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.
<PAGE>
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
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<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
<CAPTION>
June 30 December 31
1998 1997
----------- -----------
<S> <C> <C>
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>
</TABLE>
1
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<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three months
ended June 30
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
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>
</TABLE>
2
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Six months
ended June 30
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
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>
</TABLE>
3
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<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
<CAPTION>
Common stock
------------------ Total
Number Par Contributed Accumulated stockholders'
of shares value capital deficit equity
---------- ----- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
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>
</TABLE>
4
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Six months
ended June 30
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
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)
</TABLE>
5
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED)
(In thousands)
(Unaudited)
<CAPTION>
Six months
ended June 30
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
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>
</TABLE>
6
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data)
(Unaudited)
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Bally Total Fitness Holding Corporation (the "Company") and the
subsidiaries which it controls. The Company, through its subsidiaries, is a
nationwide commercial operator of fitness centers with approximately 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
<PAGE>
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:
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
========== ========== =========== ===========
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BALLY TOTAL FITNESS HOLDING CORPORATION
---------------------------------------------------------------
Registrant
/s/ John W. Dwyer
---------------------------------------------------------------
John W. Dwyer
Executive Vice President, Chief Financial Officer and Treasurer
(principal financial officer)
Dated: August 14, 1998
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 30, 1998, THE CONSOLIDATED
STATEMENT OF OPERATIONS AND THE CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 65,981
<SECURITIES> 0
<RECEIVABLES> 501,312 <F1>
<ALLOWANCES> 107,536
<INVENTORY> 0
<CURRENT-ASSETS> 289,274
<PP&E> 649,904
<DEPRECIATION> 323,406
<TOTAL-ASSETS> 1,051,113
<CURRENT-LIABILITIES> 390,849
<BONDS> 406,665
0
0
<COMMON> 236
<OTHER-SE> 161,652
<TOTAL-LIABILITY-AND-EQUITY> 1,051,113
<SALES> 0
<TOTAL-REVENUES> 365,364
<CGS> 0
<TOTAL-COSTS> 223,293 <F2>
<OTHER-EXPENSES> 19,692 <F3>
<LOSS-PROVISION> 61,698
<INTEREST-EXPENSE> 20,507
<INCOME-PRETAX> 4,326
<INCOME-TAX> 250
<INCOME-CONTINUING> 4,076
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,076
<EPS-PRIMARY> .19
<EPS-DILUTED> .16
<FN>
<F1>THIS AMOUNT IS THE SUM OF THE SHORT-TERM AND LONG-TERM INSTALLMENT
CONTRACTS RECEIVABLE LINES ON THE CONDENSED CONSOLIDATED BALANCE SHEET AT
JUNE 30, 1998 AND IS NET OF UNEARNED FINANCE CHARGES.
<F2>THIS AMOUNT IS THE SUM OF THE FITNESS CENTER OPERATIONS LINE, THE
ADVERTISING LINE AND THE CHANGE IN DEFERRED MEMBERSHIP ORIGINATION COSTS
LINE ON THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS
ENDED JUNE 30, 1998.
<F3>THIS AMOUNT IS THE MEMBER PROCESSING AND COLLECTION CENTERS LINE ON THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1998.
</FN>
</TABLE>
