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, 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 October 31, 1998, 23,147,305 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)
September 30, 1998 and December 31, 1997...................... 1
Consolidated statement of operations (unaudited)
Three months ended September 30, 1998 and 1997................ 2
Consolidated statement of operations (unaudited)
Nine months ended September 30, 1998 and 1997................. 3
Consolidated statement of stockholders' equity (unaudited)
Nine months ended September 30, 1998.......................... 4
Consolidated statement of cash flows (unaudited)
Nine months ended September 30, 1998 and 1997................. 5
Notes to condensed consolidated financial statements
(unaudited)................................................... 7
Item 2. Management's discussion and analysis of financial
condition and results of operations.................... 10
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K.......................... 15
SIGNATURE PAGE....................................................... 16
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
September 30 December 31
1998 1997
------------ -----------
ASSETS
Current assets:
Cash and equivalents............................... $ 30,926 $ 61,679
Installment contracts receivable, less unearned
finance charges of $37,273 and $27,709 and
allowance for doubtful receivables and
cancellations of $63,298 and $43,728............. 199,956 168,011
Other current assets............................... 33,181 31,743
------------ -----------
Total current assets............................. 264,063 261,433
Installment contracts receivable, less unearned
finance charges of $19,312 and $14,357 and
allowance for doubtful receivables and
cancellations of $53,274 and $36,803............... 215,586 175,575
Property and equipment, less accumulated
depreciation and amortization of $332,871
and $314,544....................................... 338,557 311,197
Intangible assets, less accumulated
amortization of $57,663 and $54,124................ 102,814 101,220
Deferred income taxes................................ 3,358 4,171
Deferred membership origination costs................ 99,350 86,737
Other assets......................................... 26,366 27,233
------------ -----------
$ 1,050,094 $ 967,566
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts pay8able.................................. $ 39,979 $ 36,908
Income taxes payable............................... 2,452 2,342
Deferred income taxes.............................. 4,847 5,660
Accrued liabilities................................ 55,200 50,464
13% Senior Subordinated Notes due 2003, called
for 1998 redemption.............................. - 22,555
Other current maturities of long-term debt......... 5,131 4,590
Deferred revenues.................................. 285,383 270,853
------------ -----------
Total current liabilities........................ 392,992 393,372
Long-term debt, less current maturities.............. 407,116 405,425
Other liabilities.................................... 6,275 7,459
Deferred revenues.................................... 85,669 90,989
Stockholders' equity................................. 158,042 70,321
------------ -----------
$ 1,050,094 $ 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 September 30
-----------------------
1998 1997
---------- ----------
Net revenues:
Membership revenues -
Initial membership fees on financed
memberships originated.......................... $ 107,053 $ 91,032
Initial membership fees on paid-in-full
memberships originated......................... 7,086 15,541
Dues collected................................... 52,016 47,720
Change in deferred revenues...................... (183) (3,427)
---------- ----------
165,972 150,866
Finance charges earned.............................. 13,573 9,983
Fees and other...................................... 10,063 4,298
---------- ----------
189,608 165,147
Operating costs and expenses:
Fitness center operations........................... 108,809 99,382
Member processing and collection centers............ 9,692 10,789
Advertising......................................... 10,897 10,735
General and administrative.......................... 6,775 8,753
Provision for doubtful receivables.................. 30,857 25,052
Depreciation and amortization....................... 11,997 12,631
Change in deferred membership origination costs..... (3,229) (3,123)
---------- ----------
175,798 164,219
---------- ----------
Operating income...................................... 13,810 928
Interest income....................................... 942 575
Interest expense...................................... (10,216) (11,658)
---------- ----------
Income (loss) before income taxes..................... 4,536 (10,155)
Income tax provision ................................. (275) (100)
---------- ----------
Net income (loss)..................................... $ 4,261 $ (10,255)
========== ==========
Basic earnings (loss) per common share................ $ .18 $ (.60)
========== ==========
Diluted earnings (loss) per common share.............. $ .16 $ (.60)
========== ==========
<FN>
See accompanying notes.
</FN>
2
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Nine months
ended September 30
-----------------------
1998 1997
---------- ----------
Net revenues:
Membership revenues -
Initial membership fees on financed
memberships originated.......................... $ 321,663 $ 266,593
Initial membership fees on paid-in-full
memberships originated......................... 24,387 47,564
Dues collected................................... 150,218 144,577
Change in deferred revenues...................... (6,497) (4,372)
---------- ----------
489,771 454,362
Finance charges earned.............................. 36,904 29,516
Fees and other...................................... 28,297 11,492
---------- ----------
554,972 495,370
Operating costs and expenses:
Fitness center operations........................... 316,397 288,750
Member processing and collection centers............ 29,384 28,983
Advertising......................................... 35,986 34,671
General and administrative.......................... 19,399 20,980
Provision for doubtful receivables.................. 92,555 72,617
Depreciation and amortization....................... 36,492 40,703
Change in deferred membership origination costs..... (12,613) (1,641)
---------- ----------
517,600 485,063
---------- ----------
Operating income...................................... 37,372 10,307
Interest income....................................... 2,213 839
Interest expense...................................... (30,723) (34,081)
---------- ----------
Income (loss) before income taxes..................... 8,862 (22,935)
Income tax provision ................................. (525) (300)
---------- ----------
Net income (loss)..................................... $ 8,337 $ (23,235)
========== ==========
Basic earnings (loss) per common share................ $ .38 $ (1.68)
========== ==========
Diluted earnings (loss) per common share.............. $ .32 $ (1.68)
========== ==========
<FN>
See accompanying notes.
</FN>
3
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
Common stock
------------------ Common Total
Number Par Contributed Accumulated stock in stockholders'
of shares value capital deficit treasury equity
---------- ----- ----------- ----------- -------- -------------
Balance at December 31, 1997....... 20,575,092 $ 206 $ 392,718 $ (322,603) $ - $ 70,321
Net income......................... - - - 8,337 - 8,337
Issuance of common stock through
public offering................... 2,800,000 28 82,716 - - 82,744
Issuance of common stock for
acquisition of business........... 230,769 2 4,398 - - 4,400
Issuance of common stock under
stock purchase and option plans... 62,699 - 423 - - 423
Purchases of common stock.......... (471,300) - - - (8,183) (8,183)
---------- ----- --------- ---------- ------- ---------
Balance at September 30, 1998...... 23,197,260 $ 236 $ 480,255 $ (314,266) $(8,183) $ 158,042
========== ===== ========= ========== ======= =========
<FN>
See accompanying notes.
</FN>
4
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Nine months
ended September 30
-----------------------
1998 1997
---------- ----------
OPERATING:
Net income (loss)................................... $ 8,337 $ (23,235)
Adjustments to reconcile to cash used -
Depreciation and amortization, including
amortization included in interest expense....... 38,162 42,517
Provision for doubtful receivables................ 92,555 72,617
Change in operating assets and
liabilities..................................... (165,302) (116,789)
Other, net........................................ - (75)
---------- ----------
Cash used in operating activities............... (26,248) (24,965)
INVESTING:
Purchases and construction of property
and equipment..................................... (47,690) (18,720)
Acquisitions of businesses.......................... (2,117) -
Proceeds from sale of property and equipment........ - 4,939
---------- ----------
Cash used in investing activities .............. (49,807) (13,781)
FINANCING:
Debt transactions -
Redemption of 13% Senior Subordinated
Notes due 2003.................................. (24,021) -
Proceeds from other long-term borrowings.......... - 7,500
Repayments of other long-term debt................ (5,344) (10,203)
Debt issuance costs............................... (317) (258)
---------- ----------
Cash used in debt transactions.................. (29,682) (2,961)
Equity transactions -
Proceeds from issuance of common stock through
public offering................................. 82,744 88,390
Proceeds from issuance of common stock under
stock purchase and option plans................. 423 163
Purchases of common stock for treasury............ (8,183) -
---------- ----------
Cash provided by financing activities........... 45,302 85,592
---------- ----------
Increase (decrease) in cash and equivalents........... (30,753) 46,846
Cash and equivalents, beginning of period............. 61,679 16,534
---------- ----------
Cash and equivalents, end of period................... $ 30,926 $ 63,380
========== ==========
(continued)
5
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED)
(In thousands)
(Unaudited)
Nine months
ended September 30
-----------------------
1998 1997
---------- ----------
SUPPLEMENTAL CASH FLOWS INFORMATION:
Changes in operating assets and liabilities,
net of effects from acquisitions, were as
follows -
Increase in installment contracts receivable.... $ (164,429) $ (99,817)
Increase in other current and other assets...... (1,875) (13,307)
Increase in deferred membership
origination costs............................. (12,613) (1,641)
Increase (decrease) in accounts payable......... 2,746 (1,187)
Increase in income taxes payable................ 452 160
Increase (decrease) in accrued and other
liabilities................................... 3,920 (5,369)
Increase in deferred revenues................... 6,497 4,372
---------- ----------
$ (165,302) $ (116,789)
========== ==========
Cash payments for interest and income taxes
were as follows -
Interest paid................................... $ 25,787 $ 39,445
Interest capitalized............................ (422) (691)
Income taxes paid, net.......................... 73 140
Investing and financing activities exclude the
following non-cash transactions -
Acquisition of business with common stock....... $ 4,400 $ -
Acquisition of property and equipment
through capital leases/borrowings............. 7,104 3,585
Repayments of long-term debt using proceeds
from sale of property and equipment........... - 6,007
<FN>
See accompanying notes.
</FN>
6
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data)
(Unaudited)
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Bally Total Fitness Holding Corporation (the "Company") and the
subsidiaries which it controls. The Company, through its subsidiaries, is a
nationwide commercial operator of fitness centers with approximately 325
facilities concentrated in 27 states and Canada. The Company operates in one
industry segment, and all significant revenues arise from the commercial
operation of fitness centers, primarily in major metropolitan markets in the
United States. Unless otherwise specified in the text, references to the Company
include the Company and its subsidiaries. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements included in the Company's Annual Report on Form 10-K and Form 10-K/A
for the year ended December 31, 1997.
All adjustments have been recorded which are, in the opinion of management,
necessary for a fair presentation of the condensed consolidated balance sheet of
the Company at September 30, 1998, its consolidated statement of operations for
the three and nine months ended September 30, 1998 and 1997, its consolidated
statement of cash flows for the nine months ended September 30, 1998 and 1997,
and its consolidated statement of stockholders' equity for the nine months ended
September 30, 1998. All such adjustments were of a normal recurring nature.
The accompanying condensed consolidated financial statements have been prepared
in conformity with generally accepted accounting principles which require the
Company's management to make estimates and assumptions that affect the amounts
reported therein. Actual results could vary from such estimates. In addition,
certain reclassifications have been made to the nine month period of 1998 to
conform with the third quarter 1998 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, 1998 and
1997 are not necessarily indicative of the results of operations for the full
year.
ACQUISITIONS
During the second quarter of 1998, the Company acquired 9 fitness centers, 8
located in the San Francisco/Oakland area and one in Chicago. The total purchase
price of the 9 centers was $6,923 consisting of 230,769 common shares of the
Company stock valued at $4,400, $2,073 in cash and $450 in future consideration.
STOCK OFFERING
In May 1998, the Company issued 2,800,000 shares of its common stock at $31 3/8
per share through underwriters. The offering provided net proceeds of $82,744.
The Company is using these proceeds to fund its growth strategy.
7
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data)
(Unaudited)
INSTALLMENT CONTRACTS RECEIVABLE
SEPTEMBER 30 DECEMBER 31
1998 1997
------------ -----------
Current:
Installment contracts receivable............... $300,527 $239,448
Unearned finance charges....................... (37,273) (27,709)
Allowance for doubtful receivables and
cancellations................................ (63,298) (43,728)
-------- --------
$199,956 $168,011
======== ========
Long-term:
Installment contracts receivable............... $288,172 $226,735
Unearned finance charges....................... (19,312) (14,357)
Allowance for doubtful receivables and
cancellations................................ (53,274) (36,803)
-------- --------
$215,586 $175,575
======== ========
ALLOWANCE FOR DOUBTFUL RECEIVABLES AND CANCELLATIONS
A summary of the allowance for doubtful receivables and cancellations activity
is as follows:
Three months ended Nine months ended
----------------------- -----------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Balance at beginning of period..$ 107,536 $ 88,630 $ 80,531 $ 86,095
Contract cancellations and
write-offs of uncollectible
amounts, net of recoveries.... (56,546) (50,522) (161,263) (149,171)
Provision for cancellations
(classified as a direct
reduction of revenues)....... 34,725 27,848 104,749 81,467
Provision for doubtful
receivables .................. 30,857 25,052 92,555 72,617
----------- ----------- ----------- -----------
Balance at end of period........$ 116,572 $ 91,008 $ 116,572 $ 91,008
=========== =========== =========== ===========
8
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data)
(Unaudited)
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 23,499,985 shares and 16,959,883 shares for the three
months ended September 30, 1998 and 1997, respectively, and 22,180,601 shares
and 13,868,305 shares for the nine months ended September 30, 1998 and 1997,
respectively. Diluted earnings (loss) per common share is computed by dividing
net income (loss) by the weighted average number of shares of common stock and
common stock equivalents outstanding during each period, which totaled
27,142,927 shares and 16,959,883 shares for the three months ended September 30,
1998 and 1997, respectively, and 25,971,315 shares and 13,868,305 shares for the
nine months ended September 30, 1998 and 1997, respectively. Common stock
equivalents represent the dilutive effect of the assumed exercise of outstanding
warrants and stock options. Common stock equivalents increased the weighted
average number of shares outstanding for diluted earnings per common share by
3,642,942 and 3,790,714 share for the three and nine months ended September 30,
1998, respectively. The assumed exercise of outstanding warrants and stock
options for diluted loss per common share was not applicable in 1997 because
their effect was anti-dilutive.
SUBSEQUENT EVENTS
In November 1998, the Company amended its November 1997 three-year revolving
credit agreement increasing the credit line to $90,000. The amount available
under the credit line is reduced by any outstanding letters of credit, which
cannot exceed $30,000. The credit line was unused except for outstanding letters
of credit totaling $6.8 million as of September 30, 1998 and $6.6 million as of
November 16, 1998.
9
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, 1998 AND 1997
Net revenues for the third quarter of 1998 were $189.6 million compared to
$165.1 million in 1997, an increase of $24.5 million (15%). This increase was,
in part, a result of a $7.5 million (7%) increase in initial membership fees
originated, consisting of a $16.0 million (18%) increase in financed memberships
originated offset, in part, by an $8.5 million (54%) decrease in paid-in-full
memberships originated. These results generally reflect management's strategy of
selling more all-club membership plans (which typically have been financed and
generate better long-term returns for the Company) and fewer single-club
membership plans. The weighted average selling price of membership contracts
sold increased 25%. Total membership units sold during the quarter declined
slightly compared to the prior year period due primarily to the planned
curtailment of sales of the lower priced, lower margin, single-club and
discounted upgrade and add-on membership plans in 1998. Unit sales of all other
membership types increased period over period by 10%. Dues collected increased
$4.3 million (9%) from the 1997 quarter while prepaid dues increased by only $.2
million during the 1998 quarter, primarily as a result of the increasing number
of members paying dues monthly by Electronic Fund Transfer (EFT) methods. The
Company's experience has shown that EFT methods generally result in improved
customer satisfaction, lower attrition and improved margins. Reflecting
management's continuing strategy to improve the quality of its facilities, the
Company, between July 1997 and September 1998, closed 10 older, typically
smaller and less profitable facilities while opening 5 new, larger facilities,
using its new prototype design. In addition, during the second quarter of 1998,
the Company acquired 9 fitness centers, 8 located in the San Francisco/Oakland
area and one in Chicago. The weighted average number of fitness centers selling
memberships increased from 316 in the third quarter of 1997 to 323 in the third
quarter of 1998, an increase of 2%. New membership revenue and dues collected
from comparable fitness centers increased 6% over the prior year quarter.
Deferred revenue accounting decreased revenues by $.2 million in the third
quarter of 1998 compared to a decrease of $3.4 million in 1997.
Finance charges earned during the third quarter of 1998 increased $3.6 million
(36%) compared to the 1997 quarter due to the increase in the size and quality
of the receivables portfolio. Receivables written off in the period, as a
percent of average receivables, was 10% compared to 11% experienced during the
prior year quarter. Additionally, the percentage of accounts current with all
contractual payments improved to 86% from 83% as of December 31, 1997. The
average interest rate for finance charges to members was substantially unchanged
between the periods.
Fees and other revenues increased $5.8 million (134%) over the 1997 quarter
principally due to the increase in revenues from the Company's new initiatives
consisting primarily of personal training fees, sales of Bfit Nutritionals(TM)
and sales from Bfit Essentials(sm) retail stores. New initiative revenues
totaled $8.0 million in the 1998 quarter compared to $2.6 million of similar
revenues in the 1997 quarter, an increase of $5.4 million.
Operating income for the third quarter of 1998 was $13.8 million compared to $.9
million in 1997. The increase of $12.9 million was due to the aforementioned
$24.5 million increase in revenues and a $.6 million decline in depreciation and
amortization expense, partially offset by a $12.2 million (8%) increase in
operating costs and expenses. The 1997 quarter included a one-time charge of
$3.1 million.
The provision for doubtful receivables included in operating costs and expenses
above, for the third quarter of 1998 was $30.9 million compared to $25.1 million
in 1997, an increase of $5.8 million due to the increase in initial membership
fees on financed memberships originated. The total provision rate, inclusive of
provisions for cancellations which are reflected as a direct reduction of
initial membership fees on financed memberships originated, was 41% of gross
financed originations during each of the periods.
10
BALLY TOTAL FITNESS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating costs and expenses, excluding the separately discussed items
consisting of the provision for doubtful accounts, depreciation and
amortization, and the aforementioned one-time charge in the 1997 quarter, and
net of direct selling costs deferred through the change in deferred membership
origination costs, increased $9.5 million (8%). This increase was due
principally to costs associated with the new initiatives' revenue growth and
the incremental costs of operating additional clubs.
The Company's interest income for the third quarter of 1998 increased to $.9
million from $.6 million in 1997 due to an increase in temporarily invested
available cash balances.
Interest expense was $10.2 million for the third quarter of 1998 compared to
$11.7 million in 1997, a decrease of $1.5 million (13%) due to lower average
interest rates.
The income tax provision for the third quarter of 1998 reflects state income
taxes as the federal taxes provided were offset by the reversal of valuation
reserves. The 1997 income tax provision reflects state income taxes only, as no
federal benefit was provided because the ultimate realization of additional
deferred tax assets could not be assured.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net revenues for the first nine months of 1998 were $555.0 million compared to
$495.4 million in the 1997 period, an increase of $59.6 million (12%). This
increase is in part a result of an increase in initial membership fees
originated of $31.9 million (10%), consisting of a $55.1 million (21%) increase
in financed memberships originated offset, in part, by a $23.2 million (49%)
decrease in paid-in-full memberships originated. The weighted average selling
price of membership contracts sold increased 22%. Total membership units sold
during the first nine months of 1998 declined slightly compared to the prior
year period due primarily to the planned curtailment of sales of the lower
priced, lower margin, single club and discounted upgrade and add-on membership
plans in 1998. Unit sales of all other membership types increased period over
period by 12%. Dues collected increased $5.6 million (4%) from the 1997 period
while prepaid dues decreased by $.7 million during the 1998 period. Reflecting
management's continuing strategy to improve the quality of its facilities, the
Company, between January 1997 and September 1998, closed 13 older, typically
smaller and less profitable facilities and sold one fitness center to a
franchisee while opening 11 new, larger facilities, using its new prototype
design. In addition, during the first nine months of 1998, the Company acquired
9 fitness centers. The weighted average number of fitness centers selling
memberships during the first nine months increased to 319 from 318 during the
comparable 1997 period. New membership revenue and dues collected from
comparable fitness centers increased 9% over the prior year period. Deferred
revenue accounting decreased revenues by $6.5 million during the 1998 period
compared to a decrease of $4.4 million in 1997.
Finance charges earned increased $7.4 million (25%) in the nine months of 1998
due to the increase in the size and quality of the receivables portfolio, as
previously discussed. The average interest rate for finance charges to members
was substantially unchanged between the periods.
Fees and other revenues increased $16.8 million (146%) over the 1997 period
principally due to the increase in revenues from the Company's new initiatives
consisting primarily of personal training fees, sales of Bfit Nutritionals(TM)
and sales from Bfit Essentials(sm) retail stores. New initiative revenues
totaled $22.5 million in the 1998 period compared to $6.2 million of similar
revenues in the 1997 period, an increase of $16.3 million.
Operating income for the first nine months of 1998 was $37.4 million compared to
$10.3 million in the 1997 period. The increase of $27.1 million was due to the
aforementioned $59.6 million increase in revenues and a $4.2 million decline in
depreciation and amortization, offset, in part, by a $36.7 million (8%) increase
in
11
BALLY TOTAL FITNESS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
operating costs and expenses. The 1997 period included a one-time charge of
$3.9 million.
Depreciation expense is expected to decline, exclusive of the effects from
additions or acquisitions, by up to $5.0 million annually during the next three
years. For the first nine months of 1998 depreciation expense, as expected,
declined $4.2 million, of which $2.1 million was related to the amortization
portion of the aforementioned $3.9 million one-time charge.
The provision for doubtful receivables, included in operating costs and
expenses, for the first nine months of 1998 was $92.6 million compared to $72.6
million in 1997, an increase of $20.0 million due to the increase in initial
membership fees on financed memberships originated. The total provision rate,
inclusive of provisions for cancellations which are reflected as a direct
reduction of initial membership fees on financed memberships originated, was 41%
of gross financed originations during each of the periods.
Operating costs and expenses, excluding the separately discussed items
consisting of the provision for doubtful accounts, depreciation and
amortization, and the aforementioned one-time charge in the 1997 period, and net
of direct selling costs deferred through the change in deferred membership
origination costs, increased $20.7 million (6%). This increase was due
principally to costs associated with the new initiatives revenue growth and, to
a lesser extent, the incremental costs of operating additional clubs.
The Company's interest income for the first nine months of 1998 increased to
$2.2 million from $.8 million in 1997 due to an increase in temporarily invested
available cash balances.
Interest expense was $30.7 million for the first nine months of 1998 compared to
$34.1 million in 1997, a decrease of $3.4 million (10%) due to lower average
interest rates.
The income tax provision for the first nine months of 1998 reflects state income
taxes as the federal taxes provided were offset by the reversal of valuation
reserves. The 1997 income tax provision reflects state income taxes only, as no
federal benefit was provided because the ultimate realization of additional
deferred tax assets could not be assured.
LIQUIDITY AND CAPITAL RESOURCES
The Company is in the process of upgrading and increasing the number of its
facilities to improve revenue potential from its membership and more effectively
capitalize on its facilities, streamlined marketing, member support and
administrative functions. Management plans to make capital expenditures of
approximately $10 million to $15 million annually to maintain and upgrade the
Company's existing facilities. In addition, the Company has completed nearly 80%
of its planned investment of approximately $20 million to extensively add and
upgrade exercise equipment, refresh interior and exterior finishes to improve
club ambience, and refurbish and make major upgrades to approximately 25% of its
clubs. In recent years, the Company has spent $6 million to $15 million
annually, as funds were available, to open new or replacement facilities.
Beginning in 1998, the Company has increased its annual spending target to
approximately $20 million to $30 million to build and open 15 to 20 new
facilities based on its new prototype, which is designed to cost less to
construct and maintain than the Company's older facilities. The new facilities
are expected to range in size generally from 15,000 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 offering provided net proceeds of $82.7
million. The Company is using these proceeds to fund its growth strategy to open
new fitness
12
BALLY TOTAL FITNESS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
centers, to selectively acquire club-related real estate and to acquire fitness
center operators in strategic geographic markets. The Company will allocate
these proceeds among the contemplated uses based on available business
opportunities and prevailing market conditions. The Company is in various stages
of discussions to acquire regional operators of fitness centers. None of the
individual negotiations are for a material acquisition of fitness centers or
club-related real estate.
On August 6, 1998, the Company announced that it has been authorized to
repurchase up to 1,500,000 shares of the Company's common stock on the open
market from time to time. To date the Company has repurchased 554,800 shares at
an average price of $17.11 per share.
In November 1998, the Company amended its November 1997 three-year revolving
credit agreement increasing the credit line to $90,000. The credit line was
unused except for outstanding letters of credit totaling $6.8 million as of
September 30, 1998 and $6.6 million as of November 16, 1998.
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, the Company's debt service requirements, including interest,
through September 30, 1999 are approximately $43.3 million. Management believes
that the Company will be able to satisfy its debt service and capital
expenditure requirements through September 30, 1999 along with funding any of
the Company's stock repurchases, out of available cash balances and cash flow
from operations.
In the first nine months of 1998, cash used in operating activities was $26.2
million compared to $25.0 million in the 1997 period. Net installment contracts
receivable grew $72.0 million during the 1998 period compared to $26.6 million
in the 1997 period. Interest paid during the 1998 period declined $13.7 million
reflecting a combination of lower average rates and timing of semi-annual
payments. Excluding the growth in net receivables and changes in interest
payments, operating activities provided cash of $32.1 million compared to $1.6
million for the first nine months of 1998 and 1997, respectively. The period
over period improvement of $30.5 million principally reflects the $31.6 million
increase in profitability for the first nine months of 1998 compared to the 1997
period.
During the third quarter of 1998, normal collections from installment contracts
receivable, down payments, and monthly dues improved $16.1 million compared to
the 1997 quarter, entirely offsetting the planned curtailment of discounted
paid-in-full memberships and discounted collection accelerations of installment
contracts receivable and monthly dues. During the first nine months of 1998,
normal collections improved $28.5 million compared to the 1997 period, largely
offsetting the $41.2 million foregone in the planned curtailment of discounted
paid-in-full memberships and discounted collection accelerations of installment
contracts receivable and monthly dues. This improvement in cash flows is
well-ahead of plan and should result in positive cash from operations early next
year. Prior to completing public offerings of 8,000,000 shares of common stock
in August 1997 and 2,800,000 shares in May 1998, which provided net proceeds
totaling $171.1 million, the Company was dependent on availability under its
credit facility and its operations to provide for cash needs. The Company
managed liquidity requirements in recent years by emphasizing the sale of
single-club paid-in-full membership plans and accelerating collections through
promotional discounting of financed memberships and dues to increase available
cash. Management believes use of these techniques has had a negative impact on
operating results and long-term operating cash flows, and that the availability
of working capital has substantially reduced the need for these techniques to be
continued.
Capital expenditures during the first nine months of 1998 were $54.8 million
(including capital leases of $7.1 million) an increase of $32.5 million over the
1997 period. This increase is a result of 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
13
BALLY TOTAL FITNESS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
due 2003 at a price of 106.5% of the principal amount, together with accrued and
unpaid interest.
YEAR 2000
The Company has completed an assessment of whether its systems and those of
third parties, which could have a material impact on the Company will function
properly with respect to dates in 2000 and thereafter. The Company has
determined that two of its existing software applications require modification,
with such modifications expected to be completed in 1998 at an aggregate cost to
the Company of less than $.1 million. The Company believes that the only third
parties that could have a material impact on the Company are the major financial
institutions that process the Company's collections of installment receivables
and dues by electronic funds transfers. Management believes that these financial
institutions are currently working on modifications to their internal systems to
insure that those systems will function properly with respect to dates in 2000
and thereafter and expect that these modifications will be completed in 1998.
The Company does not anticipate that the noncompliance, if any, with Year 2000
of any of its non-information technology systems (i.e. embedded technology such
as microcontrollers) will result in material adverse effect to the Company.
Management is currently undertaking an analysis of worst case scenarios and
developing contingency plans to deal with such scenarios.
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; failure of entities providing goods
and services to the Company to be Year 2000 compliant; 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.
14
BALLY TOTAL FITNESS HOLDING CORPORATION
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits:
10.1 Employment Agreement effective as of January 1, 1998 between the
Company and John W. Dwyer.
10.2 Employment Agreement effective as of January 1, 1998 between the
Company and Lee S. Hillman.
10.3 Employment Agreement effective as of January 1, 1998 between the
Company and Harold Morgan.
10.4 Employment Agreement effective as of January 1, 1998 between the
Company and John Wildman.
27 Financial Data Schedule for September 30, 1998 (filed
electronically only).
(b) Reports on Form 8-K:
Financial
Date Items Statements
---- ----- ----------
August 13, 1998 #5 and #7 None
15
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 16, 1998
16