companys internal control
over financial reporting that management has not discovered to
date.
The Companys evaluations of the effectiveness of internal
control over financial reporting in future periods are subject
to the risk that controls may become inadequate because of
changes in conditions (including, but not limited to, lack of
resources) or that the degree of compliance with the policies or
procedures may deteriorate.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty,
and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more
people, or by management override of controls. The design of any
system of controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving our stated
goals under all potential future conditions; over time, controls
may become inadequate because of changes in conditions, or the
degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
77
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(e)
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Report of
Independent Registered Public Accounting Firm
|
The Board of Directors and Stockholders
Bally Total Fitness Holding Corporation:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting (Item 9A(b)), that Bally Total Fitness
Holding Corporation (the Company) did not maintain
effective internal control over financial reporting as of
December 31, 2006, because of the effects of material
weaknesses identified in managements assessment, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Bally Total
Fitness Holding Corporations management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weaknesses have been identified and included
in managements assessment as of December 31, 2006:
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1.
|
Deficiencies in the Companys control
environment. The Company did not maintain an
effective control environment as defined in the Internal
Control-Integrated Framework published by the Committee of
Sponsoring Organizations of the Treadway Commission.
Specifically, the following control deficiencies were identified:
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The Company did not establish and maintain an appropriate
consciousness regarding internal control over financial
reporting and sufficient resources to address and remediate
material weaknesses on a timely basis;
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The Companys finance and accounting resources were
insufficient in number, insufficiently trained, and authority
and responsibility were not properly delegated as of
December 31, 2006. Accordingly, in certain circumstances,
accounting control activities were not performed consistently,
accurately, and timely, and an effective review of technical
accounting matters was not consistently performed;
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78
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Management did not have sufficient and clearly communicated
policies reflecting an appropriate management attitude towards
financial reporting and the financial reporting function, and
did not have sufficient controls in place to ensure the
appropriate selection of and modifications to accounting
policies;
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The Company did not establish effective policies and procedures
to address the risk of management override in the financial
reporting process;
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Management did not have effective processes to ensure that all
relevant information was communicated in a timely manner from
the Companys national service center, property management
department, information technology group, human resources, sales
and marketing, and legal department to the Companys
corporate accounting department; and
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The material weaknesses in Information Technology Program
Development and Change Controls, described below, weakened the
Companys control environment.
|
These deficiencies resulted in material misstatements in the
Companys preliminary 2006 annual consolidated financial
statements. These deficiencies resulted in more than a remote
likelihood that a material misstatement of the Companys
annual or interim financial statements would not be prevented or
detected, and contributed to the development of other material
weaknesses described below.
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2.
|
Deficiencies in end-user computing
controls. The Company did not maintain adequate
policies and procedures regarding end-user computing.
Specifically, controls over the access to, and completeness,
accuracy, validity, and review of, certain spreadsheet
information that supports the financial reporting process were
either not designed appropriately or did not operate as designed.
|
These deficiencies resulted in material misstatements in the
Companys preliminary 2006 annual consolidated financial
statements. These deficiencies resulted in more than a remote
likelihood that a material misstatement of the Companys
annual or interim financial statements would not be prevented or
detected.
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3.
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Inadequate controls associated with accounting for
revenue. The Company did not maintain effective
policies and procedures related to its accounting for revenue
and did not employ personnel with the appropriate level of
technical knowledge and experience to prepare, document and
review its accounting for revenue to ensure that such accounting
complied with U.S. generally accepted accounting
principles. This lack of effective policies and procedures and
lack of knowledge and experience contributed to the
Companys failure to:
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Select and implement membership revenue accounting policies in
accordance with U.S. generally accepted accounting
principles;
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Effectively perform and document a periodic evaluation of the
reasonableness of assumptions with respect to the deferral of
revenue associated with personal training services;
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Establish procedures to identify and periodically assess
promotional offers to ensure that they were accounted for in
accordance with U.S. generally accepted accounting
principles;
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Establish procedures to identify and periodically assess changes
to the Companys principal member offers to ensure that
they were accounted for in accordance with U.S. generally
accepted accounting principles;
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Establish procedures to identify and assess the operational and
accounting support requirements necessary to record the effects
of new member offers on a timely basis in accordance with
U.S. generally accepted accounting principles;
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Establish procedures to identify and periodically assess revenue
collections and member attrition to ensure any changes or
adjustments were accounted for in accordance with
U.S. generally accepted accounting principles; and
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Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to revenue
recognition were appropriately understood and considered.
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79
These deficiencies resulted in material misstatements in the
Companys preliminary 2006 annual consolidated financial
statements. These deficiencies resulted in more than a remote
likelihood that a material misstatement of the Companys
annual or interim financial statements would not be prevented or
detected.
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4.
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Inadequate controls associated with accounting for fixed
assets. The Company did not maintain effective
policies and procedures related to its accounting for fixed
assets and did not employ personnel with the appropriate level
of knowledge and experience to prepare, document and review its
accounting for fixed assets to ensure that such accounting
complied with U.S. generally accepted accounting
principles. This lack of effective policies and procedures and
lack of knowledge and experience contributed to the
Companys failure to:
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Select and implement fixed asset accounting policies in
accordance with U.S. generally accepted accounting
principles;
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Effectively perform and document procedures to periodically
assess the valuation of fixed assets;
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Effectively perform and document controls related to the ongoing
monitoring of events that might require interim impairment
analysis;
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Effectively perform and document procedures to periodically
review the valuation of capitalized costs incurred prior to the
opening of a fitness center;
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Effectively perform and document a review of fixed asset
depreciation;
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Effectively perform and document procedures to review
capitalizable labor costs;
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Effectively reconcile the subsidiary fixed asset ledger to
consolidated fixed asset information; and
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Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to fixed assets
were appropriately understood and considered.
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These deficiencies resulted in material misstatements in the
Companys preliminary 2006 annual consolidated financial
statements. These deficiencies resulted in more than a remote
likelihood that a material misstatement of the Companys
annual or interim financial statements would not be prevented or
detected.
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5.
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Inadequate controls associated with accounting for goodwill
and other intangible assets. The Company did not
maintain effective policies and procedures related to its
accounting for goodwill and other intangible assets and did not
employ personnel with the appropriate level of knowledge and
experience to prepare, document and review its accounting for
goodwill and other intangible assets to ensure that such
accounting complied with U.S. generally accepted accounting
principles. This lack of effective policies and procedures and
lack of knowledge and experience contributed to the
Companys failure to:
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Select and implement accounting policies in accordance with
U.S. generally accepted accounting principles;
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Effectively identify, and allocate an appropriate portion of the
cost of an acquisition to, identifiable intangible assets in
conjunction with its purchase business combinations;
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Effectively perform and document procedures to periodically
reassess the valuation of goodwill; and
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Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to goodwill and
other intangible assets were appropriately understood and
considered.
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These deficiencies resulted in more than a remote likelihood
that a material misstatement of the Companys annual or
interim financial statements would not be prevented or detected.
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6.
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Inadequate controls associated with accounting for
leases. The Company did not maintain effective
policies and procedures related to its accounting for leases and
did not employ personnel with the appropriate level of knowledge
and experience to prepare, document and review its accounting
for leases to ensure that such accounting complied with
U.S. generally accepted accounting principles. This lack of
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80
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effective policies and procedures and lack of knowledge and
experience contributed to the Companys failure to:
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Perform and document procedures to ensure that leasehold
improvements were properly depreciated over the lesser of the
economic useful life or the lease term;
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Perform and document procedures to ensure leases were
appropriately accounted for as capital or operating leases;
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Design and perform policies and procedures relating to the
identification, valuation, and disclosure of contingent
liabilities related to lease guarantees; and
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Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to leases were
appropriately understood and considered.
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These deficiencies resulted in material misstatements in the
Companys preliminary 2006 annual consolidated financial
statements. These deficiencies resulted in more than a remote
likelihood that a material misstatement of the Companys
annual or interim financial statements would not be prevented or
detected.
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7.
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Inadequate controls associated with accounting for accrued
liabilities. The Company did not maintain
effective policies and procedures related to its accounting for
accrued liabilities and did not employ personnel with the
appropriate level of knowledge and experience to prepare,
document and review its accounting for accrued liabilities to
ensure that such accounting complied with U.S. generally
accepted accounting principles. This lack of effective policies
and procedures and lack of knowledge and experience contributed
to the Companys failure to:
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Effectively perform and document procedures to periodically
evaluate the reasonableness of assumptions used to estimate
liabilities associated with workers compensation, health care,
and other insured arrangements with retained risk;
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Perform and document procedures to periodically evaluate items
that may meet the definition of unclaimed property, in order to
properly value the Companys escheatment liability;
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Effectively perform and document procedures to reconcile
commission and other payroll related liabilities to supporting
detail;
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Effectively perform and document a review of expenses incurred
in one period and paid in subsequent periods to ensure that the
related accounting is reflected in the appropriate
period; and
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|
|
Execute policies and procedures to ensure that the financial
reporting and disclosure obligations related to accrued
liabilities were appropriately understood and considered.
|
These deficiencies resulted in material misstatements in the
Companys preliminary 2006 annual consolidated financial
statements. These deficiencies resulted in more than a remote
likelihood that a material misstatement of the Companys
annual or interim financial statements would not be prevented or
detected.
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8.
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Inadequate controls associated with accounting for internal
use computer software. The Company did not
maintain adequate policies and procedures or employ sufficiently
knowledgeable and experienced personnel to ensure appropriate
application of Statement of Position (SOP)
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. This lack of effective policies
and procedures and lack of knowledge and experience contributed
to the Companys failure to select and implement software
accounting policies in accordance with U.S. generally
accepted accounting principles, and effectively perform and
document procedures to periodically reassess their valuation.
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These deficiencies resulted in more than a remote likelihood
that a material misstatement of the Companys annual or
interim financial statements would not be prevented or detected.
81
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9.
|
Inadequate Information Technology Development and Change
Controls. The Company did not maintain adequate
policies and procedures over the administration of its program
development and change activities nor were existing policies and
procedures consistently applied. Specifically, controls over the
authorization, testing, and validation of applications prior to
being placed into production were either not formalized or not
consistently executed in order to support financial reporting
requirements.
|
These deficiencies resulted in material misstatements in the
Companys preliminary 2006 annual consolidated financial
statements. These deficiencies resulted in more than a remote
likelihood that a material misstatement of the Companys
annual or interim financial statements would not be prevented or
detected.
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10.
|
Deficiencies in equity compensation monitoring and review
procedures. The Company did not maintain adequate
policies and procedures over the administration of its equity
compensation programs and did not employ personnel with the
appropriate level of knowledge and experience to prepare,
document and review its accounting for the equity compensation
programs to ensure that such accounting complied with
U.S. generally accepted accounting principles.
Specifically, the Company did not have:
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Adequate policies and procedures to identify, periodically
assess, and respond to events that give rise to changes in the
rights or obligations of equity compensation holders; and
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|
Effective policies and procedures to ensure that the financial
reporting and disclosure obligations related to the acceleration
of vesting and the exercise of expired options were
appropriately understood and considered.
|
These deficiencies resulted in more than a remote likelihood
that a material misstatement of the Companys annual or
interim financial statements would not be prevented or detected.
|
|
|
|
11.
|
Inadequate financial statement preparation and review
procedures. The Company did not maintain
effective policies and procedures related to its financial
statement preparation and review procedures and did not employ
personnel with the appropriate level of knowledge and experience
to ensure that accurate and reliable interim and annual
consolidated financial statements were prepared and reviewed on
a timely basis. Specifically, the Company did not have:
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Effective reconciliation of significant balance sheet accounts;
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Effective reconciliation of subsidiaries accounts to
consolidating financial information;
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Effective reconciliation and conversion of foreign financial
statements to consolidated financial information;
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Policies and procedures relating to the origination and
maintenance of contemporaneous documentation to support key
judgments made in connection with the selection of significant
accounting policies or the application of judgments within its
financial reporting process;
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Policies and procedures related to the identification and
disclosure of subsequent events;
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Policies and procedures related to the review of complex or
unusual transactions;
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Adequate policies and procedures related to the review and
approval of accounting entries;
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Sufficient retention policies with respect to historical
documentation that formed the basis of prior accounting
judgments that have continuing relevance; and
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Effective review of financial statement information, and related
presentation and disclosure requirements.
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These deficiencies resulted in material misstatements in the
Companys preliminary 2006 annual consolidated financial
statements. These deficiencies resulted in more than a remote
likelihood that a material misstatement of the Companys
annual or interim financial statements would not be prevented or
detected.
82
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Bally Total Fitness Holding
Corporation and subsidiaries as of December 31, 2006 and
2005, and the related consolidated statements of operations,
stockholders equity (deficit) and comprehensive income,
and cash flows for each of the years in the three-year period
ended December 31, 2006. The aforementioned material
weaknesses were considered in determining the nature, timing,
and extent of audit tests applied in our audit of the 2006
consolidated financial statements, and this report does not
affect our report dated June 29, 2007, which expressed an
unqualified opinion on those consolidated financial statements.
In our opinion, managements assessment that Bally Total
Fitness Holding Corporation did not maintain effective internal
control over financial reporting as of December 31, 2006,
is fairly stated, in all material respects, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our
opinion, because of the effect of the material weaknesses
described above on the achievement of the objectives of the
control criteria, Bally Total Fitness Holding Corporation has
not maintained effective internal control over financial
reporting as of December 31, 2006, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Chicago, Illinois
June 29, 2007
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Item 9B.
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Other
Information
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None.
83
PART III
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Item 10.
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Directors
and Executive Officers of the Registrant
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The name, age and position held of each of the directors and
executive officers of the Company as of June 15, 2007 are
set forth below:
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Term
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Name
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Age
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Position with the Company
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Executive/Director Since
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Expires
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Don R. Kornstein
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55
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Interim Chairman, Chief
Restructuring Officer, Director
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2006
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2009
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Julie Adams
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61
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Senior Vice President, Membership
Services
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2003
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Marc D. Bassewitz
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50
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Senior Vice President, Secretary
and General Counsel
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2005
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Ronald G. Eidell
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63
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Senior Vice President, Chief
Financial Officer
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2006
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William G. Fanelli
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45
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Senior Vice President, Corporate
Development
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1997
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Michael A. Feder
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60
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Chief Operating Officer
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2007
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Gail J. Holmberg
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51
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Senior Vice President, Chief
Information Officer
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2006
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Thomas S. Massimino
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47
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Senior Vice President, Operations
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2006
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Harold Morgan
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50
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Senior Vice President, Chief
Administrative Officer
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1996
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John H. Wildman
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47
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Senior Vice President, Sales and
Interim Chief Marketing Officer
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1996
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Teresa R. Willows
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48
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Senior Vice President, Customer
Care and Member Services
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2006
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Charles J. Burdick
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55
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Director
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2006
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2008
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Barry R. Elson
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66
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Director
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2006
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2008
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Eric Langshur
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43
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Director
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2004
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2007
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Don R. Kornstein was appointed Chief Restructuring Officer on
May 4, 2007. Additionally, Mr. Kornstein has served as
a director since February 2006 and as interim Chairman since
August 2006. Mr. Kornstein has been a consultant for the
past five years specializing in strategic, financial and
management advisory services. Since 2002, Mr. Kornstein has
been the founder and managing member of Alpine Advisors LLC,
which provides value-enhancing strategic management, operational
and financial consulting services to a wide range of companies
with varying needs. From 2000 until 2001, in his capacity as a
consultant, Mr. Kornstein served as the interim Chief
Operating Officer of First World Communications, Inc., a telecom
and internet company. From 1994 until 2000, Mr. Kornstein
served as the Chief Executive Officer, President and a director
of Jackpot Enterprises, Inc., an NYSE-listed company engaged in
the gaming industry. From 1977 until 1994, Mr. Kornstein
was an investment banker with Bear, Stearns & Co. Inc.
Mr. Kornstein is a director of Cash Systems, Inc., a cash
access technology provider to the gaming industry.
Julie Adams was appointed Senior Vice President, Membership
Services of the Company in February 2003. Ms. Adams was
Vice President of Membership Services from November 1997 to
February 2003.
84
Marc D. Bassewitz was appointed Senior Vice President and
General Counsel of the Company in January 2005. Prior to
joining Bally, Mr. Bassewitz served as outside counsel for
the Company in his position as a partner at Latham &
Watkins LLP.
Ronald G. Eidell was appointed Senior Vice President and Chief
Financial Officer in August 2006, having served as Senior Vice
President, Finance since April 2006. Prior to joining Bally,
Mr. Eidell served as interim President and CEO of NeoPharm,
Inc. from March 2005 to October 2005. Mr. Eidell has been a
partner with Tatum LLC, a national professional services firm,
since October 2004. Prior to that he served as the Chief
Financial Officer of each of Esoterix, Inc., a provider of
medical testing services, from
2001-2003,
NovaMed, Inc., a healthcare provider, from
1998-2001,
and Metromail Corporation, a provider of information services,
from
1996-1998.
He currently serves as a director of NeoPharm, Inc., but has
indicated that he will not stand for reelection at
NeoPharms next annual meeting.
Michael A. Feder was appointed Chief Operating Officer on
June 5, 2007. Mr. Feder is a Managing Director of
AlixPartners, a financial advisory firm specializing in business
performance improvement and corporate restructuring initiatives.
In his capacity as a consultant, Mr. Feder has served in a
variety of senior leadership positions with both public and
private companies. Since November 2005, Mr. Feder has
served as an advisor to Calpine Corporation. From June 2005 to
October 2005, Mr. Feder served as the interim Chief
Executive Officer of InteliStaf, a privately held company in the
nurse-staffing industry. From January 2004 to May 2005,
Mr. Feder served as the Chief Restructuring Officer of
Avado Brands, Inc., a casual dining restaurant operator. From
September 2002 to January 2004, Mr. Feder served as the
Chief Restructuring Officer of DIRECTV Latin America.
William G. Fanelli was appointed Senior Vice President,
Corporate Development of the Company in December 2006.
Mr. Fanelli held the position of Senior Vice President,
Planning and Development from March 2005 to December 2006, and
was Acting Chief Financial Officer from April 2004 to March
2005. He also served as Senior Vice President, Finance from June
2001 to April 2004 and was Senior Vice President, Operations
from November 1997 to June 2001.
Gail Holmberg was appointed Senior Vice President, Chief
Information Officer in March 2006. Ms. Holmberg held the
position of Vice President, Chief Information Officer from
February 2003 to March 2006. Prior to joining Bally,
Ms. Holmberg served as Senior Director of Administrative
Systems for Sears, Roebuck and Co. from January 2001 to October
2001.
Thomas S. Massimino was appointed Senior Vice President,
Operations of the Company in March 2006. Mr. Massimino held
the position of Vice President, Operations from September 2001
to March 2006.
Harold Morgan was appointed Senior Vice President, Chief
Administration Officer in February 2003. Mr. Morgan held
the position of Senior Vice President, Human Resources from
December 1996 to February 2003.
John H. Wildman was appointed Senior Vice President, Sales and
Interim Chief Marketing Officer on June 5, 2007. Prior to
this appointment, Mr. Wildman served as Senior Vice
President and Chief Operating Officer since December 2002 and as
Senior Vice President, Sales and Marketing from December 1996 to
December 2002.
Teresa R. Willows was appointed Senior Vice President, Customer
Care and Member Services in December 2006. Prior to this
appointment, Ms. Willows served as Vice President, Fitness,
Retail and Nutrition Services since September 2006 and as Vice
President, Fitness Services since November 2000.
Charles J. Burdick has served as a director since February 2006.
Mr. Burdick is a member of the Pardus Capital Management
Advisory Board and a non-executive director of each of CTC
Media, Comverse Technologies and Kaupthing, Singer &
Friedlander, a subsidiary of Kaupthing Group. Previously,
Mr. Burdick was Chief Executive Officer and a director of
HIT Entertainment Plc, a London-based production company of
childrens programming, and Chief Executive Officer and a
director at Telewest Communications Group, Ltd, a cable company
in England, where he earlier also held the post of Chief
Financial Officer.
Barry R. Elson has served as a director since February 2006.
From August 2006 through May 31, 2007, Mr. Elson also
served as Acting Chief Executive Officer of the Company.
Mr. Elson was recently Chairman, then Acting Chief
Executive Officer and a director of Telewest Global, Inc., a
provider of entertainment and communication services.
Mr. Elson earlier served as Acting Chief Executive Officer
of Telewest Communications Group,
85
Ltd., prior to that he was the President of Pilot Associates, a
management consulting firm, Chief Operating Officer of Urban
Medial Communications Corporation, a venture capital-backed
communications firm, President of Conectiv Enterprises, a
mid-Atlantic energy company, and Executive Vice President,
Operations for Cox Communications, Inc. Earlier in his career,
Mr. Elson ran three professional sports organizations, the
New York Nets, the New York Islanders and the Colorado Rockies.
Eric Langshur is the Founder and Chief Executive Officer of
TLContact and now serves as Chief Executive Officer of
CarePages, Inc., a division of Revolution Health Group, LLC,
which acquired TLContact in May 2007. Mr. Langshur
previously served as President of Bombardier Aerospace, CAS.
Prior thereto, he was President of United Technologies ONSI
Corporation, and prior to that post held several senior
management positions within divisions of United Technologies,
including Pratt & Whitney and Hamilton Standard.
Mr. Langshur is a director of Corsair Capital Group, and
serves as a member of the Governors Blue Ribbon Pension
Commission in Illinois.
Audit
Committee
The Company has a separately designated audit committee of the
Board established in accordance with the Exchange Act.
Currently, Eric Langshur and Charles J. Burdick serve as members
of the Audit Committee. Our Board has determined that each
member of the Audit Committee is independent, as that term is
defined in the Exchange Act, and that Mr. Burdick is also
an audit committee financial expert as defined by
the SEC.
Contacting
the Board of Directors
Stockholders who wish to communicate with the Board of Directors
may do so by sending written communications to the Board of
Directors at the following address: Board of Directors,
c/o Corporate
Secretary, Bally Total Fitness Holding Corporation,
8700 West Bryn Mawr Avenue, Chicago, Illinois 60631.
Stockholders who wish to direct communications to only the
independent directors of Bally may do so by sending written
communications to the independent directors at the following
address: Independent Directors,
c/o Corporate
Secretary, Bally Total Fitness Holding Corporation,
8700 West Bryn Mawr Avenue, Chicago, Illinois 60631.
Governance
Principles
The Board of Directors Corporate Governance Guidelines,
which include guidelines for determining director independence
and qualifications for directors, are published on the Investor
Information Corporate Governance section of
Ballys website at www.ballyfitness.com. All of
Ballys other corporate governance materials, including the
committee charters and key practices, are also published on the
Investor Information Corporate Governance section of
Ballys website. These materials are also available in
print to any stockholder upon request. The Board regularly
reviews corporate governance developments and modifies its
Corporate Governance Guidelines, committee charters and key
practices as warranted. Any modifications are reflected on
Ballys website.
Director
Independence
The Board of Directors has adopted standards for director
independence for determining whether a director is independent
from management. These standards are based upon the listing
standards of the NYSE and applicable laws and regulations and
can be found in the Companys Corporate Governance
Guidelines. In accordance with these standards, to be
independent, a director must have no material
relationship with the Company, directly or indirectly, except as
a director. In addition, a majority of the directors serving on
the Board must be independent.
The Board of Directors reviews annually any relationships that a
director has with the Company (either directly or as a partner,
stockholder or officer of an organization that has a
relationship with the Company), based on applicable standards
and on a summary of the answers to annual questionnaires
completed by each of the directors. The Board of Directors has
affirmatively determined, on these bases, that as of the date of
this filing, all of the Companys directors are
independent, other than Mr. Kornstein, the Companys
interim Chairman and Chief Restructuring Officer, who is not
independent for these purposes. Accordingly, three of the four
directors are independent. The Board has also determined that
all Board standing committees are composed of at least a
majority of independent directors.
86
With respect to individuals who served as directors during 2006,
but were not directors as of December 31, 2006, the Board
of Directors previously detemined that all such directors were
independent, other than Mr. Toback, our former Chairman,
President and Chief Executive Officer.
Separate
Sessions of Non-Management Directors
The Corporate Governance Guidelines of the Company provide for
regular executive sessions of the non-management directors
without management participation. A non-management
director is a director who is not an officer
of the Company within the meaning of
Rule 16a-1(f)
under the Securities Act of 1933, as amended. The independent
directors meet in executive session at least four times annually.
Code of
Ethics
Our Board has adopted a Code of Business Conduct, Practices and
Ethics (the Code of Ethics) applicable to the
members of our Board and our officers. A copy of our Code of
Ethics can be obtained from the Company, without charge, by
written request to the Secretary at the Companys address
and is posted on the Companys website
(www.ballyfitness.com).
Section 16(a)
Beneficial Ownership Reporting Compliance
The Company is required to identify any director, executive
officer or beneficial owner of more than ten percent of the
common stock, or any other person subject to Section 16 of
the Exchange Act, that failed to file on a timely basis, as
disclosed in their forms, reports required by Section 16(a)
of the Exchange Act. To our knowledge, based on information
furnished to us, all of these filing requirements were satisfied
for 2006.
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Item 11.
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Executive
Compensation
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Compensation
Discussion And Analysis
Overview
of 2006 Executive Compensation
In this Compensation Discussion and Analysis, we address the
compensation paid or awarded to our executive officers listed in
the Summary Compensation Table that follows this discussion. We
sometimes refer to these executive officers as our named
executive officers or NEOs. This Compensation
Discussion and Analysis does not address the basis for 2006
compensation paid to (a) Messrs. Eidell and Elson,
both of whom served in 2006 pursuant to agreements with the
Company; or (b) Messrs. Landeck or Toback, both of
whom terminated their employment with the Company and received
compensation pursuant to separation agreements. The 2006
compensation arrangements applicable to these four named
executive officers are detailed in Employment and
Separation Agreements below. All compensation paid to
these four named executive officers is set forth in the Summary
Compensation Table below.
Compensation
Objectives
The compensation paid or awarded to our named executive officers
is generally designed to meet the following objectives:
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Provide compensation that is competitive in order to compete for
management talent. We refer to this objective as
competitive compensation.
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Condition a majority of a named executive officers
compensation on a combination of short and long-term
performance. We refer to this objective as performance
incentives.
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Encourage the aggregation and maintenance of meaningful equity
ownership, and the alignment of executive officer and
stockholder interests as an incentive to increase stockholder
value. We refer to this objective as stockholder
incentives.
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Provide an incentive for long-term continued employment with us.
We refer to this objective as retention incentives.
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87
The principal components of compensation that we typically pay
to the named executive officers to meet these objectives are as
follows:
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Type of Compensation
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Objectives Addressed
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Salary
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Competitive Compensation
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Annual Incentive Compensation
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Competitive Compensation
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Performance Incentives
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Retention Incentives
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Equity Compensation (Stock Options
and Restricted Stock Awards)
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Performance Incentives
Stockholder Incentives
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Retention Incentives
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In 2006, no new equity compensation grants (in the form of
either stock options or restricted stock awards) were made to
our named executive officers, because there was not an equity
incentive plan applicable to named executive officers in effect
between January 3 and December 19, 2006. For a detailed
description of the Companys previous and current equity
compensation plans, see Executive and Director
Compensation below.
Determination
of Competitive Compensation
In assessing competitive compensation for 2006, we relied on
data provided to us in 2005 by our compensation consultants, AON
Consulting. The data provided by AON Consulting focused on the
compensation level of a comparator group of sporting retail
stores, entertainment, and large multi-site retail companies.
The revenues in this comparator group (when the survey was done)
range from approximately $133 million to
$11.6 billion. The comparator companies included the
following:
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Big 5 Sporting Goods Corp.
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Gymboree Corp.
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Blockbuster, Inc.
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Hastings Entertainment, Inc.
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Callaway Golf Co.
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K2, Inc.
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Circuit City Stores, Inc.
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Nautilus Group, Inc.
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Dicks Sporting Goods, Inc.
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Radioshack Corp.
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Galyans Trading Co., Inc.
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Sports Club Co., Inc.
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Gaylord Entertainment Co.
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Staples, Inc.
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Guitar Center, Inc.
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Toys R Us, Inc.
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We have historically sought to structure total direct
compensation, namely base salary, annual incentive plan payout
at target levels and long term incentives, at a level that
approximates the
75th percentile
of the comparator companies. We have not followed this guideline
rigidly, and the Compensation Committee of our Board of
Directors has from time to time made determinations that
represent a departure from this general guideline. Moreover, a
majority of our compensation is performance-based, and actual
cash compensation paid to our named executive officers may vary
considerably from that paid to executive officers in the
comparator companies, based on achievement of performance
targets. In the past, as explained in more detail below under
Long Term Incentives Stock Options, our
long-term incentive compensation was largely based on stock
options and restricted stock. Many of the comparator companies
provide other forms of long-term incentives.
Components
of Executive Compensation Program
Salaries
The salary amounts set forth in the Summary Compensation Table
reflect salary decisions made by the Compensation Committee of
our Board of Directors in 2006 and 2007.
88
In determining executive officer salaries, we consider an
executives performance in the preceding year as well as
such executives anticipated responsibilities in the
upcoming year. We also reference salary practices by the
comparator companies. Specifically, we compare the top highest
paid executives in the comparator companies to the top highest
paid Bally executives based on the data provided by AON
Consulting.
Annual
Incentive Plan
The principal objective of our annual incentive plan is to
provide incentive to achieve performance goals that support
long-term stockholder returns. In addition, the annual incentive
plan supports our objective for competitive compensation. In
setting the annual incentive plan target bonuses, we consider
competitive factors, including total cash compensation. This
guideline influences our target award levels, but actual payouts
to named executive officers can vary significantly based on
actual performance. Accordingly, the executives and the
Companys performance will determine whether or not the
executive actually receives competitive compensation.
We set target award levels for our executive officers based on a
percentage of their salary. The percentage of salary payable at
target award levels for all eligible executive officers for 2006
was 50% of base salary; the same percentage was applicable to
all eligible executive officers. We believe that this practice
unified the commitment of the affected executive officers to
achievement of our annual performance goals.
For named executive officers, 50% of the target award has
historically been designed to be based on achievement of
individual goals and performance ratings and 50% was based on
various corporate performance measures. Generally, however, the
corporate performance measure is a percentage of EBITDA.
However, for 2006, the Compensation Committee decided to utilize
a more individual and discretionary approach to short term
incentives. The Compensation Committee believed that this
approach to short-term incentives was warranted, in light of the
significant uncertainties associated with the Companys
performance and projected 2006 EBITDA targets, as a means of
providing sufficient incentives and retention considerations to
named executive officers for their performance in 2006.
Based on the applicable performance ratings, as adjusted to
reflect individual performance, incentive payments to the
eligible named executive officers were as follows:
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Actual Award as Percentage of Target
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Name
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Actual Award
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Award Opportunity
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Marc Bassewitz
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$
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175,000
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100
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%
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John Wildman
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$
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150,000
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80
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%
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James McDonald
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$
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95,000
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54.29
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%
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None of the other named executive officers received bonuses for
performance in 2006.
Long-Term
Incentives Stock Options & Restricted
Stock Awards
We believe that stock ownership by executives is important to
aligning executives interest with those of stockholders.
We believe it is important to grant a mixture of long-term
equity instruments that in the aggregate provide both reward for
value appreciation as well as retention and tangible value for
services during and after the vesting period. We believe that by
awarding both stock options and restricted stock we have aligned
the executives more appropriately than if we were to award only
one type of stock-based equity instrument. Stock options and
restricted stock help us meet our objectives to provide
stockholder incentives, competitive compensation, retention
incentives and performance incentives.
In the past, we have utilized options on our common stock as a
principal form of long-term compensation. Our stock options
generally:
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have a 10 year term;
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vest as to all underlying shares on the third anniversary of the
date of the grant; and
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have an exercise price equal to or greater than the fair market
value per share on or prior to the date of grant, which we
determine based on the closing price of the common stock.
|
89
We believe stock options provide a strong incentive to increase
stockholder value, because the value of the stock options is
entirely dependent on the increase in the market price of our
common stock following the date of grant. The options are used
as a value appreciation instrument as the executive realizes
value only if the stock price increases. This aligns the
interests of the executives with the interests of the
stockholders.
We have also used restricted stock awards as an incentive and
retention device to reward our executives over the long-term and
to align them with our stockholders in optimizing the value of
the Company. Such awards can be granted with performance vesting
restrictions or with time vesting restrictions. Our restricted
stock issued with time vesting restrictions typically vests
after four years provided the executive is employed by the
Company on the vesting date. This vesting arrangement is
typically referred to as cliff vesting.
The Company has maintained three plans (collectively the
Plans) to provide incentive awards to named
executive officers and key employees. Only the Inducement Plan
described below was in effect throughout 2006. The 1996
Long-Term Incentive Plan (the Incentive Plan)
provides for the grant of non-qualified stock options, incentive
stock options and compensatory restricted stock awards to
officers and key employees of the Company. There have been no
grants under the Incentive Plan since December 31, 2005,
and the Incentive Plan expired on January 3, 2006.
To replace the Incentive Plan, in December 2006, the Company
adopted (and the Companys shareholders approved) the 2007
Omnibus Equity Compensation Plan (Omnibus Plan).
Under the Omnibus Plan, the Company will be able to grant stock
options, stock units, stock awards, dividend equivalents and
other stock-based awards to employees and non-employee
directors, and employees of its subsidiaries. No awards have
been granted under the Omnibus Plan.
Additionally, the Inducement Award Equity Incentive Plan (the
Inducement Plan) is a means of providing equity
compensation to induce the acceptance and continuation of
employment of newly hired officers and key employees of the
Company. The Company adopted the Inducement Plan because the
Incentive Plan lacked sufficient shares available to provide
necessary equity inducement for new employees. No awards were
made to any named executive officer under the Inducement Plan in
2006.
In 2006, no new equity compensation grants (in the form of
either stock options or restricted stock awards) were made to
our named executive officers, because there was not an equity
incentive plan in effect between January 3, 2006 (when the
Incentive Plan expired) and December 19, 2006 (when the
Omnibus Plan became effective).
Perquisites
We currently provide our named executive officers with certain
perquisites and additional insurance benefits, which we believe
to be necessary competitive compensation. These perquisites,
which are described generally below, are detailed for each named
executive officer in the 2006 Summary Compensation Table set
forth in Executive and Director Compensation.
In 2006, Messrs. Bassewitz, McDonald and Wildman each
received a monthly car allowance of $1,458, $1,250 and $1,458,
respectively. In addition, these executive officers were
eligible for reimbursement of expenses up to $6,000, $8,000 and
$6,000 per year, respectively, for services provided by a
qualified financial counselor, including the preparation of
personal income tax returns.
We purchase individual life insurance policies, in the amount of
3 times each executives base salary and bonus, for all
executive officers. We also purchase long term disability
insurance in excess of the benefit provided by the
Companys group insurance plan, such that an affected
executive officers long-term disability benefit totals 60%
of the executive officers annual base salary rate in
effect as of the last day of the immediately preceding calendar
year.
Finally, we also reimburse named executive officers for up to
$2,000 per year for expenses incurred for the provisions of
personal security services.
90
Employment
Agreements, Change in Control and Separation
Agreements
As of December 31, 2006, the Company was party to
employment agreements and change in control arrangements with
three of our named executive officers, Messrs. Bassewitz,
Wildman and McDonald (collectively, the Employment
Agreements). In the case of Messrs. Bassewitz and
McDonald, such agreements were entered into upon commencement of
their employment with the Company. In the case of
Mr. Wildman, such agreement was entered into on
January 1, 2006, in connection with Mr. Wildmans
increased operational responsibilities, including oversight of
retail operations. In making the determination to enter into the
Employment Agreements, we considered the need to provide
competitive compensation in order to create management stability
during a period of uncertainty. Absent such agreements, there is
an increased risk that executive officers may be encouraged to
seek other employment opportunities if they became concerned
about their employment security following a change in control.
We believe that the agreements serve to provide financial
security to an executive officer in the event the executive
officer is terminated without cause following a change in
control, by providing a meaningful payment to the executive
officer. The agreements also provide clear statements of the
rights of the executive officers and protect against a change in
employment and other terms by an acquirer that would be
unfavorable to the executive officer. We also determined to
provide benefits, although at a lower level, for certain types
of employment terminations that do not follow a change in
control. We believe these severance obligations provide a
competitive benefit that enhances our ability to retain capable
executive officers.
The Company entered into a Separation Agreement dated as of
August 10, 2006, providing for separation of Paul A. Toback
from his role as Chairman, President and Chief Executive Officer
of the Company effective August 11, 2006. The Company also
entered into a Separation Agreement dated as of August 1,
2006, providing for separation of Carl Landeck from his role as
Chief Financial Officer of the Company effective April 13,
2006 (collectively the Separation Agreements).
On June 13, 2007, the Company entered into a Confidential
Settlement Agreement and Mutual General Release with James A.
McDonald, who had been employed by the Company as its Senior
Vice President and Chief Marketing Officer since May 2,
2005, providing for the termination of Mr. McDonalds
employment with the Company effective June 29, 2007.
Notwithstanding this termination, Mr. McDonald remains a
named executive officer for purposes of reporting 2006 executive
compensation.
For a more detailed discussion of the Separation Agreements and
Employment Agreements, see Employment and Separation
Agreements below.
Tax
Considerations
Section 162(m) of the Internal Revenue Code limits to
$1 million the deductibility for federal income tax
purposes of annual compensation paid by a publicly held company
to its chief executive officer and its four other highest paid
executive officers, unless certain conditions are met. To the
extent feasible, we structure executive compensation to preserve
deductibility for federal income tax purposes. Nevertheless, we
retain the flexibility to authorize compensation that may not be
deductible if we believe it is in the best interests of our
Company. No executives compensation exceeded the
deductibility limit in 2006.
Under our change in control and severance agreements, our
executive officers will be entitled to receive an additional
payment if payments to them resulting from a change in control
are subject to the excise tax imposed by Section 4999 of
the Internal Revenue Code. It is possible that a change in
control could result in those additional payments to our
executive officers. Nevertheless, we believe that the payments
relating to the excise tax are appropriate to preserve the
intended benefits under the agreements, as well as the incentive
for executive officers to maintain their employment with us.
Role of
the Compensation Committee In Executive Compensation
As set forth in the Charter of the Compensation Committee, one
of the Compensation Committees purposes is to administer
our executive compensation program. It is the Compensation
Committees responsibility to oversee the design of
executive compensation programs, recommend to the Board of
Directors the types and amounts of
91
compensation for executive officers, and administer our
incentive compensation and stock option plans. Our human
resources department supports the Compensation Committees
work, and in some cases acts under delegated authority to
administer compensation programs. In addition, as described
above, the Compensation Committee directly engages outside
consulting firms to assist in its review of compensation for
executive officers.
COMPENSATION
COMMITTEE REPORT
The Compensation Committee has reviewed this Compensation
Discussion and Analysis and discussed its contents with members
of the Companys management. Based on this review and
discussion, the Compensation Committee has recommended that the
Compensation Discussion and Analysis be included in the
Companys 2006 Annual Report on
Form 10-K.
The
Compensation Committee:
Mr. Burdick
Mr. Kornstein (Chair through June 1, 2007)
Mr. Langshur
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board
of directors or compensation committee of any other company that
has one or more of its executive officers serving as a member of
our Board of Directors or Compensation Committee.
Executive
and Director Compensation
Summary
of 2006 Executive Compensation
The following table sets forth information regarding 2006
compensation that is required to be disclosed by SEC registrants
under the rules promulgated by the SEC for our former Acting
Chief Executive Officer, our former Chief Executive Officer, our
Chief Financial Officer, our former Chief Financial Officer and
our three other most highly compensated executive officers who
were serving as executive officers as of December 31, 2006.
In the discussion that follows, we refer to these individuals as
our named executive officers. For more information on the
92
terms of their employment see Potential Payments Upon
Termination or Change in Control and Employment and
Separation Agreements below.
SUMMARY
2006 COMPENSATION TABLE
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Non-Equity
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
Awards
|
|
|
Awards
|
|
|
Incentive Plan
|
|
|
Compensation
|
|
|
Total
|
|
Name and Principal Position
|
|
Year
|
|
|
($)
|
|
|
($)(1)
|
|
|
($)(2)
|
|
|
($)(3)
|
|
|
Compensation
|
|
|
($)(4)
|
|
|
($)
|
|
|
Barry R. Elson(5)
|
|
|
2006
|
|
|
|
233,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
233,871
|
|
Former Acting Chief Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul A. Toback(6)
|
|
|
2006
|
|
|
|
422,282
|
|
|
|
|
|
|
|
925,312
|
|
|
|
545,425
|
|
|
|
|
|
|
|
4,733,309
|
|
|
|
6,626,328
|
|
Former Chairman, President and
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronald G. Eidell(7)
|
|
|
2006
|
|
|
|
319,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
319,015
|
|
Senior Vice President and Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carl Landeck(8)
|
|
|
2006
|
|
|
|
123,077
|
|
|
|
|
|
|
|
376,979
|
|
|
|
220,176
|
|
|
|
|
|
|
|
1,047,282
|
|
|
|
1,767,514
|
|
Former Senior Vice President and
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marc D. Bassewitz
|
|
|
2006
|
|
|
|
350,000
|
|
|
|
175,000
|
|
|
|
96,250
|
|
|
|
59,459
|
|
|
|
|
|
|
|
24,518
|
|
|
|
705,227
|
|
Senior Vice President, Secretary
and General Counsel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James A. McDonald(9)
|
|
|
2006
|
|
|
|
350,000
|
|
|
|
95,000
|
|
|
|
96,250
|
|
|
|
39,400
|
|
|
|
|
|
|
|
171,486
|
|
|
|
752,136
|
|
Former Senior Vice President,
Chief Marketing Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
John H. Wildman(10)
|
|
|
2006
|
|
|
|
375,000
|
|
|
|
150,000
|
|
|
|
105,000
|
|
|
|
128,377
|
|
|
|
|
|
|
|
26,953
|
|
|
|
785,330
|
|
Senior Vice President, Former
Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
(1) |
|
The 2006 bonus represents the bonus earned in 2006 and paid in
March 2007 under the Companys annual incentive plan. |
|
(2) |
|
Reflects the aggregate expense recognized for financial
statement reporting purposes in 2006, disregarding the
possibility of forfeitures related to vesting conditions, in
accordance with the Financial Accounting Standards Boards
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment, for restricted stock awards granted
prior to 2006 for which we continue to recognize expense. No
restricted stock awards were granted during 2006 to a named
executive officer. The awards granted prior to 2006 vest upon
the earliest to occur of a) four years from date of
issuance, b) a Change in Control of the Company,
(c) the grantees death or (d) the grantee having
become disabled within the meaning of Section
(22)(e)(3) of the Internal Revenue Code. |
|
(3) |
|
Reflects the aggregate expense recognized for financial
statement reporting purposes in 2006, disregarding the
possibility of forfeitures related to vesting conditions, in
accordance with the Financial Accounting Standards Boards
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment, for stock option awards granted
prior to 2006 for which we continue to recognize expense in
2006. No stock option awards were granted during 2006 to a named
executive officer. We amortize the expense for the grant date
fair value of the stock option awards over the vesting period
using the graded method. |
93
|
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|
|
|
In determining the estimated fair value of our share-based
awards as of the grant date, we used the Black-Scholes
option-pricing model with the following assumptions for the year
ended December 31, 2006: |
|
|
|
Expected Dividend Yield
|
|
0%
|
Expected Volatility in Stock Price
|
|
52.0%
|
Risk-Free Interest Rate
|
|
4.73%
|
Expected Life of Stock Awards
|
|
6 years
|
Weighted-Average Fair Value at
Grant Date
|
|
$3.41
|
|
|
|
(4) |
|
All Other Compensation for 2006 consists of the items set forth
in the table below: |
|
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Miscellaneous
|
|
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Payments Under
|
|
|
|
Executive
|
|
Executive
|
|
Compensation
|
|
|
Separation
|
|
Auto
|
|
Medical Plan
|
|
Disability
|
|
(Relocation
|
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|
Agreement*
|
|
Allowance
|
|
Premiums
|
|
Insurance
|
|
Expenses)
|
|
Paul A. Toback
|
|
$
|
4,709,448
|
|
|
$
|
12,616
|
|
|
$
|
6,833
|
|
|
$
|
4,412
|
|
|
|
**
|
|
Marc D. Bassewitz
|
|
|
|
|
|
$
|
17,500
|
|
|
$
|
4,556
|
|
|
$
|
2,461
|
|
|
|
**
|
|
Carl Landeck
|
|
$
|
1,019,550
|
|
|
$
|
4,615
|
|
|
$
|
3,417
|
|
|
|
|
|
|
$
|
19,700
|
|
James A. McDonald
|
|
|
|
|
|
$
|
15,000
|
|
|
$
|
2,278
|
|
|
$
|
5,208
|
|
|
$
|
149,000
|
|
John H. Wildman
|
|
|
|
|
|
$
|
17,212
|
|
|
$
|
6,833
|
|
|
$
|
2,908
|
|
|
|
**
|
|
|
|
|
|
*
|
The Company entered into a separation agreement with each of
Messrs. Toback and Landeck in 2006. For details of these
agreements, see Employment and Separation Agreements
below.
|
|
|
|
|
**
|
Less than $10,000 in aggregate.
|
|
|
|
(5) |
|
Mr. Elson served as Acting Chief Executive Officer from
August 11, 2006 through May 31, 2007. Compensation in
the amount of $122,064, received by Mr. Elson for his 2006
services as a director, is not reflected in this Summary
Compensation Table, but is reflected in Director
Compensation below. |
|
(6) |
|
Mr. Toback resigned as Chairman, President and Chief
Executive Officer of the Company effective August 10, 2006. |
|
(7) |
|
Mr. Eidell has been employed by the Company since April
2006 and has served as Chief Financial Officer since
August 6, 2006. As set forth below in Employment and
Separation Agreements, Mr. Eidell serves the Company
pursuant to an interim executive services agreement between the
Company and Tatum, LLC, in which Mr. Eidell is a partner,
and the Company has no obligation to provide Mr. Eidell
with any benefits or incentives other than his monthly salary. |
|
(8) |
|
Mr. Landeck ceased being an employee of the Company
effective April 13, 2006. |
|
(9) |
|
Mr. McDonalds employment was terminated effective
June 29, 2007. See Employment and Separation
Agreements below for a summary of the terms and conditions
of Mr. McDonalds separation. |
|
(10) |
|
Mr. Wildman ceased serving as Chief Operating Officer of
the Company effective June 5, 2007. Since that date,
Mr. Wildman has served as the Companys Senior Vice
President, Sales and Interim Chief Marketing Officer. |
2006
Grants of Plan-Based Awards
In 2006, the Company did not make any grants or awards to a
named executive officer under any non-equity or equity incentive
plan.
94
Outstanding
Equity Awards at December 31, 2006
The following table shows outstanding equity awards held by the
named executive officers as of December 31, 2006.
|
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Equity
|
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Incentive
|
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Equity
|
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|
Plan
|
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Incentive
|
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Awards;
|
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Plan
|
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Market
|
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Equity
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Awards;
|
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or Payout
|
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Incentive
|
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Number
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Value of
|
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Plan
|
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of Unearned
|
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|
Unearned
|
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|
Awards;
|
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Market
|
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|
|
|
Shares,
|
|
|
Shares,
|
|
|
|
Number of
|
|
|
Number of
|
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|
Number
|
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|
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|
|
|
|
|
Number of
|
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|
Value of
|
|
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|
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|
Units or
|
|
|
Units or
|
|
|
|
Securities
|
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|
Securities
|
|
|
of Securities
|
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|
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Shares or
|
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Shares or
|
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Other
|
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Other
|
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|
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Underlying
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
|
Units
|
|
|
|
|
|
Rights
|
|
|
Rights
|
|
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|
Unexercised
|
|
|
Unexercised
|
|
|
Unexercised
|
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|
Option
|
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|
|
|
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|
that
|
|
|
that Have
|
|
|
|
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|
that Have
|
|
|
that Have
|
|
|
|
Options
|
|
|
Options
|
|
|
Unearned
|
|
|
Exercise
|
|
|
Option
|
|
|
Option
|
|
|
Have Not
|
|
|
Not
|
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|
Stock
|
|
|
Not
|
|
|
Not
|
|
|
|
(Exercisable)
|
|
|
(Unexercisable)
|
|
|
Options
|
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Price
|
|
|
Grant
|
|
|
Expiration
|
|
|
Vested
|
|
|
Vested
|
|
|
Grant
|
|
|
Vested
|
|
|
Vested
|
|
Name
|
|
(#)
|
|
|
(#)(1)
|
|
|
(#)
|
|
|
($)
|
|
|
Date
|
|
|
Date
|
|
|
(#)
|
|
|
($)(2)
|
|
|
Date
|
|
|
(#)
|
|
|
($)
|
|
|
Barry R. Elson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Paul A. Toback
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
Ronald G. Eidell
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carl Landeck
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marc D. Bassewitz
|
|
|
24,335
|
|
|
|
48,665
|
|
|
|
16,666
|
|
|
|
4.21
|
|
|
|
03/08/05
|
|
|
|
03/08/15
|
|
|
|
55,000
|
|
|
|
134,200
|
|
|
|
11/29/05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,666
|
|
|
|
3.51
|
|
|
|
03/08/05
|
|
|
|
03/08/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,333
|
|
|
|
7.01
|
|
|
|
11/29/05
|
|
|
|
11/29/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,333
|
|
|
|
2.91
|
|
|
|
05/26/05
|
|
|
|
05/26/15
|
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James A. McDonald
|
|
|
14,334
|
|
|
|
28,666
|
|
|
|
15,333
|
|
|
|
7.01
|
|
|
|
11/29/05
|
|
|
|
11/29/15
|
|
|
|
|
|
|
|
134,200
|
|
|
|
11/29/05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
4.21
|
|
|
|
03/08/05
|
|
|
|
03/08/15
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John H. Wildman
|
|
|
238,334
|
|
|
|
56,666
|
|
|
|
16,666
|
|
|
|
7.01
|
|
|
|
11/29/05
|
|
|
|
11/29/15
|
|
|
|
|
|
|
|
146,400
|
|
|
|
11/29/05
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All options reflected in this table vest in accordance with the
descriptions below of the Long Term Incentive Plan and
Inducement Plan. |
|
(2) |
|
Based on the NYSE closing price of $2.45 for the common stock on
December 31, 2006. Closing prices for the Companys
common stock have declined significantly since December 31,
2006; the over-the counter closing price reported on
May 31, 2007 was $0.80. |
Long-Term
Incentive Plan
In January 1996, the Board of the Company adopted the Incentive
Plan. The Incentive Plan provides for the grant of non-qualified
stock options, incentive stock options and compensatory
restricted stock awards (collectively Awards) to
officers and key employees of the Company. Initially,
2,100,000 shares of common stock were reserved for issuance
under the Incentive Plan.
Pursuant to the Incentive Plan, non-qualified stock options were
generally granted with an exercise price equal to the fair
market value of the common stock on the day prior to the grant.
Incentive stock options were granted at not less than the fair
market value of the common stock on the day prior to the grant.
Option grants become exercisable at the discretion of the
Compensation Committee, generally in three equal annual
installments commencing one year from the date of grant. Option
grants in 2005, 2004 and 2003 have
10-year
terms.
In November 1997, June 1999, December 2000 and June 2002 the
Incentive Plan was amended to increase the aggregate number of
shares of common stock that may be granted under the Incentive
Plan to an aggregate of 8,600,000 shares. At
December 31, 2005, 283,965 shares of common stock were
available for future grant under the Incentive Plan; no awards
were granted under the Incentive Plan from December 31,
2005 to January 3, 2006. The Incentive Plan expired on
January 3, 2006 (although the terms of the Incentive Plan
apply to grants still outstanding thereunder).
95
Inducement
Award Equity Incentive Plan
On March 8, 2005, the Companys Compensation Committee
adopted the Inducement Plan as a means of providing equity
compensation to induce the acceptance and continuation of
employment of newly hired officers and key employees of the
Company. The Company adopted the Inducement Plan because of the
1996 Long-Term Incentive Plans potential lack of
sufficient shares available to provide necessary equity
inducement for new employees.
Under the Inducement Plan, the Company (with the approval of the
Board, the Compensation Committee
and/or their
delegates, hereinafter Administrator) may grant
common stock as a material inducement to eligible employees,
either from time to time in the discretion of the Administrator
or automatically upon the occurrence of specified events. The
Administrator in its sole discretion determines whether an award
may be granted, the number of shares of common stock awarded,
the date an award may be exercised, vesting periods, and
exercise price. Generally, options granted under the Inducement
Plan become exercisable in three equal annual installments
commencing one year from the date of the grant.
The Inducement Plan continues for a
10-year term
ending March 8, 2015. The Inducement Plan provides for the
issuance of up to 600,000 shares of the Companys
common stock. As of December 31, 2006, 385,000 restricted
shares and stock options covering an additional
181,500 shares have been granted. The restrictions
applicable to 330,000 of these restricted shares lapsed in May
and September 2005 under the terms of the Plans change in
control provision. During 2006, the 23,000 options previously
granted to Mr. Landeck on November 29, 2005 under the
Inducement Plan were cancelled in connection with his departure
from the Company. At December 31, 2006, 131,500 shares
of common stock were available for future grant under the
Inducement Plan.
2007
Omnibus Equity Compensation Plan
On December 19, 2006, the Companys stockholders
approved the adoption of the Omnibus Plan, which was previously
approved by the Board. The Omnibus Plan provides for the
issuance of a maximum of 3,000,000 shares of common stock
in connection with the grant of stock options, stock units,
stock awards, dividend equivalents and other stock-based awards.
This Omnibus Plan is intended to replace the Incentive Plan,
which terminated on January 3, 2006. To date, there have
been no awards under the Omnibus Plan.
Option
Exercises and Stock Vested
During the fiscal year 2006, no named executive officers
exercised outstanding options, nor did any stock award (that was
granted to a named executive officer prior to 2006) vest.
Potential
Payments Upon Termination or Change in Control
We have entered into an Employment Agreement with each named
executive officer (other than Messrs. Eidell and Elson)
that provides for payments and benefits in connection with
specified termination of employment events, including certain
terminations following a change in control. Any payments or
benefits provided under the termination provisions of the
Employment Agreements are conditional upon the affected
executives (a) resignation from all offices,
directorships and fiduciary positions with the Company, its
affiliates and its employee benefits plans; (b) execution
of a release and indemnification agreement in a form acceptable
to the Company; and (c) continued compliance with the
employment agreements non-competition and confidentiality
provisions.
Under any event of termination covered by the Employment
Agreements, the executive officer may elect to continue group
medical and dental coverage at the then prevailing employee rate
for a period of 18 months from the date of termination. In
the event an executive officer is liable for payment of any
excise tax under Section 4999 of the Internal Revenue Code
of 1986, the executive officer will receive a special tax
reimbursement equal to the excise tax plus any additional
federal, state and local income taxed attributable to the excise
tax reimbursement.
96
The information in this section does not include information
relating to the following:
|
|
|
|
|
payments and benefits provided on a nondiscriminatory basis to
salaried employees generally upon termination of employment,
including our tax-qualified defined contribution plan,
restricted shares and shares underlying options that vested
prior to the termination event; and
|
|
|
|
short-term incentive payments that would not be increased due to
the termination event.
|
The following discussion describes payments that may be made to
our named executive officers upon several events of termination,
including termination in connection with a change in control,
assuming the termination event occurred on December 31,
2006 (except as otherwise noted).
Involuntary
Termination Without Cause Within Two Years Following Change In
Control; Voluntary Termination With Good Reason
Upon termination of a named executive officers employment
on an involuntary basis without cause within two years following
a change in control or (b) on a voluntary basis for good
reason, the executive officer would receive:
|
|
|
|
|
a lump sum cash severance payment equal to two times the sum of
such executive officers (a) highest annual base
salary plus (b) target bonus for the year in which such
termination occurs (or, if the termination follows a change in
control, the year in which the change in control occurs);
|
|
|
|
if termination occurs prior to payment of the annual bonus with
respect to the immediately preceding calendar year, immediate
payment of the full amount of the annual bonus;
|
|
|
|
payment for any unused, earned vacation days for the calendar
year in which such termination occurs;
|
|
|
|
immediate vesting of all awards granted to the executive under
any LTIP (LTIP includes any long-term incentive plan
under which senior executives of the Company are eligible to
receive equity compensation or other long-term incentive grants);
|
|
|
|
continuation of medical coverage for a period of 18 months,
unless terminated earlier because the executive becomes covered
under another medical plan; and
|
|
|
|
outplacement/career transition services.
|
A change in control occurs under the Employment
Agreements if:
|
|
|
|
|
a person becomes the beneficial owner of 50% or more of the
Companys then-outstanding common stock or voting power;
|
|
|
|
the Companys stockholders approve a merger or other
business combination or a sale of all or substantially all of
our assets, followed by the consummation of such transaction;
|
|
|
|
a change in the composition of the Board of Directors such that
the Incumbent Board members no longer constitute at
least a majority of the Board; or
|
|
|
|
the approval by the Companys stockholders of a complete
liquidation or dissolution of the Company.
|
Good reason means the occurrence of any of the
following events, without the consent of the executive officer:
(i) a material reduction in authority or responsibility,
(ii) a reduction in compensation or (iii) a business
relocation beyond reasonable commuting distance (this is defined
as more than 20 highway miles from the principal work location).
The Employment Agreements do not provide for any payments or
benefits in the event of a change of control unless the named
executive officer is terminated within two years following the
change in control. The Incentive Plan, however, provides for
immediate vesting of outstanding equity awards in such event.
The Employment Agreements provide for a payment to the executive
officer if (a) excess parachute payments to them following
a change in control of the Company are subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code or
(b) the vesting of restricted shares of Company stock
following a change in control subjects the executive officer to
income taxes.
97
Other
Involuntary Terminations Without Cause
Upon termination of a named executive officers employment
on an involuntary basis without cause, other than a termination
within two years following a change in control, the executive
officer would receive:
|
|
|
|
|
a lump sum cash severance payment equal to the greater of
(a) all amounts of base salary that would otherwise be
payable for the remainder of the then-current term of employment
and that remain unpaid, or (b) 1.5 times the exective
officers then-current annual base salary;
|
|
|
|
if termination occurs prior to payment of the annual bonus with
respect to the immediately preceding calendar year, immediate
payment of the full amount of the annual bonus;
|
|
|
|
a lump sum equal to 1.5 times the executive officers
target annual bonus for the then-current calendar year;
|
|
|
|
payment for any unused, earned vacation days for the calendar
year in which such termination occurs;
|
|
|
|
immediate vesting of all awards granted to the executive under
any LTIP; and
|
|
|
|
continuation of medical coverage for a period of 18 months,
unless terminated earlier because the executive becomes covered
under another medical plan.
|
Involuntary
Termination With Cause or Voluntary Resignation Without Good
Reason
Upon the termination of a named executive officers
employment with cause, or if a named executive officer resigns
voluntarily without good reason, the executive officer would not
be entitled to any payments, benefits or other amounts otherwise
due under the executive officers Employment Agreement, but
may, however, be eligible for certain benefits under the
Companys employee benefits plans. A named executive
officer whose employment is terminated under either of these
circumstances would remain subject to the restrictive covenants
in his Employment Agreement relating to non-solicitation and
confidentiality.
Termination
Following Death or Disability
Upon the termination of a named executive officers
employment due to the death or long-term disability of the
executive officer, the executive officer (or his estate in the
event of the executives death) would receive (in addition
to payments due under applicable life or disability insurance
policies):
|
|
|
|
|
immediate payment of any unpaid base salary through the date of
his death or long-term disability;
|
|
|
|
if termination occurs prior to payment of the annual bonus with
respect to the immediately preceding calendar year, immediate
payment of the full amount of the annual bonus;
|
|
|
|
payment for any unused, earned vacation days for the calendar
year in which such termination occurs; and
|
|
|
|
immediate vesting of all awards granted to the executive under
any LTIP.
|
Termination
at Expiration of Employment Agreement
Upon termination of a named executive officers employment,
other than for cause, on the termination date of the
officers Employment Agreement, the executive officer would
receive:
|
|
|
|
|
a lump sum equal to the exective officers then-current
annual base salary;
|
|
|
|
if termination occurs prior to payment of the annual bonus with
respect to the calendar year in which the expiration occurs,
immediate payment of the full amount of the annual bonus;
|
|
|
|
a lump sum equal to the executive officers target annual
bonus for the then-current calendar year;
|
|
|
|
payment for any unused, earned vacation days for the calendar
year in which such termination occurs; and
|
|
|
|
continuation of medical coverage for a period of 18 months,
unless terminated earlier because the executive becomes covered
under another medical plan.
|
98
See Employment and Separation Agreements below for a
more detailed description of the amounts and benefits payable to
each named executive officer with an Employment Agreement.
A change in control occurred, for purposes of the Employment
Agreements in February 2006; the change in control event was a
change in the composition of the Incumbent Board such that the
Incumbent Board no longer constituted a majority of the Board.
Accordingly, Messrs. Bassewitz and Wildman would be
entitled to payments and benefits under their respective
Employment Agreements if their employment is terminated within
two years following such change in control. Additionally,
certain restructuring options being considered by the Company
could result in an additional change in control and trigger a
new two-year measuring period for purposes of the Employment
Agreements.
The following table quantifies the potential payments to
Mr. Bassewitz by the Company in the event of termination of
employment or a change in control of the Company, assuming the
event had occurred on December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
Involuntary
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
Following
|
|
|
Without Cause
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
(Other Than
|
|
|
Termination
|
|
|
Termination at
|
|
|
Change of
|
|
|
|
Control/Voluntary
|
|
|
Following
|
|
|
Following
|
|
|
Expiration of
|
|
|
Control
|
|
Benefits and
|
|
Resignation
|
|
|
Change in
|
|
|
Death or
|
|
|
Employment
|
|
|
(Employment Not
|
|
Payments Due Upon
|
|
With Good
|
|
|
Control)
|
|
|
Disability
|
|
|
Agreement
|
|
|
Terminated)
|
|
Specified Event
|
|
Reason ($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary(1)
|
|
|
700,000
|
|
|
|
525,000
|
|
|
|
7,093
|
|
|
|
350,000
|
|
|
|
|
|
Annual/Target Bonus(2)
|
|
|
350,000
|
|
|
|
262,500
|
|
|
|
|
|
|
|
175,000
|
|
|
|
|
|
Unused Vacation
|
|
|
1,346
|
|
|
|
1,346
|
|
|
|
1,346
|
|
|
|
1,346
|
|
|
|
|
|
Equity Awards(3)
|
|
|
307,448
|
|
|
|
253,429
|
|
|
|
253,429
|
|
|
|
|
|
|
|
307,448
|
|
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
|
|
|
26,313
|
|
|
|
26,313
|
|
|
|
|
|
|
|
26,313
|
|
|
|
|
|
Total
|
|
|
1,385,107
|
|
|
|
1,068,588
|
|
|
|
261,868
|
|
|
|
552,659
|
|
|
|
307,448
|
|
|
|
|
(1) |
|
Based on Mr. Bassewitzs 2006 annual base salary of
$350,000. |
|
(2) |
|
Based on Mr. Bassewitzs 2006 target bonus of $175,000. |
|
(3) |
|
These amounts constitute the sum of the following: |
|
|
|
|
$
|
134,200
|
|
Market value of 55,000 shares
of restricted stock awarded to Mr. Bassewitz under the Incentive
Plan.
|
$
|
119,229
|
|
Market value of 48,665 shares
of common stock underlying unvested options awarded to Mr.
Bassewitz under the Incentive Plan.
|
$
|
54,019
|
|
In the case of a change in
control, an income tax gross-up payment due to Mr. Bassewitz
under his Employment Agreement on account of the vesting of his
restricted stock.
|
Market value of the common stock is based on the NYSE closing
price of $2.45 on December 31, 2006. Closing prices for the
Companys common stock have declined significantly since
December 31, 2006; the over-the-counter closing price
reported on May 31, 2007 was $0.80.
99
The following table quantifies the potential payments to
Mr. McDonald by the Company under his Employment Agreement
in the event of termination of employment or a change in control
of the Company, assuming the event had occurred on
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
Involuntary
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
Following
|
|
|
Without Cause
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
(Other Than
|
|
|
Termination
|
|
|
Termination at
|
|
|
Change of
|
|
|
|
Control/Voluntary
|
|
|
Following
|
|
|
Following
|
|
|
Expiration of
|
|
|
Control
|
|
Benefits and
|
|
Resignation
|
|
|
Change in
|
|
|
Death or
|
|
|
Employment
|
|
|
(Employment Not
|
|
Payments Due Upon
|
|
With Good
|
|
|
Control)
|
|
|
Disability
|
|
|
Agreement
|
|
|
Terminated)
|
|
Specified Event
|
|
Reason ($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary(1)
|
|
|
700,000
|
|
|
|
525,000
|
|
|
|
7,044
|
|
|
|
350,000
|
|
|
|
|
|
Annual Bonus(2)
|
|
|
350,000
|
|
|
|
262,500
|
|
|
|
|
|
|
|
175,000
|
|
|
|
|
|
Unused Vacation
|
|
|
2,692
|
|
|
|
2,692
|
|
|
|
2,692
|
|
|
|
2,692
|
|
|
|
|
|
Equity Awards(3)
|
|
|
258,451
|
|
|
|
204,432
|
|
|
|
204,432
|
|
|
|
|
|
|
|
258,451
|
|
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
|
|
|
26,313
|
|
|
|
26,313
|
|
|
|
|
|
|
|
26,313
|
|
|
|
|
|
Total(4)
|
|
|
1,337,456
|
|
|
|
1,020,937
|
|
|
|
214,168
|
|
|
|
554,005
|
|
|
|
258,451
|
|
|
|
|
(1) |
|
Based on Mr. McDonalds 2006 annual base salary of
$350,000. |
|
(2) |
|
Based on Mr. McDonalds target 2006 bonus of $175,000. |
|
(3) |
|
These amounts constitute the sum of the following: |
|
|
|
|
$
|
134,200
|
|
Market value of 55,000 shares
of restricted stock awarded to Mr. McDonald under the Incentive
Plan.
|
$
|
70,232
|
|
Market value of 28,666 shares
of common stock underlying unvested options awarded to Mr.
McDonald under the Incentive Plan.
|
$
|
54,019
|
|
In the case of a change in
control, an income tax gross-up payment due to Mr. McDonald
under his Employment Agreement on account of the vesting of his
restricted stock.
|
Market value of the common stock is based on the NYSE closing
price of $2.45 on December 31, 2006. Closing prices for the
Companys common stock have declined significantly since
December 31, 2006; the over-the-counter closing price
reported on May 31, 2007 was $0.80.
|
|
|
(4) |
|
The McDonald Separation Agreement (as defined and described
below in Employment and Separation Agreements)
provided for a negotiated termination payment and benefits
package other than that provided for in his Employment Agreement. |
The following table quantifies the potential payments to
Mr. Wildman by the Company in the event of termination of
employment or a change in control of the Company, assuming the
event had occurred on December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
Involuntary
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
Following
|
|
|
Without Cause
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
(Other Than
|
|
|
Termination
|
|
|
Termination at
|
|
|
Change of
|
|
|
|
Control/Voluntary
|
|
|
Following
|
|
|
Following
|
|
|
Expiration of
|
|
|
Control
|
|
Benefits and Payments
|
|
Resignation
|
|
|
Change in
|
|
|
Death or
|
|
|
Employment
|
|
|
(Employment Not
|
|
Due Upon Specified
|
|
With Good
|
|
|
Control)
|
|
|
Disability
|
|
|
Agreement
|
|
|
Terminated)
|
|
Event
|
|
Reason ($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Salary(1)
|
|
|
750,000
|
|
|
|
562,500
|
|
|
|
7,566
|
|
|
|
375,000
|
|
|
|
|
|
Annual Bonus(2)
|
|
|
375,000
|
|
|
|
281,250
|
|
|
|
|
|
|
|
187,500
|
|
|
|
|
|
Unused Vacation
|
|
|
12,981
|
|
|
|
12,981
|
|
|
|
12,981
|
|
|
|
12,981
|
|
|
|
|
|
Equity Awards(3)
|
|
|
344,162
|
|
|
|
285,232
|
|
|
|
285,232
|
|
|
|
|
|
|
|
344,162
|
|
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
|
|
|
26,313
|
|
|
|
26,313
|
|
|
|
|
|
|
|
26,313
|
|
|
|
|
|
Total
|
|
|
1,508,456
|
|
|
|
1,168,276
|
|
|
|
305,779
|
|
|
|
601,794
|
|
|
|
344,162
|
|
100
|
|
|
(1) |
|
Based on Mr. Wildmans 2006 annual base salary of
$375,000. |
|
(2) |
|
Based on Mr. Wildmans target 2006 bonus of $187,500. |
|
(3) |
|
These amounts constitute the sum of the following: |
|
|
|
|
|
$
|
146,400
|
|
|
Market value of 60,000 shares
of restricted stock awarded to Mr. Wildman under the Incentive
Plan.
|
$
|
138,832
|
|
|
Market value of 56,666 shares
of common stock underlying unvested options awarded to Mr.
Wildman under the Incentive Plan.
|
$
|
58,930
|
|
|
In the case of a change in
control, an income tax gross-up payment due to Mr. Wildman under
his Employment Agreement on account of the vesting of his
restricted stock.
|
|
|
|
|
|
Market value of the common stock is based on the NYSE closing
price of $2.45 on December 31, 2006. Closing prices for the
Companys common stock have declined significantly since
December 31, 2006; the over-the-counter closing price
reported on May 31, 2007 was $0.80. |
In the event of termination of employment
and/or a
change in control of the Company on December 31, 2006, no
payments or other benefits would have been due to
Messrs. Eidell or Elson. Accordingly, we have not included
a table quantifying estimated payments to these named executive
officers upon the occurrence of any specified event described
above.
Director
Compensation
In 2006, annual compensation for non-employee directors was
comprised of the following components: annual retainer, special
retainer and board and committee stipends. Each of these
components is described in more detail below. Members of the
Board who were also employees of Bally did not receive any
additional compensation for service on the Board or any
committees of the Board during the period in which they served
as an employee. The Board met 31 times in 2006.
The following table sets forth information concerning the
compensation earned by non-employee directors in 2006. There
were no stock awards or option awards made to directors in 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Payment
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
|
|
|
|
In Lieu Of
|
|
|
|
|
|
|
|
|
|
or Paid
|
|
|
Stock
|
|
|
Option
|
|
|
Equity
|
|
|
All Other
|
|
|
|
|
|
|
in Cash
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Total
|
|
Name of Director
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Charles J. Burdick
|
|
|
185,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
185,135
|
|
Barry M. Deutsch
|
|
|
172,817
|
|
|
|
|
|
|
|
|
|
|
|
14,300
|
|
|
|
|
|
|
|
187,117
|
|
Barry R. Elson(1)
|
|
|
122,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,064
|
|
Don R. Kornstein(2)
|
|
|
478,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
478,435
|
|
Eric L. Langshur
|
|
|
258,317
|
|
|
|
|
|
|
|
|
|
|
|
16,500
|
|
|
|
|
|
|
|
274,817
|
|
J. Kenneth Looloian
|
|
|
2,750
|
|
|
|
|
|
|
|
|
|
|
|
3,396
|
|
|
|
|
|
|
|
6,146
|
|
James F. McAnally, M.D.
|
|
|
147,750
|
|
|
|
|
|
|
|
|
|
|
|
2,704
|
|
|
|
|
|
|
|
150,454
|
|
Adam S. Metz
|
|
|
22,632
|
|
|
|
|
|
|
|
|
|
|
|
10,350
|
|
|
|
|
|
|
|
32,982
|
|
John W. Rogers, Jr.
|
|
|
326,000
|
|
|
|
|
|
|
|
|
|
|
|
26,100
|
|
|
|
|
|
|
|
352,100
|
|
Steven S. Rogers
|
|
|
176,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176,250
|
|
|
|
|
(1) |
|
Does not reflect compensation paid to Mr. Elson for his
services as Acting Chief Executive Officer from and after
August 11, 2006. Such compensation is reflected in the
Summary Compensation Table at page 93. |
|
(2) |
|
Includes $50,000 per month additional director fees paid to
Mr. Kornstein for his services as interim Chairman from and
after August 11, 2006. |
101
Annual
Board/Committee Retainers
Standard compensation of non-employee directors included an
annual cash retainer of $30,000 for 2006. In addition,
non-employee directors who served as members of Board committees
received annual cash retainers of $1,000 per year per committee.
Committee chairmen (other than the Chairman of the Audit
Committee) received an annual retainer of $7,500. The Chairman
of the Audit Committee received an annual retainer of $25,000.
Special
Retainers
One-time special retainers were awarded in 2006 as compensation
for the extraordinary commitment of time spent during the
previous year on Board and committee activities, in the
following amounts:
|
|
|
|
|
$40,000 to each director;
|
|
|
|
$35,000 to each of the Lead Director and the Audit Committee
Chairman;
|
|
|
|
$25,000 to each of the Compensation Committee Chairman and
Nominating & Corporate Governance Committee Chairman
(though that payment was not made to the then-current
Compensation Committee Chairman because he was also then the
Lead Director);
|
|
|
|
$17,500 to each Co-Chairman of the Strategic Alternatives
Committee; and
|
|
|
|
an additional $1,000 per-meeting stipend to Audit Committee
members for meetings attended from January 1, 2006 to
June 30, 2006 (increasing the per-meeting stipend for Audit
Committee meetings during that period from $1,000 to $2,000).
|
The Companys 1996 Non-Employee Directors Stock
Option Plan (the Directors Plan) expired on
January 3, 2006 and no new equity plan was approved at the
companys annual meeting on January 26, 2006.
Accordingly, on March 10, 2006, the Board approved an
additional cash retainer, to commence in 2006, of $40,000 per
non-employee director, in lieu of equity compensation.
A one-time special retainer of $50,000 was awarded in 2006 to
Mr. Deutsch, Mr. Langshur, Mr. Looloian,
Dr. McAnally and Mr. John Rogers as compensation for
the extraordinary commitment of time spent during the previous
year on Board and committee activities.
Meeting
Stipends
Standard compensation of non-employee directors in 2006 included
a $2,000 stipend for each Board meeting attended and a $1,000
stipend for each committee meeting attended that was not held in
conjunction with a Board meeting. An additional per-meeting
stipend of $2,000 was paid to Audit Committee members for
meetings attended from January 1, 2006 to June 30,
2006.
1996
Non-Employee Directors Stock Option Plan Grants/Cash
Payment in Lieu of Equity Compenation
Pursuant to the Directors Plan, each non-employee director
of Bally was granted an option to purchase 5,000 shares of
common stock upon the commencement of service on the Board, with
another option to purchase 5,000 shares of common stock
granted on the second anniversary thereof. The Directors
Plan expired on January 3, 2006 and no further options may
be issued thereunder. Options under the Directors Plan
generally were granted with an exercise price equal to the fair
market value of the common stock at the date of the grant.
Option grants under the Directors Plan become exercisable
in three equal annual installments commencing one year from the
date of grant, or upon a change in control, as defined in the
Directors Plan, and have a
10-year term.
On May 4, 2005, all of the options granted under the
Directors Plan prior to May 4, 2005 became
exercisable for a period of 90 days, as a result of a
change in control event; at the end of the
90-day
period, the options terminated according to the terms of the
Directors Plan. For these purposes, a change in control
under the Directors Plan 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. Specifically, the change in control
event was the acquisition of the
102
Companys common stock on May 4, 2005 by Liberation
Investment Group LLC, Liberation Investments, Ltd., Liberation
Investments, L.P. and Emanuel R. Pearlman.
Due to an administrative error, directors were not apprised of
the vesting and subsequent expiration of their options during
2005, and thus did not have an opportunity to exercise their
options. Accordingly, on March 10, 2006, the Board, with
affected directors abstaining, awarded a cash payment for each
expired option to each director equal to the difference between
(i) the average of the high and low prices of Bally common
stock on the NYSE on December 2, 2005 (the first available
trading date under the Companys insider trading policy
following expiration of the options) and (ii) the exercise
price of such option. The amounts awarded to the directors were:
Mr. Deutsch $14,300;
Mr. Langshur $16,500;
Mr. Looloian $10,950;
Dr. McAnally $10,950; Mr. John
Rogers $26,100. In the case of Mr. Looloian and
Dr. McAnally, the actual amount paid, $3,396 and $2,704,
respectively, was net of proceeds received upon a cashless
exercise of certain options that the Company erroneously
permitted to be exercised in December 2005 (Mr. Looloian
and Dr. McAnally paid the Company the par value with
respect to the shares received on exercise of the options).
In addition, in connection with Mr. Metzs resignation
from the Board, the Board approved a $10,350 cash payment to
him, representing a Black-Scholes valuation of his options at
the time of his resignation.
Other
Personal Benefits
In addition to the retainers and fees listed above, the Company
reimburses the directors for their travel expenses incurred in
attending meetings of the Board or its committees, as well as
for fees and expenses incurred in attending director education
seminars and conferences. The directors do not receive any other
personal benefits.
Director
Indemnification Agreements
On September 8, 2006, the Board approved the Companys
entry into Indemnification Agreements with members of the Board,
providing for indemnification of such directors in certain
circumstances. The Company entered into Indemnification
Agreements with Messrs. Burdick, Deutsch, Elson, Langshur,
Steven Rogers and John Rogers. Under the Indemnification
Agreements, the Company will be obligated to indemnify each
director in certain circumstances and upon certain conditions
against expenses, judgments, fines and settlement amounts,
incurred by such director. The Indemnification Agreements also
establish procedures and other agreements pertaining to such
obligations of the Company.
Changes
in Non-Employee Director Compensation
On December 19, 2006, after the Nominating and Corporate
Governance Committee of the Board completed a review of the
compensation for non-employee directors, the Board adopted
certain changes to the Companys compensation policy for
the Board, effective January 1, 2007. Total annual
compensation for non-employee directors consists of cash
compensation of $65,000 and equity consideration valued at
$65,000. The Board also approved annual cash retainers of
$35,000 for the Chair of the Audit Committee and $25,000 for the
Chair of each of the Compensation Committee and the Nominating
Committee. Other members of the Audit Committee each receive an
annual cash retainer of $21,000 and members of each of the
Compensation Committee and the Nominating Committee each receive
an annual cash retainer of $15,000. Non-employee directors
generally are not entitled to fees for meetings attended.
However, in recognition of the increased time commitment
required of Board members due to the Companys
restructuring and the complexities associated with completion
and audit of the Companys 2006 financial statements, on
June 15, 2007, the Board instituted a per meeting stipend
for certain meetings attended by Board members between
June 1, 2007 and September 30, 2007. The stipends are
(a) $2,000 per Board member for each Board meeting attended in
person; (b) $1,000 per Board member for each Board meeting
attended telephonically; and (c) $1,000 per member of the
Companys Audit Committee for each Audit Committee meeting
attended. Mr. Kornstein is not eligible to receive these
stipends during the period he serves as Chief Restructuring
Officer of the Company. Mr. Elson is not eligible to
receive these stipends during the period he provides consulting
services to the Company.
103
Directors
Change of Control Provisions
There is no outstanding director compensation provision that is
triggered upon a change in control.
Employment
and Separation Agreements
Agreement
with Tatum, LLC regarding Ronald G. Eidell
On April 13, 2006, the Company entered into an interim
executive services agreement with Tatum, LLC
(Tatum), pursuant to which Ronald G. Eidell, a
partner of Tatum, LLC, was engaged as Senior Vice President,
Finance of the Company (the Eidell Services
Agreement). The Eidell Services Agreement provides that
Mr. Eidell will devote efforts to the Company in a manner
that is customary for senior executives of the Company, for a
salary of $38,400 per month (Salary) payable by the
Company. In addition, under the Eidell Services Agreement the
Company pays Tatum a fee of $9,600 per month (Fees).
The Company may terminate the Eidell Services Agreement on
30 days prior written notice, or immediately for
cause (as defined). Tatum may terminate the Eidell Services
Agreement on 60 days prior written notice. The
Company has no obligation to provide Mr. Eidell with any
health or medical benefits, stock or bonus payments or any other
benefits, other than coverage under the Companys existing
directors and officers insurance policies.
On August 6, 2006, the Board named Mr. Eidell as
Senior Vice President and Chief Financial Officer and principal
financial officer of the Company.
Agreement
with Tatum, LLC regarding Michael L. Goldberg
Effective December 14, 2006, Michael L. Goldberg was
appointed as the Companys Vice President, Corporate
Controller. Since 2000, Mr. Goldberg, has served as
a partner at Tatum, LLC. The Company and Tatum entered into an
Interim Executive Services Agreement (the Goldberg
Services Agreement) with respect to
Mr. Goldbergs services. The Goldberg Services
Agreement provides that Mr. Goldberg will devote efforts to
the Company in a manner that is customary for executives of the
Company, for a salary of $32,800 per month (Salary)
payable by the Company. In addition, under the Goldberg Services
Agreement the Company will pay Tatum a fee of $8,200 per month.
The Company may terminate the Goldberg Services Agreement on
30 days prior written notice and Tatum may terminate
the Goldberg Services Agreement on 60 days prior
written notice. The Company has no obligation to provide
Mr. Goldberg with any health or medical benefits, stock or
bonus payments or any other benefits, other than coverage under
the Companys existing directors and officers
insurance policies.
Employment
Agreement with the former Chairman, President and Chief
Executive Officer
On August 24, 2004, the Company entered into an employment
agreement with Mr. Toback to provide for him to continue as
the Companys President and Chief Executive Officer through
December 31, 2007 (the Toback Employment
Agreement). The term of the Toback Employment Agreement
was to be automatically extended each year for an additional
12 months commencing December 31, 2007, unless either
party provided notice of intent not to renew at least
90 days prior to the then-current termination date. The
Toback Employment Agreement provided for an initial annual base
salary of $575,000, subject to increases at the discretion of
the Company, and an annual incentive target payment of 70% of
Mr. Tobacks then current base salary. This incentive
payment was to be based on performance criteria established by
the Board. He was also eligible for additional perquisites,
including a car allowance, security fees, tax/financial
planning, and a tax
gross-up
payment for income taxes relating to the vesting of restricted
stock. Effective as of November 30, 2005, the Company
amended the Toback Employment Agreement to (i) include
specific language regarding Company-provided disability
insurance memorializing the Companys standard policy and
(ii) eliminate an exception from the definition of
Change of Control for issuances of equity by the
Company. The Company further amended the Toback Employment
Agreement on August 6, 2006, in consideration of, among
other matters, Mr. Tobacks agreement to resolve
various claims by Mr. Toback, including with respect to the
Companys obligation to implement a supplemental retirement
plan for his benefit. The modification increased by $900,000 the
amount payable to Mr. Toback only in the event he was
terminated without Cause, as defined in the Toback
Employment Agreement, on or prior to February 7, 2008.
104
Separation
Agreement with the former Chairman, President and Chief
Executive Officer
The Company entered into a Separation Agreement dated as of
August 10, 2006, providing for Mr. Tobacks
separation as Chairman, President and Chief Executive Officer of
the Company as of August 11, 2006 (the Separation
Agreement). The negotiated terms of the Separation
Agreement are substantially equivalent to those set forth in the
Toback Employment Agreement in the circumstances of termination
without cause following a change in control (as
defined). Under the Separation Agreement, the Company agreed to
pay Mr. Toback severance in the amount of $3,832,500, less
required deductions for state and federal withholding, which
equals (i) a lump sum equal to three times the sum of
Mr. Tobacks annual salary and target bonus; plus
(ii) the amount payable to Mr. Toback, pursuant to the
August 6, 2006 modification to the Toback Employment
Agreement in the event Mr. Toback is terminated without
cause, or resigns for good reason within the two-year period
following February 7, 2006; plus (iii) compensation
for any unused earned vacation days. The Company also agreed to
provide Mr. Toback and his eligible dependents with
continued health coverage under the Companys medical plan
at the level in which they currently participate until
August 11, 2015. These severance amounts were paid on
August 11, 2006.
The Separation Agreement also provided that Mr. Toback
would immediately vest in the equity awards granted under the
Companys 1996 Long-Term Incentive Plan. Mr. Toback
was also entitled to tax
gross-up
payments for income and employment taxes relating to the vesting
of his restricted stock. The Separation Agreement also provided
for the exercise of Mr. Tobacks vested stock options
for the unexpired period of the respective stated option term.
In connection with Mr. Tobacks termination of
employment with the Company, the Company and Mr. Toback
executed a release of claims pursuant to which Mr. Toback
released the Company and any of its predecessors, successors,
parents, affiliates and their present and former officers,
directors, agents, employees and shareholders from any and all
claims or causes of action that Mr. Toback might have had
against the Company and the Board agreed to a covenant not to
sue Mr. Toback for any known claims or causes of action
that the Board might have had against Mr. Toback.
Employment
Agreement and Separation Agreement with the former Senior Vice
President and Chief Financial Officer
In March 2005, the Company entered into an employment agreement
with Carl J. Landeck with a term through March 31, 2008.
Mr. Landecks agreement provided for an annual base
salary of $400,000, subject to increases at the Companys
discretion, and a bonus payable at the Companys discretion
with a target bonus of 50% of base pay. Mr. Landeck was
guaranteed a minimum bonus for fiscal 2005 of $100,000.
Effective April 13, 2006, Mr. Landeck ceased being an
employee of the Company. In connection with
Mr. Landecks departure, the Company entered into a
Separation Agreement with him on August 1, 2006 (the
Landeck Separation Agreement). Under the Landeck
Separation Agreement, the Company agreed to pay Mr. Landeck
severance in the amount of $700,000, less required deductions
for state and federal withholding. The Company also agreed to
pay to Mr. Landeck an additional lump sum amount of $15,000
to cover the cost of certain health care premiums and up to
$20,000 to reimburse Mr. Landeck for his legal fees
relating to the Landeck Separation Agreement. These severance
amounts were paid on October 17, 2006 pursuant to the terms
of the Landeck Separation Agreement.
The Landeck Separation Agreement also provided that
Mr. Landeck would immediately vest in equity awards granted
under the Companys Inducement Plan. The 23,000 options
that were granted to Mr. Landeck under the Inducement Plan
on November 29, 2005 at an exercise price of $7.01 were
cancelled. The Landeck Separation Agreement extended the
exercise period of Mr. Landecks vested options until
October 10, 2006. At the end of the extended exercise
period, any unexercised options immediately expired.
The negotiated terms are substantially less than those that
would have been required based on the express terms of
Mr. Landecks employment agreement in the event his
employment terminated other than for Cause. In exchange for the
consideration set forth in the Landeck Separation Agreement,
Mr. Landeck released the Company and any of its
predecessors, successors, parents, affiliates and their present
and former officers, directors, agents, employees and
shareholders from any and all claims or causes of action that
Mr. Landeck might have had against the Company.
105
Separation
Agreement with former Senior Vice President and Chief Marketing
Officer
On June 13, 2007, the Company entered into a Confidential
Settlement Agreement and Mutual General Release (the
McDonald Separation Agreement) with James A.
McDonald, who had been employed by the Company as its Senior
Vice President and Chief Marketing Officer since May 2,
2005, providing for the termination of Mr. McDonalds
employment with the Company effective June 29, 2007 (the
Termination Date).
Under the McDonald Separation Agreement, the Company paid
McDonald two severance payments, each in the amount of $262,500,
on June 13, 2007 and on the Termination Date. The McDonald
Separation Agreement also provides for payments by the Company
to McDonald on account of medical insurance premiums, relocation
expenses and attorneys fees, and requires the Company to
provide life insurance to McDonald (on the same terms as
provided in McDonalds employment agreement with the
Company) for a period of 18 months following the
Termination Date. The McDonald Separation Agreement also
contains, among other provisions, customary mutual releases,
indemnification provisions and non-disparagement provisions.
Monthly
Stipends for the Interim Chairman of the Board and the Acting
Chief Executive Officer
On August 11, 2006, following Mr. Tobacks
termination, the Board appointed director Barry R. Elson as
Acting Chief Executive Officer. On September 1, 2006, the
Compensation Committee approved payment of a monthly stipend to
Mr. Elson, retroactive to August 11, 2006, in the
amount of $50,000 per month (prorated for the month of August)
through the earlier of December 31, 2006 or appointment of
a permanent Chief Executive Officer. In determining
Mr. Elsons compensation, the Compensation Committee
consulted with AON Consulting, which provides executive
compensation advisory services. AON Consulting provided the
Compensation Committee with information regarding compensation
packages for chief executive officers at comparable companies.
In addition, the Compensation Committee considered the
compensation paid to the Companys former Chief Executive
Officer as well as the duties assigned to the Acting Chief
Executive Officer. On December 19, 2006, the Board extended
the $50,000 monthly payment to Mr. Elson until the
earlier of the appointment of a permanent Chief Executive
Officer or the completion of a recapitalization of the Company.
Effective May 31, 2007, Mr. Elson resigned from his
position as Acting Chief Executive Officer. Mr. Elson did
not resign from the Companys Board of Directors.
Mr. Elson will provide certain executive services to the
Company for a period of 90 days, through August 31,
2007, for a monthly fee of $25,000.
On September 1, 2006, the Compensation Committee also
approved payment of additional director fees to
Mr. Kornstein, Interim Chairman of the Board, retroactive
to August 11, 2006, in the amount of $50,000 per month
through the earlier of December 31, 2006 or the election of
a permanent Chairman of the Board. On December 19, 2006,
the Board extended the $50,000 monthly payment to
Mr. Kornstein until the earlier of the naming of a
permanent Chief Executive Officer or the completion of a
recapitalization of the Company. On May 4, 2007, the Board
appointed Mr. Kornstein as Chief Restructuring Officer. In
consideration of his services as Chief Restructuring Officer,
Mr. Kornstein will receive monthly compensation of $50,000,
in addition to the monthly additional director fee of $50,000
that is paid to Mr. Kornstein for his services as interim
Chairman of the Board.
During the periods in which they received the above described
monthly stipends for their services as interim Chairman of the
Board and Acting Chief Executive Officer, respectively, neither
of Messrs. Kornstein or Elson received other director
stipends or meeting fees that otherwise would have been due them
for their services as directors of the Company.
Employment
Agreements with Other Senior Executives
The Company has entered into employment agreements with Harold
Morgan, Marc Bassewitz, Jim McDonald and John Wildman, with
terms of January 1, 2005 through December 31, 2007
with respect to Messrs. Morgan and Bassewitz,
January 1, 2006 through December 31, 2008 with respect
to Mr. Wildman, and January 1, 2005 through
May 1, 2008 with respect to Mr. McDonald. The term of
each employment agreement will be automatically extended each
year for an additional 12 months on the anniversary date of
the respective termination date unless either party provides
notice of intent not to renew at least ninety (90) days
prior to the then-current termination date. The Company
previously entered into an employment agreement with William
Fanelli, effective as of January 1, 2003 for a term of
three years through December 31, 2005. Commencing
January 1, 2006, the term of Mr. Fanellis
106
agreement is extended each day by one day to create a new
one-year term. At any time at or after January 1, 2006,
Bally or Mr. Fanelli may deliver notice to the other party
that the employment period shall expire on the last day of the
one year period commencing on the date of delivery of such
notice.
The foregoing agreements provide for an annual base salary
($325,000 for Mr. Fanelli; $350,000 for
Messrs. Morgan, McDonald and Bassewitz; and $375,000 for
Mr. Wildman), subject to increases at the discretion of
Bally, and a bonus payable at the discretion of Bally with a
target bonus of 50% of base pay. On May 4, 2007, in
consideration of their substantially increased responsibilities
in connection with the Companys efforts to negotiate and
implement a financial and operational restructuring, the Board
voted to increase the annual base salaries of
Messrs. Bassewitz and Wildman to $500,000 and $425,000,
respectively.
Effective as of November 30, 2005, the Company amended the
employment agreements with Messrs. Bassewitz and Morgan to
(i) include specific language regarding Company-provided
disability insurance memorializing the Companys standard
policy and (ii) eliminate an exception from the definition
of Change of Control for issuances of equity by the
Company. Mr. Wildmans employment agreement contains
the same provisions.
On September 14, 2006, the Company entered into amendments
to the employment agreements with each of Messrs. Bassewitz
and McDonald. The amendments clarify that the definition of
LTIP includes any plan under which senior executives
of the Company are eligible to receive equity compensation or
other long-term incentive grants, including the Companys
Inducement Award Equity Incentive Plan.
On September 8, 2006, the Board authorized the Company to
enter into an Indemnification Agreement with Mr. Bassewitz
pursuant to which the Company will be obligated to indemnify
Mr. Bassewitz in certain circumstances and upon certain
conditions against expenses, judgments, fines and settlement
amounts incurred by him. The Indemnification Agreement also
establishes procedures and other agreements pertaining to such
obligations of the Company.
2007
Management Incentive Plan
On May 28, 2007, the Board approved an incentive plan
pursuant to which Mr. Kornstein (in his capacity as Chief
Restructuring Officer) and certain other executive officers,
including Messrs. Bassewitz and Wildman, will each be
eligible to receive a cash incentive award (Incentive
Bonus) in connection with the successful consummation of a
plan of reorganization filed under Chapter 11 of the
U.S. Bankruptcy Code as to which the Company is a debtor
(the Restructuring Plan). The Company has
implemented the incentive plan by entering into Restructuring
Bonus Agreements (the Bonus Agreements) with
affected executive officers. The Bonus Agreements each set forth
a maximum incentive value which is payable if the Company
consummates a Restructuring Plan by October 31, 2007 (the
Target Date) and provide for incremental monthly
reductions thereafter.
The Board set the maximum value of Mr. Kornsteins
Incentive Bonus at $2,100,000, with reductions based on the
number of months after the Target Date in which the
Restructuring Plan becomes effective. If the Restructuring Plan
does not become effective within eight months of the Target
Date, Mr. Kornstein will no longer be eligible to receive
an Incentive Bonus.
The Board set the maximum value of Mr. Bassewitzs
Incentive Bonus at $375,000, with reductions based on the number
of months after the Target Date in which the Restructuring Plan
becomes effective. If the Restructuring Plan becomes effective
after more than five months after the Target Date,
Mr. Bassewitz will be eligible to receive an Incentive
Bonus of $131,250 and the Incentive Bonus will not be reduced
thereafter.
The Board set the maximum value of Mr. Wildmans
Incentive Bonus at $159,375, with reductions based on the number
of months after the Target Date in which the Restructuring Plan
becomes effective. If the Restructuring Plan becomes effective
after more than five months after the Target Date,
Mr. Wildman will be eligible to receive an Incentive Bonus
of $55,781 and the Incentive Bonus will not be reduced
thereafter.
107
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
In general, beneficial ownership includes those
shares a stockholder has the power to vote or transfer and stock
options or warrants that are exercisable currently or within
60 days. Unless otherwise indicated, all information with
respect to ownership of common stock is as of December 31,
2006. On December 31, 2006, Bally had outstanding
41,286,512 shares of common stock.
Beneficial
Ownership of Directors and Executive Officers
The following table shows the number of shares of Bally common
stock beneficially owned by the directors, named executive
officers and all directors and executive officers as a group as
of December 31, 2006. The Common Shares Owned
column includes, in certain circumstances, shares of common
stock held in the name of the directors or executive
officers spouse, minor children, or relatives sharing the
directors or executive officers home, the reporting
of which is required by applicable rules of the SEC, but as to
which shares of common stock the director or executive officer
may have disclaimed beneficial ownership. As used in the
following tables, an asterisk in the Percentage of Outstanding
Stock column means less than 1%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Options
|
|
|
Total
|
|
|
Percentage of
|
|
|
|
Shares
|
|
|
Exercisable
|
|
|
Beneficial
|
|
|
Outstanding
|
|
Beneficial Owner
|
|
Owned
|
|
|
Within 60 Days
|
|
|
Ownership
|
|
|
Stock*
|
|
|
Barry R. Elson
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
Paul A. Toback(1)
|
|
|
135,000
|
|
|
|
552,000
|
|
|
|
687,000
|
|
|
|
1.66
|
|
Ronald G. Eidell
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
Carl Landeck(2)
|
|
|
55,000
|
|
|
|
0
|
|
|
|
55,000
|
|
|
|
**
|
|
Marc D. Bassewitz
|
|
|
130,000
|
|
|
|
24,335
|
|
|
|
154,335
|
|
|
|
**
|
|
James A. McDonald
|
|
|
105,000
|
|
|
|
14,334
|
|
|
|
119,334
|
|
|
|
**
|
|
John H. Wildman
|
|
|
60,000
|
|
|
|
238,334
|
|
|
|
298,334
|
|
|
|
**
|
|
Charles J. Burdick
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
Don R. Kornstein
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
Eric Langshur
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
All directors and executive
officers as a group (19 persons)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.64
|
|
|
|
|
* |
|
Based on 41,286,512 shares of common stock outstanding. |
|
** |
|
Less than 1% of the outstanding common stock. |
|
(1) |
|
Mr. Toback resigned as Chairman, President and Chief
Executive Officer effective August 10, 2006, and was not
required to report transactions in the Companys stock
following this date. Accordingly, this table shows
Mr. Tobacks stock ownership known to the Company as
of August 10, 2006. |
|
(2) |
|
Mr. Landeck ceased being an employee of the Company
effective April 13, 2006, and was not required to report
transactions in the Companys stock following this date.
Accordingly, this table shows Mr. Landecks stock
ownership known to the Company as of April 13, 2006. |
108
Stockholders
Who Own at Least 5% of Bally Common Stock
The following table shows all persons we know to be the
beneficial owners of more than 5% of Bally common stock as of
June 15, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
Total Beneficial
|
|
|
Outstanding
|
|
Name and Address of Beneficial Owner
|
|
Ownership
|
|
|
Stock(1)
|
|
|
Pardus Capital Management
L.P.(2)(3)
1001 Avenue of the Americas, Suite 1100
New York, New York 10018
|
|
|
6,105,500
|
|
|
|
14.8
|
%
|
Emanuel R. Pearlman(2)(4)
|
|
|
4,619,450
|
|
|
|
11.2
|
%
|
Liberation Investment Group
LLC(2)(4)
|
|
|
|
|
|
|
|
|
Liberation Investments, Ltd.(2)(4)
|
|
|
|
|
|
|
|
|
Liberation Investments, L.P.(2)(4)
|
|
|
|
|
|
|
|
|
330 Madison Avenue,
6th Floor
|
|
|
|
|
|
|
|
|
New York, NY 10017
|
|
|
|
|
|
|
|
|
Dimensional Fund Advisors
Inc.(2)(5)
|
|
|
3,140,100
|
|
|
|
7.6
|
%
|
1299 Ocean Ave, 11th Flr
|
|
|
|
|
|
|
|
|
Santa Monica, CA 90401
|
|
|
|
|
|
|
|
|
S.A.C. Capital Advisors LLC(2)(6)
|
|
|
2,776,000
|
|
|
|
6.7
|
%
|
72 Cummings Point Road
|
|
|
|
|
|
|
|
|
Stamford, CT 06902
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company had 41,257,012 common shares outstanding as of
May 31, 2007. The Percent of Outstanding Stock
was calculated by using the disclosed number of beneficially
owned shares by the applicable beneficial owner and related
entities, as a group, as the numerator and the number of the
Companys outstanding common shares as of May 31, 2007
as the denominator. |
|
(2) |
|
Represents a beneficial owner of more than 5% of the common
stock based on the owners reported ownership of shares of
common stock in filings made with the Securities and Exchange
Commission pursuant to Section 13(d), 13(g) and 16(a) of
the Securities Exchange Act of 1934, as amended and the
attendant regulations. Information with respect to each
beneficial owner is generally as of the date of the most recent
filing by the beneficial owner with the SEC and is based solely
on information contained in such filings. |
|
(3) |
|
Pardus European Special Opportunities Master Fund L.P., a
limited partnership formed under the laws of the Cayman Islands
(the Fund), is the holder of 6,105,000 shares
of common stock. Pardus Capital Management, L.P.
(PCM), a Delaware limited partnership, serves as the
investment manager of the Fund and possesses sole power to vote
and direct the disposition of all the shares held by the Fund.
PCM is deemed to beneficially own 6,105,000 shares of
common stock. |
|
(4) |
|
Liberation Investments, L.P. (LILP), a Delaware
limited partnership, is the beneficial owner of
2,978,213 shares of common stock. Liberation Investments,
Ltd. (LILtd), a private offshore investment
corporation, is the beneficial owner of 1,606,237 shares of
common stock. Mr. Pearlman is the direct beneficial owner
of 35,000 shares of common stock. Liberation Investment
Group LLC (LIG), the general partner of LILP and
discretionary investment adviser to LILtd, and
Mr. Pearlman, the General Manager, Chief Investment Officer
and majority member of LIG, are indirect beneficial owners of
the shares held by LILP and LILtd. |
|
(5) |
|
Dimensional Fund Advisors Inc. (Dimensional),
an investment advisor registered under Section 203 of the
Investment Advisors Act of 1940, furnishes investment advice to
four investment companies registered under the Investment
Company Act of 1940, and serves as investment manager to certain
other commingled group trusts and separate accounts. These
investment companies, trusts and accounts are the
Funds. In its role as investment advisor or manager,
Dimensional possesses voting and/or investment power and may be
deemed to be the beneficial owner of the shares held by the
Funds. Dimensional disclaims beneficial ownership of such
securities. |
|
(6) |
|
S.A.C. Capital Advisors, LLC (SAC Capital Advisors)
has shared voting power and shared investment power with respect
to 2,776,200 shares of common stock; S.A.C. Capital
Advisors, S.A.C. Capital Management, LLC (SAC Capital
Management), and Mr. Steven Cohen do not directly own
any shares. Pursuant to investment |
109
|
|
|
|
|
agreements, each of SAC Capital Advisors and SAC Capital
Management share all investment and voting power with respect to
the securities held by S.A.C. Capital Associates, LLC and S.A.C.
Meridian Fund, LLC. Mr. Cohen controls each of SAC Capital
Advisors and SAC Capital Management. Each of SAC Capital
Advisors, SAC Capital Management and Mr. Cohen may be
deemed to own beneficially 2,776,200 shares. Each of SAC
Capital Advisors, SAC Capital Management, and Mr. Cohen
disclaim beneficial ownership of any of these securities. |
Our Plan of Reorganization, if approved by the requisite number
of creditors and the Bankruptcy Court, will result in a change
in control of the Company on its effective date. See
Item 1 Business Planned
Reorganization.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
PLANS
The following table sets forth, as of December 31, 2006,
information concerning compensation plans under which our
securities are authorized for issuance. The table does not
reflect exercises, terminations or expirations since that date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
Number of Securities
|
|
|
|
|
|
Future Issuance Under
|
|
|
|
to be Issued Upon
|
|
|
Weighted-Average
|
|
|
Equity Compensation
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Plans (Excluding
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Securities
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Plans approved by stockholders(1)
|
|
|
4,038,627
|
|
|
$
|
11.87
|
|
|
|
3,000,000
|
|
Plans not approved by
stockholders(2)
|
|
|
83,500
|
|
|
$
|
4.29
|
|
|
|
131,500
|
|
Total
|
|
|
4,122,127
|
|
|
$
|
11.72
|
|
|
|
3,131,500
|
|
|
|
|
(1) |
|
Both the Incentive Plan and the Directors Plan expired on
January 3, 2006. Accordingly, there were no shares
authorized for issuance under either of those plans on
December 31, 2006. Effective December 31, 2006, there
were 3,000,000 shares issuable under the Omnibus Plan,
which became effective on December 19, 2006. |
|
(2) |
|
The number of securities remaining for future issuance at
December 31, 2006 consisted of 131,500 shares issuable
under the Incentive Plan. Since December 31, 2006, no
options have been granted under the Inducement Plan. |
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
Under the Companys Code of Business Conduct, Practices and
Ethics (Code), which is attached to this
Form 10-K
as Exhibit 14, all directors and employees owe complete and
undivided loyalty to the Company and are to avoid any situations
that are or have the appearance of being a conflict between
their personal interests and those of the Company. Any
transaction or personal relationship that might involve a
conflict of interest is to be reviewed by the Code Administrator
(who is the Companys Vice President of Internal Audit or
such other party designated by the Audit Committee to administer
the Code).
Certain
Transactions
During 2006, Bally paid approximately $8 million for goods
and services from two companies that each employ a relative of
Mr. Wildman. Bally believes that the terms of these
arrangements were at least as favorable to Bally as those which
could be obtained from unrelated parties.
During 2006, Bally paid $987,000 to Tatum LLC, a financial and
accounting services provider in which Messrs. Eidell and
Goldberg are partners. Bally utilized the services of several
partners and associates of Tatum LLC to manage and assist in
certain projects related to accelerating the accounting close
process and remediation of material weaknesses. Bally believes
that the terms of these arrangements were at least as favorable
to Bally as those which could be obtained from unrelated parties.
110
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Fees Paid
to the Principal Accountant
The table below sets forth the fees billed for the services of
KPMG LLP for the years ended December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Audit fees(1)
|
|
$
|
8,289,900
|
|
|
$
|
5,141,300
|
|
Audit-related fees(2)
|
|
|
75,250
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
Total audit and audit-related fees
|
|
$
|
8,365,150
|
|
|
$
|
5,151,300
|
|
Tax fees(3)
|
|
|
25,000
|
|
|
|
60,000
|
|
All other fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees
|
|
$
|
8,390,150
|
|
|
$
|
5,211,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Audit fees include work performed in connection with the audit
of the 2006 consolidated financial statements, the reports on
managements assessment regarding the effectiveness of
internal control over financial reporting and the effectiveness
of internal control over financial reporting, and the reviews of
the financial statements included in our 2006
Forms 10-Q.
It also includes fees for professional services that are
normally provided by our registered public accounting firm in
connection with statutory and regulatory filings. |
|
(2) |
|
Audit related fees include work performed in connection with
separate audits of subsidiaries and affiliated entities not
required by statute or regulation. |
|
(3) |
|
Tax fees include services performed in connection with the
Companys assessment of the implications of an ownership
change for purposes of Internal Revenue Code Section 382. |
Policy on
Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Registered Public Accounting
Firm
The Audit Committee has responsibility for retaining, setting
fees, and overseeing the work of the registered public
accounting firm. The retention of the firm is subject to
stockholder ratification. In recognition of this responsibility,
the Audit Committee has established a policy to pre-approve all
audit and permissible non-audit services provided by the
registered public accounting firm. The Audit Committee has
delegated pre-approval authority to the chairman of the
committee. The chairman must report any pre-approval decisions
to the Audit Committee at its next scheduled meeting for
approval by the Audit Committee as a whole.
111
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
Financial
Statements
An Index to Financial Statements and Financial Statement
Schedules has been filed as a part of this Report
beginning on
page F-1
and is incorporated in this Item 15 by reference.
Exhibits
An Exhibit Index has been filed as a part of
this Report beginning on
page E-1
and is incorporated herein by reference.
112
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: June 29, 2007
|
|
By:
|
|
/s/ Don
R. Kornstein
|
|
|
|
|
Don R. Kornstein
|
|
|
|
|
Interim Chairman and Chief
Restructuring Officer
(principal executive officer)
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated. This report may be signed in multiple identical
counterparts all of which, taken together, shall constitute a
single document.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Don
R.
Kornstein
|
|
|
|
|
|
|
|
By:
|
|
Don R. Kornstein
Interim Chairman and Chief Restructuring Officer
(principal executive officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: June 29, 2007
|
|
|
|
/s/ Ronald
G.
Eidell
|
|
|
By:
|
|
Ronald G. Eidell
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: June 29, 2007
|
|
|
|
/s/ Charles
J.
Burdick
|
|
|
By:
|
|
Charles J. Burdick
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: June 29, 2007
|
|
|
|
/s/ Barry
R.
Elson
|
|
|
By:
|
|
Barry R. Elson
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: June 29, 2007
|
|
|
|
/s/ Eric
Langshur
|
|
|
By:
|
|
Eric Langshur
Director
|
113
BALLY
TOTAL FITNESS HOLDING CORPORATION
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
Consolidated Financial Statements
as of December 31, 2006 and 2005 and for the three years
ended December 31, 2006:
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Bally Total Fitness Holding Corporation:
We have audited the accompanying consolidated balance sheets of
Bally Total Fitness Holding Corporation and subsidiaries as of
December 31, 2006 and 2005, and the related consolidated
statements of operations, stockholders deficit and
comprehensive income (loss), and cash flows for each of the
years in the three-year period ended December 31, 2006.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Bally Total Fitness Holding Corporation and
subsidiaries as of December 31, 2006 and 2005, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2006, in
conformity with U.S. generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial
statements, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123(R),
Share-Based Payment and Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements in Current Year Financial
Statements as of January 1, 2006.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated
financial statements, the Company has suffered recurring losses
from operations and negative cash flows, has a net capital
deficiency, and has short-term obligations that cannot be
satisfied by available funds, all of which raise substantial
doubt about its ability to continue as a going concern.
Managements plans in regard to these matters are also
described in Note 1. The consolidated financial statements
do not include any adjustments that might result from the
outcome of this uncertainty.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Bally Total Fitness Holding Corporations
internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated June 29, 2007
expressed an unqualified opinion on managements assessment
of, and an adverse opinion on the effective operation of,
internal control over financial reporting.
/s/ KPMG LLP
Chicago, Illinois
June 29, 2007
F-2
BALLY
TOTAL FITNESS HOLDING CORPORATION
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands,
|
|
|
|
except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
34,799
|
|
|
$
|
17,454
|
|
Deferred income taxes
|
|
|
296
|
|
|
|
151
|
|
Prepaid expenses
|
|
|
19,831
|
|
|
|
20,846
|
|
Other current assets
|
|
|
21,407
|
|
|
|
20,905
|
|
Current assets held for sale
|
|
|
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
76,333
|
|
|
|
59,698
|
|
Property and equipment, net
|
|
|
247,797
|
|
|
|
314,670
|
|
Goodwill, net
|
|
|
19,734
|
|
|
|
19,734
|
|
Trademarks, net
|
|
|
6,754
|
|
|
|
6,912
|
|
Intangible assets, net
|
|
|
728
|
|
|
|
2,879
|
|
Deferred financing costs, net
|
|
|
27,922
|
|
|
|
29,501
|
|
Other assets
|
|
|
17,503
|
|
|
|
21,811
|
|
Non-current assets held for sale
|
|
|
|
|
|
|
39,894
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
396,771
|
|
|
$
|
495,099
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
49,197
|
|
|
$
|
57,832
|
|
Income taxes payable
|
|
|
1,430
|
|
|
|
1,697
|
|
Accrued liabilities
|
|
|
115,703
|
|
|
|
99,953
|
|
Current maturities of long-term debt
|
|
|
513,913
|
|
|
|
13,018
|
|
Deferred revenues
|
|
|
279,555
|
|
|
|
299,441
|
|
Current liabilities associated with
assets held for sale
|
|
|
|
|
|
|
7,764
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
959,798
|
|
|
|
479,705
|
|
Long-term debt, less current
maturities
|
|
|
247,434
|
|
|
|
756,304
|
|
Deferred rent liability
|
|
|
87,903
|
|
|
|
87,290
|
|
Deferred income taxes
|
|
|
1,925
|
|
|
|
1,435
|
|
Other liabilities
|
|
|
42,746
|
|
|
|
39,606
|
|
Deferred revenues
|
|
|
457,387
|
|
|
|
566,469
|
|
Non-current liabilities associated
with assets held for sale
|
|
|
|
|
|
|
27,976
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
837,395
|
|
|
|
1,479,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,797,193
|
|
|
|
1,958,785
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, $.10 par
value; 10,000,000 shares authorized; none issued
|
|
|
|
|
|
|
|
|
Series A Junior Participating;
602,000 shares authorized; none issued
|
|
|
|
|
|
|
|
|
Series B Junior Participating;
100,000 shares authorized; none issued
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value;
60,200,000 shares authorized; 41,955,051 and
39,172,090 shares issued at December 31, 2006 and
2005, respectively; and 41,286,512 and 38,503,551 outstanding at
December 31, 2006 and 2005, respectively
|
|
|
420
|
|
|
|
392
|
|
Contributed capital
|
|
|
691,631
|
|
|
|
669,089
|
|
Accumulated deficit
|
|
|
(2,072,051
|
)
|
|
|
(2,113,854
|
)
|
Unearned compensation (restricted
stock)
|
|
|
|
|
|
|
(5,534
|
)
|
Common stock in treasury, at cost,
668,540 and 668,539 shares at December 31, 2006 and
2005
|
|
|
(11,635
|
)
|
|
|
(11,635
|
)
|
Accumulated other comprehensive loss
|
|
|
(8,787
|
)
|
|
|
(2,144
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(1,400,422
|
)
|
|
|
(1,463,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
396,771
|
|
|
$
|
495,099
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
BALLY
TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except share data)
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
$
|
1,002,216
|
|
|
$
|
941,556
|
|
|
$
|
907,781
|
|
Retail products
|
|
|
42,571
|
|
|
|
47,159
|
|
|
|
49,676
|
|
Miscellaneous
|
|
|
14,264
|
|
|
|
15,126
|
|
|
|
17,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,059,051
|
|
|
|
1,003,841
|
|
|
|
974,498
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
|
663,303
|
|
|
|
665,036
|
|
|
|
670,737
|
|
Retail products
|
|
|
40,881
|
|
|
|
49,837
|
|
|
|
52,190
|
|
Marketing and advertising
|
|
|
58,185
|
|
|
|
53,549
|
|
|
|
59,857
|
|
General and administrative
|
|
|
92,623
|
|
|
|
86,030
|
|
|
|
75,977
|
|
Gain on sales of land and buildings
|
|
|
(3,984
|
)
|
|
|
|
|
|
|
|
|
Impairment of goodwill and other
intangibles
|
|
|
1,462
|
|
|
|
1,220
|
|
|
|
234
|
|
Asset impairment charges
|
|
|
38,258
|
|
|
|
10,115
|
|
|
|
11,490
|
|
Depreciation and amortization
|
|
|
54,209
|
|
|
|
58,415
|
|
|
|
65,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
944,937
|
|
|
|
924,202
|
|
|
|
936,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
114,114
|
|
|
|
79,639
|
|
|
|
38,123
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(101,859
|
)
|
|
|
(85,329
|
)
|
|
|
(67,201
|
)
|
Foreign exchange gain
|
|
|
1,125
|
|
|
|
869
|
|
|
|
1,578
|
|
Loss on debt extinguishment
|
|
|
(7,677
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
716
|
|
|
|
89
|
|
|
|
(1,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107,695
|
)
|
|
|
(84,371
|
)
|
|
|
(67,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
|
|
|
6,419
|
|
|
|
(4,732
|
)
|
|
|
(29,498
|
)
|
Income tax provision
|
|
|
(855
|
)
|
|
|
(826
|
)
|
|
|
(775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
5,564
|
|
|
|
(5,558
|
)
|
|
|
(30,273
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
|
(872
|
)
|
|
|
(4,056
|
)
|
|
|
17
|
|
Gain on disposal
|
|
|
38,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued
operations
|
|
|
37,503
|
|
|
|
(4,056
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
43,067
|
|
|
$
|
(9,614
|
)
|
|
$
|
(30,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
0.14
|
|
|
$
|
(0.16
|
)
|
|
$
|
(0.92
|
)
|
Income (loss) from discontinued
operations
|
|
|
0.94
|
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
|
|
$
|
1.08
|
|
|
$
|
(0.28
|
)
|
|
$
|
(0.92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding
|
|
|
39,809,395
|
|
|
|
34,624,039
|
|
|
|
32,838,811
|
|
Diluted income (loss) per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
0.14
|
|
|
$
|
(0.16
|
)
|
|
$
|
(0.92
|
)
|
Income (loss) from discontinued
operations
|
|
|
0.92
|
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
|
|
$
|
1.06
|
|
|
$
|
(0.28
|
)
|
|
$
|
(0.92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted common shares outstanding
|
|
|
40,519,475
|
|
|
|
34,624,039
|
|
|
|
32,838,811
|
|
See accompanying notes to consolidated financial statements.
F-4
BALLY
TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS DEFICIT
AND COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Other
|
|
|
Total
|
|
|
|
Shares
|
|
|
Par
|
|
|
Contributed
|
|
|
Accumulated
|
|
|
Unearned
|
|
|
Stock in
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Outstanding
|
|
|
Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Compensation
|
|
|
Treasury
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
|
(In thousands, except share data)
|
|
|
Balance at December 31, 2003
|
|
|
34,035,734
|
|
|
$
|
347
|
|
|
$
|
647,832
|
|
|
$
|
(2,073,984
|
)
|
|
$
|
(3,760
|
)
|
|
$
|
(11,635
|
)
|
|
$
|
(1,757
|
)
|
|
$
|
(1,442,957
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,256
|
)
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(640
|
)
|
|
|
(640
|
)
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,896
|
)
|
Restricted stock activity
|
|
|
(137,500
|
)
|
|
|
(1
|
)
|
|
|
(1,071
|
)
|
|
|
|
|
|
|
2,193
|
|
|
|
|
|
|
|
|
|
|
|
1,121
|
|
Issuance of common stock under
stock purchase and option plans
|
|
|
115,571
|
|
|
|
1
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
34,013,805
|
|
|
|
347
|
|
|
|
647,367
|
|
|
|
(2,104,240
|
)
|
|
|
(1,567
|
)
|
|
|
(11,635
|
)
|
|
|
(2,397
|
)
|
|
|
(1,472,125
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,614
|
)
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,361
|
)
|
Restricted stock activity
|
|
|
1,420,000
|
|
|
|
14
|
|
|
|
9,026
|
|
|
|
|
|
|
|
(3,967
|
)
|
|
|
|
|
|
|
|
|
|
|
5,073
|
|
Issuance of common stock under
stock purchase and option plans
|
|
|
525,232
|
|
|
|
6
|
|
|
|
2,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,371
|
|
Shares issued to noteholders
|
|
|
1,903,200
|
|
|
|
19
|
|
|
|
7,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,394
|
|
Shares issued to accredited investor
|
|
|
409,314
|
|
|
|
4
|
|
|
|
1,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,433
|
|
Shares issued to agent
|
|
|
232,000
|
|
|
|
2
|
|
|
|
1,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
38,503,551
|
|
|
|
392
|
|
|
|
669,089
|
|
|
|
(2,113,854
|
)
|
|
|
(5,534
|
)
|
|
|
(11,635
|
)
|
|
|
(2,144
|
)
|
|
|
(1,463,686
|
)
|
Cumulative effect of adoption of
SAB 108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2006
|
|
|
38,503,551
|
|
|
|
392
|
|
|
|
669,089
|
|
|
|
(2,115,118
|
)
|
|
|
(5,534
|
)
|
|
|
(11,635
|
)
|
|
|
(2,144
|
)
|
|
|
(1,464,950
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,067
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,643
|
)
|
|
|
(6,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,424
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
4,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,641
|
|
Sale of common stock
|
|
|
800,000
|
|
|
|
8
|
|
|
|
5,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,600
|
|
Shares issued to noteholders
|
|
|
1,956,194
|
|
|
|
19
|
|
|
|
17,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,488
|
|
Shares issued to agent
|
|
|
11,936
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
Reclassification of unearned
compensation balance to contributed capital
|
|
|
|
|
|
|
|
|
|
|
(5,534
|
)
|
|
|
|
|
|
|
5,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of restricted stock
|
|
|
(36,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under
stock option plans
|
|
|
51,081
|
|
|
|
1
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
41,286,512
|
|
|
$
|
420
|
|
|
$
|
691,631
|
|
|
$
|
(2,072,051
|
)
|
|
$
|
|
|
|
$
|
(11,635
|
)
|
|
$
|
(8,787
|
)
|
|
$
|
(1,400,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
BALLY
TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
43,067
|
|
|
$
|
(9,614
|
)
|
|
$
|
(30,256
|
)
|
Gain on disposal and (gain) loss
from discontinued operations
|
|
|
(37,503
|
)
|
|
|
4,056
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing
operations
|
|
|
5,564
|
|
|
|
(5,558
|
)
|
|
|
(30,273
|
)
|
Adjustments to reconcile to cash
provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization,
including amortization included in interest expense
|
|
|
75,443
|
|
|
|
67,102
|
|
|
|
69,309
|
|
Changes in operating assets and
liabilities
|
|
|
(135,635
|
)
|
|
|
(55,403
|
)
|
|
|
(27,470
|
)
|
Deferred income taxes, net
|
|
|
351
|
|
|
|
346
|
|
|
|
344
|
|
Write-off of debt issuance costs
|
|
|
7,677
|
|
|
|
|
|
|
|
1,589
|
|
Write-off of long-term assets
|
|
|
4,470
|
|
|
|
4,618
|
|
|
|
|
|
Impairment of long-lived assets
|
|
|
39,720
|
|
|
|
11,335
|
|
|
|
11,724
|
|
(Gain) loss on sale/disposal of
assets
|
|
|
(5,328
|
)
|
|
|
274
|
|
|
|
925
|
|
Foreign currency translation gain
|
|
|
(1,125
|
)
|
|
|
(869
|
)
|
|
|
(1,578
|
)
|
Equity in losses of unconsolidated
subsidiaries, net
|
|
|
809
|
|
|
|
300
|
|
|
|
842
|
|
Stock-based compensation
|
|
|
4,641
|
|
|
|
5,073
|
|
|
|
1,122
|
|
Cash (used) provided by
discontinued operations
|
|
|
(872
|
)
|
|
|
3,483
|
|
|
|
9,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by
operating activities
|
|
|
(4,285
|
)
|
|
|
30,701
|
|
|
|
36,124
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and construction of
property and equipment
|
|
|
(39,592
|
)
|
|
|
(35,958
|
)
|
|
|
(44,456
|
)
|
Proceeds from sale of discontinued
operations
|
|
|
45,359
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of discontinued
operations in escrow
|
|
|
131
|
|
|
|
|
|
|
|
|
|
Proceeds from sales and disposals
of properties
|
|
|
21,250
|
|
|
|
2,043
|
|
|
|
|
|
Proceeds from sales and disposals
of properties in escrow
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated
subsidiaries
|
|
|
(96
|
)
|
|
|
(394
|
)
|
|
|
(501
|
)
|
Cash used by discontinued operations
|
|
|
|
|
|
|
(1,896
|
)
|
|
|
(5,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
investing activities
|
|
|
28,052
|
|
|
|
(36,205
|
)
|
|
|
(50,241
|
)
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (repayments) borrowings under
revolving credit agreement
|
|
|
(35,000
|
)
|
|
|
35,000
|
|
|
|
(21,000
|
)
|
Borrowings of other long-term debt
|
|
|
210,900
|
|
|
|
|
|
|
|
175,000
|
|
Repayments of other long-term debt
|
|
|
(190,262
|
)
|
|
|
(23,331
|
)
|
|
|
(130,521
|
)
|
Proceeds from financing of
properties
|
|
|
11,469
|
|
|
|
|
|
|
|
|
|
Debt issuance and refinancing costs
|
|
|
(9,680
|
)
|
|
|
(11,307
|
)
|
|
|
(4,862
|
)
|
Proceeds from sale of common stock
|
|
|
5,600
|
|
|
|
1,433
|
|
|
|
|
|
Stock purchase and option plans
|
|
|
277
|
|
|
|
1,604
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by
financing activities
|
|
|
(6,696
|
)
|
|
|
3,399
|
|
|
|
19,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
|
17,071
|
|
|
|
(2,105
|
)
|
|
|
5,106
|
|
Effect of exchange rate changes on
cash balance
|
|
|
274
|
|
|
|
382
|
|
|
|
431
|
|
Cash, beginning of year
|
|
|
17,454
|
|
|
|
19,177
|
|
|
|
13,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
34,799
|
|
|
$
|
17,454
|
|
|
$
|
19,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and
liabilities, net of effects from acquisitions or sales,
were
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in other
current and other assets
|
|
$
|
1,015
|
|
|
$
|
(6,875
|
)
|
|
$
|
24,629
|
|
Increase (decrease) in accounts
payable
|
|
|
(8,661
|
)
|
|
|
6,457
|
|
|
|
(11,859
|
)
|
Increase (decrease) in income taxes
payable
|
|
|
(267
|
)
|
|
|
298
|
|
|
|
1,399
|
|
Decrease in accrued liabilities
|
|
|
(2,278
|
)
|
|
|
(13,908
|
)
|
|
|
(20,176
|
)
|
Increase (decrease) in other
liabilities
|
|
|
(915
|
)
|
|
|
(1,629
|
)
|
|
|
1,099
|
|
Decrease in deferred revenues
|
|
|
(124,529
|
)
|
|
|
(39,746
|
)
|
|
|
(22,562
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(135,635
|
)
|
|
$
|
(55,403
|
)
|
|
$
|
(27,470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for interest and
income taxes were
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
79,292
|
|
|
$
|
75,937
|
|
|
$
|
62,301
|
|
Interest capitalized
|
|
|
(516
|
)
|
|
|
(309
|
)
|
|
|
(855
|
)
|
Income taxes (refund)/paid, net
|
|
|
777
|
|
|
|
184
|
|
|
|
(1,045
|
)
|
Investing and financing activities
exclude the following non-cash transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and
equipment through capital leases/borrowings
|
|
$
|
5,110
|
|
|
$
|
252
|
|
|
$
|
5,384
|
|
Reclassification of unearned
compensation balance to contributed capital
|
|
|
5,534
|
|
|
|
|
|
|
|
|
|
Payment of consents with common
stock
|
|
|
17,488
|
|
|
|
7,394
|
|
|
|
|
|
Stock issued to accredited investors
|
|
|
|
|
|
|
1,433
|
|
|
|
|
|
Stock issued to agent
|
|
|
98
|
|
|
|
1,529
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
BALLY
TOTAL FITNESS HOLDING CORPORATION
(All dollar amounts in thousands, except share data)
|
|
Note 1
|
Nature of
Operations
|
Description
of Business
Bally Total Fitness Holding Corporation (the
Company), through its subsidiaries, is a nationwide
commercial operator of fitness centers. As of December 31,
2006, the Company operated three hundred seventy-five
facilities, located in twenty-six states and Canada.
Additionally, thirty-five clubs were operated pursuant to
franchise and joint venture agreements in the United States,
Mexico, Asia, and the Caribbean. All significant revenues arise
from the commercial operation of fitness centers, primarily in
major metropolitan areas in the United States and Canada. Unless
otherwise specified in the text, references to the Company
include the Company and its subsidiaries.
The Company reported a loss from continuing operations for the
years 2002 through 2005, and reported modest income from
continuing operations in 2006. In addition, our
December 31, 2006 consolidated balance sheet reflects a
stockholders deficit of $1,400,422. During the last five
years, the Companys primary markets have become more
competitive, with competitors entering and opening new fitness
centers. At the same time, the Companys ability to invest
in its fitness centers has been constrained by its financial
condition, particularly as it relates to liquidity. These
conditions are expected to persist.
The Company has a substantial amount of debt. As of
December 31, 2006, total consolidated debt (excluding trade
debt) was $761,347. Of this amount, $513,913 is due in 2007 and
is classified as a current liability in the Companys
consolidated balance sheet. This debt level resulted in reported
interest expense of $101,859 in 2006, including cash-payable
interest of $79,292. This substantial amount of debt service
adversely affected financial health and business operations by,
among other things, limiting the Companys ability to
obtain additional financing to fund future working capital,
capital expenditures, acquisitions of clubs and other general
corporate requirements; continuing to require that the Company
dedicate a substantial portion of any cash flows from operations
and future business opportunities; and increasing the
Companys vulnerability to adverse economic conditions.
Planned
Reorganization
As a result of the Companys deteriorating financial
condition and pending debt requirements, in November 2005 the
Company began considering strategic alternatives. To this end,
the Company engaged JP Morgan Securities, Inc. and The
Blackstone Group to assist the Company in commencing a process
to identify and evaluate strategic alternatives, including
without limitation a sale of substantially all of the
Companys assets. This process, which was conducted under
the direction of the Strategic Alternatives Committee of the
Board, did not result in a strategic transaction. The Company
subsequently retained Jefferies & Company in February
2007 as its financial advisors. In March 2007, certain holders
of our Senior Notes and Senior Subordinated Notes formed an Ad
Hoc Committee and the Company began discussions with them with
respect to de-leveraging its balance sheet. In April 2006, the
Company was required to make an interest payment of $14,812 on
its Senior Subordinated Notes. It elected not to make this
interest payment and an event of default occurred under the
Senior Subordinated Notes Indenture, which also triggered an
event of default under the Senior Notes Indenture. In April and
May 2007, the Company entered into Forbearance Agreements
with lenders under its New Facility and holders of its Senior
Subordinated Notes and Senior Notes, which agreements expire on
July 13, 2007.
On June 27, 2007, the Company commenced a solicitation of
votes on the Plan of Reorganization from holders of the Senior
Notes and Senior Subordinated Notes. If the Company receives the
requisite votes in favor of the Plan of Reorganization, it
intends to file a voluntary prepackaged petition for
reorganization under Chapter 11 of the U.S. Bankruptcy
Code in the Bankruptcy Court in late July 2007. Prior to
commencement of the consent solicitation, the Company entered
into a Restructuring Support Agreement with holders of a
majority of the Senior Notes and more than 80% of the Senior
Subordinated Notes, in which the consenting noteholders agreed
to vote in favor of the Plan of Reorganization, on the terms and
conditions specified therein. Under certain
F-7
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
circumstances, the Company may file for bankruptcy prior to the
end of the solicitation period. The Plan of Reorganization
includes, among other things, the following key terms:
|
|
|
|
|
New Facility. The New Facility would be
unimpaired. As a condition to effectiveness of the Plan of
Reorganization, the Company will amend and restate (with the
consent of the Lenders) or replace the New Facility with a
$292,000 senior secured credit facility agreement on terms no
less favorable than described in the Plan of Reorganization.
|
|
|
|
Senior Notes. The Company does not intend to
make the cash interest payment due on the Senior Notes on
July 15, 2007. The Plan of Reorganization would, if
approved, confirmed and consummated, result in the cancellation
and discharge of all claims relating to the Senior Notes. Each
holder of Senior Notes would receive a pro rata share of new
senior notes (the New Senior Notes) in the principal
amount of $247,337.5 with an interest rate of
123/8%.
The maturity and guarantees of the New Senior Notes would be the
same as for the Senior Notes. Upon effectiveness of the Plan,
holders of the Senior Notes would receive a fee equal to 2% of
the face value of their notes.
|
|
|
|
Senior Notes Indenture. The Senior Notes
Indenture would be amended to provide the holders with a
silent second lien on substantially all of the
Companys assets and the assets of its subsidiary
guarantors. Under the amended Senior Note Indenture, the Company
would have a permitted debt basket for the New Facility of
$292,000, with a reduction for proceeds of asset sales completed
after June 15, 2007 that are used to permanently pay down
indebtedness under the New Facility and are not reinvested in
replacement assets within 360 days after the applicable
asset sale. The amended Senior Note Indenture would also permit
the Company to issue, in addition to the Rights Offering Senior
Subordinated Notes, an additional $90,000 of
pay-in-kind
senior subordinated notes, as described more fully under
Rights Offering section below after emergence from
bankruptcy.
|
|
|
|
Senior Subordinated Notes. Holders of Senior
Subordinated Notes would receive, in exchange for their claims,
New Subordinated Notes representing approximately 24.8% of their
claims, New Junior Subordinated Notes representing approximately
21.7% of their claims, and shares of common stock representing
100% of the equity in the reorganized company, subject to
reduction for common stock to be issued to holder of certain
other claims. The New Subordinated Notes would mature five years
and nine months after the effective date of the Plan of
Reorganization and would bear interest payable annually at
135/8%
per annum if paid in kind or 12% per annum if paid in cash, at
our option, subject to a toggle covenant based on specified cash
EBITDA and minimum liquidity thresholds.
|
|
|
|
Rights Offering. In addition to the
consideration described above, holders of Senior Subordinated
Notes would receive non-detachable rights to participate in a
rights offering of Rights Offering Senior Subordinated Notes in
principal amount equal to approximately 27.9% of their claims,
or $90,000. The Rights Offering Senior Subordinated Notes would
rank senior to the New Subordinated Notes and New Junior
Subordinated Notes but otherwise have the same terms. Holders of
certain other claims against the Company will be given the
opportunity to participate in the rights offering, which, if
exercised, would generate incremental proceeds beyond the
$90,000 to be funded by electing Senior Subordinated Noteholders.
|
|
|
|
Subscription and Backstop Purchase
Agreement. On June 27, 2007, the Company
entered into a Subscription and Backstop Purchase Agreement with
certain holders of Senior Subordinated Notes, who have agreed to
subscribe for their pro rata share of Rights Offering Senior
Subordinated Notes and to purchase any Rights Offering Senior
Subordinated Notes not subscribed for in the rights offering.
The Company has agreed to pay a fee to each backstop provider in
the amount of 4% of its backstop commitment, subject to a rebate
of approximately 80% of such amount if the Plan is consummated.
|
|
|
|
Existing Equity. All existing equity would be
cancelled for no consideration.
|
F-8
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
The Company expects to continue normal club operations during
the restructuring process. If the Company files the Plan of
Reorganization, it would seek to obtain the necessary relief
from the Bankruptcy Court to pay the majority of its employee,
trade and certain other creditors in full and on time in
accordance with existing business terms. Upon effectiveness of
the Plan of Reorganization, the Company would, among other
things, amend its charter and by-laws and enter into a
stockholders agreement and a registration rights agreement
with holders of the Companys common shares. In addition,
the Companys new Board of Directors will consider adopting
a new management long-term incentive plan intended to provide
incentives to certain employees to continue their efforts to
foster and promote the Companys long-term growth
objectives.
If the Company does not receive the necessary votes in favor of
the Plan of Reorganization during the solicitation period, it
will evaluate other available options, including filing one or
more traditional, non-prepackaged Chapter 11 cases.
|
|
Note 2
|
Summary
of Significant Accounting Policies
|
Description of Business: The Company, through
its subsidiaries, is a nationwide commercial operator of fitness
centers. As of December 31, 2006, the Company operated
three hundred seventy-five facilities, located in twenty-six
states and Canada. Additionally, thirty-five clubs were operated
pursuant to franchise and joint venture agreements in the United
States, Mexico, Asia, and the Caribbean. All significant
revenues arise from the commercial operation of fitness centers,
primarily in major metropolitan areas in the United States and
Canada. Unless otherwise specified in the text, references to
the Company include the Company and its subsidiaries.
Principles of Presentation and
Consolidation: The consolidated financial
statements include the accounts of the Company and its
majority-owned subsidiaries and other controlled entities. All
significant intercompany balances and transactions have been
eliminated in consolidation.
The Company has prepared the consolidated financial statements
on the basis that the Company will continue as a going concern.
Use of Estimates: The preparation of
consolidated financial statements in accordance with
U.S. generally accepted accounting principles
(GAAP) requires management to make extensive use of
certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial
statements, as well as the reported amounts of revenues and
expenses during the reporting periods. Significant estimates in
these consolidated financial statements include estimates of
future cash flows associated with assets, useful lives of
depreciable and amortizable assets, expected member attrition,
future taxable income, future cash flows resulting from retained
risk arrangements, and contingencies and litigation. Management
bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the
circumstances in making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions.
Cash: The Company considers all highly liquid
investments with maturities of three months or less when
purchased to be cash equivalents. The carrying amount of cash
equivalents approximates fair value due to the short maturity of
those instruments.
Property and Equipment: Property and equipment
are stated at cost. Property and equipment acquired in business
combinations are recorded at their estimated fair values on the
date of acquisition under the purchase method of accounting.
Equipment under capital leases is stated at the present value of
the minimum lease payments. Improvements are capitalized, while
repair and maintenance costs are charged to operations when
incurred.
Depreciation of property and equipment is calculated using the
straight-line method over the estimated useful lives of the
related assets. Buildings and related improvements are
depreciated over 5 to 35 years and useful lives for
F-9
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
equipment and furnishings range from 5 to 10 years.
Equipment held under capital leases and leasehold improvements
are amortized on the straight-line method over the shorter of
the estimated useful life of the asset or the remaining lease
term. Depreciation of construction in progress is not recorded
until the assets are placed into service. Depreciation of
property and equipment amounted to $53,434, $56,462 and $64,547
for 2006, 2005 and 2004, respectively.
Long-Lived Assets: The Company accounts for
its long-lived tangible assets and definite-lived intangible
assets in accordance with SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Under
SFAS No. 144, the Company assesses the recoverability
of long-lived assets (excluding goodwill) and identifiable
acquired intangible assets with finite useful lives, whenever
events or changes in circumstances indicate that the Company may
not be able to recover the assets carrying amount. The
Company measures the recoverability of assets to be held and
used by a comparison of the carrying amount of the asset to the
projected and estimated net future cash flows to be generated by
that asset, or, for identifiable intangibles with finite useful
lives, by determining whether the amortization of the intangible
asset balance over its remaining life can be recovered through
undiscounted projected and estimated future cash flows. The
amount of impairment of identifiable intangible assets with
finite useful lives, if any, to be recognized is measured based
on projected discounted future cash flows. The Company measures
the amount of impairment of other long-lived assets (excluding
goodwill) by the amount by which the carrying value of the asset
exceeds the fair market value of the asset, which is generally
determined based on projected discounted future cash flows. The
Company presents an impairment charge as a separate line item
within income (loss) from continuing operations in the
Companys consolidated statements of operations, unless the
impairment is associated with a discontinued operation. In that
case, the Company includes the impairment charge, on a
net-of-tax basis, within the results of discontinued operations.
The Company classifies long-lived assets to be disposed of other
than by sale as held and used until they are disposed.
Primary indicators of impairment include significant declines in
the operating results or an expectation that a long-lived asset
may be disposed of before the end of its useful life. Impairment
is assessed at a club operation level, which is the lowest level
at which identifiable cash flows are largely independent of the
cash flows of other assets. Costs to reduce the carrying value
of long-lived assets are separately identified in the Statements
of Operations as Asset impairment charges. See
Note 5 for a description of asset impairment charges
recorded in 2006, 2005 and 2004.
The Company accounts for discontinued operations under
SFAS No. 144, which requires that a component of an
entity that has been disposed of or is classified as held for
sale after January 1, 2002 and has operations and cash
flows that can be clearly distinguished from the rest of the
entity be reported as discontinued operations. In the period
that a component of an entity has been disposed of or classified
as held for sale, the Company reclassifies the results of
operations for current and prior periods into a single caption
titled discontinued operations.
Deferred Lease Liabilities and Noncash Rental
Expense: The Company recognizes rental expense
for leases with scheduled rent increases, leasehold incentives
and rent concessions on the straight-line basis over the life of
the lease beginning upon the commencement of the lease.
Software for Internal Use: Certain costs
incurred related to software developed for internal use are
accounted for in accordance with the American Institute of
Certified Public Accountants Statement of Position
No. 98-1
(SOP 98-1),
Accounting for Costs of Computer Software Developed or
Obtained for Internal Use. In accordance with
SOP 98-1,
costs incurred in the planning and post-implementation stages
are expensed as incurred, while costs relating to application
development are capitalized. Qualifying software development
costs are included as an element of property and equipment in
the consolidated balance sheets. The Company amortizes such
software costs over the shorter of the estimated useful life of
the software or five years.
Goodwill and Other Intangible Assets: The
Companys intangible assets are comprised principally of
goodwill, member relationships, leasehold rights and certain
trademarks. Goodwill represents the excess of cost
F-10
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
over fair value of assets of businesses acquired. In accordance
with SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142)
goodwill and other intangible assets acquired in a purchase
business combination and determined to have an indefinite useful
life, which consist of certain trademarks, are not amortized,
but instead tested for impairment at least annually.
The Company is required to test goodwill for impairment on an
annual basis for each of its reporting units. The Company is
also required to evaluate goodwill for impairment between annual
tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below
its carrying amount. Certain indicators of potential impairment
that could impact the Companys reporting units include,
but are not limited to, a significant long-term adverse change
in the business climate that is expected to cause a substantial
decline in membership, or a significant change in the delivery
of health and fitness services that results in a substantially
more cost effective method of delivery than health clubs. The
Company tested to determine if the fair value of each of its
reporting units was in excess of its respective carrying values
at December 31, 2006, 2005 and 2004, for purposes of the
annual impairment test.
Income Taxes: Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period
that includes the enactment date.
The Company considers future taxable income, the scheduled
reversal of deferred tax liabilities, and ongoing tax strategies
in assessing the need for a valuation allowance with respect to
its deferred tax assets. The Company records a valuation
allowance to reduce deferred tax assets to a level which
management believes more likely than not will be realized.
Deferred Financing Costs: The costs related to
the issuance of debt are capitalized and amortized to interest
expense over the life of the related debt instrument using the
effective interest method. The costs incurred in 2006, 2005 and
2004 related to the execution of waivers with respect to certain
of the Companys debt covenants. During the years ended
December 31, 2006, 2005 and 2004, the Company recognized
amortization expense of $21,100, $8,500 and $3,400,
respectively. Accumulated amortization of deferred financing
costs amounted to $28,651 and $18,167 as of December 31,
2006 and 2005, respectively.
Prepaid Expenses: Prepaid expenses consist of
prepaid rent and prepaid advertising expenses.
Other Current Assets: Other current assets
consist primarily of inventory and other prepaid expenses,
including insurance expenses and other. Inventory consists
primarily of nutritional products, apparel and other retail
products. Inventory is valued at the lower of cost or market.
Fair Values of Financial Instruments: The
Company determined by using quoted market prices that the fair
value of the Senior Subordinated Notes was $276,930 and $288,507
at December 31, 2006 and 2005, respectively, and that the
carrying value at December 31, 2006 was $297,774. The
Company determined by using quoted market prices that the fair
value of the Companys
101/2% Senior
Notes due 2011 (the Senior Notes) was $229,907 and
$242,299 at December 31, 2006 and 2005, respectively, and
that the carrying value at December 31, 2006 was $235,199.
Since considerable judgment is required in interpreting market
information, the fair value of the Senior Subordinated Notes and
the Senior Notes is not necessarily indicative of the amount
which could be realized in a current market exchange. The
carrying values of accounts payable, income taxes payable, and
accrued liabilities approximate fair value due to the short
maturity of these instruments.
Revenue Recognition: The Companys
principal sources of revenue include membership services,
principally health club memberships and personal training
services, and the sale of nutritional products. The Company
F-11
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
recognizes revenue in accordance with SEC Staff Accounting
Bulletin No. 101, Revenue Recognition in
Financial Statements, as amended by SEC Staff
Accounting Bulletin No. 104, Revenue
Recognition. As a general principle, revenue is
recognized when the following criteria are met:
(i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred and services have been rendered,
(iii) the price to the buyer is fixed or determinable, and
(iv) collectability is reasonably assured. With respect to
health club memberships and personal training, the Company
relies upon a signed contract between the Company and the
customer as the persuasive evidence of a sales arrangement.
Delivery of health club services extends throughout the term of
membership. Delivery of personal training services occurs when
individual personal training sessions have been rendered.
The Company receives membership fees and monthly dues from its
members. Membership fees, which customers often finance, become
customer obligations upon contract execution and after a
cooling off period of three to fifteen calendar days
depending on jurisdiction, while monthly dues become customer
obligations on a month-to-month basis as services are provided.
Membership fees and monthly dues are recognized at the later of
when collected or earned.
Membership fees and monthly dues collected but not earned are
included in deferred revenue. The majority of members commit to
a membership term of between 12 and 36 months. The majority
of these contracts are
36-month
contracts. Contracts include a members right to renew the
membership at a discount compared to the monthly payments made
during the initial contractual term.
Additional members may be added to the primary joining
members contract. These additional members may be added as
obligatory members that commit to the same membership term as
the primary member, or nonobligatory members that may
discontinue their membership at any time.
Membership revenue is earned on a straight-line basis over the
longer of the contractual term or the estimated membership term.
Membership term is estimated on an aggregate basis at time of
contract execution based on historical trends of actual
attrition, and these estimates are updated quarterly to reflect
actual membership retention. Estimates of membership term were
up to 360 months during 2006, 2005, and 2004. The table
below presents the current member duration distribution of our
members that have continuously maintained membership and were
members as of December 31, 2006, 2005 and 2004.
Reactivation members include members that have experienced
discontinuous periods of membership, having ceased membership to
later return to membership status through our ongoing
reactivation solicitations of expired members. Nonrenewable
members are those which have a definite term of three years or
less and do not have a right to renew their membership at the
conclusion of the term.
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Age Status of
|
|
At December 31,
|
|
Current Members
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
3 years or less
|
|
|
39.2
|
%
|
|
|
39.5
|
%
|
|
|
38.8
|
%
|
4 to 10 years
|
|
|
19.8
|
%
|
|
|
21.4
|
%
|
|
|
22.5
|
%
|
11-20 years
|
|
|
14.3
|
%
|
|
|
15.7
|
%
|
|
|
16.5
|
%
|
21-30 years
|
|
|
3.8
|
%
|
|
|
3.0
|
%
|
|
|
2.5
|
%
|
Over 30 years
|
|
|
0.6
|
%
|
|
|
0.5
|
%
|
|
|
0.4
|
%
|
Reactivation and nonrenewable
|
|
|
22.3
|
%
|
|
|
19.9
|
%
|
|
|
19.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 and 2005, the weighted average
membership life for members that commit to a membership term of
between 12 and 36 months was 34 months and
38 months, respectively. Members with these terms that
finance their initial membership fee have a weighted average
membership life of 33 months and 36 months at
December 31, 2006 and 2005, respectively, while those
members that pay their membership fee in full at point of sale
have a weighted average membership life of 48 months and
57 months at December 31, 2006 and
F-12
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
2005, respectively. As a result of the Companys business
practice of discounting monthly payments made during the renewal
term when compared to monthly payments made in the initial
contractual term, the estimate of membership term impacts the
amount of revenue deferred in the initial contractual term.
Changes in member behavior, competition, and our performance may
cause actual attrition to differ significantly from estimated
attrition. A resulting change in estimated attrition may have a
material effect on reported revenues in the period in which it
is first identified.
Beginning in the fourth quarter of 2004, the Company increased
contractual renewal rates associated with its typical membership
offering. Historically when a member reaches renewal, the
Companys business practice is to reduce renewal rates in
order to increase retention during the renewal period. Because
the Company includes a discount in its membership contract and
does not have a demonstrated history of collecting the
contractual renewal rate, it uses the current collections of
members in renewal to estimate both ultimate collections and the
portion attributable to the initial term.
To the extent that actual cash collected in renewal is different
from the estimated amount, revenues in the period of the change
in estimate may be materially impacted. If the Company is
successful in collecting the contractual renewal rate, revenue
deferred during the initial term is expected to decline. If the
Company offers discounts to renewing members that are more
significant than those that have been offered in the past,
revenue required to be deferred during the initial contract term
will increase. The potential effects of this change in estimate
may be amplified if, for example, the collection of higher
contractual renewal rates results in a decline in membership
retention, which will reduce the Companys estimate of
total membership life and further reduce the amount of deferred
revenue recorded. Changes in member behavior, competition, and
Company performance may cause actual collected renewal rates to
differ significantly from estimated renewal rates. A resulting
change in estimated renewal rates may have a material effect on
reported revenues in the period in which the change of estimate
is made.
Members in their non-obligatory renewal period of membership
totaled approximately 62% of total members at December 31,
2006 and 2005, and approximately 61% of total members at
December 31, 2004. Renewal members may cancel their
membership at any time prior to their monthly or annual due
date. Membership revenue from members in renewal includes
monthly dues paid to maintain their membership, as well as
amounts paid during the obligatory period that have been
deferred as described above, to be recognized over the estimated
term of membership, including renewal periods.
Month-to-month members may cancel their membership prior to
their monthly due date. Membership revenue for these members is
earned on a straight-line basis over the estimated membership
life. Membership life for month-to-month members is currently
estimated at between 2 and 67 months, with an average of
15 months, as of December 31, 2006, and were estimated
between 4 and 41 months, with an average of 15 months,
as of December 31, 2005.
Paid-in-full
members who purchase nonrenewable memberships must purchase a
new membership plan to continue membership beyond the initial
contractual term. Such membership fees are deferred and
amortized over the contract term.
Personal training and other services are provided at most of the
Companys fitness centers. Revenue related to personal
training services is recognized when the four criteria of
recognition described above are met, which is generally upon
rendering of services. Personal training services contracts are
either
paid-in-full
at the point of origination, or are financed and collected over
periods generally up to three months after an initial payment.
Collections of amounts related to
paid-in-full
personal training services contracts are deferred and recognized
as personal training services are rendered. Revenue related to
personal training contracts that have been financed is
recognized at the later of cash receipt or the rendering of
personal training services.
Sales of nutritional products and other fitness-related products
occur primarily through the Companys in-club retail stores
and are recognized upon delivery to the customer, generally at
point of sale. Revenue recognized in the
F-13
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
accompanying consolidated statement of operations as
miscellaneous includes amounts earned as commissions
in connection with a long-term licensing agreement related to
the third-party sale of Bally branded fitness equipment. Such
amounts are recognized prior to collection based on commission
statements from the licensee. Other amounts included in
miscellaneous revenue are recorded upon receipt and include
franchising fees, facility rental fees, locker fees, late
charges and other marketing fees pursuant to in-club promotion
agreements.
The Company enters into contracts that include a combination of
(i) health club services (which may include two or more
members on a single contract), (ii) personal training
services, and (iii) nutritional and weight management
products. In these multiple element arrangements, health club
services are typically the last delivered service. The Company
accounts for these arrangements as single units of accounting
because it does not have objective and reliable evidence of the
fair value of health club services. Under Emerging Issues Task
Force
Issue 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables (Issue
00-21),
elements qualify for separation when the services have value on
a stand-alone basis, fair value of the separate elements exists
and, in arrangements that include a general right of refund
relative to the delivered element, performance of the
undelivered element is considered probable and substantially in
the Companys control. The Company does not have objective
and reliable evidence of the fair value of health club services
and, as a result, treats these arrangements as single units of
accounting.
Costs related to acquiring members and delivering membership
services are expensed as incurred. Advertising costs are charged
to expense as incurred, or in the case of television commercial
production, upon the first airing.
Derivative Financial Instruments: The Company
is a limited user of derivative financial instruments to manage
risks generally associated with interest rate volatility. The
Company does not hold or issue derivative financial instruments
for trading purposes. Derivative financial instruments are
accounted for in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133) as
amended by SFAS No. 149, Amendment of
SFAS No. 133 on Derivative Instruments and Hedging
Activities (SFAS No. 149). This
standard requires the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not
classified as qualifying hedging instruments are adjusted to
fair value through earnings. Changes in the fair value of
derivatives that are designated and qualify as effective hedges
are recorded either in accumulated other comprehensive loss or
through earnings, as appropriate. The ineffective portion of
derivatives that are classified as hedges is immediately
recognized in earnings.
Investments: Investments in the common stock
of entities for which the Company has significant influence over
the investees operating and financial policies, but less
than a controlling interest, are accounted for using the equity
method. Under the equity method, the Companys investment
in an investee is included in the consolidated balance sheet
under the caption other assets and the
Companys share of the investees earnings or loss is
included in the consolidated statements of operations under the
caption other, net.
Commitments and Contingencies
Litigation: The Company accounts for
contingencies in accordance with SFAS 5, Accounting
for Contingencies, which requires the Company to accrue
loss contingencies when the loss is both probable and estimable.
All legal costs expected to be incurred in connection with loss
contingencies are expensed as incurred.
Comprehensive Income
(Loss): SFAS No. 130,
Reporting Comprehensive Income
(SFAS No. 130), establishes standards
for reporting comprehensive income. Comprehensive income
includes net income as currently reported under GAAP, and also
considers the effects of additional economic events that are not
required to be reported in determining net income, but rather
are reported as a separate component of stockholders
deficit. The Company reports the effects of currency translation
as components of comprehensive income (loss).
Insurance Proceeds: Insurance proceeds for
reimbursement of costs incurred as a result of investigations,
disputes and legal proceedings pursuant to the Companys
director and officer insurance policies are recorded upon
receipt and are recorded as a reduction of selling, general and
administrative costs in the statement of operations.
F-14
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
Income (Loss) Per Share: Income (loss) per
share is computed in accordance with SFAS No. 128,
Earnings per Share
(SFAS No. 128). Basic income (loss)
per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted income (loss) per
share is computed on the basis of the weighted average number of
common shares outstanding plus the effect of outstanding stock
options, certain restricted stock, and warrants using the
treasury stock method. The per share amounts
presented in the Consolidated Statements of Operations are based
on the following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Numerator for basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
43,067
|
|
|
$
|
(9,614
|
)
|
|
$
|
(30,256
|
)
|
Denominator for basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
39,809,395
|
|
|
|
34,624,039
|
|
|
|
32,838,811
|
|
Numerator for diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
43,067
|
|
|
$
|
(9,614
|
)
|
|
$
|
(30,256
|
)
|
Denominator for diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
40,519,475
|
|
|
|
34,624,039
|
|
|
|
32,838,811
|
|
The following potentially dilutive shares were not included in
the computation of diluted loss for the years ended December 31
as their effects would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Options to purchase common stock
|
|
|
2,705,091
|
|
|
|
2,622,107
|
|
|
|
4,080,223
|
|
Employee Share-based Compensation: On
January 1, 2006, the Company adopted the provisions of the
Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 123 (revised 2004),
Share-Based Payment
(SFAS No. 123R) to record compensation
expense for its employee stock options and restricted stock.
SFAS No. 123R is a revision of SFAS No. 123,
Accounting for Stock-based Compensation,
(SFAS No. 123) and supersedes Accounting
Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, (APB 25) and
its related implementation guidance. Prior to the adoption of
SFAS No. 123R, the Company followed the intrinsic
value method in accordance with APB 25, in accounting for its
employee stock options. For information regarding share-based
compensation, see Note 15 (Share-based Payments) to these
Consolidated Financial Statements.
Foreign Currency Translation: Foreign
operations of
non-U.S. subsidiaries
whose functional currency is not the U.S. dollar have been
translated into U.S. dollars in accordance with the
principles prescribed in SFAS No. 52, Foreign
Currency Translation
(SFAS No. 52). All assets,
liabilities, and minority interests are translated at the period
end exchange rates, stockholders equity is translated at
historical rates, and revenues and expenses are translated at
the average rates of exchange prevailing during the year.
Translation adjustments are included in the accumulated other
comprehensive loss component of stockholders deficit.
Gains and losses resulting from foreign currency transactions
are reflected in net income (loss).
Reclassifications: In the 2006 balance sheet,
the Company has reported its self-insurance liabilities gross of
excess insurance and recorded receivables for the amounts to be
recovered from the insurance provider. The Company has increased
other current assets by $3,511, other assets by $11,494, accrued
liabilities by $3,511, and other liabilities by $11,494 in the
2005 balance sheet to conform with the presentation in the 2006
balance sheet.
F-15
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
|
|
Note 3
|
Other
Current Assets
|
Other current assets consist of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Inventory
|
|
$
|
6,647
|
|
|
$
|
8,818
|
|
Other
|
|
|
14,760
|
|
|
|
12,087
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,407
|
|
|
$
|
20,905
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4
|
Property
and Equipment
|
Property and equipment consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Estimated Useful Life
|
|
|
2006
|
|
|
2005
|
|
|
Land
|
|
|
|
|
|
$
|
26,768
|
|
|
$
|
32,974
|
|
Buildings and improvements
|
|
|
5 to 35 years
|
|
|
|
118,520
|
|
|
|
147,204
|
|
Leasehold improvements
|
|
|
12 to 15 years(1
|
)
|
|
|
456,152
|
|
|
|
616,226
|
|
Equipment
|
|
|
5 to 10 years
|
|
|
|
226,706
|
|
|
|
268,126
|
|
Less: Accumulated depreciation
|
|
|
|
|
|
|
(580,349
|
)
|
|
|
(749,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
247,797
|
|
|
$
|
314,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Shorter of lease term or estimated useful life, not to exceed
15 years. |
Depreciation of property and equipment amounted to $53,434,
$56,462 and $64,547 in 2006, 2005 and 2004, respectively. The
Company capitalized interest of $516 and $309 for the years
ended December 31, 2006 and 2005, respectively, related to
the construction and equipping of clubs.
|
|
Note 5
|
Asset
Impairment Charges
|
In accordance with SFAS No. 144, all long-lived assets
are reviewed when events or changes in circumstances indicate
that the carrying value of the asset may not be recoverable. The
Company reviews assets at the lowest level for which there are
identifiable cash flows, which is at the club level. The
carrying amount of the club assets is compared to the expected
undiscounted future cash flows to be generated by those assets
over the estimated remaining useful life of the club. Cash flows
are projected for each club based upon historical results and
expectations. In cases where the expected future cash flows are
less than the carrying amount of the assets, those clubs are
considered impaired and the assets are written down to fair
value. For purposes of estimating fair value, the Company has
discounted the projected future cash flows of the impaired clubs
at a weighted average cost of capital.
The Company has recorded total impairment losses of $38,258,
$10,115 and $11,490 in the years ended December 31, 2006,
2005 and 2004, respectively.
|
|
Note 6
|
Insurance
Proceeds
|
Costs incurred as a result of the Audit Committee investigation,
costs of cooperating with the various government agencies
investigating accounting-related matters, attorneys and
other professional fees advanced by the Company to various
current and former Company officers, directors and employees, as
provided in the Companys 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 and other
F-16
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
litigation are reflected in General and
Administrative expenses in the Consolidated Statements of
Operations. The Company received insurance payments of $2,797
and $7,270 during the years ended December 31, 2006 and
2005, respectively, for reimbursement of costs incurred in this
period and in prior periods pursuant to the Companys
Director and Officer insurance policies. See Note 18.
|
|
Note 7
|
Goodwill
and Other Intangible Assets
|
The Companys intangible assets are comprised principally
of goodwill, member relationships, leasehold rights and certain
trademarks. Goodwill represents the excess of cost over fair
value of assets of businesses acquired. In accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142), goodwill
and other intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life,
which consist of certain trademarks, are not amortized but
instead tested for impairment at least annually.
The Company is required to test goodwill for impairment on an
annual basis for each of its reporting units. The Company is
also required to evaluate goodwill for impairment between annual
tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below
its carrying amount. Certain indicators of potential impairment
that could impact the Companys reporting units include,
but are not limited to, a significant long-term adverse change
in the business climate that is expected to cause a substantial
decline in membership, or a significant change in the delivery
of health and fitness services that results in a substantially
more cost effective method of delivery than health clubs. The
Company tested to determine if the fair values of each of its
reporting units were in excess of their respective carrying
values at December 31, 2006, 2005 and 2004, for purposes of
the annual impairment test.
As a result of the adoption of SFAS No. 142, the
Company ceased amortization of goodwill in 2002 in accordance
with the provisions of this standard. As stated above, the
Companys intangible assets other than goodwill consist
primarily of member relationships, leasehold rights, and certain
trademarks. The Company has determined member relationships and
leasehold rights have finite useful lives of six and ten years,
respectively, and are amortized on a straight-line basis over
these useful lives. The Company also evaluates other intangible
assets on an annual basis to determine if the carrying values of
these assets exceed their respective fair values. This
evaluation utilizes an expected cash flow technique to determine
fair value. Certain acquired clubs estimated future cash
flows were found to be insufficient to recover the carrying
value of acquired intangible assets. As a result of this
evaluation, the Company recorded an impairment charge against
other intangible assets of $1,462, $1,220 and $209 in the years
ended December 31, 2006, 2005 and 2004, respectively. This
charge is reported as an element of operating expenses under the
caption Impairment of goodwill and other intangibles
in the consolidated statement of operations.
F-17
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
The following table summarizes the changes in the Companys
net goodwill balance during 2006, 2005 and 2004:
|
|
|
|
|
Balance at December 31, 2003
|
|
$
|
19,662
|
|
Goodwill acquired
|
|
|
40
|
|
Goodwill impairment charge
|
|
|
(25
|
)
|
Other
|
|
|
24
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
19,701
|
|
Goodwill impairment charge
|
|
|
|
|
Other
|
|
|
33
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
19,734
|
|
Goodwill impairment charge
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
19,734
|
|
|
|
|
|
|
The following tables summarize the December 31, 2006 and
2005 gross carrying amounts and accumulated amortization of
amortizable and unamortizable intangible assets, intangible
additions, intangible impairments, amortization expense for the
years ended December 31, 2006, 2005 and 2004, and the
estimated amortization expense for the five succeeding years:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
Membership relations
|
|
$
|
6,218
|
|
|
$
|
6,753
|
|
Non-compete agreements
|
|
|
81
|
|
|
|
81
|
|
Leasehold rights
|
|
|
8,043
|
|
|
|
9,547
|
|
Trademarks
|
|
|
8,308
|
|
|
|
8,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,650
|
|
|
|
24,802
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
Membership relations
|
|
|
(6,193
|
)
|
|
|
(6,631
|
)
|
Non-compete agreements
|
|
|
(81
|
)
|
|
|
(81
|
)
|
Leasehold rights
|
|
|
(7,340
|
)
|
|
|
(6,790
|
)
|
Trademarks
|
|
|
(1,554
|
)
|
|
|
(1,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,168
|
)
|
|
|
(15,011
|
)
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
7,482
|
|
|
$
|
9,791
|
|
|
|
|
|
|
|
|
|
|
F-18
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
|
|
|
|
|
Aggregate additions to intangible
asset cost (principally leasehold rights and membership
relations):
|
|
|
|
|
Year ended December 31, 2004
|
|
$
|
20
|
|
Year ended December 31, 2005
|
|
|
|
|
Year ended December 31, 2006
|
|
|
|
|
Aggregate impairment charges to
intangible asset cost:
|
|
|
|
|
Year ended December 31, 2004
|
|
|
209
|
|
Year ended December 31, 2005
|
|
|
1,220
|
|
Year ended December 31, 2006
|
|
|
1,462
|
|
Aggregate amortization for
amortized intangible assets:
|
|
|
|
|
Year ended December 31, 2004
|
|
|
1,266
|
|
Year ended December 31, 2005
|
|
|
1,104
|
|
Year ended December 31, 2006
|
|
|
775
|
|
Estimated amortization expense:
|
|
|
|
|
Year ending December 31, 2007
|
|
|
311
|
|
Year ending December 31, 2008
|
|
|
300
|
|
Year ending December 31, 2009
|
|
|
230
|
|
Year ending December 31, 2010
|
|
|
30
|
|
Year ending December 31, 2011
|
|
|
|
|
|
|
Note 8
|
Accrued
Liabilities
|
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Payroll and benefit-related
liabilities
|
|
$
|
26,148
|
|
|
$
|
28,851
|
|
Interest
|
|
|
21,367
|
|
|
|
20,407
|
|
Deferred rent liability
|
|
|
10,136
|
|
|
|
12,590
|
|
Advertising
|
|
|
1,725
|
|
|
|
1,327
|
|
Taxes other than income taxes
|
|
|
8,760
|
|
|
|
8,241
|
|
Other
|
|
|
47,567
|
|
|
|
28,537
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
115,703
|
|
|
$
|
99,953
|
|
|
|
|
|
|
|
|
|
|
Other, at December 31, 2006, includes $15,375 relating to
the sale/leaseback transaction of October 2006. This amount
represents interim financing for the four properties included in
this transaction. In the first quarter 2007, the Company amended
this transaction and recorded the sale and subsequent leaseback
transaction.
|
|
Note 9
|
Derivative
Instruments
|
The Company accounts for derivative financial instruments in
accordance with SFAS No. 133. This standard requires
the Company to recognize all derivatives on the balance sheet at
fair value. Fair value changes are recorded in income for any
contracts not classified as qualifying hedging instruments. For
derivatives qualifying as interest rate hedging instruments, the
effective portion of the derivative fair value change must be
recorded through other
F-19
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
comprehensive income, a component of stockholders equity
(deficit). For hedges qualifying as fair value hedges, both the
swap and the hedged portion of the debt are recorded in the
balance sheets.
The Company entered into two interest rate swap agreements in
2003 which change the fixed-rate interest rate exposure on
$200,000 of the Companys
97/8% Senior
Subordinated Notes due 2007, to variable-rate based on the
six-month Eurodollar rate plus 6.01%, by entering into a
receive-fixed, pay-variable interest rate swap. Under the swap,
the Company receives fixed rate payments and makes variable rate
payments, thereby creating variable-rate long-term debt. These
swap agreements are accounted for as qualifying interest rate
hedges of the future fixed-rate interest payments in accordance
with SFAS No. 133, whereby changes in the fair market
value are reflected as adjustments to the fair value of the
derivative instrument as reflected on the accompanying
consolidated balance sheets. The change in fair value of the
swaps exactly offsets the change in fair value of the hedged
debt, with no impact on earnings.
The fair values of the interest rate swap agreements are
determined periodically by obtaining quotations from the
financial institution that is the counterparty to the Company
swap arrangements. The fair value represents an estimate of the
net amounts that the Company would receive or pay if the
agreements were transferred to another party or cancelled as of
the date of the valuation. During the years ended
December 31, 2006 and 2005, approximately $3,392 and
$1,472, respectively, related to the swaps were reported as an
addition and offset, respectively, to interest expense and
represent a yield adjustment of the hedged debt obligation. The
balance sheets at December 31, 2006 and 2005 reflect other
long-term liabilities of $2,099 and $3,798, respectively, to
reflect the fair value of the swap agreements.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Nonsubordinated:
|
|
|
|
|
|
|
|
|
Term loan, due 2007
|
|
$
|
205,900
|
|
|
$
|
|
|
Delayed-draw term loan, due 2007
|
|
|
5,000
|
|
|
|
|
|
Term loan, due 2009
|
|
|
|
|
|
|
173,250
|
|
Revolving credit facility
|
|
|
|
|
|
|
35,000
|
|
101/2% Senior
Notes due 2011
|
|
|
235,199
|
|
|
|
235,242
|
|
Capital lease obligations
|
|
|
9,527
|
|
|
|
9,080
|
|
Other secured and unsecured
obligations
|
|
|
7,947
|
|
|
|
20,845
|
|
Subordinated:
|
|
|
|
|
|
|
|
|
97/8%
Series D Senior Subordinated Notes due 2007, less
unamortized discount of $127 and $297
|
|
|
297,538
|
|
|
|
295,669
|
|
97/8%
Series B Senior Subordinated Notes due 2007
|
|
|
236
|
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
761,347
|
|
|
|
769,322
|
|
Current maturities of long-term
debt (nonsubordinated and subordinated)
|
|
|
(513,913
|
)
|
|
|
(13,018
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current
maturities
|
|
$
|
247,434
|
|
|
$
|
756,304
|
|
|
|
|
|
|
|
|
|
|
New
Facility
On October 16, 2006, the Company entered into the New
Facility with a group of financial institutions led by JPMorgan,
the proceeds of which were used to fully satisfy the
Companys obligations under its Credit Agreement which is
discussed below. The New Facility, which amended and restated
the Credit Agreement, provides (i) a term
F-20
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
loan in the amount of $205,900, (ii) a delayed-draw term
loan facility in the amount of $34,100, and (iii) a
revolving credit facility in the amount of $44,000. The New
Facility has a termination date which is the earlier of
(i) 14 days prior to the maturity of the Senior
Subordinated Notes (due October 15, 2007), including
extensions or refinancing, and (ii) October 1, 2010.
The current termination date is October 1, 2007 and, as
such, amounts outstanding under the New Facility are included in
current maturities of long-term debt on the Companys
Consolidated Balance Sheet at December 31, 2006. The term
loan is payable in quarterly installments of $514.75 beginning
on October 31, 2007 with a final installment of $199,723
due on October 1, 2010, or any earlier termination date
related to the maturity of the Senior Subordinated Notes. The
delayed draw term loan is payable in a single installment on the
termination date. The rate of interest on the borrowings under
the New Facility is, at the Companys option, either the
reference rate (higher of the prime rate or federal funds rate
plus .50%) plus a margin of 3.25% or a Eurodollar rate plus a
margin of 4.25%. Commitment fees of 0.50% and 1.00% per annum
are payable on the unused portion of the revolving credit
facility and the undrawn portion of the delayed draw term loan,
respectively. At December 31, 2006, the average rate on
borrowings under the New Facility was 9.70% per annum. The
proceeds from the term loan and revolving credit were used to
refinance the amounts outstanding under the Companys
existing Credit Agreement and to provide additional working
capital. The delayed draw term loan is available to be drawn for
18 months from October 2006 and will be used to fund
capital expenditures. The amount available under the revolving
credit facility is reduced by any letters of credit outstanding
($18,152 at December 31, 2006). A fee of 4.25% per annum
and a fronting fee of 0.25% per annum are paid on outstanding
letters of credit.
The New Facility is secured by substantially all the
Companys real and personal property, including member
obligations under installment contracts. The Companys
obligations under the New Facility are guaranteed by most of its
domestic subsidiaries. The New Facility contains restrictive
covenants that include minimum monthly cash EBITDA and minimum
monthly liquidity requirements, financial reporting
requirements, and restrictions on use of funds; additional
indebtedness; incurring liens; certain types of payments
(including, without limitation, capital stock dividends and
redemptions, payments on existing indebtedness and intercompany
indebtedness); incurring or guaranteeing debt; investments;
mergers, consolidations, sales and acquisitions; transactions
with subsidiaries; conduct of business; sale and leaseback
transactions; incurrence of judgments; and changing our fiscal
year; all subject to certain exceptions. The New Facility also
contains various financial reporting requirements, including an
annual audit opinion, provided that the receipt of a going
concern qualification or exception to such audit opinion
does not violate the terms of the New Facility so long as the
Company is otherwise in compliance with the New Facility.
The New Facility provides the Company with the ability to enter
into and to retain the proceeds from permitted
(i) sale/leaseback transactions of up to $25,000 and
(ii) asset sales of up to $25,000 and, thereafter, 50% of
incremental proceeds from permitted sale/leaseback and asset
sale transactions up to $25,000. Additionally, the New Facility
contains a covenant that required the Company to raise
additional liquidity in the amount of $20,000 by
December 31, 2006 from permitted sale/leasebacks, permitted
asset sales or issuances of capital stock. Proceeds of $22,494
from sale/leaseback transactions that were completed in October
and December 2006 met this requirement.
Costs incurred related to obtaining the New Facility totaled
approximately $5,900. The Company expensed approximately $4,000
of these costs in the fourth quarter of 2006 and the remaining
$1,900 were capitalized and will be amortized to interest
expense over the term of the New Facility, which currently has a
termination date of October 1, 2007. If the termination
date of the New Facility is extended, the deferral period for
any remaining unamortized costs will also be extended to the new
termination date. Unamortized deferred financing costs relating
to the Credit Agreement of approximately $3,600 were expensed in
the fourth quarter of 2006 and the remaining $300 will be
amortized over the term of the New Facility.
At December 31, 2006, the Company was in compliance with
all covenants under the New Facility.
F-21
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
On April 2, 2007, the Company failed to comply with certain
financial reporting covenants under the New Facility. On
April 12, 2007, the Company entered into a Forbearance
Agreement with the lenders under the New Facility. Under this
agreement the lenders agreed to forbear from exercising any
remedies under the New Facility as a result of defaults arising
from the Companys failure to deliver audited financial
statements for the fiscal year ended December 31, 2006, a
certificate of KPMG LLP or other independent public accountant
of national reputation certifying that such accountants have not
obtained knowledge of any event or act which would constitute a
default or event of default with respect to financial covenant
and certain computations (the Accountants
Certificate) and updated financial projections through
December 2010 due to the lenders by April 2, 2007; and
cross defaults arising from defaults under the indentures
governing its Senior Subordinated Notes and Senior Notes due to
the Companys inability to timely file its 2006 Annual
Report on
Form 10-K
and Quarterly Report on
Form 10-Q
for the quarter ending March 31, 2007 with the SEC, and the
failure to make a scheduled interest payment due April 16,
2007 on the Senior Subordinated Notes. The Forbearance Agreement
contains restrictions during its term on additional
indebtedness, liens, investments, asset sales and
sale/leasebacks. However, the Forbearance Agreement permitted
the Company to sell its Canadian assets and does not prohibit
sale/leaseback transactions or the sale of assets with a total
value not to exceed $7,500. The Company was permitted to retain
the net proceeds from the sale of its Canadian assets, and
$5,000 of net proceeds from other asset sales. The Forbearance
Agreement requires the Company to deliver its audited financial
statements within three days of receipt, to provide a
restructuring plan by June 28, 2007, to provide additional
monthly reporting and waives the requirement for the
Accountants Certificate. Furthermore, the Forbearance
Agreement required that the Company enter into forbearance
agreements with respect to defaults under its public indentures
with the holders of at least a majority of the Senior Notes and
at least 75% of the Senior Subordinated Notes, which the Company
effected on May 14, 2007. The Forbearance Agreement will
terminate on the earlier of July 13, 2007 or the date on
which (i) a default occurs which is not a default covered
by the Forbearance Agreement, (ii) any payment of principal
or interest is made on the Senior Subordinated Notes,
(iii) the commencement of any enforcement action under the
indenture governing either the Senior Notes or Senior
Subordinated Notes, including acceleration of the Senior Notes
or the Senior Subordinated Notes, or (iv) upon certain
challenges to the validity or enforceability of the New Facility
or the Forbearance Agreement. The Company paid fees of $587
related to the Forbearance Agreement.
Credit
Agreement
On October 14, 2004, the Company entered into a credit
agreement (the Credit Agreement) with a group of
financial institutions led by JP Morgan Chase Bank that amended
and restated its revolving credit agreement. The Credit
Agreement provided for a $175,000 term loan expiring in October
2009 and a $100,000 revolving credit facility expiring in June
2008. The term loan was payable in quarterly installments of
$437.5 beginning March 31, 2005, with a final installment
of $166,687.5 due on October 14, 2009. The rate of interest
on borrowings under the revolving credit facility was, at the
Companys option, either the reference rate (higher of the
prime rate or the federal funds rate plus 0.50%) plus a margin
of 2.25% to 3.0% per annum, or a Eurodollar rate plus a margin
of 3.25% to 4.0% per annum. The margins applicable to the
reference rate and Eurodollar rate loans are determined by
reference to a pricing matrix based on total leverage of the
Company. A commitment fee of 0.75% or 0.50% per annum, based on
utilization, is payable on the unused portion of the revolving
credit facility. The rate of interest on the term loan was, at
the Companys option, either the reference rate plus 3.75%
per annum or a Eurodollar rate plus 4.75% per annum. At
December 31, 2005, the average rate on borrowings under the
Credit Agreement was 9.02%. The Credit Agreement was secured by
substantially all of the Companys real and personal
property, including member obligations under installment
contracts. The Companys obligations under the Credit
Agreement were guaranteed by most of its domestic subsidiaries.
The Credit Agreement contained restrictive covenants that
included certain interest coverage and leverage ratios, and
restrictions on use of funds; capital expenditures; additional
indebtedness; incurring liens; certain types of payments
(including without limitation, capital stock dividends and
redemptions, payments on existing indebtedness and intercompany
indebtedness); incurring or guaranteeing debt; investments;
mergers, consolidations, sales and acquisitions; transactions
with subsidiaries;
F-22
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
conduct of business; sale and leaseback transactions; incurrence
of judgments; changing fiscal year; and financial reporting, and
all subject to certain exceptions. The amount available under
the revolving credit facility was reduced by any outstanding
letters of credit ($13,605 at December 31, 2005), which
were limited to $30,000. A fee of 2.25% to 3.0% per annum and a
fronting fee of 0.25% were paid on outstanding letters of
credit. During 2006 the Company applied proceeds of $37,386 from
asset sales to repay the term loan.
The Company entered into a number of amendments, waivers and
consents with its lenders under the Credit Agreement. On
June 23, 2006, the Company entered into the Fourth
Amendment to the Credit Agreement, which extended the
10 day period to 28 days after which a cross-default
will occur upon receipt of any financial reporting covenant
default notice under the indentures governing the Senior
Subordinated Notes or Senior Notes for the third quarter of
2006. On March 30, 2006, the Company entered into the Third
Amendment and Waiver to the Credit Agreement that modified the
definition of Consolidated Interest Expense,
modified permitted dispositions, clarified the definition of
Banking Day, extended the time for delivering the
audited financial statements for the year ended
December 31, 2005 and the unaudited financial statements
for the quarter ended March 31, 2006 until July 10,
2006, extended the time for delivering the unaudited financial
statements for the quarter ending June 30, 2006 until
September 11, 2006, with an option to elect to extend until
October 11, 2006, permitted payment of the consent fees to
the holders of the Senior Subordinated Notes and the Senior
Notes and excluded fees and expenses incurred in connection with
the consent solicitation from the computation of financial
covenants. On October 17, 2005, the Company entered into a
consent under the Credit Agreement which permitted entering into
stockholders rights plans, subject to certain conditions.
Effective August 9, 2005, the Company entered into a
consent under the Credit Agreement to extend the
10-day
cross-default period until August 31, 2005. Effective
August 24, 2005, the Company amended the Credit Agreement
to permit payment of consent fees to the holders of the Senior
Subordinated Notes and Senior Notes, to exclude certain
additional expenses from the computation of various financial
covenants and to reduce the required interest coverage ratio for
the period ending March 31, 2006 and to limit revolver
borrowings under the Credit Agreement if the Companys
unrestricted cash exceeds certain levels. On March 31,
2005, the Company entered into the First Amendment and Waiver to
the Credit Agreement that, among other things, excluded certain
expenses incurred by the Company in connection with the SEC and
Department of Justice investigations and other matters, from the
calculation of various financial covenants, waived certain
events of default related to, among other things, delivery of
financial information and leasehold mortgages, reduced permitted
capital expenditures, and increased financial reporting
requirements.
101/2% Senior
Notes
In July 2003, the Company issued $235,000 in aggregate principal
of
101/2% Senior
Notes due 2011 in two offerings under Rule 144A and
Regulation S under the Securities Act of 1933, as amended.
The Senior Notes are jointly and severally guaranteed by
substantially all of the domestic subsidiaries of the Company,
on an unsecured basis. Proceeds from the note issuances were
used to refinance the Companys $131,990 term loan and
$56,000 outstanding on the revolving credit facility, and to
repay $25,000 on the
series 2001-1.
As a result, the Company wrote off $1,669 of unamortized
issuance costs from the extinguished debt in the third quarter
of 2003. Prior to July 2006, the Company could have redeemed up
to 35% of the Senior Notes at a redemption price of 110.5% with
the proceeds from one or more equity offerings. Beginning in
July 2007, the Senior Notes may be redeemed at the
Companys option, in whole or in part, with premiums
ranging from 5.25% in 2007 to zero in 2009 and thereafter. Upon
a change of control, as defined in the indenture, holders may
require the Company to purchase the Senior Notes at a price of
101%. The indenture governing the Senior Notes contains certain
covenants which are described below.
97/8% Senior
Subordinated Notes
The
97/8%
Series B Senior Subordinated Notes and the
97/8%
Series D Senior Subordinated Notes mature on
October 15, 2007. The Series D Notes are not subject
to any sinking fund requirement but may be redeemed at the
F-23
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
Companys option, in whole or in part, with premiums
ranging from 3.29% in December 2003 to zero as of October 2005
and thereafter. Upon a change of control, as defined in the
indenture, holders may require the Company to purchase the
Senior Subordinated Notes at a price of 101%. The payment of the
Senior Subordinated Notes is subordinated to the payment in full
of all senior indebtedness of the Company, as defined
(approximately $458,463 at December 31, 2006).
The indentures governing the Senior Subordinated Notes and the
Senior Notes contain covenants including restrictions on use of
funds; additional indebtedness; incurring liens; certain types
of payments (including without limitation, capital stock
dividends and redemptions, payments on existing indebtedness and
intercompany indebtedness); incurring or guaranteeing debt of an
affiliate; capital expenditures; making certain investments;
mergers, consolidations, sales and acquisitions; transactions
with subsidiaries; conduct of business; sale and leaseback
transactions; incurrence of judgments; changing fiscal year; and
financial reporting, and all subject to certain exceptions.
The Company did not comply with its covenant obligations under
the indentures governing the Senior Subordinated Notes and the
Senior Notes to file its 2005 Annual Report on
Form 10-K
and its Quarterly Report on
Form 10-Q
for the three months ended March 31, 2006 with the SEC by
the required filing dates. See below for descriptions of the
March 2006 consent solicitation waiving for limited periods
defaults so arising under the financial reporting covenant
obligations and the May 2007 forbearance agreements with respect
to the Companys 2006
10-K report
and first quarter 2007
10-Q report.
Consent
Solicitations
The Company has entered into a number of waivers, consents and
amendments to its debt, agreements primarily as a result of its
failure to timely file reports with the SEC as discussed below.
The fees paid for these waivers and consents are contained in
the table at the end of this discussion.
As a result of the Audit Committee investigation into certain
accounting issues and the retention of new independent auditors,
the Company announced on August 9, 2004 that it was unable
to timely file its consolidated financial statements for the
quarter ending June 30, 2004 with the SEC. Although the
filing delay constituted a default of the financial reporting
covenants under the indentures, it did not result in an event of
default until delivery to the Company of a default notice and
the expiration of a
30-day cure
period. On October 29, 2004, the trustee advised the
Company of its intention to send the Company a notice of default
no later than December 15, 2004 unless the default was
cured or waived prior to that date. On December 7, 2004,
the Company completed consent solicitations to amend the
indentures governing its Senior Subordinated Notes and its
Senior Notes to waive through July 31, 2005 any default
arising under the financial reporting covenants in the
indentures from a failure to timely file its consolidated
financial statements with the SEC. In order to secure the waiver
until July 31, 2005, the Company was required to pay
additional consent fees on or before June 3, 2005 and
July 6, 2005.
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 Senior Notes and
Senior Subordinated Notes (Noteholders) under the
indentures governing the notes. On August 4 and 5, 2005, the
Company received notices of default under the indentures
following the expiration of the waiver of the financial
reporting covenant default on July 31, 2005. The notices
commenced a
30-day cure
period and a
10-day
period after which a cross-default would have occurred under the
Companys Credit Agreement. Effective August 9, 2005,
the Company entered into a consent with its lenders under the
Credit Agreement to extend the
10-day
period until August 31, 2005. 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 extend the waivers until November 30,
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 Senior
Notes, to exclude certain additional expenses from the
computation of various financial covenants and to reduce the
required interest coverage ratio for the period ending
F-24
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
March 31, 2006 and to limit revolver borrowings under the
Credit Agreement if the Companys unrestricted cash exceeds
certain levels. On November 1, 2005, the Company completed
a consent solicitation of those holders of Senior Subordinated
Notes who were not party to the August 24, 2005 consent
agreement.
On March 14, 2006, the Company announced that it would not
meet the March 16, 2006 deadline for filing its Annual
Report on
Form 10-K
for the year ended December 31, 2005 with the SEC. Although
the delay in filing resulted in defaults of the financial
reporting covenants under the indentures governing the Senior
Subordinated Notes and Senior Notes, it did not constitute an
event of default without delivery of a notice of default and
expiration of a
30-day cure
period. A cross-default under the Credit Agreement would have
occurred 10 days after receipt of such notice.
Additionally, a default would also have occurred under the
Credit Agreement if the Company did not deliver audited
financial statements for the year ended December 31, 2005
to the lenders by March 31, 2006.
On March 24, 2006, the Company announced that it would seek
waivers of the defaults of the financial reporting covenants
under the indentures governing the Senior Subordinated Notes and
the Senior Notes through a consent solicitation, which was
commenced on March 27, 2006. In connection with the consent
solicitation, the Company entered into agreements with
approximately 53% of the holders of the Senior Subordinated
Notes to consent to the requested waivers.
On March 30, 2006, the Company entered into the Third
Amendment and Waiver with the lenders under the Credit Agreement
that modified the definition of Consolidated Interest
Expense, modified permitted dispositions, clarified the
definition of Banking Day, extended the time for
delivering the audited financial statements for the year ended
December 31, 2005 and the unaudited financial statements
for the quarter ended March 31, 2006 until July 10,
2006, extended the time for delivering the unaudited financial
statements for the quarter ending June 30, 2006 until
September 11, 2006, with an option to elect to extend until
October 11, 2006, permitted payment of the consent fees to
the holders of the Senior Subordinated Notes and the Senior
Notes and excludes fees and expenses incurred in connection with
the consent solicitation from the computation of financial
covenants.
On April 10, 2006, the Company completed the consent
solicitations to amend the indentures governing the Senior
Subordinated Notes and the Senior Notes to waive any default
arising under the financial reporting covenants from a failure
to timely file financial statements with the SEC for the year
ended December 31, 2005 and the quarter ended
March 31, 2006 through July 10, 2006, and for the
quarter ended June 30, 2006 through September 11,
2006, with an option to elect to extend through October 11,
2006.
On June 23, 2006, the Company entered into the Fourth
Amendment to the Credit Agreement, which extended the
10 day period to 28 days after which a cross-default
will occur upon receipt of any financial reporting covenant
default notice under the indentures governing the Senior
Subordinated Notes or Senior Notes for the third quarter of 2006.
Additionally, on April 11, 2006, the Company entered into
stock purchase agreements (the Stock Purchase
Agreements) to sell 400,000 shares of unregistered
common stock to each of Wattles Capital Management, LLC and
investment funds affiliated with Ramius Capital Group, L.L.C.
Proceeds of $5,600 from the sales of Common Stock were used to
fund: (i) the cash portion of the consent fees paid to
holders of the Senior Subordinated Notes and Senior Notes and
related expenses; (ii) fees and expenses relating to the
Credit Agreement amendment and waiver; and (iii) additional
working capital.
F-25
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
The table below provides a summary of these waivers and
associated fees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
|
|
|
Deferred
|
|
|
|
Reason
|
|
|
|
|
|
Common Stock
|
|
|
Cash
|
|
|
Financing
|
|
Debt Issue
|
|
(See Notes)
|
|
|
Payment Date
|
|
|
Issued
|
|
|
Paid
|
|
|
Costs
|
|
|
2006 Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Agreement
|
|
|
1
|
|
|
|
June
|
|
|
|
|
|
|
$
|
543
|
|
|
$
|
543
|
|
Senior Notes
|
|
|
2
|
|
|
|
April
|
|
|
|
863,819
|
|
|
|
387
|
|
|
|
8,109
|
|
Senior Subordinated Notes
|
|
|
2
|
|
|
|
April
|
|
|
|
1,092,376
|
|
|
|
388
|
|
|
|
10,153
|
|
Credit Agreement
|
|
|
2
|
|
|
|
March
|
|
|
|
|
|
|
|
2,474
|
|
|
|
2,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments 2006
|
|
|
|
|
|
|
|
|
|
|
1,956,195
|
|
|
$
|
3,792
|
|
|
$
|
21,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Notes
|
|
|
2
|
|
|
|
November
|
|
|
|
464,773
|
|
|
$
|
1,432
|
|
|
$
|
4,152
|
|
Senior Notes and Senior
Subordinated Notes
|
|
|
2
|
|
|
|
November
|
|
|
|
232,000
|
|
|
|
|
|
|
|
1,529
|
|
Senior Notes
|
|
|
2
|
|
|
|
August
|
|
|
|
|
|
|
|
3,433
|
|
|
|
3,433
|
|
Senior Subordinated Notes
|
|
|
2
|
|
|
|
August
|
|
|
|
1,438,427
|
|
|
|
|
|
|
|
4,675
|
|
Credit Agreement
|
|
|
1
|
|
|
|
August
|
|
|
|
|
|
|
|
2,616
|
|
|
|
2,616
|
|
Credit Agreement
|
|
|
1
|
|
|
|
August
|
|
|
|
|
|
|
|
377
|
|
|
|
377
|
|
Senior Notes
|
|
|
3
|
|
|
|
June & July
|
|
|
|
|
|
|
|
1,160
|
|
|
|
1,160
|
|
Senior Subordinated Notes
|
|
|
2
|
|
|
|
June & July
|
|
|
|
|
|
|
|
1,180
|
|
|
|
1,180
|
|
Credit Agreement
|
|
|
2
|
|
|
|
March
|
|
|
|
|
|
|
|
1,095
|
|
|
|
1,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments 2005
|
|
|
|
|
|
|
|
|
|
|
2,135,200
|
|
|
$
|
11,293
|
|
|
$
|
20,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
1 Extend cross default period
2 Failure to timely file reports with the SEC
3 Potential covenant default
Noteholder
Forbearance Agreements
On March 15, 2007, the Company announced that it would not
meet the March 16, 2007 deadline for filing its Annual
Report on
Form 10-K
for the year ended December 31, 2006. Although the delay in
filing resulted in defaults of the financial reporting covenants
under the indentures governing the Senior Notes and the Senior
Subordinated Notes, it did not constitute an event of default
without delivery of notice and the expiration of a
30-day grace
period. Pursuant to the New Facility a cross-default occurs
28 days from the delivery of such notice. On April 16,
2007, the Company did not make the $14,812 interest payment due
on its Senior Subordinated Notes.
On May 14, 2007, the Company entered into the Senior Notes
Forbearance Agreement with holders representing over 80% of the
aggregate principal amount outstanding of the Senior Notes.
Pursuant to the Senior Notes Forbearance Agreement, holders of
the Senior Notes waived defaults arising from the Companys
failure to (i) timely file its 2006 Annual Report on
Form 10-K
and Quarterly Report on
Form 10-Q
for the quarter ending March 31, 2007 with the SEC,
(ii) make a scheduled interest payment on the Senior
Subordinated Notes due April 16, 2007, (iii) provide
the required notices of default to the trustee, and
(iv) potential failure to satisfy conditions regarding the
execution of sale and leaseback transactions, and agreed to
forbear from exercising any
F-26
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
related remedies until July 13, 2007. Holders of the Senior
Notes also consented to amend certain provisions of the Senior
Notes Indenture in connection with the waiver of the defaults.
The Company paid cash consent fees of $279 to holders of the
Senior Notes that executed the Senior Note Forbearance Agreement
and consented to the related amendments to the Senior Notes
Indenture.
On May 14, 2007, the Company also entered into the Senior
Subordinated Notes Forbearance Agreement with holders
representing over 80% of the aggregate principal amount
outstanding of the Senior Subordinated Notes. Pursuant to the
Senior Subordinated Notes Forbearance Agreement, holders of the
Senior Subordinated Notes waived defaults arising from the
Companys failure to (i) make the scheduled interest
payment on the Senior Subordinated Notes due April 16,
2007, (ii) timely file its 2006 Annual Report on
Form 10-K
and Quarterly Report on
Form 10-Q
for the quarter ending March 31, 2007 with the SEC,
(iii) provide the required notices of default to the
trustee, and (iv) potential failure to satisfy conditions
regarding the execution of sale and leaseback transactions, and
agreed to forbear from exercising any related remedies until
July 13, 2007. Holders of the Senior Subordinated Notes
also consented to amend certain provisions of the Senior
Subordinated Notes Indenture in connection with the waiver of
the defaults. The Company did not pay a consent fee to holders
of the Senior Subordinated Notes in connection with the Senior
Subordinated Notes Forbearance Agreement.
On May 22, 2007, the Company entered into a Senior Notes
Supplemental Indenture and a Senior Subordinated Notes
Supplemental Indenture with the Trustee, which amended the
Senior Notes Indenture and the Senior Subordinated Notes
Indenture, respectively. The Supplemental Indentures were
entered into in connection with the successful completion of the
Forbearance Agreements.
Other
Secured Debt
As of December 31, 2006 and 2005, the Companys
unrestricted Canadian subsidiary was not in compliance with the
terms of its credit agreement. As a result, the outstanding
amounts of $197 and $2,428 as of December 31, 2006 and
2005, respectively, have been classified as current as of such
date. The amount outstanding on the Canadian subsidiarys
credit agreement was repaid in full on January 31, 2007.
The Company was not in compliance with the financial reporting
covenants under two mortgage agreements which required the
provision of audited 2006 consolidated financial statements by
March 31, 2007 and April 15, 2007. At May 31,
2007, the amount outstanding under these agreements was $2,083.
Upon filing this
Form 10-K,
the Company will be in compliance with these agreements.
Capital
Leases
The Company leases certain equipment under capital leases
expiring in periods ranging from one to five years. Included in
Property and Equipment at December 31, 2006 and
2005 were assets under capital leases of $7,549 and $9,860,
respectively, net of accumulated amortization of $11,611 and
$29,556, respectively. The Company was not in compliance with
the financial reporting covenants which required the provision
of audited 2006 consolidated financial statements by
April 15, 2007 under capital leases with amounts
outstanding at May 31, 2007 of $3,374. Upon filing this
Form 10-K,
the Company will be in compliance with these agreements.
Liquidity
The Company requires operating 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 are unsure that our
cash flow and availability under our revolving credit facility
and delayed draw term loan will be sufficient to meet our
expected needs for working capital and other cash requirements
in 2007. In light of our current financial situation, the
Company did not make the $14,812 interest payment due on the
Senior Subordinated Notes in April 2007. Further, as discussed
below, the Company will not have sufficient liquidity in the
event that it is
F-27
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
unable to refinance or extend the maturity of $300,000 of debt
outstanding under the Senior Subordinated Notes issue and as a
result the New Facility terminates on October 1, 2007. The
Companys cash flows and liquidity may, however, be
negatively impacted by various items, including declines in
membership revenues, changes in terms or other requirements by
vendors, regulatory fines, penalties, settlements or adverse
results in securities or other litigations, future consent
payments to lenders or noteholders if required and unexpected
capital requirements. The Company has substantial interest
payments due on its Senior Notes in July 2007 and interest and
principal on the Senior Subordinated Notes in October 2007 and
it has been required to provide additional letters of credit and
cash deposits to support certain vendors, credit card payment
processing and insurance programs, which has reduced available
liquidity under the revolving credit facility. Accordingly, no
assurances can be provided that the Company will have sufficient
liquidity to meet all known and unforeseen requirements.
On October 1, 2007, the New Facility will terminate in the
event that the Senior Subordinated Notes have not been extended
or refinanced. If this occurs, the Company will not have access
to its revolving credit and delayed draw term loan facilities
and amounts outstanding under the New Facility will become due.
Furthermore, pursuant to the New Facility the Companys
depository accounts are subject to control agreements, and in
the event of a default, its lenders could exercise their rights
under these agreements. Absent an agreement by the lenders to
extend the maturity of the New Facility, the Company will not
have sufficient liquidity to operate its business and will be
unable to satisfy the New Facility obligations when due. If such
events were to occur, the holders of the Senior Notes and the
Senior Subordinated Notes could accelerate the obligations under
those instruments, and the Company would be unable to satisfy
those obligations.
Maturities of long-term debt and future minimum payments under
capital leases, together with the present value of future
minimum rentals as of December 31, 2006, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-
|
|
|
|
|
|
|
|
|
|
Term
|
|
|
Capital
|
|
|
|
|
|
|
Debt
|
|
|
Leases
|
|
|
Total
|
|
|
2007
|
|
$
|
511,625
|
|
|
$
|
3,255
|
|
|
$
|
514,880
|
|
2008
|
|
|
2,452
|
|
|
|
2,113
|
|
|
|
4,565
|
|
2009
|
|
|
911
|
|
|
|
5,993
|
|
|
|
6,904
|
|
2010
|
|
|
113
|
|
|
|
171
|
|
|
|
284
|
|
2011
|
|
|
235,312
|
|
|
|
|
|
|
|
235,312
|
|
Thereafter
|
|
|
1,407
|
|
|
|
|
|
|
|
1,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
751,820
|
|
|
$
|
11,532
|
|
|
$
|
763,352
|
|
Less amount representing interest
|
|
|
|
|
|
|
(2,005
|
)
|
|
|
(2,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
751,820
|
|
|
$
|
9,527
|
|
|
$
|
761,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above maturities present amounts under the New Facility as
due in 2007, pursuant to the early termination provisions
related to the refinancing of the Senior Subordinated Notes.
Deferred revenue represents cash received from members, but not
yet earned. The summary set forth below of the activity and
balances in deferred revenue at December 31, 2005 and 2006
and for the years then ended includes as cash additions all cash
received for membership services. Revenue recognized includes
all revenue earned during the periods from membership services.
Financed members are those members who have financed their
initial membership fee to be paid monthly. Advanced payments
from financed members are included within this table as advanced
payments of periodic dues and membership fees.
F-28
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Cash
|
|
|
Revenue
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Additions
|
|
|
Recognized
|
|
|
2006
|
|
|
Deferral of receipts from financed
members:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial contract term payments
|
|
$
|
517,624
|
|
|
$
|
216,493
|
|
|
$
|
(322,275
|
)
|
|
$
|
411,842
|
|
Down payments
|
|
|
100,009
|
|
|
|
43,798
|
|
|
|
(60,998
|
)
|
|
|
82,809
|
|
Deferral of receipts representing
advance payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in-full
membership fees collected upon origination
|
|
|
109,819
|
|
|
|
37,940
|
|
|
|
(42,849
|
)
|
|
|
104,910
|
|
Advance payments of periodic dues
and membership fees
|
|
|
120,696
|
|
|
|
117,305
|
|
|
|
(119,147
|
)
|
|
|
118,854
|
|
Receipts collected and earned
without deferral during period
|
|
|
|
|
|
|
342,094
|
|
|
|
(342,094
|
)
|
|
|
|
|
Deferral of receipts for personal
training services
|
|
|
17,762
|
|
|
|
119,921
|
|
|
|
(120,562
|
)
|
|
|
17,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
865,910
|
|
|
$
|
877,551
|
|
|
|
(1,007,925
|
)
|
|
|
735,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of foreign currency
translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,129
|
|
SAB 108 transitional deferred
revenue adjustment
|
|
|
|
|
|
|
|
|
|
|
5,709
|
|
|
|
|
|
Elimination of sold clubs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,002,216
|
)
|
|
$
|
736,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company estimates membership term for contracts originated
during each month. Each quarter it updates its estimate of
membership term for each individual monthly origination group to
take into account attrition experience specific to that group.
As monthly sales originations mature, each quarter it monitors
the specific attrition of each group and makes adjustments to
the estimated membership term. During the first three years of
multi-year value plan financed memberships, it closely monitors
collection history and changes the estimates of membership term
based on this experience. During the renewal term, the Company
monitors membership term by reviewing actual membership term
experience in each membership term group. In the fourth quarter
of 2006, as a result of a change in estimate as to membership
term length based on the most recent historical experience, the
Company recorded a decrease in deferred revenue of $71,022 and
increased revenue recognized by the same amount (with a
consequent increase in income from continuing operations and net
income of $71,022 and income per common share of $1.78).
F-29
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Cash
|
|
|
Revenue
|
|
|
December 31,
|
|
|
|
2004
|
|
|
Additions
|
|
|
Recognized
|
|
|
2005
|
|
|
Deferral of receipts from financed
members:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial contract term payments
|
|
$
|
534,446
|
|
|
$
|
272,854
|
|
|
$
|
(289,676
|
)
|
|
$
|
517,624
|
|
Down payments
|
|
|
105,614
|
|
|
|
48,413
|
|
|
|
(54,018
|
)
|
|
|
100,009
|
|
Deferral of receipts representing
advance payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in-full
membership fees collected upon origination
|
|
|
115,735
|
|
|
|
30,999
|
|
|
|
(36,915
|
)
|
|
|
109,819
|
|
Advance payments of periodic dues
and membership fees
|
|
|
132,164
|
|
|
|
129,541
|
|
|
|
(141,009
|
)
|
|
|
120,696
|
|
Receipts collected and earned
without deferral during period
|
|
|
|
|
|
|
301,248
|
|
|
|
(301,248
|
)
|
|
|
|
|
Deferral of receipts for personal
training services
|
|
|
17,697
|
|
|
|
118,755
|
|
|
|
(118,690
|
)
|
|
|
17,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
905,656
|
|
|
$
|
901,810
|
|
|
$
|
(941,556
|
)
|
|
$
|
865,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12
|
Stockholders
Deficit
|
Preferred Stock: The Company is authorized to
issue 10,000,000 shares, $.10 par value, of preferred
stock in one or more series and to designate the rights,
preferences, limitations, and restrictions of and upon shares of
each series, including voting, redemption, and conversion
rights. 100,000 shares of Series B Junior
Participating Preferred Stock have been authorized; no shares
are issued or outstanding.
On October 18, 2005, the Companys Board of Directors
adopted a Stockholder Rights Plan (Rights Plan),
authorized a new class of 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,
entitled 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 provided that the Rights became exercisable only
after a triggering event, including a person or group acquiring
15% or more of the Companys Common Stock. The
Companys Board of Directors was 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. The
Rights Plan terminated pursuant to its terms on July 15,
2006.
Common Stock: The Company is authorized to
issue 60,200,000 shares of Common Stock, $.01 par
value. Each share of Common Stock is entitled to one vote per
share. At December 31, 2006, 3,867,201 shares of
Common Stock were reserved for future issuance;
735,701 shares in connection with outstanding warrants and
3,131,500 shares in connection with certain stock plans.
Restrictions on Net Assets: The Companys
ability to meet its future financial obligations is dependent on
the availability of cash flows from its subsidiaries. As further
described in Note 10, the Companys subsidiaries are
subject to contractual restrictions that limit their ability to,
among other things, incur additional indebtedness, pay dividends
or other distributions on or redeem or repurchase their capital
stock, make investments, enter into transactions with
affiliates, issue stock, engage in unrelated lines of business,
create liens to secure debt, and transfer or sell assets or
merge with other companies. As a result, substantially all of
the net assets of the Companys subsidiaries were
restricted at December 31, 2006.
F-30
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
The income tax provision applicable to income (loss) from
continuing operations before income taxes consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Deferred taxes
|
|
$
|
2,017
|
|
|
$
|
396
|
|
|
$
|
(15,469
|
)
|
Change in valuation allowance
|
|
|
(1,672
|
)
|
|
|
(52
|
)
|
|
|
15,813
|
|
Foreign (all current)
|
|
|
33
|
|
|
|
35
|
|
|
|
75
|
|
State (all current)
|
|
|
477
|
|
|
|
447
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
855
|
|
|
$
|
826
|
|
|
$
|
775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and
liabilities for financial accounting and income tax purposes.
Significant components of the Companys deferred tax assets
and liabilities as of December 31, 2006 and 2005, along
with their classification, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Installment contract revenues
|
|
$
|
297,997
|
|
|
$
|
|
|
|
$
|
337,017
|
|
|
$
|
|
|
Amounts not yet deducted for tax
purposes
|
|
|
30,795
|
|
|
|
|
|
|
|
33,414
|
|
|
|
|
|
Depreciation and capitalized costs
|
|
|
123,682
|
|
|
|
|
|
|
|
112,455
|
|
|
|
|
|
Tax loss carryforwards
|
|
|
379,707
|
|
|
|
|
|
|
|
346,152
|
|
|
|
|
|
Acquired intangibles
|
|
|
|
|
|
|
387
|
|
|
|
|
|
|
|
1,863
|
|
Other, net
|
|
|
|
|
|
|
4,345
|
|
|
|
|
|
|
|
2,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
832,181
|
|
|
|
4,732
|
|
|
|
829,038
|
|
|
|
4,832
|
|
Valuation allowance
|
|
|
(829,076
|
)
|
|
|
|
|
|
|
(825,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,105
|
|
|
$
|
4,732
|
|
|
$
|
3,548
|
|
|
$
|
4,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
717
|
|
|
$
|
421
|
|
|
$
|
842
|
|
|
$
|
691
|
|
Long-term
|
|
|
2,388
|
|
|
|
4,311
|
|
|
|
2,706
|
|
|
|
4,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,105
|
|
|
$
|
4,732
|
|
|
$
|
3,548
|
|
|
$
|
4,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006, the Company has estimated federal
Alternative Minimum Tax (AMT) credits and tax loss
carryforwards of $5,896 and $791,868, respectively. The AMT
credits can be carried forward indefinitely, while the tax loss
carryforwards expire beginning in 2011 through 2026. In
addition, the Company has substantial state tax loss
carryforwards that began to expire in 2005 and fully expire
through 2026. On September 28, 2005, the Company underwent
an ownership change for purposes of IRC Section 382. Due to
the ownership change that occurred, the utilization of the
Companys federal tax loss carryforwards is subject to an
annual limitation under Section 382, which will
significantly limit their use. The amount of the limitation may,
under certain circumstances, be increased by built-in gains held
by the Company at the time of the change that are recognized in
the five-year period after the ownership change. Depending upon
how the pending restructuring is accomplished, certain federal
and state tax loss and AMT credit carryforwards could be
severely limited and may not be fully utilizable by the Company.
Based upon the Companys past performance, the expiration
dates of its carryforwards, and the change in ownership under
IRC Section 382, the ultimate realization of all of the
Companys deferred tax assets cannot be assured.
Accordingly, a valuation allowance has been recorded to reduce
deferred tax assets to a level which, more
F-31
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
likely than not, will be realized. Included in the deferred tax
asset and valuation allowance is $7,037 resulting from the
exercise of stock options and the Company-sponsored stock
purchase plan. The related benefit will be included as
additional paid-in capital when realized. Also included in the
deferred tax asset and valuation allowance is $795 resulting
from loss carryovers acquired. The related benefit will be
credited to goodwill when realized.
A reconciliation of the income tax provision with amounts
determined by applying the U.S. statutory tax rate to
income (loss) from continuing operations before income taxes is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Provision (benefit) at U.S.
statutory tax rate (35)%
|
|
$
|
2,247
|
|
|
$
|
(1,656
|
)
|
|
$
|
(10,325
|
)
|
Add (deduct):
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for change in valuation
allowance
|
|
|
(1,672
|
)
|
|
|
(52
|
)
|
|
|
15,813
|
|
Deferred state income taxes, net
of related federal income tax effect
|
|
|
(492
|
)
|
|
|
676
|
|
|
|
(4,661
|
)
|
Current state income taxes, net of
related federal income tax effect
|
|
|
310
|
|
|
|
291
|
|
|
|
231
|
|
Foreign withholding taxes
|
|
|
33
|
|
|
|
35
|
|
|
|
75
|
|
Non-deductible executive
compensation
|
|
|
|
|
|
|
1,045
|
|
|
|
208
|
|
Other, net
|
|
|
429
|
|
|
|
487
|
|
|
|
(566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision from
continuing operations
|
|
$
|
855
|
|
|
$
|
826
|
|
|
$
|
775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In June 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109. This interpretation prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return, and
provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition. The Company is currently evaluating the impact
FIN 48 will have on its financial condition and results of
operations. FIN 48 is effective for public companies for
annual periods that begin after December 15, 2006.
|
|
Note 14
|
Warrants
and Stock Transactions
|
The Company issued warrants in 1996, which as of
December 31, 2006 were held by the former Chairman of the
Board of Directors, President and Chief Executive Officer of the
Company, Lee Hillman, entitling him to acquire
735,701 shares of Common Stock at an exercise price of
$5.26 per share, subject to possible reduction of the exercise
price by a maximum of $1.00 per share based on the closing price
of Common Stock on the day immediately prior to exercise of the
warrant. The warrants expire on December 31, 2007.
|
|
Note 15
|
Share-based
Payments
|
In December 2004 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment
(SFAS No. 123R). SFAS No. 123R
is a revision of SFAS No. 123, Accounting for
Stock-based Compensation,
(SFAS No. 123) and supersedes Accounting
Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, (APB 25) and
its related implementation guidance. SFAS No. 123R
primarily focuses on accounting for transactions in which an
entity obtains employee services in share-based payment
transactions and requires entities to recognize compensation
expense from all share-based payment transactions in the
financial statements. SFAS No. 123R establishes fair
value as the measurement objective in accounting for share-based
payment arrangements and requires all companies to apply a
fair-value-based measurement method in accounting for all
share-based payment transactions with employees.
F-32
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
The Company adopted SFAS No. 123R on January 1,
2006 using the modified prospective method. Accordingly, prior
period amounts have not been restated. Under this method, the
Company must record compensation expense for all awards granted
after the adoption date and for the unvested portion of
previously granted awards that remain outstanding at the
adoption date, under the fair value method. The Company has
elected to recognize compensation expense on a straight-line
basis over the vesting period of the award. Total stock-based
compensation expense for the year ended December 31, 2006
was $5,022, which is comprised of $2,095 related to stock
options, $2,546 related to restricted shares, and $381 related
to estimated income tax obligations which are liability
classified.
Pursuant to the terms of restricted stock grants to
Mr. Landeck (former Chief Financial Officer),
Mr. Toback (former Chairman, President and Chief Executive
Officer) and Mr. Gaan (former Senior Vice President),
remaining unrecognized compensation cost of $345 on
55,000 shares, $788 on 135,000 shares and $222 on
40,000 shares was recognized at the dates of their
terminations in April, August and September 2006, respectively.
In addition, pursuant to the separation agreement for
Mr. Toback, the Company accelerated the vesting on
approximately 332,000 options granted to Mr. Toback in 2003
and 2005 and recognized the remaining unrecognized compensation
cost of $370 in August 2006.
Prior to the adoption of SFAS No. 123R, the Company
accounted for its stock-based awards using the intrinsic value
method in accordance with APB 25, and recognized no compensation
costs for its stock plans other than for its restricted stock
awards. Specifically, the adoption of SFAS No. 123R
resulted in the recording of compensation expense for employee
stock options. The following table shows the effect of adopting
SFAS No. 123R on selected items (As
Reported) and what those items would have been under
previous guidance under APB 25:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2006
|
|
|
|
As
|
|
|
Under APB
|
|
|
|
Reported
|
|
|
No. 25
|
|
|
Income from continuing operations
before income taxes
|
|
$
|
6,419
|
|
|
$
|
8,514
|
|
Income from continuing operations
|
|
|
5,564
|
|
|
|
7,659
|
|
Net income
|
|
|
43,067
|
|
|
|
45,162
|
|
Cash flow used in operating
activities
|
|
|
(4,285
|
)
|
|
|
(4,285
|
)
|
Cash flow used in financing
activities
|
|
|
(6,696
|
)
|
|
|
(6,696
|
)
|
Basic income per common share:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.14
|
|
|
$
|
0.19
|
|
Income from discontinued operations
|
|
|
0.94
|
|
|
|
0.94
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.08
|
|
|
$
|
1.13
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.14
|
|
|
$
|
0.19
|
|
Income from discontinued operations
|
|
|
0.92
|
|
|
|
0.93
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.06
|
|
|
$
|
1.12
|
|
|
|
|
|
|
|
|
|
|
F-33
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
The following table illustrates the pro forma effect on net loss
attributable to common stockholders if the fair value-based
method had been applied to all outstanding and unvested awards
in each period:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Net loss, as reported
|
|
$
|
(9,614
|
)
|
|
$
|
(30,256
|
)
|
Plus: Stock-based compensation
expense included in net loss
|
|
|
6,132
|
|
|
|
1,122
|
|
Less: Stock-based compensation
expense determined under fair value based method
|
|
|
(8,175
|
)
|
|
|
(5,030
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(11,657
|
)
|
|
$
|
(34,164
|
)
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(0.28
|
)
|
|
$
|
(0.92
|
)
|
Pro forma
|
|
|
(0.34
|
)
|
|
|
(1.04
|
)
|
Diluted loss per common share
|
|
|
|
|
|
|
|
|
As reported
|
|
|
(0.28
|
)
|
|
|
(0.92
|
)
|
Pro forma
|
|
|
(0.34
|
)
|
|
|
(1.04
|
)
|
Stock-based
Compensation Plans
In January 1996, the Board of Directors of the Company adopted
the 1996 Non-Employee Directors Stock Option Plan (the
Directors Plan). The Directors Plan
provided for the grant of non-qualified stock options to
non-employee directors of the Company. Options under the
Directors Plan were generally granted with an exercise
price equal to the fair market value of the Common Stock at the
day prior to the date of grant. Option grants under the
Directors Plan became exercisable in three equal annual
installments commencing one year from the date of grant and had
a 10-year
term. The Directors Plan expired as of January 3,
2006. As such, stock options may no longer be granted under the
Directors Plan.
Also in January 1996, the Board of Directors of the Company
adopted the 1996 Long-Term Incentive Plan (the Incentive
Plan). The Incentive Plan provided for the grant of
non-qualified stock options, incentive stock options and
compensatory restricted stock awards (collectively
Awards) to officers and key employees of the
Company. Pursuant to the Incentive Plan, non-qualified stock
options were generally granted with an exercise price equal to
the fair market value of the Common Stock on the day prior to
the date of grant. Incentive stock options could not be granted
at less than the fair market value of the Common Stock on the
date of grant. Option grants become exercisable generally in
three equal annual installments commencing one year from the
date of grant. Option grants in 2005, 2004 and 2003 have
10-year
terms. The Incentive Plan expired as of January 3, 2006. As
such, awards may no longer be granted under the Incentive Plan.
On March 8, 2005, the Company adopted the Inducement Award
Equity Incentive Plan (the Inducement Plan) as a
means of providing equity compensation in order to induce
individuals to become employed by the Company. The Inducement
Plan provides for the issuance of up to 600,000 shares of
the Companys Common Stock in the form of stock options and
restricted shares, subject to various restrictions. Pursuant to
the Inducement Plan, non-qualified stock options are generally
granted with an exercise price equal to the fair market value of
the Common Stock on the day prior to the date of grant.
Inducement stock options must be granted at not less than the
fair market value of the Common Stock on the date of grant.
Options are granted at the discretion of the Compensation
Committee of the Board of Directors (the Compensation
Committee). Option grants become exercisable generally in
three equal annual installments commencing one year from the
date of grant and have
10-year
terms. As of December 31, 2006, 131,500 shares remain
available for issuance under the Inducement Plan.
F-34
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
Certain employment arrangements contain provisions that provide
for the payment to the participant of amounts which represent
estimated income tax obligations related to the vesting of
awards. The amounts related to the estimated income tax
obligations are liability classified awards.
On December 19, 2006, the Companys stockholders
approved the adoption of the 2007 Omnibus Equity Compensation
Plan (the 2007 Plan), which was previously approved
by the Board. The 2007 Plan provides for the issuance of a
maximum of 3,000,000 shares of common stock in connection
with the grant of stock options, stock units, stock awards,
dividend equivalents and other stock-based awards to the
Companys employees, non-employee directors and employees
of the Companys subsidiaries. The exercise price of stock
options may be equal to or greater than the fair market value of
the Companys common stock on the date of grant. The
Compensation Committee will determine the criteria for
exercisability option grants and each grant will have a
10-year
term. The 2007 Plan will expire on December 19, 2016.
Stock
Options
A summary of stock based compensation activity within the
Companys stock-based compensation plans for the year ended
December 31, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
(Years)
|
|
|
Value
|
|
|
Outstanding at December 31,
2005
|
|
|
4,138,514
|
|
|
$
|
13.26
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
28,500
|
|
|
|
5.49
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(51,081
|
)
|
|
|
5.41
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(165,258
|
)
|
|
|
7.18
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(564,249
|
)
|
|
|
14.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
3,386,426
|
|
|
$
|
13.34
|
|
|
|
5.6
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2006
|
|
|
2,893,455
|
|
|
$
|
14.74
|
|
|
|
5.1
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information pertaining to option activity during the years
ended December 31, 2006, 2005 and 2004 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2006
|
|
2005
|
|
2004
|
|
Weighted average grant-date fair
value of stock options granted
|
|
$
|
3.41
|
|
|
$
|
2.34
|
|
|
$
|
2.87
|
|
Total intrinsic value of stock
options exercised
|
|
|
155
|
|
|
|
1,196
|
|
|
|
15
|
|
The Company received $277 of cash from stock options exercised
during the year ended December 31, 2006. At
December 31, 2006, there was approximately $1,061 of total
unrecognized compensation cost related to non-vested stock
options. This cost will be recognized over a weighted average
period of 1.7 years.
F-35
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
The fair value of each option granted is estimated on the date
of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Expected life in years
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
Risk-free interest rate
|
|
|
4.73
|
%
|
|
|
4.21
|
%
|
|
|
3.88
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
52.0
|
%
|
|
|
51.9
|
%
|
|
|
51.2
|
%
|
For 2006, the expected life of each award granted was calculated
using historical experience. Expected volatility was based on
historical volatility levels of the Companys common stock.
The risk-free interest rate is based on the implied yield
currently available on U.S. Treasury strip rates with a
remaining term equal to the expected term. Expected dividend
yield is based on historical dividend payments.
Restricted
Stock
The Company also grants restricted stock awards to certain
employees. Restricted stock awards are valued at the closing
market value of the Companys common stock on the day prior
to the grant, and the total value of the award is recognized as
expense ratably over the vesting period of the employees
receiving the grants. The Company did not grant restricted stock
awards in 2006.
A summary of restricted stock activity for the year ended
December 31, 2006 is as follows:
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|
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Weighted Average
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|
|
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Grant Date
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Number of Shares
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Fair Value
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Outstanding at December 31,
2005
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837,000
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$
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6.92
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Granted
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Vested
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(232,500
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)
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7.01
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Forfeited
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(36,250
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)
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5.89
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Outstanding at December 31,
2006
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568,250
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$
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6.90
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Pursuant to the Incentive Plan and the Inducement Plan,
restricted stock awards are rights granted to an employee to
receive shares of stock without payment but subject to
forfeiture and other restrictions as set forth in the Incentive
Plan or the Inducement Plan, as applicable. Generally, the
restricted stock awarded, and the right to vote such stock or to
receive dividends thereon, may not be sold, exchanged or
otherwise disposed of during the restricted period. Except as
otherwise determined by the Compensation Committee, the
restrictions and risks of forfeiture generally lapse four years
after the date of grant.
The restrictions on the shares issued in 2002 lapse upon a
change in control of the Company (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 Companys Board of Directors), the employees
death, termination of employment due to disability or the first
date prior to December 31, 2005 which follows seven
consecutive trading days on which the trading price equals or
exceeds the targeted stock price of $42 per share. The weighted
average fair value of the 2002 grant cannot be determined due to
its variable nature. The restrictions on the shares issued in
2003 lapse four years after the date of issuance, upon a change
in control of the Company (as previously defined), the
employees death or termination of employment other than
for cause. Vesting on the shares issued in 2003 can accelerate
based on the attainment of certain performance goals. The
Company is recognizing compensation expense on these shares over
the four-year vesting
F-36
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
period. In addition, 100,000 shares were granted in 2003 to
Paul A. Toback with restrictions that lapse upon a change in
control of the Company, his death or termination of employment
due to disability. The weighted average fair value of this grant
cannot be determined due to the variable nature of the grant.
Upon the resignation of the Companys former Chief
Financial Officer in April 2004, the Company recognized $465 of
additional compensation expense relating to the conversion of
100,000 shares of restricted stock at a market price of
$6.03 per share. In the eleven month period prior to the
resignation, $138 of compensation expense was recognized on the
shares which converted.
On May 4, 2005, 1,320,500 shares of restricted stock
became vested under the terms of the 1996 Long-Term Incentive
Plans change in control provision, which provides for
accelerated vesting in the event of a change in control. For
these purposes, a change in control is 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 Companys Board of Directors. The
acquisition on May 4, 2005 of the Companys Common
Stock by Liberation Investment Group LLC, Liberation
Investments, Ltd., Liberation Investments, L.P. and Emanuel R.
Pearlman constituted such a change in control. Accordingly,
808,000 shares of restricted stock subject to four-year
cliff vesting conditions and 512,500 shares of restricted
stock subject to certain performance-based conditions lapsed. In
connection with this event, $2,201 of unearned compensation was
reported as general and administrative expense in the
three-month period ended June 30, 2005 which related to the
time-based restricted shares, and $1,609 in compensation was
reported as general and administrative expense in the
three-month period ended June 30, 2005 which related to the
performance-based restricted shares. Existing employment
agreements with certain executives contain tax consequence
gross-up
provisions the effects of which resulted in $977 in compensation
reported as general and administrative expense in the
three-months ended June 30, 2005.
As of December 31, 2005, 385,000 restricted shares and
stock options covering an additional 153,000 shares have
been granted under the Inducement Plan. 330,000 shares of
restricted stock became vested in May and September 2005 under
the terms of the Inducement Plans 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 Companys Board of
Directors. The acquisition on May 4, 2005 of the
Companys Common Stock by Liberation Investment Group LLC,
Liberation Investments, Ltd., Liberation Investments, L.P. and
Emanuel R. Pearlman and on September 6, 2005 by Pardus
Capital Management L.P. constituted such a change in control. In
the three-month periods ended June 30, 2005 and
September 30, 2005, $397 and $618 respectively, in
compensation was reported as general and administrative expense,
related to these time-based awards.
Stock
Issued for Services
The Company issued 11,936 shares of its common stock to its
tabulation agent for their services in connection with the
Companys consent solicitation. The shares were valued as
of the agreement date and the Company has recorded general and
administrative expense of $98 for this transaction.
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|
Note 16
|
Defined
Contribution Plan
|
The Company has sponsored several defined contribution plans,
including a 401(k), that provides retirement benefits for
certain full-time employees. Eligible employees elect to
participate by contributing a percentage of their pre-tax
earnings to the plans. Employee contributions to the plans, up
to certain limits, are matched in various percentages by the
Company. The Companys matching contributions related to
the plans totaled $730, $827 and $862 for 2006, 2005 and 2004,
respectively. In the third quarter of 2004, the Company
terminated the Management
F-37
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
Retirement Savings Plan (MRSP), a non-qualified
deferred compensation plan (rabbi trust), and paid
out the entire amount to the key employees who participated in
the plan.
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|
Note 17
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Related
Party Transactions
|
The Company has regular transactions in the normal course of
business for fitness equipment and services with two companies
that employ relatives of John Wildman, Senior Vice President and
Chief Operating Officer. During 2006 and 2005, the Company paid
$8,038 and $6,688 to those companies, respectively, for
providing such goods and services.
In 2006, the Board of Directors named Ronald G. Eidell as Senior
Vice President and Chief Financial Officer and principal
financial officer of the Company and Michael L. Goldberg as Vice
President, Corporate Controller. Mr. Eidell and
Mr. Goldberg are also partners of Tatum LLC, a financial
and accounting services provider. The Company has also utilized
the services of several partners and associates of Tatum LLC, to
manage and assist in certain projects related to accelerating
the accounting close process and remediation of material
internal control weaknesses. The Company paid Tatum LLC an
aggregate of $987 in 2006.
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|
Note 18
|
Commitments
and Contingencies
|
Operating leases. The Company leases various
fitness center facilities, office facilities, and equipment
under operating leases expiring in periods ranging from one to
25 years, excluding optional renewal periods. Certain
leases contain contingent rental provisions generally related to
cost-of-living criteria or revenues of the respective fitness
centers. Rent expense under operating leases was $126,470,
$126,444 and $124,600 for 2006, 2005 and 2004, respectively.
Minimum future rent payments under long-term noncancellable
operating leases in effect as of December 31, 2006,
exclusive of taxes, insurance, other expenses payable directly
by the Company and contingent rent, are $141,226, $132,178,
$117,919, $105,152 and $94,609 for 2007 through 2011,
respectively, and $417,130 thereafter.
In connection with the Companys January 2006 sale of its
Crunch Fitness brand along with certain additional
health clubs located in San Francisco, California, the
Company
and/or
certain of its subsidiaries remain liable for the obligations on
certain leases transferred to the purchaser in the amount of
$80,679. The amount of foregoing contingent liabilities will
reduce over time as obligations are paid by the purchaser under
these leases. However, certain of the leases possess renewal
options which, if exercised by the purchaser, will again
increase the amount of liability of the Company
and/or
certain of its subsidiaries under such lease existing as of the
date of such exercise by purchaser but for no more than the
obligations for a 5 year period under any such lease. The
Companys exposure for these retained contingent
liabilities is mitigated by two letters of credit naming the
Company as beneficiary, aggregating $3,228 and having a term
equal to the longer of three years or the time the purchaser has
a Debt to EBITDA Ratio of less than 3 to 1. The Company has
recorded a liability on its balance sheet for the estimated fair
value of these retained liabilities in the amount of $600.
Capital leases. Under the terms of an
agreement with the landlord, the Company is obligated to
purchase at the landlords option the leased premises at
the Greenwood, Indiana location for a predetermined amount of
$5,099 at any time during a ten-year period ending July 2009.
The Company has included this contingent liability under capital
leases.
Litigation:
Putative
Securities Class Actions
Between May and July 2004, ten putative securities class
actions, now consolidated and designated In re Bally Total
Fitness Securities Litigation were filed in the United
States District Court for the Northern District of Illinois
F-38
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
against the Company and certain of its former and current
officers and directors. Each of these substantially similar
lawsuits alleged that the defendants violated
Sections 10(b)
and/or 20(a)
of the Securities Exchange Act of 1934, as amended (the
Exchange Act), as well as the associated
Rule 10b-5,
in connection with the Companys proposed restatement.
On March 15, 2005, the Court appointed a lead plaintiff and
on May 23, 2005 the Court appointed lead plaintiffs
counsel. By stipulation of the parties, the consolidated lawsuit
was stayed pending restatement of the Companys financial
statements in November 2005. On December 30, 2005,
plaintiffs filed an amended consolidated complaint, asserting
claims on behalf of a putative class of persons who purchased
Bally stock between August 3, 1999 and April 28, 2004,
and adding the Companys former outside audit firm,
Ernst & Young LLP as an additional defendant. On
July 12, 2006, the Court granted defendants motions
to dismiss the amended consolidated complaint and dismissed the
complaint in its entirety, without prejudice to plaintiffs
filing an amended complaint on or before August 14, 2006.
An amended complaint was filed on August 14, 2006.
Defendants filed motions to dismiss the amended complaint on
September 28, 2006. On February 20, 2007 the Court
issued a Memorandum Opinion and Order dismissing claims against
all defendants with prejudice. Plaintiffs filed a Notice of
Appeal on March 23, 2007. On April 18, 2007, the Court
granted Plaintiffs unopposed Motion to Suspend Briefing,
suspending briefing pending a ruling by the United States
Supreme Court regarding the Seventh Circuits standard for
pleading scienter in Makor Issues & Rights v.
Tellabs and directing the parties to file position
statements within 14 days of the issuance of the Supreme
Courts decision. The Supreme Courts decision was
issued on June 21, 2007. It is not yet possible to
determine the ultimate outcome of this action.
Stockholder
Derivative Lawsuits in Illinois State Court
On June 8, 2004, two stockholder derivative lawsuits were
filed in the Circuit Court of Cook County, Illinois, by two
Bally stockholders, David Schacter and James Berra, purportedly
on behalf of the Company against Paul Toback, James McAnally,
John Rogers, Jr., Lee Hillman, John Dwyer, J. Kenneth
Looloian, Stephen Swid, George Aronoff, Martin Franklin and Liza
Walsh, who are former officers
and/or
directors. These lawsuits allege claims for breaches of
fiduciary duty against those individuals in connection with the
Companys restatement regarding the timing of recognition
of prepaid dues. The two actions were consolidated on
January 12, 2005. By stipulation of the parties, the
consolidated lawsuit was stayed pending restatement of the
Companys financial statements in November 2005. An amended
consolidated complaint was filed on February 27, 2006. The
Company filed a motion to dismiss on May 20, 2006, directed
solely to the issue of whether plaintiffs have adequately
alleged demand futility as required by applicable Delaware law
in order to establish standing to sue derivatively. Shortly
before oral argument on that motion, the parties executed a
Memorandum of Understanding memorializing a settlement in
principle of all claims. On May 18, 2007, the Court entered
a Preliminary Order provisionally approving the Stipulation of
Settlement subject to notice and a hearing on June 19,
2007. On June 19, 2007, the Court entered a final order
approving the parties settlement and dismissing the action
with prejudice.
Stockholder
Derivative Lawsuits in Illinois Federal Court
On April 5, 2005, a stockholder derivative lawsuit was
filed in the United States District Court for the Northern
District of Illinois, purportedly on behalf of the Company
against certain former officers and directors of the Company by
another of the Companys stockholders, Albert Said. This
lawsuit asserts claims for breaches of fiduciary duty in failing
to supervise properly its financial and corporate affairs and
accounting practices. Plaintiff also requests restitution and
disgorgement of bonuses and trading proceeds under Delaware law
and the Sarbanes-Oxley Act of 2002. By stipulation of the
parties, the lawsuit was stayed pending restatement of the
Companys financial statements In November 2005. An amended
consolidated complaint was filed on February 27, 2006.
Bally filed a motion to dismiss on May 30, 2006, directed
solely to the issues of whether the court has subject matter
jurisdiction and whether plaintiffs have adequately alleged
demand futility as required by applicable Delaware law in order
to establish standing to sue derivatively. On March 27,
2007, the Court entered an order indicating its
F-39
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
intention to convert the Companys motion to a motion for
summary judgment and requiring the Company to file a new motion
and brief, which the Company did on April 13, 2007. That
motion is currently pending. On June 18, 2007, the Company
and plaintiffs reached an agreement in principle to resolve the
action. It is not yet possible to determine the ultimate outcome
of this action.
Individual
Securities Action in Illinois
On March 15, 2006, a lawsuit captioned Levine v. Bally
Total Fitness Holding Corporation, et al., Case No. 06
C 1437 was filed in the United States District Court for the
Northern District of Illinois against the Company, certain of
its former officers and directors, and its former outside audit
firm, Ernst & Young, LLP. Plaintiffs complaint
alleged violations of Sections 10(b), 18 and 20(a) of the
Exchange Act, SEC
Rule 10b-5,
and the Illinois Consumer Fraud and Deceptive Practices Act, as
well common law fraud in connection with the Companys
restatement. The Court found this action related to the
consolidated securities class action discussed above, and
transferred it to the judge before whom the class action cases
were pending. After defendants filed motions to dismiss the
complaint and after the Court granted motions to dismiss the
class action cases, plaintiff moved for leave to amend its
complaint. On July 19, 2006, the Court denied
plaintiffs motion and ordered completion of briefings on
defendants motions to dismiss on statute of limitations
issues. On September 29, 2006, the Court granted
defendants motion to dismiss plaintiffs
Section 18 claim as untimely, denied the motion as to
Sections 10(b) and 20(a), dismissed Ernst &
Young, LLP as a defendant and granted plaintiff leave to amend
his complaint. An amended complaint was filed on
November 3, 2006. The Company filed a motion to dismiss the
amended complaint on January 5, 2007. On April 2,
2007, the Court granted the Companys motion and dismissed
the case with prejudice. Plaintiff did not file a timely Notice
of Appeal of this dismissal, but instead filed a new action in
the Circuit Court of Cook County, Illinois, Case No. 07 L
4280, asserting only claims for common law fraud and under the
Illinois Consumer Fraud and Deceptive Practices Act. The Company
has not yet answered the complaint. It is not yet possible to
determine the ultimate outcome of this action.
Lawsuit
in Oregon
On September 17, 2004, a lawsuit captioned Jack Garrison
and Deane Garrison v. Bally Total Fitness Holding
Corporation, Lee S. Hillman and John W. Dwyer, CV 04 1331,
was filed in the United States District Court for the District
of Oregon. The plaintiffs alleged that the defendants violated
certain provisions of the Oregon Securities Act, breached the
contract of sale, and committed common-law fraud in connection
with the acquisition of the plaintiffs business in
exchange for shares of Bally stock.
On April 7, 2005, all defendants joined in a motion to
dismiss two of the four counts of plaintiffs complaint,
including plaintiffs claims of breach of contract and
fraud. On November 28, 2005, the District Court granted the
motion to dismiss plaintiffs claims for breach of contract
and fraud against all parties. Motions for summary judgment were
filed on April 21, 2006. On July 27, 2006, the
presiding Magistrate Judge issued proposed Findings and
Conclusions recommending that summary judgment be entered in
favor of all defendants on all remaining claims. The parties
thereafter reached agreement under which plaintiffs would
dismiss their case without appealing the Magistrate Judges
recommendation. The parties executed a final Settlement
Agreement on October 16, 2006, and final judgment
dismissing the action with prejudice was entered on
November 26, 2006.
Lawsuit
in Massachusetts
On March 11, 2005, plaintiffs filed a complaint in the
matter of Fit Tech Inc., et al. v. Bally Total Fitness
Holding Corporation, et al., Case
No. 05-CV-10471
MEL, pending in the United States District Court for the
District of Massachusetts. This action is related to an earlier
action brought in 2003 by the same plaintiffs in the same court
alleging breach of contract and violation of certain earn-out
provisions of an agreement whereby the Company acquired certain
fitness centers from plaintiffs in return for shares of Bally
stock. The 2005 complaint
F-40
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
asserted new claims against the Company for violation of state
and federal securities laws on the basis of allegations that
misrepresentations in Ballys financial statements resulted
in Ballys stock price to be artificially inflated at the
time of the Fit-Tech transaction. Plaintiffs also asserted
additional claims for breach of contract and common law claims.
Certain employment disputes between the parties to this
litigation are also subject to arbitration in Chicago.
Plaintiffs claims are brought against the Company and its
former Chairman and CEO Paul Toback, as well as former Chairman
and CEO Lee Hillman and former CFO John Dwyer. Plaintiffs have
voluntarily dismissed all claims under the federal securities
laws, leaving breach of contract, common law and state
securities claims pending. On April 4, 2006, the Court
granted motions to dismiss all claims against defendants Hillman
and Dwyer for lack of jurisdiction. All remaining claims were
dismissed with prejudice pursuant to a confidential stipulation
of settlement, which was filed on November 3, 2006.
Securities
and Exchange Commission Investigation
In April 2004, the Division of Enforcement of the SEC commenced
an investigation in connection with the Companys
restatement. The Company continues to fully cooperate in the
ongoing SEC investigation. It is not yet possible to determine
the ultimate outcome of this investigation.
Department
of Justice Investigation
In February 2005, the United States Justice Department commenced
a criminal investigation in connection with the Companys
restatement. The investigation is being conducted by the United
States Attorney for the Northern District of Illinois. The
Company is fully cooperating with the investigation. It is not
yet possible to determine the ultimate outcome of this
investigation.
Demand
Letters
On December 27, 2004, the Company received a stockholder
demand that it bring actions or seek other remedies against
parties potentially responsible for the Companys
accounting errors. The Board appointed a Special Demand
Evaluation Committee consisting of three independent directors
to evaluate that request. On June 21, 2005, the Company
received a second, substantially similar, stockholder demand,
which the Special Demand Evaluation Committee also evaluated
along with the other stockholder demand. The Special Demand
Evaluation Committee retained independent counsel,
Sidley & Austin LLP, to assist it in evaluating the
demands.
On March 10, 2006, the Companys Board of Directors
accepted the recommendation of its Special Demand Evaluation
Committee that no further action be taken at this time against
any current or former officers or directors of the Company
regarding the matters raised in the two shareholder demand
letters. The Committees recommendation, based on the
report of its independent counsel and adopted by the Board of
Directors, was based on consideration of a variety of factors,
including (i) the nature and strength of the Companys
potential claims; (ii) defenses available to the officers
and directors; (iii) potential damages and resources
available to satisfy any damages award; (iv) the
Companys indemnification and advancement obligations under
its charter, bylaws, and individual agreements;
(v) potential expenses to the Company and potential
counterclaims arising from the pursuit of potential civil
claims; and (vi) business disruption and employee morale
issues.
Insurance
Lawsuits
On November 10, 2005, two of the Companys excess
directors and officers liability insurance providers filed a
complaint captioned Travelers Indemnity Company and ACE
American Insurance Company v. Bally Total Fitness Holding
Corporation; Holiday Universal, Inc. n/k/a Bally Total Fitness
of the Mid-Atlantic, Inc; George N. Aronoff; Paul Toback; John
W. Dwyer; Lee S. Hillman; Stephen C. Swid; James McAnally; J.
Kenneth Looloian; Liza M. Walsh; Annie P. Lewis, as
Executor of the Estate of Aubrey C. Lewis, Deceased; Theodore
Noncek;
F-41
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
Geoff Scheitlin; John H. Wildman; John W. Rogers, Jr.;
and Martin E. Franklin, Case No. 05C 6441, in the
United States District Court for the Northern District of
Illinois. The complaint alleged that financial information
included in the Companys applications for directors and
officers liability insurance in the
2002-2004
policy years was materially false and misleading. Plaintiff
requested the Court to declare two of the Companys 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 Companys
claims. Firemans Fund, another excess carrier, was allowed to
join in the case on January 4, 2006. Defendants filed
motions to dismiss or stay the proceedings on February 10,
2006. The motion to dismiss was granted on September 11,
2006.
On April 6, 2006, an additional excess directors and
officers liability insurance provider filed a complaint
captioned RLI Insurance Company v. Bally Total Fitness
Holding Corporation; Holiday Universal, Inc.;
George N. Aronoff; Paul Toback; John H. Dwyer; Lee S.
Hillman; Stephen C. Swid; James McAnally; J. Kenneth Looloian;
Liza M. Walsh; Annie P. Lewis, as Executor of the Estate of
Aubrey C. Lewis, Deceased; Theodore Noncek; Geoff Scheitlin;
John H. Wildman; John W. Rogers, Jr.; and Martin E.
Franklin, Case No. 06CH06892 in the circuit court of
Cook County, Illinois, County Department Chancery Division. The
complaint alleged that financial information included in the
Companys applications for directors and officers liability
insurance in the
2002-2003
policy year was materially false and misleading. Plaintiff
requested the Court to declare the Companys excess policy
for the year
2002-2003
void, voidable
and/or
subject to rescission. Defendants filed motions to dismiss or
stay the proceedings on July 10, 2006, and a motion for
advancement of defense costs and to compel interim funding on
October 20, 2006. On November 16, 2006, the Court
granted Defendants motion to dismiss.
On August 22, 2006, the Companys primary directors
and officers insurance provider for the policy years
2001-2002
and
2002-2003
filed a complaint captioned Great American Insurance
Company v. Bally Total Fitness Holding Corporation,
Case No. 06 C 4554 in the United States District Court
for the Northern District of Illinois. The complaint alleged
that financial information included in the Companys
applications for directors and officers liability insurance in
the
2001-2002
and
2002-2003
policy years was materially false and misleading. Plaintiff
requested the Court to declare the Companys primary
policies for those years void ab initio and rescinded,
and to award plaintiff all sums that plaintiff has paid pursuant
to an Interim Funding and Non-Waiver Agreement between the
parties, which consists of the $10,000,000 limit of the
2002-2003
primary policy and additional amounts paid pursuant to the
2001-2002
primary policy. The Company filed a motion to dismiss or stay
the proceedings on October 12, 2006. On April 26,
2007, the Court denied Defendants motion. On June 8,
2007, plaintiff filed a motion for summary judgment, which
motion remains pending. On June 11, 2007, the Company filed
its answer and counterclaims to Great Americans compliant
for rescission, as well as a third-party complaint against RLI
Insurance Company and other third party defendants. It is not
yet possible to determine the ultimate outcome of the insurance
litigation.
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 should not have a material adverse
effect on the financial condition or results of operations of
the Company. In addition, from time to time, customer complaints
are investigated by various governmental bodies. In the opinion
of management, none of these other complaints or investigations
currently pending should have a material adverse effect on our
financial condition or results of operations.
In addition, 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 operations.
However, we cannot assure you
F-42
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
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. See Item 1
Business Government Regulation and
Item 1A Risk Factors.
|
|
Note 19
|
Net Gain
on Sales of Land and Buildings
|
The Company recorded a gain of $901 on the sale of land and a
building relating to a club in Canada in March 2006, a $872 gain
on the sale of land and a building relating to a club in Ohio in
June 2006, and a $2,353 gain on the sale of land and a building
relating to a club in Georgia in July 2006. In addition, in
September 2006 the Company recorded a $142 loss on the sale of
assets related to a club in Tennessee.
|
|
Note 20
|
Sale/Leaseback
Transactions
|
The Company entered into three sale/leaseback transactions in
2006 involving eight owned properties. These transactions
involved the sale of land, buildings, and related building
improvements and the subsequent leaseback of the same property
over periods of ten and twenty years. The transactions generated
$22,500 of proceeds and resulted in deferred gains of $12,400
that will be amortized in proportion to the related gross rental
charged to expense over the respective lease term based upon
operating lease classification according to
SFAS No. 13, Accounting for Leases.
One of the three aforementioned transactions did not qualify for
sale/leaseback treatment as of December 31, 2006 and
therefore the transaction, which generated $8,919 of proceeds
and resulted in a deferred gain of $6,117, was recorded as a
financing according to SFAS No. 98,
Accounting for Leases. In the first quarter
of 2007, the Company amended this transaction and recorded the
sale and subsequent leaseback transaction.
|
|
Note 21
|
Discontinued
Operations
|
On January 20, 2006, pursuant to a sale agreement, the
Company completed the sale of twenty-five health clubs operated
primarily under the Crunch Fitness brand, along with
certain additional health clubs operating under the
Gorilla Sports and Pinnacle Fitness
brands located in San Francisco, California. The Company
received $45,000 in gross proceeds and recorded a net gain of
$38,375. As a result of this transaction, the Company has
presented the operating results of Crunch as a discontinued
operation for all periods presented. All previously reported
amounts from the statement of operations and balance sheet have
been reclassified in accordance with the reporting requirements
of SFAS No. 144.
The financial results of Crunch Fitness, included in
discontinued operations, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenue
|
|
$
|
4,687
|
|
|
$
|
67,192
|
|
|
$
|
73,490
|
|
Income (loss) from discontinued
operations before income taxes
|
|
|
(866
|
)
|
|
|
(3,980
|
)
|
|
|
93
|
|
Income tax provision
|
|
|
(6
|
)
|
|
|
(76
|
)
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
|
(872
|
)
|
|
|
(4,056
|
)
|
|
|
17
|
|
Gain on disposal of discontinued
operations
|
|
|
38,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from
discontinued operations
|
|
$
|
37,503
|
|
|
$
|
(4,056
|
)
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the gain on disposal is goodwill of approximately
$21,997 and trademarks and other amortizable intangible assets
with a net book value of approximately $4,603 as of the date of
sale.
F-43
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
|
|
Note 22
|
Employment
Agreement and Separation Agreement
|
On August 6, 2006, upon the recommendation of the
Compensation Committee, the Board of Directors (with
Mr. Toback recusing himself) approved a modification to the
employment agreement between the Company and Paul A. Toback, the
Companys then Chairman, President and Chief Executive
Officer (the Employment Agreement). The modification
increased by $900 the amount payable to Mr. Toback only in
the event he was terminated without Cause (as
defined in the Employment Agreement) on or prior to
February 7, 2008.
On August 11, 2006, the Company announced the separation of
Mr. Toback as Chairman, President and Chief Executive
Officer of the Company, effective August 11, 2006. Pursuant
to the terms of a separation agreement and general release dated
August 10, 2006 (the Separation Agreement),
among other things, on August 11, 2006 the Company paid
Mr. Toback approximately $3,800 and certain equity awards
previously granted to him immediately vested. The Company is
also obligated to provide Mr. Toback a tax
gross-up if
any amounts payable under the Separation Agreement or otherwise
are subject to excise tax under Section 4999 of the
Internal Revenue Code. In addition, Mr. Toback is entitled
to tax
gross-up
payments for income and employment taxes relating to the vesting
of his restricted stock. The terms of Mr. Tobacks
Separation Agreement were substantially equivalent to those set
forth in the Employment Agreement in the circumstances of
termination without Cause following a Change in Control (as
defined in the Employment Agreement). The Company recorded a
charge of approximately $5,400 in the third quarter of 2006 in
connection with the Separation Agreement.
|
|
Note 23
|
Adoption
of Staff Accounting Bulletin No. 108
|
The Company adopted the provisions of Staff Accounting
Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements, (SAB 108), in the
quarter ended December 31, 2006. SAB 108 requires the
utilization of a dual approach in assessing the quantitative
effects of financial misstatements. This dual approach includes
both an income statement method and a balance sheet method. Upon
adoption of SAB 108, the Company recorded a $1,264
cumulative adjustment, net of tax, to increase its opening
accumulated deficit balance at January 1, 2006. This
adjustment was to correct certain prior year misstatements that
had previously been considered immaterial under the
Companys method of evaluating
F-44
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
uncorrected misstatements to the 2005 and 2004 consolidated
financial statements, but were considered material under the
dual approach. The following table reflects the matters included
in this cumulative adjustment:
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
Description
|
|
Adjustment
|
|
|
Nature and Timing of the Differences
|
|
Other assets
|
|
$
|
3,251
|
|
|
The adjustment resulted from the
Companys capitalization policy with respect to group
exercise supplies, which were incorrectly capitalized.
|
Other assets
|
|
|
1,371
|
|
|
The adjustment resulted from
reporting an investment under the equity method, which should
have been reported under the consolidation method.
|
Property and equipment, net
|
|
|
(717
|
)
|
|
The adjustment resulted from the
Companys incorrect assignment of property to a club that
was subject to impairment in accordance with SFAS No. 144, and a
reconciling item between the subledger and general ledger that
required correction.
|
Deferred rent liability
|
|
|
165
|
|
|
The adjustment resulted from
recording landlord contributions on a cash basis, which should
have been recorded on the accrual basis.
|
Deferred revenues
|
|
|
(5,709
|
)
|
|
The adjustment resulted from the
incorrect assignment of data to pools used to determine the
required value of deferred revenue, which should have been
assigned to different pools.
|
Property and equipment, net
|
|
|
(133
|
)
|
|
The adjustment resulted from the
incorrect application of SFAS No. 13, Accounting for
Leases, which required the capitalization of the leased
asset and recognition of the related liability.
|
Accrued liabilities
|
|
|
161
|
|
|
The adjustment resulted from an
omission in the calculated liability for accrued vacation at
each balance sheet date.
|
Accrued liabilities
|
|
|
2,875
|
|
|
The adjustment resulted from an
omission in the calculated liability for repairs and maintenance
and general and administrative expenses at December 31, 2005.
|
|
|
|
|
|
|
|
Net effect
|
|
$
|
1,264
|
|
|
Increase to accumulated deficit as
of January 1, 2006
|
|
|
|
|
|
|
|
|
|
Note 24
|
Subsequent
Events
|
NYSE
Delisting
On May 2, 2007, the NYSE permanently suspended trading of
the Companys common stock and delisted the common stock in
accordance with Section 12 of the Exchange Act and the
rules promulgated thereunder as of June 8, 2007. Since
May 2, 2007, the Companys common stock has been
quoted on the Pink Sheets Electronic Quotation Service.
Forbearance
Agreements
On April 12, 2007, the Company entered into the Forbearance
Agreement under its New Facility. Under the Forbearance
Agreement, the Agent and the Lenders will forbear from
exercising any remedies under the New Facility as a result of
certain defaults. The Forbearance Agreement will terminate on
July 13, 2007, unless earlier in accordance with its terms.
The Forbearance Agreement required that the Company enter into
forbearance agreements with respect to defaults under our public
indentures with holders of at least a majority of the Senior
Notes and at least 75% of the Senior Subordinated Notes.
F-45
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
On May 14, 2007, the Company entered into the Senior Notes
Forbearance Agreement with holders representing over 80% of the
aggregate principal amount outstanding of the Senior Notes.
Pursuant to the Senior Notes Forbearance Agreement, holders of
the Senior Notes waived certain defaults under the Senior Notes
Indenture and agreed to forbear from exercising any related
remedies until July 13, 2007. Holders of the Senior Notes
also consented to amend certain provisions of the Senior Notes
Indenture in connection with the waiver of the defaults. The
Company paid cash consent fees of $279 to holders of the Senior
Notes that executed the Senior Notes Forbearance Agreement and
consented to the related amendments to the Senior Notes
Indenture.
On May 14, 2007, the Company also entered into the Senior
Subordinated Notes Forbearance Agreement with holders
representing over 80% of the aggregate principal amount
outstanding of the Senior Subordinated Notes. Pursuant to the
Senior Subordinated Notes Forbearance Agreement, holders of the
Senior Subordinated Notes waived certain defaults under the
Senior Subordinated Notes Indenture and agreed to forbear from
exercising any related remedies until July 13, 2007.
Holders of the Senior Subordinated Notes also consented to amend
certain provisions of the Senior Subordinated Notes Indenture in
connection with the waiver of the defaults. The Company did not
pay a consent fee to holders of the Senior Subordinated Notes in
connection with the Senior Subordinated Notes Forbearance
Agreement.
Impairment
Review
In February 2007, the Board of Directors approved a revised
five-year business plan for the years 2007 2011.
This event triggered an impairment review as of March 31,
2007. This review yielded an impairment charge that was deemed
immaterial to the Companys consolidated financial
statements.
Sale of
Canada Clubs
On April 24, 2007, the Companys subsidiaries, Bally
Matrix Fitness Centre Ltd., an Ontario, Canada corporation
(Matrix), and BTF Canada Corporation, an Ontario,
Canada corporation (BTF, and together with Matrix,
the Sellers), entered into an Asset Purchase
Agreement (the Purchase Agreement) pursuant to
which, among other things, the Sellers transferred five health
clubs and certain related assets located in greater metropolitan
Toronto in Ontario, Canada, to Extreme Fitness, Inc., an
Alberta, Canada unlimited liability corporation (Extreme
Fitness). In addition, the Sellers entered into an Asset
Purchase Agreement with Goodlife Fitness Centres Inc., an
Ontario, Canada corporation (Goodlife), to sell 10
additional health clubs located in greater metropolitan Toronto
in Ontario, Canada. The Sellers closed on the agreements with
Extreme Fitness and Goodlife on June 1, 2007, realizing net
cash proceeds of approximately $18 million. The completion
of the transactions resulted in the sale of substantially all of
the Companys Canadian operations.
The Company will record an estimated gain of approximately
$21,000 in the second quarter of 2007 as a result of the sales.
Management
Changes
Effective May 31, 2007, Barry R. Elson resigned as Acting
Chief Executive Officer of the Company. Mr. Elson will
facilitate a transition of his responsibilities by providing
consulting services to the Company for a
90-day
period through August 2007 and by continuing to serve as a
member of our Board of Directors (the Board). The
Board approved a $25 monthly stipend to Mr. Elson for
such consulting services. Mr. Elson will not receive
non-employee director fees during the period he is providing
consulting services. The Company is continuing to search for a
permanent Chief Executive Officer.
Effective May 4, 2007, the Board appointed Don R. Kornstein
to serve as Chief Restructuring Officer responsible for the
oversight and implementation of restructuring efforts and
exploration of strategic options for the Company.
Mr. Kornstein reports directly to the Companys Board,
of which he is also a member. The Board approved a
$50 monthly stipend to Mr. Kornstein in connection
with such services, in addition to the $50 monthly
F-46
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
stipend Mr. Kornstein currently receives for his service as
interim Chairman of the Board. Mr. Kornstein will not
receive non-employee director fees during the period he is
receiving either or both of these monthly stipends. Effective
June 1, 2007, Mr. Kornstein is no longer a member of
the Audit Committee. The Company does not have an employment
agreement with Mr. Kornstein.
Effective June 5, 2007, the Board of Directors appointed
Michael A. Feder to serve as Chief Operating Officer of the
Company. Mr. Feder will be responsible for oversight and
management of the Companys operations. Mr. Feder
succeeded former Chief Operating Officer John H. Wildman, who
remains with the Company as Senior Vice President, Sales and
Interim Chief Marketing Officer. On June 5, 2007, the
Company entered into an Agreement for Interim Management and
Restructuring Services (the APS Agreement) with AP
Services, LLC, an affiliate of AlixPartners, LLP
(AlixPartners), pursuant to which Mr. Feder
will serve as the Companys Chief Operating Officer.
On June 13, 2007, the Company entered into a Confidential
Settlement Agreement and Mutual General Release with James A.
McDonald, who had been employed by the Company as its Senior
Vice President and Chief Marketing Officer since May 2,
2005, providing for the termination of Mr. McDonalds
employment with the Company effective June 29, 2007.
Planned
Reorganization
As a result of the Companys deteriorating financial
condition and pending debt requirements, in November 2005 the
Company began considering strategic alternatives. To this end,
the Company engaged JP Morgan Securities, Inc. and The
Blackstone Group to assist the Company in commencing a process
to identify and evaluate strategic alternatives, including
without limitation a sale of substantially all of the
Companys assets. This process, which was conducted under
the direction of the Strategic Alternatives Committee of the
Board, did not result in a strategic transaction. The Company
subsequently retained Jefferies & Company in February
2007 as its financial advisors. In March 2007, certain holders
of our Senior Notes and Senior Subordinated Notes formed an Ad
Hoc Committee and the Company began discussions with them with
respect to de-leveraging its balance sheet. In April 2006, the
Company was required to make an interest payment of $14,812 on
its Senior Subordinated Notes. It elected not to make this
interest payment and an event of default occurred under the
Senior Subordinated Notes Indenture, which also triggered an
event of default under the Senior Notes Indenture.
On June 27, 2007, the Company commenced a solicitation of
votes on the Plan of Reorganization from holders of the Senior
Notes and Senior Subordinated Notes. If the Company receives the
requisite votes in favor of the Plan of Reorganization, it
intends to file a voluntary prepackaged petition for
reorganization under Chapter 11 of the U.S. Bankruptcy
Code in the Bankruptcy Court in late July 2007. Prior to
commencement of the consent solicitation, the Company entered
into a Restructuring Support Agreement with holders of a
majority of the Senior Notes and more than 80% of the Senior
Subordinated Notes, in which the consenting noteholders agreed
to vote in favor of the Plan of Reorganization, on the terms and
conditions specified therein. Under certain circumstances, the
Company may file for bankruptcy prior to the end of the
solicitation period. The Plan of Reorganization includes, among
other things, the following key terms:
|
|
|
|
|
New Facility. The New Facility would be
unimpaired. As a condition to effectiveness of the Plan of
Reorganization, the Company will amend and restate (with the
consent of the Lenders) or replace the New Facility with a
$292,000 secured credit facility agreement on terms no less
favorable than described in the Plan of Reorganization.
|
|
|
|
Senior Notes. The Company does not intend to
make the cash interest payment due on the Senior Notes on
July 15, 2007. The Plan of Reorganization would, if
approved, confirmed and consummated, result in the cancellation
and discharge of all claims relating to the Senior Notes. Each
holder of Senior Notes would
|
F-47
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
|
|
|
|
|
receive a pro rata share of new senior notes (the New
Senior Notes) in the principal amount of $247,337.5 with
an interest rate of 12-3/8%. The maturity and guarantees of the
New Senior Notes would be the same as for the Senior Notes. Upon
effectiveness of the Plan, holders of the Senior Notes would
receive a fee equal to 2% of the face value of their notes.
|
|
|
|
|
|
Senior Notes Indenture. The Senior Notes
Indenture would be amended to provide the holders with a
silent second lien on substantially all of the
Companys assets and the assets of its subsidiary
guarantors. Under the amended Senior Note Indenture, the Company
would have a permitted debt basket for the New Facility of
$292,000, with a reduction for proceeds of asset sales completed
after June 15, 2007 that are used to permanently pay down
indebtedness under the New Facility and are not reinvested in
replacement assets within 360 days after the applicable
asset sale. The amended Senior Note Indenture would also permit
the Company to issue, in addition to the Rights Offering Senior
Subordinated Notes, an additional $90,000 of
pay-in-kind
senior subordinated notes as described more fully under
Rights Offering below, after emergence from
bankruptcy.
|
|
|
|
Senior Subordinated Notes. Holders of Senior
Subordinated Notes would receive, in exchange for their claims,
New Subordinated Notes representing approximately 24.8% of their
claims, New Junior Subordinated Notes representing approximately
21.7% of their claims, and shares of common stock representing
100% of the equity in the reorganized company, subject to
reduction for common stock to be issued to holder of certain
other claims. The New Subordinated Notes would mature five years
and nine months after the effective date of the Plan of
Reorganization and would bear interest payable annually at
135/8%
per annum if paid in kind or 12% per annum if paid in cash, at
the Companys option, subject to a toggle covenant based on
specified cash EBITDA and minimum liquidity thresholds.
|
|
|
|
Rights Offering. In addition to the
consideration described above, holders of Senior Subordinated
Notes would receive non-detachable rights to participate in a
rights offering of Rights Offering Senior Subordinated Notes in
principal amount equal to approximately 27.9% of their claims,
or $90,000. The Rights Offering Senior Subordinated Notes would
rank senior to the New Subordinated Notes and New Junior
Subordinated Notes but otherwise have the same terms. Holders of
certain other claims against the Company will be given the
opportunity to participate in the rights offering, which, if
exercised, would generate incremental proceeds beyond the
$90,000 to be funded by electing Senior Subordinated Noteholders.
|
|
|
|
Subscription and Backstop Purchase
Agreement. On June 27, 2007, the Company
entered into a Subscription and Backstop Purchase Agreement with
certain holders of its Senior Subordinated Notes, who have
agreed to subscribe for their pro rata share of Rights Offering
Senior Subordinated Notes and to purchase any Rights Offering
Senior Subordinated Notes not subscribed for in the rights
offering. The Company has agreed to pay a fee to each backstop
provider in the amount of 4% of its backstop commitment, subject
to a rebate of approximately 80% of such amount if the Plan is
consummated.
|
|
|
|
Existing Equity. All existing equity would be
cancelled for no consideration.
|
The Company expects to continue normal club operations during
the restructuring process. If the Company files the Plan of
Reorganization, it would seek to obtain the necessary relief
from the Bankruptcy Court to pay the majority of its employee,
trade and certain other creditors in full and on time in
accordance with existing business terms. Upon effectiveness of
the Plan of Reorganization, the Company would, among other
things, amend its charter and by-laws and enter into a
stockholders agreement and a registration rights agreement
with holders of the Companys common shares. In addition,
the Companys new Board of Directors will consider adopting
a new management long-term incentive plan intended to provide
incentives to certain employees to continue their efforts to
foster and promote the Companys long-term growth
objectives.
F-48
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
If the Company does not receive the necessary votes in favor of
the Plan of Reorganization during the solicitation period, it
will evaluate other available options, including filing one or
more traditional, non-prepackaged Chapter 11 cases.
|
|
Note 25
|
Quarterly
Financial Data (Unaudited)
|
Quarterly financial data for the years ended December 31,
2006 and 2005 is as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Net revenues
|
|
$
|
255.2
|
|
|
$
|
253.8
|
|
|
$
|
254.6
|
|
|
$
|
259.6
|
|
Operating expenses
|
|
|
236.9
|
|
|
|
230.7
|
|
|
|
230.6
|
|
|
|
235.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
18.3
|
|
|
|
23.1
|
|
|
|
24.0
|
|
|
|
24.2
|
|
Net income (loss)
|
|
|
32.6
|
|
|
|
4.6
|
|
|
|
(0.7
|
)
|
|
|
1.6
|
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic per common share
|
|
|
0.87
|
|
|
|
0.14
|
|
|
|
(0.02
|
)
|
|
|
0.05
|
|
Diluted per common share
|
|
|
0.87
|
|
|
|
0.14
|
|
|
|
(0.02
|
)
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
September 30
|
|
|
December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Net revenues
|
|
$
|
248.4
|
|
|
$
|
247.9
|
|
|
$
|
300.8
|
|
|
$
|
242.5
|
|
Operating expenses
|
|
|
228.5
|
|
|
|
225.6
|
|
|
|
248.9
|
|
|
|
232.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
19.9
|
|
|
|
22.3
|
|
|
|
51.9
|
|
|
|
10.0
|
|
Net income (loss)
|
|
|
(5.7
|
)
|
|
|
(.2
|
)
|
|
|
16.9
|
|
|
|
(15.6
|
)
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic per common share
|
|
|
(0.14
|
)
|
|
|
(0.01
|
)
|
|
|
0.41
|
|
|
|
(0.42
|
)
|
Diluted per common share
|
|
|
(0.14
|
)
|
|
|
(0.01
|
)
|
|
|
0.41
|
|
|
|
(0.42
|
)
|
|
|
|
(a) |
|
The Companys 2006 year-end evaluation of membership
attrition trends resulted in an adjustment to reduce deferred
revenue in the fourth quarter of 2006 (increasing membership
revenue) by $71.0 million to adjust deferred revenue to
reflect current estimates of overall expected membership life. |
|
(b) |
|
Impairment charges recorded in the fourth quarter related to
long-lived assets and other intangible assets were
$39.7 million and $11.3 million for the years ended
December 31, 2006 and 2005, respectively. |
|
(c) |
|
In the fourth quarter of 2006, the Company recorded a
$7.6 million loss on debt extinguishment related to
obtaining the New Facility. |
|
(d) |
|
In the fourth quarter of 2006 and 2005, the Company recorded a
write-off of equipment at various clubs of $4.5 million and
$4.6 million, respectively. |
|
(e) |
|
The Company also recorded bonus payments in the fourth quarter
of 2006 and 2005 of $2.7 million and $4.0 million,
respectively. Prior to the fourth quarter, payment of these
bonuses was not considered probable. |
F-49
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
|
|
Note 26
|
Supplemental
Condensed Consolidating Financial Information
|
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 governing the Senior
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 Parent. Non-Guarantor subsidiaries include Canadian
operations and certain entities for real estate finance programs.
As defined in the indenture governing the Senior Notes,
guarantor subsidiaries include:
Bally Fitness Franchising, Inc.; Bally Franchise RSC, Inc.;
Bally Franchising Holdings, Inc.; Bally REFS West Hartford, LLC;
Bally Total Fitness Corporation; Bally Total Fitness
Franchising, Inc.; Bally Total Fitness International, Inc.;
Bally Total Fitness of Missouri, Inc.; Bally Total Fitness of
Toledo, Inc.; Bally Total Fitness of Connecticut Coast, Inc.;
Bally Total Fitness of Connecticut Valley, Inc.; 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.; Bally Total
Fitness of Upstate New York, Inc.; Bally Total Fitness of
Colorado, Inc.; Bally Total Fitness of the Southeast, Inc.;
Holiday/Southeast Holding Corp.; Bally Total Fitness of
California, Inc.; Bally Total Fitness of the Mid-Atlantic, Inc.;
Bally Total Fitness of Greater New York, Inc.; Jack
La Lanne Holding Corp.; Bally Sports Clubs, Inc.; New
Fitness Holding Co., Inc.; Nycon Holding Co., Inc.; Bally Total
Fitness of Philadelphia, Inc.; Bally Total Fitness of Rhode
Island, Inc.; Bally Total Fitness of the Midwest, Inc.; Bally
Total Fitness of Minnesota, Inc.; BTF/CFI, Inc. (f/k/a Crunch
Fitness International, Inc.); Tidelands Holiday Health Clubs,
Inc.; and U.S. Health, Inc.
F-50
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
The following tables present the condensed consolidating balance
sheets at December 31, 2006 and December 31, 2005, and
the condensed consolidating statements of operations and the
condensed consolidating statements of cash flows for the years
ended December 31, 2006, 2005, and 2004. The Eliminations
column reflects the elimination of investments in subsidiaries
and intercompany balances and transactions.
CONDENSED
CONSOLIDATING BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
|
|
|
$
|
31,911
|
|
|
$
|
2,888
|
|
|
$
|
|
|
|
$
|
34,799
|
|
Other current assets
|
|
|
|
|
|
|
39,646
|
|
|
|
1,888
|
|
|
|
|
|
|
|
41,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
71,557
|
|
|
|
4,776
|
|
|
|
|
|
|
|
76,333
|
|
Property and equipment, net
|
|
|
|
|
|
|
234,689
|
|
|
|
13,108
|
|
|
|
|
|
|
|
247,797
|
|
Goodwill, net
|
|
|
|
|
|
|
19,734
|
|
|
|
|
|
|
|
|
|
|
|
19,734
|
|
Trademarks, net
|
|
|
6,507
|
|
|
|
|
|
|
|
247
|
|
|
|
|
|
|
|
6,754
|
|
Intangible assets, net
|
|
|
|
|
|
|
413
|
|
|
|
315
|
|
|
|
|
|
|
|
728
|
|
Investment in and advances to
subsidiaries
|
|
|
(662,464
|
)
|
|
|
221,315
|
|
|
|
|
|
|
|
441,149
|
|
|
|
|
|
Other assets
|
|
|
27,898
|
|
|
|
14,540
|
|
|
|
2,987
|
|
|
|
|
|
|
|
45,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(628,059
|
)
|
|
$
|
562,248
|
|
|
$
|
21,433
|
|
|
$
|
441,149
|
|
|
$
|
396,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
|
$
|
48,963
|
|
|
$
|
234
|
|
|
$
|
|
|
|
$
|
49,197
|
|
Income taxes payable
|
|
|
|
|
|
|
1,284
|
|
|
|
146
|
|
|
|
|
|
|
|
1,430
|
|
Accrued liabilities
|
|
|
21,957
|
|
|
|
77,759
|
|
|
|
15,987
|
|
|
|
|
|
|
|
115,703
|
|
Current maturities of long-term
debt
|
|
|
511,205
|
|
|
|
658
|
|
|
|
2,050
|
|
|
|
|
|
|
|
513,913
|
|
Deferred revenues
|
|
|
|
|
|
|
275,099
|
|
|
|
4,456
|
|
|
|
|
|
|
|
279,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
533,162
|
|
|
|
403,763
|
|
|
|
22,873
|
|
|
|
|
|
|
|
959,798
|
|
Long-term debt, less current
maturities
|
|
|
239,201
|
|
|
|
5,373
|
|
|
|
2,860
|
|
|
|
|
|
|
|
247,434
|
|
Net affiliate payable
|
|
|
|
|
|
|
430,265
|
|
|
|
57,797
|
|
|
|
(488,062
|
)
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
126,526
|
|
|
|
6,048
|
|
|
|
|
|
|
|
132,574
|
|
Deferred revenues
|
|
|
|
|
|
|
444,839
|
|
|
|
12,548
|
|
|
|
|
|
|
|
457,387
|
|
Stockholders deficit
|
|
|
(1,400,422
|
)
|
|
|
(848,518
|
)
|
|
|
(80,693
|
)
|
|
|
929,211
|
|
|
|
(1,400,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(628,059
|
)
|
|
$
|
562,248
|
|
|
$
|
21,433
|
|
|
$
|
441,149
|
|
|
$
|
396,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-51
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
CONDENSED
CONSOLIDATING BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
|
|
|
$
|
16,238
|
|
|
$
|
1,216
|
|
|
$
|
|
|
|
$
|
17,454
|
|
Other current assets
|
|
|
|
|
|
|
40,487
|
|
|
|
1,415
|
|
|
|
|
|
|
|
41,902
|
|
Current assets held for sale
|
|
|
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
57,067
|
|
|
|
2,631
|
|
|
|
|
|
|
|
59,698
|
|
Property and equipment, net
|
|
|
|
|
|
|
294,888
|
|
|
|
19,782
|
|
|
|
|
|
|
|
314,670
|
|
Goodwill, net
|
|
|
|
|
|
|
19,734
|
|
|
|
|
|
|
|
|
|
|
|
19,734
|
|
Trademarks, net
|
|
|
6,507
|
|
|
|
|
|
|
|
405
|
|
|
|
|
|
|
|
6,912
|
|
Intangible assets, net
|
|
|
|
|
|
|
2,333
|
|
|
|
546
|
|
|
|
|
|
|
|
2,879
|
|
Investment in and advances to
subsidiaries
|
|
|
(724,893
|
)
|
|
|
221,315
|
|
|
|
|
|
|
|
503,578
|
|
|
|
|
|
Other assets
|
|
|
29,265
|
|
|
|
18,072
|
|
|
|
3,975
|
|
|
|
|
|
|
|
51,312
|
|
Non-current assets held for sale
|
|
|
|
|
|
|
39,894
|
|
|
|
|
|
|
|
|
|
|
|
39,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(689,121
|
)
|
|
$
|
653,303
|
|
|
$
|
27,339
|
|
|
$
|
503,578
|
|
|
$
|
495,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
|
$
|
57,724
|
|
|
$
|
108
|
|
|
$
|
|
|
|
$
|
57,832
|
|
Income taxes payable
|
|
|
|
|
|
|
1,641
|
|
|
|
56
|
|
|
|
|
|
|
|
1,697
|
|
Accrued and other liabilities
|
|
|
22,407
|
|
|
|
71,279
|
|
|
|
6,267
|
|
|
|
|
|
|
|
99,953
|
|
Current maturities of long-term
debt
|
|
|
6,594
|
|
|
|
485
|
|
|
|
5,939
|
|
|
|
|
|
|
|
13,018
|
|
Deferred revenues
|
|
|
|
|
|
|
293,116
|
|
|
|
6,325
|
|
|
|
|
|
|
|
299,441
|
|
Current liabilities associated
with assets held for sale
|
|
|
|
|
|
|
7,764
|
|
|
|
|
|
|
|
|
|
|
|
7,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
29,001
|
|
|
|
432,009
|
|
|
|
18,695
|
|
|
|
|
|
|
|
479,705
|
|
Long-term debt, less current
maturities
|
|
|
745,564
|
|
|
|
5,182
|
|
|
|
5,558
|
|
|
|
|
|
|
|
756,304
|
|
Net affiliate payable
|
|
|
|
|
|
|
514,890
|
|
|
|
61,567
|
|
|
|
(576,457
|
)
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
119,753
|
|
|
|
8,578
|
|
|
|
|
|
|
|
128,331
|
|
Deferred revenues
|
|
|
|
|
|
|
554,722
|
|
|
|
11,747
|
|
|
|
|
|
|
|
566,469
|
|
Non-current liabilities associated
with assets held for sale
|
|
|
|
|
|
|
27,976
|
|
|
|
|
|
|
|
|
|
|
|
27,976
|
|
Stockholders deficit
|
|
|
(1,463,686
|
)
|
|
|
(1,001,229
|
)
|
|
|
(78,806
|
)
|
|
|
1,080,035
|
|
|
|
(1,463,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(689,121
|
)
|
|
$
|
653,303
|
|
|
$
|
27,339
|
|
|
$
|
503,578
|
|
|
$
|
495,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-52
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
$
|
|
|
|
$
|
962,728
|
|
|
$
|
39,488
|
|
|
$
|
|
|
|
$
|
1,002,216
|
|
Retail products
|
|
|
|
|
|
|
41,459
|
|
|
|
1,112
|
|
|
|
|
|
|
|
42,571
|
|
Miscellaneous
|
|
|
|
|
|
|
12,778
|
|
|
|
1,486
|
|
|
|
|
|
|
|
14,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,016,965
|
|
|
|
42,086
|
|
|
|
|
|
|
|
1,059,051
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
|
|
|
|
|
636,228
|
|
|
|
27,075
|
|
|
|
|
|
|
|
663,303
|
|
Retail products
|
|
|
|
|
|
|
39,718
|
|
|
|
1,163
|
|
|
|
|
|
|
|
40,881
|
|
Marketing and advertising
|
|
|
|
|
|
|
57,154
|
|
|
|
1,031
|
|
|
|
|
|
|
|
58,185
|
|
General and administrative
|
|
|
10,305
|
|
|
|
79,796
|
|
|
|
2,522
|
|
|
|
|
|
|
|
92,623
|
|
Gain on sales of land and buildings
|
|
|
|
|
|
|
(3,083
|
)
|
|
|
(901
|
)
|
|
|
|
|
|
|
(3,984
|
)
|
Impairment of goodwill and other
intangibles
|
|
|
|
|
|
|
1,410
|
|
|
|
52
|
|
|
|
|
|
|
|
1,462
|
|
Asset impairment charges
|
|
|
|
|
|
|
37,036
|
|
|
|
1,222
|
|
|
|
|
|
|
|
38,258
|
|
Depreciation and amortization
|
|
|
|
|
|
|
51,744
|
|
|
|
2,465
|
|
|
|
|
|
|
|
54,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,305
|
|
|
|
900,003
|
|
|
|
34,629
|
|
|
|
|
|
|
|
944,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(10,305
|
)
|
|
|
116,962
|
|
|
|
7,457
|
|
|
|
|
|
|
|
114,114
|
|
Equity in income from continuing
operations of subsidiaries
|
|
|
119,964
|
|
|
|
|
|
|
|
|
|
|
|
(119,964
|
)
|
|
|
|
|
Interest expense
|
|
|
(98,724
|
)
|
|
|
(2,160
|
)
|
|
|
(3,546
|
)
|
|
|
2,571
|
|
|
|
(101,859
|
)
|
Foreign exchange gain
|
|
|
|
|
|
|
715
|
|
|
|
410
|
|
|
|
|
|
|
|
1,125
|
|
Loss on debt extinguishment
|
|
|
(7,677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,677
|
)
|
Other, net
|
|
|
2,306
|
|
|
|
450
|
|
|
|
531
|
|
|
|
(2,571
|
)
|
|
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,869
|
|
|
|
(995
|
)
|
|
|
(2,605
|
)
|
|
|
(119,964
|
)
|
|
|
(107,695
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
5,564
|
|
|
|
115,967
|
|
|
|
4,852
|
|
|
|
(119,964
|
)
|
|
|
6,419
|
|
Income tax provision
|
|
|
|
|
|
|
(759
|
)
|
|
|
(96
|
)
|
|
|
|
|
|
|
(855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
5,564
|
|
|
|
115,208
|
|
|
|
4,756
|
|
|
|
(119,964
|
)
|
|
|
5,564
|
|
Gain from discontinued operations
|
|
|
37,503
|
*
|
|
|
37,503
|
|
|
|
|
|
|
|
(37,503
|
)
|
|
|
37,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
43,067
|
|
|
$
|
152,711
|
|
|
$
|
4,756
|
|
|
$
|
(157,467
|
)
|
|
$
|
43,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Equity in amounts from subsidiaries related to discontinued
operations. |
F-53
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
$
|
|
|
|
$
|
903,260
|
|
|
$
|
38,296
|
|
|
$
|
|
|
|
$
|
941,556
|
|
Retail products
|
|
|
|
|
|
|
45,785
|
|
|
|
1,374
|
|
|
|
|
|
|
|
47,159
|
|
Miscellaneous
|
|
|
|
|
|
|
13,322
|
|
|
|
1,804
|
|
|
|
|
|
|
|
15,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
962,367
|
|
|
|
41,474
|
|
|
|
|
|
|
|
1,003,841
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
|
|
|
|
|
635,887
|
|
|
|
29,149
|
|
|
|
|
|
|
|
665,036
|
|
Retail products
|
|
|
|
|
|
|
48,455
|
|
|
|
1,382
|
|
|
|
|
|
|
|
49,837
|
|
Marketing and advertising
|
|
|
|
|
|
|
52,402
|
|
|
|
1,147
|
|
|
|
|
|
|
|
53,549
|
|
General and administrative
|
|
|
4,470
|
|
|
|
80,121
|
|
|
|
1,439
|
|
|
|
|
|
|
|
86,030
|
|
Impairment of goodwill and other
intangibles
|
|
|
|
|
|
|
858
|
|
|
|
362
|
|
|
|
|
|
|
|
1,220
|
|
Asset impairment charges
|
|
|
|
|
|
|
7,657
|
|
|
|
2,458
|
|
|
|
|
|
|
|
10,115
|
|
Depreciation and amortization
|
|
|
|
|
|
|
56,411
|
|
|
|
2,004
|
|
|
|
|
|
|
|
58,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,470
|
|
|
|
881,791
|
|
|
|
37,941
|
|
|
|
|
|
|
|
924,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(4,470
|
)
|
|
|
80,576
|
|
|
|
3,533
|
|
|
|
|
|
|
|
79,639
|
|
Equity in income (loss) from
continuing operations of subsidiaries
|
|
|
79,121
|
|
|
|
|
|
|
|
|
|
|
|
(79,121
|
)
|
|
|
|
|
Interest expense
|
|
|
(82,161
|
)
|
|
|
(1,618
|
)
|
|
|
(3,698
|
)
|
|
|
2,148
|
|
|
|
(85,329
|
)
|
Foreign exchange gain (loss)
|
|
|
|
|
|
|
2,198
|
|
|
|
(1,329
|
)
|
|
|
|
|
|
|
869
|
|
Other, net
|
|
|
1,952
|
|
|
|
326
|
|
|
|
(41
|
)
|
|
|
(2,148
|
)
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,088
|
)
|
|
|
906
|
|
|
|
(5,068
|
)
|
|
|
(79,121
|
)
|
|
|
(84,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
|
|
|
(5,558
|
)
|
|
|
81,482
|
|
|
|
(1,535
|
)
|
|
|
(79,121
|
)
|
|
|
(4,732
|
)
|
Income tax provision
|
|
|
|
|
|
|
(787
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
(826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
(5,558
|
)
|
|
|
80,695
|
|
|
|
(1,574
|
)
|
|
|
(79,121
|
)
|
|
|
(5,558
|
)
|
Loss from discontinued operations
|
|
|
(4,056
|
)*
|
|
|
(4,056
|
)
|
|
|
|
|
|
|
4,056
|
|
|
|
(4,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(9,614
|
)
|
|
$
|
76,639
|
|
|
$
|
(1,574
|
)
|
|
$
|
(75,065
|
)
|
|
$
|
(9,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Equity in amounts from subsidiaries related to discontinued
operations. |
F-54
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
$
|
|
|
|
$
|
870,317
|
|
|
$
|
37,464
|
|
|
$
|
|
|
|
$
|
907,781
|
|
Retail products
|
|
|
|
|
|
|
48,194
|
|
|
|
1,482
|
|
|
|
|
|
|
|
49,676
|
|
Miscellaneous
|
|
|
|
|
|
|
15,269
|
|
|
|
1,772
|
|
|
|
|
|
|
|
17,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
933,780
|
|
|
|
40,718
|
|
|
|
|
|
|
|
974,498
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership services
|
|
|
|
|
|
|
641,131
|
|
|
|
29,606
|
|
|
|
|
|
|
|
670,737
|
|
Retail products
|
|
|
|
|
|
|
50,857
|
|
|
|
1,333
|
|
|
|
|
|
|
|
52,190
|
|
Marketing and advertising
|
|
|
|
|
|
|
58,602
|
|
|
|
1,255
|
|
|
|
|
|
|
|
59,857
|
|
General and administrative
|
|
|
3,828
|
|
|
|
69,829
|
|
|
|
2,320
|
|
|
|
|
|
|
|
75,977
|
|
Impairment of goodwill and other
intangibles
|
|
|
|
|
|
|
122
|
|
|
|
112
|
|
|
|
|
|
|
|
234
|
|
Asset impairment charges
|
|
|
|
|
|
|
11,209
|
|
|
|
281
|
|
|
|
|
|
|
|
11,490
|
|
Depreciation and amortization
|
|
|
|
|
|
|
63,761
|
|
|
|
2,129
|
|
|
|
|
|
|
|
65,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,828
|
|
|
|
895,511
|
|
|
|
37,036
|
|
|
|
|
|
|
|
936,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(3,828
|
)
|
|
|
38,269
|
|
|
|
3,682
|
|
|
|
|
|
|
|
38,123
|
|
Equity in income (loss) from
continuing operations of subsidiaries
|
|
|
30,769
|
|
|
|
|
|
|
|
|
|
|
|
(30,769
|
)
|
|
|
|
|
Interest expense
|
|
|
(59,582
|
)
|
|
|
(5,545
|
)
|
|
|
(8,728
|
)
|
|
|
6,654
|
|
|
|
(67,201
|
)
|
Foreign exchange gain
|
|
|
|
|
|
|
2,907
|
|
|
|
(1,329
|
)
|
|
|
|
|
|
|
1,578
|
|
Other, net
|
|
|
2,368
|
|
|
|
80
|
|
|
|
2,208
|
|
|
|
(6,654
|
)
|
|
|
(1,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,445
|
)
|
|
|
(2,558
|
)
|
|
|
(7,849
|
)
|
|
|
(30,769
|
)
|
|
|
(67,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
|
|
|
(30,273
|
)
|
|
|
35,711
|
|
|
|
(4,167
|
)
|
|
|
(30,769
|
)
|
|
|
(29,498
|
)
|
Income tax provision
|
|
|
|
|
|
|
(775
|
)
|
|
|
|
|
|
|
|
|
|
|
(775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
(30,273
|
)
|
|
|
34,936
|
|
|
|
(4,167
|
)
|
|
|
(30,769
|
)
|
|
|
(30,273
|
)
|
Income from discontinued operations
|
|
|
17
|
*
|
|
|
17
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(30,256
|
)
|
|
$
|
34,953
|
|
|
$
|
(4,167
|
)
|
|
$
|
(30,786
|
)
|
|
$
|
(30,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Equity in amounts from subsidiaries related to discontinued
operations. |
F-55
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
43,067
|
|
|
$
|
152,711
|
|
|
$
|
4,756
|
|
|
$
|
(157,467
|
)
|
|
$
|
43,067
|
|
Adjustments to reconcile to cash
provided
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization,
including amortization included in interest expense
|
|
|
20,956
|
|
|
|
51,885
|
|
|
|
2,602
|
|
|
|
|
|
|
|
75,443
|
|
Changes in operating assets and
liabilities
|
|
|
(450
|
)
|
|
|
(137,413
|
)
|
|
|
2,228
|
|
|
|
|
|
|
|
(135,635
|
)
|
Changes in net affiliate balances
|
|
|
|
|
|
|
(83,621
|
)
|
|
|
(3,510
|
)
|
|
|
87,131
|
|
|
|
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
38,446
|
|
|
|
1,274
|
|
|
|
|
|
|
|
39,720
|
|
Other, net
|
|
|
12,318
|
|
|
|
(38,696
|
)
|
|
|
(502
|
)
|
|
|
|
|
|
|
(26,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
operating activities
|
|
|
75,891
|
|
|
|
(16,688
|
)
|
|
|
6,848
|
|
|
|
(70,336
|
)
|
|
|
(4,285
|
)
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and construction of
property and equipment
|
|
|
|
|
|
|
(38,905
|
)
|
|
|
(687
|
)
|
|
|
|
|
|
|
(39,592
|
)
|
Proceeds from sale of discontinued
operations
|
|
|
|
|
|
|
45,490
|
|
|
|
|
|
|
|
|
|
|
|
45,490
|
|
Proceeds from sales and disposals
of property
|
|
|
|
|
|
|
20,922
|
|
|
|
1,328
|
|
|
|
|
|
|
|
22,250
|
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
(96
|
)
|
|
|
|
|
|
|
(96
|
)
|
Investment in and advances to
subsidiaries
|
|
|
(70,336
|
)
|
|
|
|
|
|
|
|
|
|
|
70,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
investing activities
|
|
|
(70,336
|
)
|
|
|
27,507
|
|
|
|
545
|
|
|
|
70,336
|
|
|
|
28,052
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayments under revolving
credit agreement
|
|
|
(35,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,000
|
)
|
Borrowings of other long-term debt
|
|
|
210,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
210,900
|
|
Repayments of other long-term debt
|
|
|
(177,652
|
)
|
|
|
(6,615
|
)
|
|
|
(5,995
|
)
|
|
|
|
|
|
|
(190,262
|
)
|
Proceeds from financing of
properties
|
|
|
|
|
|
|
11,469
|
|
|
|
|
|
|
|
|
|
|
|
11,469
|
|
Debt issuance and refinancing costs
|
|
|
(9,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,680
|
)
|
Proceeds from sale of stock
|
|
|
5,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,600
|
|
Stock purchase and options plans
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
financing activities
|
|
|
(5,555
|
)
|
|
|
4,854
|
|
|
|
(5,995
|
)
|
|
|
|
|
|
|
(6,696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash
|
|
|
|
|
|
|
15,673
|
|
|
|
1,398
|
|
|
|
|
|
|
|
17,071
|
|
Effect of exchange rate changes on
cash balances
|
|
|
|
|
|
|
|
|
|
|
274
|
|
|
|
|
|
|
|
274
|
|
Cash, beginning of year
|
|
|
|
|
|
|
16,238
|
|
|
|
1,216
|
|
|
|
|
|
|
|
17,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
|
|
|
$
|
31,911
|
|
|
$
|
2,888
|
|
|
$
|
|
|
|
$
|
34,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-56
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(9,614
|
)
|
|
$
|
76,639
|
|
|
$
|
(1,574
|
)
|
|
$
|
(75,065
|
)
|
|
$
|
(9,614
|
)
|
Adjustments to reconcile to cash
provided
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization,
including amortization included in interest expense
|
|
|
3,250
|
|
|
|
66,004
|
|
|
|
2,004
|
|
|
|
|
|
|
|
71,258
|
|
Changes in operating assets and
liabilities
|
|
|
6,894
|
|
|
|
(60,608
|
)
|
|
|
1,620
|
|
|
|
|
|
|
|
(52,094
|
)
|
Changes in net affiliate balances
|
|
|
|
|
|
|
(54,591
|
)
|
|
|
(1,260
|
)
|
|
|
55,851
|
|
|
|
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
8,515
|
|
|
|
2,820
|
|
|
|
|
|
|
|
11,335
|
|
Other, net
|
|
|
5,073
|
|
|
|
3,114
|
|
|
|
1,629
|
|
|
|
|
|
|
|
9,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
|
5,603
|
|
|
|
39,073
|
|
|
|
5,239
|
|
|
|
(19,214
|
)
|
|
|
30,701
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and construction of
property and equipment
|
|
|
|
|
|
|
(37,385
|
)
|
|
|
(469
|
)
|
|
|
|
|
|
|
(37,854
|
)
|
Other, net
|
|
|
|
|
|
|
2,043
|
|
|
|
(394
|
)
|
|
|
|
|
|
|
1,649
|
|
Investment in and advances to
subsidiaries
|
|
|
(19,214
|
)
|
|
|
|
|
|
|
|
|
|
|
19,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(19,214
|
)
|
|
|
(35,342
|
)
|
|
|
(863
|
)
|
|
|
19,214
|
|
|
|
(36,205
|
)
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings under revolving
credit agreement
|
|
|
33,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,250
|
|
Net repayments of other long-term
debt
|
|
|
(11,369
|
)
|
|
|
(6,219
|
)
|
|
|
(3,993
|
)
|
|
|
|
|
|
|
(21,581
|
)
|
Debt issuance and refinancing costs
|
|
|
(11,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,307
|
)
|
Proceeds from sale of stock
|
|
|
1,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,433
|
|
Stock purchase and options plans
|
|
|
1,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
financing activities
|
|
|
13,611
|
|
|
|
(6,219
|
)
|
|
|
(3,993
|
)
|
|
|
|
|
|
|
3,399
|
|
Increase (decrease) in cash
|
|
|
|
|
|
|
(2,488
|
)
|
|
|
383
|
|
|
|
|
|
|
|
(2,105
|
)
|
Effect of exchange rate changes on
cash balances
|
|
|
|
|
|
|
|
|
|
|
382
|
|
|
|
|
|
|
|
382
|
|
Cash, beginning of year
|
|
|
|
|
|
|
18,726
|
|
|
|
451
|
|
|
|
|
|
|
|
19,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
|
|
|
$
|
16,238
|
|
|
$
|
1,216
|
|
|
$
|
|
|
|
$
|
17,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-57
BALLY
TOTAL FITNESS HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(All dollar amounts in thousands, except share data)
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(30,256
|
)
|
|
$
|
34,953
|
|
|
$
|
(4,167
|
)
|
|
$
|
(30,786
|
)
|
|
$
|
(30,256
|
)
|
Adjustments to reconcile to cash
provided
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization,
including amortization included in interest expense
|
|
|
1,149
|
|
|
|
68,939
|
|
|
|
3,110
|
|
|
|
|
|
|
|
73,198
|
|
Changes in operating assets and
liabilities
|
|
|
3,077
|
|
|
|
(37,211
|
)
|
|
|
9,661
|
|
|
|
|
|
|
|
(24,473
|
)
|
Changes in net affiliate balances
|
|
|
|
|
|
|
(13,850
|
)
|
|
|
93,654
|
|
|
|
(79,804
|
)
|
|
|
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
14,784
|
|
|
|
393
|
|
|
|
|
|
|
|
15,177
|
|
Other, net
|
|
|
1,122
|
|
|
|
(1,562
|
)
|
|
|
2,918
|
|
|
|
|
|
|
|
2,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
operating activities
|
|
|
(24,908
|
)
|
|
|
66,053
|
|
|
|
105,569
|
|
|
|
(110,590
|
)
|
|
|
36,124
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and construction of
property and equipment
|
|
|
|
|
|
|
(48,910
|
)
|
|
|
(830
|
)
|
|
|
|
|
|
|
(49,740
|
)
|
Acquisitions of businesses, net of
cash acquired and other
|
|
|
|
|
|
|
(501
|
)
|
|
|
|
|
|
|
|
|
|
|
(501
|
)
|
Investment in and advances to
subsidiaries
|
|
|
(110,590
|
)
|
|
|
|
|
|
|
|
|
|
|
110,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(110,590
|
)
|
|
|
(49,411
|
)
|
|
|
(830
|
)
|
|
|
110,590
|
|
|
|
(50,241
|
)
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayments under revolving
credit agreement
|
|
|
154,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154,000
|
|
Net repayments of other long-term
debt
|
|
|
(14,246
|
)
|
|
|
(11,310
|
)
|
|
|
(104,965
|
)
|
|
|
|
|
|
|
(130,521
|
)
|
Debt issuance and refinancing costs
|
|
|
(4,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,862
|
)
|
Stock purchase and options plans
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
financing activities
|
|
|
135,498
|
|
|
|
(11,310
|
)
|
|
|
(104,965
|
)
|
|
|
|
|
|
|
19,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
|
|
|
|
|
5,332
|
|
|
|
(226
|
)
|
|
|
|
|
|
|
5,106
|
|
Effect of exchange rate changes on
cash balances
|
|
|
|
|
|
|
|
|
|
|
431
|
|
|
|
|
|
|
|
431
|
|
Cash, beginning of year
|
|
|
|
|
|
|
13,394
|
|
|
|
246
|
|
|
|
|
|
|
|
13,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
|
|
|
$
|
18,726
|
|
|
$
|
451
|
|
|
$
|
|
|
|
$
|
19,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-58
EXHIBIT INDEX
Bally
Total Fitness Holding Corporation
Form 10-K
For the
Year Ended December 31, 2006
|
|
|
|
|
No.
|
|
Description
|
|
|
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 Companys
Current Report on Form 8-K, file no. 001-13997, dated September
19, 2005).
|
|
2
|
.2
|
|
First Amendment to Purchase
Agreement dated December 19, 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 2.1 to the
Companys Current Report on Form 8-K, file no. 001-13997,
dated December 22, 2005).
|
|
2
|
.3
|
|
Amendment No. 2 to the Purchase
Agreement, dated January 20, 2006, among Bally Total Fitness
Holding Corporation, Bally Total Fitness Corporation, Crunch
Fitness International, Inc., Health & Tennis Corporation of
New York, Bally Total Fitness of Greater New York, Inc. (f/k/a
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 Chicago, LLC, Crunch CFI, LLC, AGT Crunch
Chicago LLC and AGT Crunch Acquisition LLC (incorporated by
reference to Exhibit 2.1 to the Companys Current Report on
Form 8-K, file no. 001-13997, dated January 20, 2006).
|
|
3
|
.1
|
|
Restated Certificate of
Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Companys registration statement on Form
S-1 filed January 3, 1996, registration no. 33-99844).
|
|
3
|
.2
|
|
Amended and Restated By-Laws of
the Company (incorporated by reference to Exhibit 3.2 to the
Companys Current Report on Form 8-K, file no. 001-13997,
dated May 27, 2005).
|
|
3
|
.3
|
|
Certificate of Designations for
Series B Junior Participating Preferred Stock of Bally Total
Fitness Holding Corporation (incorporated by reference to
Exhibit 3.3 to the Companys Current Report on Form 8-K,
file no. 001-13997, dated October 18, 2005).
|
|
3
|
.4
|
|
Amendment to the Bylaws of Bally
Total Fitness Holding Corporation (incorporated by reference to
Exhibit 3.2 to the Companys Current Report on Form 8-K,
file no. 001-13997, filed August 11, 2006).
|
|
4
|
.1
|
|
Indenture dated as of October 7,
1997, between the Company and First Trust National Association,
as trustee for the Registrants
97/8% Senior
Subordinated Notes due 2007, including the form of Old Note and
form of New Note (incorporated by reference to Exhibit 4.1 to
the Companys registration statement on Form S-4 filed
October 31, 1997, registration no. 333-39195).
|
|
4
|
.2
|
|
Warrant Agreement dated as of
December 29, 1995, between Bally Entertainment Corporation and
the Company (incorporated by reference to Exhibit 4.3 to the
Companys registration statement on Form S-1 filed January
3, 1996, registration no. 33-99844).
|
|
4
|
.3
|
|
First Amendment dated as of
January 21, 2003, to Warrant Agreement dated as of December 29,
1995 between the Company and Bally Entertainment Corporation
(incorporated by reference to Exhibit 4.3 to the Companys
registration statement on Form S-3 filed April 30, 2003,
registration no. 333-104877).
|
|
4
|
.4
|
|
Registration Rights Agreement
dated as of December 29, 1995, between Bally Entertainment
Corporation and the Company (incorporated by reference to
Exhibit 4.2 to the Companys registration statement on Form
S-1 filed January 3, 1996, registration no. 33-99844).
|
|
4
|
.5
|
|
Registration Rights Agreement
dated as of January 21, 2003, between the Company and Lee S.
Hillman (incorporated by reference to Exhibit 4.4 to the
Companys registration statement on Form S-3 filed
April 30, 2003, registration no. 333-104877).
|
E-1
|
|
|
|
|
No.
|
|
Description
|
|
|
4
|
.6
|
|
Indenture dated as of December 16,
1998, between the Company and U.S. Bank Trust National
Association, as trustee for the Registrants
97/8% Senior
Subordinated Notes due 2007, including the form of Series C
Notes and form of Series D Notes (incorporated by reference to
Exhibit 4.9 to the Companys Annual Report on Form 10-K,
file no. 0-27478, for the fiscal year ended December 31, 1998).
|
|
4
|
.7
|
|
Supplemental Indenture dated as of
December 7, 2004, among Bally Total Fitness Holding Corporation
and U.S. Bank National Association, as trustee for the
Registrants
97/8% Senior
Subordinated Notes due 2007 (incorporated by reference to
Exhibit 4.1 to the Companys Current Report on Form 8-K,
file
no. 001-13997,
dated December 7, 2004).
|
|
4
|
.8
|
|
Supplemental Indenture dated as of
September 2, 2005, among Bally Total Fitness Holding Corporation
and U.S. Bank National Association, as trustee for the
Registrants
97/8% Senior
Subordinated Notes due 2007 (incorporated by reference to
Exhibit 4.2 to the Companys Current Report on Form 8-K,
file
no. 001-13997,
dated September 7, 2005).
|
|
4
|
.9
|
|
Supplemental Indenture dated as of
April 7, 2006, among Bally Total Fitness Holding Corporation and
U.S. Bank National Association, as trustee for the
Registrants
97/8% Senior
Subordinated Notes due 2007 (incorporated by reference to
Exhibit 4.2 to the Companys Current Report on Form 8-K,
file
no. 001-13997,
dated April 12, 2006).
|
|
4
|
.10
|
|
Indenture dated as of July 2,
2003, between the Company and U.S. Bank National Association, as
trustee for the Registrants
101/2% Senior
Notes due 2011, including the form of the Note (incorporated by
reference to Exhibit 4.1 to the Companys Form 10-Q, file
no. 0-27478, dated August 14, 2003).
|
|
4
|
.11
|
|
First Supplemental Indenture dated
as of July 22, 2003, between the Company and U.S. Bank National
Association, as trustee for the Registrants
101/2% Senior
Notes due 2011 (incorporated by reference to Exhibit 4.2 to the
Companys Form 10-Q, file no. 0-27478, dated August 14,
2003).
|
|
4
|
.12
|
|
Supplemental Indenture dated as of
December 7, 2004, among Bally Total Fitness Holding Corporation
and U.S. Bank National Association, as trustee for the
Registrants
101/2% Senior
Notes due 2011 (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K, file
no. 001-13997,
dated December 7, 2004).
|
|
4
|
.13
|
|
Supplemental Indenture dated as of
September 2, 2005, among Bally Total Fitness Holding Corporation
and U.S. Bank National Association, as trustee for the
Registrants
101/2% Senior
Notes due 2011 (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K, file
no. 001-13997,
dated September 7, 2005).
|
|
4
|
.14
|
|
Supplemental Indenture dated as of
April 7, 2006, among Bally Total Fitness Holding Corporation and
U.S. Bank National Association, as trustee for the
Registrants
101/2% Senior
Notes due 2011 (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K, file
no. 001-13997,
dated April 12, 2006).
|
|
4
|
.15
|
|
Rights Agreement dated as of
October 18, 2005, between Bally Total Fitness Holding
Corporation and LaSalle Bank National Association, which
includes the form of Certificate of Designations of the Series B
Junior Participating Preferred Stock of Bally Total Fitness
Holding Corporation as Exhibit A, the form of Rights Certificate
as Exhibit B and the Summary of Rights to Purchase Preferred
Shares as Exhibit C (incorporated by reference as Exhibit 4.1 to
the Companys Current Report on Form 8-K, file
no. 001-13997,
dated October 18, 2005).
|
|
4
|
.16
|
|
Amended and Restated Registration
Rights Agreement dated as of April 13, 2006, by and between
Bally Total Fitness Holding Corporation and certain holders who
are signatories thereto (incorporated by reference as Exhibit
10.4 to the Companys Current Report on Form 8-K, file no.
001-13997, dated April 18, 2006).
|
|
4
|
.17
|
|
Registration Rights Agreement
dated as of April 11, 2006, among Bally Total Fitness Holding
Corporation and the purchasers listed on the signature page
thereto (incorporated by reference as Exhibit 4.3 to the
Companys Current Report on Form 8-K, file no. 001-13997,
dated April 12, 2006).
|
|
4
|
.18
|
|
Senior Notes Supplemental
Indenture, dated as of May 22, 2007, among Bally Total Fitness
Holding Corporation, the Guarantors listed on Schedule A thereto
and U.S. Bank National Association, as Trustee (incorporated by
reference to Exhibit 10.1 to the Companys Current Report
on 8-K, file no. 001-13997, dated May 29, 2007).
|
E-2
|
|
|
|
|
No.
|
|
Description
|
|
|
4
|
.19
|
|
Senior Subordinated Notes
Supplemental Indenture, dated as of May 22, 2007, among Bally
Total Fitness Holding Corporation and U.S. Bank National
Association, as Trustee (incorporated by reference to Exhibit
10.2 to the Companys Current Report on 8-K, file no.
001-13997, dated May 29, 2007).
|
|
+10
|
.1
|
|
The Companys 1996
Non-Employee Directors Stock Option Plan (incorporated by
reference to Exhibit 10.23 to the Companys registration
statement on Form S-1 filed January 3, 1996, registration
no. 33-99844).
|
|
+10
|
.2
|
|
Inducement Plan and Award
Agreement thereunder (incorporated by reference to Exhibit 10.1
to the Companys Current Report on Form 8-K, file no.
0-27478, dated March 8, 2005).
|
|
+10
|
.3
|
|
The Companys 1996 Long-Term
Incentive Plan (incorporated by reference to Exhibit 10.21 to
the Companys registration statement on Form S-1 filed
January 3, 1996, registration no. 33-99844).
|
|
+10
|
.4
|
|
First Amendment dated as of
November 21, 1997, to the Companys 1996 Long-Term
Incentive Plan (incorporated by reference to Exhibit 10.15 to
the Companys Annual Report on Form 10-K, file
no. 0-27478,
for the fiscal year ended December 31, 1997).
|
|
+10
|
.5
|
|
Second Amendment dated as of
February 24, 1998, to the Companys 1996 Long-Term
Incentive Plan (incorporated by reference to Exhibit 10.16 to
the Companys Annual Report on Form 10-K, file
no. 0-27478,
for the fiscal year ended December 31, 1997).
|
|
+10
|
.6
|
|
Third Amendment dated as of June
10, 1999, to the Companys 1996 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.6 to the Companys
Annual Report on Form 10-K for the fiscal year ended December
31, 2004).
|
|
+10
|
.7
|
|
Fourth Amendment dated as of
December 5, 2000, to the Companys 1996 Long-Term Incentive
Plan (incorporated by reference to Exhibit 10.7 to the
Companys Annual Report on Form 10-K for the fiscal year
ended December 31, 2004).
|
|
+10
|
.8
|
|
Fifth Amendment dated as of June
6, 2002, to the Companys 1996 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.8 to the Companys
Annual Report on Form 10-K for the fiscal year ended December
31, 2004).
|
|
+10
|
.9
|
|
Form of Restricted Stock Award
Agreement under the Companys Employment Inducement Award
Equity Incentive Plan (incorporated by reference to Exhibit 10.2
to the Companys Current Report on Form 8-K, file no.
001-13997, dated December 5, 2005).
|
|
+10
|
.10
|
|
Form of Restricted Stock Award
Agreement under the 1996 Long-Term Incentive Plan (incorporated
by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K, file no. 001-13997, dated December 5, 2005).
|
|
+10
|
.11
|
|
The Companys 2007 Omnibus
Equity Compensation Plan (incorporated by reference to the
Companys definitive proxy statement on Schedule 14A dated
December 1, 2006).
|
|
+10
|
.12
|
|
Separation Agreement for Lee S.
Hillman dated as of December 10, 2002 (incorporated by reference
to Exhibit 99.1 to the Companys Current Report on Form
8-K, file no. 0-27478, dated December 11, 2002).
|
|
+10
|
.13
|
|
General Release and Settlement
Agreement, made and entered into as of April 28, 2004, by and
between John W. Dwyer and the Company (incorporated by reference
to Exhibit 99.2 to the Companys Current Report on Form
8-K, file no. 0-27478, dated April 29, 2004).
|
|
+10
|
.14
|
|
Employment Agreement effective as
of January 1, 2003, between the Company and William G. Fanelli
(incorporated by reference to Exhibit 10.31 to the
Companys Annual Report on Form 10-K, file
no. 0-27478,
for the fiscal year ended December 31, 2002).
|
|
+10
|
.15
|
|
Employment Agreement effective as
of January 1, 2004, between the Company and Paul A. Toback
(incorporated by reference to Exhibit 99 to the Companys
Current Report on Form 8-K, file
no. 001-13997,
dated August 24, 2004).
|
|
+10
|
.16
|
|
Employment Agreement effective as
of January 1, 2005, between the Company and Marc D. Bassewitz
(incorporated by reference to Exhibit 99.1 to the Companys
Current Report on Form 8-K, file
no. 001-13997,
dated as of November 24, 2004).
|
|
+10
|
.17
|
|
Employment Agreement effective as
of March 8, 2005, between the Company and Harold Morgan
(incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K, file
no. 001-13997,
dated as of March 8, 2005).
|
E-3
|
|
|
|
|
No.
|
|
Description
|
|
|
+10
|
.18
|
|
Employment Agreement effective as
of March 22, 2005, between the Company and Carl J. Landeck
(incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K, file
no. 001-13997,
dated as of March 22, 2005).
|
|
+10
|
.19
|
|
Employment Agreement effective as
of May 2, 2005, between the Company and James A. McDonald
(incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K, file
no. 001-13997,
dated as of April 25, 2005).
|
|
+10
|
.20
|
|
Employment Agreement effective as
of January 1, 2006, between the Company and John H. Wildman
(incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K, file
no. 001-13997,
dated February 10, 2006).
|
|
+10
|
.21
|
|
Interim Executive Services
Agreement dated as of April 12, 2006, between Tatum, LLC and the
Company (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K, file
no. 001-13997,
dated April 18, 2006).
|
|
+10
|
.22
|
|
Confidential Settlement and
General Release, dated July 21, 2006, between the Company and
Carl J. Landeck. (incorporated by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K, file no.
001-13997, filed August 7, 2006).
|
|
+10
|
.23
|
|
Amendment to Employment Agreement
between Bally Total Fitness Holding Corporation and
Paul Toback, dated August 6, 2006 (incorporated by
reference to Exhibit 10.9 to the Companys Quarterly Report
on Form 10-Q, file no. 001-13997, for the three months ended
June 30, 2006).
|
|
+10
|
.24
|
|
Confidential Settlement Agreement
and General Release, dated August 10, 2006, between the Company
and Paul A. Toback (incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K, file no.
001-13997, filed August 11, 2006).
|
|
+10
|
.25
|
|
Form of Indemnification Agreement
between the Company members of the Board of Directors
(incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K, file
no. 001-13997,
filed September 13, 2006).
|
|
+10
|
.26
|
|
Amendment to Employment Agreement,
dated September 14, 2006, between the Company and
Marc D. Bassewitz (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K,
file no. 001-13997, filed September 15, 2006).
|
|
+10
|
.27
|
|
Amendment to Employment Agreement,
dated September 14, 2006, between the Company and
James A. McDonald (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K,
file no. 001-13997, filed September 15, 2006).
|
|
+10
|
.28
|
|
Confidential Settlement Agreement
and Mutual General Release, dated June 13, 2007, between the
Company and James A. McDonald (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K,
file no. 001-13997,
dated June 18, 2007).
|
|
*+10
|
.29
|
|
Amendment to Employment Agreement,
dated as of June 28, 2007, between the Company and
John H. Wildman.
|
|
10
|
.30
|
|
Credit Agreement dated as of
November 18, 1997, as amended and restated as of October 14,
2004, among Bally Total Fitness Holding Corporation, the several
banks and other financial institutions as parties thereto,
JPMorgan Chase Bank, as agent, Deutsche Bank Securities Inc., as
syndication agent, and LaSalle Bank National Association, as
documentation agent (incorporated by reference to Exhibit 10.1
to the Companys Current Report on Form 8-K, file no.
001-13997, dated October 14, 2004).
|
|
10
|
.31
|
|
Amended and Restated Guarantee and
Collateral Agreement dated as of October 14, 2004, made by the
Company and certain of its subsidiaries in favor of The Chase
Manhattan Bank, as Collateral Agent (incorporated by reference
to Exhibit 10.25 to the Companys Annual Report on Form
10-K for the year ended December 31, 2004).
|
|
10
|
.32
|
|
First Amendment and Waiver dated
as of March 31, 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 Companys
Current Report on Form 8-K, file no. 001-13997, dated as of
April 4, 2005).
|
E-4
|
|
|
|
|
No.
|
|
Description
|
|
|
10
|
.33
|
|
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
Companys Current Report on Form 8-K, file no. 001-13997,
dated as of August 12, 2005).
|
|
10
|
.34
|
|
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 Companys
Current Report on Form 8-K, file no. 001-13997, dated
as of August 25, 2005).
|
|
10
|
.35
|
|
Consent dated as of October 17,
2005, under the Credit Agreement, dated as of November 18, 1997,
as amended and restated as of October 14, 2004, as amended as of
March 31, 2005, August 9, 2005 and August 30, 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
Companys Current Report on Form 8-K, file no. 001-13997,
dated October 21, 2005).
|
|
10
|
.36
|
|
Third Amendment and Waiver dated
as of March 24, 2006, under the Credit Agreement, dated as of
November 18, 1997, as amended and restated as of October 14,
2004 (as in effect on March 23, 2006), 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 Companys
Current Report on Form 8-K, file no. 001-13997, dated March 31,
2006).
|
|
10
|
.37
|
|
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 Companys Current
Report on Form 8-K, file no. 001-13997, dated November 14, 2005).
|
|
10
|
.38
|
|
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 Companys Current Report
on Form 8-K, file no. 001-13997, dated November 14, 2005).
|
|
10
|
.39
|
|
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 Companys Current Report
on Form 8-K, file no. 001-13997, dated November 14, 2005).
|
|
10
|
.40
|
|
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 Companys
Current Report on Form 8-K, file no. 001-13997, dated November
14, 2005).
|
|
10
|
.41
|
|
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
Companys Current Report on Form 8-K, file no. 001-13997,
dated November 14, 2005).
|
|
10
|
.42
|
|
Consent Agreement 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, dated March 22, 2006 (incorporated by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K, file no.
001-13997, dated April 18, 2006).
|
E-5
|
|
|
|
|
No.
|
|
Description
|
|
|
10
|
.43
|
|
Consent Agreement 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, L.P., dated March 22, 2006
(incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K, file no. 001-13997, dated April 18,
2006).
|
|
10
|
.44
|
|
Consent Agreement by and between
Bally Total Fitness Holding Corporation and Pardus European
Special Opportunities Master Fund L.P., dated March 22, 2006
(incorporated by reference to Exhibit 10.3 to the Companys
Current Report on Form 8-K, file no. 001-13997, dated April 18,
2006).
|
|
10
|
.45
|
|
Stock Purchase Agreement dated as
of April 11, 2006, among Bally Total Fitness Holding Corporation
and Wattles Capital Management, LLC (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on Form
8-K, file no. 001-13997, dated April 12, 2006).
|
|
10
|
.46
|
|
Stock Purchase Agreement dated as
of April 11, 2006, among Bally Total Fitness Holding Corporation
and investment funds affiliated with Ramius Capital Group,
L.L.C. (incorporated by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K, file no. 001-13997,
dated April 12, 2006).
|
|
10
|
.47
|
|
Fourth Amendment dated as of June
23, 2006, 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 10.39 to the Companys Annual
Report on Form 10-K, file
no. 001-13997,
for the fiscal year ended December 31, 2005).
|
|
10
|
.48
|
|
Amended and Restated Credit
Agreement, dated as of October 16, 2006, by and among, Bally
Total Fitness Holding Corporation, as Borrower, the several
banks and other financial institutions parties thereto, JPMorgan
Chase Bank, N.A., as Agent, and Morgan Stanley Senior Funding,
Inc., as Syndication Agent (incorporated by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K, file
no. 001-13997,
filed October 20, 2006).
|
|
10
|
.49
|
|
Reaffirmation of the Guarantee And
Collateral Agreement And Operating Bank Guaranty, dated
October 16, 2006, made by the Company in favor of JPMorgan
Chase Bank, N.A., as Collateral Agent (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on Form
8-K, file
no. 001-13997,
filed October 20, 2006).
|
|
10
|
.50
|
|
Form of Senior Notes Forbearance
Agreement relating to the Companys
101/2% Senior
Notes due 2011 (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on 8-K, file no. 001-13997, dated
May 17, 2007).
|
|
10
|
.51
|
|
Form of Senior Subordinated Notes
Forbearance Agreement relating to the Companys
97/8% Senior
Subordinated Notes due 2007 (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on 8-K, file
no. 001-13997, dated May 17, 2007).
|
|
10
|
.52
|
|
Forbearance Agreement, dated April
5, 2007, under the Amended And Restated Credit Agreement dated
as of October 16, 2006, among the Company, the lenders parties
thereto (the Lenders), JPMorgan Chase Bank,
N.A., as agent for the Lenders and Morgan Stanley Senior
Funding, Inc., as Syndication Agent (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on 8-K,
file no. 001-13997, dated April 13, 2007).
|
|
+10
|
.53
|
|
Form of Restructuring Bonus
Agreement for Marc Bassewitz and John Wildman (incorporated by
reference to Exhibit 10.1 to the Companys current Report
on 8-K, file no. 001-13997, dated June 1, 2006).
|
|
10
|
.54
|
|
Form of Restructuring Bonus
Agreement for Don R. Kornstein (incorporated by reference to
Exhibit 10.2 to the Companys current Report on 8-K, file
no. 001-13997, dated June 1, 2006).
|
|
*+10
|
.55
|
|
Management Services Agreement,
dated as of May 4, 2007, among Bally Total Fitness Holding
Corporation, Alpine Advisors LLC and Don R. Kornstein
|
|
+10
|
.56
|
|
Interim Management and
Restructuring Services Agreement, dated as of June 5, 2007,
between Bally Total Fitness Holding Corporation and AP Services,
LLC (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on 8-K, file no. 001-13997, dated
June 11, 2007.
|
E-6
|
|
|
|
|
No.
|
|
Description
|
|
|
10
|
.57
|
|
Form of Restructuring Support
Agreement, dated as of June 15, 2007, between the Company and
the holders of its
101/2% Senior
Notes due 2011 and
97/8% Senior
Subordinated Notes due 2007 parties thereto (incorporated by
reference to Exhibit 10.1 to the Companys Current Report
on Form 8-K, file no. 001-13997, dated June 18, 2007).
|
|
10
|
.58
|
|
Form of Subscription and Backstop
Purchase Agreement, dated June 27, 2007, between the
Company and the holders of it
97/8% Senior
Subordinated Notes due 2007 parties thereto (incorporated by
reference to Exhibit 10.2 to the Companys Current Report
on Form 8-K, file no. 001-13997, dated June 27, 2007).
|
|
*14
|
|
|
Code of Business Conduct,
Practices and Ethics.
|
|
16
|
|
|
Letter re: change in certifying
accountants (incorporated by reference to Exhibit 16 to the
Companys Annual Report on Form 10-K, file no. 0-27478, for
the fiscal year ended December 31, 2003).
|
|
*21
|
|
|
List of subsidiaries of the
Company.
|
|
*23
|
|
|
Consent of Independent Registered
Public Accounting Firm.
|
|
*31
|
.1
|
|
Certification of the principal
executive officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
*31
|
.2
|
|
Certification of the principal
financial officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
*32
|
.1
|
|
Certification of the principal
executive officer and principal financial officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
* |
|
Filed herewith. |
|
+ |
|
Management contract or compensatory plan or arrangement. |
E-7