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, 1999
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, 1999, 23,819,079 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 sheets (unaudited)
September 30, 1999 and December 31, 1998...................... 1
Consolidated statements of operations (unaudited)
Three months ended September 30, 1999 and 1998................ 2
Consolidated statements of operations (unaudited)
Nine months ended September 30, 1999 and 1998................. 3
Consolidated statement of stockholders' equity (unaudited)
Nine months ended September 30, 1999.......................... 4
Consolidated statements of cash flows (unaudited)
Nine months ended September 30, 1999 and 1998................. 5
Notes to condensed consolidated financial statements
(unaudited)................................................... 7
Item 2. Management's discussion and analysis of financial
condition and results of operations.................... 10
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K.......................... 14
SIGNATURE PAGE....................................................... 15
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents........................... $ 12,517 $ 64,382
Installment contracts receivable, net.......... 225,308 199,979
Other current assets........................... 42,695 34,212
---------- ----------
Total current assets......................... 280,520 298,573
Installment contracts receivable, net............ 255,030 222,147
Property and equipment, less accumulated
depreciation and amortization of $371,654
and $340,702................................... 447,040 361,300
Intangible assets, less accumulated
amortization of $62,649 and $58,844............ 133,456 101,815
Deferred income taxes............................ 29,570 17,430
Deferred membership origination costs............ 105,335 97,901
Other assets..................................... 35,669 29,679
---------- ----------
$1,286,620 $1,128,845
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 42,902 $ 40,957
Income taxes payable........................... 3,211 2,608
Deferred income taxes.......................... 31,059 18,919
Accrued liabilities............................ 65,449 48,596
Current maturities of long-term debt........... 9,316 5,799
Deferred revenues.............................. 296,794 282,806
---------- ----------
Total current liabilities.................... 448,731 399,685
Long-term debt, less current maturities.......... 548,676 482,199
Other liabilities................................ 6,075 6,226
Deferred revenues................................ 84,059 78,952
Stockholders' equity............................. 199,079 161,783
---------- ----------
$1,286,620 $1,128,845
========== ==========
<FN>
See accompanying notes
</FN>
</TABLE>
1
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net revenues:
Membership revenues --
Initial membership fees on financed
memberships originated......................... $ 119,968 $ 107,053
Initial membership fees on paid-in-full
memberships originated......................... 5,566 7,086
Dues collected................................... 58,922 52,016
Change in deferred revenues...................... (303) (183)
---------- ----------
184,153 165,972
Finance charges earned.............................. 15,086 13,573
Products and services............................... 20,290 10,728
---------- ----------
219,529 190,273
Operating costs and expenses:
Fitness center operations........................... 117,705 108,809
Member processing and collection centers............ 9,962 10,357
Advertising......................................... 12,217 10,897
General and administrative.......................... 6,975 6,775
Provision for doubtful receivables.................. 35,719 30,857
Depreciation and amortization....................... 13,232 11,997
Change in deferred membership origination costs..... (1,421) (3,229)
---------- ----------
194,389 176,463
---------- ----------
Operating income...................................... 25,140 13,810
Interest income....................................... 415 942
Interest expense...................................... (13,062) (10,216)
---------- ----------
Income before income taxes............................ 12,493 4,536
Income tax provision ................................. (250) (275)
---------- ----------
Net income ........................................... $ 12,243 $ 4,261
========== ==========
Net income per common share--basic.................. $ .52 $ .18
========== ==========
Net income per common share--assuming dilution...... $ .45 $ .16
========== ==========
<FN>
See accompanying notes
</FN>
</TABLE>
2
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net revenues:
Membership revenues --
Initial membership fees on financed
memberships originated......................... $ 365,589 $ 321,663
Initial membership fees on paid-in-full
memberships originated......................... 17,671 24,387
Dues collected................................... 174,244 150,218
Change in deferred revenues...................... (14,579) (6,497)
---------- ----------
542,925 489,771
Finance charges earned.............................. 44,546 36,904
Products and services............................... 50,587 29,528
---------- ----------
638,058 556,203
Operating costs and expenses:
Fitness center operations........................... 346,387 316,397
Member processing and collection centers............ 30,310 30,615
Advertising......................................... 38,096 35,986
General and administrative.......................... 19,866 19,399
Provision for doubtful receivables.................. 107,410 92,555
Depreciation and amortization....................... 38,276 36,492
Change in deferred membership origination costs..... (6,872) (12,613)
---------- ----------
573,473 518,831
---------- ----------
Operating income...................................... 64,585 37,372
Interest income....................................... 1,829 2,213
Interest expense...................................... (37,805) (30,723)
---------- ----------
Income before income taxes and cumulative
effect of a change in accounting principle.......... 28,609 8,862
Income tax provision ................................. (580) (525)
---------- ----------
Income before cumulative effect of a change in
accounting principle................................ 28,029 8,337
Cumulative effect of a change in accounting principle,
net of income tax................................... (262)
---------- ----------
Net income ........................................... $ 27,767 $ 8,337
========== ==========
Earnings per common share --basic:
Income before cumulative effect of a change
in accounting principle........................... $ 1.20 $ .38
Cumulative effect of a change in accounting
principle......................................... (.01)
---------- ----------
Net income per common share--basic.................. $ 1.19 $ .38
========== ==========
Earnings per common share - assuming dilution:
Income before cumulative effect of a change in
accounting principle.............................. $ 1.03 $ .32
Cumulative effect of a change in accounting
principle......................................... (.01)
---------- ----------
Net income per common share--assuming dilution...... $ 1.02 $ .32
========== ==========
<FN>
See accompanying notes
</FN>
</TABLE>
3
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
<CAPTION>
COMMON STOCK UNEARNED
------------------- COMPENSATION COMMON TOTAL
NUMBER PAR CONTRIBUTED ACCUMULATED (RESTRICTED STOCK IN STOCKHOLDERS'
OF SHARES VALUE CAPITAL DEFICIT STOCK) TREASURY EQUITY
---------- ----- ----------- ----------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998....... 23,373,393 $ 239 $ 488,046 $ (309,306) $ (7,978) $(9,218) $ 161,783
Net income......................... 27,767 27,767
Issuance of common stock for
acquisition of business.......... 141,723 1 7,798 7,799
Issuance of common stock under
stock purchase and option plans.. 284,419 3 1,727 1,730
---------- ----- ----------- ----------- ---------- ------- ------------
Balance at September 30, 1999...... 23,799,535 $ 243 $ 497,571 $ (281,539) $ (7,978) $(9,218) $ 199,079
========== ===== =========== =========== ========== ======= ============
<FN>
See accompanying notes
</FN>
</TABLE>
4
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30
------------------------
1999 1998
---------- ----------
<S> <C> <C>
OPERATING:
Income before cumulative effect of a change
in accounting principle........................... $ 28,029 $ 8,337
Adjustments to reconcile--
Depreciation and amortization, including
amortization classified as interest expense..... 40,714 38,162
Provision for doubtful receivables................ 107,410 92,555
Change in operating assets and
liabilities..................................... (148,920) (165,302)
---------- ----------
Cash provided by (used in) operating activities. 27,233 (26,248)
INVESTING:
Purchases and construction of property
and equipment..................................... (82,736) (47,690)
Acquisitions of businesses and other................ (16,783) (2,117)
---------- ----------
Cash used in investing activities .............. (99,519) (49,807)
FINANCING:
Debt transactions --
Net borrowings under revolving credit agreement... 28,500
Redemption of 13% Senior Subordinated
notes due 2003.................................. (24,021)
Repayments of other long-term debt................ (5,584) (5,344)
Debt issuance and refinancing costs............... (4,225) (317)
---------- ----------
Cash provided by (used in) debt transactions.... 18,691 (29,682)
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................. 1,730 423
Purchase of common stock for treasury (8,183)
---------- ----------
Cash provided by financing activities............ 20,421 45,302
---------- ----------
Decrease in cash and equivalents...................... (51,865) (30,753)
Cash and equivalents, beginning of period............. 64,382 61,679
---------- ----------
Cash and equivalents, end of period................... $ 12,517 $ 30,926
========== ==========
<FN>
(continued)
</FN>
</TABLE>
5
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(In thousands)
(Unaudited)
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30
------------------------
1999 1998
---------- ----------
<S> <C> <C>
SUPPLEMENTAL CASH FLOWS INFORMATION:
Changes in operating assets and liabilities
were as follows --
Increase in installment contracts
receivable.................................... $ (165,622) $ (164,429)
Increase in other current and
other assets.................................. (5,852) (1,875)
Increase in deferred membership
origination costs............................. (6,872) (12,613)
Increase in accounts payable.................... 1,869 2,746
Increase in income taxes payable................ 444 452
Increase in accrued and other
liabilities................................... 12,534 3,920
Increase in deferred revenues................... 14,579 6,497
---------- ----------
$ (148,920) $ (165,302)
========== ==========
Cash payments for interest and income taxes
were as follows --
Interest paid................................... $ 28,843 $ 25,787
Interest capitalized............................ (1,032) (422)
Income taxes paid, net.......................... 136 73
Investing and financing activities exclude the
following non-cash transactions --
Acquisition of property and equipment
through capital leases/borrowings............. 22,113 7,104
Debt, including assumed debt, related to
acquisitions of businesses.................... 24,835 -
Acquisition of business with common stock....... 7,799 4,400
<FN>
See accompanying notes.
</FN>
</TABLE>
6
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands)
(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
commercial operator of fitness centers in North America, with approximately 360
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. 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 for the year ended December 31, 1998.
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, 1999, its consolidated statements
of operations for the three and nine months ended September 30, 1999 and 1998,
its consolidated statements of cash flows for the nine months ended September
30, 1999 and 1998, and its consolidated statement of stockholders' equity for
the nine months ended September 30, 1999. 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 have been made to prior period financial
statements to conform with the 1999 presentation.
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, 1999
and 1998 are not necessarily indicative of the results of operations for the
full year.
ACQUISITIONS
During the first nine months of 1999, the Company acquired 23 fitness
centers; 10 upscale centers in Toronto, Canada, six in Fresno, California, four
in the Seattle area, two in the San Francisco area and one in Chicago. The total
purchase price of the 23 centers was $43,340 consisting of debt, including
assumed and seller financed debt, cash and shares of the Company's stock.
Certain seller notes, which had a value of $8,947 on the date issued, are
convertible into 275,312 shares of common stock on or before July 2001.
SUBSEQUENT EVENT
In November 1999, the Company completed a $175,000 senior secured credit
facility consisting of a 5-year $75,000 term loan due November 2004 and the
modification of the Company's existing revolving credit facility increasing the
amount available to $100,000 and extending its maturity to November 2002. The
amount available under the credit line is reduced by any outstanding letters of
credit, which cannot exceed $30,000.
7
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands)
(Unaudited)
<TABLE>
INSTALLMENT CONTRACTS RECEIVABLE
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
------------ -----------
<S> <C> <C>
Current:
Installment contracts receivable $ 343,619 $ 294,880
Unearned finance charges...................... (42,453) (35,792)
Allowance for doubtful receivables
and cancellations........................... (75,858) (59,109)
----------- -----------
$ 225,308 $ 199,979
=========== ===========
Long-term:
Installment contracts receivable $ 337,081 $ 287,443
Unearned finance charges...................... (21,473) (18,104)
Allowance for doubtful receivables
and cancellations........................... (60,578) (47,192)
----------- -----------
$ 255,030 $ 222,147
=========== ===========
</TABLE>
<TABLE>
ALLOWANCE FOR DOUBTFUL RECEIVABLES AND CANCELLATIONS
A summary of the allowance for doubtful receivables and cancellations activity
is as follows:
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at beginning of period...... $132,297 $107,536 $106,301 $ 80,531
Contract cancellations and
write-offs of uncollectable
amounts, net of recoveries........ (70,123) (56,546) (197,640) (161,263)
Provision for cancellations
(classified as a direct
reduction of revenues)........... 38,543 34,725 120,365 104,749
Provision for doubtful
receivables....................... 35,719 30,857 107,410 92,555
-------- -------- -------- --------
Balance at end of period............ $136,436 $116,572 $136,436 $116,572
======== ======== ======== ========
</TABLE>
8
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands)
(Unaudited)
EARNINGS PER COMMON SHARE
Basic earnings per common share for each period is computed based on the
weighted average number of shares of common stock outstanding of 23,417,395 and
23,491,719 for the three months ended September 30, 1999 and 1998, respectively,
and 23,316,082 and 22,177,815 for the nine months ended September 30, 1999 and
1998, respectively. Diluted earnings per common share for each period includes
the addition of common stock equivalents of 3,930,773 and 3,642,942 for the
three months ended September 30, 1999 and 1998, respectively, and 3,779,647 and
3,790,714 for the nine months ended September 30, 1999 and 1998, respectively.
Common stock equivalents represent the dilutive effect of the assumed exercise
of outstanding warrants and stock options and conversion of convertible seller
notes.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, Reporting the Costs of Start-up
Activities. The SOP was effective beginning on January 1, 1999, and required
that start-up costs including organization costs capitalized prior to January 1,
1999 be written-off and any future start-up costs be expensed as incurred. The
Company's unamortized start-up costs at January 1, 1999 were written off and
reported as a cumulative effect of a change in accounting principle, net of tax,
in accordance with APB Opinion No. 20.
9
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net revenue for the third quarter of 1999 was $219.5 million compared to
$190.3 million in 1998, an increase of $29.2 million (15%). Net revenue from
comparable fitness centers increased 9%. This significant increase in net
revenue resulted from the following:
-- Total new membership units sold increased 1% and the weighted average
selling price of membership contracts sold increased 10% over the prior
year quarter. These increases were attributable to the sale of higher
margin multi-club, membership plans coupled with a significant
strategic reduction in the scope of summer discount programs that,
historically, resulted in slightly higher unit sales at significantly
lower prices and yields. As a result, initial membership fees
originated increased $11.4 million (10%) despite the loss of more than
1% of club sales days (over 300 club days) during the quarter due to
inclement weather and other unusual conditions.
-- Dues collected increased $6.9 million (13%) from the 1998 quarter,
reflecting continued improvements in member retention and pricing from
strategies implemented during prior periods and the increase in the
number of fitness centers operating under our four upscale brands which
generally charge higher dues.
-- Finance charges earned during the third quarter of 1999 increased $1.5
million (11%) compared to the 1998 quarter, due to the growth in size
and consistent higher quality of the receivables portfolio. Average
interest rates for these finance charges were substantially unchanged
between the periods. The percentage of accounts current with all
contractual payments was 86% as of September 30, 1999 and 1998.
-- Products and services revenue increased $9.6 million (89%) over the
1998 quarter, primarily reflecting increased sales of personal training
services, nutritional and other retail products and financial services.
The weighted average number of fitness centers increased to 348 from 323
in the third quarter of 1998, including an increase to a weighted average of 27
from 13 centers operating under four upscale brands: Bally Sports Club, Pinnacle
Fitness, Gorilla Sports and Sports Clubs of Canada.
Operating income for the third quarter of 1999 was $25.1 million compared
to $13.8 million in 1998. The increase of $11.3 million (82%) was due to a $29.2
million (15%) increase in revenues offset by a $17.9 million (10%) increase in
operating costs and expenses. The operating margin before depreciation and
amortization increased to 17% from 14% in the prior year period. Excluding the
provision for doubtful receivables and the effect of deferral accounting,
operating costs and expenses increased $11.3 million (8%) from 1998. Fitness
center operating expenses increased $8.9 million (8%) due principally to
incremental costs of operating new fitness centers, costs supporting the revenue
growth of new product and service offerings and additional commissions from the
growth in initial membership fees originated. A substantial portion of the
commission expense is deferred through deferral accounting. Advertising expenses
increased 12% due to increased market research, new club marketing and direct
mail programs used to grow initial membership fees. Member processing and
collection center expenses and general and administrative expenses were
substantially unchanged quarter over quarter.
The provision for doubtful receivables, included in operating costs and
expenses, for the third quarter of 1999 was $35.7 million compared to $30.9
million in 1998, an increase of $4.8 million (16%) due to the increase in
initial membership fees on financed memberships originated. The total provision
rate, inclusive of the provision for doubtful receivables and the provision for
cancellations, which is reflected in the financial statements as a direct
reduction of initial membership fees on financed memberships originated, was 41%
of the gross financed portion of originations during each of the periods.
10
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
Deferral accounting was less favorable to earnings by $1.9 million for the
1999 quarter compared to 1998. This decrease reflects the combined impact of a
decrease in revenues of $.1 million and $1.8 million decrease in the expense
offset.
Interest expense was $13.1 million for the third quarter of 1999 compared
to $10.2 million in 1998. The $2.9 million increase was due to higher levels of
debt incurred.
The income tax provisions for the third quarter of 1999 and 1998 reflect
state income taxes only. The federal provisions were offset by the utilization
of prior years' net operating losses.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net revenue for the first nine months of 1999 was $638.1 million compared
to $556.2 million in 1998, an increase of $81.9 million (15%). Net revenue from
comparable fitness centers increased 10%. This significant increase in net
revenue resulted from the following:
-- Total new membership units sold increased 5% and the weighted average
selling price of membership contracts sold increased 6% over the prior
year period. These increases were attributable to the sale of higher
margin, multi-club membership plans coupled with a significant
strategic reduction in the scope of summer discount programs that,
historically, resulted in slightly higher unit sales at significantly
lower prices and yields. As a result, initial membership fees
originated increased $37.2 million (11%).
-- Dues collected increased $24.0 million (16%) from the 1998 period,
reflecting continued improvements in member retention and pricing from
strategies implemented in prior periods and the increase in the number
of fitness centers operating under our four upscale brands.
-- Finance charges earned during the first nine months of 1999 increased
$7.6 million (21%) compared to the 1998 period, due to the growth in
size and consistent higher quality of the receivables portfolio.
Average interest rates for these finance charges were substantially
unchanged between the periods.
-- Products and services revenue increased $21.1 million (71%) over the
1998 period, primarily reflecting increased sales of personal training
services, nutritional and other retail products and financial services.
The weighted average number of fitness centers increased to 338 from 319
in 1998, including an increase to a weighted average of 19 from nine centers
operating under our four upscale brands.
Operating income for the first nine months of 1999 was $64.6 million
compared to $37.4 million in 1998. The increase of $27.2 million (73%) was due
to a $81.9 million (15%) increase in revenues partially offset by a $54.7
million (11%) increase in operating costs and expenses. The operating margin
before depreciation and amortization increased to 16% from 13% in the prior year
period. Excluding the provision for doubtful receivables and the effect of
deferral accounting, operating costs and expenses increased $34.0 million (8%)
from 1998. Fitness center operating expenses increased $30.0 million (9%) due
principally to incremental costs of operating new fitness centers, costs
supporting the revenue growth of new product and service offerings and
additional commissions from the growth in initial membership fees originated. A
substantial portion of the commission expense is deferred through deferral
accounting. Advertising expenses increased 6% due to increased market research,
new club marketing and direct mail programs used to grow initial membership
fees. Member processing and collection center expenses and general and
administrative expenses were substantially unchanged period over period.
11
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
The provision for doubtful receivables, included in operating costs and
expenses, for the first nine months of 1999 was $107.4 million compared to $92.6
million in 1998, an increase of $14.9 million (16%) due to the increase in
initial membership fees on financed memberships originated. The total provision
rate, inclusive of the provision for doubtful receivables and the provision for
cancellations, which is reflected in the financial statements as a direct
reduction of initial membership fees on financed memberships originated, was 41%
of the gross financed portion of originations during each of the periods.
Deferral accounting reduced earnings by $13.8 million for 1999 compared to
1998. This decrease reflects the combined impact of a decrease in revenues of
$8.1 million and $5.7 million decrease in the expense offset.
Interest expense was $37.8 million for the first nine months of 1999
compared to $30.7 million in 1998. The $7.1 million increase was due to higher
levels of debt incurred.
The income tax provisions for the first nine months of 1999 and 1998
reflect state income taxes only. The federal provisions were offset by the
utilization of prior years' net operating losses.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the first nine months of 1999
was a positive $27.2 million compared to a use of $26.2 million in 1998. The
period over period improvement of $53.4 million principally reflects the
continued growth in overall collections from installment contracts receivable
and monthly dues and is net of the timing of other working capital changes which
were seasonally low at September 30, 1999. Additionally, inventories of our
privately-labeled nutritional line were grown by nearly $3 million to support
rapid sales growth in view of the nearly tripling of the number of products
offered and to support the rollout of new membership programs that include these
products. Net installment contracts receivable grew $58.2 million during the
nine-month period. Excluding the growth in receivables, cash provided by
operating activities grew to $85.4 million, a $39.8 million improvement over the
1998 period.
We have no scheduled principal payments under our $300.0 million
subordinated debt until October 2007. In April 1999, the Company amended its
$160.0 million securitization facility extending the initial maturity to July
2001. The interest rate on the $145.5 million of fixed rate accounts receivable
trust certificates remained unchanged at 8.43%. The interest rate on the $14.5
million of floating rate accounts receivable trust certificates is 3.01% above
the London Interbank Offer Rate with the interest capped at 8.99% pursuant to an
interest rate cap agreement. The remaining features of the securitization
facility remained substantially unchanged. Accordingly, our debt service
requirements, including interest, for the next 12 months are approximately $61.7
million. We believe that we will be able to satisfy our annual debt service
requirements, capital expenditures and stock repurchases, if any, out of
available cash balances, cash flow from operations and borrowings on the
revolving credit facility.
In November 1999, we completed a $175.0 million senior secured credit
facility consisting of a 5-year $75.0 million term loan due November 2004 and
the modification of our existing revolving credit facility increasing the amount
available to $100.0 million and extending the maturity to November 2002. The
amount available under the credit line is reduced by any outstanding letters of
credit, which cannot exceed $30.0 million. At September 30, 1999, we had drawn
$28.5 million on the line, and outstanding letters of credit totaled $6.1
million. At November 12, 1999, the revolving credit facility was undrawn except
for $6.1 million of outstanding letters of credit.
We are authorized to repurchase up to 1,500,000 shares of our common stock
on the open market from time to time. As of October 31, 1999, we have
repurchased 554,800 shares at an average price of $17 per share. No purchases
have been made since September 1998.
12
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
During the first nine months of 1999, we invested $82.7 million in
property and equipment, including approximately $58.0 million related to new
fitness centers and major upgrades and expansions, including new equipment, of
existing fitness centers and $7.5 million to purchase existing leaseholds. We
opened 13 new facilities during the first nine months of 1999 and acquired 23
fitness centers; 10 in Toronto, Canada, six in Fresno, California, four in the
Seattle area, two in the San Francisco area and one in the Chicago area.
YEAR 2000
We have completed an assessment of whether our systems and those of third
parties which could have a material impact on our business will function
properly with respect to dates in 2000 and thereafter. We believe all critical
system modifications have been completed and implemented. We believe the only
third parties that could have a material impact on our business are the major
financial institutions that process our collections of installment receivables
and monthly dues by electronic payment methods. We believe these financial
institutions are currently working on modifications to their internal systems to
insure those systems will function properly with respect to dates in 2000 and
thereafter and expect these modifications will be completed in 1999. We do not
anticipate that noncompliance, if any, with year 2000 of any of our
non-information technology systems, such as embedded microcontrollers, will
materially or adversely affect our business. We believe our worst case scenarios
result primarily from third party noncompliance, if any, with year 2000. Due to
our geographic dispersion, we believe the assessment of these scenarios and the
development of contingency plans is not practical or feasible.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this Form 10-Q including, without
limitation, statements relating to our 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 our actual results, performance or achievements
to be materially different from any future results, performance or achievements
expressed or implied by the 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
and service 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; failure of entities that provide goods
and services to us to be year 2000 compliant; and other factors described in
this Form 10-Q or in other of our filings with the Securities and Exchange
Commission. We are under 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 6. Exhibits and reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule for September 30, 1999 (filed
electronically only).
27.2 Restated Financial Data Schedule for September 30, 1998 (filed
electronically only).
(b) Reports on Form 8-K:
Financial
Date Items Statements
---- ----- ----------
August 3, 1999 #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: November 15, 1999
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999, THE CONSOLIDATED
STATEMENT OF OPERATIONS AND THE CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 12,517
<SECURITIES> 0
<RECEIVABLES> 616,774 <F1>
<ALLOWANCES> 136,436
<INVENTORY> 0
<CURRENT-ASSETS> 280,520
<PP&E> 818,694
<DEPRECIATION> 371,654
<TOTAL-ASSETS> 1,286,620
<CURRENT-LIABILITIES> 448,731
<BONDS> 548,676
0
0
<COMMON> 243
<OTHER-SE> 198,836
<TOTAL-LIABILITY-AND-EQUITY> 1,286,620
<SALES> 0
<TOTAL-REVENUES> 638,058
<CGS> 0
<TOTAL-COSTS> 377,611 <F2>
<OTHER-EXPENSES> 30,310 <F3>
<LOSS-PROVISION> 107,410
<INTEREST-EXPENSE> 37,805
<INCOME-PRETAX> 28,609
<INCOME-TAX> 580
<INCOME-CONTINUING> 28,029
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (262)
<NET-INCOME> 27,767
<EPS-BASIC> 1.19
<EPS-DILUTED> 1.02
<FN>
<F1>THIS AMOUNT IS THE SUM OF THE SHORT-TERM AND LONG-TERM INSTALLMENT
CONTRACTS RECEIVABLE LINES ON THE CONDENSED CONSOLIDATED BALANCE SHEET AT
SEPTEMBER 30, 1999 AND IS NET OF UNEARNED FINANCE CHARGES.
<F2>THIS AMOUNT IS THE SUM OF THE FITNESS CENTER OPERATIONS LINE, THE
ADVERTISING LINE AND THE CHANGE IN DEFERRED MEMBERSHIP ORIGINATION COSTS
LINE ON THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999.
<F3>THIS AMOUNT IS THE MEMBER PROCESSING AND COLLECTION CENTERS LINE ON THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET, THE CONSOLIDATED STATEMENT OF
OPERATIONS AND THE CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 30,926
<SECURITIES> 0
<RECEIVABLES> 532,114 <F1>
<ALLOWANCES> 116,572
<INVENTORY> 0
<CURRENT-ASSETS> 264,063
<PP&E> 671,428
<DEPRECIATION> 332,871
<TOTAL-ASSETS> 1,050,094
<CURRENT-LIABILITIES> 392,992
<BONDS> 407,116
0
0
<COMMON> 236
<OTHER-SE> 157,806
<TOTAL-LIABILITY-AND-EQUITY> 1,050,094
<SALES> 0
<TOTAL-REVENUES> 556,203
<CGS> 0
<TOTAL-COSTS> 339,770 <F2>
<OTHER-EXPENSES> 30,615 <F3>
<LOSS-PROVISION> 92,555
<INTEREST-EXPENSE> 30,723
<INCOME-PRETAX> 8,862
<INCOME-TAX> 525
<INCOME-CONTINUING> 8,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,337
<EPS-BASIC> .38
<EPS-DILUTED> .32
<FN>
<F1>THIS AMOUNT IS THE SUM OF THE SHORT-TERM AND LONG-TERM INSTALLMENT
CONTRACTS RECEIVABLE LINES ON THE CONDENSED CONSOLIDATED BALANCE SHEET AT
SEPTEMBER 30, 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 NINE MONTHS
ENDED SEPTEMBER 30, 1998.
<F3>THIS AMOUNT IS THE MEMBER PROCESSING AND COLLECTION CENTERS LINE ON THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998.
</FN>
</TABLE>
