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 March 31, 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 May 13, 1998, 23,643,600 shares of the registrant's common stock were
outstanding.
BALLY TOTAL FITNESS HOLDING CORPORATION
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial statements:
Condensed consolidated balance sheet (unaudited)
March 31, 1998 and December 31, 1997..................... 1
Consolidated statement of operations (unaudited)
Three months ended March 31, 1998 and 1997............... 2
Consolidated statement of stockholders' equity (unaudited)
Three months ended March 31, 1998........................ 3
Consolidated statement of cash flows (unaudited)
Three months ended March 31, 1998 and 1997............... 4
Notes to condensed consolidated financial statements
(unaudited).............................................. 6
Item 2. Management's discussion and analysis of financial
condition and results of operations............... 7
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K.................... 10
SIGNATURE PAGE................................................. 11
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
March 31 December 31
1998 1997
----------- -----------
ASSETS
Current assets:
Cash and equivalents............................... $ 22,643 $ 61,679
Installment contracts receivable, less unearned
finance charges of $33,267 and $27,709 and
allowance for doubtful receivables and
cancellations of $51,841 and $43,728............. 180,161 168,011
Other current assets............................... 32,685 31,743
---------- ----------
Total current assets............................. 235,489 261,433
Installment contracts receivable, less unearned
finance charges of $17,237 and $14,357 and
allowance for doubtful receivables and
cancellations of $43,630 and $36,803............... 191,879 175,575
Property and equipment, less accumulated
depreciation and amortization of $312,731
and $314,544....................................... 315,599 311,197
Intangible assets, less accumulated
amortization of $55,251 and $54,124................ 100,094 101,220
Deferred income taxes................................ 351 4,171
Deferred membership origination costs................ 92,829 86,737
Other assets......................................... 27,152 27,233
---------- ----------
$ 963,393 $ 967,566
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 41,201 $ 36,908
Income taxes payable............................... 2,281 2,342
Deferred income taxes.............................. 1,839 5,660
Accrued liabilities................................ 57,234 50,464
13% Senior Subordinated Notes due 2003............. 22,555
Other current maturities of long-term debt......... 4,031 4,590
Deferred revenues.................................. 280,249 270,853
---------- ----------
Total current liabilities........................ 386,835 393,372
Long-term debt, less current maturities.............. 405,978 405,425
Other liabilities.................................... 6,177 7,459
Deferred revenues.................................... 91,741 90,989
Stockholders' equity................................. 72,662 70,321
---------- ----------
$ 963,393 $ 967,566
========== ==========
<FN>
See accompanying notes.
</FN>
1
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three months
ended March 31
-----------------------
1998 1997
---------- ----------
Net revenues:
Membership revenues -
Initial membership fees on financed
memberships originated......................... $ 115,574 $ 95,568
Initial membership fees on paid-in-full
memberships originated......................... 9,983 17,475
Dues collected................................... 51,573 47,788
Change in deferred revenues...................... (10,147) (5,665)
---------- ----------
166,983 155,166
Finance charges earned............................. 11,147 9,769
Fees and other..................................... 6,358 3,470
---------- ----------
184,488 168,405
Operating costs and expenses:
Fitness center operations.......................... 103,122 95,924
Member processing and collection centers........... 10,591 9,403
Advertising........................................ 13,500 12,686
General and administrative......................... 6,305 5,921
Provision for doubtful receivables................. 32,392 25,537
Depreciation and amortization...................... 12,743 13,065
Change in deferred membership origination costs.... (6,092) (302)
---------- ----------
172,561 162,234
---------- ----------
Operating income..................................... 11,927 6,171
Interest income...................................... 551 128
Interest expense..................................... (10,206) (11,879)
---------- ----------
Income (loss) before income taxes.................... 2,272 (5,580)
Income tax provision ................................ (200) (100)
---------- ----------
Net income (loss).................................... $ 2,072 $ (5,680)
========== ==========
Basic earnings (loss) per common share............... $ .10 $ (.46)
========== ==========
Diluted earnings (loss) per common share............. $ .09 $ (.46)
========== ==========
<FN>
See accompanying notes.
2
</FN>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
Common stock
------------------ Total
Number Par Contributed Accumulated stockholders'
of shares value capital deficit equity
---------- ----- ----------- ----------- -------------
Balance at December 31, 1997...... 20,575,092 $ 206 $ 392,718 $ (322,603) $ 70,321
Net income........................ 2,072 2,072
Issuance of common stock under
stock purchase and option plans.. 25,825 269 269
---------- ----- --------- ---------- --------
Balance at March 31, 1998......... 20,600,917 $ 206 $ 392,987 $ (320,531) $ 72,662
========== ===== ========= ========== ========
<FN>
See accompanying notes.
</FN>
3
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Three months
ended March 31
-----------------------
1998 1997
---------- ----------
OPERATING:
Net income (loss).................................. $ 2,072 $ (5,680)
Adjustments to reconcile to cash provided (used) -
Depreciation and amortization, including
amortization included in interest expense...... 13,284 13,624
Provision for doubtful receivables............... 32,392 25,537
Change in operating assets and
liabilities.................................... (47,670) (44,360)
---------- ----------
Cash provided by (used in) operating activities 78 (10,879)
INVESTING:
Purchases and construction of property
and equipment.................................... (13,423) (6,842)
Other, net......................................... (55)
---------- ----------
Cash used in investing activities ............. (13,423) (6,897)
FINANCING:
Debt transactions -
Net borrowings under revolving credit
agreement...................................... 12,000
Redemption of 13% Senior Subordinated
Notes due 2003................................. (24,021)
Repayments of other long-term debt............... (1,939) (834)
Debt issuance costs.............................. (7)
---------- ----------
Cash (used in) provided by debt transactions... (25,960) 11,159
Equity transactions -
Proceeds from issuance of common stock under
stock purchase and option plans................ 269 7
---------- ----------
Cash (used in) provided by financing activities (25,691) 11,166
---------- ----------
Decrease in cash and equivalents..................... (39,036) (6,610)
Cash and equivalents, beginning of period............ 61,679 16,534
---------- ----------
Cash and equivalents, end of period.................. $ 22,643 $ 9,924
========== ==========
(continued)
4
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED)
(In thousands)
(Unaudited)
Three months
ended March 31
-----------------------
1998 1997
---------- ----------
SUPPLEMENTAL CASH FLOWS INFORMATION:
Changes in operating assets and liabilities,
were as follows -
Increase in installment contracts
receivable................................... $ (60,846) $ (42,341)
Increase in other current and other assets..... (1,464) (4,414)
Increase in deferred membership
origination costs............................ (6,092) (302)
Increase in accounts payable................... 4,293 2,512
Increase in income taxes payable............... 280 64
Increase (decrease) in accrued and
other liabilities............................ 6,012 (5,544)
Increase in deferred revenues.................. 10,147 5,665
---------- ----------
$ (47,670) $ (44,360)
========== ==========
Cash payments for interest and income taxes
were as follows -
Interest paid.................................. $ 5,604 $ 17,823
Interest capitalized........................... (170) (288)
Income taxes (refunded) paid, net.............. (80) 36
Investing and financing activities exclude the
following non-cash transactions -
Acquisition of property and equipment
through capital leases/borrowings............ $ 1,933 $ 163
<FN>
See accompanying notes.
</FN>
5
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data)
(Unaudited)
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Bally Total Fitness Holding Corporation (the "Company") and the
subsidiaries which it controls. The Company, through its subsidiaries, is a
nationwide commercial operator of fitness centers with approximately 320
facilities concentrated in 27 states and Canada. The Company operates in one
industry segment, and all significant revenues arise from the commercial
operation of fitness centers, primarily in major metropolitan markets in the
United States. Unless otherwise specified in the text, references to the Company
include the Company and its subsidiaries. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements included in the Company's Annual Report on Form 10-K 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 March 31, 1998, its consolidated statements of operations and
cash flows for the three months ended March 31, 1998 and 1997, and its
consolidated statement of stockholders' equity for the three months ended March
31, 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 months ended March 31, 1998 and 1997 are not
necessarily indicative of the results of operations for the full year.
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 20,579,571 shares and 12,279,131 shares for the three
months ended March 31, 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 24,265,028 shares and 12,279,131 shares for the three
months ended March 31, 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 3,685,457 for diluted earnings per common share
in 1998. 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.
SUBSEQUENT EVENT
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 $82.8
million. The Company intends to use 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 has not yet allocated these proceeds
among contemplated uses.
6
BALLY TOTAL FITNESS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Net revenues for the first quarter of 1998 were $184.5 million compared to
$168.4 million in 1997, an increase of $16.1 million (10%). This increase is
substantially a result of an increase in initial membership fees originated of
$12.5 million (11%), consisting of a $20.0 million (21%) increase in financed
memberships originated offset, in part, by a $7.5 million (43%) decrease in
paid-in-full memberships originated. These results generally reflect
management's current 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. Accordingly, the weighted
average selling price of membership contracts sold increased 18%. Further, the
number of membership contracts sold increased 1% while the average number of
fitness centers selling memberships decreased from 319 in the first quarter of
1997 to 313 in the first quarter of 1998, reflecting management's continuing
strategy to improve the quality of the Company's facilities. Between January
1997 and March 1998, the Company closed 9 older, typically smaller and less
profitable facilities and sold a fitness center to a franchisee while opening 5
new, larger facilities, using its new prototype design. Dues collected increased
$3.8 million (8%) over the 1997 quarter, reflecting the Company's continuing
strategy of increasing renewal dues rates. As a result of the strong increase in
initial membership fees originated, deferred revenue accounting reduced revenues
by $10.1 million in the first quarter of 1998 compared to a $5.7 million
reduction in 1997. Finance charges earned increased $1.4 million (14%) in the
first quarter of 1998 due primarily to the increase in the size of the
receivables portfolio. Fees and other revenues increased $2.9 million (83%) over
the 1997 quarter, primarily reflecting the increase in revenues from the
Company's new initiatives (including personal training and the sale of
nutritional and other retail products).
Operating income for the first quarter of 1998 was $11.9 million compared to
$6.2 million in 1997. The increase of $5.7 million (93%) was due to the
aforementioned $16.1 million increase in revenues partially offset by a $10.4
million (6%) increase in operating costs and expenses, which includes a $6.9
million increase in the provision for doubtful receivables. Excluding the
provision for doubtful receivables, operating costs and expenses increased $3.5
million (3%) 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 $2.6 million due
primarily to costs associated with the new initiatives described above.
The provision for doubtful receivables for the first quarter of 1998 was $32.4
million compared to $25.5 million in 1997, an increase of $6.9 million (27%) due
to the increase in financed memberships originated.
Interest income for the first quarter of 1998 increased to $.6 million from $.1
million in 1997 due to the investment of temporary excess funds from the 1997
public offering of common stock.
Interest expense was $10.2 million for the first quarter of 1998 compared to
$11.9 million in 1997, a decrease of $1.7 million (14%) primarily due to lower
average interest rates.
The income tax provision for the first quarter of 1998 primarily 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.
7
BALLY TOTAL FITNESS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
The Company is in the process of expanding and upgrading its facilities in order
to grow revenue potential from its membership and more effectively capitalize on
its streamlined marketing and administrative functions. Management plans to make
capital expenditures of approximately $10 million to $12 million annually to
maintain and make minor upgrades to the Company's existing facilities, including
exercise equipment upgrades, heating, ventilation and air conditioning and other
operating equipment upgrades and replacements, and locker room and workout area
refurbishments, among others. In addition, the Company has completed
approximately 25% 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. For the last several 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 intends to increase
its annual spending to approximately $20 million to $25 million to 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.
In May 1998, the Company issued 2,800,000 shares of its common stock at $31 3/8
per share through underwriters (the "1998 Stock Offering"). The offering
provided net proceeds of $82.8 million. The Company intends to use 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 has not yet allocated these proceeds
among the contemplated uses. The Company will determine the allocation based on
available business opportunities and prevailing market conditions. The Company
is not currently involved in any negotiations for the material acquisition of
fitness centers or club-related real estate. The balance of the net proceeds to
the Company, if any, will be used for general corporate and working capital
purposes and, pending such uses, the Company may temporarily invest available
funds from the 1998 Stock Offering in short-term securities.
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 for
the next twelve months are approximately $42.2 million. Management believes that
the Company will be able to satisfy its debt service and capital expenditure
requirements over the next twelve months out of existing cash balances and cash
flow from operations.
In the first quarter of 1998, cash provided from operations was $.1 million, an
improvement of $11.0 million over 1997. The positive change in cash flow was due
to improved results from operations ($7.8 million) plus the timing of the
payment of expenses ($13.3 million), principally interest, offset, in part, by
the Company's emphasis on the sale of financed memberships which decreased cash
receipts from the sale of paid-in-full memberships ($7.5 million). Capital
expenditures of $15.4 million in 1998 (including capital leases of $1.9 million)
reflected an $8.4 million increase 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
$171.2 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 of financed
memberships and dues to increase available cash reserves 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 that available working capital has substantially reduced
the need for these techniques to be continued.
8
BALLY TOTAL FITNESS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - 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-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.
9
BALLY TOTAL FITNESS HOLDING CORPORATION
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits:
10 Employment Agreement effective as of January 1, 1998 between the
Company and Lee S. Hillman.
27 Financial Data Schedule for March 31, 1998 (filed electronically
only).
(b) Reports on Form 8-K:
None.
10
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: May 15, 1998
11