FORM 10-Q/A 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 March 31, 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 June 30, 1997, 12,510,380 shares of the registrant's common stock were outstanding. BALLY TOTAL FITNESS HOLDING CORPORATION INDEX Page Number PART I. FINANCIAL INFORMATION Item 1. Financial statements: Condensed consolidated balance sheet (unaudited) March 31, 1997 and December 31, 1996.......................... 1 Consolidated statement of operations (unaudited) Three months ended March 31, 1997 and 1996.................... 2 Consolidated statement of stockholders' equity (unaudited) Three months ended March 31, 1997............................. 3 Consolidated statement of cash flows (unaudited) Three months ended March 31, 1997 and 1996.................... 4 Notes to condensed consolidated financial statements (unaudited)................................................... 6 Item 2. Management's discussion and analysis of financial condition and results of operations.................... 8 PART II. OTHER INFORMATION Item 6. Exhibits and reports on Form 8-K.......................... 11 SIGNATURE PAGE....................................................... 12 BALLY TOTAL FITNESS HOLDING CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (In thousands) (As restated) March 31 December 31 1997 1996 ----------- ----------- ASSETS Current assets: Cash and equivalents......................... $ 9,924 $ 16,534 Installment contracts receivable, less unearned finance charges of $26,887 and $24,467 and allowance for doubtful receivables and cancellations of $51,587 and $48,471................................ 161,962 153,235 Other current assets......................... 28,314 24,075 ----------- ----------- Total current assets....................... 200,200 193,844 Installment contracts receivable, less unearned finance charges of $12,508 and $11,382 and allowance for doubtful receivables and cancellations of $40,042 and $37,624 ................................. 155,049 146,972 Property and equipment, less accumulated depreciation and amortization of $312,628 and $304,865................................. 320,666 325,459 Intangible assets, less accumulated amortization of $50,745 and $49,619.......... 104,599 105,725 Deferred income taxes ......................... 17,003 13,656 Deferred membership origination costs.......... 82,442 82,140 Other assets................................... 24,988 25,506 ----------- ----------- $ 904,947 $ 893,302 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................. $ 44,077 $ 41,565 Income taxes payable......................... 2,322 2,258 Deferred income taxes........................ 18,492 15,145 Accrued liabilities.......................... 49,631 55,063 Current maturities of long-term debt......... 8,387 8,401 Deferred revenues............................ 267,456 265,465 ----------- ----------- Total current liabilities.................. 390,365 387,897 Long-term debt, less current maturities........ 387,740 376,397 Other liabilities.............................. 6,657 6,824 Deferred revenues.............................. 101,706 98,032 Stockholders' equity........................... 18,479 24,152 ----------- ----------- $ 904,947 $ 893,302 =========== =========== <FN> See accompanying notes. </FN> 1 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (In thousands, except per share data) (As restated) Three months ended March 31 ---------------------- 1997 1996 ---------- ---------- Net revenues: Membership revenues - Initial membership fees on paid-in-full memberships originated........................ $ 17,475 $ 21,157 Initial membership fees on financed memberships originated........................ 95,568 87,178 Dues collected.................................. 47,788 43,416 Change in deferred revenues..................... (5,665) (748) ---------- ---------- 155,166 151,003 Finance charges earned............................ 9,769 9,595 Fees and other.................................... 3,598 3,294 ---------- ---------- 168,533 163,892 Operating costs and expenses: Fitness center operations......................... 95,924 95,214 Member processing and collection centers.......... 9,403 11,589 Advertising....................................... 12,686 12,611 General and administrative........................ 5,921 5,789 Provision for doubtful receivables................ 25,537 24,478 Depreciation and amortization..................... 13,065 13,676 Change in deferred membership origination costs... (302) 492 ---------- ---------- 162,234 163,849 ---------- ---------- Operating income.................................... 6,299 43 Interest expense.................................... 11,879 11,849 ---------- ---------- Loss before income taxes............................ (5,580) (11,806) Income tax provision ............................... 100 150 ---------- ---------- Net loss............................................ $ (5,680) $ (11,956) ========== ========== Net loss per common share........................... $ (.46) $ (.98) ========== ========== <FN> See accompanying notes. </FN> 2 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) (In thousands, except share data) (As restated) Common stock Unearned ------------------ compensation Total Number Par Contributed Accumulated (restricted stockholders' of shares value capital deficit stock) equity ---------- ----- ----------- ----------- ------------ ------------- Balance at December 31, 1996........... 12,495,161 $ 125 $ 303,811 $(277,733) $ (2,051) $ 24,152 Net loss .............................. (5,680) (5,680) Issuance of common stock upon exercise of stock options............. 1,814 7 7 ---------- ----- ---------- ---------- ---------- ---------- Balance at March 31, 1997.............. 12,496,975 $125 $ 303,818 $(283,413) $ (2,051) $ 18,479 ========== ===== ========== ========== ========== ========== <FN> See accompanying notes. </FN> 3 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (In thousands) (As restated) Three months ended March 31 ---------------------- 1997 1996 ---------- ---------- OPERATING: Net loss........................................... $ (5,680) $ (11,956) Adjustments to reconcile to cash used - Depreciation and amortization, including amortization included in interest expense........ 13,624 14,552 Provision for doubtful receivables................ 25,537 24,478 Change in operating assets and liabilities........ (44,360) (42,212) ---------- --------- Cash used in operating activities.............. (10,879) (15,138) INVESTING: Purchases and construction of property and equipment..................................... (6,842) (7,172) Other, net......................................... (55) 747 ---------- ---------- Cash used in investing activities ............. (6,897) (6,425) FINANCING: Debt transactions - Net borrowings under revolving credit agreement........................................ 12,000 9,000 Proceeds from other long-term borrowings.......... 1,500 Repayments of other long-term debt................ (834) (310) Debt issuance costs............................... (7) (144) ---------- ---------- Cash provided by debt transactions............. 11,159 10,046 Equity transaction - Proceeds from issuance of common stock upon exercise of stock options........................ 7 ---------- ---------- Cash provided by financing activities.......... 11,166 10,046 ---------- ---------- Decrease in cash and equivalents.................... (6,610) (11,517) Cash and equivalents, beginning of period........... 16,534 21,263 ---------- ---------- Cash and equivalents, end of period................. $ 9,924 $ 9,746 ========== ========== <FN> (continued) </FN> 4 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) - (CONTINUED) (In thousands) (As restated) Three months ended March 31 ---------------------- 1997 1996 ---------- ---------- SUPPLEMENTAL CASH FLOWS INFORMATION: Changes in operating assets and liabilities were as follows - Increase in installment contracts receivable................................... $ (42,341) $ (28,678) Increase in other current and other assets.... (4,414) (747) (Increase) decrease in deferred membership origination costs................. (302) 492 Increase (decrease) in accounts payable....... 2,512 (8,344) Increase (decrease) in income taxes payable... 64 (930) Decrease in accrued and other liabilities..... (5,544) (4,753) Increase in deferred revenues................. 5,665 748 ---------- ---------- $ (44,360) $ (42,212) ========== ========== Cash payments for interest and income taxes were as follows - Interest paid................................. $ 17,823 $ 17,352 Interest capitalized.......................... (288) (55) Income taxes paid, net........................ 36 1,080 Investing and financing activities exclude the following non-cash transactions - Acquisition of property and equipment through capital leases....................... $ 163 $ 1,999 <FN> See accompanying notes. </FN> 5 BALLY TOTAL FITNESS HOLDING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (All dollar amounts in thousands, except share data) 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 March 31, 1997, its consolidated statements of operations and cash flows for the three months ended March 31, 1997 and 1996, and its consolidated statement of stockholders' equity for the three months ended March 31, 1997. 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 "SEC Staff"), the Company has agreed to restate its condensed consolidated financial statements for all periods presented to reflect a change in the method of recognizing membership revenue. Summarized financial information illustrating the effect of the restatement on the Company's condensed consolidated financial statements is as follows: March 31, 1997 March 31, 1996 ---------------------- --------------------- As As originally As originally As reported restated reported restated ---------- --------- ---------- --------- Financial position - Deferred membership origination costs............................. $ -- $ 82,442 Current deferred revenues........... 54,005 267,456 Long-term deferred revenues......... 25,529 101,706 Stockholders' equity................ 219,036 18,479 Results of operations - Net revenues........................ $177,321 $168,033 $171,081 $163,892 Operating income.................... 14,001 5,799 9,592 43 Net income (loss).................... 2,522 (5,680) (2,457) (11,956) Net income (loss) per common share.............................. .19 (.46) (.20) (.98) 6 BALLY TOTAL FITNESS HOLDING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) (ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) In addition, the Company changed its first quarter 1997 application of Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities", which provides new accounting and reporting standards for sales, securitizations, and servicing of receivables and other financial assets, secured borrowing and collateral transactions, and extinguishments of liabilities occurring after December 31, 1996. SFAS No. 125 addresses whether a transfer of financial assets constitutes a sale and, if so, the determination of any resulting gain or loss. SFAS No. 125 is based on a "financial- components approach" that focuses on control. Under this approach, following a transfer of financial assets (including portions of financial assets), an entity recognizes the assets it controls and liabilities it has incurred, and derecognizes financial assets for which control has been surrendered and financial liabilities that have been extinguished. The Company, based upon a series of consultations with its independent auditors, initially believed that under the Company's securitization facility, installment contracts receivable originating and being sold to a special purpose entity after December 31, 1996 qualified for "sale treatment" under SFAS No. 125. However, based upon Emerging Issues Task Force Issue 96-20 guidance, the Company and its independent auditors now believe that sales of installment contracts receivable after December 31, 1996 do not qualify for "sale treatment" under SFAS No. 125. As a result of this additional restatement of the Company's first quarter 1997 condensed consolidated financial statements, assets relating to installment contracts receivable and long-term debt each increased by approximately $30,000 at March 31, 1997, and finance charges earned and interest expense each increased by approximately $500 for the three months ended March 31, 1997. SEASONAL FACTORS The Company's operations are subject to seasonal factors and, therefore, the results of operations for the three months ended March 31, 1997 and 1996 are not necessarily indicative of the results of operations for the full year. 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 12,279,131 shares and 12,170,161 shares for the three months ended March 31, 1997 and 1996, respectively. Certain restricted stock was issued subject to forfeiture unless certain conditions are met. These contingent shares are considered common stock equivalents and are excluded from the loss per share computation until the conditions are met because their effect would be anti-dilutive. In February 1997, the Financial Accounting Standards Board issued 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 months ended March 31, 1997 each would have been $(.46) per share. LONG-TERM DEBT The Company's revolving credit agreement was amended in February 1997 to provide for a $20,000 line of credit, which is reduced by the amount of any outstanding letters of credit in excess of $10,000 (which excess may not exceed $10,000). The maximum amount available under this revolving credit agreement, including letters of credit, is $30,000. At March 31, 1997, outstanding letters of credit totaled approximately $13,600 and borrowings on the credit line totaled $12,000. 7 BALLY TOTAL FITNESS HOLDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 Net revenues for the first quarter of 1997 were $168.5 million compared to $163.9 million in 1996, an increase of $4.6 million (3%). The average number of fitness centers selling memberships decreased from 324 in the first quarter of 1996 to 319 in the first quarter of 1997, reflecting the closure of 12 older, typically smaller and less profitable facilities offset, in part, by the opening of 6 new, larger facilities between January 1996 and March 1997. Initial membership fees originated increased $4.7 million (4%) in the 1997 quarter, consisting of an $8.4 million (10%) increase in financed memberships originated offset, in part, by a $3.7 million (17%) decrease in paid-in-full memberships originated. These results generally reflect management's current strategy of selling more financed membership plans and fewer discounted paid- in-full membership plans, which resulted in an 18% increase in the average selling price of contracts sold and a 14% decline in the number of contracts sold. Dues collected increased $4.4 million (10%) over 1996, reflecting the Company's continuing strategy of increasing renewal dues. Finance charges earned increased $.2 million (2%) in the 1997 quarter and fees and other revenues increased $.3 million (9%) from 1996. Operating income for the first quarter of 1997 was $6.3 million compared to approximately break-even in 1996. The improvement of $6.3 million is due to the aforementioned increase in revenues and a $1.6 million (1%) decrease in operating costs and expenses, which is net of a $1.0 million increase in the provision for doubtful receivables. Excluding the provision for doubtful receivables, operating costs and expenses decreased $2.6 million (2%) from 1996 primarily due to a $2.2 million (19%) decrease in member processing and collection center expenses, which includes the realization in 1997 of the full effect of cost reductions achieved in connection with the completion of the primary phase of a computer conversion in late 1995. In addition, telephone expenses decreased as a result of renegotiated rates and fewer member service calls. Operating costs and expenses are expected to include a non-recurring charge during the second quarter or later in 1997, principally amortization, relating to the restricted stock awards issued in conjunction with the spin-off of the Company for which restrictions lapsed and vesting has yet to occur. The charge, which is based in part on the price of the Company's common stock at the time of future vesting, is not yet determinable. The provision for doubtful receivables for the first quarter of 1997 was $25.5 million compared to $24.5 million in 1996, an increase of $1.0 million (4%) primarily due to the increase in initial membership fees originated on financed memberships. The rate of the Company's provision for doubtful receivables can vary from period to period. The Company estimates the ultimate realization of initial membership fees originated on financed memberships based upon a number of factors such as method of payment (EFT vs. coupon books) and amount of downpayment, among others. The Company continually analyzes the provision because initial membership fees can be paid to the Company in installments. Updated collection experience trends are reviewed each reporting period and, if necessary, the allowance is adjusted accordingly. Changes in the allowance as a percentage of gross receivables may result from various factors including significant near-term fluctuations in amounts of initial membership fees originated for financed memberships (historically, approximately 50% of financed memberships that default do so within 120 days of origination) or the timing or acceleration of write-offs. The Company believes the qualitative profile of its receivables portfolio at March 31, 1997 is generally improved from that in recent years due to more accounts paying by EFT and higher average downpayments. Interest expense, net of capitalized interest, was $11.9 million for the first quarter of 1997 compared to $11.8 million in 1996, an increase of $.1 million (1%). The income tax provision for the first 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. 8 BALLY TOTAL FITNESS HOLDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(CONTINUED) LIQUIDITY AND CAPITAL RESOURCES The Company has no scheduled principal payments under its $200 million principal amount of 13% Senior Subordinated Notes due 2003 (the "13% Notes") until January 2003. Through July 1999, the principal amount of the certificates under the Company's securitization facility remains fixed at $160 million. In addition, the Company's revolving credit agreement, which provides for borrowings of up to $20 million, expires in June 1998. Accordingly, debt service requirements of the Company for the next twelve months are principally for interest and are expected to be approximately $51 million. The Company's recent losses and the terms of its revolving credit agreement have limited the Company's ability to borrow significant amounts of additional funds. Consequently, the Company has been dependent on availability under its revolving credit agreement ($4.4 million at March 31, 1997) 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 down- payments 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, if needed in the future, such discounting and acceleration techniques may be increasingly costly and less effective. 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. 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. For the last several years, the Company has spent $6 million to $15 million annually, as funds were available, to open new or replacement facilities. The Company expects to continue those expenditures as funds are available. The Company filed a Registration Statement with the Securities and Exchange Commission to offer additional shares of its common stock which has not yet been declared effective (the "Offering"). The Company intends to use (i) approximately $20 million to $30 million of the proceeds of the Offering for capital expenditures to develop 15 to 25 new facilities over the next three years and more extensively refurbish and make major upgrades to approximately 25% of its facilities over the next two years, (ii) $7.5 million to repay a loan to an affiliate of an underwriter of the Offering, (iii) as much as $3 million to support the introduction of new initiatives and (iv) the balance, if any, for general corporate and working capital purposes. The Company expects that completion of the Offering will alleviate the need to use the discounting techniques described above. Pending such uses, the Company may temporarily invest available funds from the Offering in short-term securities and/or reduce indebtedness under its revolving credit agreement. FORWARD-LOOKING STATEMENTS Forward-looking statements in this Form 10-Q/A 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; 9 BALLY TOTAL FITNESS HOLDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(CONTINUED) 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 mentioned in this Form 10-Q/A. 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. CASH EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION ("CASH EBITDA") The indenture governing the 13% Notes requires the disclosure of information with respect to Cash EBITDA (as calculated using accounting principles in effect in January 1993, when the 13% Notes were issued) in this Form 10-Q/A. Cash EBITDA should not be considered as an alternative to any measure of performance or liquidity as promulgated under generally accepted accounting principles (such as net income/loss or cash provided by/used in operating, investing and financing activities), nor should it be considered as an indicator of the Company's overall financial performance. Cash EBITDA is calculated as follows (in millions): Three months ended March 31 ---------------------- 1997 1996 ---------- ---------- Loss before income taxes................................ $ (5.6) $ (11.8) Adjustments to reconcile to Cash EBITDA: Interest expense (excluding $3.5 million and $3.6 million of interest on the securitization facilities)................... 7.9 8.3 Depreciation and amortization......................... 13.1 13.7 Provision for doubtful receivables.................... 25.5 24.5 Increase in installment contracts receivable.......................................... (42.3) (28.7) Increase in deferred revenues......................... 5.7 .7 (Increase) decrease in deferred membership origination costs................................... (.3) .5 Other non-cash items.................................. .1 ---------- ---------- Cash EBITDA............................................. $ 4.1 $ 7.2 ========== ========== Cash EBITDA was $4.1 million for the first quarter of 1997 compared to $7.2 million for 1996, a decrease of $3.1 million primarily attributed to decreased collections and decreased accelerations on installment contracts receivable offset, in part, by an increase in renewal dues and a decrease in cash expenses. 10 BALLY TOTAL FITNESS HOLDING CORPORATION PART II. OTHER INFORMATION Item 6. Exhibits and reports on Form 8-K (a) Exhibits: 27 Restated Financial Data Schedule for March 31, 1997 and 1996 (filed electronically only). (b) Reports on Form 8-K: None. 11 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: July 16, 1997 12