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. 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 BALLY TOTAL FITNESS HOLDING CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) JUNE 30 DECEMBER 31 1999 1998 ----------- ----------- 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> 1 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) THREE MONTHS ENDED JUNE 30 ------------------------ 1999 1998 ---------- ---------- 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> 2 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) SIX MONTHS ENDED JUNE 30 ------------------------ 1999 1998 ---------- ---------- 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> 3 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands, except share data) (Unaudited) COMMON STOCK UNEARNED ------------------ COMPENSATION COMMON TOTAL NUMBER PAR CONTRIBUTED ACCUMULATED (RESTRICTED STOCK IN STOCKHOLDERS' OF SHARES VALUE CAPITAL DEFICIT STOCK) TREASURY EQUITY ---------- ----- ----------- ----------- ----------- -------- ------------ 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> 4 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) SIX MONTHS ENDED JUNE 30 ------------------------ 1999 1998 ---------- ---------- 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> 5 BALLY TOTAL FITNESS HOLDING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED) (In thousands) (Unaudited) SIX MONTHS ENDED JUNE 30 ------------------------ 1999 1998 ---------- ---------- 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> 6 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 BALLY TOTAL FITNESS HOLDING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in thousands) (Unaudited) INSTALLMENT CONTRACTS RECEIVABLE JUNE 30 DECEMBER 31 1999 1998 ---------- ----------- 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 ========= ========= ALLOWANCE FOR DOUBTFUL RECEIVABLES AND CANCELLATIONS A summary of the allowance for doubtful receivables and cancellations activity is as follows: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- 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 ======== ======== ======== ======== 8 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 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 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 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 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 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 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