Bally Total Fitness Holding Corp. will restate its financials for the years ended Dec. 31, 2000 through Dec. 31, 2003 and the first quarter of 2004. Accordingly, such financial statements and other communications related to such periods should no longer be relied upon.
Bally Total Fitness will delay the issuance of its financial statements until after completion of multi-year audits, which are expected to be completed by July 2005. In the interim, the company will continue to provide quarterly updates on its business operations through the release of selected unaudited operating and cash flow data and will furnish such data for the third quarter of this year later this week.
The restatements relate to how the company recognized membership initiation fees during the periods in question.
Bally’s Audit Committee determined that beginning in fiscal year 2000, the company should have changed its revenue recognition policy for membership initiation fees. Prior to 2003, the company deferred and recognized financed membership initiation fees over the average membership life, which it approximated to be 22 months. The Audit Committee determined that, following the effective date of Staff Accounting Bulletin No. 101, the company should have recognized revenue for all membership fees over the longer of the contractual life or the period over which service was provided. The Audit Committee also determined the need to revise its method of accounting for these revenues in 2003 and the first quarter of 2004 to defer recognition under the modified cash method to periods beyond the initial contract period for certain of its members. These changes would have delayed revenue recognition.
The restatement will not affect reported cash flows, but will result in a cumulative, non-cash charge as of Jan. 1, 2000, the amount of which has not yet been determined, but will include the amount previously reported as a cumulative effect adjustment when the company converted to a modified cash basis of accounting effective Jan. 1, 2003.
The Audit Committee further determined that, prior to the second quarter of 2003, the company's recognition of revenue associated with recoveries of unpaid dues on inactive member contracts was in error. The Audit Committee also determined that the company's allowance for doubtful accounts was inadequate for years prior to 2003. Because the company intends to restate its financial statements using the modified cash method of revenue recognition, no separate restatement will be required to address these two matters.
Additionally, as previously announced, the company expects to restate prior periods to record a liability related to repayment obligations of approximately $22 million due in 2015 or later on membership contracts sold by a subsidiary before Bally acquired it in the late 1980s. This liability, which had a present value of approximately $6 million as of Sept. 30, 2004, has not been reflected in the company's financial statements since 1995. The effect on prior income statements is the addition of non-cash annual interest charges of between $325,000 and $700,000 in each of the years 1996 through 2003. The company also intends to change the balance sheet presentation of its installment contract receivables, which would also change an equal amount of deferred revenue, so as not to report these amounts on its balance sheet.
The ongoing investigation by Bally’s Audit Committee is expected to be completed by year end. The committee is continuing to investigate other accounting matters that may have affected the company's financial statements prior to its change to a modified cash basis of accounting in 2003. As previously disclosed, the Division of Enforcement of the Securities and Exchange Commission is also conducting an investigation related to the Bally’s previously issued financial statements. Bally continues to fully cooperate with these investigations, the company said.
In addition, Bally commenced a consent solicitation in November, seeking waivers of defaults from the holders of its 10-1/2 percent senior notes due 2011 and 9-7/8 percent senior subordinated notes due 2007 to provide the time necessary to file its financial statements. Lenders under the company's $275 million secured credit facility have foregone any requirement for receipt from the company of any financial statements filed with the SEC. However, the credit agreement provides for a cross-default in the event of delivery of a default notice under either of the indentures.