FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the period ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission file number: 0-27478
BALLY TOTAL FITNESS HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3228107
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
8700 West Bryn Mawr Avenue, Chicago, Illinois 60631
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (773) 380-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes: X No:
As of October 31, 1998, 23,147,305 shares of the registrant's common stock were
outstanding.
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial statements:
Condensed consolidated balance sheet (unaudited)
September 30, 1998 and December 31, 1997...................... 1
Consolidated statement of operations (unaudited)
Three months ended September 30, 1998 and 1997................ 2
Consolidated statement of operations (unaudited)
Nine months ended September 30, 1998 and 1997................. 3
Consolidated statement of stockholders' equity (unaudited)
Nine months ended September 30, 1998.......................... 4
Consolidated statement of cash flows (unaudited)
Nine months ended September 30, 1998 and 1997................. 5
Notes to condensed consolidated financial statements
(unaudited)................................................... 7
Item 2. Management's discussion and analysis of financial
condition and results of operations.................... 10
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K.......................... 15
SIGNATURE PAGE....................................................... 16
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
<CAPTION>
September 30 December 31
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents............................... $ 30,926 $ 61,679
Installment contracts receivable, less unearned
finance charges of $37,273 and $27,709 and
allowance for doubtful receivables and
cancellations of $63,298 and $43,728............. 199,956 168,011
Other current assets............................... 33,181 31,743
------------ -----------
Total current assets............................. 264,063 261,433
Installment contracts receivable, less unearned
finance charges of $19,312 and $14,357 and
allowance for doubtful receivables and
cancellations of $53,274 and $36,803............... 215,586 175,575
Property and equipment, less accumulated
depreciation and amortization of $332,871
and $314,544....................................... 338,557 311,197
Intangible assets, less accumulated
amortization of $57,663 and $54,124................ 102,814 101,220
Deferred income taxes................................ 3,358 4,171
Deferred membership origination costs................ 99,350 86,737
Other assets......................................... 26,366 27,233
------------ -----------
$ 1,050,094 $ 967,566
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts pay8able.................................. $ 39,979 $ 36,908
Income taxes payable............................... 2,452 2,342
Deferred income taxes.............................. 4,847 5,660
Accrued liabilities................................ 55,200 50,464
13% Senior Subordinated Notes due 2003, called
for 1998 redemption.............................. - 22,555
Other current maturities of long-term debt......... 5,131 4,590
Deferred revenues.................................. 285,383 270,853
------------ -----------
Total current liabilities........................ 392,992 393,372
Long-term debt, less current maturities.............. 407,116 405,425
Other liabilities.................................... 6,275 7,459
Deferred revenues.................................... 85,669 90,989
Stockholders' equity................................. 158,042 70,321
------------ -----------
$ 1,050,094 $ 967,566
============ ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
1
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three months
ended September 30
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Net revenues:
Membership revenues -
Initial membership fees on financed
memberships originated.......................... $ 107,053 $ 91,032
Initial membership fees on paid-in-full
memberships originated......................... 7,086 15,541
Dues collected................................... 52,016 47,720
Change in deferred revenues...................... (183) (3,427)
---------- ----------
165,972 150,866
Finance charges earned.............................. 13,573 9,983
Fees and other...................................... 10,063 4,298
---------- ----------
189,608 165,147
Operating costs and expenses:
Fitness center operations........................... 108,809 99,382
Member processing and collection centers............ 9,692 10,789
Advertising......................................... 10,897 10,735
General and administrative.......................... 6,775 8,753
Provision for doubtful receivables.................. 30,857 25,052
Depreciation and amortization....................... 11,997 12,631
Change in deferred membership origination costs..... (3,229) (3,123)
---------- ----------
175,798 164,219
---------- ----------
Operating income...................................... 13,810 928
Interest income....................................... 942 575
Interest expense...................................... (10,216) (11,658)
---------- ----------
Income (loss) before income taxes..................... 4,536 (10,155)
Income tax provision ................................. (275) (100)
---------- ----------
Net income (loss)..................................... $ 4,261 $ (10,255)
========== ==========
Basic earnings (loss) per common share................ $ .18 $ (.60)
========== ==========
Diluted earnings (loss) per common share.............. $ .16 $ (.60)
========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Nine months
ended September 30
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Net revenues:
Membership revenues -
Initial membership fees on financed
memberships originated.......................... $ 321,663 $ 266,593
Initial membership fees on paid-in-full
memberships originated......................... 24,387 47,564
Dues collected................................... 150,218 144,577
Change in deferred revenues...................... (6,497) (4,372)
---------- ----------
489,771 454,362
Finance charges earned.............................. 36,904 29,516
Fees and other...................................... 28,297 11,492
---------- ----------
554,972 495,370
Operating costs and expenses:
Fitness center operations........................... 316,397 288,750
Member processing and collection centers............ 29,384 28,983
Advertising......................................... 35,986 34,671
General and administrative.......................... 19,399 20,980
Provision for doubtful receivables.................. 92,555 72,617
Depreciation and amortization....................... 36,492 40,703
Change in deferred membership origination costs..... (12,613) (1,641)
---------- ----------
517,600 485,063
---------- ----------
Operating income...................................... 37,372 10,307
Interest income....................................... 2,213 839
Interest expense...................................... (30,723) (34,081)
---------- ----------
Income (loss) before income taxes..................... 8,862 (22,935)
Income tax provision ................................. (525) (300)
---------- ----------
Net income (loss)..................................... $ 8,337 $ (23,235)
========== ==========
Basic earnings (loss) per common share................ $ .38 $ (1.68)
========== ==========
Diluted earnings (loss) per common share.............. $ .32 $ (1.68)
========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
<CAPTION>
Common stock
------------------ Common Total
Number Par Contributed Accumulated stock in stockholders'
of shares value capital deficit treasury equity
---------- ----- ----------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997....... 20,575,092 $ 206 $ 392,718 $ (322,603) $ - $ 70,321
Net income......................... - - - 8,337 - 8,337
Issuance of common stock through
public offering................... 2,800,000 28 82,716 - - 82,744
Issuance of common stock for
acquisition of business........... 230,769 2 4,398 - - 4,400
Issuance of common stock under
stock purchase and option plans... 62,699 - 423 - - 423
Purchases of common stock.......... (471,300) - - - (8,183) (8,183)
---------- ----- --------- ---------- ------- ---------
Balance at September 30, 1998...... 23,197,260 $ 236 $ 480,255 $ (314,266) $(8,183) $ 158,042
========== ===== ========= ========== ======= =========
<FN>
See accompanying notes.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine months
ended September 30
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATING:
Net income (loss)................................... $ 8,337 $ (23,235)
Adjustments to reconcile to cash used -
Depreciation and amortization, including
amortization included in interest expense....... 38,162 42,517
Provision for doubtful receivables................ 92,555 72,617
Change in operating assets and
liabilities..................................... (165,302) (116,789)
Other, net........................................ - (75)
---------- ----------
Cash used in operating activities............... (26,248) (24,965)
INVESTING:
Purchases and construction of property
and equipment..................................... (47,690) (18,720)
Acquisitions of businesses.......................... (2,117) -
Proceeds from sale of property and equipment........ - 4,939
---------- ----------
Cash used in investing activities .............. (49,807) (13,781)
FINANCING:
Debt transactions -
Redemption of 13% Senior Subordinated
Notes due 2003.................................. (24,021) -
Proceeds from other long-term borrowings.......... - 7,500
Repayments of other long-term debt................ (5,344) (10,203)
Debt issuance costs............................... (317) (258)
---------- ----------
Cash used in debt transactions.................. (29,682) (2,961)
Equity transactions -
Proceeds from issuance of common stock through
public offering................................. 82,744 88,390
Proceeds from issuance of common stock under
stock purchase and option plans................. 423 163
Purchases of common stock for treasury............ (8,183) -
---------- ----------
Cash provided by financing activities........... 45,302 85,592
---------- ----------
Increase (decrease) in cash and equivalents........... (30,753) 46,846
Cash and equivalents, beginning of period............. 61,679 16,534
---------- ----------
Cash and equivalents, end of period................... $ 30,926 $ 63,380
========== ==========
(continued)
</TABLE>
5
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS - (CONTINUED)
(In thousands)
(Unaudited)
<CAPTION>
Nine months
ended September 30
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
SUPPLEMENTAL CASH FLOWS INFORMATION:
Changes in operating assets and liabilities,
net of effects from acquisitions, were as
follows -
Increase in installment contracts receivable.... $ (164,429) $ (99,817)
Increase in other current and other assets...... (1,875) (13,307)
Increase in deferred membership
origination costs............................. (12,613) (1,641)
Increase (decrease) in accounts payable......... 2,746 (1,187)
Increase in income taxes payable................ 452 160
Increase (decrease) in accrued and other
liabilities................................... 3,920 (5,369)
Increase in deferred revenues................... 6,497 4,372
---------- ----------
$ (165,302) $ (116,789)
========== ==========
Cash payments for interest and income taxes
were as follows -
Interest paid................................... $ 25,787 $ 39,445
Interest capitalized............................ (422) (691)
Income taxes paid, net.......................... 73 140
Investing and financing activities exclude the
following non-cash transactions -
Acquisition of business with common stock....... $ 4,400 $ -
Acquisition of property and equipment
through capital leases/borrowings............. 7,104 3,585
Repayments of long-term debt using proceeds
from sale of property and equipment........... - 6,007
<FN>
See accompanying notes.
</FN>
</TABLE>
6
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data)
(Unaudited)
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Bally Total Fitness Holding Corporation (the "Company") and the
subsidiaries which it controls. The Company, through its subsidiaries, is a
nationwide commercial operator of fitness centers with approximately 325
facilities concentrated in 27 states and Canada. The Company operates in one
industry segment, and all significant revenues arise from the commercial
operation of fitness centers, primarily in major metropolitan markets in the
United States. Unless otherwise specified in the text, references to the Company
include the Company and its subsidiaries. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements included in the Company's Annual Report on Form 10-K and Form 10-K/A
for the year ended December 31, 1997.
All adjustments have been recorded which are, in the opinion of management,
necessary for a fair presentation of the condensed consolidated balance sheet of
the Company at September 30, 1998, its consolidated statement of operations for
the three and nine months ended September 30, 1998 and 1997, its consolidated
statement of cash flows for the nine months ended September 30, 1998 and 1997,
and its consolidated statement of stockholders' equity for the nine months ended
September 30, 1998. All such adjustments were of a normal recurring nature.
The accompanying condensed consolidated financial statements have been prepared
in conformity with generally accepted accounting principles which require the
Company's management to make estimates and assumptions that affect the amounts
reported therein. Actual results could vary from such estimates. In addition,
certain reclassifications have been made to the nine month period of 1998 to
conform with the third quarter 1998 presentation.
SEASONAL FACTORS
The Company's operations are subject to seasonal factors and, therefore, the
results of operations for the three and nine months ended September 30, 1998 and
1997 are not necessarily indicative of the results of operations for the full
year.
ACQUISITIONS
During the second quarter of 1998, the Company acquired 9 fitness centers, 8
located in the San Francisco/Oakland area and one in Chicago. The total purchase
price of the 9 centers was $6,923 consisting of 230,769 common shares of the
Company stock valued at $4,400, $2,073 in cash and $450 in future consideration.
STOCK OFFERING
In May 1998, the Company issued 2,800,000 shares of its common stock at $31 3/8
per share through underwriters. The offering provided net proceeds of $82,744.
The Company is using these proceeds to fund its growth strategy.
7
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data)
(Unaudited)
<TABLE>
INSTALLMENT CONTRACTS RECEIVABLE
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
------------ -----------
<S> <C> <C>
Current:
Installment contracts receivable............... $300,527 $239,448
Unearned finance charges....................... (37,273) (27,709)
Allowance for doubtful receivables and
cancellations................................ (63,298) (43,728)
-------- --------
$199,956 $168,011
======== ========
Long-term:
Installment contracts receivable............... $288,172 $226,735
Unearned finance charges....................... (19,312) (14,357)
Allowance for doubtful receivables and
cancellations................................ (53,274) (36,803)
-------- --------
$215,586 $175,575
======== ========
</TABLE>
<TABLE>
ALLOWANCE FOR DOUBTFUL RECEIVABLES AND CANCELLATIONS
A summary of the allowance for doubtful receivables and cancellations activity
is as follows:
<CAPTION>
Three months ended Nine months ended
----------------------- -----------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at beginning of period..$ 107,536 $ 88,630 $ 80,531 $ 86,095
Contract cancellations and
write-offs of uncollectible
amounts, net of recoveries.... (56,546) (50,522) (161,263) (149,171)
Provision for cancellations
(classified as a direct
reduction of revenues)....... 34,725 27,848 104,749 81,467
Provision for doubtful
receivables .................. 30,857 25,052 92,555 72,617
----------- ----------- ----------- -----------
Balance at end of period........$ 116,572 $ 91,008 $ 116,572 $ 91,008
=========== =========== =========== ===========
</TABLE>
8
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data)
(Unaudited)
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is computed by dividing net income (loss)
by the weighted average number of shares of common stock outstanding during each
period, which totaled 23,499,985 shares and 16,959,883 shares for the three
months ended September 30, 1998 and 1997, respectively, and 22,180,601 shares
and 13,868,305 shares for the nine months ended September 30, 1998 and 1997,
respectively. Diluted earnings (loss) per common share is computed by dividing
net income (loss) by the weighted average number of shares of common stock and
common stock equivalents outstanding during each period, which totaled
27,142,927 shares and 16,959,883 shares for the three months ended September 30,
1998 and 1997, respectively, and 25,971,315 shares and 13,868,305 shares for the
nine months ended September 30, 1998 and 1997, respectively. Common stock
equivalents represent the dilutive effect of the assumed exercise of outstanding
warrants and stock options. Common stock equivalents increased the weighted
average number of shares outstanding for diluted earnings per common share by
3,642,942 and 3,790,714 share for the three and nine months ended September 30,
1998, respectively. The assumed exercise of outstanding warrants and stock
options for diluted loss per common share was not applicable in 1997 because
their effect was anti-dilutive.
SUBSEQUENT EVENTS
In November 1998, the Company amended its November 1997 three-year revolving
credit agreement increasing the credit line to $90,000. The amount available
under the credit line is reduced by any outstanding letters of credit, which
cannot exceed $30,000. The credit line was unused except for outstanding letters
of credit totaling $6.8 million as of September 30, 1998 and $6.6 million as of
November 16, 1998.
9
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net revenues for the third quarter of 1998 were $189.6 million compared to
$165.1 million in 1997, an increase of $24.5 million (15%). This increase was,
in part, a result of a $7.5 million (7%) increase in initial membership fees
originated, consisting of a $16.0 million (18%) increase in financed memberships
originated offset, in part, by an $8.5 million (54%) decrease in paid-in-full
memberships originated. These results generally reflect management's strategy of
selling more all-club membership plans (which typically have been financed and
generate better long-term returns for the Company) and fewer single-club
membership plans. The weighted average selling price of membership contracts
sold increased 25%. Total membership units sold during the quarter declined
slightly compared to the prior year period due primarily to the planned
curtailment of sales of the lower priced, lower margin, single-club and
discounted upgrade and add-on membership plans in 1998. Unit sales of all other
membership types increased period over period by 10%. Dues collected increased
$4.3 million (9%) from the 1997 quarter while prepaid dues increased by only $.2
million during the 1998 quarter, primarily as a result of the increasing number
of members paying dues monthly by Electronic Fund Transfer (EFT) methods. The
Company's experience has shown that EFT methods generally result in improved
customer satisfaction, lower attrition and improved margins. Reflecting
management's continuing strategy to improve the quality of its facilities, the
Company, between July 1997 and September 1998, closed 10 older, typically
smaller and less profitable facilities while opening 5 new, larger facilities,
using its new prototype design. In addition, during the second quarter of 1998,
the Company acquired 9 fitness centers, 8 located in the San Francisco/Oakland
area and one in Chicago. The weighted average number of fitness centers selling
memberships increased from 316 in the third quarter of 1997 to 323 in the third
quarter of 1998, an increase of 2%. New membership revenue and dues collected
from comparable fitness centers increased 6% over the prior year quarter.
Deferred revenue accounting decreased revenues by $.2 million in the third
quarter of 1998 compared to a decrease of $3.4 million in 1997.
Finance charges earned during the third quarter of 1998 increased $3.6 million
(36%) compared to the 1997 quarter due to the increase in the size and quality
of the receivables portfolio. Receivables written off in the period, as a
percent of average receivables, was 10% compared to 11% experienced during the
prior year quarter. Additionally, the percentage of accounts current with all
contractual payments improved to 86% from 83% as of December 31, 1997. The
average interest rate for finance charges to members was substantially unchanged
between the periods.
Fees and other revenues increased $5.8 million (134%) over the 1997 quarter
principally due to the increase in revenues from the Company's new initiatives
consisting primarily of personal training fees, sales of Bfit Nutritionals(TM)
and sales from Bfit Essentials(sm) retail stores. New initiative revenues
totaled $8.0 million in the 1998 quarter compared to $2.6 million of similar
revenues in the 1997 quarter, an increase of $5.4 million.
Operating income for the third quarter of 1998 was $13.8 million compared to $.9
million in 1997. The increase of $12.9 million was due to the aforementioned
$24.5 million increase in revenues and a $.6 million decline in depreciation and
amortization expense, partially offset by a $12.2 million (8%) increase in
operating costs and expenses. The 1997 quarter included a one-time charge of
$3.1 million.
The provision for doubtful receivables included in operating costs and expenses
above, for the third quarter of 1998 was $30.9 million compared to $25.1 million
in 1997, an increase of $5.8 million due to the increase in initial membership
fees on financed memberships originated. The total provision rate, inclusive of
provisions for cancellations which are reflected as a direct reduction of
initial membership fees on financed memberships originated, was 41% of gross
financed originations during each of the periods.
10
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating costs and expenses, excluding the separately discussed items
consisting of the provision for doubtful accounts, depreciation and
amortization, and the aforementioned one-time charge in the 1997 quarter, and
net of direct selling costs deferred through the change in deferred membership
origination costs, increased $9.5 million (8%). This increase was due
principally to costs associated with the new initiatives' revenue growth and
the incremental costs of operating additional clubs.
The Company's interest income for the third quarter of 1998 increased to $.9
million from $.6 million in 1997 due to an increase in temporarily invested
available cash balances.
Interest expense was $10.2 million for the third quarter of 1998 compared to
$11.7 million in 1997, a decrease of $1.5 million (13%) due to lower average
interest rates.
The income tax provision for the third quarter of 1998 reflects state income
taxes as the federal taxes provided were offset by the reversal of valuation
reserves. The 1997 income tax provision reflects state income taxes only, as no
federal benefit was provided because the ultimate realization of additional
deferred tax assets could not be assured.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net revenues for the first nine months of 1998 were $555.0 million compared to
$495.4 million in the 1997 period, an increase of $59.6 million (12%). This
increase is in part a result of an increase in initial membership fees
originated of $31.9 million (10%), consisting of a $55.1 million (21%) increase
in financed memberships originated offset, in part, by a $23.2 million (49%)
decrease in paid-in-full memberships originated. The weighted average selling
price of membership contracts sold increased 22%. Total membership units sold
during the first nine months of 1998 declined slightly compared to the prior
year period due primarily to the planned curtailment of sales of the lower
priced, lower margin, single club and discounted upgrade and add-on membership
plans in 1998. Unit sales of all other membership types increased period over
period by 12%. Dues collected increased $5.6 million (4%) from the 1997 period
while prepaid dues decreased by $.7 million during the 1998 period. Reflecting
management's continuing strategy to improve the quality of its facilities, the
Company, between January 1997 and September 1998, closed 13 older, typically
smaller and less profitable facilities and sold one fitness center to a
franchisee while opening 11 new, larger facilities, using its new prototype
design. In addition, during the first nine months of 1998, the Company acquired
9 fitness centers. The weighted average number of fitness centers selling
memberships during the first nine months increased to 319 from 318 during the
comparable 1997 period. New membership revenue and dues collected from
comparable fitness centers increased 9% over the prior year period. Deferred
revenue accounting decreased revenues by $6.5 million during the 1998 period
compared to a decrease of $4.4 million in 1997.
Finance charges earned increased $7.4 million (25%) in the nine months of 1998
due to the increase in the size and quality of the receivables portfolio, as
previously discussed. The average interest rate for finance charges to members
was substantially unchanged between the periods.
Fees and other revenues increased $16.8 million (146%) over the 1997 period
principally due to the increase in revenues from the Company's new initiatives
consisting primarily of personal training fees, sales of Bfit Nutritionals(TM)
and sales from Bfit Essentials(sm) retail stores. New initiative revenues
totaled $22.5 million in the 1998 period compared to $6.2 million of similar
revenues in the 1997 period, an increase of $16.3 million.
Operating income for the first nine months of 1998 was $37.4 million compared to
$10.3 million in the 1997 period. The increase of $27.1 million was due to the
aforementioned $59.6 million increase in revenues and a $4.2 million decline in
depreciation and amortization, offset, in part, by a $36.7 million (8%) increase
in
11
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
operating costs and expenses. The 1997 period included a one-time charge of
$3.9 million.
Depreciation expense is expected to decline, exclusive of the effects from
additions or acquisitions, by up to $5.0 million annually during the next three
years. For the first nine months of 1998 depreciation expense, as expected,
declined $4.2 million, of which $2.1 million was related to the amortization
portion of the aforementioned $3.9 million one-time charge.
The provision for doubtful receivables, included in operating costs and
expenses, for the first nine months of 1998 was $92.6 million compared to $72.6
million in 1997, an increase of $20.0 million due to the increase in initial
membership fees on financed memberships originated. The total provision rate,
inclusive of provisions for cancellations which are reflected as a direct
reduction of initial membership fees on financed memberships originated, was 41%
of gross financed originations during each of the periods.
Operating costs and expenses, excluding the separately discussed items
consisting of the provision for doubtful accounts, depreciation and
amortization, and the aforementioned one-time charge in the 1997 period, and net
of direct selling costs deferred through the change in deferred membership
origination costs, increased $20.7 million (6%). This increase was due
principally to costs associated with the new initiatives revenue growth and, to
a lesser extent, the incremental costs of operating additional clubs.
The Company's interest income for the first nine months of 1998 increased to
$2.2 million from $.8 million in 1997 due to an increase in temporarily invested
available cash balances.
Interest expense was $30.7 million for the first nine months of 1998 compared to
$34.1 million in 1997, a decrease of $3.4 million (10%) due to lower average
interest rates.
The income tax provision for the first nine months of 1998 reflects state income
taxes as the federal taxes provided were offset by the reversal of valuation
reserves. The 1997 income tax provision reflects state income taxes only, as no
federal benefit was provided because the ultimate realization of additional
deferred tax assets could not be assured.
LIQUIDITY AND CAPITAL RESOURCES
The Company is in the process of upgrading and increasing the number of its
facilities to improve revenue potential from its membership and more effectively
capitalize on its facilities, streamlined marketing, member support and
administrative functions. Management plans to make capital expenditures of
approximately $10 million to $15 million annually to maintain and upgrade the
Company's existing facilities. In addition, the Company has completed nearly 80%
of its planned investment of approximately $20 million to extensively add and
upgrade exercise equipment, refresh interior and exterior finishes to improve
club ambience, and refurbish and make major upgrades to approximately 25% of its
clubs. In recent years, the Company has spent $6 million to $15 million
annually, as funds were available, to open new or replacement facilities.
Beginning in 1998, the Company has increased its annual spending target to
approximately $20 million to $30 million to build and open 15 to 20 new
facilities based on its new prototype, which is designed to cost less to
construct and maintain than the Company's older facilities. The new facilities
are expected to range in size generally from 15,000 to 35,000 square feet and
have the capacity to accommodate significantly more members than older clubs of
the same size because they will generally focus on the most widely used
amenities.
In May 1998, the Company issued 2,800,000 shares of its common stock at $31 3/8
per share through underwriters. The offering provided net proceeds of $82.7
million. The Company is using these proceeds to fund its growth strategy to open
new fitness
12
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BALLY TOTAL FITNESS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
centers, to selectively acquire club-related real estate and to acquire fitness
center operators in strategic geographic markets. The Company will allocate
these proceeds among the contemplated uses based on available business
opportunities and prevailing market conditions. The Company is in various stages
of discussions to acquire regional operators of fitness centers. None of the
individual negotiations are for a material acquisition of fitness centers or
club-related real estate.
On August 6, 1998, the Company announced that it has been authorized to
repurchase up to 1,500,000 shares of the Company's common stock on the open
market from time to time. To date the Company has repurchased 554,800 shares at
an average price of $17.11 per share.
In November 1998, the Company amended its November 1997 three-year revolving
credit agreement increasing the credit line to $90,000. The credit line was
unused except for outstanding letters of credit totaling $6.8 million as of
September 30, 1998 and $6.6 million as of November 16, 1998.
The Company has no scheduled principal payments under its subordinated debt
until October 2007 and the principal amount of the certificates under its
securitization facility remains fixed at $160 million through July 1999.
Accordingly, the Company's debt service requirements, including interest,
through September 30, 1999 are approximately $43.3 million. Management believes
that the Company will be able to satisfy its debt service and capital
expenditure requirements through September 30, 1999 along with funding any of
the Company's stock repurchases, out of available cash balances and cash flow
from operations.
In the first nine months of 1998, cash used in operating activities was $26.2
million compared to $25.0 million in the 1997 period. Net installment contracts
receivable grew $72.0 million during the 1998 period compared to $26.6 million
in the 1997 period. Interest paid during the 1998 period declined $13.7 million
reflecting a combination of lower average rates and timing of semi-annual
payments. Excluding the growth in net receivables and changes in interest
payments, operating activities provided cash of $32.1 million compared to $1.6
million for the first nine months of 1998 and 1997, respectively. The period
over period improvement of $30.5 million principally reflects the $31.6 million
increase in profitability for the first nine months of 1998 compared to the 1997
period.
During the third quarter of 1998, normal collections from installment contracts
receivable, down payments, and monthly dues improved $16.1 million compared to
the 1997 quarter, entirely offsetting the planned curtailment of discounted
paid-in-full memberships and discounted collection accelerations of installment
contracts receivable and monthly dues. During the first nine months of 1998,
normal collections improved $28.5 million compared to the 1997 period, largely
offsetting the $41.2 million foregone in the planned curtailment of discounted
paid-in-full memberships and discounted collection accelerations of installment
contracts receivable and monthly dues. This improvement in cash flows is
well-ahead of plan and should result in positive cash from operations early next
year. Prior to completing public offerings of 8,000,000 shares of common stock
in August 1997 and 2,800,000 shares in May 1998, which provided net proceeds
totaling $171.1 million, the Company was dependent on availability under its
credit facility and its operations to provide for cash needs. The Company
managed liquidity requirements in recent years by emphasizing the sale of
single-club paid-in-full membership plans and accelerating collections through
promotional discounting of financed memberships and dues to increase available
cash. Management believes use of these techniques has had a negative impact on
operating results and long-term operating cash flows, and that the availability
of working capital has substantially reduced the need for these techniques to be
continued.
Capital expenditures during the first nine months of 1998 were $54.8 million
(including capital leases of $7.1 million) an increase of $32.5 million over the
1997 period. This increase is a result of the implementation of the Company's
refurbishment and growth strategy discussed above. Also in January 1998, the
Company redeemed the remaining $22.6 million aggregate principal amount of the
13% Senior Subordinated Notes
13
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BALLY TOTAL FITNESS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
due 2003 at a price of 106.5% of the principal amount, together with accrued and
unpaid interest.
YEAR 2000
The Company has completed an assessment of whether its systems and those of
third parties, which could have a material impact on the Company will function
properly with respect to dates in 2000 and thereafter. The Company has
determined that two of its existing software applications require modification,
with such modifications expected to be completed in 1998 at an aggregate cost to
the Company of less than $.1 million. The Company believes that the only third
parties that could have a material impact on the Company are the major financial
institutions that process the Company's collections of installment receivables
and dues by electronic funds transfers. Management believes that these financial
institutions are currently working on modifications to their internal systems to
insure that those systems will function properly with respect to dates in 2000
and thereafter and expect that these modifications will be completed in 1998.
The Company does not anticipate that the noncompliance, if any, with Year 2000
of any of its non-information technology systems (i.e. embedded technology such
as microcontrollers) will result in material adverse effect to the Company.
Management is currently undertaking an analysis of worst case scenarios and
developing contingency plans to deal with such scenarios.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this Form 10-Q including, without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve known and unknown risks, uncertainties,
and other factors that may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward- looking statements. These
factors include, among others, the following: general economic and business
conditions; competition; success of operating initiatives, advertising and
promotional efforts; existence of adverse publicity or litigation; acceptance of
new product offerings; changes in business strategy or plans; quality of
management; availability, terms, and development of capital; business abilities
and judgment of personnel; changes in, or the failure to comply with, government
regulations; regional weather conditions; failure of entities providing goods
and services to the Company to be Year 2000 compliant; and other factors
described in this Form 10-Q or in other filings of the Company with the
Securities and Exchange Commission. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
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BALLY TOTAL FITNESS HOLDING CORPORATION
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits:
10.1 Employment Agreement effective as of January 1, 1998 between the
Company and John W. Dwyer.
10.2 Employment Agreement effective as of January 1, 1998 between the
Company and Lee S. Hillman.
10.3 Employment Agreement effective as of January 1, 1998 between the
Company and Harold Morgan.
10.4 Employment Agreement effective as of January 1, 1998 between the
Company and John Wildman.
27 Financial Data Schedule for September 30, 1998 (filed
electronically only).
(b) Reports on Form 8-K:
Financial
Date Items Statements
---- ----- ----------
August 13, 1998 #5 and #7 None
15
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SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BALLY TOTAL FITNESS HOLDING CORPORATION
---------------------------------------------------------------
Registrant
/s/ John W. Dwyer
---------------------------------------------------------------
John W. Dwyer
Executive Vice President, Chief Financial Officer and Treasurer
(principal financial officer)
Dated: November 16, 1998
16
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THE EMPLOYMENT AGREEMENT made and entered into as of the first day of
January 1998, among Bally Total Fitness Holding Corporation, a Delaware
corporation ("BTFHC") and John W. Dwyer ("Employee").
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements herein contained, the parties agree as follows:
1. Employment.
(a) BTFHC hereby employs Employee in the capacity of Executive Vice
President, Chief Financial Officer. BTFHC may employ Employee in such other
capacities of equal status and responsibility as the Chief Executive Officer of
BTFHC, or his designated representative, shall reasonably determine, and
Employee hereby accepts such employment upon the terms and conditions herein set
forth.
(b) During the term of his employment, Employee will devote his best
efforts to his employment and perform such duties consistent with his status as
a senior executive in such capacities as the Chief Executive Officer of BTFHC
shall reasonably assign to him. Employee will devote his entire working time and
attention to the business and related interests of, and will be loyal to, BTFHC,
and Employee agrees to render service on behalf of BTFHC and its subsidiaries or
affiliates.
(c) Employee shall not, without prior written consent of BTFHC,
directly or indirectly, during the term of this Employment Agreement:
(i) Other than in the performance of duties naturally inherent
to BTFHC's business and in furtherance thereof, render services of a
business, professional or commercial nature to any other person or firm,
whether for compensation or otherwise, but this shall not be construed
as preventing the Employee from investing his assets in such form or
manner as will not require any services on the part of the Employee in
the operation of the affairs of the companies in which such investments
are made and which are not in violation of subparagraph (ii) below or
from engaging in Boards of Directors (subject to the approval of BTFHC's
Chief Executive Officer) or charitable activities so long as such
activities do not interfere with the performance of Employee's duties
hereunder;
(ii) Engage in any activity competitive with or adverse to
BTFHC's business or welfare, whether alone, as a partner, or as an
officer, director, employee or shareholder of any other corporation, or
otherwise, directly or indirectly, except that the ownership of not more
than one percent (1%) of the stock of any publicly traded corporation
shall not be deemed violative of this subparagraph (ii);
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(iii) Be engaged by any entity which conducts business with or
acts as consultant or advisor to BTFHC, whether alone, as a partner, or
as an officer, director, employee or shareholder, or otherwise, directly
or indirectly, except that ownership of not more than one percent (1%)
of the stock of any publicly traded corporation shall not be deemed
violative of this subparagraph (iii).
2. Term. The term of this Employment Agreement shall begin on the
effective date stated above ("commencement date") and shall continue for three
(3) years through December 31, 2000, unless terminated by either party pursuant
to paragraphs 7 or 8.
3. Compensation.
(a) In consideration of the services to be rendered by the Employee
hereunder, BTFHC agrees to pay to the Employee, and the Employee agrees to
accept, as compensation, the sum of Three Hundred Thousand Dollars and No/100
Cents ($300,000.00) (the "Base Salary" ) for each twelve month period following
the effective date of this Employment Agreement, which shall be paid on the
regularly recurring pay periods established by BTFHC. The Base Salary shall be
subject to periodic review for consideration of increase by BTFHC.
(b) It is further understood by the parties that, pursuant to the
policies of BTFHC, discretionary bonus payments may be made in addition to the
Base Salary above provided.
4. Vacation and Other Benefits. Employee shall be entitled to a
reasonable vacation each year of his employment with BTFHC as well as other
employment benefits, including hospitalization, life insurance, death and
retirement plans, an automobile allowance or the use of an automobile, and the
like, afforded to senior executives of BTFHC of comparable status and tenure and
consistent with that afforded under BTFHC's policies.
5. Expenses. BTFHC shall pay all reasonable expenses incurred by
Employee in the performance of his responsibilities and duties for BTFHC.
Employee shall submit to BTFHC periodic statements of all expenses so incurred.
Subject to such audits BTFHC may deem necessary, BTFHC shall reimburse Employee
the full amount of any such expenses advanced by Employee promptly in the
ordinary course.
6. Covenants and Confidential Information.
(a) Employee agrees that for the applicable period specified below,
he will not, directly or indirectly, do any of the following:
(i) Be engaged as a partner, officer, director, employee,
shareholder or consultant by any entity which is engaged in the
operation of health or fitness clubs within five (5) miles of any
facility which (on the date Employee ceases to be employed hereunder) is
owned, managed or under development to be owned or managed by BTFHC, its
subsidiaries, affiliates
2
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and/or its successors and assigns, or is owned by a franchisee of BTFHC,
its subsidiaries, affiliates and/or its successor and assigns
("Facility"); provided, however, that the ownership of not more than one
percent (1%) of the stock in a publicly-traded corporation shall not be
deemed violative of this subparagraph 6(a)(i);
(ii) Induce any person who is an employee, officer, or agent of
BTFHC, to terminate said relationship or employ, assist in employing or
otherwise associate in business with any present, former or future
employee or officer of BTFHC;
(iii) Disclose, divulge, discuss, copy or otherwise use or suffer
to be used in any manner, in competition with, or contrary to the
interests of BTFHC, the customer lists, inventions, ideas, discoveries,
manufacturing methods, product research or engineering data or other
trade secrets of BTFHC, it being acknowledged by Employee that all such
information regarding the business of BTFHC compiled or obtained by, or
furnished to, Employee while he shall have been employed by or
associated with BTFHC is confidential information and the exclusive
property of BTFHC.
(b) The provisions of subparagraphs 6(a)(i), 6(a)(ii) and 6(a)(iii)
shall be operative during the Term hereof except as hereafter provided in this
subparagraph 6(b).
(i) In the event of a "Change in Control" (as defined in
subparagraph 9(c)), the provisions of subparagraphs 6(a)(i) and 6(a)(ii)
shall be operative only so long as the Employee remains an employee of
BTFHC.
(ii) In any event, including a Change in Control or in the event
Employee is terminated for illness or incapacity (as provided in
subparagraph 7(a)) or for "Cause" (as defined in subparagraph 8(a)), the
provisions of subparagraph 6(a)(iii) shall be operative until such time
as the information becomes public knowledge other than through the act
of Employee.
(iii) In the event Employee is terminated for Cause or for
illness or incapacity (as provided in subparagraph 7(a)), the provisions
of subparagraphs 6(a)(i) and 6(a)(ii) shall be operative during the Term
of this Agreement and for one (1) additional year.
(c) Employee expressly agrees and understands that the remedy at law
for any breach by him of this paragraph 6 will be inadequate and that the
damages flowing from such breach are not readily susceptible to being measured
in monetary terms. Accordingly, it is acknowledged that BTFHC shall be entitled
to immediate injunctive relief and if the court so permits, may obtain a
temporary order restraining any threatened or further breach. Nothing contained
in this paragraph 6 shall be deemed to limit BTFHC's remedies at law or in
equity for any breach by Employee of the provisions of this paragraph 6 which
may be pursued or availed of by BTFHC. Any covenant on Employee's part contained
hereinabove, which may not be specifically enforceable, shall nevertheless, if
breached, give rise to a cause of action for monetary damages.
3
<PAGE>
(d) Employee has carefully considered the nature and extent of the
restrictions upon him and the rights and remedies conferred upon BTFHC under
this paragraph 6, and hereby acknowledges and agrees that the same are
reasonable in time and territory, are designed to eliminate competition which
otherwise would be unfair to BTFHC, do not stifle the inherent skill and
experience of Employee, would not operate as a bar to Employee's sole means of
support, are fully required to protect the legitimate interests of BTFHC and do
not confer a benefit upon BTFHC disproportionate to the detriment to Employee.
(e) For the purposes of this paragraph 6, the term "BTFHC" shall be
deemed to include BTFHC and its subsidiaries and affiliates and the successors
and assigns of it and its subsidiaries and affiliates, involved in the operation
or management of a fitness center.
(f) The covenants contained in this paragraph 6 shall be construed to
extend to separate counties and adjacent counties, if applicable, of the states
of the United States in which BTFHC and its subsidiaries, affiliates and its and
their successors and assigns has a fitness center, and to the extent that any
such covenant shall be illegal and/or unenforceable with respect to any one of
said counties, said covenants shall not be affected thereby with respect to each
other county, such covenants with respect to each county being construed as
severable and independent.
7. Illness, Incapacity or Death During Employment.
(a) If the Employee is unable to perform his services by reason of
illness or incapacity resulting in a failure to discharge his duties under this
Employment Agreement for six (6) or more consecutive months, then upon three (3)
days notice, BTFHC may terminate the employment of Employee under this
Employment Agreement and Employee, upon such termination, shall be (i) paid his
Base Salary on a pro-rata basis to the date of termination through the three (3)
day notice period; plus (ii) any previously declared but unpaid bonuses; plus
(iii) reimbursement of all expenses reasonably incurred by Employee in
performing his responsibilities and duties for BTFHC through and including such
three (3) day notice period; plus (iv) any other payment or benefit which
Employee is then entitled to receive under any employment benefit plan,
retirement plan or similar arrangement then maintained by BTFHC, in the amount
and to the extent determined under the terms and conditions of any such plan.
In the event of such termination, the Employee shall have the right, at
his option, to the assignment of any and all insurance policies or health
protection plans if said policies and plans permit assignment out of the group
to the Employee.
(b) In the event that BTFHC elects to terminate this Employment
Agreement pursuant to Section 7(a) by reason of illness or incapacity, then
Employee shall be entitled to the long-term disability (LTD) benefits provided
to senior officers by BTFHC but in any event at no less than sixty percent (60%)
of Base Salary as of the date of termination, without reference to set-off or
caps existing in any LTD plan.
4
<PAGE>
(c) In the event of Employee's death, all obligations of BTFHC under
this Employment Agreement shall terminate other than the payment of that portion
of his Base Salary on a pro-rata basis accrued to the date of death, any
previously declared but unpaid bonuses, plus reimbursement of all expenses
reasonably incurred by Employee in performing his responsibilities and duties
for BTFHC prior to and including such date.
8. Termination.
(a) The employment of Employee under this Employment Agreement, and
the term hereof, may be terminated by BTFHC for cause at any time. For purposes
hereof, the term "cause" means:
(i) Employee's fraud or dishonesty;
(ii) Employee's willful misconduct or gross negligence in the
performance of his duties hereunder, including willful failure to
perform such duties as may properly be assigned him hereunder; or
(iii) Employee's material breach of any material provision of
this Employment Agreement.
(b) Any termination shall not be in limitation of any other right or
remedy BTFHC or Employee may have under this Employment Agreement or otherwise.
9. Optional Termination Upon Change of Control.
(a) In the event that there is a "Change in Control" (as defined in
this paragraph 9) of BTFHC and the successor in control, without cause,
terminates this Employment Agreement, Employee shall be paid a lump sum equal to
twenty-four (24) months Base Salary or an amount equal to his Base Salary for
the balance of the three year term, whichever is greater, and the greater of the
average of twice the bonuses paid to Employee by BTFHC for 1997 or the bonus, if
any, for the prior year. If the successor in control changes Employee's title or
substantially changes his duties or functions from those which he previously
performed hereunder or requires Employee to perform the majority of his duties
at a location outside of the metropolitan area of Chicago, Illinois, the
successor in control shall be deemed to have constructively terminated
Employee's services without cause and Employee shall be entitled to payment set
forth in the first sentence of this paragraph.
In the event that there is a Change in Control (as defined in this
paragraph 9) of BTFHC, Employee may, at his option, terminate this Employment
Agreement at any time thereafter upon thirty (30) days written notice to BTFHC.
If Employee exercises this right to terminate, he shall be paid the following
amounts: (i) a lump sum amount equal to one-half (1/2) of his annual Base Salary
as in effect at the time of exercise (or, if greater, at the time of the Change
in Control); plus, (ii) his Base Salary on a pro-rata basis through and
including the date of his employment termination; plus (iii) any
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<PAGE>
previously declared but unpaid bonuses; plus (iv) reimbursement of all expenses
reasonably incurred by Employee in performing his responsibilities and duties
for BTFHC through and including the date of his employment termination; plus (v)
any other payment or benefit which Employee is then entitled to receive under
any employment benefit plan, retirement plan or similar arrangement then
maintained by BTFHC, in the amount and to the extent determined under the terms
and conditions of any such plan. All such payments shall be made no later than
thirty (30) days after the last day of Employee's employment. In addition,
Employee shall have the right, at his election, to the assignment of any and all
insurance policies and/or health protection plans if said policies and plans
permit assignment to Employee.
A "Change in Control" shall, except as provided below, mean a change in
control of BTFHC of a nature that would be required to be reported in response
to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934 (as in effect on the effective date of this Employment
Agreement, the "Exchange Act"), whether or not BTFHC is then subject to such
reporting requirement; provided that, without limitation, such a Change in
Control shall be deemed to have occurred if:
(i) any "person" (as defined in subsections 13(d) and 14(d) of
the Exchange Act), other than a person with which Arthur M. Goldberg is
affiliated or of which he is a part, is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), of securities
of BTFHC representing twenty percent (20%) or more of the combined
voting power of BTFHC's then outstanding securities;
(ii) during any period of two (2) consecutive years or less (not
including any period prior to the effective date of this Employment
Agreement) there shall cease to be a majority of the Board of Directors
of BTFHC comprised of Continuing Directors (as defined below); or
(iii) the stockholders of BTFHC approve (1) a merger or
consolidation of BTFHC with any other corporation, other than a merger
or consolidation that would result in the voting securities of BTFHC
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of
the surviving entity) at least 80% of the combined voting power of the
voting securities of BTFHC or such surviving entity outstanding
immediately after such merger or consolidation, or (2) a plan of
complete liquidation of BTFHC or an agreement for the sale or
disposition by BTFHC of all or substantially all of its assets.
Notwithstanding anything else contained herein to the contrary, the
acquisition of BTFHC securities from BTFHC which issuance was approved by the
Continuing Directors (as defined below) shall not, either on its own or in
connection with any other acquisition of BTFHC securities prior thereto, be
deemed to be a Change in Control for purposes of this Agreement.
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The term "Continuing Directors" shall mean individuals who constitute
the Board of Directors of BTFHC as of the effective date of this Employment
Agreement and any new director(s) whose election by such Board or nomination for
election by BTFHC's stockholders was approved by a vote of at least two-thirds
of the directors then in office who either were directors as of the effective
date of this Employment Agreement or whose election or nomination for election
was previously so approved.
10. Parachute Payments.
(a) If it shall be determined that any payment, distribution or
benefit received or to be received by Employee from BTFHC pursuant to this
Agreement or any option plan maintained by Employer or its affiliates (other
than with respect to that certain Restricted Stock Award Agreement dated
September 15, 1998) ("Payments") would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (such
tax referred to as the "Excise Tax"), then Employee shall be entitled to receive
an additional payment from BTFHC (the "Excise Tax Gross-Up Payment") in an
amount such that the net amount retained by Employee, after the calculation and
deduction of any Excise Tax on the Payments (together with any penalties and
interest that have been or will be imposed on Employee in connection therewith)
and any federal, state and local income taxes, Excise Taxes and payroll taxes
(including the tax imposed by Section 3101(b) of the Code) on the Excise Tax
Gross-Up Payment provided for in this paragraph 10, shall be equal to the
Payments. In computing the amount of this payment, it shall be assumed that
Employee is subject to tax by each taxing jurisdiction at the highest marginal
tax rate in the respective taxing jurisdiction of Employee, taking into account
the city and state in which Employee resides, but giving effect to the tax
benefit, if any, which Employee may enjoy to the extent that any such tax is
deductible in determining the tax liability of any other taxing jurisdiction
(provided that the highest marginal tax rate for federal income tax purposes
shall be determined under Section 1 of the Code).
(b) All determinations required to be made under this paragraph 10,
including whether and when an Excise Tax Gross-Up Payment is required and the
amount of such Excise Tax Gross-Up Payment and the assumptions to be utilized in
arriving at such determination, except as specified in subparagraph 10(a), shall
be made by BTFHC's independent auditors (the "Accounting Firm"), which shall
provide detailed supporting calculations both to BTFHC and Employee within 15
business days after BTFHC makes any Payments to Employee. The determination of
tax liability and the assumptions made by the Accounting Firm shall be subject
to review by Employee's tax advisor, and, if Employee's tax advisor does not
agree with the determination reached by the Accounting Firm, then the Accounting
Firm and Employee's tax advisor shall jointly designate a nationally-recognized
public accounting firm within five (5) business days after notice has been given
to BTFHC of Employee's disagreement with the Accounting Firm's calculation,
which shall make the determination within 15 business days after its
appointment. If the parties cannot agree on a nationally recognized public
accounting firm, then both parties shall select a nationally recognized public
accounting firm who shall then jointly select a third nationally recognized
public accounting firm which shall make the determination within 15 business
days after its appointment. All fees and expenses of the accountants and tax
advisors retained by either Employee or BTFHC shall be borne by BTFHC. Any
Excise Tax
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Gross-Up Payment, as determined pursuant to this paragraph 10, shall be paid by
BTFHC to Employee within five (5) days after the receipt of the determination,
subject to applicable federal, state, local and Excise Tax withholding
requirements. Any determination by a jointly designated public accounting firm
shall be binding upon BTFHC and Employee, and shall not be subject to
arbitration pursuant to Section 18.
(c) As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination hereunder, it is possible
that Excise Tax Gross-Up Payments will not have been made by BTFHC that should
have been made consistent with the calculations required to be made hereunder
("Underpayment"). In the event that the IRS, on audit, asserts that Employee has
made an underpayment and Employee is required (by reason of settlement or
otherwise) to make a payment of any Excise Tax, or if Employee is required to
make one or more payments of Excise Tax to the IRS (and/or interest or penalties
thereon) upon the filing of his original or amended tax returns which exceed the
amounts taken into account in determining the initial Excise Tax Gross-Up
Payment made pursuant to subparagraphs 10(a) and 10(b), then in either of such
events any such Under payment calculated in accordance with and in the same
manner as the Excise Tax Gross-Up Payment in subparagraph 10(a) shall be
promptly paid by BTFHC to or for the benefit of Employee. In addition, BTFHC
will pay Employee an amount equal to any penalties, interest or additions to be
assessed against him as a result of the underpayment, which amounts shall be
grossed up for any federal, state, local or Excise Taxes payable with respect to
such penalties, interest or additions to tax such that Employee receives a net
amount equal to the penalties, interest and additions to tax assessed against
him (determined in the same manner as described in subparagraph 10(a)). Employee
shall not be obligated to contest any proposed assessment of any Underpayment
and may settle any such audit action or proceeding involving an Underpayment at
his discretion; provided, however, that Employee shall, upon notice of
examination by the Internal Revenue Service, give notice thereof to BTFHC and
BTFHC, at its sole cost and in its sole discretion, may, on behalf of Employee,
defend and contest against any proposed Internal Revenue Service deficiency. In
the event that BTFHC assumes the defense of the proposed deficiency, BTFHC shall
immediately, upon written request of the Employee, secure all of its possible
obligations to the Employee as provided for in this subparagraph 10(c) by either
posting cash collateral in escrow or providing Employee with a "clean
irrevocable letter of credit" in the amount of all of BTFHC's possible
obligations to the Employee pursuant to this subparagraph 10(c). The terms of
such escrow or clean irrevocable letter of credit shall be negotiated by BTFHC
and Employee at such time and any dispute relating to such matters shall be
settled in an arbitration pursuant to Section 18 of this Agreement. Employee
agrees to execute any documents, including Powers of Attorney, that may be
necessary to facilitate BTFHC's defense and/or contesting the Internal Revenue
Service's assertions. In the event that the Excise Tax Gross-Up Payment exceeds
the amount subsequently determined to be due, such excess shall constitute a
loan from BTFHC to Employee payable on the fifth day after demand by BTFHC
(together with interest at the rate provided in Section 1274(b)(2)(B) of the
Code).
11. Severable. Provisions. The provisions of this Employment
Agreement are severable, and if any one or more provisions may be determined to
be illegal or otherwise unenforceable, in
8
<PAGE>
whole or in part, the remaining provisions, and any partially unenforceable
provision to the extent enforceable in any jurisdiction, shall nevertheless be
binding and enforceable.
12. Binding Agreement. The rights and obligations of BTFHC under
this Employment Agreement shall inure to the benefit of and shall be binding
upon the respective successors and assigns of BTFHC.
13. Attorneys' Fees. In the event Employee is required to commence an
arbitration action to enforce the provisions of this Employment Agreement and
Employee prevails in such action, BTFHC shall pay Employee's costs and expenses,
including reasonable attorneys' fees, incurred in such arbitration and in any
subsequent legal action brought to enforce the arbitration decision.
14. Notices. Any notice to be given to BTFHC under the terms of this
Employment Agreement shall be addressed to BTFHC at the address of its principal
places of business, and any notice to be given to Employee shall be addressed to
him at his home address last shown on the records of BTFHC, or at such other
address as the parties may hereafter designate in writing to the other. Any such
notice shall have been duly given when enclosed in a properly sealed envelope
addressed as aforesaid, postage prepaid, registered or certified, return receipt
requested, and depos ited in a post office or branch post office regularly
maintained by the United States Government.
15. Waiver. Either party's failure to enforce any provision or
provisions of this Employment Agreement shall not in any way be construed as a
waiver of any such provision or provisions as to any future violations thereof,
nor prevent that party thereafter from enforcing each and every other provision
of this Employment Agreement. The rights granted the parties herein are
cumulative and the waiver by a party of any single remedy shall not constitute a
waiver of such party's right to assert all other legal remedies available to him
or it under the circumstances.
16. Governing Law. This Employment Agreement shall be governed by
and construed and interpreted according to the internal laws of the State of
Illinois without reference to principles of conflict of laws.
17. Miscellaneous. Captions and headings used herein are for
convenience only and are not a part of this Employment Agreement and shall not
be used in construing it. This Employment Agreement constitutes the entire
agreement between BTFHC and Employee with respect to the subject matter hereof
and may not be modified or terminated orally. No modification, termination or
attempted waiver of this Employment Agreement shall be valid unless in writing
and signed by the party against whom the same is sought to be enforced.
18. Arbitration. Any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the Rules of the American Arbitration Association then
pertaining in Chicago, Illinois and judgment upon the award rendered by the
arbitrator or arbitrators may be entered in any court having jurisdiction
thereof. The arbitrator or arbitrators shall be deemed to possess the powers to
issue mandatory orders and restraining orders
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in connection with such arbitration; provided, however, that nothing in this
paragraph 18 shall be construed so as to deny BTFHC's right and power to seek
and obtain injunctive relief in a court of equity for any breach or threatened
breach of Employee of any of his covenants contained in subparagraph 6(a)
hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be duly elected as of the day and year first above written.
BALLY TOTAL FITNESS HOLDING
CORPORATION
ATTEST: /s/ Joycelyn S. Jaksa /s/ Harold Morgan
----------------------------- -----------------------------------
Harold Morgan "BTFHC"
/s/ John W. Dwyer
-----------------------------------
John M. Dwyer "Employee"
Approved by the Compensation Committee of Bally Total Fitness Holding
Corporation on October 22nd, 1998.
------------
/s/ Liza M. Walsh
-----------------------------------
Chairman, Compensation Committee -
Bally Total Fitness Holding
Corporation
10
EXHIBIT 10.2
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT is made and entered
into on October 26, 1998, effective as of the 1st day of January, 1998, by and
between BALLY TOTAL FITNESS HOLDING CORPORATION, a Delaware corporation
("BALLY" or "EMPLOYER") and LEE S. HILLMAN ("EMPLOYEE").
WHEREAS, Employer and Employee desire to terminate their current
employment arrangement, and Employer and Employee desire to enter into this
Employment Agreement (this "EMPLOYMENT AGREEMENT") to set forth the rights and
duties of the parties herein;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements herein contained, the parties agree as follows:
1. EMPLOYMENT
(a) Bally hereby employs Employee in the capacities of President and
Chief Executive Officer and such other capacity or capacities of equal status
and responsibility as the Board of Directors of Bally shall determine, and
Employee hereby accepts such employment upon the terms and conditions herein set
forth.
<PAGE>
(b) During the term of his employment, Employee will devote his best
efforts to his employment and perform such duties consistent with his capacities
as President and Chief Executive Officer of Bally and such other capacity or
capacities as the Board of Directors of Bally shall determine, as are reasonably
assigned to him by Employer. While it is understood and agreed that Employee's
job capacities may change at Employer's discretion during the term of this
Employment Agreement, his level of responsibility shall not be substantially
reduced at any time. Except as hereinafter permitted in Section 1(c), Employee
will devote substantially all of his working time and attention to the business
and related interests of, and will be loyal to, Employer, and Employee agrees to
render service on behalf of Employer or on behalf of its subsidiaries or
affiliates.
(c) Without the prior written consent of Employer, Employee shall
not, either in his individual capacity or in his capacity as a fiduciary of
trusts which are for the benefit of Arthur M. Goldberg and/or his family members
or others (the "AMG TRUSTS"), directly or indirectly, during the term of this
Employment Agreement:
(i) Other than (A) in the performance of duties naturally
inherent to Employer's business and in furtherance thereof, (B) the
provision of services, if any, to Hilton Hotels Corporation pursuant
to that certain
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consulting agreement dated November 21, 1996 between Hilton Hotels
Corporation and Employee ("CONSULTING AGREEMENT"), or (C) in his
capacity as a fiduciary of the AMG Trusts, render services of a
business, professional or commercial nature to any other person or
firm, whether for compensation or otherwise; provided, however, that
nothing contained in this Section 1(c) shall be construed as
preventing Employee from (x) investing his assets or the assets of the
AMG Trusts in such form or manner as will not require any services on
the part of Employee in the operation of the affairs of the companies
in which such investments are made and which are not in violation of
Section 1(c)(ii), (y) acting as a director of other companies
(including, but not by way of limitation, Continuecare Corporation and
Holmes Place, P.L.C.), or (z) either in his individual capacity or in
his capacity as a fiduciary of the AMG Trusts, from engaging in
charitable activities so long as such activities do not unreasonably
interfere with the performance of Employee's duties hereunder;
(ii) Engage in any activity competitive with or adverse to
Employer's business or welfare, whether alone, as a partner, or as an
officer, director, employee or shareholder of any other corporation,
or otherwise, directly or indirectly; provided, however, that (A) the
ownership by Employee of not more than one percent (1%) of the stock
in a publicly-traded
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corporation shall not be deemed violative of this Section 1(c)(ii),
(B) the ownership by the AMG Trusts of equity or debt (of whatever
nature) in any entity shall not be deemed violative of this Section
1(c)(ii), and (C) serving as a director of Continuecare Corporation
and Holmes Place, P.L.R. is hereby consented to and shall not be
deemed violative of this Section 1(c)(ii).
(iii) Be engaged by any entity (other than charitable
organizations, as a consultant pursuant to the Consulting Agreement or
in his capacity as a fiduciary of the AMG Trusts) which conducts
business with or acts as consultant or advisor to Employer, whether
Employee is acting alone, as a partner, or as an officer, director,
employee or shareholder, or otherwise, directly or indirectly, except
that (A) ownership of not more than one percent (1%) of the stock of a
publicly-traded corporation shall not be deemed violative of this
Section 1(c)(iii) and (B) serving as a director of Continuecare
Corporation and Holmes Place, P.L.C. is hereby consented to and shall
not be deemed violative of this Section 1(c)(iii).
2. TERM
The term of the employment of Employee under this Employment
Agreement shall begin as of January 1, 1998 and end on December 31, 2000 (the
"TERM") unless this
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Employment Agreement is terminated earlier for any of the following reasons: (i)
due to illness, incapacity or death of Employee pursuant to Section 7; (ii) by
Bally, for Cause, pursuant to Section 8; or (iii) in the event of a Change of
Control pursuant to Section 9.
3. COMPENSATION
(a) In consideration of the services to be rendered by Employee
hereunder, Employer agrees to pay to Employee, and Employee agrees to accept, as
compensation, an annual base salary of Four Hundred Fifty Thousand Dollars
($450,000) (the "BASE SALARY") for each twelve month period beginning January 1,
1998 of this Employment Agreement, which amounts shall be paid on the regularly
recurring pay periods established by Employer. The Base Salary shall be subject
to periodic increase by Employer, although any determination to increase the
Base Salary shall be within Employer's sole discretion.
(b) It is further understood by both parties that Employee will
participate in any bonus plans or similar plans established by Employer for its
senior management and pursuant to the policies of Employer. A discretionary
bonus payment may be made in addition to the Base Salary and any bonus plan or
similar plan, which shall be made within Employer's sole discretion.
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4. VACATIONS AND OTHER BENEFITS
(a) Employee shall be entitled to reasonable vacations each year of
his employment with Employer as well as all other employment benefits and
perquisites (including, without limitation, medical, prescription drug, dental,
hospitalization, life insurance, death and retirement plans, office space,
secretary as selected by Employee, support services, an automobile allowance or
the use of an automobile, and the like) at levels at least as great as afforded
to other senior executives of Employer and consistent with that afforded under
Employer's policies. Employer may, at its sole discretion, change such policies.
In addition, Employer will provide Employee with life insurance and long-term
disability insurance as described on Schedule A hereto.
(b) In addition to the other compensation and benefits under this
Employment Agreement, Employer shall pay Employee, as additional compensation,
an amount equal to two hundred percent (200%) of the premiums (and any other
costs) necessary to maintain in full force and effect, so long as Employee is
employed hereunder, a policy of term insurance on the life of Employee, in an
amount equal to the greater of (i) $1,600,000 and (ii) that amount which is
twice his annual Base Salary as in effect from time to time. The policy shall be
owned by Employee and/or any member of his family and/or a trust for their
benefit as shall be selected by Employee. Employee shall promptly advise
Employer of the owner and the designated beneficiary or beneficiaries of such
policies.
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<PAGE>
The additional compensation referenced in this Section 4(b) shall be
supplemental to any other life insurance benefits provided to Employee,
including the group life insurance provided to Employee at the time this
Employment Agreement commenced or any subsequent improvement thereof.
5. EXPENSES
Employer shall pay all reasonable expenses incurred by Employee in the
performance of his responsibilities and duties for Employer. Employee shall
submit to Employer periodic statements of all reasonable expenses so incurred.
Subject to such audits as Employer may deem necessary, Employer shall reimburse
Employee the full amount of any such reasonable expenses advanced by Employee
promptly in the ordinary course.
6. COVENANTS AND CONFIDENTIAL INFORMATION
(a) Employee agrees that for the applicable period specified below,
he will not, directly or indirectly, do any of the following:
(i) Be engaged as a partner, officer, director, employee,
shareholder or consultant by any entity (other than Hilton Hotels
Corporation, Continuecare Corporation and Holmes Place, P.L.C.) which
is engaged in the
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<PAGE>
operation of health or fitness clubs within five (5) miles of any
facility which (on the date Employee ceases to be employed hereunder)
is owned, managed or under development to be owned or managed by
Employer, its subsidiaries, affiliates and/or its successors and
assigns, or is owned by a franchisee of Employer ("Facility");
provided, however, that the ownership of not more than one percent
(1%) of the stock in a publicly-traded corporation shall not be deemed
violative of this Section 6(a)(i);
(ii) Induce any person who is an officer of Employer to
terminate said relationship or employ, or assist in employing or
otherwise associate in business with any officer or employee of
Employer who held such position within three (3) months before the
termination of Employee's employment hereunder;
(iii) Disclose, divulge, discuss, copy or otherwise use or
suffer to be used in any manner, in competition with, or contrary to
the interests of Employer, the customer lists, inventions, ideas,
discoveries, manufacturing methods, product research or engineering
data or other trade secrets of Employer, it being acknowledged by
Employee that all such information regarding the business of Employer
compiled or obtained by, or furnished to, Employee while he shall have
been employed by or associated with
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<PAGE>
Employer is confidential information and the exclusive property of
Employer.
(b) The provisions of Sections 6(a)(i), 6(a)(ii) and 6(a)(iii) shall
be operative during the Term hereof except as hereafter provided in this
Section 6(b).
(i) In the event of a "Change in Control" (as defined in
Section 9 (c), the provisions of Sections 6(a)(i) and 6(a))(ii) shall
be operative only so long as the Employee remains an employee of
Employer.
(ii) In the event of a Change in Control the provisions of
Section 6(a)(iii) shall be operative until such time as the
information becomes public knowledge other than through the act of
Employee.
(iii) In the event Employee is terminated for "Cause" (as
defined in Section 8(a)), the provisions of Section 6(a)(i) and
6(a)(ii) shall be operative during the Terms of this Agreement and for
one (1) additional year.
(iv) In the event Employee is terminated for Cause, the
provisions of Section 6(a)(iii) shall be operative until such time as
the information becomes public knowledge other than through the act of
Employee.
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<PAGE>
(v) In the event Employee is terminated for illness or
incapacity (as provided in Section 7(a)), the provisions of Sections
6(a)(i) and 6(a)(ii) shall be operative during the Term of this
Agreement and for one (1) additional year.
(vi) In the event Employee is terminated for illness or
incapacity (as provided in Section 7(a)), the provisions of Section
6(a)(iii) shall be operative until such time as the information
becomes public knowledge other than through the act of Employee.
(c) Employee expressly agrees and understands that the remedy at law
for any breach by him of this Section 6 will be inadequate and that the damages
flowing from such breach are not readily susceptible to being measured in
monetary terms. Accordingly, it is acknowledged that Employer shall be entitled
to immediate injunctive relief and if the court so permits, may obtain a
temporary order restraining any threatened or further breach. Nothing contained
in this Section 6 shall be deemed to limit Employer's remedies at law or in
equity for any breach by Employee of the provisions of this Section 6 which may
be pursued or availed of by Employer. Any covenant on Employee's part contained
hereinabove, which may not be specifically enforceable, shall nevertheless, if
breached, give rise to a cause of action for monetary damages.
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<PAGE>
(d) Employee has carefully considered the nature and extent of the
restrictions upon him and the rights and remedies conferred upon Employer under
this Section 6, and hereby acknowledges and agrees that the same are reasonable
in time and territory, are designed to eliminate competition which otherwise
would be unfair to Employer, do not stifle the inherent skill and experience of
Employee, would not operate as a bar to Employee's sole means of support, are
fully required to protect the legitimate interests of Employer and do not confer
a benefit upon Employer disproportionate to the detriment to Employee.
(e) Solely for the purposes of this Section 6, the term
"EMPLOYER" shall be deemed to include Bally Total Fitness Holding Corporation
and any of its subsidiaries, together with their respective successors or
assigns, which are involved primarily in the operation or management of health
or fitness facilities.
(f) The covenants contained in this Section 6 shall be construed to
extend to separate counties and adjacent counties, if applicable, of the states
of the United States in which there is a Facility, and to the extent that any
such covenant shall be illegal and/or unenforceable with respect to any one of
said counties, said covenants shall not be affected thereby with respect to each
other county, such covenants with respect to each county being construed as
severable and independent.
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<PAGE>
7. ILLNESS, INCAPACITY OR DEATH DURING EMPLOYMENT
(a) If Employee is unable to perform his services by reason of
illness or incapacity resulting in a failure to discharge his duties under this
Employment Agreement for six (6) or more consecutive months, then upon three (3)
days notice, Employer may terminate the employment of Employee under this
Employment Agreement. Upon such termination, Employee shall be paid the
following amounts: (i) his Base Salary on a pro-rata basis to the date of
termination (through and including the three (3) day notice period); plus (ii)
any previously declared but unpaid bonuses; plus (iii) reimbursement of all
expenses reasonably incurred by Employee in performing his responsibilities and
duties for Employer through and including such three (3) day notice period; plus
(iv) any other payment or benefit which Employee is then entitled to receive
under any employment benefit plan, retirement plan or similar arrangement then
maintained by Employer, in the amount and to the extent determined under the
terms and conditions of any such plan. In the event of such termination,
Employee shall have the right, at his election, to the assignment of any and all
insurance policies or health protection plans if said policies and plans permit
assignment to Employee.
(b) In the event that Employer elects to terminate this Employment
Agreement pursuant to Section 7(a) by reason of illness or incapacity, then in
addition to any payments or benefits which Employee is then entitled to receive
under Section 7(a),
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Employee shall be entitled to all long-term disability ("LTD") benefits as then
provided to senior officers of Employer (including, without limitation, LTD
benefits for the same time period, and in the same dollar amount or percentage
of Base Salary, as then provided to senior officers of Employer), but in any
event at no less than sixty percent (60%) of Base Salary as of the date of
termination, without reference to, or reduction for, setoffs or caps existing in
any LTD plan.
(c) In the event of Employee's death, all obligations of Employer
under this Employment Agreement shall terminate; provided, however, that
Employee's estate shall be paid the following amounts: (i) his Base Salary on a
pro-rata basis accrued to the date of death; plus (ii) any previously declared
but unpaid bonuses; plus (iii) reimbursement of all expenses reasonably incurred
by Employee in performing his responsibilities and duties for Employer prior to
and including such date; plus (iv) any other payment or benefit which Employee
is then entitled to receive under any employment benefit plan, retirement plan,
death benefit plan or similar arrangement then maintained by Employer, in the
amount and to the extent determined under the terms and conditions of any such
plan.
8. TERMINATION FOR CAUSE AND SEVERANCE COMPENSATION
(a) The employment of Employee under this Employment Agreement, and
the Term hereof, may be terminated by Employer for Cause at any time. For
purposes
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hereof, the term "CAUSE" means:
(i) Employee's fraud or dishonesty;
(ii) After thirty (30) days written notice thereof and
failure to cease and/or cure Employee's willful misconduct or gross
negligence in the performance of his duties hereunder, including
willful failure to perform such duties as may properly be assigned him
hereunder; or
(iii) After thirty (30) days written notice thereof and
failure to cure Employee's material breach of any material provision
of this Employment Agreement.
(b) Any termination pursuant to Section 8(a) shall not be in
limitation of any other right or remedy Employer may have under any other
Section of this Employment Agreement or otherwise; provided, however, that
Section 8(a) shall set forth the exclusive definition of "Cause."
(c) Notwithstanding anything to the contrary contained herein, if
there is a dispute between Employer and Employee (after the thirty (30) day
written notice has been given for purposes of Sections 8(a)(i), 8(a)(ii) or
8(a)(iii)) as to whether any of the above
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"Cause" provisions factually existed, still exist and/or have been cured, such
dispute shall be arbitrated pursuant to Section 17.
(d) Upon the effective date of termination of Employee's employment
pursuant to this Section 8, Employee shall be paid the following amounts: (i)
his Base Salary, on a pro-rata basis through and including the effective date of
termination; plus (ii) any previously declared but unpaid bonuses; plus (iii)
reimbursement of all expenses reasonably incurred by Employee in performing his
responsibilities and duties for Employer through and including the effective
date of termination; plus (iv) any other payment or benefit which Employee is
then entitled to receive under any employment benefit plan, retirement plan or
similar arrangement then maintained by Employer, in the amount and to the extent
determined under the terms and conditions of any such plan. In addition,
Employee shall have the right, at his election and at his cost, to the
assignment of any and all insurance policies or health protection plans if said
policies and plans permit assignment to Employee.
9. TERMINATION UPON CHANGE IN CONTROL
(a) In the event that there is a Change in Control (as defined in
Section 9(c)) of Bally, Employee may, at his option, terminate this
Employment Agreement at any time thereafter upon thirty (30) days written notice
to Employer. If Employee exercises this
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right to terminate, he shall be paid the following amounts: (i) a lump sum
amount equal to one-half (1/2) of his annual Base Salary as in effect at the
time of exercise (or, if greater, at the time of the Change in Control); plus,
(ii) his Base Salary on a pro-rata basis through and including the date of his
employment termination; plus (iii) any previously declared but unpaid bonuses;
plus (iv) reimbursement of all expenses reasonably incurred by Employee in
performing his responsibilities and duties for Employer through and including
the date of his employment termination; plus (v) any other payment or benefit
which Employee is then entitled to receive under any employment benefit plan,
retirement plan or similar arrangement then maintained by Employer, in the
amount and to the extent determined under the terms and conditions of any such
plan. All such payments shall be made no later than the last day of Employee's
employment. In addition, Employee shall have the right, at his election, to the
assignment of any and all insurance policies and/or health protection plans if
said policies and plans permit assignment to Employee. In further addition, in
the event that there is a Change in Control (as that term is defined in either
of Section 2.7 of the 1996 Long-Term Incentive Plan of Bally Total Fitness
Holding Corporation -- the "1996 Option Plan" -- or in Section 9(c) of this
Agreement) of Bally, the time limitations set forth in Section 4(b) of that
certain Award Agreement dated November 21, 1997 between the Employer and the
Employee shall be deemed stricken, and the Employee may exercise the option
immediately for all of the shares granted pursuant to the Award Agreement for
which the Employee has not yet exercised his option to purchase such shares;
provided, further, that the Employee at his choice at such time may exercise his
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option by either purchasing such stock or via the "cashless exercise program and
procedures" as in existence on the date of this Agreement, or the reasonable
equivalent thereof, regardless of whether or not such "cashless exercise program
and procedures" are actually in existence on the date of the Change in Control.
(b) In the event that there is a Change in Control (as defined in
Section 9(c)) of Bally and the successor in control, without Cause, terminates
this Employment Agreement, Employee shall be paid the following amounts: (i) a
lump sum amount equal to the product of his Annual Base Salary as in effect at
the time of termination (or, if greater, at the time of the Change in Control)
multiplied by three (3); plus (ii) a lump sum amount equal to the product of the
annual average of the bonuses, if any, paid to Employee by Employer with respect
to the three full calendar years ending before the calendar year in which the
Change in Control occurs (or lesser number of full calendar years if less than
three), multiplied by two (2) (provided that in no event shall calendar year
1996 be taken into account in determining this average); plus (iii) his Base
Salary on a pro-rata basis through and including the date of his employment
termination; plus (iv) any previously declared but unpaid bonuses; plus (v)
reimbursement of all expenses reasonably incurred by Employee in performing his
responsibilities and duties for Employer through and including the date of his
employment termination; plus (vi) any other payment or benefit which Employee is
then entitled to receive under any employment benefit plan, retirement plan or
similar arrangement then maintained by Employer, in the amount and to the extent
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determined under the terms and conditions of any such plan. All such payments
shall be made no later than the last day of Employee's employment. In addition,
Employee shall have the right, at his election, to the assignment of any and all
insurance policies and/or health protection plans if said policies and plans
permit assignment to Employee. If the successor in control changes Employee's
title, substantially changes his duties or functions from those which he
previously performed hereunder, or, except for the inherent travel requirement
in his positions, requires Employee to perform his duties outside of the
metropolitan area of Chicago, Illinois or to relocate his present address, the
successor in control shall be deemed to have constructively terminated this
Employment Agreement without Cause.
(c) A "CHANGE IN CONTROL" shall, except as provided below, mean a
change in control of Bally of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934 (as in effect on the effective date of this
Employment Agreement, the "EXCHANGE ACT"), whether or not Bally is then subject
to such reporting requirement; provided that, without limitation, such a Change
in Control shall be deemed to have occurred if:
(i) Any "person" (as defined in subsections 13(d) and 14(d)
of the Exchange Act), other than a person with which Arthur M.
Goldberg is
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affiliated or of which he is a part, is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of Bally representing twenty percent (20%)
or more of the combined voting power of Bally's then outstanding
securities;
(ii) During any period of two (2) consecutive years or less
(not including any period prior to October 7, 1996) there shall cease
to be a majority of the Board of Directors of Bally comprised of
Continuing Directors (as defined in Section 9(d)); or
(iii) The stockholders of Bally approve (A) a merger or
consolidation of Bally with any other corporation, other than a merger
or consolidation that would result in the voting securities of Bally
outstanding immediately prior thereto continuing to represent (either
by remaining outstanding or by being converted into voting securities
of the surviving entity) at least 80% of the combined voting power of
the voting securities of Bally or such surviving entity outstanding
immediately after such merger or consolidation, or (B) a plan of
complete liquidation of Bally or an agreement for the sale or
disposition by Bally of all or substantially all of its assets.
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Notwithstanding anything contained herein to the contrary, the
following shall not be deemed a Change in Control for purposes of this
Agreement:
(A) if an event described in subsection (i) of this Section
9(c) shall occur upon the issuance of Bally securities by Bally in a
public offering, which issuance was approved by the Continuing
Directors (as defined below) and the Continuing Directors remain as a
majority of the Board of Directors of Bally and the Employee's
position with Bally remains unchanged; or
(B) if an event described in subsections (i) of the Section
9(c) shall occur because of the issuance of Bally securities in
connection with an acquisition by Bally, which issuance was approved
by the Continuing Directors (as defined below) and the Continuing
Directors remain as a majority of the Board of Directors and the
Employee's position with Bally remains unchanged.
(d) The term "CONTINUING DIRECTORS" shall mean individuals who
constitute the Board of Directors of Bally as of October 7, 1996 and any new
director(s) whose election by such Board or nomination for election by Bally's
stockholders was approved by a vote of at least two-thirds of the directors then
in office who either were
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directors as of October 7, 1996 or whose election or nomination for election was
previously so approved.
10. PARACHUTE PAYMENTS
(a) If it shall be determined that any payment, distribution or
benefit received or to be received by Employee from Employer pursuant to this
Agreement or any option plan or other plan maintained by Employer or its
affiliates ("PAYMENTS") would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code of 1986, as amended (the "CODE") (such tax
referred to as the "EXCISE TAX"), then Employee shall be entitled to receive an
additional payment from Bally (the "EXCISE TAX GROSS-UP PAYMENT") in an amount
such that the net amount retained by Employee, after the calculation and
deduction of any Excise Tax on the Payments (together with any penalties and
interest that have been or will be imposed on Employee in connection therewith)
and any federal, state and local income taxes, Excise Taxes and payroll taxes
(including the tax imposed by Section 3101(b) of the Code) on the Excise Tax
Gross-Up Payment provided for in this Section 10, shall be equal to the
Payments. In computing the amount of this payment, it shall be assumed that
Employee is subject to tax by each taxing jurisdiction at the highest marginal
tax rate in the respective taxing jurisdiction of Employee, taking into account
the city and state in which Employee resides, but giving effect to the tax
benefit, if any, which Employee may enjoy to the extent that any such tax is
deductible in determining
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<PAGE>
the tax liability of any other taxing jurisdiction (provided that the highest
marginal tax rate for federal income tax purposes shall be determined under
Section 1 of the Code).
(b) All determinations required to be made under this Section 10,
including whether and when an Excise Tax Gross-Up Payment is required and the
amount of such Excise Tax Gross-Up Payment and the assumptions to be utilized in
arriving at such determination, except as specified in Section 10(a), shall be
made by Employer's independent auditors (the "ACCOUNTING FIRM"), which shall
provide detailed supporting calculations both to Employer and Employee within 15
business days after Employer makes any Payments to Employee. The determination
of tax liability and the assumptions made by the Accounting Firm shall be
subject to review by Employee's tax advisor, and, if Employee's tax advisor does
not agree with the determination reached by the Accounting Firm, then the
Accounting Firm and Employee's tax advisor shall jointly designate a
nationally-recognized public accounting firm within five (5) business days after
notice has been given to Employer of Employee's disagreement with the Accounting
Firm's calculation, which shall make the determination within 15 business days
after its appointment. If the parties cannot agree on a nationally recognized
public accounting firm, then both parties shall select a nationally recognized
public accounting firm who shall then jointly select a third nationally
recognized public accounting firm which shall make the determination within 15
business days after its appointment. All fees and expenses of the accountants
and tax advisors retained by either Employee or Employer shall be borne by
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<PAGE>
Employer. Any Excise Tax Gross-Up Payment, as determined pursuant to this
Section 10, shall be paid by Employer to Employee within five (5) days after the
receipt of the determination, subject to applicable federal, state, local and
Excise Tax withholding requirements. Any determination by a jointly designated
public accounting firm shall be binding upon Employer and Employee, and shall
not be subject to arbitration pursuant to Section 17.
(c) As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination hereunder, it is possible
that Excise Tax Gross-Up Payments will not have been made by Employer that
should have been made consistent with the calculations required to be made
hereunder ("UNDERPAYMENT"). In the event that the IRS, on audit, asserts that
Employee has made an underpayment and Employee is required (by reason of
settlement or otherwise) to make a payment of any Excise Tax, or if Employee is
required to make one or more payments of Excise Tax to the IRS (and/or interest
or penalties thereon) upon the filing of his original or amended tax returns
which exceed the amounts taken into account in determining the initial Excise
Tax Gross-Up Payment made pursuant to Sections 10(a) and 10(b), then in either
of such events any such Underpayment calculated in accordance with and in the
same manner as the Excise Tax Gross-Up Payment in Section 10(a) shall be
promptly paid by Employer to or for the benefit of Employee. In addition,
Employer will pay Employee an amount equal to any penalties, interest or
additions to be assessed against him as a result of the underpayment,
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<PAGE>
which amounts shall be grossed up for any federal, state, local or Excise Taxes
payable with respect to such penalties, interest or additions to tax such that
Employee receives a net amount equal to the penalties, interest and additions to
tax assessed against him (determined in the same manner as described in Section
10(a). Employee shall not be obligated to contest any proposed assessment of any
Underpayment and may settle any such audit action or proceeding involving an
Underpayment at his discretion; provided, however, that Employee shall, upon
notice of examination by the Internal Revenue Service, give notice thereof to
Employer and Employer, at its sole cost and in its sole discretion, may, on
behalf of Employee, defend and contest against any proposed Internal Revenue
Service deficiency. In the event that Employer assumes the defense of the
proposed deficiency, the Employer shall immediately, upon written request of the
Employee secure all of its possible obligations to the Employee as provided for
in this Section 10(c) by either posting cash collateral in escrow or providing
Employee with a "clean irrevocable letter of credit" in the amount of all of the
Employer's possible obligations to the Employee pursuant to this Section 10(c).
The terms of such escrow or clean irrevocable letter of credit shall be
negotiated by Employer and Employee at such time and any dispute relating to
such matters shall be settled in an arbitration pursuant to Section 17 of this
Agreement. Employee agrees to execute any documents, including Powers of
Attorney, that may be necessary to facilitate Employer's defense and/or
contesting the Internal Revenue Service's assertions. In the event that the
Excise Tax Gross-Up Payment exceeds the amount subsequently determined to be
due, such excess shall constitute a loan from Employer to Employee payable on
the
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<PAGE>
fifth day after demand by Employer (together with interest at the rate provided
in Section 1274(b)(2)(B) of the Code).
11. INDEMNIFICATION
Employer and Employee are parties to an Indemnification Agreement
dated January 3, 1996, and it is agreed that the provisions of that
Indemnification Agreement shall govern the subject matter thereof.
12. SEVERABLE PROVISIONS
The provisions of this Employment Agreement are severable, and if any
one or more provisions may be determined to be illegal or otherwise
unenforceable, in whole or in part, the remaining provisions, and any partially
unenforceable provision to the extent enforceable in any jurisdiction, shall
nevertheless be binding and enforceable.
13. ASSIGNABILITY; BINDING NATURE
(a) The rights and obligations of Employer and Employee under this
Employment Agreement shall inure to the benefit of and shall be binding upon
their respective successors, heirs (in the case of Employee) and assigns.
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<PAGE>
(b) No rights or obligations of Employer under this Employment
Agreement may be assigned or transferred by Employer, except that such rights or
obligations may be assigned or transferred pursuant to a merger or consolidation
in which Employer is not the continuing entity, or the sale or liquidation of
all or substantially all of the assets of Employer; provided, however, that the
assignee or transferee is the successor to all or substantially all of the
assets of Employer and such assignee or transferee assumes the liabilities,
obligations, and duties of Employer, as contained in this Employment Agreement,
either contractually or as a matter of law. Employer further agrees that, in the
event of a sale of assets or liquidation as described in the preceding sentence,
it shall take whatever action it legally can in order to cause such assignee or
transferee to expressly assume the liabilities, obligations, and duties of
Employer hereunder.
(c) No rights or obligations of Employee under this Employment
Agreement may be assigned or transferred by Employee; provided, however, that
all of his rights may be transferred by will or by operation of law.
14. NOTICES
Any notice to be given to Employer under the terms of this
Employment Agreement shall be addressed to Employer at the address of its
principal place of business,
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<PAGE>
and any notice to be given to Employee shall be addressed to him at his home
address last shown on the records of Employer, or at such other address as
either party may hereafter designate in writing to the other. Any such notice
shall have been duly given when enclosed in a properly sealed envelope addressed
as aforesaid, postage prepaid, registered or certified, return receipt
requested, and deposited in a post office or branch post office regularly
maintained by the United States Government.
15. WAIVER
Either party's failure to enforce any provision or provisions of this
Employment Agreement shall not in any way be construed as waiver of any such
provision or provisions as to any future violations thereof, and shall not
prevent that party thereafter from enforcing each and every other provision of
this Employment Agreement. The rights granted the parties herein are cumulative
and the waiver by a party of any single remedy shall not constitute a waiver of
such party's right to assert all other legal remedies available to him or it
under the circumstances.
16. GOVERNING LAWS
This Employment Agreement shall be governed by and construed and
interpreted according to the internal laws of the State of Illinois, without
reference to
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principles of conflict of laws.
17. ARBITRATION
Any controversy or claim arising out of or relating to this Employment
Agreement, or the breach thereof, shall be settled by arbitration in accordance
with the Rules of the American Arbitration Association then pertaining in
Chicago, Illinois and judgment upon the award rendered by the arbitrator or
arbitrators may be entered in any court having jurisdiction thereof. The
arbitrator or arbitrators shall be deemed to possess the powers to issue
mandatory orders and restraining orders in connection with such arbitration;
provided, however, that nothing in this Section 17 shall be construed so as to
deny Employer's right and power to seek and obtain injunctive relief in a court
of equity for any breach or threatened breach of Employee of any of his
covenants contained in Section 6(a). Costs of the arbitration, including,
without limitation, reasonable attorneys' fees of all parties (which shall
include any fees incurred or accrued in any application to confirm the
arbitration award), shall be borne by Bally. During the Term, pending the
resolution of any arbitration, Bally shall continue payment of all amounts due
Employee under this Employment Agreement and all benefits to which Employee is
entitled at the time the dispute arises.
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<PAGE>
18. REPRESENTATIONS
(a) Bally represents and warrants that it is fully authorized and
empowered to enter into this Employment Agreement and that the performance of
its obligations under this Employment Agreement will not violate any agreement
between it and any other person, firm, or organization.
(b) Employee represents that he knows of no agreement between him and
any other person, firm, or organization that would be violated by the
performance of his obligations under this Employment Agreement.
19. REGISTRATION OF WARRANTS
Employer shall promptly enter into an amendment of that certain
Registration Rights Agreement originally entered into as of the 29th day of
December, 1995 between Company and Bally Entertainment Corporation to provide
Employee one demand right for shelf registration (the "Shelf Registration
Statement") with respect to the shares of Employer's Common Stock, par value
$.01 per share, underlying the Warrant Certificate No. W-3 issued to Employee by
Employer. Subject to the terms of the Registration Rights Agreement, as amended,
Employer shall agree to keep the Shelf Registration Statement effective from the
date of demand by Employee through the earlier of the date which is 30
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<PAGE>
days after the last day which warrants may be exercised pursuant to the Warrant
Certificate or the date all shares registered pursuant to the Shelf Registration
Statement have been sold.
20. SURVIVORSHIP
The respective rights and obligations of the parties hereunder shall
survive any termination of Employee's employment to the extent necessary to the
intended preservation of such rights and obligations.
21. BENEFICIARIES/REFERENCES
Employee shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following Employee's death by
giving Bally written notice thereof. In the event of Employee's death or a
judicial determination of his incompetence, reference in this Employment
Agreement to Employee shall be deemed, where appropriate, to refer to his
beneficiary, estate, or other legal representative.
22. MISCELLANEOUS
(a) Captions and paragraph headings used herein are for convenience
only
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<PAGE>
and are not a part of this Employment Agreement and shall not be used in
construing it.
(b) This Employment Agreement constitutes the entire understanding
and agreement between Employer and Employee with respect to the subject matter
hereof and supersedes all prior agreements, understandings, discussions,
negotiations and undertakings (including the Old Agreement), whether written or
oral, between Employer and Employee.
(c) Except as specifically provided in this Employment Agreement,
this Employment Agreement shall not affect nor have any force or effect upon any
other agreement to which Employee is a party and/or beneficiary.
(d) This Employment Agreement may not be modified or terminated
orally. No modification, termination or attempted waiver of this Employment
Agreement shall be valid unless in writing and signed by the party against whom
the same is sought to be enforced.
(e) Except as otherwise indicated, all references to "Sections" refer
to sections or subsections, as appropriate, of this Employment Agreement.
(f) The capitalized terms used in this Employment Agreement shall
have the meanings indicated in the Sections in which they are defined or as
otherwise required by
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<PAGE>
the context in which they are used.
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be duly executed as of the day and year first above written.
BALLY TOTAL FITNESS
HOLDING CORPORATION
ATTEST: /s/ Joycelyn S. Jaksa By: /s/ John W. Dwyer
-------------------------- -----------------------------------
JOHN W. DWYER
Executive Vice President,
Chief Financial Officer & Treasurer
/s/ Lee Hillman
---------------------------------------
LEE S. HILLMAN
Approved by the Compensation Committee on October 22nd, 1998.
------------
/s/ Liza M. Walsh
---------------------------------------
Chairman,
Compensation Committee
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SCHEDULE A
----------
LIFE INSURANCE AND DISABILITY INSURANCE
Disability
- ----------
CIGNA Group Policy $10,000 per month
UNUM Policy No. Supplemental Disability in an amount
Which, when combined with the CIGNA
Group Policy, will provide an amount
equal to 60% of Base Pay
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EXHIBIT 10.3
SENIOR VICE PRESIDENT
EMPLOYMENT AGREEMENT
--------------------
THE EMPLOYMENT AGREEMENT made and entered into as of the first day of
January 1998, among Bally Total Fitness Holding Corporation, a Delaware
corporation ("BTFHC") and Harold Morgan ("Employee").
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements herein contained, the parties agree as follows:
1. Employment.
(a) BTFHC hereby employs Employee in the capacity of Senior Vice
President. BTFHC may employ Employee in such other capacities of equal status
and responsibility as the Chief Executive Officer of BTFHC, or his designated
representative, shall reasonably determine, and Employee hereby accepts such
employment upon the terms and conditions herein set forth.
(b) During the term of his employment, Employee will devote his best
efforts to his employment and perform such duties consistent with his status as
a Senior Vice President and in such capacities as the Chief Executive Officer of
BTFHC shall reasonably assign to him. Employee will devote his entire working
time and attention to the business and related interests of, and will be loyal
to, BTFHC, and Employee agrees to render service on behalf of BTFHC and its
subsidiaries or affiliates.
(c) Employee shall not, without prior written consent of BTFHC, directly
or indirectly, during the term of this Employment Agreement:
(i) Other than in the performance of duties naturally inherent to
BTFHC's business and in furtherance thereof, render services of a
business, professional or commercial nature to any other person or firm,
whether for compensation or otherwise, but this shall not be construed as
preventing the Employee from investing his assets in such form or manner
as will not require any services on the part of the Employee in the
operation of the affairs of the companies in which such investments are
made and which are not in violation of subparagraph (ii) below or from
engaging in boards of directors (subject to the approval of BTFHC's Chief
Executive Officer) or charitable activities so long as such activities do
not interfere with the performance of Employee's duties hereunder;
(ii) Engage in any activity competitive with or adverse to BTFHC's
business or welfare, whether alone, as a partner, or as an officer,
director, employee or shareholder of any other corporation, or otherwise,
directly or indirectly, except that the ownership of not more than one
percent (1%) of the stock of any publicly traded corporation shall not be
deemed violative of this subparagraph (ii);
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(iii) Be engaged by any entity which conducts business with or acts
as consultant or advisor to BTFHC, whether alone, as a partner, or as an
officer, director, employee or shareholder, or otherwise, directly or
indirectly, except that ownership of not more than one percent (1%) of the
stock of any publicly traded corporation shall not be deemed violative of
this subparagraph (iii).
2. Term. The term of this Employment Agreement shall begin on the
effective date stated above ("commencement date") and shall continue for three
(3) years through December 31, 2000, unless terminated by either party pursuant
to paragraphs 7 or 8.
3. Compensation.
(a) In consideration of the services to be rendered by the Employee
hereunder, BTFHC agrees to pay to the Employee, and the Employee agrees to
accept, as compensation, the sum of One Hundred Eighty-Five Thousand Dollars and
No/100 Cents Dollars ($185,000.00) (the "Base Salary") for each twelve month
period following the effective date of this Employment Agreement, which shall be
paid on the regularly recurring pay periods established by BTFHC. The Base
Salary shall be subject to periodic review for consideration of increase by
BTFHC.
(b) It is further understood by the parties that, pursuant to the
policies of BTFHC, discretionary bonus payments may be made in addition to the
Base Salary above provided.
4. Vacation and Other Benefits. Employee shall be entitled to a
reasonable vacation each year of his employment with BTFHC as well as other
employment benefits, including hospitalization, life insurance, death and
retirement plans, an automobile allowance or the use of an automobile, and the
like, afforded to senior executives of BTFHC of comparable status and tenure and
consistent with that afforded under BTFHC's policies.
5. Expenses. BTFHC shall pay all reasonable expenses incurred by
Employee in the performance of his responsibilities and duties for BTFHC.
Employee shall submit to BTFHC periodic statements of all expenses so incurred.
Subject to such audits BTFHC may deem necessary, BTFHC shall reimburse Employee
the full amount of any such expenses advanced by Employee promptly in the
ordinary course.
6. Covenants and Confidential Information.
(a) Employee agrees that for the applicable period specified below, he
will not, directly or indirectly, do any of the following:
(i) Be engaged as a partner, officer, director, employee,
shareholder or consultant by any entity which is engaged in the operation
of health or fitness clubs within five (5) miles of any facility which (on
the date Employee ceases to be employed hereunder) is owned, managed or
under development to be owned or managed by BTFHC, its subsidiaries,
affiliates and/or its successors and assigns, or is owned by a franchisee
of BTFHC, its subsidiaries, affiliates and/or its successor and assigns
("Facility"); provided, however, that the ownership
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of not more than one percent (1%) of the stock in a publicly-traded
corporation shall not be deemed violative of this subparagraph 6(a)(i);
(ii) Induce any person who is an employee, officer, or agent of
BTFHC, to terminate said relationship or employ, assist in employing or
otherwise associate in business with any present, former or future
employee or officer of BTFHC;
(iii) Disclose, divulge, discuss, copy or otherwise use or suffer
to be used in any manner, in competition with, or contrary to the
interests of BTFHC, the customer lists, inventions, ideas, discoveries,
manufacturing methods, product research or engineering data or other trade
secrets of BTFHC, it being acknowledged by Employee that all such
information regarding the business of BTFHC compiled or obtained by, or
furnished to, Employee while he shall have been employed by or associated
with BTFHC is confidential information and the exclusive property of
BTFHC.
(b) The provisions of subparagraphs 6(a)(i), 6(a)(ii) and 6(a)(iii) shall
be operative during the Term hereof and as hereafter provided in this
subparagraph 6(b).
(i) In the event of a "Change in Control" (as defined in
subparagraph 9(c)), the provisions of subparagraphs 6(a)(i) and 6(a)(ii)
shall be operative only so long as the Employee remains an employee of
BTFHC.
(ii) In all events, including a Change in Control or in the event
Employee is terminated for illness or incapacity (as provided in
subparagraph 7(a)) or for "Cause" (as defined in subparagraph 8(a)), the
provisions of subparagraph 6(a)(iii) shall be operative until such time as
the information becomes public knowledge other than through the act of
Employee.
(iii) In the event Employee is terminated for Cause or for illness
or incapacity (as provided in subparagraph 7(a)), the provisions of
subparagraphs 6(a)(i) and 6(a)(ii) shall be operative during the Term of
this Agreement and for one (1) additional year.
(c) Employee expressly agrees and understands that the remedy at law for
any breach by him of this paragraph 6 will be inadequate and that the damages
flowing from such breach are not readily susceptible to being measured in
monetary terms. Accordingly, it is acknowledged that BTFHC shall be entitled to
immediate injunctive relief and if the court so permits, may obtain a temporary
order restraining any threatened or further breach. Nothing contained in this
paragraph 6 shall be deemed to limit BTFHC's remedies at law or in equity for
any breach by Employee of the provisions of this paragraph 6 which may be
pursued or availed of by BTFHC. Any covenant on Employee's part contained
hereinabove, which may not be specifically enforceable, shall nevertheless, if
breached, give rise to a cause of action for monetary damages.
(d) Employee has carefully considered the nature and extent of the
restrictions upon him and the rights and remedies conferred upon BTFHC under
this paragraph 6, and hereby acknowledges and agrees that the same are
reasonable in time and territory, are designed to eliminate competition which
otherwise would be unfair to BTFHC, do not stifle the inherent skill and
experience of
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Employee, would not operate as a bar to Employee's sole means of support, are
fully required to protect the legitimate interests of BTFHC and do not confer a
benefit upon BTFHC disproportionate to the detriment to Employee.
(e) For the purposes of this paragraph 6, the term "BTFHC" shall be
deemed to include BTFHC and its subsidiaries and affiliates and the successors
and assigns of it and its subsidiaries and affiliates, involved in the operation
or management of a fitness center.
(f) The covenants contained in this paragraph 6 shall be construed to
extend to separate counties and adjacent counties, if applicable, of the states
of the United States in which BTFHC and its subsidiaries, affiliates and its and
their successors and assigns has a fitness center, and to the extent that any
such covenant shall be illegal and/or unenforceable with respect to any one of
said counties, said covenants shall not be affected thereby with respect to each
other county, such covenants with respect to each county being construed as
severable and independent.
7. Illness, Incapacity or Death During Employment.
(a) If the Employee is unable to perform his services by reason of
illness or incapacity resulting in a failure to discharge his duties under this
Employment Agreement for six (6) or more consecutive months or for 180 days in
any 365-day period, then upon three (3) days notice, BTFHC may terminate the
employment of Employee under this Employment Agreement and Employee, upon such
termination, shall be (i) paid his Base Salary on a pro-rata basis to the date
of termination through the three (3) day notice period; plus (ii) any previously
declared but unpaid bonuses; plus (iii) reimbursement of all expenses reasonably
incurred by Employee in performing his responsibilities and duties for BTFHC
through and including such three (3) day notice period; plus (iv) any other
payment or benefit which Employee is then entitled to receive under any
employment benefit plan, retirement plan or similar arrangement then maintained
by BTFHC, in the amount and to the extent determined under the terms and
conditions of any such plan.
In the event of such termination, the Employee shall have the right, at
his option, to the assignment of any and all insurance policies or health
protection plans if said policies and plans permit assignment out of the group
to the Employee.
(b) In the event that BTFHC elects to terminate this Employment Agreement
pursuant to Section 7(a) by reason of illness or incapacity, then Employee shall
be entitled to the long-term disability (LTD) benefits provided to senior
officers by BTFHC but in any event at no less than sixty percent (60%) of Base
Salary as of the date of termination, without reference to set-off or caps
existing in any LTD plan.
(c) In the event of Employee's death, all obligations of BTFHC under this
Employment Agreement shall terminate other than the payment of that portion of
his Base Salary on a pro-rata basis accrued to the date of death, any previously
declared but unpaid bonuses, plus reimbursement of all expenses reasonably
incurred by Employee in performing his responsibilities and duties for BTFHC
prior to and including such date.
8. Termination.
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<PAGE>
(a) The employment of Employee under this Employment Agreement, and the
term hereof, may be terminated by BTFHC for cause at any time. For purposes
hereof, the term "cause" means:
(i) Employee's fraud or dishonesty;
(ii) Employee's willful misconduct or gross negligence in the
performance of his duties hereunder, including willful failure to perform
such duties as may properly be assigned him hereunder; or
(iii) Employee's material breach of any material provision of this
Employment Agreement.
(b) Any termination shall not be in limitation of any other right or
remedy BTFHC or Employee may have under this Employment Agreement or otherwise.
9. Optional Termination Upon Change of Control.
(a) In the event that there is a "Change in Control" (as defined in this
paragraph 9) of BTFHC and the successor in control, without cause, terminates
this Employment Agreement, Employee shall be paid, subject to the limits set
forth in paragraph 10 a lump sum equal to twenty-four (24) months of his then
Base Salary or an amount equal to his then Base Salary for the balance of the
three year term, whichever is greater, and the greater of the average of twice
the bonuses paid to Employee by BTFHC for 1997 or the bonus, if any, for any
year after 1997 but prior to the Change in Control. If the successor in control
changes Employee's title or substantially changes his duties or functions from
those which he previously performed hereunder or requires Employee to perform
the majority of his duties at a location outside of the metropolitan area of
Chicago, Illinois, the successor in control shall be deemed to have
constructively terminated Employee's services without cause and Employee shall
be entitled to payment set forth in the first sentence of this paragraph.
In the event that there is a Change in Control (as defined in this
paragraph 9) of BTFHC, Employee may, at his option, terminate this Employment
Agreement at any time thereafter upon thirty (30) days written notice to BTFHC.
If Employee exercises this right to terminate, he shall be paid the following
amounts: (i) a lump sum amount equal to one-half (1/2) of his annual Base Salary
as in effect at the time of exercise (or, if greater, at the time of the Change
in Control); plus, (ii) his Base Salary on a pro-rata basis through and
including the date of his employment termination; plus (iii) any previously
declared but unpaid bonuses; plus (iv) reimbursement of all expenses reasonably
incurred by Employee in performing his responsibilities and duties for BTFHC
through and including the date of his employment termination; plus (v) any other
payment or benefit which Employee is then entitled to receive under any
employment benefit plan, retirement plan or similar arrangement then maintained
by BTFHC, in the amount and to the extent determined under the terms and
conditions of any such plan. All such payments shall be made no later than
thirty (30) days after the last day of Employee's employment. In addition,
Employee shall have the right, at his election, to the assignment of any and all
insurance policies and/or health protection plans if said policies and plans
permit assignment to Employee.
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A "Change in Control" shall, except as provided below, mean a change in
control of BTFHC of a nature that would be required to be reported in response
to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934 (as in effect on the effective date of this Employment
Agreement, the "Exchange Act"), whether or not BTFHC is then subject to such
reporting requirement; provided that, without limitation, such a Change in
Control shall be deemed to have occurred if:
(i) any "person" (as defined in subsections 13(d) and 14(d) of
the Exchange Act), other than a person with which Arthur M. Goldberg is
affiliated or of which he is a part, is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), of securities of BTFHC
representing twenty percent (20%) or more of the combined voting power of
BTFHC's then outstanding securities;
(ii) during any period of two (2) consecutive years or less (not
including any period prior to the effective date of this Employment
Agreement) there shall cease to be a majority of the Board of Directors of
BTFHC comprised of Continuing Directors (as defined below); or
(iii) the stockholders of BTFHC approve (1) a merger or
consolidation of BTFHC with any other corporation, other than a merger or
consolidation that would result in the voting securities of BTFHC
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least 80% of the combined voting power of the voting
securities of BTFHC or such surviving entity outstanding immediately after
such merger or consolidation, or (2) a plan of complete liquidation of
BTFHC or an agreement for the sale or disposition by BTFHC of all or
substantially all of its assets.
Notwithstanding anything else contained herein to the contrary, the
acquisition of BTFHC securities from BTFHC which issuance was approved by the
Continuing Directors (as defined below) shall not, either on its own or in
connection with any other acquisition of BTFHC securities prior thereto, be
deemed to be a Change in Control for purposes of this Agreement.
The term "Continuing Directors" shall mean individuals who constitute the
Board of Directors of BTFHC as of the effective date of this Employment
Agreement and any new director(s) whose election by such Board or nomination for
election by BTFHC's stockholders was approved by a vote of at least two-thirds
of the directors then in office who either were directors as of the effective
date of this Employment Agreement or whose election or nomination for election
was previously so approved.
10. Limit on Payments. Notwithstanding anything in this Agreement to the
contrary, in the event of a Change in Control, the total compensation to
Employee under this Agreement and any other agreements between the Employee and
Company or its subsidiaries relating to a Change in Control shall not exceed an
amount equal to (i) an amount equal to 2.99 times the Employee's "annualized
includible compensation for the base period" (as defined in Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), over (ii) the present
value of any and all "payments in the nature of compensation" (within the
meaning of Section 280G of the Code and any proposed,
6
<PAGE>
temporary or final Treasury Regulations promulgated thereunder) to the Employee
under this Agreement or any other agreement or arrangement between the Company
and the Employee treated as "parachute payment(s)" under Section 280G of the
Code and any proposed, temporary or final Treasury Regulations promulgated
thereunder, such that no payment to the Employee pursuant to this Agreement or
any other agreement between the Employee and the Company or its subsidiaries
will constitute an "excess parachute payment" within the meaning of Section 280G
of the Code. All determinations under this paragraph 10 shall be made by the
Company based on the advice or counsel of its tax professional and shall be
binding and conclusive on the Company and the Employee.
11. Severable. Provisions. The provisions of this Employment Agreement
are severable, and if any one or more provisions may be determined to be illegal
or otherwise unenforceable, in whole or in part, the remaining provisions, and
any partially unenforceable provision to the extent enforceable in any
jurisdiction, shall nevertheless be binding and enforceable.
12. Binding Agreement. The rights and obligations of BTFHC under this
Employment Agreement shall inure to the benefit of and shall be binding upon the
respective successors and assigns of BTFHC.
13. Attorneys' Fees. In the event Employee is required to commence an
arbitration action to enforce the provisions of this Employment Agreement and
Employee prevails in such action, BTFHC shall pay Employee's reasonable costs
and expenses, including reasonable attorneys' fees, incurred in such arbitration
and in any subsequent legal action brought to enforce the arbitration decision.
14. Notices. Any notice to be given to BTFHC under the terms of this
Employment Agreement shall be addressed to BTFHC at the address of its principal
places of business, and any notice to be given to Employee shall be addressed to
him at his home address last shown on the records of BTFHC, or at such other
address as the parties may hereafter designate in writing to the other. Any such
notice shall have been duly given when enclosed in a properly sealed envelope
addressed as aforesaid, postage prepaid, registered or certified, return receipt
requested, and depos ited in a post office or branch post office regularly
maintained by the United States Government.
15. Waiver. Either party's failure to enforce any provision or provisions
of this Employment Agreement shall not in any way be construed as a waiver of
any such provision or provisions as to any future violations thereof, nor
prevent that party thereafter from enforcing each and every other provision of
this Employment Agreement. The rights granted the parties herein are cumulative
and the waiver by a party of any single remedy shall not constitute a waiver of
such party's right to assert all other legal remedies available to him or it
under the circumstances.
16. Governing Law. This Employment Agreement shall be governed by and
construed and interpreted according to the internal laws of the State of
Illinois without reference to principles of conflict of laws.
17. Miscellaneous. Captions and headings used herein are for
convenience only and are not a part of this Employment Agreement and shall not
be used in construing it. This Employment Agreement constitutes the entire
agreement between BTFHC and Employee with respect to the
7
<PAGE>
subject matter hereof and may not be modified or terminated orally. No
modification, termination or attempted waiver of this Employment Agreement shall
be valid unless in writing and signed by the party against whom the same is
sought to be enforced.
18. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the Rules of the American Arbitration Association then
pertaining in Chicago, Illinois and judgment upon the award rendered by the
arbitrator or arbitrators may be entered in any court having jurisdiction
thereof. The arbitrator or arbitrators shall be deemed to possess the powers to
issue mandatory orders and restraining orders in connection with such
arbitration; provided, however, that nothing in this paragraph 18 shall be
construed so as to deny BTFHC's right and power to seek and obtain injunctive
relief in a court of equity for any breach or threatened breach of Employee of
any of his covenants contained in subparagraph 6(a) hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be duly elected as of the day and year first above written.
BALLY TOTAL FITNESS HOLDING
CORPORATION
ATTEST: /s/ William Fanelli /s/ John W. Dwyer
----------------------- -----------------------------------------
John Dwyer "BTFHC"
/s/ Harold Morgan
-----------------------------------------
Harold Morgan "Employee"
Approved by the Compensation Committee of Bally Total Fitness Holding
Corporation on ____________________, 1998.
/s/ Liza M. Walsh
-----------------------------------------
Liza Walsh
Chairman, Compensation Committee - Bally
Total Fitness Holding Corporation
8
EXHIBIT 10.4
SENIOR VICE PRESIDENT
EMPLOYMENT AGREEMENT
--------------------
THE EMPLOYMENT AGREEMENT made and entered into as of the first day of
January 1998, among Bally Total Fitness Holding Corporation, a Delaware
corporation ("BTFHC") and John Wildman ("Employee").
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements herein contained, the parties agree as follows:
1. Employment.
(a) BTFHC hereby employs Employee in the capacity of Senior Vice
President. BTFHC may employ Employee in such other capacities of equal status
and responsibility as the Chief Executive Officer of BTFHC, or his designated
representative, shall reasonably determine, and Employee hereby accepts such
employment upon the terms and conditions herein set forth.
(b) During the term of his employment, Employee will devote his best
efforts to his employment and perform such duties consistent with his status as
a Senior Vice President and in such capacities as the Chief Executive Officer of
BTFHC shall reasonably assign to him. Employee will devote his entire working
time and attention to the business and related interests of, and will be loyal
to, BTFHC, and Employee agrees to render service on behalf of BTFHC and its
subsidiaries or affiliates.
(c) Employee shall not, without prior written consent of BTFHC, directly
or indirectly, during the term of this Employment Agreement:
(i) Other than in the performance of duties naturally inherent to
BTFHC's business and in furtherance thereof, render services of a
business, professional or commercial nature to any other person or firm,
whether for compensation or otherwise, but this shall not be construed as
preventing the Employee from investing his assets in such form or manner
as will not require any services on the part of the Employee in the
operation of the affairs of the companies in which such investments are
made and which are not in violation of subparagraph (ii) below or from
engaging in boards of directors (subject to the approval of BTFHC's Chief
Executive Officer) or charitable activities so long as such activities do
not interfere with the performance of Employee's duties hereunder;
(ii) Engage in any activity competitive with or adverse to BTFHC's
business or welfare, whether alone, as a partner, or as an officer,
director, employee or shareholder of any other corporation, or otherwise,
directly or indirectly, except that the ownership of not more than one
percent (1%) of the stock of any publicly traded corporation shall not be
deemed violative of this subparagraph (ii);
(iii) Be engaged by any entity which conducts business with or acts
as consultant or advisor to BTFHC, whether alone, as a partner, or as an
officer, director, employee or shareholder, or otherwise, directly or
indirectly, except that ownership of not more than
1
<PAGE>
one percent (1%) of the stock of any publicly traded corporation shall not
be deemed violative of this subparagraph (iii).
2. Term. The term of this Employment Agreement shall begin on the
effective date stated above ("commencement date") and shall continue for three
(3) years through December 31, 2000, unless terminated by either party pursuant
to paragraphs 7 or 8.
3. Compensation.
(a) In consideration of the services to be rendered by the Employee
hereunder, BTFHC agrees to pay to the Employee, and the Employee agrees to
accept, as compensation, the sum of Two Hundred Forty Thousand Dollars and
No/100 Cents ($240,000.00) (the "Base Salary" ) for each twelve month period
following the effective date of this Employment Agreement, which shall be paid
on the regularly recurring pay periods established by BTFHC. The Base Salary
shall be subject to periodic review for consideration of increase by BTFHC.
(b) It is further understood by the parties that, pursuant to the
policies of BTFHC, discretionary bonus payments may be made in addition to the
Base Salary above provided.
4. Vacation and Other Benefits. Employee shall be entitled to a
reasonable vacation each year of his employment with BTFHC as well as other
employment benefits, including hospitalization, life insurance, death and
retirement plans, an automobile allowance or the use of an automobile, and the
like, afforded to senior executives of BTFHC of comparable status and tenure and
consistent with that afforded under BTFHC's policies.
5. Expenses. BTFHC shall pay all reasonable expenses incurred by
Employee in the performance of his responsibilities and duties for BTFHC.
Employee shall submit to BTFHC periodic statements of all expenses so incurred.
Subject to such audits BTFHC may deem necessary, BTFHC shall reimburse Employee
the full amount of any such expenses advanced by Employee promptly in the
ordinary course.
6. Covenants and Confidential Information.
(a) Employee agrees that for the applicable period specified below, he
will not, directly or indirectly, do any of the following:
(i) Be engaged as a partner, officer, director, employee,
shareholder or consultant by any entity which is engaged in the operation
of health or fitness clubs within five (5) miles of any facility which (on
the date Employee ceases to be employed hereunder) is owned, managed or
under development to be owned or managed by BTFHC, its subsidiaries,
affiliates and/or its successors and assigns, or is owned by a franchisee
of BTFHC, its subsidiaries, affiliates and/or its successor and assigns
("Facility"); provided, however, that the ownership of not more than one
percent (1%) of the stock in a publicly-traded corporation shall not be
deemed violative of this subparagraph 6(a)(i);
2
<PAGE>
(ii) Induce any person who is an employee, officer, or agent of
BTFHC, to terminate said relationship or employ, assist in employing or
otherwise associate in business with any present, former or future
employee or officer of BTFHC;
(iii) Disclose, divulge, discuss, copy or otherwise use or suffer
to be used in any manner, in competition with, or contrary to the
interests of BTFHC, the customer lists, inventions, ideas, discoveries,
manufacturing methods, product research or engineering data or other trade
secrets of BTFHC, it being acknowledged by Employee that all such
information regarding the business of BTFHC compiled or obtained by, or
furnished to, Employee while he shall have been employed by or associated
with BTFHC is confidential information and the exclusive property of
BTFHC.
(b) The provisions of subparagraphs 6(a)(i), 6(a)(ii) and 6(a)(iii) shall
be operative during the Term hereof and as hereafter provided in this
subparagraph 6(b).
(i) In the event of a "Change in Control" (as defined in
subparagraph 9(c)), the provisions of subparagraphs 6(a)(i) and 6(a)(ii)
shall be operative only so long as the Employee remains an employee of
BTFHC.
(ii) In all events, including a Change in Control or in the event
Employee is terminated for illness or incapacity (as provided in
subparagraph 7(a)) or for "Cause" (as defined in subparagraph 8(a)), the
provisions of subparagraph 6(a)(iii) shall be operative until such time as
the information becomes public knowledge other than through the act of
Employee.
(iii) In the event Employee is terminated for Cause or for illness
or incapacity (as provided in subparagraph 7(a)), the provisions of
subparagraphs 6(a)(i) and 6(a)(ii) shall be operative during the Term of
this Agreement and for one (1) additional year.
(c) Employee expressly agrees and understands that the remedy at law for
any breach by him of this paragraph 6 will be inadequate and that the damages
flowing from such breach are not readily susceptible to being measured in
monetary terms. Accordingly, it is acknowledged that BTFHC shall be entitled to
immediate injunctive relief and if the court so permits, may obtain a temporary
order restraining any threatened or further breach. Nothing contained in this
paragraph 6 shall be deemed to limit BTFHC's remedies at law or in equity for
any breach by Employee of the provisions of this paragraph 6 which may be
pursued or availed of by BTFHC. Any covenant on Employee's part contained
hereinabove, which may not be specifically enforceable, shall nevertheless, if
breached, give rise to a cause of action for monetary damages.
(d) Employee has carefully considered the nature and extent of the
restrictions upon him and the rights and remedies conferred upon BTFHC under
this paragraph 6, and hereby acknowledges and agrees that the same are
reasonable in time and territory, are designed to eliminate competition which
otherwise would be unfair to BTFHC, do not stifle the inherent skill and
experience of Employee, would not operate as a bar to Employee's sole means of
support, are fully required to protect the legitimate interests of BTFHC and do
not confer a benefit upon BTFHC disproportionate to the detriment to Employee.
3
<PAGE>
(e) For the purposes of this paragraph 6, the term "BTFHC" shall be
deemed to include BTFHC and its subsidiaries and affiliates and the successors
and assigns of it and its subsidiaries and affiliates, involved in the operation
or management of a fitness center.
(f) The covenants contained in this paragraph 6 shall be construed to
extend to separate counties and adjacent counties, if applicable, of the states
of the United States in which BTFHC and its subsidiaries, affiliates and its and
their successors and assigns has a fitness center, and to the extent that any
such covenant shall be illegal and/or unenforceable with respect to any one of
said counties, said covenants shall not be affected thereby with respect to each
other county, such covenants with respect to each county being construed as
severable and independent.
7. Illness, Incapacity or Death During Employment.
(a) If the Employee is unable to perform his services by reason of
illness or incapacity resulting in a failure to discharge his duties under this
Employment Agreement for six (6) or more consecutive months or for 180 days in
any 365-day period, then upon three (3) days notice, BTFHC may terminate the
employment of Employee under this Employment Agreement and Employee, upon such
termination, shall be (i) paid his Base Salary on a pro-rata basis to the date
of termination through the three (3) day notice period; plus (ii) any previously
declared but unpaid bonuses; plus (iii) reimbursement of all expenses reasonably
incurred by Employee in performing his responsibilities and duties for BTFHC
through and including such three (3) day notice period; plus (iv) any other
payment or benefit which Employee is then entitled to receive under any
employment benefit plan, retirement plan or similar arrangement then maintained
by BTFHC, in the amount and to the extent determined under the terms and
conditions of any such plan.
In the event of such termination, the Employee shall have the right, at
his option, to the assignment of any and all insurance policies or health
protection plans if said policies and plans permit assignment out of the group
to the Employee.
(b) In the event that BTFHC elects to terminate this Employment Agreement
pursuant to Section 7(a) by reason of illness or incapacity, then Employee shall
be entitled to the long-term disability (LTD) benefits provided to senior
officers by BTFHC but in any event at no less than sixty percent (60%) of Base
Salary as of the date of termination, without reference to set-off or caps
existing in any LTD plan.
(c) In the event of Employee's death, all obligations of BTFHC under this
Employment Agreement shall terminate other than the payment of that portion of
his Base Salary on a pro-rata basis accrued to the date of death, any previously
declared but unpaid bonuses, plus reimbursement of all expenses reasonably
incurred by Employee in performing his responsibilities and duties for BTFHC
prior to and including such date.
8. Termination.
(a) The employment of Employee under this Employment Agreement, and the
term hereof, may be terminated by BTFHC for cause at any time. For purposes
hereof, the term "cause" means:
4
<PAGE>
(i) Employee's fraud or dishonesty;
(ii) Employee's willful misconduct or gross negligence in the
performance of his duties hereunder, including willful failure to perform
such duties as may properly be assigned him hereunder; or
(iii) Employee's material breach of any material provision of this
Employment Agreement.
(b) Any termination shall not be in limitation of any other right or
remedy BTFHC or Employee may have under this Employment Agreement or otherwise.
9. Optional Termination Upon Change of Control.
(a) In the event that there is a "Change in Control" (as defined in this
paragraph 9) of BTFHC and the successor in control, without cause, terminates
this Employment Agreement, Employee shall be paid, subject to the limits set
forth in paragraph 10 a lump sum equal to twenty-four (24) months of his then
Base Salary or an amount equal to his then Base Salary for the balance of the
three year term, whichever is greater, and the greater of the average of twice
the bonuses paid to Employee by BTFHC for 1997 or the bonus, if any, for any
year after 1997 but prior to the Change in Control. If the successor in control
changes Employee's title or substantially changes his duties or functions from
those which he previously performed hereunder or requires Employee to perform
the majority of his duties at a location outside of the metropolitan area of
Chicago, Illinois, the successor in control shall be deemed to have
constructively terminated Employee's services without cause and Employee shall
be entitled to payment set forth in the first sentence of this paragraph.
In the event that there is a Change in Control (as defined in this
paragraph 9) of BTFHC, Employee may, at his option, terminate this Employment
Agreement at any time thereafter upon thirty (30) days written notice to BTFHC.
If Employee exercises this right to terminate, he shall be paid the following
amounts: (i) a lump sum amount equal to one-half (1/2) of his annual Base Salary
as in effect at the time of exercise (or, if greater, at the time of the Change
in Control); plus, (ii) his Base Salary on a pro-rata basis through and
including the date of his employment termination; plus (iii) any previously
declared but unpaid bonuses; plus (iv) reimbursement of all expenses reasonably
incurred by Employee in performing his responsibilities and duties for BTFHC
through and including the date of his employment termination; plus (v) any other
payment or benefit which Employee is then entitled to receive under any
employment benefit plan, retirement plan or similar arrangement then maintained
by BTFHC, in the amount and to the extent determined under the terms and
conditions of any such plan. All such payments shall be made no later than
thirty (30) days after the last day of Employee's employment. In addition,
Employee shall have the right, at his election, to the assignment of any and all
insurance policies and/or health protection plans if said policies and plans
permit assignment to Employee.
A "Change in Control" shall, except as provided below, mean a change in
control of BTFHC of a nature that would be required to be reported in response
to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934 (as in effect on the effective date of this Employment
Agreement, the "Exchange Act"), whether or not BTFHC is then subject
5
<PAGE>
to such reporting requirement; provided that, without limitation, such a Change
in Control shall be deemed to have occurred if:
(i) any "person" (as defined in subsections 13(d) and 14(d) of
the Exchange Act), other than a person with which Arthur M. Goldberg is
affiliated or of which he is a part, is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), of securities of BTFHC
representing twenty percent (20%) or more of the combined voting power of
BTFHC's then outstanding securities;
(ii) during any period of two (2) consecutive years or less (not
including any period prior to the effective date of this Employment
Agreement) there shall cease to be a majority of the Board of Directors of
BTFHC comprised of Continuing Directors (as defined below); or
(iii) the stockholders of BTFHC approve (1) a merger or
consolidation of BTFHC with any other corporation, other than a merger or
consolidation that would result in the voting securities of BTFHC
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least 80% of the combined voting power of the voting
securities of BTFHC or such surviving entity outstanding immediately after
such merger or consolidation, or (2) a plan of complete liquidation of
BTFHC or an agreement for the sale or disposition by BTFHC of all or
substantially all of its assets.
Notwithstanding anything else contained herein to the contrary, the
acquisition of BTFHC securities from BTFHC which issuance was approved by the
Continuing Directors (as defined below) shall not, either on its own or in
connection with any other acquisition of BTFHC securities prior thereto, be
deemed to be a Change in Control for purposes of this Agreement.
The term "Continuing Directors" shall mean individuals who constitute the
Board of Directors of BTFHC as of the effective date of this Employment
Agreement and any new director(s) whose election by such Board or nomination for
election by BTFHC's stockholders was approved by a vote of at least two-thirds
of the directors then in office who either were directors as of the effective
date of this Employment Agreement or whose election or nomination for election
was previously so approved.
10. Limit on Payments. Notwithstanding anything in this Agreement to the
contrary, in the event of a Change in Control, the total compensation to
Employee under this Agreement and any other agreements between the Employee and
Company or its subsidiaries relating to a Change in Control shall not exceed an
amount equal to (i) an amount equal to 2.99 times the Employee's "annualized
includible compensation for the base period" (as defined in Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), over (ii) the present
value of any and all "payments in the nature of compensation" (within the
meaning of Section 280G of the Code and any proposed, temporary or final
Treasury Regulations promulgated thereunder) to the Employee under this
Agreement or any other agreement or arrangement between the Company and the
Employee treated as "parachute payment(s)" under Section 280G of the Code and
any proposed, temporary or final Treasury Regulations promulgated thereunder,
such that no payment to the Employee pursuant to
6
<PAGE>
this Agreement or any other agreement between the Employee and the Company or
its subsidiaries will constitute an "excess parachute payment" within the
meaning of Section 280G of the Code. All determinations under this paragraph 10
shall be made by the Company based on the advice or counsel of its tax
professional and shall be binding and conclusive on the Company and the
Employee.
11. Severable. Provisions. The provisions of this Employment Agreement
are severable, and if any one or more provisions may be determined to be illegal
or otherwise unenforceable, in whole or in part, the remaining provisions, and
any partially unenforceable provision to the extent enforceable in any
jurisdiction, shall nevertheless be binding and enforceable.
12. Binding Agreement. The rights and obligations of BTFHC under this
Employment Agreement shall inure to the benefit of and shall be binding upon the
respective successors and assigns of BTFHC.
13. Attorneys' Fees. In the event Employee is required to commence an
arbitration action to enforce the provisions of this Employment Agreement and
Employee prevails in such action, BTFHC shall pay Employee's reasonable costs
and expenses, including reasonable attorneys' fees, incurred in such arbitration
and in any subsequent legal action brought to enforce the arbitration decision.
14. Notices. Any notice to be given to BTFHC under the terms of this
Employment Agreement shall be addressed to BTFHC at the address of its principal
places of business, and any notice to be given to Employee shall be addressed to
him at his home address last shown on the records of BTFHC, or at such other
address as the parties may hereafter designate in writing to the other. Any such
notice shall have been duly given when enclosed in a properly sealed envelope
addressed as aforesaid, postage prepaid, registered or certified, return receipt
requested, and depos ited in a post office or branch post office regularly
maintained by the United States Government.
15. Waiver. Either party's failure to enforce any provision or provisions
of this Employment Agreement shall not in any way be construed as a waiver of
any such provision or provisions as to any future violations thereof, nor
prevent that party thereafter from enforcing each and every other provision of
this Employment Agreement. The rights granted the parties herein are cumulative
and the waiver by a party of any single remedy shall not constitute a waiver of
such party's right to assert all other legal remedies available to him or it
under the circumstances.
16. Governing Law. This Employment Agreement shall be governed by and
construed and interpreted according to the internal laws of the State of
Illinois without reference to principles of conflict of laws.
17. Miscellaneous. Captions and headings used herein are for convenience
only and are not a part of this Employment Agreement and shall not be used in
construing it. This Employment Agreement constitutes the entire agreement
between BTFHC and Employee with respect to the subject matter hereof and may not
be modified or terminated orally. No modification, termination or attempted
waiver of this Employment Agreement shall be valid unless in writing and signed
by the party against whom the same is sought to be enforced.
7
<PAGE>
18. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the Rules of the American Arbitration Association then
pertaining in Chicago, Illinois and judgment upon the award rendered by the
arbitrator or arbitrators may be entered in any court having jurisdiction
thereof. The arbitrator or arbitrators shall be deemed to possess the powers to
issue mandatory orders and restraining orders in connection with such
arbitration; provided, however, that nothing in this paragraph 18 shall be
construed so as to deny BTFHC's right and power to seek and obtain injunctive
relief in a court of equity for any breach or threatened breach of Employee of
any of his covenants contained in subparagraph 6(a) hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be duly elected as of the day and year first above written.
BALLY TOTAL FITNESS HOLDING
CORPORATION
ATTEST: /s/ John W. Dwyer /s/ Harold Morgan
----------------------- ------------------------------------------
Harold Morgan "BTFHC"
/s/ John Wildman
------------------------------------------
John Wildman "Employee"
Approved by the Compensation Committee of Bally Total Fitness Holding
Corporation on ____________________, 1998.
/s/ Liza M. Walsh
------------------------------------------
Liza Walsh
Chairman, Compensation Committee - Bally
Total Fitness Holding Corporation
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1998, THE CONSOLIDATED
STATEMENT OF OPERATIONS AND THE CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 30,926
<SECURITIES> 0
<RECEIVABLES> 532,114<F1>
<ALLOWANCES> 116,572
<INVENTORY> 0
<CURRENT-ASSETS> 264,063
<PP&E> 671,428
<DEPRECIATION> 332,871
<TOTAL-ASSETS> 1,050,094
<CURRENT-LIABILITIES> 425,951
<BONDS> 374,157
0
0
<COMMON> 236
<OTHER-SE> 157,806
<TOTAL-LIABILITY-AND-EQUITY> 1,050,094
<SALES> 0
<TOTAL-REVENUES> 554,972
<CGS> 0
<TOTAL-COSTS> 339,770<F2>
<OTHER-EXPENSES> 29,384<F3>
<LOSS-PROVISION> 92,555
<INTEREST-EXPENSE> 30,723
<INCOME-PRETAX> 8,862
<INCOME-TAX> 525
<INCOME-CONTINUING> 8,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,337
<EPS-PRIMARY> .38
<EPS-DILUTED> .32
<FN>
<F1>THIS AMOUNT IS THE SUM OF THE SHORT-TERM AND LONG-TERM INSTALLMENT
CONTRACTS RECEIVABLE LINES ON THE CONDENSED CONSOLIDATED BALANCE SHEET AT
SEPTEMBER 30, 1998 AND IS NET OF UNEARNED FINANCE CHARGES.
<F2>THIS AMOUNT IS THE SUM OF THE FITNESS CENTER OPERATIONS LINE, THE
ADVERTISING LINE AND THE CHANGE IN DEFERRED MEMBERSHIP ORIGINATION COSTS
LINE ON THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998.
<F3>THIS AMOUNT IS THE MEMBER PROCESSING AND COLLECTION CENTERS LINE ON THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998.
</FN>
</TABLE>
