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 June 30, 1998 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 July 31, 1998, 23,653,790 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) June 30, 1998 and December 31, 1997........................... 1 Consolidated statement of operations (unaudited) Three months ended June 30, 1998 and 1997..................... 2 Consolidated statement of operations (unaudited) Six months ended June 30, 1998 and 1997....................... 3 Consolidated statement of stockholders' equity (unaudited) Six months ended June 30, 1998................................ 4 Consolidated statement of cash flows (unaudited) Six months ended June 30, 1998 and 1997....................... 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 4. Submission of Matters to a Vote of Security Holders....... 14 Item 6. Exhibits and reports on Form 8-K.......................... 14 SIGNATURE PAGE....................................................... 15 BALLY TOTAL FITNESS HOLDING CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (In thousands) (Unaudited) June 30 December 31 1998 1997 ----------- ----------- ASSETS Current assets: Cash and equivalents.............................. $ 65,981 $ 61,679 Installment contracts receivable, less unearned finance charges of $36,033 and $27,709 and allowance for doubtful receivables and cancellations of $58,419 and $43,728............ 189,561 168,011 Other current assets.............................. 33,732 31,743 ----------- ----------- Total current assets............................ 289,274 261,433 Installment contracts receivable, less unearned finance charges of $18,670 and $14,357 and allowance for doubtful receivables and cancellations of $49,117 and $36,803.............. 204,215 175,575 Property and equipment, less accumulated depreciation and amortization of $323,406 and $314,544...................................... 326,498 311,197 Intangible assets, less accumulated amortization of $56,439 and $54,124............... 103,994 101,220 Deferred income taxes............................... 4,255 4,171 Deferred membership origination costs............... 96,121 86,737 Other assets........................................ 26,756 27,233 ----------- ----------- $ 1,051,113 $ 967,566 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................. $ 44,621 $ 36,908 Income taxes payable.............................. 2,229 2,342 Deferred income taxes............................. 5,744 5,660 Accrued liabilities............................... 48,373 50,464 13% Senior Subordinated Notes due 2003, called for 1998 redemption............................. 22,555 Other current maturities of long-term debt........ 4,597 4,590 Deferred revenues................................. 285,285 270,853 ----------- ----------- Total current liabilities....................... 390,849 393,372 Long-term debt, less current maturities............. 406,665 405,425 Other liabilities................................... 6,127 7,459 Deferred revenues................................... 85,584 90,989 Stockholders' equity................................ 161,888 70,321 ----------- ----------- $ 1,051,113 $ 967,566 =========== =========== <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 June 30 ----------------------- 1998 1997 ---------- ---------- Net revenues: Membership revenues - Initial membership fees on financed memberships originated......................... $ 103,671 $ 79,993 Initial membership fees on paid-in-full memberships originated........................ 7,545 14,548 Dues collected.................................. 46,629 49,069 Change in deferred revenues..................... 3,833 4,720 ---------- ---------- 161,678 148,330 Finance charges earned............................. 12,184 9,764 Fees and other..................................... 7,014 3,724 ---------- ---------- 180,876 161,818 Operating costs and expenses: Fitness center operations.......................... 104,466 93,444 Member processing and collection centers........... 9,101 8,791 Advertising........................................ 11,589 11,250 General and administrative......................... 6,319 6,306 Provision for doubtful receivables................. 29,306 22,028 Depreciation and amortization...................... 11,752 15,007 Change in deferred membership origination costs.... (3,292) 1,784 ---------- ---------- 169,241 158,610 ---------- ---------- Operating income..................................... 11,635 3,208 Interest income...................................... 720 136 Interest expense..................................... (10,301) (10,544) ---------- ---------- Income (loss) before income taxes.................... 2,054 (7,200) Income tax provision ................................ (50) (100) ---------- ---------- Net income (loss).................................... $ 2,004 $ (7,300) ========== ========== Basic earnings (loss) per common share............... $ .09 $ (.59) ========== ========== Diluted earnings (loss) per common share............. $ .08 $ (.59) ========== ========== <FN> See accompanying notes. </FN> 2 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share data) (Unaudited) Six months ended June 30 ----------------------- 1998 1997 ---------- ---------- Net revenues: Membership revenues - Initial membership fees on financed memberships originated......................... $ 219,245 $ 175,561 Initial membership fees on paid-in-full memberships originated........................ 17,528 32,023 Dues collected.................................. 98,202 96,857 Change in deferred revenues..................... (6,314) (945) ---------- ---------- 328,661 303,496 Finance charges earned............................. 23,331 19,533 Fees and other..................................... 13,372 7,194 ---------- ---------- 365,364 330,223 Operating costs and expenses: Fitness center operations.......................... 207,588 189,368 Member processing and collection centers........... 19,692 18,194 Advertising........................................ 25,089 23,936 General and administrative......................... 12,624 12,227 Provision for doubtful receivables................. 61,698 47,565 Depreciation and amortization...................... 24,495 28,072 Change in deferred membership origination costs.... (9,384) 1,482 ---------- ---------- 341,802 320,844 ---------- ---------- Operating income..................................... 23,562 9,379 Interest income...................................... 1,271 264 Interest expense..................................... (20,507) (22,423) ---------- ---------- Income (loss) before income taxes.................... 4,326 (12,780) Income tax provision ................................ (250) (200) ---------- ---------- Net income (loss).................................... $ 4,076 $ (12,980) ========== ========== Basic earnings (loss) per common share............... $ .19 $ (1.06) ========== ========== Diluted earnings (loss) per common share............. $ .16 $ (1.06) ========== ========== <FN> See accompanying notes. </FN> 3 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands, except share data) (Unaudited) Common stock ------------------ Total Number Par Contributed Accumulated stockholders' of shares value capital deficit equity ---------- ----- ----------- ----------- ------------- Balance at December 31, 1997....... 20,575,092 $ 206 $ 392,718 $ (322,603) $ 70,321 Net income......................... 4,076 4,076 Issuance of common stock through public offering................... 2,800,000 28 82,716 82,744 Issuance of common stock for acquisition of business........... 230,769 2 4,398 4,400 Issuance of common stock under stock purchase and option plans... 46,068 347 347 ---------- ----- ---------- ---------- -------- Balance at June 30, 1998........... 23,651,929 $ 236 $ 480,179 $ (318,527) $161,888 ========== ===== ========== ========== ======== <FN> See accompanying notes. </FN> 4 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) (Unaudited) Six months ended June 30 ----------------------- 1998 1997 ---------- ---------- OPERATING: Net income (loss).................................. $ 4,076 $ (12,980) Adjustments to reconcile to cash used - Depreciation and amortization, including amortization included in interest expense...... 25,602 29,236 Provision for doubtful receivables............... 61,698 47,565 Change in operating assets and liabilities.................................... (112,544) (67,886) ---------- ---------- Cash used in operating activities.............. (21,168) (4,065) INVESTING: Purchases and construction of property and equipment.................................... (28,182) (13,060) Acquisitions of businesses......................... (2,073) Other, net......................................... (93) ---------- ---------- Cash used in investing activities ............. (30,255) (13,153) FINANCING: Debt transactions - Redemption of 13% Senior Subordinated Notes due 2003................................. (24,021) Net borrowings under revolving credit agreement...................................... 12,000 Repayments of other long-term debt............... (3,038) (1,798) Debt issuance costs.............................. (307) (7) ---------- ---------- Cash (used in) provided by debt transactions... (27,366) 10,195 Equity transactions - Proceeds from issuance of common stock through public offering................................ 82,744 Proceeds from issuance of common stock under stock purchase and option plans................ 347 54 ---------- ---------- Cash provided by financing activities.......... 55,725 10,249 ---------- ---------- Increase (decrease) in cash and equivalents.......... 4,302 (6,969) Cash and equivalents, beginning of period............ 61,679 16,534 ---------- ---------- Cash and equivalents, end of period.................. $ 65,981 $ 9,565 ========== ========== (continued) 5 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED) (In thousands) (Unaudited) Six months ended June 30 ----------------------- 1998 1997 ---------- ---------- SUPPLEMENTAL CASH FLOWS INFORMATION: Changes in operating assets and liabilities, net of effects from acquisitions, were as follows - Increase in installment contracts receivable... $ (111,806) $ (65,148) Increase in other current and other assets..... (2,229) (8,783) (Increase) decrease in deferred membership origination costs............................ (9,384) 1,482 Increase in accounts payable................... 7,388 6,596 Increase in income taxes payable............... 229 67 Decrease in accrued and other liabilities.................................. (3,056) (3,045) Increase in deferred revenues.................. 6,314 945 ---------- ---------- $ (112,544) $ (67,886) ========== ========== Cash payments for interest and income taxes were as follows - Interest paid.................................. $ 21,502 $ 22,149 Interest capitalized........................... (232) (892) Income taxes paid, net......................... 22 133 Investing and financing activities exclude the following non-cash transactions - Acquisition of business with common stock...... $ 4,400 $ Acquisition of property and equipment through capital leases/borrowings............ 3,814 2,814 <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 325 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 and Form 10-K/A for the year ended December 31, 1997. 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 June 30, 1998, its consolidated statements of operations and cash flows for the three and six months ended June 30, 1998 and 1997, and its consolidated statement of stockholders' equity for the six months ended June 30, 1998. 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. In addition, certain reclassifications (interest income) have been made to prior period financial statements to conform with the 1998 presentation. SEASONAL FACTORS The Company's operations are subject to seasonal factors and, therefore, the results of operations for the three and six months ended June 30, 1998 and 1997 are not necessarily indicative of the results of operations for the full year. ACQUISITIONS During the three months ended June 30, 1998 the Company acquired 9 fitness centers, 8 located in the San Francisco/Oakland area and one in Chicago. The total purchase price of the 9 centers was $6.9 million consisting of 230,769 common shares of the Company stock valued at $4.4 million, $2.1 million in cash and $.4 million in future consideration. STOCK OFFERING In May 1998, the Company issued 2,800,000 shares of its common stock at $31 3/8 per share through underwriters. The offering provided net proceeds of $82.7 million. The Company is using these proceeds to fund its growth strategy to open new fitness centers based on its new club prototype, to selectively acquire club-related real estate and to acquire fitness center operators in strategic geographic markets. The Company will allocate these proceeds among contemplated uses based on available business opportunities and prevailing market conditions. 7 BALLY TOTAL FITNESS HOLDING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in thousands, except share data) (Unaudited) ALLOWANCE FOR DOUBTFUL RECEIVABLES AND CANCELLATIONS A summary of the allowance for doubtful receivables and cancellations activity is as follows: Three months ended Six months ended ------------------------ ------------------------ 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Balance at beginning of period $ 95,471 $ 91,629 $ 80,531 $ 86,095 Contract cancellations and write-offs of uncollectible amounts, net of recoveries (49,950) (49,628) (104,717) (98,649) Provision for cancellations (classified as a direct reduction of revenues) 32,709 24,601 70,024 53,619 Provision for doubtful receivables 29,306 22,028 61,698 47,565 ---------- ---------- ----------- ----------- Balance at end of period $ 107,536 $ 88,630 $ 107,536 $ 88,630 ========== ========== =========== =========== EARNINGS (LOSS) PER COMMON SHARE Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each period, which totaled 22,430,153 shares and 12,314,465 shares for the three months ended June 30, 1998 and 1997, respectively, and 21,509,974 shares and 12,296,896 shares for the six months ended June 30, 1998 and 1997, respectively. Diluted earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding during each period, which totaled 26,421,590 shares and 12,314,465 shares for the three months ended June 30, 1998 and 1997, respectively, and 25,369,680 shares and 12,296,896 shares for the six months ended June 30, 1998 and 1997, respectively. Common stock equivalents represent the dilutive effect of the assumed exercise of outstanding warrants and stock options. Common stock equivalents increased the weighted average number of shares outstanding by 3,991,437 and 3,859,706 for diluted earnings per common share for the three and six months ended June 30, 1998, respectively. The assumed exercise of outstanding warrants and stock options for diluted loss per common share was not applicable in 1997 because their effect was anti-dilutive. 8 BALLY TOTAL FITNESS HOLDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997 Net revenues for the second quarter of 1998 were $180.9 million compared to $161.8 million in 1997, an increase of $19.1 million (12%). This increase is substantially a result of an increase in initial membership fees originated of $16.7 million (18%), consisting of a $23.7 million (30%) increase in financed memberships originated offset, in part, by a $7.0 million (48%) decrease in paid-in-full memberships originated. These results generally reflect management's strategy of selling more all-club membership plans (which typically have been financed and generate better long-term returns for the Company) and fewer single-club membership plans. The weighted average selling price of membership contracts sold increased 25%. Reflecting management's continuing strategy to improve the quality of its facilities, the Company, between April 1997 and June 1998, closed 11 older, typically smaller and less profitable facilities and sold one fitness center to a franchisee while opening 8 new, larger facilities, using its new prototype design. In addition, during the second quarter of 1998, the Company acquired 9 fitness centers, 8 located in the San Francisco/Oakland area and one in Chicago. The weighted average number of fitness centers selling memberships increased from 318 in the second quarter of 1997 to 319 in the second quarter of 1998. Dues collected decreased $2.4 million (5%) from the 1997 quarter, primarily as a result of the effects of the Company's previously announced strategy to discontinue its practice of accelerating dues collections by offering discounts for prepayments coupled with an increasing number of members paying dues monthly by Electronic Fund Transfer "EFT" methods instead of annual payments. The Company's experience has shown that EFT methods generally result in improved customer satisfaction, lower attrition and improved margins. Consistent with this strategy, prepaid dues decreased by almost 6% over the preceding 6 months. Deferred revenue accounting increased revenues by $3.8 million in the second quarter of 1998 compared to an increase of $4.7 million in 1997. Finance charges earned increased $2.4 million (25%) in the second quarter of 1998 due to the increase in the size and quality of the receivables portfolio. Receivables written off in the period as a percent of average receivables was 10%, compared to 12% experienced during the prior year period, a 17% improvement. Additionally, the percentage of accounts current with all contractual payments improved to 87% from 83% as of December 31, 1997. The average rate for finance charges to members was substantially unchanged between the periods. Fees and other revenues increased $3.3 million (88%) over the 1997 quarter, reflecting a portion of the increase in revenues from the Company's new initiatives (including personal training and the sale of nutritional and other retail products). Revenues from new initiatives totalled $7.7 million in the 1998 quarter (of which $2.4 million, relating to the sale of new System 30 memberships, is included in membership originations revenue) compared to $2.0 million of similar revenues in the 1997 quarter, an increase of $5.7 million. System 30 memberships, first offered on a limited basis in the fourth quarter of 1997, are priced $150 above the highest membership price and include the benefits of the all-club membership plus a supply of nutritional products, a fitness assessment and two personal training sessions. Operating income for the second quarter of 1998 was $11.6 million compared to $3.2 million in 1997. The increase of $8.4 million (263%) was due to the aforementioned $19.1 million increase in revenues partially offset by a $10.7 million (7%) increase in operating costs and expenses. The increase in operating costs and expenses reflects a $7.3 million increase in the provision for doubtful receivables in 1998 offset by a $3.4 million one-time charge in the second quarter 1997, netting to $3.9 million. Other operating costs and expenses, excluding the $3.9 million net increase above, increased $6.8 million (5%) from 1997. Fitness center operations and member processing and collection centers expenses, net of direct selling costs deferred through the change in deferred membership origination costs, increased $6.3 million due primarily to $3.5 million of costs associated with the $5.7 million growth in new initiative revenues described above. Miscellaneous items accounted for the remainder. 9 BALLY TOTAL FITNESS HOLDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Depreciation expense is expected to decline, exclusive of the effects from additions or acquisitions, by $3.0 million to $5.0 million annually during the next three years, because assets acquired by the Company in the 1980's which have continuing economic lives, are becoming fully depreciated as a result of the Company's depreciation policies. For the second quarter of 1998, depreciation expense, as expected, declined $1.2 million. Amortization expense declined $2.1 million related to the amortization portion of the $3.4 million one-time charge mentioned above. The provision for doubtful receivables for the second quarter of 1998 was $29.3 million compared to $22.0 million in 1997, an increase of $7.3 million (33%) due to the increase in initial membership fees originated on financed memberships. The total provision rate, inclusive of provisions for cancellations which are reflected as a direct reduction of initial membership fees on financed memberships originated, was 41% of gross financed originations during each of the periods. Interest income for the second quarter of 1998 increased to $.7 million from $.1 million in 1997 due to an increase in temporarily invested available cash balances. Interest expense was $10.3 million for the second quarter of 1998 compared to $10.5 million in 1997, a decrease of $.2 million (2%) due to lower average interest rates. The income tax provision for the second quarter of 1998 reflects state income taxes as the federal taxes provided were offset by the reversal of valuation reserves. The 1997 income tax provision reflects state income taxes only, as no federal benefit was provided because the ultimate realization of additional deferred tax assets could not be assured. COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 Net revenues for the first six months of 1998 were $365.4 million compared to $330.2 million in 1997, an increase of $35.2 million (11%). This increase is substantially a result of an increase in initial membership fees originated of $29.2 million (14%), consisting of a $43.7 million (25%) increase in financed memberships originated offset, in part, by a $14.5 million (45%) decrease in paid-in-full memberships originated. The weighted average selling price of membership contracts sold increased 21%. Reflecting management's continuing strategy to improve the quality of its facilities, the Company, between January 1997 and June 1998, closed 12 older, typically smaller and less profitable facilities and sold one fitness center to a franchisee while opening 9 new, larger facilities, using its new prototype design. In addition, during the first six months of 1998, the Company acquired 9 fitness centers. The weighted average number of fitness centers selling memberships decreased from 318 in the six months of 1997 to 317 in the six months of 1998. Dues collected increased $1.3 million (1%) over 1997, reflecting the Company's continuing strategy of increasing renewal dues rates offset, in part, by the effects of the Company's previously announced strategy to discontinue its practice of accelerating dues collections by offering discounts for prepayments coupled with an increasing number of members paying dues monthly by EFT methods instead of annual payments. Consistent with this strategy, prepaid dues decreased by almost 6% over the preceding 6 months. As a result of the strong increase in initial membership fees originated, deferred revenue accounting reduced revenues by $6.3 million in the six months of 1998 compared to a $.9 million reduction in 1997. Finance charges earned increased $3.8 million (19%) in the six months of 1998 due to the increase in the size and quality of the receivables portfolio, as previously discussed. The average rate for finance charges to members was substantially unchanged between the periods. Fees and other revenues increased $6.2 million (86%) over the 1997 period, reflecting a portion of the increase in revenues from the Company's new initiatives (including personal training and the sale of nutritional and other retail products). Revenues from new initiatives totalled $14.7 million in the 1998 period (of which $4.9 million, relating to the sale portion of new System 30 memberships, is included in membership 10 BALLY TOTAL FITNESS HOLDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS originations revenue) compared to $3.7 million of similar revenues in the 1997 period, an increase of $11.0 million. Operating income for the first six months of 1998 was $23.6 million compared to $9.4 million in 1997. The increase of $14.2 million (151%) was due to the aforementioned $35.2 million increase in revenues partially offset by a $21.0 million (7%) increase in operating costs and expenses. The increase in operating costs and expenses reflects a $14.1 million increase in the provision for doubtful receivables in 1998 offset by a $3.4 million one-time charge in 1997, netting to $10.7 million. Other operating costs and expenses, excluding the $10.7 million net increase above, increased $10.3 million (4%) from 1997. Fitness center operations and member processing and collection centers expenses, net of direct selling costs deferred through the change in deferred membership origination costs, increased $8.9 million due primarily to $6.6 million of costs associated with the $11.0 million growth in new initiative revenues described above. As previously discussed, depreciation expense is expected to decline, exclusive of the effects from additions or acquisitions, by up to $5.0 million annually during the next three years. For the first six months of 1998 depreciation expense, as expected, declined $1.5 million. Amortization expense declined $2.1 million related to the amortization portion of the $3.4 million one-time charge mentioned above. The provision for doubtful receivables for the first six months of 1998 was $61.7 million compared to $47.6 million in 1997, an increase of $14.1 million (30%) due to the increase in initial membership fees originated on financed memberships. The total provision rate, inclusive of provisions for cancellations which are reflected as a direct reduction of initial membership fees on financed memberships originated, was 41% of gross financed originations during each of the periods. Interest income for the first six months of 1998 increased to $1.3 million from $.3 million in 1997 due to an increase in temporarily invested available cash balances. Interest expense was $20.5 million for the first six months of 1998 compared to $22.4 million in 1997, a decrease of $1.9 million (9%) due to lower average interest rates. The income tax provision for the first six months of 1998 reflects state income taxes as the federal taxes provided were offset by the reversal of valuation reserves. The 1997 income tax provision reflects state income taxes only, as no federal benefit was provided because the ultimate realization of additional deferred tax assets could not be assured. LIQUIDITY AND CAPITAL RESOURCES The Company is in the process of upgrading and increasing the number of its facilities to improve revenue potential from its membership and more effectively capitalize on its facilities, streamlined marketing, member support and administrative functions. Management plans to make capital expenditures of approximately $10 million to $12 million annually to maintain the Company's existing facilities, including exercise equipment upgrades, mechanical and other operating equipment replacements, and locker room and fitness area finishes, among others. In addition, the Company has completed almost half of its planned investment of approximately $15 million to extensively add and upgrade exercise equipment, refresh interior and exterior finishes to improve club ambience, and refurbish and make major upgrades to approximately 25% of its clubs. In recent years, the Company has spent $6 million to $15 million annually, as funds were available, to open new or replacement facilities. Beginning in 1998, the Company has increased its annual spending target to approximately $20 million to $25 million to build and open 15 to 20 new facilities based on its new prototype, which is designed to cost less to construct and maintain than the Company's older facilities. The new facilities are expected to range in size generally from 20,000 to 35,000 square feet and have the capacity to accommodate significantly more members than older clubs of the same size because they will generally focus on the most widely used amenities. 11 BALLY TOTAL FITNESS HOLDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In May 1998, the Company issued 2,800,000 shares of its common stock at $31 3/8 per share through underwriters. The offering provided net proceeds of $82.7 million. The Company is using these proceeds to fund its growth strategy to open new fitness centers, to selectively acquire club-related real estate and to acquire fitness center operators in strategic geographic markets. The Company will allocate these proceeds among the contemplated uses based on available business opportunities and prevailing market conditions. The Company is in various stages of discussions to acquire regional operators of fitness centers. None of the individual negotiations are for a material acquisition of fitness centers or club-related real estate. On August 6, 1998 the Company announced that it has been authorized to repurchase up to 1,500,000 shares of the Company's common stock on the open market from time to time. As of June 30, 1998, the Company's $70 million revolving credit line was unused except for outstanding letters of credit totaling $6.9 million. The Company has no scheduled principal payments under its subordinated debt until October 2007 and the principal amount of the certificates under its securitization facility remains fixed at $160 million through July 1999. Accordingly, debt service requirements (primarily interest) of the Company through June 30, 1999 are approximately $42.7 million. Management believes that the Company will be able to satisfy its debt service and capital expenditure requirements through June 30, 1999 along with funding any of the Company's stock repurchases, out of existing cash balances and cash flow from operations. In the first six months of 1998, cash used in operations was $21.2 million, an increase of $17.1 million over 1997. The increase was due principally to the Company's emphasis on the sale of financed memberships which decreased cash receipts from the sale of paid-in-full memberships by $14.5 million and the avoidance of discounted collection accelerations of installment contracts receivable and accelerations of discounted dues prepayments of $11.5 million, partially offset by increased regularly scheduled collections from installment contracts receivable of $8.0 million. Management believes the increasing level of collections will continue to grow and accordingly that cash from operating activities is expected to be positive in 1999. Capital expenditures of $32.0 million in the first six months of 1998 (including capital leases of $3.8 million) increased $16.1 million over 1997, resulting from the implementation of the Company's refurbishment and growth strategy discussed above. Also in January 1998, the Company redeemed the remaining $22.6 million aggregate principal amount of the 13% Senior Subordinated Notes due 2003 at a price of 106.5% of the principal amount, together with accrued and unpaid interest. Prior to completing public offerings of 8,000,000 shares of common stock in August 1997 and 2,800,000 shares in May 1998, which provided net proceeds totaling $171.1 million, the Company was dependent on availability under its credit facility and its operations to provide for cash needs. The Company managed liquidity requirements in recent years by emphasizing the sale of single-club paid-in-full membership plans and accelerating collections through promotional discounting of financed memberships and dues to increase available cash and, to a lesser extent, sales of non-strategic assets and sale/leaseback arrangements. Management believes use of these techniques has had a negative impact on operating results and long-term operating cash flows, and that available working capital has substantially reduced the need for these techniques to be continued. 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 that 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- 12 BALLY TOTAL FITNESS HOLDING CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 this Form 10-Q or in other 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. 13 BALLY TOTAL FITNESS HOLDING CORPORATION PART II. OTHER INFORMATION Item 4. Submission of matters to a vote of security holders At the Company's annual meeting of stockholders held on June 11, 1998, the stockholders considered and voted on the following: Two persons nominated by the Board of Directors for election as directors of Class II for three-year terms expiring in 2001 or until their successors have been duly elected, along with the voting results which resulted in each nominee being elected as a director, were as follows: Votes Votes Nominee cast for withheld ------------------ ---------- --------- Lee S. Hillman 17,492,286 33,028 James F. Mc Anally, M.D. 17,491,117 34,207 Item 6. Exhibits and reports on Form 8-K (a) Exhibits: 27 Financial Data Schedule for June 30, 1998 (filed electronically only). (b) Reports on Form 8-K: Financial Date Items Statements ----------- --------- ---------- May 7, 1998 #5 and #7 None 14 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 Executive Vice President, Chief Financial Officer and Treasurer (principal financial officer) Dated: August 14, 1998 15