[X] | Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the period ended September 30, 2003 |
[ ] | Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
Delaware | 36-3228107 |
(State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) |
8700 West Bryn Mawr Avenue, Chicago, Illinois | 60631 |
(Address of principal executive offices) | (Zip Code) |
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:
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes: X No:
As of October 31, 2003, 34,023,088 shares of the registrants common stock were outstanding.
Page | |
Number |
Item 1. | Financial statements: |
Condensed consolidated balance sheet (unaudited) |
September 30, 2003 and December 31, 2002 | 1 |
Consolidated statement of income (unaudited) |
Three months ended September 30, 2003 and 2002 | 2 |
Consolidated statement of income (unaudited) |
Nine months ended September 30, 2003 and 2002 | 3 |
Consolidated statement of stockholders equity (unaudited) |
Nine months ended September 30, 2003 | 4 |
Consolidated statement of cash flows (unaudited) |
Nine months ended September 30, 2003 and 2002 | 5 |
Notes to condensed consolidated financial statements |
(unaudited) | 7 |
Item 2. | Managements discussion and analysis of financial |
condition and results of operations | 22 |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 29 |
Item 4. | Evaluation of Disclosure Controls and Procedures | 29 |
Item 4. | Submission of matters to a vote of security holders | 29 |
Item 6. | Exhibits and reports on Form 8-K | 30 |
SIGNATURE PAGE | 31 |
September 30 | December 31 | ||||
2003 | 2002 | ||||
ASSETS | |||||
Current assets: | |||||
Cash and equivalents | $ | 21,401 | $ | 12,907 | |
Installment contracts receivable, net | 289,099 | 271,531 | |||
Other current assets | 71,374 | 92,764 | |||
Total current assets | 381,874 | 377,202 | |||
Installment contracts receivable, net | 254,395 | 251,074 | |||
Property and equipment, less accumulated depreciation | |||||
and amortization of $587,081 and $538,613 | 639,373 | 657,539 | |||
Goodwill | 242,126 | 242,854 | |||
Trademarks | 6,969 | 6,969 | |||
Intangible assets, less accumulated | |||||
amortization of $9,870 and $9,453 | 2,370 | 2,786 | |||
Deferred income taxes | 75,178 | 81,314 | |||
Deferred membership origination costs | 119,011 | 119,484 | |||
Other assets | 35,315 | 32,652 | |||
$ | 1,756,611 | $ | 1,771,874 | ||
LIABILITIES AND STOCKHOLDERS EQUITY | |||||
Current liabilities: | |||||
Accounts payable | $ | 55,315 | $ | 51,752 | |
Income taxes payable | 784 | 1,497 | |||
Deferred income taxes | 24,848 | 29,303 | |||
Accrued liabilities | 85,910 | 87,683 | |||
Current maturities of long-term debt | 25,538 | 28,904 | |||
Deferred revenues | 243,078 | 271,031 | |||
Total current liabilities | 435,473 | 470,170 | |||
Long-term debt, less current maturities | 719,138 | 697,850 | |||
Other liabilities | 10,912 | 10,689 | |||
Deferred revenues | 53,961 | 63,689 | |||
Stockholders equity | 537,127 | 529,476 | |||
$ | 1,756,611 | $ | 1,771,874 | ||
Three months ended | |||||
September 30 | |||||
2003 | 2002 | ||||
Net revenues: | |||||
Membership revenue | $ | 165,568 | $ | 180,480 | |
Products and services | 71,586 | 57,398 | |||
Miscellaneous revenue | 4,349 | 5,200 | |||
241,503 | 243,078 | ||||
Operating costs and expenses: | |||||
Fitness center operations | 139,347 | 140,946 | |||
Products and services | 44,791 | 36,681 | |||
Member processing and collection centers | 12,057 | 11,686 | |||
Advertising | 11,935 | 12,221 | |||
General and administrative | 8,620 | 7,916 | |||
Special charges | 6,500 | ||||
Depreciation and amortization | 19,276 | 19,567 | |||
236,026 | 235,517 | ||||
Operating income | 5,477 | 7,561 | |||
Finance charges earned | 19,436 | 16,815 | |||
Interest expense | (15,651) | (13,796) | |||
Other, net | (2,858) | (556) | |||
927 | 2,463 | ||||
Income from continuing operations before income taxes | 6,404 | 10,024 | |||
Income tax provision | (1,537) | (2,406) | |||
Income from continuing operations | 4,867 | 7,618 | |||
Loss from discontinued operations (net of tax benefit | |||||
of $40 and $125, in 2003 and 2002, respectively) | (126) | (394) | |||
Net income | $ | 4,741 | $ | 7,224 | |
Basic earnings per common share: | |||||
Income from continuing operations | $ | 0.15 | $ | 0.23 | |
Loss from discontinued operations | (0.01) | ||||
Net income per common share | $ | 0.15 | $ | 0.22 | |
Diluted earnings per common share: | |||||
Income from continuing operations | $ | 0.14 | $ | 0.23 | |
Loss from discontinued operations | (0.01) | ||||
Net income per common share | $ | 0.14 | $ | 0.22 | |
Pro forma amounts, assuming the new accounting principle is applied retroactively: | |||||
Income from continuing operations | $ | 4,867 | $ | 7,259 | |
Net income | 4,741 | 6,865 | |||
Basic net income per common share | 0.15 | 0.21 | |||
Diluted net income per common share | 0.14 | 0.21 |
Nine months ended | |||||
September 30 | |||||
2003 | 2002 | ||||
Net revenues: | |||||
Membership revenue | $ | 511,990 | $ | 551,544 | |
Products and services | 221,016 | 163,133 | |||
Miscellaneous revenue | 14,018 | 15,060 | |||
747,024 | 729,737 | ||||
Operating costs and expenses: | |||||
Fitness center operations | 420,922 | 418,848 | |||
Products and services | 139,350 | 103,466 | |||
Member processing and collection centers | 35,668 | 33,679 | |||
Advertising | 43,999 | 45,143 | |||
General and administrative | 25,303 | 23,758 | |||
Special charges | 6,500 | ||||
Depreciation and amortization | 57,918 | 55,937 | |||
723,160 | 687,331 | ||||
Operating income | 23,864 | 42,406 | |||
Finance charges earned | 56,798 | 51,937 | |||
Interest expense | (43,572) | (41,986) | |||
Other, net | (4,678) | (393) | |||
8,548 | 9,558 | ||||
Income from continuing operations before income taxes | 32,412 | 51,964 | |||
Income tax provision | (7,779) | (8,110) | |||
Income from continuing operations | 24,633 | 43,854 | |||
Discontinued operations | |||||
Loss from discontinued operations (net of tax benefit | |||||
of $236 and $255, in 2003 and 2002, respectively) | (745) | (1,153) | |||
Loss on disposal | (1,699) | ||||
Loss from discontinued operations | (2,444) | (1,153) | |||
Income before cumulative effect of changes in accounting principles | 22,189 | 42,701 | |||
Cumulative effect of changes in accounting principles, net of taxes | (15,579) | ||||
Net income | $ | 6,610 | $ | 42,701 | |
Basic earnings per common share: | |||||
Income from continuing operations | $ | 0.75 | $ | 1.37 | |
Loss from discontinued operations | (0.07) | (0.04) | |||
Cumulative effect of changes in accounting principles | (0.48) | ||||
Net income per common share | $ | 0.20 | $ | 1.33 | |
Diluted earnings per common share: | |||||
Income from continuing operations | $ | 0.74 | $ | 1.32 | |
Loss from discontinued operations | (0.07) | (0.03) | |||
Cumulative effect of changes in accounting principles | (0.47) | ||||
Net income per common share | $ | 0.20 | $ | 1.29 | |
Pro forma amounts, assuming the new accounting principle is applied retroactively: | |||||
Income from continuing operations | $ | 24,633 | $ | 45,742 | |
Net income | 22,189 | 44,589 | |||
Basic net income per common share | 0.68 | 1.39 | |||
Diluted net income per common share | 0.67 | 1.35 |
Common stock | Unearned | ||||||||||||||||||
compensation | Common | Total | |||||||||||||||||
Par | Contributed | Accumulated | (restricted | stock in | stockholders | ||||||||||||||
Shares | value | capital | deficit | stock) | treasury | equity | |||||||||||||
Balance at December 31, 2002 | 33,193,425 | $ | 338 | $ | 670,561 | $ | (104,279) | $ | (25,509) | $ | (11,635) | $ | 529,476 | ||||||
Net income | 6,610 | 6,610 | |||||||||||||||||
Restricted stock activity | 695,000 | 7 | 4,191 | (3,854) | 344 | ||||||||||||||
Issuance of common stock under | |||||||||||||||||||
stock purchase and option plans | 131,330 | 2 | 695 | 697 | |||||||||||||||
Balance at September 30, 2003 | 34,019,755 | $ | 347 | $ | 675,447 | $ | (97,669) | $ | (29,363) | $ | (11,635) | $ | 537,127 | ||||||
Nine months ended | |||||
September 30 | |||||
2003 | 2002 | ||||
OPERATING: | |||||
Net income before cumulative effect of changes in accounting principles | $ | 22,189 | $ | 42,701 | |
Adjustments to reconcile to cash provided | |||||
Depreciation and amortization, including amortization | |||||
included in interest expense | 60,650 | 58,895 | |||
Change in operating assets and liabilities | (49,357) | (66,533) | |||
Write-off of debt issuance costs | 2,562 | ||||
Loss on disposal of discontinued operations | 1,699 | ||||
Stock-based compensation | 344 | ||||
Cash provided by operating activities | 38,087 | 35,063 | |||
INVESTING: | |||||
Purchases and construction of property and equipment | (31,508) | (61,991) | |||
Purchases of real estate | (11,510) | ||||
Acquisitions of businesses and other | (501) | (6,217) | |||
Cash used in investing activities | (32,009) | (79,718) | |||
FINANCING: | |||||
Debt transactions | |||||
Net borrowings (repayments) under revolving credit agreement | (49,500) | 35,900 | |||
Net borrowings of other long-term debt | 61,009 | 9,643 | |||
Debt issuance and refinancing costs | (9,790) | (270) | |||
Cash provided by debt transactions | 1,719 | 45,273 | |||
Equity transactions | |||||
Proceeds from exercise of warrants | 2,513 | ||||
Proceeds from issuance of common stock under stock | |||||
purchase and option plans | 697 | 1,754 | |||
Purchases of common stock for treasury | (860) | ||||
Cash provided by financing transactions | 2,416 | 48,680 | |||
Increase in cash and equivalents | 8,494 | 4,025 | |||
Cash and equivalents, beginning of period | 12,907 | 9,310 | |||
Cash and equivalents, end of period | $ | 21,401 | $ | 13,335 | |
Nine months ended | ||||||
September 30 | ||||||
2003 | 2002 | |||||
SUPPLEMENTAL CASH FLOWS INFORMATION: | ||||||
Changes in operating assets and liabilites: | ||||||
Increase in installment contracts receivable | $ | (20,742) | $ | (67,488) | ||
Decrease (increase) in other current and other assets | 1,686 | (12,857) | ||||
Decrease (increase) in deferred membership origination costs | 473 | (6,805) | ||||
Increase in accounts payable | 3,582 | 13,264 | ||||
Increase in income taxes payable and deferred income taxes | 5,847 | 7,043 | ||||
Increase (decrease) in accrued and other liabilities | (1,987) | 8,175 | ||||
Decrease in deferred revenues | (38,216) | (7,865) | ||||
Change in operating assets and liabilities | $ | (49,357) | $ | (66,533) | ||
Cash payments for interest and income taxes | ||||||
were as follows | ||||||
Interest paid | $ | 30,477 | $ | 34,139 | ||
Interest capitalized | (844) | (2,442) | ||||
Income taxes paid, net | 1,698 | 909 | ||||
Investing and financing activities exclude the following | ||||||
non-cash transactions | ||||||
Acquisitions of property and equipment | ||||||
through capital leases/borrowings | $ | 7,210 | $ | 11,231 | ||
Acquisitions of businesses with common stock | 8,855 | |||||
Restricted stock activity | 4,191 | 4,619 | ||||
Debt, including assumed debt related to | ||||||
acquisition of businesses | 2,846 |
The accompanying condensed consolidated financial statements include the accounts of Bally Total Fitness Holding Corporation (the Company) and the subsidiaries that it controls. The Company, through its subsidiaries, is a commercial operator of 415 fitness centers at September 30, 2003 concentrated in 29 states and Canada. Additionally, the Company has twelve clubs operated pursuant to franchise and joint venture agreements in the United States, Asia, and the Caribbean. 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 and Canada. 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 Companys Annual Report on Form 10-K for the year ended December 31, 2002.
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, 2003, its consolidated statements of income for the three and nine months ended September 30, 2003 and 2002, its consolidated statement of stockholders equity for the nine months ended September 30, 2003, and its consolidated statement of cash flows for the nine months ended September 30, 2003 and 2002. All such adjustments were of a normal recurring nature.
The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States which require the Companys 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 2003 presentation.
As defined in the indenture to the Bally Total Fitness Holding Corporation 10½% Senior Notes, due 2011, guarantor subsidiaries include:
59th Street Gym LLC; 708 Gym LLC; Ace LLC; Bally Fitness Franchising, Inc.; Bally Franchise RSC, Inc.; Bally Franchising Holdings, Inc.; Bally Total Fitness Clinics, Inc.; Bally Total Fitness Corporation; Bally Total Fitness International, Inc.; Bally Total Fitness of Missouri, Inc.; Bally Total Fitness of Toledo, Inc.; Ballys Fitness and Racquet Clubs, Inc.; BFIT Rehabilitation Services, Inc.; BFIT Rehab of Boca Raton, Inc.; BFIT Rehab of Kendall, Inc.; BFIT Rehab of West Palm Beach, Inc.; Connecticut Coast Fitness Centers, Inc.; Connecticut Valley Fitness Centers, Inc.; Crunch LA LLC; Crunch World LLC; Flambe LLC; Greater Philly No. 1 Holding Company; Greater Philly No. 2 Holding Company; Health & Tennis Corporation of New York; Holiday Health Clubs of the East Coast, Inc.; Holiday Health & Fitness Centers of New York, Inc.; Holiday Health Clubs and Fitness Centers, Inc.; Holiday Health Clubs of the Southeast, Inc.; Holiday/Southeast Holding Corp.; Holiday Spa Health Clubs of California; Holiday Universal, Inc.; Crunch Fitness International, Inc.; Jack La Lanne Fitness Centers, Inc.; Jack La Lanne Holding Corp.; Manhattan Sports Club, Inc.; Mission Impossible, LLC; New Fitness Holding Co., Inc.; Nycon Holding Co., Inc.; Physical Fitness Centers of Philadelphia, Inc.; PowerFlex Corporation; Providence Fitness Centers, Inc.; Rhode Island Holding Company; Scandinavian Health Spa, Inc.; Scandinavian US Swim & Fitness, Inc., Soho Ho LLC; Sportslife, Inc.; Sportslife Gwinnett, Inc.; Sportslife Roswell, Inc.; Sportslife Stone Mountain, Inc.; Sportslife Town Center II, Inc.; Tidelands Holiday Health Clubs, Inc.; U.S. Health, Inc.; and West Village Gym at the Archives LLC.
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143). SFAS No. 143 addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets. It requires that the Company recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are then capitalized as part of the carrying amount of the long-lived asset. The Company has implemented the provisions of SFAS No. 143 as of January 1, 2003. As a result, a non-cash cumulative adjustment of $165 was recorded to provide for estimated future restoration obligations on the Companys leaseholds in the first quarter of 2003.
In the second quarter of 2003, the Company changed its accounting method (effective January 1, 2003) related to the recognition of recoveries of unpaid dues under inactive membership contracts from accrual-based estimations to a cash basis of recognition, which is considered a preferable method of accounting for such past due amounts since it is less reliant on estimations. The effect of this change was a cumulative non-cash charge of $15,414 (net of tax effect of $4,868) or $.47 per diluted share. As a result of recording the cumulative effect adjustment as of the beginning of the year, membership revenue increased during the first quarter of 2003 by $1,149. Net income for the first quarter of 2003 increased by $873 and basic and diluted earnings per share increased by $.03.
The Companys operations are subject to seasonal factors and, therefore, the results of operations for the nine months ended September 30, 2003 and 2002 are not necessarily indicative of the results of operations for the full year.
The Company is exposed to market risk from changes in the interest rates on certain of its outstanding debt. The outstanding loan balance under its bank credit facility and the Series 2001-1 accounts receivable-backed variable funding certificates bear interest at variable rates based upon prevailing short-term interest rates in the United States and Europe.
The Company has an 8.5% interest rate cap on the Series 2001-1 accounts receivable-backed variable funding certificates which covers the outstanding $130 million (as of September 30, 2003) of principal through its original principal repayment schedule. Additionally, on $100 million of the variable funding certificates which were refinanced, the Company has purchased a 7.75% rate cap extending through the refinanced period. The Company has also entered into interest rate swap agreements whereby the fixed interest commitment on $200 million of outstanding principal on the Companys 9.875% Senior Subordinated Notes, due 2007, was swapped for a variable rate commitment based on the six-month Euro rate, plus 6.01% (7.13% at September 30, 2003).
Installment contracts receivable | |||||
September 30 | December 31 | ||||
2003 | 2002 | ||||
Current: | |||||
Installment contracts receivable | $ | 415,483 | $ | 404,707 | |
Unearned finance charges | (40,011) | (36,015) | |||
Allowance for doubtful receivables and cancellations | (86,373) | (97,161) | |||
$ | 289,099 | $ | 271,531 | ||
Long-term: | |||||
Installment contracts receivable | $ | 342,311 | $ | 343,749 | |
Unearned finance charges | (24,217) | (22,396) | |||
Allowance for doubtful receivables and cancellations | (63,699) | (70,279) | |||
$ | 254,395 | $ | 251,074 | ||
Three months ended | Nine months ended | ||||||||||
September 30 | September 30 | ||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||
Balance at beginning of period | $ | 162,691 | $ | 130,860 | $ | 167,440 | $ | 130,504 | |||
Contract cancellations and | |||||||||||
write-offs of uncollectible | |||||||||||
amounts, net of recoveries | (84,685) | (81,268) | (258,589) | (258,448) | |||||||
Provision for cancellations and | |||||||||||
doubtful receivables | 72,066 | 84,119 | 241,221 | 261,655 | |||||||
Balance at end of period | $ | 150,072 | $ | 133,711 | $ | 150,072 | $ | 133,711 | |||
Gross committed membership fees is a measure which includes the total potential future value of all initial membership fee revenue, dues revenue, earned finance charges and membership-related products and services revenue from new membership sales originated in a period. It is measured on a gross basis before consideration of our provision for doubtful accounts and cancellations and without deferral of initiation fee revenue, and includes the future potential collection of dues revenue over the initial term of membership. We track gross committed membership revenue as an indicator of current sales trends and believe it to be a useful measure to allow investors to understand current trends in membership sales which may not be apparent under deferral accounting for the initiation fee component of membership revenue. The following is a reconciliation of gross committed membership fees to initial membership fees originated, net:
Three months ended | Nine months ended | ||||||||||
September 30 | September 30 | ||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||
Gross committed membership fees | $ | 266,231 | $ | 287,389 | $ | 857,333 | $ | 888,117 | |||
Less: Committed monthly dues | (66,592) | (59,385) | (199,503) | (180,600) | |||||||
Provision for doubtful receivables | |||||||||||
and cancellations | (72,066) | (84,119) | (241,221) | (261,655) | |||||||
Unearned finance charges and other | (40,663) | (42,134) | (134,450) | (122,366) | |||||||
Products and services revenues | |||||||||||
included in membership programs | (31,306) | (20,349) | (96,626) | (57,348) | |||||||
Initial membership fees originated, net | $ | 55,604 | $ | 81,402 | $ | 185,533 | $ | 266,148 | |||
The following presents the components of membership revenue as presented in the accompanying consolidated statements of income:
Three months ended | Nine months ended | ||||||||||
September 30 | September 30 | ||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||
Initial membership fees: | |||||||||||
Originated, net | $ | 55,604 | $ | 81,402 | $ | 185,533 | $ | 266,148 | |||
Decrease in deferral | 13,963 | 4,848 | 38,607 | 2,885 | |||||||
69,567 | 86,250 | 224,140 | 269,033 | ||||||||
Dues: | |||||||||||
Dues collected | 98,237 | 91,624 | 288,241 | 277,532 | |||||||
Decrease (increase) in deferral | (2,236) | 2,606 | (391) | 4,979 | |||||||
96,001 | 94,230 | 287,850 | 282,511 | ||||||||
Membership revenue | $ | 165,568 | $ | 180,480 | $ | 511,990 | $ | 551,544 | |||
Products and services | |||||||||||
Three months ended | Nine months ended | ||||||||||
September 30 | September 30 | ||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||
Net revenues: | |||||||||||
Retail and nutritional supplements | |||||||||||
Membership programs | $ | 3,290 | $ | 7,305 | $ | 14,667 | $ | 22,815 | |||
Other sales | 14,138 | 13,791 | 43,753 | 42,024 | |||||||
Personal training | |||||||||||
Membership programs | 28,016 | 13,044 | 81,959 | 34,533 | |||||||
Other sales | 26,142 | 21,389 | 79,397 | 58,785 | |||||||
Financial services | 1,869 | 1,240 | 4,976 | ||||||||
71,586 | 57,398 | 221,016 | 163,133 | ||||||||
Direct operating costs and expenses: | |||||||||||
Retail and nutritional supplements | 15,081 | 16,221 | 49,756 | 48,266 | |||||||
Personal training | 29,710 | 20,460 | 89,594 | 55,200 | |||||||
44,791 | 36,681 | 139,350 | 103,466 | ||||||||
Direct operating margin | $ | 26,795 | $ | 20,717 | $ | 81,666 | $ | 59,667 | |||
Margin percentage | 37% | 36% | 37% | 37% |
Basic earnings per common share for each period is computed based on the weighted average number of shares of common stock outstanding of 32,662,634 and 32,379,261 for the three months ended September 30, 2003 and 2002, respectively, and 32,632,527 and 32,069,163 for the nine months ended September 30, 2003 and 2002, respectively. Diluted earnings per common share for each period includes the addition of common stock equivalents of 1,008,041 and 625,467 for the three months ended September 30, 2003 and 2002, respectively, and 582,601 and 1,021,453 for the nine months ended September 30, 2003 and 2002, respectively. Common stock equivalents represent the dilutive effect of the assumed exercise of outstanding warrants and stock options. Options outstanding to purchase 2,975,594 and 3,069,125 shares of common stock at September 30, 2003 and 2002, respectively, were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market prices of the Companys common shares. The range of exercise prices per share for these options was between $12.00 and $36.00 and $15.31 and $36.00 at September 30, 2003 and 2002, respectively.
At September 30, 2003, for accounting purposes, the Company had approximately $103,000 of unrecognized federal net operating loss carryforwards. Separately, the Companys alternative minimum tax (AMT) net operating loss carryforwards have been substantially recognized. Therefore, having fully recognized AMT net operating loss carryforwards for reporting purposes, the Companys federal income tax rate increased to 20% during the second quarter of 2002. The 20% federal rate will remain in effect until such time
For federal income tax payment purposes, the Company has available net operating loss carryforwards exceeding $343,000 and AMT net operating loss carryfowards in excess of $203,000. Therefore, the Company currently does not expect to make any significant federal tax payments earlier than 2006. At such time, the Company will be required to pay taxes at the 20% AMT rate for periods currently estimated to extend beyond 2006, including those periods benefited by AMT credits.
The Company accounts for its stock-based compensation plans, described in the Companys 2002 Annual Report on Form 10-K, using the intrinsic value method and in accordance with the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost related to option plans was reflected in net income, as all options granted under those plans had an exercise price equal to the fair market value of the underlying common stock on the date of grant. The Company has recorded compensation expense related to the restricted stock grants which vest over time. The following table illustrates, in accordance with the provisions of Statement of Financial Accounting Standards No. 148, Accounting for StockBased CompensationTransition and Disclosure, the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
Three months ended | Nine months ended | ||||||||||
September 30 | September 30 | ||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||
Net income, as reported | $ | 4,741 | $ | 7,224 | $ | 6,610 | $ | 42,701 | |||
Plus: stock-based compensation expense | |||||||||||
included in net income, net of tax | 168 | 261 | |||||||||
Less: stock-based compensation expense | |||||||||||
determined under fair value based | |||||||||||
method, net of tax | (1,007) | (1,113) | (2,613) | (3,828) | |||||||
Pro forma net income | $ | 3,902 | $ | 6,111 | $ | 4,258 | $ | 38,873 | |||
Basic earnings per common share | |||||||||||
As reported | $ | 0.15 | $ | 0.22 | $ | 0.20 | $ | 1.33 | |||
Pro forma | 0.12 | 0.19 | 0.13 | 1.21 | |||||||
Diluted earnings per common share | |||||||||||
As reported | 0.14 | 0.22 | 0.20 | 1.29 | |||||||
Pro forma | 0.12 | 0.19 | 0.13 | 0.17 |
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Companys stock options have characteristics significantly different from those of traded options, and because
Condensed consolidating financial statements present the accounts of Bally Total Fitness Holding Corporation (Parent), and its Guarantor and Non-Guarantor subsidiaries, as defined in the indenture to the Bally Total Fitness Holding Corporation 10 ½% Senior Notes due 2011 (the Notes) issued in July 2003. The Notes are unconditionally guaranteed, on a joint and several basis, by the Guarantor subsidiaries including substantially all domestic subsidiaries of Bally Total Fitness Holding Corporation. Non-Guarantor subsidiaries include Canadian operations and special purpose entities for accounts receivable and real estate finance programs. The following tables present the condensed consolidating balance sheet at September 30, 2003 and December 31, 2002, the condensed consolidating statements of income for the three months and nine months ended September 30, 2003 and 2002, and the condensed consolidating statement of cash flows for the nine months ended September 30, 2003 and 2002.
September 30, 2003 | ||||||||||||||
Guarantor | Non-Guarantor | Consolidated | ||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||
ASSETS | ||||||||||||||
Current assets: | ||||||||||||||
Cash and equivalents | $ | - | $ | 18,097 | $ | 3,304 | $ | - | $ | 21,401 | ||||
Installment contracts | ||||||||||||||
receivable, net | - | - | 289,099 | - | 289,099 | |||||||||
Other current assets | - | 69,827 | 1,547 | - | 71,374 | |||||||||
Total current assets | - | 87,924 | 293,950 | - | 381,874 | |||||||||
Installment contracts | ||||||||||||||
receivable, net | - | - | 254,395 | - | 254,395 | |||||||||
Property and equipment, net | - | 596,966 | 42,407 | - | 639,373 | |||||||||
Goodwill | 31,390 | 188,164 | 22,572 | - | 242,126 | |||||||||
Trademarks | 6,767 | 202 | - | - | 6,969 | |||||||||
Intangible assets, net | - | 2,370 | - | - | 2,370 | |||||||||
Deferred income taxes | - | 75,178 | - | - | 75,178 | |||||||||
Deferred membership | ||||||||||||||
origination costs | - | 117,013 | 1,998 | - | 119,011 | |||||||||
Investment in and advances | ||||||||||||||
to subsidiaries | 1,081,966 | 221,315 | - | (1,303,281) | - | |||||||||
Other assets | 11,749 | 6,478 | 17,088 | - | 35,315 | |||||||||
$ | 1,131,872 | $ | 1,295,610 | $ | 632,410 | $ | (1,303,281) | $ | 1,756,611 | |||||
LIABILITIES AND | ||||||||||||||
STOCKHOLDERS EQUITY | ||||||||||||||
Current liabilities: | ||||||||||||||
Accounts payable | $ | - | $ | 55,148 | $ | 167 | $ | - | $ | 55,315 | ||||
Income taxes payable | - | 590 | 194 | - | 784 | |||||||||
Deferred income taxes | - | 23,804 | 1,044 | - | 24,848 | |||||||||
Accrued liabilities | 21,575 | 62,205 | 2,130 | - | 85,910 | |||||||||
Current maturities | ||||||||||||||
of long-term debt | 18,180 | 3,395 | 3,963 | - | 25,538 | |||||||||
Deferred revenues | - | 238,981 | 4,097 | - | 243,078 | |||||||||
Total current liabilities | 39,755 | 384,123 | 11,595 | - | 435,473 | |||||||||
Long-term debt, less current | ||||||||||||||
maturities | 554,990 | 17,290 | 146,858 | - | 719,138 | |||||||||
Net affiliate payable | - | 625,866 | 278,243 | (904,109) | - | |||||||||
Other liabilities | - | 10,407 | 505 | - | 10,912 | |||||||||
Deferred revenues | - | 53,062 | 899 | - | 53,961 | |||||||||
Stockholders equity | 537,127 | 204,862 | 194,310 | (399,172) | 537,127 | |||||||||
$ | 1,131,872 | $ | 1,295,610 | $ | 632,410 | $ | (1,303,281) | $ | 1,756,611 | |||||
December 31, 2002 | ||||||||||||||
Guarantor | Non-Guarantor | Consolidated | ||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||
ASSETS | ||||||||||||||
Current assets: | ||||||||||||||
Cash and equivalents | $ | - | $ | 9,198 | $ | 3,709 | $ | - | $ | 12,907 | ||||
Installment contracts | ||||||||||||||
receivable, net | - | 2,416 | 269,115 | - | 271,531 | |||||||||
Other current assets | - | 91,073 | 1,691 | - | 92,764 | |||||||||
Total current assets | - | 102,687 | 274,515 | - | 377,202 | |||||||||
Installment contracts | ||||||||||||||
receivable, net | - | 2,230 | 248,844 | - | 251,074 | |||||||||
Property and equipment, net | - | 613,142 | 44,397 | - | 657,539 | |||||||||
Goodwill | 31,390 | 187,762 | 23,702 | - | 242,854 | |||||||||
Trademarks | 6,767 | 202 | - | - | 6,969 | |||||||||
Intangible assets, net | - | 2,786 | - | - | 2,786 | |||||||||
Deferred income taxes | - | 81,314 | - | - | 81,314 | |||||||||
Deferred membership | ||||||||||||||
origination costs | - | 117,832 | 1,652 | - | 119,484 | |||||||||
Investment in and advances | ||||||||||||||
to subsidiaries | 1,025,011 | 219,730 | - | (1,244,741) | - | |||||||||
Other assets | 8,024 | 5,950 | 18,678 | - | 32,652 | |||||||||
$ | 1,071,192 | $ | 1,333,635 | $ | 611,788 | $ | (1,244,741) | $ | 1,771,874 | |||||
LIABILITIES AND | ||||||||||||||
STOCKHOLDERS EQUITY | ||||||||||||||
Current liabilities: | ||||||||||||||
Accounts payable | $ | - | $ | 51,264 | $ | 488 | $ | - | $ | 51,752 | ||||
Income taxes payable | - | 1,493 | 4 | - | 1,497 | |||||||||
Deferred income taxes | - | 28,252 | 1,051 | - | 29,303 | |||||||||
Accrued liabilities | 13,832 | 72,336 | 1,515 | - | 87,683 | |||||||||
Current maturities | ||||||||||||||
of long-term debt | 21,675 | 4,285 | 2,944 | - | 28,904 | |||||||||
Deferred revenues | - | 267,317 | 3,714 | - | 271,031 | |||||||||
Total current liabilities | 35,507 | 424,947 | 9,716 | - | 470,170 | |||||||||
Long-term debt, less current | ||||||||||||||
maturities | 506,209 | 19,148 | 172,493 | - | 697,850 | |||||||||
Net affiliate payable | - | 621,526 | 258,703 | (880,229) | - | |||||||||
Other liabilities | - | 10,185 | 504 | - | 10,689 | |||||||||
Deferred revenues | - | 62,761 | 928 | - | 63,689 | |||||||||
Stockholders equity | 529,476 | 195,068 | 169,444 | (364,512) | 529,476 | |||||||||
$ | 1,071,192 | $ | 1,333,635 | $ | 611,788 | $ | (1,244,741) | $ | 1,771,874 | |||||
Three Months Ended September 30, 2003 | ||||||||||||||
Guarantor | Non-Guarantor | Consolidated | ||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||
Net revenues: | ||||||||||||||
Membership revenue | $ | - | $ | 158,860 | $ | 6,708 | $ | - | $ | 165,568 | ||||
Products and services | - | 69,679 | 1,907 | - | 71,586 | |||||||||
Miscellaneous revenue | - | 4,006 | 343 | - | 4,349 | |||||||||
- | 232,545 | 8,958 | - | 241,503 | ||||||||||
Operating costs and expenses: | ||||||||||||||
Fitness center operations | - | 133,987 | 5,360 | - | 139,347 | |||||||||
Products and services | - | 43,214 | 1,577 | - | 44,791 | |||||||||
Member processing and | ||||||||||||||
collection centers | - | 7,461 | 4,596 | - | 12,057 | |||||||||
Advertising | - | 11,434 | 501 | - | 11,935 | |||||||||
General and administrative | 911 | 7,388 | 321 | - | 8,620 | |||||||||
Depreciation and amortization | - | 18,544 | 732 | - | 19,276 | |||||||||
911 | 222,028 | 13,087 | - | 236,026 | ||||||||||
Operating income (loss) | (911) | 10,517 | (4,129) | - | 5,477 | |||||||||
Equity in net income of subsidiaries | 14,970 | - | - | (14,970) | - | |||||||||
Finance charges earned | - | - | 19,436 | - | 19,436 | |||||||||
Interest expense | (12,548) | (374) | (2,729) | - | (15,651) | |||||||||
Other, net | - | (2,602) | (256) | - | (2,858) | |||||||||
2,422 | (2,976) | 16,451 | (14,970) | 927 | ||||||||||
Income from continuing operations | ||||||||||||||
before income taxes | 1,511 | 7,541 | 12,322 | (14,970) | 6,404 | |||||||||
Income tax benefit (provision) | 3,230 | (1,810) | (2,957) | - | (1,537) | |||||||||
Income from continuing operations | 4,741 | 5,731 | 9,365 | (14,970) | 4,867 | |||||||||
Loss from discontinued operations | ||||||||||||||
(net of tax benefit of $40) | - | - | (126) | - | (126) | |||||||||
Net income | $ | 4,741 | $ | 5,731 | $ | 9,239 | $ | (14,970) | $ | 4,741 | ||||
Three Months Ended September 30, 2002 | ||||||||||||||
Guarantor | Non-Guarantor | Consolidated | ||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||
Net revenues: | ||||||||||||||
Membership revenue | $ | - | $ | 173,663 | $ | 6,817 | $ | - | $ | 180,480 | ||||
Products and services | - | 55,949 | 1,449 | - | 57,398 | |||||||||
Miscellaneous revenue | - | 4,862 | 338 | - | 5,200 | |||||||||
- | 234,474 | 8,604 | - | 243,078 | ||||||||||
Operating costs and expenses: | ||||||||||||||
Fitness center operations | - | 135,986 | 4,960 | - | 140,946 | |||||||||
Products and services | - | 35,576 | 1,105 | - | 36,681 | |||||||||
Member processing and | ||||||||||||||
collection centers | - | 6,612 | 5,074 | - | 11,686 | |||||||||
Advertising | - | 11,885 | 336 | - | 12,221 | |||||||||
General and administrative | 1,025 | 6,494 | 397 | - | 7,916 | |||||||||
Special charges | - | 6,500 | - | - | 6,500 | |||||||||
Depreciation and amortization | - | 18,975 | 592 | - | 19,567 | |||||||||
1,025 | 222,028 | 12,464 | - | 235,517 | ||||||||||
Operating income (loss) | (1,025) | 12,446 | (3,860) | - | 7,561 | |||||||||
Equity in net income of subsidiaries | 16,226 | - | - | (16,226) | - | |||||||||
Finance charges earned | - | 168 | 16,647 | - | 16,815 | |||||||||
Interest expense | (10,820) | (333) | (2,643) | - | (13,796) | |||||||||
Other, net | - | 6 | (562) | - | (556) | |||||||||
5,406 | (159) | 13,442 | (16,226) | 2,463 | ||||||||||
Income from continuing operations | ||||||||||||||
before income taxes | 4,381 | 12,287 | 9,582 | (16,226) | 10,024 | |||||||||
Income tax benefit (provision) | 2,843 | (2,694) | (2,555) | - | (2,406) | |||||||||
Income from continuing operations | 7,224 | 9,593 | 7,027 | (16,226) | 7,618 | |||||||||
Loss from discontinued operations | ||||||||||||||
(net of tax benefit of $125) | - | - | (394) | - | (394) | |||||||||
Net income | $ | 7,224 | $ | 9,593 | $ | 6,633 | $ | (16,226) | $ | 7,224 | ||||
Nine Months Ended September 30, 2003 | ||||||||||||||
Guarantor | Non-Guarantor | Consolidated | ||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||
Net revenues: | ||||||||||||||
Membership revenue | $ | - | $ | 492,201 | $ | 19,789 | $ | - | $ | 511,990 | ||||
Products and services | - | 215,005 | 6,011 | - | 221,016 | |||||||||
Miscellaneous revenue | - | 12,954 | 1,064 | - | 14,018 | |||||||||
- | 720,160 | 26,864 | - | 747,024 | ||||||||||
Operating costs and expenses: | ||||||||||||||
Fitness center operations | - | 405,059 | 15,863 | - | 420,922 | |||||||||
Products and services | - | 134,562 | 4,788 | - | 139,350 | |||||||||
Member processing and | ||||||||||||||
collection centers | - | 20,864 | 14,804 | - | 35,668 | |||||||||
Advertising | - | 42,773 | 1,226 | - | 43,999 | |||||||||
General and administrative | 2,883 | 21,452 | 968 | - | 25,303 | |||||||||
Depreciation and amortization | - | 55,750 | 2,168 | - | 57,918 | |||||||||
2,883 | 680,460 | 39,817 | - | 723,160 | ||||||||||
Operating income (loss) | (2,883) | 39,700 | (12,953) | - | 23,864 | |||||||||
Equity in net income of subsidiaries | 34,660 | - | - | (34,660) | - | |||||||||
Finance charges earned | - | - | 56,798 | - | 56,798 | |||||||||
Interest expense | (34,025) | (1,894) | (7,653) | - | (43,572) | |||||||||
Other, net | - | (4,420) | (258) | - | (4,678) | |||||||||
635 | (6,314) | 48,887 | (34,660) | 8,548 | ||||||||||
Income (loss) from continuing | ||||||||||||||
operations before income taxes | (2,248) | 33,386 | 35,934 | (34,660) | 32,412 | |||||||||
Income tax benefit (provision) | 8,858 | (8,013) | (8,624) | - | (7,779) | |||||||||
Income from continuing operations | 6,610 | 25,373 | 27,310 | (34,660) | 24,633 | |||||||||
Discontinued operations | ||||||||||||||
Loss from discontinued operations | ||||||||||||||
(net of tax benefit of $236) | - | - | (745) | - | (745) | |||||||||
Loss on disposal | - | - | (1,699) | - | (1,699) | |||||||||
Loss from discontinued operations | - | - | (2,444) | - | (2,444) | |||||||||
Income before cumulative effect of | ||||||||||||||
changes in accounting principles | 6,610 | 25,373 | 24,866 | (34,660) | 22,189 | |||||||||
Cumulative effect of changes in | ||||||||||||||
accounting principles, net of taxes | - | (15,579) | - | - | (15,579) | |||||||||
Net income | $ | 6,610 | $ | 9,794 | $ | 24,866 | $ | (34,660) | $ | 6,610 | ||||
Nine Months Ended September 30, 2002 | ||||||||||||||
Guarantor | Non-Guarantor | Consolidated | ||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||
Net revenues: | ||||||||||||||
Membership revenue | $ | - | $ | 531,710 | $ | 19,834 | $ | - | $ | 551,544 | ||||
Products and services | - | 158,515 | 4,618 | - | 163,133 | |||||||||
Miscellaneous revenue | - | 13,942 | 1,118 | - | 15,060 | |||||||||
- | 704,167 | 25,570 | - | 729,737 | ||||||||||
Operating costs and expenses: | ||||||||||||||
Fitness center operations | - | 404,160 | 14,688 | - | 418,848 | |||||||||
Products and services | - | 100,081 | 3,385 | - | 103,466 | |||||||||
Member processing and | ||||||||||||||
collection centers | - | 20,804 | 12,875 | - | 33,679 | |||||||||
Advertising | - | 44,053 | 1,090 | - | 45,143 | |||||||||
General and administrative | 3,086 | 19,516 | 1,156 | - | 23,758 | |||||||||
Special charges | - | 6,500 | - | - | 6,500 | |||||||||
Depreciation and amortization | - | 54,160 | 1,777 | - | 55,937 | |||||||||
3,086 | 649,274 | 34,971 | - | 687,331 | ||||||||||
Operating income (loss) | (3,086) | 54,893 | (9,401) | - | 42,406 | |||||||||
Equity in net income of subsidiaries | 72,250 | - | - | (72,250) | - | |||||||||
Finance charges earned | - | 519 | 51,418 | - | 51,937 | |||||||||
Interest expense | (32,104) | (949) | (8,933) | - | (41,986) | |||||||||
Other, net | - | 31 | (424) | - | (393) | |||||||||
40,146 | (399) | 42,061 | (72,250) | 9,558 | ||||||||||
Income from continuing operations | ||||||||||||||
before income taxes | 37,060 | 54,494 | 32,660 | (72,250) | 51,964 | |||||||||
Income tax benefit (provision) | 5,641 | (8,262) | (5,489) | - | (8,110) | |||||||||
Income from continuing operations | 42,701 | 46,232 | 27,171 | (72,250) | 43,854 | |||||||||
Loss from discontinued operations | ||||||||||||||
(net of tax benefit of $255) | - | - | (1,153) | - | (1,153) | |||||||||
Net income | $ | 42,701 | $ | 46,232 | $ | 26,018 | $ | (72,250) | $ | 42,701 | ||||
Nine Months Ended September 30, 2003 | ||||||||||||||
Guarantor | Non-Guarantor | Consolidated | ||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||
OPERATING: | ||||||||||||||
Net income before cumulative effect of | ||||||||||||||
changes in accounting principles | $ | 6,610 | $ | 25,373 | $ | 24,866 | $ | (34,660) | $ | 22,189 | ||||
Adjustments to reconcile to | ||||||||||||||
cash provided | ||||||||||||||
Depreciation and amortization, | ||||||||||||||
including amortization | ||||||||||||||
included in interest expense | 1,503 | 56,006 | 3,141 | - | 60,650 | |||||||||
Change in operating assets | ||||||||||||||
and liabilities | 8,130 | (32,591) | (24,896) | - | (49,357) | |||||||||
Write-off of debt issuance costs | 2,232 | - | 330 | - | 2,562 | |||||||||
Loss on disposal of | ||||||||||||||
discontinued operation | - | - | 1,699 | - | 1,699 | |||||||||
Stock-based compensation | 344 | - | - | - | 344 | |||||||||
Cash provided by | ||||||||||||||
operating activities | 18,819 | 48,788 | 5,140 | (34,660) | 38,087 | |||||||||
INVESTING: | ||||||||||||||
Purchases and construction | ||||||||||||||
of property and equipment | - | (30,838) | (670) | - | (31,508) | |||||||||
Acquisitions of businesses and other | - | - | (501) | - | (501) | |||||||||
Cash used in investing activities | - | (30,838) | (1,171) | - | (32,009) | |||||||||
FINANCING: | ||||||||||||||
Debt transactions | ||||||||||||||
Net repayments under revolving | ||||||||||||||
credit agreement | (49,500) | - | - | - | (49,500) | |||||||||
Net borrowings (repayments) of | ||||||||||||||
other long-term debt | 94,786 | (10,724) | (23,053) | - | 61,009 | |||||||||
Debt issuance and refinancing | ||||||||||||||
costs | (7,847) | - | (1,943) | - | (9,790) | |||||||||
Change in net affiliate balances | (56,955) | 1,673 | 20,622 | 34,660 | - | |||||||||
Cash provided by (used in) | ||||||||||||||
debt transactions | (19,516) | (9,051) | (4,374) | 34,660 | 1,719 | |||||||||
Equity transactions | ||||||||||||||
Proceeds from issuance of | ||||||||||||||
common stock under stock | ||||||||||||||
purchase and option plans | 697 | - | - | - | 697 | |||||||||
Cash provided by (used in) | ||||||||||||||
financing transactions | (18,819) | (9,051) | (4,374) | 34,660 | 2,416 | |||||||||
Increase (decrease) in cash and equivalents | - | 8,899 | (405) | - | 8,494 | |||||||||
Cash and equivalents, beginning of period | - | 9,198 | 3,709 | - | 12,907 | |||||||||
Cash and equivalents, end of period | $ | - | $ | 18,097 | $ | 3,304 | $ | - | $ | 21,401 | ||||
Nine Months Ended September 30, 2002 | ||||||||||||||
Guarantor | Non-Guarantor | Consolidated | ||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||
OPERATING: | ||||||||||||||
Net income | $ | 42,701 | $ | 46,232 | $ | 26,018 | $ | (72,250) | $ | 42,701 | ||||
Adjustments to reconcile to | ||||||||||||||
cash provided | ||||||||||||||
Depreciation and amortization, | ||||||||||||||
including amortization | ||||||||||||||
included in interest expense | 1,612 | 54,400 | 2,883 | - | 58,895 | |||||||||
Change in operating assets | ||||||||||||||
and liabilities | 7,391 | 8,714 | (82,638) | - | (66,533) | |||||||||
Cash provided by (used in) | ||||||||||||||
operating activities | 51,704 | 109,346 | (53,737) | (72,250) | 35,063 | |||||||||
INVESTING: | ||||||||||||||
Purchases and construction | ||||||||||||||
of property and equipment | - | (56,540) | (5,451) | - | (61,991) | |||||||||
Purchases of real estate | - | (11,510) | - | - | (11,510) | |||||||||
Acquisitions of businesses and other | - | (4,212) | (2,005) | - | (6,217) | |||||||||
Cash used in investing activities | - | (72,262) | (7,456) | - | (79,718) | |||||||||
FINANCING: | ||||||||||||||
Debt transactions | ||||||||||||||
Net borrowings under revolving | ||||||||||||||
credit agreement | 35,900 | - | - | - | 35,900 | |||||||||
Net borrowings (repayments) of | ||||||||||||||
other long-term debt | (2,712) | (9,359) | 21,714 | - | 9,643 | |||||||||
Debt issuance and refinancing | ||||||||||||||
costs | (270) | - | - | - | (270) | |||||||||
Change in net affiliate balances | (88,029) | (22,963) | 38,742 | 72,250 | - | |||||||||
Cash provided by (used in) | ||||||||||||||
debt transactions | (55,111) | (32,322) | 60,456 | 72,250 | 45,273 | |||||||||
Equity transactions | ||||||||||||||
Proceeds from exercise of warrants | 2,513 | - | - | - | 2,513 | |||||||||
Proceeds from issuance of | ||||||||||||||
common stock under stock | ||||||||||||||
purchase and option plans | 1,754 | - | - | - | 1,754 | |||||||||
Purchases of common stock | ||||||||||||||
for treasury | (860) | - | - | - | (860) | |||||||||
Cash provided by (used in) | ||||||||||||||
financing transactions | (51,704) | (32,322) | 60,456 | 72,250 | 48,680 | |||||||||
Increase (decrease) in cash and equivalents | - | 4,762 | (737) | - | 4,025 | |||||||||
Cash and equivalents, beginning of period | - | 8,435 | 875 | - | 9,310 | |||||||||
Cash and equivalents, end of period | $ | - | $ | 13,197 | $ | 138 | $ | - | $ | 13,335 | ||||
Net revenues for the third quarter of 2003 were $241.5 million compared to $243.1 million in the 2002 quarter, a decrease of $1.6 million (1%). Net revenues from comparable fitness centers decreased 2%. The $1.6 million decrease in net revenues resulted from the following:
| Total membership revenue decreased $14.9 million or 8% (8% decline at same clubs), resulting from a $16.7 million or 19% decline in initial membership fees recognized during the period (18% related to same clubs) offset by a $1.8 million or 2% increase in dues revenue recognized (2% increase at same clubs). | |
| Products and services revenue increased $14.2 million (25%) from the 2002 quarter, primarily reflecting the continued growth of personal training services, nutritional product sales and the introduction of our Weight Management Program. | |
| Miscellaneous revenue totaled $4.3 million, a decrease of $.9 million (16%) from the prior year quarter. |
The weighted-average number of fitness centers was 416 in the third quarter of 2003 and 2002.
Gross committed membership fees originated during the third quarter decreased 7% compared to the 2002 quarter, with a 10% decrease at same clubs. The number of new members joining decreased 2% during the third quarter of 2003 compared with the same quarter a year ago, with a 5% decrease at same clubs. The average committed duration of memberships originated during the third quarter of 2003 was 30.9 months versus 30.6 months in the prior year quarter, a 1% increase. The gross committed monthly membership fees originated during the third quarter of 2003 averaged $38.24 versus $41.04 in the year ago quarter, a 7% decrease. The decrease in the monthly average resulted from a decrease in average membership price during the quarter.
Operating income for the third quarter of 2003 was $5.5 million compared to $7.6 million in 2002. Net revenues decreased $1.6 million (1%) and operating costs and expenses increased $.8 million for the third quarter of 2003 offset by a decrease in depreciation and amortization of $.3 million. Earnings before interest, taxes, depreciation and amortization, loss from discontinued operations, including finance charges earned (EBITDA) as adjusted, was $44.4 million, a decrease of $6 million from the prior year period. The EBITDA margin (as adjusted) was 17% in the third quarter of 2003, compared to 19% in the 2002 period. These decreases are due, in part, to the continuing trend of lower initial membership fees originated. The following table is a reconciliation of net income to EBITDA and EBITDA as adjusted (in thousands):
Three months ended | |||||
September 30 | |||||
2003 | 2002 | ||||
Net income | $ | 4,741 | $ | 7,224 | |
Add: | |||||
Depreciation and amortization | 19,276 | 19,567 | |||
Interest expense | 15,651 | 13,796 | |||
Income tax provision | 1,537 | 2,406 | |||
Loss from discontinued operations | 126 | 394 | |||
EBITDA | 41,331 | 43,387 | |||
Add: | |||||
Special charges | 6,500 | ||||
Stock-based compensation | 222 | ||||
Other, net | 2,858 | 556 | |||
EBITDA as adjusted | $ | 44,411 | $ | 50,443 | |
Fitness center operating expenses decreased by $1.6 million (1%) as a result of the implementation of cost reduction initiatives which were offset by planned increases in rent, utilities, insurance and other fixed costs. Products and services expenses increased $8.1 million (22%) to support the revenue growth of product and service offerings. Direct operating margin from products and services increased to $26.8 million from $20.7 million in the 2002 period, a 29% increase (22% related to same clubs), with a margin of 37% in the 2003 period compared to 36% in the prior year. Member processing and collection center expenses increased $.4 million (3%) compared to the prior year quarter, reflecting costs related to the consolidation of member processing functions into our Norwalk, California facility. Advertising expenses decreased $.3 million (2%) compared to the prior year quarter reflecting strategic reductions in discretionary marketing spending. General and administrative expenses increased $.7 million (9%) compared to the prior year quarter. Depreciation and amortization expense decreased $.3 million (1%) compared to the prior year quarter.
Finance charges earned in excess of interest expense totaled $3.8 million in the third quarter of 2003, an increase of $.8 million over the prior year period resulting principally from higher finance charges earned, offset in part, by higher interest rates on the Companys refinanced debt.
Other, net expense was $2.8 million for the three months ended September 30, 2003, which includes the write off of $2.6 million of unamortized issuance costs from extinguished debt.
The Company has reported as discontinued operations an internet-based start-up company which was liquidated in the second quarter of 2003. As a result, a loss from discontinued operations of $.1 million and $.4 million, net of taxes, was recorded during the third quarter of 2003 and 2002, respectively, related to the liquidation of this company.
Net revenues for the first nine months of 2003 were $747 million compared to $729.7 million in 2002, an increase of $17.3 million (2%). Net revenues from comparable fitness centers were unchanged. The $17.3 million increase in net revenues resulted from the following:
| Total membership revenue decreased $39.6 million or 7% (8% decline at same clubs), resulting from a $44.9 million or 17% decline in initial membership fees recognized during the period (16% related to same clubs) offset by a $5.3 million or 2% increase in dues revenue recognized (1% increase at same clubs). | |
| Products and services revenue increased $57.9 million (35%) over the prior year period, primarily reflecting the continued growth of personal training services, nutritional product sales and the introduction of our Weight Management Program. | |
| Miscellaneous revenue totaled $14 million, a decrease of $1 million (7%) from the prior year period. |
The weighted-average number of fitness centers increased to 413 from 412 in the first nine months of 2002.
Gross committed membership fees originated during the first nine months decreased 4% compared to the 2002 period, with a 6% decrease at same clubs. The number of new members joining increased 3% during the first nine months of 2003 compared with the same period a year ago, with no change at same clubs. The average committed duration of memberships originated during the first nine months of 2003 was 30.6 months versus 30.5 months in the prior year period. The gross committed monthly membership fees originated during the first nine months of 2003 averaged $39.95 versus $43.12 in the year ago period, a 7% decrease. The decrease in the monthly average resulted from a decrease in average membership price during the period including a slight decrease in the proportion of multiple-club memberships sold due to apparent price sensitivity of new members.
Operating income for the first nine months of 2003 was $23.9 million compared to $42.4 million in 2002. Net revenues increased $17.3 million (2%) for the first nine months of 2003, offset by a $33.8 million (5%) increase in operating costs and expenses ($35.9 million of which is related to the growth in products and services revenues), and an increase in depreciation and amortization of $2 million. EBITDA as adjusted, was $138.9 million, a decrease of $17.9 million from the prior year period. The EBITDA margin (as adjusted) was 17% for the first nine months of 2003, compared to 20% in the 2002 period. These decreases are due, in part, to the continuing trend of lower initial membership fees originated. The following table is a reconciliation of net income to EBITDA and EBITDA as adjusted (in thousands):
Nine months ended | |||||
September 30 | |||||
2003 | 2002 | ||||
Net income | $ | 6,610 | $ | 42,701 | |
Add: | |||||
Depreciation and amortization | 57,918 | 55,937 | |||
Interest expense | 43,572 | 41,986 | |||
Income tax provision | 7,779 | 8,110 | |||
Loss from discontinued operations | 2,444 | 1,153 | |||
Cumulative effect of accounting changes | 15,579 | ||||
EBITDA | 133,902 | 149,887 | |||
Add: | |||||
Special charges | 6,500 | ||||
Stock-based compensation | 344 | ||||
Other, net | 4,678 | 393 | |||
EBITDA as adjusted | $ | 138,924 | $ | 156,780 | |
Fitness center operating expenses increased $2.1 million in the first nine months of 2003 compared to the prior year, due to planned increases in rent, utilities, insurance and other fixed costs. Products and services expenses increased $35.9 million (35%) to support the revenue growth of product and service offerings. Direct operating margin from products and services increased to $81.7 million from $59.7 million in the 2002 period, a 37% increase (28% related to same clubs), with a margin of 37% in both periods. Member processing and collection center expenses increased $2 million (6%) compared to the prior year period, reflecting increased telecommunication and member mailing costs, in addition to costs related to the consolidation of member processing functions into our Norwalk, California facility. Advertising expenses decreased $1.1 million (3%) compared to the prior year period reflecting strategic reductions in discretionary marketing spending. General and administrative expenses increased $1.5 million (7%) compared to the prior year period. Depreciation and amortization expense increased $2 million (4%), resulting from additional fitness centers and other depreciable assets since the prior year period.
Finance charges earned in excess of interest expense totaled $13.2 million in the first nine months of 2003, an increase of $3.3 million over the prior year period resulting principally from lower interest rates on the Companys borrowings and higher finance charges earned.
Other, net expense was $4.7 million for the nine months ended September 30, 2003, which includes the write off of $2.6 million of unamortized issuance costs from extinguished debt and $1.7 million resulting from the second quarter sale of a portion of the Company's non-performing previously written down installment accounts receivable to a third party. Additionally, at September 30, 2003, installment accounts receivable included $36.6 million related to the residual value of other non-performing previously written down installment accounts receivable. These accounts may be subject to further valuation adjustments as we continue to evaluate their liquidation value.
The Company has reported as discontinued operations an internet-based start-up company which was liquidated in the second quarter of 2003. As a result, a loss from discontinued operations of $2.4 million and
$1.2 million, net of taxes, was recorded for the nine months ended September 30, 2003 and 2002, respectively, related to the liquidation of this company. In the second quarter of 2003, the Company changed its accounting method (effective January 1, 2003) related to the recognition of recoveries of unpaid dues under inactive membership contracts from accrual-based estimations to a cash basis of recognition, which is considered a preferable method of accounting for such past due amounts since it is less reliant on estimations. The effect of this change was a cumulative non-cash charge of $15,414 (net of tax effect of $4,868) or $.47 per diluted share. The Company also implemented the provisions of SFAS No. 143 as of January 1, 2003. As a result, a non-cash cumulative adjustment of $165 was recorded to provide for estimated future restoration obligations on the Companys leaseholds in the first quarter of 2003.
Cash flows from operating activities were $38.1 million in the first nine months of 2003, compared to $35.1 million in the 2002 period. Over the past two years, the Company sold a portion of its installment contracts receivable portfolio to a major financial institution in three bulk sales at net book value, with combined proceeds of approximately $128 million. Excluding the impact of the sales of receivables and net of the change in dues prepayments during the periods, cash flows from operating activities were $56 million in the first nine months of 2003, compared to $73.9 million in 2002.
Capital expenditures totaled $32 million in the first nine months of 2003 compared to $79.7 million in the 2002 period. Capital expenditures for 2003 are expected to be less than $50 million. The following table details cash used in investing activities during the three and nine months ended September 30, 2003 and 2002 (in thousands):
Three months ended | Nine months ended | ||||||||||
September 30 | September 30 | ||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||
Club improvements | $ | 3,132 | $ | 7,399 | $ | 10,077 | $ | 18,848 | |||
New clubs | 5,821 | 9,531 | 13,771 | 29,874 | |||||||
Club remodels and expansions | (20) | 1,264 | 3,336 | 10,287 | |||||||
Administrative and systems | 2,376 | 632 | 4,324 | 2,982 | |||||||
Real estate purchases and other | 89 | 125 | 501 | 17,727 | |||||||
$ | 11,398 | $ | 18,951 | $ | 32,009 | $ | 79,718 | ||||
As a result of the decrease in capital expenditures, our free cash flow (cash provided by operating activities, less cash used in investing activities) was $6.1 million for the nine months ended September 30, 2003, compared to a deficit of $44.7 million in the first nine months of 2002. We are disclosing free cash flow because management believes that it is an important measure of liquidity and investors are focused on our ability to reduce our overall debt. The following table is a reconciliation of cash provided by operating activities to free cash flow (deficit) for the three and nine months ended September 30, 2003 and 2002 (in thousands):
Three months ended | Nine months ended | ||||||||||
September 30 | September 30 | ||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||
Cash provided by operating activities | $ | 6,710 | $ | 8,146 | $ | 38,087 | $ | 35,063 | |||
Less: Cash used in investing activities | (11,398) | (18,951) | (32,009) | (79,718) | |||||||
Free cash flow (deficit) | $ | (4,688) | $ | (10,805) | $ | 6,078 | $ | (44,655) | |||
At the end of the second quarter the Company announced the completion of the refinancing of its existing $132 million term loan and $56 million outstanding on its revolving credit agreement by issuing $235 million in aggregate principal of 10 ½% Senior Notes due 2011 in two offerings under Rule 144A and Regulation S under the Securities Act of 1933, as amended. The Company also entered into a new $100 million Senior Secured Revolving Credit Facility due 2008. These transactions were completed in July 2003. As a result, the Company wrote off $2.6 million of unamortized issuance costs from the extinguished debt in the third quarter of 2003. In addition, in July 2003 the Company paid down $25 million on its $155 million Securitization Series 2001-1 and extended the revolving period on $100 million of the balance through July 2005. The balance of $30 million of principal on the securitization which was not extended will amortize in the fourth quarter of 2003. The amount available under the revolving credit facility is reduced by any outstanding letters of credit, which cannot exceed $30 million. As of November 4, 2003, the Company had outstanding $6 million in letters of credit and availability of $76.5 million on its new $100 million revolving credit line. As of September 30, 2003, our debt service requirements, including interest, through September 30, 2004 were approximately $83.7 million, exclusive of the $30 million in principal payments on the securitization. We believe that we will be able to satisfy these short-term requirements for debt service and capital expenditures out of available cash balances, cash flow from operations and borrowings on the revolving credit facility.
On September 8, 2003, the Company entered into interest rate swap agreements whereby the fixed interest commitment on $200 million of outstanding principal of the Companys 9.875% Senior Subordinated Notes, due 2007, was swapped for a variable rate commitment based on the six-month Euro rate, plus 6.01%. As a result, interest expense for the 2003 quarter was reduced by approximately $.3 million.
We are authorized to repurchase up to 1,500,000 shares of our common stock on the open market from time to time. We repurchased 625,100 shares between August 1998 and November 1999 at an average price of $18 per share, and 54,500 shares in February 2002 at $16 per share.
Forward-looking statements in this Form 10-Q including, without limitation, statements relating to the Companys 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 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 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.
The Company is exposed to market risk from changes in the interest rates on certain of its outstanding debt. The outstanding loan balance under its bank credit facility and the Series 2001-1 accounts receivable-backed variable funding certificates bear interest at variable rates based upon prevailing short-term interest rates in the United States and Europe.
The Company has an 8.5% interest rate cap on the Series 2001-1 accounts receivable-backed variable funding certificates which covers the outstanding $130 million (as of September 30, 2003) of principal through its original principal repayment schedule. Additionally, on $100 million of the variable funding certificates which were refinanced, the Company has purchased a 7.75% rate cap extending through the refinanced period. The Company has also entered into interest rate swap agreements whereby the fixed interest commitment on $200 million of outstanding principal on the Companys 9.875% Senior Subordinated Notes, due 2007, was swapped for a variable rate commitment based on the six-month Euro rate, plus 6.01% (7.13% at September 30, 2003).
The Companys Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Companys disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Companys disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Companys reports filed or submitted under the Exchange Act.
Since the Evaluation Date, there have not been any significant changes in the Companys internal controls or in other factors that could significantly affect such controls.
At the Companys annual meeting of stockholders held on July 31, 2003, the stockholders considered and voted on the following:
Two persons nominated by the Board of Directors for election as directors of Class I for three-year terms expiring in 2006 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 | ||
Paul A. Toback | 30,816,134 | 717,523 | ||
Martin E. Franklin | 30,977,979 | 555,678 |
In addition to the two directors elected at the meeting, the following directors term of office as directors continued after the meeting: John W. Dwyer, J. Kenneth Looloian, James F. McAnally, M.D., John W. Rogers, Jr., and Stephen C. Swid.
A shareholder proposal was made requiring the office of Chairman of the Board be held by an independent outside Director. The proposal did not pass with the result of said vote as follows:
For: | 6,078,764 | ||
Against: | 15,034,439 | ||
Abstain: | 156,983 | ||
Non-vote: | 10,263,471 |
(a) | Exhibits: |
Exhibit 31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
Exhibit 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
Exhibit 32.1 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
(b) | Reports on Form 8-K: |
1. | On July 2, 2003 we filed a Current Report on Form 8-K attaching a press release announcing the completion of our $200 million Senior Notes Offering and $90 million Revolving Credit Facility. Also announced was the completed refinancing of $100 million of our $155 million securitization Series 2001-1. | |
2. | On July 16, 2003 we filed a Current Report on Form 8-K attaching a press release announcing the sale of an additional $35 million of Senior Notes. | |
3. | On August 5, 2003 we filed a Current Report on Form 8-K attaching a press release announcing our earnings for the quarter ended June 30, 2003. | |
4. | On September 30, 2003 we filed a Current Report on Form 8-K containing financial statements for prior periods, management's discussion and analysis of financial condition and results of operations and selected historical consolidated financial data amended to conform with the June 30, 2003 presentation filed on Form S-4 dated September 30, 2003, registering $235 million of 10 ½% Senior Notes due 2011 (the notes). Additionally, consolidating financial statements were included to present the accounts of Bally Total Fitness Holding Corporation and our Guarantor and Non-Guarantor subsidiaries, as defined in the indenture to the Notes. |
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 | |
By: | /s/ John W. Dwyer |
John W. Dwyer | |
Executive Vice President, Chief Financial Officer and Director | |
(principal financial officer) |