FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the period ended September 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission file number: 0-27478
BALLY TOTAL FITNESS HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3228107
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
8700 West Bryn Mawr Avenue, Chicago, Illinois 60631
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (773) 380-3000
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: X No:
As of October 31, 1997, 20,570,288 shares of the registrant's common stock were
outstanding.
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial statements:
Condensed consolidated balance sheet (unaudited)
September 30, 1997 and December 31, 1996...................... 1
Consolidated statement of operations (unaudited)
Three months ended September 30, 1997 and 1996................ 2
Consolidated statement of operations (unaudited)
Nine months ended September 30, 1997 and 1996................. 3
Consolidated statement of stockholders' equity (unaudited)
Nine months ended September 30, 1997.......................... 4
Consolidated statement of cash flows (unaudited)
Nine months ended September 30, 1997 and 1996................. 5
Notes to condensed consolidated financial statements
(unaudited)................................................... 7
Item 2. Management's discussion and analysis of financial
condition and results of operations.................... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K.......................... 13
SIGNATURE PAGE....................................................... 14
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
<CAPTION>
September 30 December 31
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents.............................. $ 63,380 $ 16,534
Installment contracts receivable, less unearned
finance charges of $28,030 and $24,467 and
allowance for doubtful receivables and
cancellations of $50,916 and $48,471............ 166,043 153,235
Other current assets.............................. 35,336 24,075
---------- ----------
Total current assets............................ 264,759 193,844
Installment contracts receivable, less unearned
finance charges of $13,040 and $11,382 and
allowance for doubtful receivables and
cancellations of $40,092 and $37,624.............. 160,725 146,972
Property and equipment, less accumulated
depreciation and amortization of $310,078
and $304,865...................................... 303,336 325,459
Intangible assets, less accumulated
amortization of $52,997 and $49,619............... 102,347 105,725
Deferred income taxes............................... 24,561 13,656
Deferred membership origination costs............... 83,781 82,140
Other assets........................................ 25,518 25,506
---------- ----------
$ 965,027 $ 893,302
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 40,378 $ 41,565
Income taxes payable.............................. 2,418 2,258
Deferred income taxes............................. 26,050 15,145
Accrued liabilities............................... 51,468 55,063
Current maturities of long-term debt.............. 7,908 8,401
Deferred revenues................................. 269,909 265,465
---------- ----------
Total current liabilities....................... 398,131 387,897
Long-term debt, less current maturities............. 371,765 376,397
Other liabilities................................... 6,343 6,824
Deferred revenues................................... 97,267 98,032
Stockholders' equity................................ 91,521 24,152
---------- ----------
$ 965,027 $ 893,302
========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
1
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three months
ended September 30
-----------------------
1997 1996
---------- ----------
(as restated)
<S> <C> <C>
Net revenues:
Membership revenues -
Initial membership fees on paid-in-full
memberships originated...................... $ 15,541 $ 22,215
Initial membership fees on financed
memberships originated...................... 91,032 73,583
Dues collected................................ 47,720 43,640
Change in deferred revenues................... (3,427) 5,357
---------- ----------
150,866 144,795
Finance charges earned........................... 9,983 9,142
Fees and other................................... 4,298 2,702
---------- ----------
165,147 156,639
Operating costs and expenses:
Fitness center operations........................ 99,382 94,140
Member processing and collection centers......... 10,789 10,410
Advertising...................................... 10,735 10,979
General and administrative....................... 8,753 5,021
Provision for doubtful receivables............... 25,052 19,914
Depreciation and amortization.................... 12,631 13,447
Change in deferred membership origination costs.. (3,123) (35)
---------- ----------
164,219 153,876
---------- ----------
Operating income................................... 928 2,763
Interest income.................................... 575 258
Interest expense................................... (11,658) (12,142)
---------- ----------
Loss before income taxes........................... (10,155) (9,121)
Income tax provision .............................. (100) (116)
---------- ----------
Net loss........................................... $ (10,255) $ (9,237)
========== ==========
Net loss per common share.......................... $ (.60) $ (.76)
========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Nine months
ended September 30
-----------------------
1997 1996
---------- ----------
(as restated)
<S> <C> <C>
Net revenues:
Membership revenues -
Initial membership fees on paid-in-full
memberships originated....................... $ 47,564 $ 65,500
Initial membership fees on financed
memberships originated....................... 266,593 231,489
Dues collected................................. 144,577 129,282
Change in deferred revenues.................... (4,372) 15,516
---------- ----------
454,362 441,787
Finance charges earned............................ 29,516 27,698
Fees and other.................................... 11,492 9,530
---------- ----------
495,370 479,015
Operating costs and expenses:
Fitness center operations......................... 288,750 281,540
Member processing and collection centers.......... 28,983 31,728
Advertising....................................... 34,671 36,789
General and administrative........................ 20,980 15,110
Provision for doubtful receivables................ 72,617 64,334
Depreciation and amortization..................... 40,703 41,119
Change in deferred membership origination costs... (1,641) 1,845
---------- ----------
485,063 472,465
---------- ----------
Operating income.................................... 10,307 6,550
Interest income..................................... 839 726
Interest expense.................................... (34,081) (36,042)
---------- ----------
Loss before income taxes............................ (22,935) (28,766)
Income tax provision ............................... (300) (365)
---------- ----------
Net loss............................................ $ (23,235) $ (29,131)
========== ==========
Net loss per common share........................... $ (1.68) $ (2.39)
========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
<CAPTION>
Common stock Unearned
------------------ compensation Total
Number Par Contributed Accumulated (restricted stockholders'
of shares value capital deficit stock) equity
---------- ----- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996....... 12,495,161 $ 125 $ 303,811 $ (277,733) $ (2,051) $ 24,152
Net loss........................... (23,235) (23,235)
Issuance of common stock through
public offering................. 8,000,000 80 88,310 88,390
Issuance of common stock upon
exercise of stock options....... 51,886 1 162 163
Amortization of unearned
compensation.................... 2,051 2,051
---------- ----- ---------- ---------- -------- ---------
Balance at September 30, 1997...... 20,547,047 $ 206 $ 392,283 $ (300,968) $ -- $ 91,521
========== ===== ========== ========== ======== =========
<FN>
See accompanying notes.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine months
ended September 30
-----------------------
1997 1996
---------- ----------
(as restated)
<S> <C> <C>
OPERATING:
Net loss.......................................... $ (23,235) $ (29,131)
Adjustments to reconcile to cash used -
Depreciation and amortization, including
amortization included in interest expense..... 42,517 43,546
Provision for doubtful receivables.............. 72,617 64,334
Change in operating assets and
liabilities................................... (116,789) (93,202)
Other, net...................................... (75)
---------- ----------
Cash used in operating activities............. (24,965) (14,453)
INVESTING:
Purchases and construction of property
and equipment................................... (18,720) (13,346)
Proceeds from sale of property and equipment...... 4,939
Other, net........................................ 564
---------- ----------
Cash used in investing activities ............ (13,781) (12,782)
FINANCING:
Debt transactions -
Net borrowings under revolving credit
agreement..................................... 11,500
Proceeds from other long-term borrowings........ 7,500 1,500
Repayments of other long-term debt.............. (10,203) (1,577)
Debt issuance costs............................. (258) (302)
---------- ----------
Cash provided by (used in) debt transactions.. (2,961) 11,121
Equity transactions -
Proceeds from issuance of common stock
through public offering....................... 88,390
Proceeds from issuance of common stock upon
exercise of stock options..................... 163
Capital contribution by Bally Entertainment
Corporation................................... 6,760
---------- ----------
Cash provided by financing activities......... 85,592 17,881
---------- ----------
Increase (decrease) in cash and equivalents......... 46,846 (9,354)
Cash and equivalents, beginning of period........... 16,534 21,263
---------- ----------
Cash and equivalents, end of period................. $ 63,380 $ 11,909
========== ==========
<FN>
(continued)
</FN>
</TABLE>
5
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED)
(In thousands)
(Unaudited)
<CAPTION>
Nine months
ended September 30
-----------------------
1997 1996
---------- ----------
(as restated)
<S> <C> <C>
SUPPLEMENTAL CASH FLOWS INFORMATION:
Changes in operating assets and liabilities,
net of effects from the sale of a
fitness center, were as follows -
Increase in installment contracts
receivable................................. $ (99,817) $ (60,113)
Increase in other current and other assets... (13,307) (4,645)
(Increase) decrease in deferred membership
origination costs.......................... (1,641) 1,845
Decrease in accounts payable................. (1,187) (8,189)
Increase (decrease) in income taxes
payable.................................... 160 (1,527)
Decrease in accrued and other liabilities.... (5,369) (5,057)
Increase (decrease) in deferred revenues..... 4,372 (15,516)
---------- ----------
$ (116,789) $ (93,202)
========== ==========
Cash payments for interest and income taxes
were as follows -
Interest paid................................ $ 39,445 $ 39,271
Interest capitalized......................... (691) (173)
Income taxes paid, net....................... 140 1,892
Investing and financing activities exclude the
following non-cash transactions -
Acquisition of property and equipment
through capital leases/borrowings.......... $ 3,585 $ 3,873
Repayment of long-term debt using proceeds
from sale of property and equipment........ 6,007
<FN>
See accompanying notes.
</FN>
</TABLE>
6
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data)
(Unaudited)
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Bally Total Fitness Holding Corporation (the "Company") and the
subsidiaries which it controls. The Company, through its subsidiaries, is a
nationwide commercial operator of fitness centers with approximately 320
facilities concentrated in 27 states and Canada. The Company operates in one
industry segment, and all significant revenues arise from the commercial
operation of fitness centers, primarily in major metropolitan markets in the
United States. Unless otherwise specified in the text, references to the Company
include the Company and its subsidiaries. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements included in the Company's Annual Report on Form 10-K/A for the year
ended December 31, 1996.
All adjustments have been recorded which are, in the opinion of management,
necessary for a fair presentation of the condensed consolidated balance sheet of
the Company at September 30, 1997, its consolidated statements of operations for
the three and nine months ended September 30, 1997 and 1996, its consolidated
statement of stockholders' equity for the nine months ended September 30, 1997
and its consolidated statement of cash flows for the nine months ended September
30, 1997 and 1996. All such adjustments were of a normal recurring nature.
The accompanying condensed consolidated financial statements have been prepared
in conformity with generally accepted accounting principles which require the
Company's management to make estimates and assumptions that affect the amounts
reported therein. Actual results could vary from such estimates.
RESTATEMENT
As more fully described in the "Summary of significant accounting policies
Restatement and Membership revenue recognition" notes to the consolidated
financial statements included in the Company's Annual Report on Form 10-K/A for
the year ended December 31, 1996, following a series of extensive discussions
with the Staff of the Securities and Exchange Commission, the Company restated
its condensed consolidated financial statements for periods prior to the
issuance of its June 30, 1997 financial statements to reflect a change in the
method of recognizing membership revenue. Summarized financial information
illustrating the effect of the restatement on the Company's consolidated
statements of operations for the three and nine months ended September 30, 1996
is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1996 September 30, 1996
------------------------ ------------------------
As As
originally As originally As
reported restated reported restated
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues...................... $158,802 $156,897 $488,443 $479,741
Operating income.............. 5,334 3,021 20,082 7,276
Net loss...................... (6,773) (9,237) (16,225) (29,131)
Net loss per common share..... (.56) (.76) (1.33) (2.39)
</TABLE>
In addition, certain reclassifications (primarily interest income) have been
made to prior period financial statements to conform with the 1997 presentation.
7
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SEASONAL FACTORS
The Company's operations are subject to seasonal factors and, therefore, the
results of operations for the three and nine months ended September 30, 1997 and
1996 are not necessarily indicative of the results of operations for the full
year.
STOCK OFFERING
In August 1997, the Company completed a public offering of 8,000,000 shares of
its common stock, which provided net proceeds of $88,390 (the "Stock Offering").
The Company has used or intends to use the proceeds of the Stock Offering to
develop new facilities and more extensively refurbish and upgrade existing
facilities, to repay certain indebtedness, to support the introduction of new
initiatives and for general corporate and working capital purposes.
LOSS PER COMMON SHARE
Loss per common share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during each period, which totaled
16,959,883 shares and 12,170,161 shares for the three months ended September 30,
1997 and 1996, respectively, and 13,868,305 shares and 12,170,161 shares for the
nine months ended September 30, 1997 and 1996, respectively. Certain restricted
stock was issued subject to forfeiture unless certain conditions were met. These
contingent shares were considered common stock equivalents and were excluded
from the loss per share computation until the conditions were met because their
effect was anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", which
establishes new standards for computing and presenting earnings per share. SFAS
No. 128 requires a dual presentation of basic earnings per share (computed by
dividing income/loss available to common stockholders by the weighted-average
number of common shares outstanding for the period) and diluted earnings per
share (computed similarly to fully diluted earnings per share pursuant to APB
Opinion No. 15) on the face of the Company's statement of operations. The
Company will adopt SFAS No. 128 in the fourth quarter of 1997; earlier
application is not permitted. As computed under SFAS No. 128, basic and diluted
loss per share for the three and nine months ended September 30, 1997 each would
have been $.60 per share and $1.68 per share, respectively.
SUBSEQUENT EVENT
In October 1997, the Company completed a refinancing (the "Refinancing"). The
components of the Refinancing were (i) the issuance by the Company of $225,000
principal amount of 9 7/8% Senior Subordinated Notes due 2007 (the "9 7/8%
Notes"), (ii) the consummation of a tender offer and consent solicitation by the
Company (the "Tender Offer") with respect to its $200,000 principal amount of
13% Senior Subordinated Notes due 2003 (the "13% Notes"), and (iii) the
application of the net proceeds from the issuance of the 9 7/8% Notes to retire
the 13% Notes. Pursuant to the Tender Offer, the Company purchased $177,400
principal amount of the 13% Notes in October 1997. The remaining $22,600
principal amount of the 13% Notes not tendered in the Tender Offer are expected
to be purchased, redeemed or defeased by the Company prior to the end of January
1998. The retirement of the 13% Notes will result in an extraordinary loss
totaling approximately $20,600.
8
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net revenues for the third quarter of 1997 were $165.1 million compared to
$156.6 million in 1996, an increase of $8.5 million (5%). The average number of
fitness centers selling memberships decreased from 322 in the third quarter of
1996 to 316 in the third quarter of 1997, reflecting the closure of 13 older,
typically smaller and less profitable facilities and the sale of a fitness
center to a franchisee offset, in part, by the opening of 6 new, larger
facilities, all occurring between July 1996 and September 1997. Initial
membership fees originated increased $10.8 million (11%) in the 1997 quarter,
consisting of a $17.5 million (24%) increase in financed memberships originated
offset, in part, by a $6.7 million (30%) decrease in paid-in-full memberships
originated. These results generally reflect management's current strategy of
selling more financed membership plans (which historically have generated better
long-term returns for the Company) and fewer discounted paid-in-full membership
plans (for which dues are frequently waived for up to three years), which
resulted in a 22% increase in the average selling price of contracts sold and a
9% decline in the number of contracts sold. These fluctuations in the average
price and number of contracts sold also reflect management's recent emphasis on
the sale of premium membership plans (which provide additional in-club services
and/or access to other fitness centers operated by the Company) and de-emphasis
on the sale of lower-priced membership plans (which typically offer limited
amenities or are sold as add-ons to existing memberships). In addition, deferred
revenue accounting delayed recognition of revenues for the 1997 quarter by $3.4
million while it added $5.4 million to revenues for the 1996 quarter, and this
unfavorable effect of the change in deferred revenues in the current quarter
versus the same quarter last year is expected to continue into early 1998. Dues
collected increased $4.1 million (9%) over 1996, reflecting the Company's
continuing strategy of increasing renewal dues. Finance charges earned increased
$.8 million (9%) in the 1997 quarter due primarily to the increase in the size
of the receivables portfolio. Fees and other revenues increased $1.6 million
(59%) over the 1996 quarter, primarily reflecting the sale of nutritional and
other retail products which the Company began selling in 1997 in certain of its
fitness centers and an increased emphasis on personal training services.
Operating income for the third quarter of 1997 was $.9 million compared to $2.8
million in 1996. The decrease of $1.9 million is due to a $10.3 million increase
in operating expenses (which includes a final $3.1 million charge relating to
restricted stock awards issued in conjunction with the spin-off of the Company
that vested in August 1997) offset, in part, by the aforementioned increase in
revenues. Excluding the charge related to restricted stock awards and the
provision for doubtful receivables, operating costs and expenses increased $2.1
million (2%) from 1996 due, in part, to a $5.2 million (6%) increase in fitness
center operating expenses primarily resulting from increased spending to improve
club operations and appearance, additional commissions (a substantial portion of
which are deferred through the change in deferred membership origination costs)
from the growth in initial membership fees originated, and costs associated with
the new initiatives described above.
The provision for doubtful receivables for the third quarter of 1997 was $25.1
million compared to $19.9 million in 1996, an increase of $5.2 million (26%)
primarily due to the increase in sales of financed membership plans.
Interest expense was $11.7 million for the third quarter of 1997 compared to
$12.1 million in 1996, a decrease of $.4 million (3%) primarily due to lower
average interest rates.
The income tax provision for the third quarter of 1997 and 1996 has been
determined using the estimated annual effective tax rate for each year and
reflects state income taxes only, as no federal benefit has been provided due to
the uncertainty of tax loss realization.
9
<PAGE>
BALLY TOTAL FITNESS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net revenues for the first nine months of 1997 were $495.4 million compared to
$479.0 million in 1996, an increase of $16.4 million (3%). The average number of
fitness centers selling memberships decreased from 323 in the first nine months
of 1996 to 317 in the first nine months of 1997, reflecting the closure of 17
older, typically smaller and less profitable facilities and the sale of a
fitness center to a franchisee offset, in part, by the opening of 8 new, larger
facilities, all occurring between January 1996 and September 1997. Initial
membership fees originated increased $17.2 million (6%) in the 1997 period,
consisting of a $35.1 million (15%) increase in financed memberships originated
offset, in part, by a $17.9 million (27%) decrease in paid-in- full memberships
originated. These results generally reflect management's current strategy of
selling more financed membership plans (which historically have generated better
long-term returns for the Company) and fewer discounted paid-in-full membership
plans (for which dues are frequently waived for up to three years), which
resulted in a 21% increase in the average selling price of contracts sold and a
13% decline in the number of contracts sold. These fluctuations in the average
price and number of contracts sold also reflect management's recent emphasis on
the sale of premium membership plans (which provide additional in-club services
and/or access to other fitness centers operated by the Company) and de-emphasis
on the sale of lower-priced membership plans (which typically offer limited
amenities or are sold as add-ons to existing memberships). In addition, deferred
revenue accounting delayed recognition of revenues for the 1997 period by $4.4
million while it added $15.5 million to revenues for the 1996 period, and this
unfavorable effect of the change in deferred revenues in the current period
versus the same period last year is expected to continue into early 1998. Dues
collected increased $15.3 million (12%) over 1996, reflecting the Company's
continuing strategy of increasing renewal dues. Finance charges earned increased
$1.8 million (7%) in the 1997 period due primarily to the increase in the size
of the receivables portfolio. Fees and other revenues increased $2.0 million
(21%) over the 1996 period, primarily reflecting the sale of nutritional and
other retail products which the Company began selling in 1997 in certain of its
fitness centers and an increased emphasis on personal training services.
Operating income for the first nine months of 1997 was $10.3 million compared to
$6.6 million in 1996. The increase of $3.7 million is due to the aforementioned
increase in revenues offset, in part, by a $12.6 million (3%) increase in
operating costs and expenses, which includes $6.5 million of charges ($2.1
million of which is amortization of unearned compensation) relating to
restricted stock awards issued in conjunction with the spin-off of the Company
for which the remaining restrictions lapsed in June 1997 and vesting occurred in
August 1997. Excluding the charges related to restricted stock awards and the
provision for doubtful receivables, operating costs and expenses decreased $2.2
million (1%) from 1996. Member processing and collection center expenses
decreased $2.7 million (9%), and reflects decreases in telephone expenses (as a
result of renegotiated rates and fewer member service calls), printing and
equipment rental costs. In addition, advertising expenses decreased $2.1 million
(6%) due to reduced television spending and the elimination of certain agency
fees in 1997. Fitness center operating expenses increased $7.2 million (3%) due,
in part, to increased spending to improve club operations and appearance,
additional commissions (a substantial portion of which are deferred through the
change in deferred membership origination costs) from the growth in initial
membership fees originated, and costs associated with the new initiatives
described above.
The provision for doubtful receivables for the first nine months of 1997 was
$72.6 million compared to $64.3 million in 1996, an increase of $8.3 million
(13%) primarily due to the increase in sales of financed membership plans.
10
<PAGE>
BALLY TOTAL FITNESS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
Interest expense was $34.1 million for the first nine months of 1997 compared to
$36.0 million in 1996, a decrease of $1.9 million (5%) primarily due to lower
average interest rates and an increase in the amount of capitalized interest.
The income tax provision for the first nine months of 1997 and 1996 has been
determined using the estimated annual effective tax rate for each year and
reflects state income taxes only, as no federal benefit has been provided due to
the uncertainty of tax loss realization.
LIQUIDITY AND CAPITAL RESOURCES
The Company intends to expand and upgrade its facilities in order to increase
its membership base and more effectively capitalize on its streamlined marketing
and administrative functions. In August 1997, the Company completed a public
offering of 8,000,000 shares of its common stock, which provided net proceeds of
$88.4 million. The Company has used or intends to use the proceeds of the Stock
Offering as follows: (i) approximately $25 million to $30 million over the next
three years for capital expenditures to open 20 to 30 new facilities, (ii)
approximately $10 million over the next two years to extensively refurbish and
make major upgrades to approximately 25% of its clubs, which include converting
low-usage pools and racquet areas into expanded exercise areas and to a lesser
extent retail and outpatient rehabilitation service areas, adding and upgrading
exercise equipment, and refreshing interior and exterior finishes to improve
club ambience, among others, (iii) $7.5 million to repay a loan from an
affiliate of an underwriter of the Stock Offering, (iv) as much as $3 million to
support the introduction of new initiatives and (v) the balance for general
corporate and working capital purposes. Pending such uses, the Company has
temporarily invested available funds from the Stock Offering in short-term
securities and eliminated indebtedness under its revolving credit agreement. In
addition, using cash generated by operations and through leasing arrangements,
management plans to make capital expenditures of approximately $10 million to
$12 million over the next twelve months to maintain and make minor upgrades to
the Company's existing facilities, which include exercise equipment upgrades,
HVAC and other operating equipment upgrades and replacements, and locker room
and workout area refurbishments, among others.
Prior to the Stock Offering, the Company was dependent on availability under its
revolving credit agreement and its operations to provide for cash needs. The
Company has managed liquidity requirements in recent years by utilizing
membership plan discounting techniques designed to increase its cash sales and
downpayments and to accelerate collections and dues payments to increase
available cash reserves and, to a lesser extent, sales of non-strategic assets
and sale/leaseback arrangements. Management believes use of these discounting
techniques has had a negative impact on both current and long term results, and
that the proceeds provided by the Stock Offering have reduced the need to
continue the discounting techniques.
In October 1997, the Company completed the Refinancing which reduces interest
expense, extends debt maturities and improves financial flexibility. The
components of the Refinancing were (i) the issuance by the Company of $225
million principal amount of the 9 7/8% Notes, (ii) the consummation of the
Tender Offer by the Company with respect to its $200 million principal amount of
the 13% Notes, and (iii) the application of the net proceeds from the issuance
of the 9 7/8% Notes to retire the 13% Notes. Pursuant to the Tender Offer, the
Company purchased $177.4 million principal amount of the 13% Notes in October
1997. The remaining $22.6 million principal amount of the 13% Notes not tendered
in the Tender Offer are expected to be purchased, redeemed or defeased by the
Company prior to the end of January 1998. In addition, the Indenture pursuant to
which the 13% Notes were issued was substantially amended pursuant to the Tender
Offer.
Prior to the end of 1997, the Company expects to enter into a new revolving
credit agreement with a group of banks, which would provide for a three-year $70
million
11
<PAGE>
BALLY TOTAL FITNESS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
credit line. The amount expected to be available under the credit line would be
reduced by any outstanding letters of credit, which can not exceed $30 million
(outstanding letters of credit totalled $9.8 million at September 30, 1997). The
new revolving credit agreement is expected to be secured by substantially all
real and personal property (excluding installment contracts receivable) of the
Company.
The Company has no scheduled principal payments under the 9 7/8% Notes until
October 2007 and the principal amount of the certificates under the Company's
securitization facility remains fixed at $160 million through July 1999.
Accordingly, exclusive of the remaining 13% Notes which are expected to be
retired prior to the end of January 1998 using the remaining proceeds from the
issuance of the 9 7/8% Notes, debt service requirements (primarily interest) of
the Company for the next twelve months are approximately $45 million. Management
believes that the Company will be able to satisfy its debt service and capital
expenditure requirements over the next twelve months out of existing cash
balances and cash flow from operations. Management also believes that as a
result of the Stock Offering, the Refinancing and the expected new revolving
credit agreement, the Company's liquidity and financial flexibility have
significantly improved.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this Form 10-Q including, without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve known and unknown risks, uncertainties,
and other factors which may cause the actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward- looking
statements. These factors include, among others, the following: general economic
and business conditions; competition; success of operating initiatives,
advertising and promotional efforts; existence of adverse publicity or
litigation; acceptance of new product offerings; changes in business strategy or
plans; quality of management; availability, terms, and development of capital;
business abilities and judgment of personnel; changes in, or the failure to
comply with, government regulations; regional weather conditions; and other
factors described in filings of the Company with the Securities and Exchange
Commission. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
12
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule for September 30, 1997 (filed
electronically only).
27.2 Restated Financial Data Schedule for September 30, 1996 (filed
electronically only).
(b) Reports on Form 8-K:
Financial
Date Items statements
------------- --------- ----------
July 30, 1997 #5 and #7 None
13
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BALLY TOTAL FITNESS HOLDING CORPORATION
------------------------------------------------------------
Registrant
/s/ John W. Dwyer
------------------------------------------------------------
John W. Dwyer
Senior Vice President, Chief Financial Officer and Treasurer
(principal financial officer)
Dated: November 14, 1997
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997, THE
CONSOLIDATED STATEMENT OF OPERATIONS AND THE CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 63,380
<SECURITIES> 0
<RECEIVABLES> 417,776<F1>
<ALLOWANCES> 91,008
<INVENTORY> 0
<CURRENT-ASSETS> 264,759
<PP&E> 613,414
<DEPRECIATION> 310,078
<TOTAL-ASSETS> 965,027
<CURRENT-LIABILITIES> 398,131
<BONDS> 371,765
0
0
<COMMON> 206
<OTHER-SE> 91,315
<TOTAL-LIABILITY-AND-EQUITY> 965,027
<SALES> 0
<TOTAL-REVENUES> 495,370
<CGS> 0
<TOTAL-COSTS> 321,780<F2>
<OTHER-EXPENSES> 28,983<F3>
<LOSS-PROVISION> 72,617
<INTEREST-EXPENSE> 34,081
<INCOME-PRETAX> (22,935)
<INCOME-TAX> 300
<INCOME-CONTINUING> (23,235)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,235)
<EPS-PRIMARY> (1.68)
<EPS-DILUTED> 0
<FN>
<F1>THIS AMOUNT IS THE SUM OF THE SHORT-TERM AND LONG-TERM INSTALLMENT
CONTRACTS RECEIVABLE LINES ON THE CONDENSED CONSOLIDATED BALANCE SHEET AT
SEPTEMBER 30, 1997 AND IS NET OF UNEARNED FINANCE CHARGES.
<F2>THIS AMOUNT IS THE SUM OF THE FITNESS CENTER OPERATIONS LINE, THE
ADVERTISING LINE AND THE CHANGE IN DEFERRED MEMBERSHIP ORIGINATION COSTS
LINE ON THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997.
<F3>THIS AMOUNT IS THE MEMBER PROCESSING AND COLLECTION CENTERS LINE ON THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1996, THE
CONSOLIDATED STATEMENT OF OPERATIONS AND THE CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 11,909
<SECURITIES> 0
<RECEIVABLES> 396,217<F1>
<ALLOWANCES> 97,078
<INVENTORY> 0
<CURRENT-ASSETS> 187,107
<PP&E> 627,572
<DEPRECIATION> 299,007
<TOTAL-ASSETS> 902,651
<CURRENT-LIABILITIES> 432,898
<BONDS> 323,187
0
0
<COMMON> 125
<OTHER-SE> 9,779
<TOTAL-LIABILITY-AND-EQUITY> 902,651
<SALES> 0
<TOTAL-REVENUES> 479,015
<CGS> 0
<TOTAL-COSTS> 320,174<F2>
<OTHER-EXPENSES> 31,728<F3>
<LOSS-PROVISION> 64,334
<INTEREST-EXPENSE> 36,042
<INCOME-PRETAX> (28,766)
<INCOME-TAX> 365
<INCOME-CONTINUING> (29,131)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,131)
<EPS-PRIMARY> (2.39)
<EPS-DILUTED> 0
<FN>
<F1>THIS AMOUNT IS THE SUM OF THE SHORT-TERM AND LONG-TERM INSTALLMENT
CONTRACTS RECEIVABLE LINES ON THE CONDENSED CONSOLIDATED BALANCE SHEET AT
SEPTEMBER 30, 1996 AND IS NET OF UNEARNED FINANCE CHARGES.
<F2>THIS AMOUNT IS THE SUM OF THE FITNESS CENTER OPERATIONS LINE, THE
ADVERTISING LINE AND THE CHANGE IN DEFERRED MEMBERSHIP ORIGINATION COSTS
LINE ON THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996.
<F3>THIS AMOUNT IS THE MEMBER PROCESSING AND COLLECTION CENTERS LINE ON THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1996.
</FN>
</TABLE>
