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. 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 BALLY TOTAL FITNESS HOLDING CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (In thousands) (Unaudited) September 30 December 31 1997 1996 ------------ ----------- 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> 1 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share data) (Unaudited) Three months ended September 30 ----------------------- 1997 1996 ---------- ---------- (as restated) 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> 2 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share data) (Unaudited) Nine months ended September 30 ----------------------- 1997 1996 ---------- ---------- (as restated) 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> 3 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands, except share data) (Unaudited) 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........................... (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> 4 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) (Unaudited) Nine months ended September 30 ----------------------- 1997 1996 ---------- ---------- (as restated) 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> 5 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED) (In thousands) (Unaudited) Nine months ended September 30 ----------------------- 1997 1996 ---------- ---------- (as restated) 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> 6 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: Three months ended Nine months ended September 30, 1996 September 30, 1996 ------------------------ ------------------------ As As originally As originally As reported restated reported restated ---------- --------- ---------- --------- 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) In addition, certain reclassifications (primarily interest income) have been made to prior period financial statements to conform with the 1997 presentation. 7 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 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 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 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 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 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 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