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, 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 July 31, 1999, 23,658,782 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)
June 30, 1999 and December 31, 1998........................... 1
Consolidated statements of operations (unaudited)
Three months ended June 30, 1999 and 1998..................... 2
Consolidated statements of operations (unaudited)
Six months ended June 30, 1999 and 1998....................... 3
Consolidated statement of stockholders' equity (unaudited)
Six months ended June 30, 1999................................ 4
Consolidated statements of cash flows (unaudited)
Six months ended June 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 4. Submission of matters to a vote of security holders....... 14
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>
JUNE 30 DECEMBER 31
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents.............................. $ 13,020 $ 64,382
Installment contracts receivable, net............. 217,234 199,979
Other current assets.............................. 36,155 34,212
----------- -----------
Total current assets............................ 266,409 298,573
Installment contracts receivable, net............... 246,278 222,147
Property and equipment, less accumulated
depreciation and amortization of $361,150
and $340,702...................................... 401,960 361,300
Intangible assets, less accumulated
amortization of $61,366 and $58,844............... 103,537 101,815
Deferred income taxes............................... 23,808 17,430
Deferred membership origination costs............... 103,727 97,901
Other assets........................................ 36,245 29,679
----------- -----------
$ 1,181,964 $ 1,128,845
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 44,171 $ 40,957
Income taxes payable.............................. 2,835 2,608
Deferred income taxes............................. 25,297 18,919
Accrued liabilities............................... 53,013 48,596
Current maturities of long-term debt.............. 6,989 5,799
Deferred revenues................................. 292,388 282,806
----------- -----------
Total current liabilities....................... 424,693 399,685
Long-term debt, less current maturities............. 487,193 482,199
Other liabilities................................... 6,126 6,226
Deferred revenues................................... 85,481 78,952
Stockholders' equity................................ 178,471 161,783
----------- -----------
$ 1,181,964 $ 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 JUNE 30
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net revenues:
Membership revenues --
Initial membership fees on financed
memberships originated......................... $ 118,891 $ 101,422
Initial membership fees on paid-in-full
memberships originated........................ 5,435 7,443
Dues collected.................................. 55,354 46,629
Change in deferred revenues..................... (839) 3,833
---------- ----------
178,841 159,327
Finance charges earned............................. 15,477 12,184
Fees and other..................................... 15,506 9,884
---------- ----------
209,824 181,395
Operating costs and expenses:
Fitness center operations.......................... 115,693 104,466
Member processing and collection centers........... 9,711 9,620
Advertising........................................ 12,106 11,589
General and administrative......................... 6,203 6,319
Provision for doubtful receivables................. 34,876 29,306
Depreciation and amortization...................... 12,649 11,752
Change in deferred membership origination costs.... (2,562) (3,292)
---------- ----------
188,676 169,760
---------- ----------
Operating income..................................... 21,148 11,635
Interest income...................................... 553 720
Interest expense..................................... (12,446) (10,301)
---------- ----------
Income before income taxes........................... 9,255 2,054
Income tax provision ................................ (180) (50)
---------- ----------
Net income .......................................... $ 9,075 $ 2,004
========== ==========
Net income per common share--basic................. $ .39 $ .09
========== ==========
Net income per common share--assuming dilution..... $ .34 $ .08
========== ==========
<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>
SIX MONTHS
ENDED JUNE 30
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net revenues:
Membership revenues --
Initial membership fees on financed
memberships originated......................... $ 245,621 $ 214,610
Initial membership fees on paid-in-full
memberships originated........................ 12,105 17,301
Dues collected.................................. 115,322 98,202
Change in deferred revenues..................... (14,276) (6,314)
---------- ----------
358,772 323,799
Finance charges earned............................. 29,460 23,331
Fees and other..................................... 30,297 18,800
---------- ----------
418,529 365,930
Operating costs and expenses:
Fitness center operations.......................... 228,682 207,588
Member processing and collection centers........... 20,348 20,258
Advertising........................................ 25,879 25,089
General and administrative......................... 12,891 12,624
Provision for doubtful receivables................. 71,691 61,698
Depreciation and amortization...................... 25,044 24,495
Change in deferred membership origination costs.... (5,451) (9,384)
---------- ----------
379,084 342,368
---------- ----------
Operating income..................................... 39,445 23,562
Interest income...................................... 1,414 1,271
Interest expense..................................... (24,743) (20,507)
---------- ----------
Income before income taxes and cumulative
effect of a change in accounting principle......... 16,116 4,326
Income tax provision ................................ (330) (250)
---------- ----------
Income before cumulative effect of a change in
accounting principle............................... 15,786 4,076
Cumulative effect of a change in accounting principle,
net of income tax.................................. (262)
---------- ----------
Net income .......................................... $ 15,524 $ 4,076
========== ==========
Earnings per common share --basic:
Income before cumulative effect of a change
in accounting principle.......................... $ .68 $ .19
Cumulative effect of a change in accounting
principle........................................ (.01)
---------- ----------
Net income per common share--basic................. $ .67 $ .19
========== ==========
Earnings per common share - assuming dilution:
Income before cumulative effect of a change in
accounting principle............................. $ .59 $ .16
Cumulative effect of a change in accounting
principle........................................ (.01)
---------- ----------
Net income per common share--assuming dilution..... $ .58 $ .16
========== ==========
<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......................... 15,524 15,524
Issuance of common stock under
stock purchase and option plans.. 195,114 2 1,162 1,164
---------- ----- --------- ---------- -------- -------- ---------
Balance at June 30, 1999........... 23,568,507 $ 241 $ 489,208 $ (293,782) $ (7,978) $ (9,218) $ 178,471
========== ===== ========= ========== ======== ======== =========
<FN>
See accompanying notes
</FN>
</TABLE>
4
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
SIX MONTHS
ENDED JUNE 30
------------------------
1999 1998
---------- ----------
<S> <C> <C>
OPERATING:
Income before cumulative effect of a change
in accounting principle.......................... $ 15,786 $ 4,076
Adjustments to reconcile--
Depreciation and amortization, including
amortization included in interest expense...... 26,603 25,602
Provision for doubtful receivables............... 71,691 61,698
Change in operating assets and
liabilities.................................... (97,550) (112,544)
---------- ----------
Cash provided by (used in) operating activities 16,530 (21,168)
INVESTING:
Purchases and construction of property
and equipment.................................... (54,199) (28,182)
Acquisitions of businesses and other............... (7,027) (2,073)
---------- ----------
Cash used in investing activities ............. (61,226) (30,255)
FINANCING:
Debt transactions --
Redemption of 13% Senior Subordinated
notes due 2003................................. (24,021)
Repayments of other long-term debt............... (3,605) (3,038)
Debt issuance and refinancing costs.............. (4,225) (307)
---------- ----------
Cash used in debt transactions................. (7,830) (27,366)
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................ 1,164 347
---------- ----------
Cash provided by (used in) financing activities (6,666) 55,725
---------- ----------
Increase (decrease) in cash and equivalents.......... (51,362) 4,302
Cash and equivalents, beginning of period............ 64,382 61,679
---------- ----------
Cash and equivalents, end of period.................. $ 13,020 $ 65,981
========== ==========
<FN>
(continued)
</FN>
</TABLE>
5
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(In thousands)
(Unaudited)
<CAPTION>
SIX MONTHS
ENDED JUNE 30
------------------------
1999 1998
---------- ----------
<S> <C> <C>
SUPPLEMENTAL CASH FLOWS INFORMATION:
Changes in operating assets and liabilities
were as follows --
Increase in installment contracts
receivable................................... $ (113,077) $ (111,806)
Increase in other current and
other assets................................. (701) (2,229)
Increase in deferred membership
origination costs............................ (5,451) (9,384)
Increase in accounts payable................... 3,214 7,388
Increase in income taxes payable............... 227 229
Increase (decrease) in accrued and other
liabilities.................................. 3,963 (3,056)
Increase in deferred revenues.................. 14,275 6,314
---------- ----------
$ (97,550) $ (112,544)
========== ==========
Cash payments for interest and income taxes
were as follows --
Interest paid.................................. $ 23,731 $ 21,502
Interest capitalized........................... (567) (232)
Income taxes paid, net......................... 103 22
Investing and financing activities exclude the
following non-cash transactions --
Acquisition of property and equipment
through capital leases/borrowings............ 6,284 3,814
Debt, including assumed debt, related to
acquisitions of businesses................... 3,417
Acquisition of business with common stock...... 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 350
facilities concentrated in 27 states and Canada. The Company operated 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 June 30, 1999, its consolidated statements of
operations for the three and six months ended June 30, 1999 and 1998, its
consolidated statements of cash flows for the six months ended June 30, 1999 and
1998, and its consolidated statement of stockholders' equity for the six months
ended June 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 six months ended June 30, 1999 and
1998 are not necessarily indicative of the results of operations for the full
year.
ACQUISITIONS
During the first six months of 1999, the Company acquired six fitness
centers; four located in the Seattle area, one in the San Francisco area and one
in Chicago. The total purchase price of the six centers was $4,886.
SUBSEQUENT EVENT
In July 1999, the Company acquired 10 upscale fitness centers located in
Toronto, Canada. The purchase price included cash consideration of $8,947 with
the balance financed by the sellers.
7
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands)
(Unaudited)
<TABLE>
INSTALLMENT CONTRACTS RECEIVABLE
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
---------- -----------
<S> <C> <C>
Current:
Installment contracts receivable $ 332,783 $ 294,880
Unearned finance charges....................... (41,992) (35,792)
Allowance for doubtful receivables
and cancellations............................ (73,557) (59,109)
--------- ---------
$ 217,234 $ 199,979
========= =========
Long-term:
Installment contracts receivable $ 326,258 $ 287,443
Unearned finance charges....................... (21,240) (18,104)
Allowance for doubtful receivables
and cancellations............................ (58,740) (47,192)
--------- ---------
$ 246,278 $ 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 SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at beginning of period..... $121,109 $ 95,471 $106,301 $ 80,531
Contract cancellations and
write-offs of uncollectible
amounts, net of recoveries....... (63,710) (49,950) (127,517) (104,717)
Provision for cancellations
(classified as a direct
reduction of revenues).......... 40,022 32,709 81,822 70,024
Provision for doubtful
receivables...................... 34,876 29,306 71,691 61,698
-------- -------- -------- --------
Balance at end of period........... $132,297 $107,536 $132,297 $107,536
======== ======== ======== ========
</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 23,325,783 and
22,430,153 for the three months ended June 30, 1999 and 1998, respectively, and
23,264,586 and 21,509,974 for the six months ended June 30, 1999 and 1998,
respectively. Diluted earnings per common share for each period includes the
addition of common stock equivalents of 3,683,768 and 3,991,437 for the three
months ended June 30, 1999 and 1998, respectively, and 3,654,937 and 3,859,706
for the six months ended June 30, 1999 and 1998, respectively. Common stock
equivalents represent the dilutive effect of the assumed exercise of outstanding
warrants and stock options.
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 JUNE 30, 1999 AND 1998
Net revenues for the second quarter of 1999 was $209.8 million compared to
$181.4 million in 1998, an increase of $28.4 million (16%). Net revenues and new
membership joins from comparable fitness centers increased 11% and 2%,
respectively. This significant increase in net revenues resulted from the
following:
- Total new membership units sold increased 9% and the weighted average
selling price of membership contracts sold increased 7% over the prior
year quarter. The increase in new membership units sold was almost
entirely attributable to the sale of higher margin multi-club
membership plans. As a result, initial membership fees originated
increased $15.5 million (14%), consisting of a $17.5 million (17%)
increase in financed memberships originated offset, in part, by a
planned $2.0 million (27%) decrease in paid-in-full memberships
originated.
- Dues collected increased $8.7 million (19%) from the 1998 quarter,
reflecting both continued improvements in member retention and pricing
strategies implemented during prior periods.
- Finance charges earned during the second quarter of 1999 increased
$3.3 million (27%) compared to the 1998 quarter, due to the growth in
size and consistent higher quality of the receivables portfolio. The
average interest rate for finance charges to members was substantially
unchanged between the periods. The percentage of accounts current with
all contractual payments was 87% as of June 30, 1999 and 1998,
respectively.
- Fees and other revenues increased $5.6 million (57%) 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 336 in the
second quarter of 1999 from 319 in the second quarter of 1998, including an
increase to a weighted average of 16 from 10 centers operating under three
upscale brands: Bally Sports Club, Pinnacle Fitness and Gorilla Sports.
Operating income for the second quarter of 1999 was $21.1 million compared
to $11.6 million in 1998. The increase of $9.5 million (82%) was due to a $28.4
million (16%) increase in revenues partially offset by a $18.9 million (11%)
increase in operating costs and expenses. Excluding the provision for doubtful
receivables and the effect of deferral accounting, operating costs and expenses
increased $12.6 million (9%) from 1998. Fitness center operating expenses
increased $11.2 million (11%) due principally to incremental costs of operating
new fitness centers, costs supporting the 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 4%, while 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 second quarter of 1999 was $34.9 million compared to $29.3
million in 1998, an increase of $5.6 million (19%) due to the increase in
initial membership fees on financed memberships originated. The total provision
rate, inclusive of 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 gross financed originations during
each of the periods.
Deferral accounting reduced earnings by $5.4 million for the 1999 quarter
compared to 1998. This decrease reflects the combined impact of a decrease in
revenues of $4.7 million and $.7 million decrease in the expense offset.
10
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
Interest expense was $12.4 million for the second quarter of 1999
compared to $10.3 million in 1998. The $2.1 million increase was due to higher
levels of debt incurred.
The income tax provisions for the second 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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Net revenues for the first six months of 1999 was $418.5 million compared
to $365.9 million in 1998, an increase of $52.6 million (14%). Net revenues and
new membership joins from comparable fitness centers increased 10% and 1%,
respectively. This significant increase in net revenues resulted from the
following:
- Total new membership units sold increased 7% and the weighted average
selling price of membership contracts sold increased 7% over the prior
year period. The increase in new membership units sold was almost
entirely attributable to the sale of higher margin multi-club
membership plans. As a result, initial membership fees originated
increased $25.8 million (11%), consisting of a $31.0 million (14%)
increase in financed memberships originated offset, in part, by a
planned $5.2 million (30%) decrease in paid-in-full memberships
originated.
- Dues collected increased $17.1 million (17%) from the 1998 period,
reflecting both continued improvements in member retention and pricing
strategies implemented during prior periods.
- Finance charges earned during the first six months of 1999 increased
$6.1 million (26%) compared to the 1998 period, due to the growth in
size and consistent higher quality of the receivables portfolio. The
average interest rate for finance charges to members was substantially
unchanged between the periods.
- Fees and other revenues increased $11.5 million (61%) 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 332 in the
first six months of 1999 from 317 in 1998, including an increase to a weighted
average of 15 from eight centers operating under three upscale brands: Bally
Sports Club, Pinnacle Fitness and Gorilla Sports.
Operating income for the first six months of 1999 was $39.4 million
compared to $23.6 million in 1998. The increase of $15.8 million (67%) was due
to a $52.6 million (14%) increase in revenues partially offset by a $36.8
million (11%) increase in operating costs and expenses. Excluding the provision
for doubtful receivables and the effect of deferral accounting, operating costs
and expenses increased $22.8 million (8%) from 1998. Fitness center operating
expenses increased $21.1 million (10%) due principally to incremental costs of
operating new fitness centers, costs supporting the 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. Member processing and collection center
expenses were substantially unchanged, while general and administrative expenses
increased approximately 2% and advertising expenses increased approximately 3%
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 six months of 1999 was $71.7 million compared to $61.7
million in 1998, an increase of $10.0 million (16%) due to the increase in
initial membership fees on financed memberships originated. The total provision
rate, inclusive of 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 gross financed originations during
each of the periods.
Deferral accounting reduced earnings by $11.9 million for 1999 compared to
1998. This decrease reflects the combined impact of a decrease in revenues of
$8.0 million and $3.9 million decrease in the expense offset.
Interest expense was $24.7 million for the first six months of 1999
compared to $20.5 million in 1998. The $4.2 million increase was due to higher
levels of debt incurred.
The income tax provisions for the first six 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 six months of 1999 was
$16.5 million compared to a use of $21.2 million in 1998. The period over period
improvement of $37.7 million principally reflects the continued growth in
overall collections from installment contracts receivable and monthly dues. Net
installment contracts receivable grew $41.4 million during the six-month period
compared to $50.1 million in the 1998 period. Excluding the growth in
receivables, operating activities for the 1999 period provided cash of $57.9
million compared to $28.9 million for 1998.
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 $53.3
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.
Our revolving credit facility provides up to $100.0 million of credit
through November 2000. The maximum amount currently available under this credit
facility is $90.0 million. The amount available under the credit line is reduced
by any outstanding letters of credit, which cannot exceed $30.0 million. At June
30, 1999, the credit line was unused except for outstanding letters of credit
totaling $6.5 million.
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 July 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 six months of 1999, we invested approximately $54.0
million in property and equipment, including approximately $41.0 million in the
development of new fitness centers and to refurbish and make major upgrades,
including new equipment, to our existing fitness centers. We opened 11 new
facilities during the first six months of 1999 which is consistent with our plan
to open approximately 20 new fitness centers during 1999. We also acquired six
fitness centers during the first six months of 1999; four in the Seattle area,
one 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 except for our payroll
systems. Necessary modifications to the payroll systems and initial testing has
been completed. Final testing and implementation of these modifications is
expected to be completed by the end of the third quarter of 1999 at an aggregate
cost of less than $.1 million. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of stockholders held on June 10, 1999,
the stockholders considered and voted on the following:
Two persons nominated by the Board of Directors for election as
directors of Class III for three-year terms expiring in 2002 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
Nominees cast for withheld
------------------ ---------- ---------
Arthur M. Goldberg 19,829,064 89,912
J. Kenneth Looloian 19,826,076 92,900
An amendment to the Company's 1996 Long-Term Incentive Plan to
increase the number of shares of common stock available for grant
under the plan to an aggregate of 4,600,000 shares.
Votes cast for 17,978,159
Votes against 1,840,755
Votes withheld 100,062
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 First Amendment to Employment Agreement dated as of June 10, 1999
between the Company and Lee S. Hillman.
27.1 Financial Data Schedule for June 30, 1999 (filed electronically
only).
27.2 Restated Financial Data Schedules for March 31, 1999,
June 30, 1998 and March 31, 1998 (filed electronically only).
(b) Reports on Form 8-K:
Financial
Date Items Statements
---- ----- ----------
April 28, 1999 #5 and #7 None
April 30, 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: August 16, 1999
15
EXHIBIT 10.1
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT ("Amendment") to the employment agreement is made and
entered into this 10th day of June, 1999 between Bally Total Fitness Holding
Corporation, a Delaware corporation ("Bally"), and Lee S. Hillman ("Employee").
RECITALS:
A. Bally and Employee entered into an employment agreement (the
"Employment Agreement") as of the first day of January, 1998.
B. Bally has determined that it is in the best interests of Bally and its
shareholders to amend the Employment Agreement.
NOW, THEREFORE, in consideration of the promises and mutual covenants
contained in this Amendment and the Employment Agreement and for good and
valuable consideration, the receipt of which is mutually acknowledged, Bally and
the Employee agree to modify and amend the Employment Agreement as follows:
1. Section 2 of the Employment Agreement entitled "Term" shall be amended
by deleting December 31, 2000 and inserting in lieu thereof, December 31, 2001.
2. Secion 3, "Compensation", shall be amended by adding as the second
sentence of subparagraph (a) the following sentence: "The Base Salary for each
12-month period beginning January 1, 1999 shall be Five Hundred Fifty Thousand
Dollars ($550,000)."
3. All terms of the Employment Agreement not specifically amended herein
shall remain in full force and effect.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first written above.
BALLY TOTAL FITNESS HOLDING CORPORATION
By: /s/ John W. Dwyer
------------------------------------
/s/ Lee Hillman
---------------------------------------
LEE S. HILLMAN
Acknowledged and Approved by
the Compensation and Stock Option
Committee of the Board of Directors
/s/ Liza M. Walsh
- -----------------------------------
Liza M. Walsh, Chairman
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 30, 1999, THE CONSOLIDATED
STATEMENT OF OPERATIONS AND THE CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999 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-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 13,020
<SECURITIES> 0
<RECEIVABLES> 595,809<F1>
<ALLOWANCES> 132,297
<INVENTORY> 0
<CURRENT-ASSETS> 266,409
<PP&E> 763,110
<DEPRECIATION> 361,150
<TOTAL-ASSETS> 1,181,964
<CURRENT-LIABILITIES> 424,693
<BONDS> 487,193
0
0
<COMMON> 241
<OTHER-SE> 178,230
<TOTAL-LIABILITY-AND-EQUITY> 1,181,964
<SALES> 0
<TOTAL-REVENUES> 418,529
<CGS> 0
<TOTAL-COSTS> 249,110<F2>
<OTHER-EXPENSES> 20,348<F3>
<LOSS-PROVISION> 71,691
<INTEREST-EXPENSE> 24,743
<INCOME-PRETAX> 16,116
<INCOME-TAX> 330
<INCOME-CONTINUING> 15,786
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (262)
<NET-INCOME> 15,524
<EPS-BASIC> .67
<EPS-DILUTED> .58
<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, 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 SIX MONTHS ENDED JUNE 30, 1999.
<F3>THIS AMOUNT IS THE MEMBER PROCESSING AND COLLECTION CENTERS LINE ON THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 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> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998 JUN-30-1998
<CASH> 50,688 22,643 65,981
<SECURITIES> 0 0 0
<RECEIVABLES> 568,181<F1> 467,511<F1> 501,312<F1>
<ALLOWANCES> 121,109 95,471 107,536
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 293,953 235,489 289,274
<PP&E> 731,895 628,330 649,904
<DEPRECIATION> 351,157 312,731 323,406
<TOTAL-ASSETS> 1,169,986 963,393 1,051,113
<CURRENT-LIABILITIES> 423,917 386,835 390,849
<BONDS> 485,569 405,978 406,665
0 0 0
0 0 0
<COMMON> 240 206 236
<OTHER-SE> 168,629 72,456 161,652
<TOTAL-LIABILITY-AND-EQUITY> 1,169,986 963,393 1,051,113
<SALES> 0 0 0
<TOTAL-REVENUES> 208,705 184,535 365,930
<CGS> 0 0 0
<TOTAL-COSTS> 123,873<F2> 110,530<F2> 223,293<F2>
<OTHER-EXPENSES> 10,637<F3> 10,638<F3> 20,258<F3>
<LOSS-PROVISION> 36,815 32,392 61,698
<INTEREST-EXPENSE> 12,297 10,206 20,507
<INCOME-PRETAX> 6,861 2,272 4,326
<INCOME-TAX> 150 200 250
<INCOME-CONTINUING> 6,711 2,072 4,076
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> (262) 0 0
<NET-INCOME> 6,449 2,072 4,076
<EPS-BASIC> .28 .10 .19
<EPS-DILUTED> .24 .09 .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
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.
<F3>THIS AMOUNT IS THE MEMBER PROCESSING AND COLLECTION CENTERS LINE ON THE
CONSOLIDATED STATEMENT OF OPERATIONS.
</FN>
</TABLE>
