SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Series A Junior Participating Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes: X No: _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _____
The aggregate market value of the registrant's voting stock held by
nonaffiliates of the registrant as of April 15, 1998 was approximately $656
million, based on the closing price of the registrant's common stock as reported
by the New York Stock Exchange at that date. For purposes of this computation,
affiliates of the registrant include the registrant's executive officers and
directors. As of April 15, 1998, 20,600,917 shares of the registrant's common
stock were outstanding.
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PART I
Except as otherwise stated, the information contained in this Form 10-K/A is as
of December 31, 1997, the end of the registrant's last fiscal year. The
information contained in this Form 10-K/A contains forward-looking statements
which involve known and unknown risks, uncertainties and other factors that may
cause the actual results, performance or achievements of the registrant to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. See "Forward-Looking
Statements" in Item 7 of this Form 10-K/A.
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
GENERAL
The registrant, Bally Total Fitness Holding Corporation, formerly Bally's Health
& Tennis Corporation (the "Company" or "Bally"), is incorporated in Delaware and
was a wholly owned subsidiary of Bally Entertainment Corporation
("Entertainment") until the consummation of Entertainment's spin-off of the
Company. On November 6, 1995, the Board of Directors of Entertainment declared a
distribution in the form of a dividend (the "Spin-off") to holders of record of
its common stock as of the close of business on November 15, 1995 (the "Record
Date") on the basis of one share of common stock, par value $.01 per share (the
"Common Stock") of the Company, along with an associated stock purchase right
issued pursuant to a stockholder rights plan (a "Right"), for every four shares
of Entertainment common stock held on the Record Date. On January 9, 1996,
11,845,161 shares of Common Stock were distributed. In addition, the Company
completed a public offering of 8,000,000 shares of Common Stock in August 1997,
which provided net proceeds of $88.4 million to the Company (the "1997 Stock
Offering"). Unless otherwise specified in the text, references to the Company
include the Company and its subsidiaries.
The Company is the largest (and only nationwide) commercial operator of fitness
centers in the United States in terms of revenues, the number of members, and
the number and square footage of facilities. As of March 31, 1998, the Company
operated approximately 320 fitness centers concentrated in major metropolitan
areas in 27 states and Canada and had approximately four million members.
Bally's members made more than 100 million visits to its fitness centers in each
of 1996 and 1997.
The Company offers its members value by providing access to state-of-the-art
fitness facilities with affordable membership programs. Bally's fitness centers
feature an outstanding selection of cardiovascular, conditioning and strength
equipment and offer extensive aerobic training programs. In addition, many of
the Company's current fitness centers include pools, racquet courts or other
athletic facilities. The Company's new club prototype achieves efficiency by
focusing on those fitness services that receive a high degree of member use. The
Company has clustered its fitness centers in major metropolitan areas in order
to achieve marketing and operating efficiencies. These markets include, among
others, New York, Los Angeles, Chicago, Houston, Dallas, Detroit, Baltimore,
Washington, D.C., Philadelphia, Miami, Cleveland, Atlanta, Milwaukee, Seattle,
Minneapolis, Orlando, Denver, Phoenix, St. Louis, Boston, and Kansas City. In
1996, the Company completed the process of renaming its fitness centers so
substantially all use the service mark "Bally Total Fitness", thereby enhancing
brand identity, concentrating advertising and eliminating the prior practice of
using more than 25 different regional service marks and trade names.
The Company's primary target market for new members is the 18 to 34-year old,
middle income segment of the population, with secondary target markets including
older and higher income segments. Bally markets itself to these consumer
segments through the use of a variety of membership options and payment plans.
The membership options offered by the Company range from single-club memberships
to premium memberships which provide additional amenities and access to all of
Bally's fitness centers nationwide. Similarly, the Company offers a broad range
of payment alternatives. Typically, members pay an initiation fee which can
either be financed (generally for up to 36 months and subject to downpayment
requirements) or paid-in-full at the time of joining. Members are generally
required to pay monthly membership dues in order to use the Company's fitness
facilities. Management believes the various membership and payment
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plans offered, in addition to Bally's strong brand identity and the convenience
of its multiple locations, constitute distinct competitive advantages for the
Company.
OPERATING STRATEGIES
In October 1996, Lee S. Hillman was named President and Chief Executive Officer
of the Company. This completed the transition of senior management of the
Company from predominantly marketing oriented managers, including the original
founders of the Company, to managers with a more financial and operational
orientation. The new management team quickly implemented a business strategy
designed to improve the operating results of the Company. These efforts have
contributed to recent increases in revenues and operating income, although the
Company reported a loss before extraordinary item of $23.5 million for the year
ended December 31, 1997.
Core Business
During 1997, management developed and began implementing five strategies to
improve the underlying operations and the financial performance of the Company.
These strategies have already favorably impacted the Company's financial results
and management is committed to furthering their implementation.
- Emphasize the Sale of All-Club Membership Plans - Prior to the 1997 Stock
Offering, the Company managed its commission structure to emphasize the
sale of paid-in-full membership plans to generate immediate cash for
short-term liquidity at the expense of longer-term financial returns. The
1997 Stock Offering provided additional working capital, allowing the
Company to emphasize the sale of all-club membership plans, which are
typically financed, rather than single-club membership plans. In 1997,
this new emphasis contributed to an 18% increase in the weighted-average
price of memberships sold to approximately $970 from approximately $820 in
1996. Management believes that it can continue to increase new member
revenues through an emphasis on financed membership plans.
- Upgrade and Expand Fitness Centers - Using a portion of the net proceeds
from the 1997 Stock Offering and cash flow from operations, the Company
has begun to expand and upgrade its existing facilities and equipment in
order to increase its membership base and more effectively capitalize on
its streamlined marketing and administrative functions. The Company has
budgeted approximately $15 million for this initiative (over and above
normal maintenance capital expenditures), most of which has been spent or
committed.
- Increase Dues Revenues - The Company believes that its dues are
substantially less than those charged by its competitors and that it can
continue to increase dues for its members who are beyond their initial
financing period without any material loss in membership. In addition, the
Company has reduced promotions which discounted or waived dues. In 1997,
these initiatives contributed to an increase in dues collected of
approximately $11.2 million, or 6%, over 1996. Management believes that it
can continue to raise the dues charged to its members at a rate consistent
with past periods.
- Improve Collections on Financed Contracts - The Company is maintaining its
focus on increasing downpayments on financed membership plans and securing
payments by electronic funds transfer ("EFT"), which the Company's
experience has shown results in higher quality receivables. This effort
yielded an increase of 11% in the average down payment, from $73 in 1996
to $81 in 1997. In addition to seeking higher down payments, the Company
continues to develop improved collection practices based on information
provided by "credit scoring" and behavioral modeling, which management
believes will also improve the yield from the receivables portfolio.
- Continue To Leverage Fixed Cost Base - A significant percentage of the
Company's operating costs are fixed in nature, both in terms of fitness
center operations and member processing and advertising. Over the past
several years, the Company has significantly reduced these operating costs
through aggressive cost management. As the Company pursues its growth
strategies described below, management will seek to leverage the Company's
fixed cost base to improve operating margins.
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Growth Opportunities
In order to build upon the improved core operations and accelerate the growth of
the Company's business, management has identified the following external growth
opportunities:
- Develop New Fitness Centers - Beginning in 1998, the Company intends to
increase its spending to approximately $20 million to $25 million per year
to open 15 to 20 new facilities based on its new fitness center prototype,
which is designed to cost less to construct and maintain than the
Company's older facilities. The majority of the Company's new fitness
center facilities will be developed pursuant to long term lease
arrangements. The prototype model of new fitness centers developed over
the most recent years has required on average $1.3 million to fund
leasehold improvements and fitness equipment.
- Selectively Acquire Club-Related Real Estate - The Company operates
approximately 320 fitness centers, over 90% of which are leased.
Historically, the Company has not capitalized on opportunities to buy
leased properties at attractive terms due to capital constraints. The
Company's recently improved financial condition allows the Company to take
advantage of attractive opportunities to acquire leased properties. In
addition to pursuing these opportunities, the Company will also evaluate
purchasing parcels of land in strategic locations for new club expansion.
While the Company believes that from time to time there are attractive
opportunities to acquire real estate, either for existing club sites or
new locations, management intends only to pursue real estate transactions
following a very selective set of criteria, including strategic locale and
relative market values.
- Identify and Acquire Fitness Center Operators In Strategic Geographic
Locations - The Company maintains an operating strategy of clustering its
clubs in major metropolitan areas in order to achieve marketing and
operating efficiencies. Consistent with this strategy, management has
identified major metropolitan areas where the Company is absent or
underrepresented. In an effort to establish a cluster of clubs quickly in
strategic locations, the Company plans to identify and acquire fitness
center operators where attractive opportunities exist and internal growth
would not be as effective due to various factors, including timeliness and
availability of prime real estate.
The Company intends to finance a substantial portion of these growth
opportunities with funds it expects to receive from an offering of its Common
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources".
New Business Initiatives
Management believes that the Company can increase and diversify revenues by
leveraging its strong brand identity, extensive distribution infrastructure
(approximately 320 facilities), significant member base (approximately four
million members) and frequency of visitation (in excess of 100 million member
visits in each of 1996 and 1997) by offering a number of ancillary products and
services. In order to pursue these growth opportunities, the Company has
implemented the following initiatives:
- Personal Training - In 1997, the Company introduced a newly developed
personal training program which is now offered at most of its fitness
centers. The value of this service to members, coupled with decreased
outsourcing of this service, represents a significant profit opportunity
for the Company. In the fourth quarter of 1997, the Company generated $2.0
million in revenues from the sale of personal training programs. To better
introduce personal training services and Bally-branded nutritional
products to its members, the Company began offering System 30 memberships
at most of its fitness centers in January 1998. Members selecting the
System 30 membership receive the benefits of an all-club membership plan
plus a complete fitness analysis, a supply of Bally-branded nutritional
products and three personal training sessions during the first month of
membership.
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- Private-Label Nutritional Products - During 1997, the Company launched the
sale of an exclusive line of Bally-branded nutritional products to the
Company's members. The current line of Bally-branded nutritionals includes
meal replacement drinks, multi-vitamins, fat-free snack wafers, a creatine
mix and fat-reducing supplements. While these products were only being
introduced in 1997, sales for the year totaled $2.2 million, including
$1.0 million in the fourth quarter of 1997. The Company continues to test
market other nutritional products. The Company requires its suppliers of
nutritional products to maintain significant amounts of product liability
insurance. In addition, the Company maintains significant excess general
liability and umbrella insurance coverage.
- Retail Stores - To date, the Company has opened more than 60 BFIT
Essentials(TM) retail stores in its fitness centers. These retail stores
sell Bally-branded and complementary products from other manufacturers,
including nutritional products, workout apparel and related accessories.
The Company plans to have approximately 100 BFIT Essentials(TM) retail
stores in its fitness centers by the end of 1998.
- Outpatient Rehabilitative and Physical Therapy Services - The Company
believes numerous opportunities exist to contract with third party
providers and managers of health care programs and services to provide
affordable, comprehensive outpatient rehabilitative and physical therapy
services in its fitness centers, and expects to offer these services to
members and non-members alike in up to 100 of its facilities within the
next three years, primarily using existing facilities and equipment.
Pursuant to an agreement with Continucare Corporation, two such facilities
are currently in operation in the Florida market, with plans already
developed to have four additional facilities operating during 1998.
MEMBERSHIP PLANS
The Company currently offers prospective members a number of membership plans
which differ primarily by the inclusion of additional in-club services (such as
racquet sports and child care) and access to other fitness centers operated by
the Company, either locally or nationwide. From time to time, the Company also
offers special membership plans which limit access to fitness centers to certain
days and non-peak hours. The initial membership fees for access to the Company's
fitness center facilities presently range from approximately $379 to $1,199
depending on the membership plan selected, the diversity of facilities and
services available at the club of enrollment, and the local business
environment, as well as the effects of seasonal promotional strategies.
In addition to the one-time initial membership fee, members pay monthly
membership dues in order to maintain their membership privileges. Dues during
the typical financing period for memberships presently being sold are
approximately $6.00 per month and vary based on the market and the type of plan
purchased by the member. Some promotional programs offered by the Company in the
past have waived dues payments for up to 36 months if the member paid the
initiation fee in full at the time the membership originated. Renewal dues (paid
after the typical financing period ends) vary significantly and are typically
increased as contractually permitted. At December 31, 1997, approximately 90% of
the Company's members were being charged dues ranging from $2.00 to $15.00 per
month, with the overall average $7.86 per month. The Company has experienced an
average annual growth rate of dues revenues of 7% from 1992 to 1997. The Company
expects annual increases in dues revenues will continue due to contractual terms
of current membership plans and the Company's belief it can continue to increase
dues for its members who are beyond their initial financing period without any
material loss in membership. The Company also offers renewal dues that vary
depending on the member's historical usage of the fitness center facilities. The
Company's recent experience has shown that members faced with a membership
renewal decision for the first time renewed at a rate of approximately 47%, and
members faced with a membership renewal decision for subsequent periods renewed
at a rate of approximately 85%.
Members selecting financed membership plans can choose from several payment
mechanisms and downpayment options. The Company expects to continue its focus on
increasing the downpayment it receives on financed membership contracts and on
securing payment by
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EFT. The Company believes both these strategies result in better quality
receivables. See "Account Servicing".
FINANCING OF INITIAL MEMBERSHIP FEE
Generally, the Company offers financing terms of 36 months. Shorter terms are
offered on a promotional basis or as required by applicable state law. Contracts
are financed at a fixed annual percentage rate (generally between 16% and 18%,
except as otherwise limited by applicable state retail installment laws).
Financed portions of initial membership fees may be prepaid without penalty at
any time during the financing term. Management expects approximately 85% of all
new membership contracts originated during 1998 will be financed to some extent.
The Company offers two payment methods for financed portions of initial
membership fees: coupon books and EFT. EFT plans are the most popular mechanism
for payment of the financed portion of initial membership fees. Under an EFT
plan, on approximately the same date each month a predetermined amount is either
(i) automatically transferred from a member's bank account to the Company, or
(ii) automatically charged to a member's designated credit card. Currently,
approximately 80% of all financed memberships sold are paid by EFT. The other
mechanism for payment financing is the use of a coupon book. This mechanism
requires the member to mail a check monthly, accompanied by a payment coupon, to
the regional service center ("RSC") responsible for administering the membership
account. Members may change their payment method at any time.
On average, the Company received a downpayment of $81 on financed memberships
sold during 1997. This downpayment adequately defrays both the initial account
set-up cost as well as any collection costs should the account become
immediately delinquent. As a result, the Company is able to attract new members
who might otherwise be rejected while covering the incremental cost of new
membership processing and collection through the downpayment. The Company does
not perform individual credit checks on members at the time they join due, in
part, to the high cost associated with performing credit checks on the large
volume of new members. The Company satisfactorily manages its credit risk by
measuring, from past performance, the average realizable value of contracts for
coupon book and EFT payers based on various downpayment criteria. Historical
analysis performed by the Company indicates the collection experience of EFT
accounts is approximately 50% better than coupon book accounts. As of December
31, 1997, approximately 60% of membership contract receivables consisted of
EFT-financed memberships compared to 29% at December 31, 1992.
FITNESS CENTERS
Most of the Company's fitness centers are located near regional, urban and
suburban shopping areas and in downtown areas of major cities and are generally
operated under long-term leases. Fitness centers vary in size, available
facilities and types of services provided. Fitness centers contain a wide
variety of state-of-the-art progressive resistance, cardiovascular and
conditioning exercise equipment, as well as free weights. A member's use of a
fitness center may include planned exercise programs and instruction stressing
cardiovascular conditioning, strength development and improved appearance. The
Company requires a comprehensive training program for its service personnel and
offers its members orientations on the recommended use of exercise equipment.
Generally, the Company's fitness centers constructed prior to 1980 are smaller
and have fewer amenities than the fitness centers constructed in the 1980's,
which average 35,000 square feet and generally include a colorful workout area,
sauna and steam facilities, a lap pool, free-weight rooms, aerobic exercise
rooms, an indoor jogging track and, in some cases, racquetball, squash or
basketball courts. The Company's current prototype fitness center focuses on
those fitness services that the Company's members most frequently use rather
than on a broader range of fitness services that generally receive a lower
degree of member use, such as pools, racquet courts or other athletic
facilities. The prototype club, which tends to be approximately 20,000 to 30,000
square feet, has recently averaged approximately $800,000 to construct,
exclusive of purchased real estate and exercise equipment and net of any
landlord
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contribution. The Company typically pays cash for the portion of the
construction costs it incurs directly for a new club. The Company invests
approximately $500,000 for exercise equipment for a prototype club, all or a
portion of which may be leased.
The Company is in the process of expanding and upgrading its facilities in order
to increase its membership base and more effectively capitalize on its
streamlined marketing and administrative functions. Management plans to make
capital expenditures of approximately $10 million to $12 million annually to
maintain and make minor upgrades to the Company's existing facilities, including
exercise equipment upgrades, heating, ventilation and air conditioning ("HVAC")
and other operating equipment upgrades and replacements, and locker room and
workout area refurbishments, among others. In addition, the Company expects to
invest approximately $10 million during the next year to complete its plans 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, including converting some low-usage pools and
racquet areas into expanded exercise areas and to a lesser extent retail and
outpatient rehabilitative and physical therapy service areas. For the last
several years, the Company has spent $6 million to $15 million annually, as
funds were available, to open new or replacement facilities. Beginning in 1998,
the Company intends to increase its spending to approximately $20 million to $25
million per year to open 15 to 20 new facilities based on its new prototype,
which is designed to cost less to construct and maintain than the Company's
older facilities. The new facilities are expected to range in size from 10,000
to 45,000 square feet and have the capacity to accommodate significantly more
members than older clubs of the same size because they will generally focus on
only the most widely used amenities. At December 31, 1997, the Company had 41 of
the new prototype facilities in operation, of which 30 had been in operation for
at least two years. The average 1997 net revenues in excess of operating costs
(excluding depreciation and amortization) for these 30 facilities was
approximately $940,000 compared to the average 1997 results for all of the
Company's other fitness facilities of approximately $750,000.
In 1997, the Company entered into an agreement pursuant to which three fitness
centers in Syracuse, New York, including one facility previously owned by the
Company, are operated by a third party under the service mark "Bally Total
Fitness". The Company plans to seek additional franchise relationships for
facilities located in smaller markets.
SALES AND MARKETING
The Company devotes substantial resources to the marketing and promotion of its
fitness centers and their services because the Company believes strong marketing
support is critical to attracting new members, both at existing and new fitness
centers. In 1996, the Company completed the process of renaming its fitness
centers so substantially all use the service mark "Bally Total Fitness", thereby
enhancing brand identity, concentrating advertising and eliminating the prior
practice of using more than 25 different regional service marks and trade names.
The Company's strategy is to cluster numerous fitness centers in major media
markets in order to increase the efficiency of its marketing and advertising
programs. The Company operates approximately 260 clubs in 26 of the top 30 U.S.
media markets.
The Company expects to spend approximately $50 million for advertising and
promotion during 1998 compared to approximately $45 million in 1997, $47 million
in 1996 and $50 million in 1995. The Company primarily advertises on television,
and, to a lesser extent, through newspapers, telephone directories, direct mail,
radio, outdoor signage and other promotional activities.
The Company's sales and marketing programs emphasize the benefits of health,
physical fitness and exercise by appealing to the public's desire to look and
feel better. The Company's advertisements are augmented by individual sales
presentations made by its sales personnel in the fitness centers. Management
believes the various memberships and payment plans, in addition to Bally's
strong brand identity and the convenience of its multiple locations, constitute
distinct competitive advantages for the Company.
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The Company's marketing efforts also include corporate membership sales and
insurance-eligible programs which are designed to reduce workers' compensation
costs and improve productivity. In addition to its advertising, personal sales
presentations and targeted marketing efforts, the Company is increasingly
utilizing in-club marketing programs. Open-houses and contests for members and
their guests foster member loyalty and introduce fitness centers to prospective
members. Referral incentive programs involve current members in the process of
new member enrollments.
Direct mail reminders encourage renewal of existing memberships. The Company has
a group of approximately 120 employees located at its Towson, Maryland RSC
dedicated primarily to inbound telemarketing renewal and outbound service
programs to existing members, although telemarketing is not currently used to
attract prospective new members.
The Company continually evaluates strategic marketing alliances to heighten
awareness of its fitness centers. For example, in February 1998 the Company
entered into an agreement with the owner and syndicator of the "Baywatch"
television series pursuant to which an episode of the show will be filmed on
location at one of the Company's fitness centers, and stars from the show will
make appearances at fitness center grand openings and other events for the
Company. In addition, the Company recently became the title sponsor for a series
of eight Olympic-length triathlons beginning in 1998.
ACCOUNT SERVICING
The Company administers and collects amounts owing under its membership
contracts according to uniform procedures implemented by its two RSCs. The RSCs
enable the Company to conduct centralized data processing of all membership
accounts. The RSCs employ approximately 800 people in the account processing and
collection areas, including approximately 150 employees dedicated to customer
service, approximately 350 employees dedicated to account processing and
administration and approximately 300 employees dedicated to account collections.
The two RSCs collectively receive, deposit and post more than $550 million of
membership transactions annually, including the processing of downpayments and
cash sales, and collections of financed receivables and dues. In addition, the
RSCs process, on average, 2,600 new membership accounts per day. RSC personnel
are also responsible for responding to and resolving member inquiries and
maintaining membership data.
All collections for past-due accounts are initially handled internally by the
RSCs. The Company systematically pursues past-due accounts by utilizing a series
of computer-generated correspondence and telephone contacts. Computer-generated
correspondence is sent to a delinquent member at 7 and 20 days after an account
becomes past due. Collectors with varying levels of experience are responsible
for handling delinquent accounts, depending on the period of delinquency. At 30
and 60 days past due, the accounts are assigned to power dialer assisted
collectors initially as a reminder and later as a demand for payment. Accounts
that have not been collected for a 90-day period are transferred to a group of
the most experienced collectors (unless the first scheduled payment has not been
received on such accounts, in which case they are generally written off and any
downpayment received is not refunded). All remaining delinquent accounts are
written off after 180 days without payment. Accounts that are written off are
reported to credit reporting bureaus and sold to a third-party collection group.
The Company is investigating opportunities to enhance its collection efforts
based on information provided by credit scoring and behavioral modeling, which
management believes will improve the yield from the receivables portfolio. For
example, the Company would not make costly collection calls to a member with a
strong credit history until late in the collection cycle. Likewise, the Company
would aggressively pursue collection tactics on a member with a poor credit
history early in the delinquency period and reduce collection efforts if results
were not quickly realized. By tailoring its collection approach to reflect a
delinquent member's likelihood of payment, the Company believes it can collect
more of its receivables at a lower cost. The Company uses a national bureau
which charges the Company a nominal fee per credit score. As of March 31, 1998,
the Company has credit scored a majority of its financed members with
outstanding balances. The Company is also testing other collection techniques,
such as the use of monthly statements.
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COMPETITION
The Company is the largest (and only nationwide) commercial operator of fitness
centers in the United States in terms of revenues, the number of members and the
number and square footage of facilities. The Company is the largest operator, or
among the largest operators, of fitness centers in every major market in which
it has fitness centers. The Company believes its fitness centers generally offer
a high level of amenities to its members. Within each market, the Company
competes with other fitness centers, physical fitness and recreational
facilities established by local governments and hospitals and by businesses for
their employees, the YMCA and similar organizations and, to a certain extent,
with racquet and other athletic clubs, country clubs, weight-reducing salons and
the home-use fitness equipment industry. However, the Company believes its
operating experience, its ability to allocate advertising and administration
costs over all of its fitness centers, its nationwide operations, its purchasing
power and its account processing and collection infrastructure provide the
Company distinct competitive advantages. There can be no assurance that the
Company will be able to compete effectively in the future in the markets in
which it operates.
The Company believes competition has increased to some extent in certain
markets, reflecting the public's enthusiasm for fitness and a decrease in the
cost of entry into the market due to financing available from landlords and
equipment manufacturers. The Company believes its membership plans are
affordable and have the flexibility to be responsive to economic conditions.
However, the Company also competes with other entertainment and retail
businesses for the discretionary income of its target markets.
As the Company pursues new business initiatives, particularly the sale of
nutritional products and apparel, the Company competes against large,
established companies with more experience selling such products on a retail
basis and, in some instances, with substantially greater financial resources
than the Company. There can be no assurance the Company will be able to compete
effectively with such established companies.
PROPERTIES
The Company operates approximately 320 fitness centers in 27 states and Canada.
The Company owns approximately 30 fitness centers and leases either land,
buildings or both for the remainder of its fitness centers. Aggregate rent
expense for real estate (including office and administrative space) was $86.8
million, $85.8 million and $84.9 million for 1997, 1996 and 1995, respectively.
Most leases require the Company to pay real estate taxes, insurance, maintenance
and, in the case of shopping center and office building locations, common-area
maintenance fees. A limited number of leases also provide for percentage rental
based on receipts. Various leases also provide for rent adjustments based on
changes in the Consumer Price Index, most with limits provided to protect the
Company. One fitness center accounted for between 1% to 2% of the Company's net
revenues during 1997. The Company believes its properties are adequate for its
current membership.
Leases for fitness centers entered into by the Company in the last five years
generally provide for an original term of no less than 15 years and, in some
cases, for 20 years. Most leases contain at least one five-year option to renew
and often two or more such options.
The Company's executive offices are located in Chicago, Illinois, where it is a
co-tenant at a monthly base rental cost to the Company of $50,200. The lease
expires in January 2003. The Company also leases space in Huntington Beach,
California and Towson, Maryland for RSC operations.
TRADEMARKS AND TRADE NAMES
In 1996, the Company completed the process of renaming its fitness centers so
substantially all use the service mark "Bally Total Fitness", thereby enhancing
brand identity, concentrating advertising and eliminating the prior practice of
using more than 25 different regional service marks or trade names. The name
"Bally Total Fitness" is a service mark of Hilton Hotels Corporation as
successor to Entertainment. In January 1996, the Company and Entertainment
entered into a 10-year trademark license
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agreement to allow the Company to use certain marks, including the "Bally Total
Fitness" service mark, in connection with its fitness center business. The
Company paid no royalty or license fee for 1996 and pays a fee of $1.0 million
per year thereafter. Following the initial ten-year term, the Company has the
option to renew the license for an additional five-year period at a rate equal
to the greater of the then market rate or $1.0 million per year.
SEASONAL MEMBERSHIP FEE ORIGINATIONS
Historically, the Company has experienced greater membership fee originations in
the first quarter and lower membership fee originations in the fourth quarter.
The new initiatives the Company has implemented may have the effect of
increasing the seasonality of the Company's business.
EMPLOYEES
The Company has approximately 13,900 employees, including approximately 7,300
part-time employees. Approximately 12,800 employees are involved in club
operations, including sales personnel, instructors, personal trainers,
supervisory and facilities personnel, approximately 800 are involved in the
operation of the RSCs and approximately 300 are administrative support
personnel, including accounting, management information systems, marketing,
legal, human resources, real estate and other national services.
The Company is not a party to any collective bargaining agreement with its
employees. Although the Company experiences high turnover of non-management
personnel, the Company historically has not experienced difficulty in obtaining
adequate replacement personnel, except regionally from time-to-time with respect
to sales personnel, which the Company believes periodically become somewhat more
difficult to replace due, in part, to increased competition for skilled retail
sales personnel.
GOVERNMENT REGULATION
The operations and business practices of the Company are subject to regulation
at federal, state and, in some cases, local levels. General rules and
regulations of the Federal Trade Commission, and of state and local consumer
protection agencies, apply to the Company's advertising, sales and other trade
practices.
Statutes and regulations affecting the fitness industry have been enacted or
proposed in all of the states in which the Company conducts business. Typically,
these statutes and regulations prescribe certain forms and regulate the terms
and provisions of membership contracts, giving the member the right to cancel
the contract, in most cases, within three business days after signing, requiring
an escrow for funds received from pre-opening sales or the posting of a bond or
proof of financial responsibility and, in some cases, establishing maximum
prices and terms for membership contracts and limitations on the term of
contracts. In addition, the Company is subject to numerous other types of
federal and state regulations governing the sale, financing and collection of
memberships including, among others, the Truth-in-Lending Act and Regulation Z
adopted thereunder, as well as state laws governing the collection of debts.
These laws and regulations are subject to varying interpretations by a large
number of state and federal enforcement agencies and the courts. The Company
maintains internal review procedures in order to comply with these requirements
and it believes its activities are in substantial compliance with all applicable
statutes, rules and decisions.
Under so-called "cooling-off" statutes in most states, members of fitness
centers have the right to cancel their memberships for a period of three to ten
days after the date the contract was entered into (depending on the applicable
state law) and are entitled to refunds of any payment made. In addition, the
Company's membership contracts provide that a member may cancel his or her
membership at any time for qualified medical reasons or if the member relocates
a certain distance away from a Bally fitness center, and a membership may be
canceled in the event of a member's death. The specific procedures for
cancellation in these circumstances vary according to differing state laws. In
each instance, the canceling member is entitled to a refund of prepaid amounts
only. Furthermore, where permitted by law, a cancellation fee is due to the
Company upon cancellation and the Company may offset such amount against any
refunds owed.
9
<PAGE>
The Company is a party to several state and federal consent orders. From time to
time, the Company makes minor adjustments in its operating procedures to comply
with such consent orders. The consent orders essentially require continued
compliance with applicable laws and require the Company to refrain from
activities not in compliance with applicable laws.
The provision of rehabilitative and physical therapy services is affected by
federal, state and local laws and regulations concerning the development and
operation of physical rehabilitation health programs, licensing, certification
and reimbursement and other matters, which may vary by jurisdiction and which
are subject to periodic revision. The opening of a rehabilitation facility may
require approval from state and/or local governments and re-licensure from time
to time, both of which may be subject to a number of conditions. In addition, a
substantial number of recipients of rehabilitative and physical therapy services
have fees paid by governmental programs, as well as private third-party payors.
Governmental reimbursement programs (including Medicare and Medicaid) generally
require facilities and services to meet certain standards promulgated by the
federal and/or state government. Additionally, reimbursement levels by
governmental and private third-party payors are subject to change which could
limit or reduce reimbursement levels and could have a material adverse effect on
the demand for rehabilitative and physical therapy services. Further, in a
number of states and in certain circumstances pursuant to federal law, the
referral of patients to rehabilitative and physical therapy services is subject
to limitations imposed by law, the violation of which may, in certain
circumstances, constitute a felony. Recently, federal and state governments have
focused significant attention on health care reform and cost control. These
proposals include cut-backs to Medicare and Medicaid programs. It is uncertain
at this time what legislation and health care reform may ultimately be enacted
or whether other changes in the administration or interpretation of government
health care programs will occur. There can be no assurance that future health
care legislation or other changes in the administration or interpretation of
government health care programs will not have a material adverse effect on the
provision of rehabilitative and physical therapy services by the Company.
10
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock is currently traded on the New York Stock Exchange ("NYSE")
under the symbol "BFT". Prior to the commencement of trading on the NYSE on
April 2, 1998, the Common Stock was quoted on the NASDAQ National Market
("NASDAQ") under the symbol "BFIT". The following table sets forth for the
periods indicated the high and low quarterly sales prices for a share of Common
Stock as reported on NASDAQ since trading began on January 4, 1996, the date the
Company's initial Registration Statement on Form S-1 was declared effective. The
Company was a wholly owned subsidiary of Entertainment until January 9, 1996,
the date on which 11,845,161 shares of Common Stock were distributed by
Entertainment in the Spin-off.
<TABLE>
<CAPTION>
High Low
---------- ----------
<S> <C> <C>
1996:
First quarter (from January 4, 1996) $ 7 $ 3 3/4
Second quarter 5 3/4 3 15/16
Third quarter 5 1/8 4
Fourth quarter 9 1/16 4 1/2
1997:
First quarter $ 8 13/16 $ 6
Second quarter 10 7/16 5 5/8
Third quarter 17 1/2 8 1/2
Fourth quarter 22 14 3/4
</TABLE>
As of March 31 1998, there were 10,148 holders of record of the Common Stock.
The Company has not made cash dividend payments on the Common Stock since the
Spin-off and does not anticipate paying dividends on the Common Stock for the
foreseeable future. The terms of the Company's revolving credit agreement
provide that the Company is restricted from paying dividends without the consent
of the lenders during the term of the agreement. In addition, the indenture for
the 9 7/8% Senior Subordinated Notes due 2007 (the "9 7/8% Notes") generally
limits dividends paid by the Company to the aggregate of 50% of consolidated net
income, as defined, earned after January 1, 1998 and the net proceeds to the
Company from any stock offerings and the exercise of outstanding stock options
and warrants.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The primary strategic initiative of management involves improving the results of
the Company's core business and, as capital is available, increasing the number
of fitness centers it operates through the replication of its profitable new
fitness center prototype. In 1993, the Company began building more efficient
fitness centers by eliminating pools and other wet areas and racquet sports (all
of which are costly to build and maintain and which have significantly lower
utilization rates), and replacing much of that space with expanded workout areas
which receive a higher degree of member use. At approximately the same time, the
Company emphasized member payment plans using EFT for financed memberships by
adjusting sales commissions and member incentives. The Company's experience has
indicated better collection results for financed memberships sold under EFT
plans compared to those sold with standard coupon book payment plans.
EFT-financed memberships represented approximately 60% of the total membership
contracts in the receivables portfolio at December 31, 1997. Over the past
several years, membership types and pricing options were standardized, making
the selling process less complicated for both the customer and sales personnel.
In August 1994, the Company implemented a program to increase monthly dues for
contracts sold after that date and in late 1995, began to curtail the practice
of discounting dues for multiple year renewal offers. Following the 1997 Stock
Offering, the Company began emphasizing the sale of all-club memberships, which
are typically financed, rather than the sale of single-club memberships. The
Company believes all of these actions, certain of which reduced new membership
unit sales and revenues, will ultimately improve cash flows and operating
income.
In addition, management made certain changes designed to integrate operations
and reduce operating costs, including personnel costs, advertising expenses and
other operating expenses. As part of its continuing cost reduction program, the
Company began a long-term consolidation project in 1991 and computer conversion
in 1994 for its RSCs. The consolidation of five RSCs into two remaining RSCs was
completed in the third quarter of 1995, and the elimination of cost redundancies
continued throughout 1996 and 1997. The primary phase of the computer conversion
was completed in the fourth quarter of 1995. With the addition of new hardware
and software, the Company streamlined its processing procedures and developed
efficiencies that enable the RSCs to service members better while reducing
costs. The Company has completed an assessment of whether its computer systems
will function properly with respect to dates in 2000 and thereafter and has
determined that only two 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 provision for doubtful receivables was $96.1 million, $80.4 million and
$72.1 million for 1997, 1996 and 1995, respectively. The rate of the Company's
provision for doubtful receivables can vary from year to year. The Company
estimates the ultimate realization of initial membership fees originated on
financed memberships based upon a number of factors such as method of payment
(EFT vs. coupon books) and amount of downpayment, among others. The Company
continually analyzes the provision because initial membership fees can be paid
to the Company in installments. Updated collection experience trends are
reviewed each reporting period and, if necessary, the allowance is adjusted
accordingly. Changes in the allowance as a percentage of gross receivables may
result from various factors including significant near-term fluctuations in
amounts of initial membership fees originated for financed memberships or the
timing of write-offs. The Company believes, based on its experience, that the
qualitative profile of its receivables portfolio at December 31, 1997 is
generally improved from that in recent years due to more accounts paying by EFT
and higher average downpayments.
Management also believes significant opportunities exist to increase revenues
beyond those generated by the sale of membership plans and receipt of dues
without significant capital expenditures. To capitalize on the Company's strong
brand identity, extensive distribution infrastructure (approximately 320
facilities), significant member base (approximately four million members) and
frequency of visitation (more than 100 million member visits in each of 1996 and
1997), management has implemented the following new
12
<PAGE>
initiatives: (i) the introduction of a newly developed personal training program
nowbeing offered at most of its fitness centers; (ii) the sale of an exclusive
line of Bally-branded nutritional products to the Company's members; (iii) the
sale of nutritional products, workout apparel and related accessories in BFIT
Essentials(TM) retail stores currently located in over 60 of its fitness
centers; and (iv) the provision of affordable, comprehensive outpatient
rehabilitative and physical therapy services to both members and nonmembers,
presently in two of its fitness centers. These new initiatives had a limited
effect on the 1997 results, but beginning with 1998, management expects their
effect to be more meaningful.
RESULTS OF OPERATIONS
Comparison of the years ended December 31, 1997 and December 31, 1996
Net revenues for 1997 were $661.0 million compared to $639.2 million in 1996, an
increase of $21.8 million (3%). This increase is substantially a result of an
increase in initial membership fees originated of $34.8 million (9%) in 1997,
consisting of a $62.3 million (21%) increase in financed memberships originated
offset, in part, by a $27.5 million (32%) decrease in paid-in-full memberships
originated. These results generally reflect management's current strategy of
selling more all-club membership plans (which typically have been financed and
generate better long-term returns for the Company) and fewer single-club
membership plans. Accordingly, the average selling price of contracts sold
increased 18% and the number of contracts sold decreased 10%. Further, these
results were achieved while the average number of fitness centers selling
memberships decreased from 322 in 1996 to 317 in 1997, reflecting management's
continuing strategy to improve the quality of the Company's facilities. During
1997 and 1996, the Company closed 19 older, typically smaller and less
profitable facilities and sold a fitness center to a franchisee while opening 8
new, larger facilities, generally based on its new prototype. In addition,
deferred revenue accounting added only $1.0 million to revenues in 1997 compared
to $29.8 million in 1996. Dues collected increased $11.2 million (6%) over 1996,
reflecting the Company's continuing strategy of increasing renewal dues. Finance
charges earned increased $2.8 million (8%) in 1997 due primarily to the increase
in the size of the receivables portfolio. Fees and other revenues increased $1.9
million (14%) over 1996, primarily reflecting the sale of nutritional and other
retail products which the Company began selling in 1997 in certain of its
fitness centers and the 1997 introduction of the new personal training program.
Operating income for 1997 was $19.9 million compared to $19.1 million in 1996.
The increase of $.8 million (4%) was due to the aforementioned increase in
revenues substantially offset by a $21.0 million (3%) increase in operating
costs and expenses, which included a $15.7 million increase in the provision for
doubtful receivables. Operating expenses include charges of $5.9 million and
$5.1 million in 1997 and 1996, respectively ($2.1 million and $2.3 million of
which is amortization of unearned compensation in 1997 and 1996, respectively)
relating to restricted stock awards issued in conjunction with the Spin-off for
which restrictions lapsed in 1997 and 1996 and final vesting occurred in August
1997. Excluding the provision for doubtful receivables and charges related to
restricted stock awards, operating costs and expenses increased $4.5 million
(1%) from 1996. Fitness center operating expenses increased $17.7 million (5%)
due, in part, to increased spending to improve club operations and appearance,
additional commissions (a substantial portion of which are deferred through the
change in deferred membership origination costs) from the growth in initial
membership fees originated, and certain operating costs associated with the new
initiatives described above. General and administrative expenses increased $5.4
million (23%) and primarily reflects fees paid to Hilton Hotels Corporation in
1997 under a license agreement to use the name "Bally" (a similar payment was
not required in 1996), an increase of tax gross-up expense in 1997 from 1996
relating to the restricted stock awards described above and increased corporate
personnel and other overhead incurred in 1997 relating principally to the new
initiatives. Member processing and collection center expenses decreased $3.6
million (9%), reflecting decreases in telephone expenses (as a result of
renegotiated rates and fewer member service calls), printing and equipment
rental costs. In addition, advertising expenses decreased $2.4 million (5%) due
to reduced spending on television advertisements and the elimination of certain
agency fees in 1997 offset, in part, by increases in production costs and local
promotional activities.
13
<PAGE>
The provision for doubtful receivables for 1997 was $96.1 million compared to
$80.4 million in 1996, an increase of $15.7 million (20%) primarily due to the
increase in financed memberships originated.
Interest expense was $45.0 million in 1997 compared to $47.6 million in 1996, a
decrease of $2.6 million (5%) primarily due to lower average interest rates and
an increase in the amount of capitalized interest offset, in part, by a higher
average level of debt.
The income tax provision for 1997 reflects state income taxes only, as no
federal benefit has been provided because the ultimate realization of additional
deferred tax assets cannot be assured. The income tax benefit for 1996 reflects
a benefit equal to the federal provision allocated to the extraordinary item (no
additional benefit has been provided because the ultimate realization of
additional deferred tax assets cannot be assured), net of a state income tax
provision.
Comparison of the years ended December 31, 1996 and December 31, 1995
Net revenues for 1996 were $639.2 million compared to $653.4 million in 1995.
The decrease in revenues results, in part, because the average number of fitness
centers selling memberships decreased from 332 in 1995 to 322 in 1996,
reflecting the closure of 25 older, typically smaller and less profitable
facilities and the sale of a fitness center to Entertainment offset, in part, by
the opening of 13 new, larger facilities during 1996 and 1995. Initial
membership fees originated decreased $29.7 million (7%) in 1996, consisting of a
$19.6 million (6%) decrease in financed memberships originated and a $10.1
million (11%) decrease in paid-in-full memberships originated. The number of
contracts sold declined 12% and the average selling price of contracts sold
increased 6% as a result of the sale of more premium memberships in 1996. Dues
collected increased $5.1 million (3%) over 1995 despite the 3% reduction in the
average number of facilities operated, reflecting the Company's continuing
strategy of increasing renewal dues. Finance charges earned decreased $.5
million (1%) in 1996 compared to 1995. Fees and other revenues decreased $2.1
million (13%) primarily due to the reduction of personal trainer revenue in 1996
as a result of temporarily outsourcing the service and non-recurring income in
1995 pertaining to insurance recoveries.
Operating income for 1996 was $19.1 million compared to $5.0 million in 1995.
The increase of $14.1 million was due to a $28.3 million (4%) reduction in
operating costs and expenses offset, in part, by the aforementioned decrease in
revenues. The reduction in operating costs and expenses was achieved despite an
$8.3 million increase in the provision for doubtful receivables and a $5.1
million charge related to restricted stock awards issued in conjunction with the
Spin-off for which restrictions lapsed due to the increase in the market price
of the Common Stock. Excluding the provision for doubtful receivables and charge
related to restricted stock awards, operating costs and expenses decreased $41.7
million (7%) in 1996 compared to 1995 primarily due to reductions in fitness
center operating expenses and member processing and collection center expenses.
Fitness center operating expenses for 1996 decreased $30.1 million (8%) from
1995 primarily due to a reduction in payroll and related costs and other
variable costs as a result of the continuing cost reduction program and the 3%
reduction in the average number of fitness centers operated in 1996 compared to
1995. In addition, insurance expenses declined due to favorable experience in
controlling general liability risks, and commissions decreased as a result of
the decline in initial membership fees originated. Member processing and
collection center expenses decreased $8.0 million (16%) primarily due to the
aforementioned RSC consolidation and computer projects.
The provision for doubtful receivables for 1996 was $80.4 million compared to
$72.1 million in 1995, an increase of $8.3 million (12%) despite the
aforementioned decrease in financed memberships originated. Management believes
the additional provision for doubtful receivables in 1996 adequately reserved
for collection experience to be ultimately realized from sales programs in
general, and specifically from sales promotions allowing very low downpayments
offered from time to time between July 1995 and October 1996 that have shown
indications of underperforming historical collection experience.
14
<PAGE>
Interest expense was $47.6 million in 1996 compared to $43.8 million in 1995, an
increase of $3.8 million (9%) principally reflecting a higher average level of
debt offset, in part, by lower average interest rates.
As a result of the Spin-off, the Company is no longer included in the
consolidated federal income tax return of Entertainment and files its own
separate consolidated federal income tax return. Accordingly, the income tax
benefit for 1996 reflects a benefit equal to the federal provision allocated to
the extraordinary item (no additional benefit has been provided because the
ultimate realization of additional deferred tax assets cannot be assured), net
of a state income tax provision. Pursuant to a tax sharing agreement with
Entertainment, the effective rate of the income tax benefit for 1995 was lower
than the U.S. statutory tax rate (35%) due principally to operating losses
without a current year tax benefit and non-deductible amortization of costs in
excess of acquired assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company is in the process of expanding and upgrading its facilities in order
to increase its membership base and more effectively capitalize on its
streamlined marketing and administrative functions. Management plans to make
capital expenditures of approximately $10 million to $12 million annually to
maintain and make minor upgrades to the Company's existing facilities, including
exercise equipment upgrades, HVAC and other operating equipment upgrades and
replacements, and locker room and workout area refurbishments, among others. In
addition, the Company expects to invest approximately $10 million during the
next year to complete its plans 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, including
converting some low-usage pools and racquet areas into expanded exercise areas
and to a lesser extent retail and outpatient rehabilitative and physical therapy
service areas. For the last several years, the Company has spent $6 million to
$15 million annually, as funds were available, to open new or replacement
facilities. Beginning in 1998, the Company intends to increase its spending to
approximately $20 million to $25 million per year to open 15 to 20 new
facilities based on its new prototype, which is designed to cost less to
construct and maintain than the Company's older facilities. The new facilities
are expected to range in size from 10,000 to 45,000 square feet and have the
capacity to accommodate significantly more members than older clubs of the same
size because they will generally focus on only the most widely used amenities.
During 1997, the Company repaid approximately $25 million of indebtedness,
including the repayment of amounts drawn under the Company's credit facility,
from the net proceeds of the 1997 Stock Offering, and used approximately $2
million to support the introduction of new initiatives. Cash receipts from the
sale of paid-in-full memberships during the six months ended December 31, 1997
were approximately $5 million less than during the six months ended June 30,
1997 due to the Company's emphasis on the sale of financed membership plans.
This emphasis during the last six months of 1997 resulted in a corresponding
increase of approximately $26 million in net installment contracts receivable
from June 30, 1997 to December 31, 1997, and primarily caused cash used in
operating activities to increase to $35.9 million in 1997 from $5.3 million in
1996. Prior to completing the 1997 Stock Offering, the Company was dependent on
availability under its credit facility and its operations to provide for cash
needs. The Company managed liquidity requirements in recent years by emphasizing
the sale of single-club paid-in-full membership plans and accelerating
collections of financed memberships and dues to increase available cash reserves
and, to a lesser extent, sales of non-strategic assets and sale/leaseback
arrangements. Management believes use of these techniques has had a negative
impact on operating results, and that available working capital has reduced the
need for these techniques to be continued.
In October 1997, the Company refinanced its subordinated debt to reduce interest
expense, extend debt maturities and improve financial flexibility. The Company
issued $225 million aggregate principal amount of the 9 7/8% Notes and completed
a tender offer and consent solicitation (the "Tender Offer") with respect to its
$200 million aggregate principal amount of 13% Senior Subordinated Notes due
2003 (the "13% Notes").
15
<PAGE>
Pursuant to the Tender Offer, the Company purchased $177.4 million aggregate
principal amount of the 13% Notes, substantially all at a price of 108.3% of the
principal amount, together with accrued and unpaid interest. In January 1998,
the Company redeemed the remaining $22.6 million aggregate principal amount of
the 13% Notes not tendered in the Tender Offer at a price of 106.5% of the
principal amount, together with accrued and unpaid interest.
In November 1997, the Company entered into a new revolving credit agreement with
a group of banks which provides for a three-year $70 million credit line. The
amount available under the credit line is reduced by any outstanding letters of
credit, which cannot exceed $30 million. At December 31, 1997, the revolving
credit agreement was unused except for outstanding letters of credit totaling
$7.2 million.
The Company has no scheduled principal payments under the 9 7/8% Notes until
October 2007 and the principal amount of the certificates under the Company's
securitization facility remains fixed at $160 million through July 1999.
Accordingly, exclusive of the remaining 13% Notes which were redeemed in January
1998 using the remaining proceeds from the issuance of the 9 7/8% Notes, debt
service requirements (primarily interest) of the Company for the next twelve
months are approximately $43 million. Management believes that the Company will
be able to satisfy its debt service and capital expenditure requirements over
the next twelve months out of existing cash balances and cash flow from
operations. Management also believes that as a result of the 1997 Stock
Offering, the refinancing of subordinated debt and the new credit facility,
the Company's liquidity and financial flexibility have significantly improved.
The Company filed a Registration Statement with the Securities and Exchange
Commission in March 1998 to offer up to 2,875,000 shares of Common Stock (the
"1998 Stock Offering"). The Company intends to use all of the net proceeds from
the 1998 Stock Offering to fund its growth strategy to open new fitness centers
based on the new club prototype, to selectively acquire club-related real estate
both currently leased and for the development of new clubs and to acquire
fitness center operators in strategic geographic markets. The Company has not
yet allocated the net proceeds among the contemplated uses. The Company will
determine the allocation of the net proceeds among the development of new
fitness centers, the acquisition of real estate and the acquisition of fitness
center operators based on business opportunities available to the Company and
prevailing market conditions. The Company is not currently involved in any
negotiations for the material acquisition of fitness centers or the purchase of
any material real estate. The balance of the net proceeds to the Company, if
any, will be used for general corporate and working capital purposes and,
pending such uses, the Company may temporarily invest available funds from the
1998 Stock Offering in short-term securities. If the Company does not complete
the 1998 Stock Offering, the Company may seek other sources of capital to fully
undertake the growth strategy referred to above. There can be no assurance that
the 1998 Stock Offering will be completed or that other sources of capital could
be arranged on favorable terms.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this Form 10-K/A including, without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve known and unknown risks, uncertainties,
and other factors that may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. These
factors include, among others, the following: general economic and business
conditions; competition; success of operating initiatives, advertising and
promotional efforts; existence of adverse publicity or litigation; acceptance of
new product offerings; changes in business strategy or plans; quality of
management; availability, terms, and development of capital; business abilities
and judgment of personnel; changes in, or the failure to comply with, government
regulations; regional weather conditions; and other factors described in this
Form 10-K/A 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.
16
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Report of independent auditors 18
Consolidated balance sheet 19
Consolidated statement of operations 21
Consolidated statement of stockholders' equity 22
Consolidated statement of cash flows 23
Notes to consolidated financial statements 25
Supplementary data:
Quarterly consolidated financial information (unaudited) 41
17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Bally Total Fitness Holding Corporation
We have audited the accompanying consolidated balance sheets of Bally Total
Fitness Holding Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)2.
These financial statements and the schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Bally
Total Fitness Holding Corporation at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois
February 17, 1998
18
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 61,679 $ 16,534
Installment contracts receivable, net 168,011 153,235
Other current assets 31,743 24,075
-------- --------
Total current assets 261,433 193,844
Installment contracts receivable, net 175,575 146,972
Property and equipment, at cost:
Land 21,667 22,550
Buildings 109,613 108,361
Leasehold improvements 402,503 400,340
Equipment and furnishings 91,958 99,073
-------- --------
625,741 630,324
Accumulated depreciation and amortization 314,544 304,865
-------- --------
Net property and equipment 311,197 325,459
Intangible assets, less accumulated
amortization of $54,124 and $49,619 101,220 105,725
Deferred income taxes 4,171 13,656
Deferred membership origination costs 86,737 82,140
Other assets 27,233 25,506
-------- --------
$967,566 $893,302
======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
19
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED BALANCE SHEET-(CONTINUED)
(In thousands, except share data)
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 36,908 $ 41,565
Income taxes payable 2,342 2,258
Deferred income taxes 5,660 15,145
Accrued liabilities 50,464 55,063
13% Senior Subordinated Notes due 2003, called
for 1998 redemption 22,555
Other current maturities of long-term debt 4,590 8,401
Deferred revenues 270,853 265,465
-------- --------
Total current liabilities 393,372 387,897
Long-term debt, less current maturities 405,425 376,397
Other liabilities 7,459 6,824
Deferred revenues 90,989 98,032
Stockholders' equity:
Preferred stock, $.10 par value; 10,000,000
shares authorized; none issued--
Series A Junior Participating; 300,000 shares
authorized; none issued
Common stock, $.01 par value; 60,200,000 shares
authorized; 20,575,092 and 12,495,161 shares
issued and outstanding 206 125
Contributed capital 392,718 303,811
Accumulated deficit (322,603) (277,733)
Unearned compensation (restricted stock) (2,051)
-------- --------
Total stockholders' equity 70,321 24,152
-------- --------
$967,566 $893,302
======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
20
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share data)
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues:
Membership revenues--
Initial membership fees on financed
memberships originated $ 352,661 $ 290,378 $ 309,974
Initial membership fees on
paid-in-full memberships originated 58,117 85,624 95,695
Dues collected 194,084 182,909 177,783
Change in deferred revenues 961 29,791 16,813
---------- ---------- ----------
605,823 588,702 600,265
Finance charges earned 39,218 36,405 36,889
Fees and other 15,996 14,092 16,220
---------- ---------- ----------
661,037 639,199 653,374
Operating costs and expenses:
Fitness center operations 384,120 366,466 396,564
Member processing and collection centers 38,627 42,257 50,255
Advertising 45,042 47,428 50,037
General and administrative 28,952 23,586 21,603
Provision for doubtful receivables 96,078 80,350 72,145
Depreciation and amortization 52,878 55,940 57,359
Change in deferred membership
origination costs (4,597) 4,113 428
---------- ---------- ----------
641,100 620,140 648,391
---------- ---------- ----------
Operating income 19,937 19,059 4,983
Interest income 1,928 988 179
Interest expense (45,021) (47,644) (43,750)
---------- ---------- ----------
Loss before income taxes and
extraordinary item (23,156) (27,597) (38,588)
Income tax benefit (provision) (300) 2,700 7,188
---------- ---------- ----------
Loss before extraordinary item (23,456) (24,897) (31,400)
Extraordinary gain (loss) on
extinguishment of debt (21,414) 5,655
---------- ---------- ----------
Net loss $ (44,870) $ (19,242) $ (31,400)
========== ========== ==========
Basic and diluted earnings (loss) per
common share (pro forma for 1995):
Loss before extraordinary item $ (1.51) $ (2.04) $ (3.25)
Extraordinary gain (loss) on
extinguishment of debt (1.37) .46
---------- ---------- ----------
Net loss $ (2.88) $ (1.58) $ (3.25)
========== ========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
21
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<CAPTION>
Common stock Unearned
------------------- compensation Total
Number Par Contributed Accumulated (restricted stockholders'
of shares value capital deficit stock) equity
----------- ------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 19,000,000 $ 190 $ 261,738 $ (227,091) $ $ 34,837
Net loss (31,400) (31,400)
Effects of spin-off from Bally
Entertainment Corporation:
Forgiveness of income tax
obligation by Bally
Entertainment Corporation 44,507 44,507
Increase in income tax
valuation allowance due to
adjustments to the income
tax basis of certain assets (20,147) (20,147)
Excess of sales price over
historical basis of assets
sold to Bally Entertainment
Corporation 3,892 3,892
Reduction in number of shares
issued and outstanding (7,154,839) (72) 72 -
----------- ------ ----------- ----------- ------------ ------------
Balance at December 31, 1995 11,845,161 118 290,062 (258,491) 31,689
Net loss (19,242) (19,242)
Common stock issued under
long-term incentive plan 650,000 7 4,389 (4,396) -
Capital contributions by Bally
Entertainment Corporation 9,360 9,360
Amortization of unearned
compensation 2,345 2,345
----------- ------ ----------- ----------- ------------ ------------
Balance at December 31, 1996 12,495,161 125 303,811 (277,733) (2,051) 24,152
Net loss (44,870) (44,870)
Issuance of common stock
through public offering 8,000,000 80 88,310 88,390
Issuance of common stock upon
exercise of stock options and
other 79,931 1 597 598
Amortization of unearned
compensation 2,051 2,051
----------- ------ ----------- ----------- ------------ ------------
Balance at December 31, 1997 20,575,092 $ 206 $ 392,718 $ (322,603) $ - $ 70,321
=========== ====== =========== =========== ============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
22
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING:
Loss before extraordinary item $(23,456) $(24,897) $(31,400)
Adjustments to reconcile to cash used -
Depreciation and amortization,
including amortization included in
interest expense 55,287 59,124 60,701
Provision for doubtful receivables 96,078 80,350 72,145
Change in operating assets and
liabilities (163,770) (119,764) (112,922)
Other, net (75) (114) 1,622
-------- -------- --------
Cash used in operating activities (35,936) (5,301) (9,854)
INVESTING:
Purchases and construction of property
and equipment (27,065) (20,612) (22,469)
Proceeds from sale of property and
equipment 10,946
Reserve fund deposit refunded (paid)
pursuant to securitization facility 10,000 (20,000)
Other, net 833 353
-------- -------- --------
Cash used in investing activities (16,119) (9,779) (42,116)
FINANCING:
Debt transactions -
Proceeds from long-term borrowings 225,052 162,318 150,000
Repayments of long-term debt (208,034) (155,912) (82,917)
Debt issuance costs (8,466) (2,815) (6,654)
-------- -------- --------
Cash provided by debt transactions 8,552 3,591 60,429
Equity transactions -
Proceeds from issuance of common stock
through public offering 88,390
Proceeds from issuance of common stock
upon exercise of stock options 258
Capital contribution by Bally
Entertainment Corporation 6,760
-------- -------- --------
Cash provided by financing activities 97,200 10,351 60,429
-------- -------- --------
Increase (decrease) in cash and equivalents 45,145 (4,729) 8,459
Cash and equivalents, beginning of year 16,534 21,263 12,804
-------- -------- --------
Cash and equivalents, end of year $ 61,679 $ 16,534 $ 21,263
======== ======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
23
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS-(CONTINUED)
(In thousands)
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOWS INFORMATION:
Changes in operating assets and liabilities,
net of effects from acquisitions or
sales, were as follows-
Increase in installment contracts
receivable $(140,096) $ (75,491) $ (91,422)
(Increase) decrease in other current
and other assets (8,402) (4,063) 1,589
(Increase) decrease in deferred
membership origination costs (4,597) 4,113 428
Decrease in accounts payable (4,657) (475) (498)
Increase (decrease) in income taxes
payable 84 (2,866) (503)
Decrease in accrued and other
liabilities (5,141) (11,191) (5,703)
Decrease in deferred revenues (961) (29,791) (16,813)
--------- --------- ---------
$(163,770) $(119,764) $(112,922)
========= ========= =========
Cash payments for interest and income
taxes were as follows-
Interest paid $ 48,427 $ 44,604 $ 42,221
Interest capitalized (511) (236) (278)
Income taxes paid (refunded), net 216 166 (6,685)
Investing and financing activities exclude
the following non-cash transactions-
Acquisition of property and equipment
through capital leases/borrowings $ 14,044 $ 5,266 $ 2,445
Forgiveness of income tax obligations
by Bally Entertainment Corporation/
Hilton Hotels Corporation 15,200 44,507
Common stock issued under long-term
incentive plan 4,396
Capital contribution by Bally
Entertainment Corporation 2,600
Increase in income tax valuation
allowance due to adjustments to the
income tax basis of certain assets
upon spin-off from Bally Entertainment
Corporation 20,147
Excess of sales price over historical
basis of assets sold to Bally
Entertainment Corporation 3,892
<FN>
See accompanying notes.
</FN>
</TABLE>
24
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of Bally
Total Fitness Holding Corporation (the "Company") and the subsidiaries which it
controls. The Company, through its subsidiaries, is a nationwide commercial
operator of fitness centers with approximately 320 facilities concentrated in 27
states and Canada. The Company operates in one industry segment, and all
significant revenues arise from the commercial operation of fitness centers,
primarily in major metropolitan markets in the United States. Unless otherwise
specified in the text, references to the Company include the Company and its
subsidiaries.
The Company was a wholly owned subsidiary of Bally Entertainment Corporation
("Entertainment") until the consummation of Entertainment's spin-off of the
Company. On November 6, 1995, the Board of Directors of Entertainment declared a
distribution in the form of a dividend (the "Spin-off") to holders of record of
its common stock as of the close of business on November 15, 1995 (the "Record
Date") on the basis of one share of common stock, par value $.01 per share (the
"Common Stock") of the Company, along with an associated stock purchase right (a
"Right") issued pursuant to a stockholder rights plan (the "Stockholder Rights
Plan"), for every four shares of Entertainment common stock held on the Record
Date. On January 9, 1996 (the "Distribution Date"), 11,845,161 shares of Common
Stock were distributed. For financial accounting purposes, the Company has
reflected the effect of the Spin-off as of December 31, 1995.
The accompanying 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 (primarily interest income) have been made to prior
years' financial statements to conform with the 1997 presentation.
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents. The carrying amount of
cash equivalents approximates fair value due to the short maturity of those
instruments.
PROPERTY AND EQUIPMENT
Depreciation of buildings, equipment and furnishings (including assets under
capital leases) is provided on the straight-line method over the estimated
economic lives of the related assets and amortization of leasehold improvements
is provided on the straight-line method over the lesser of the estimated useful
lives of the improvements or the lease periods. Depreciation and amortization of
property and equipment was $45,739, $48,444 and $51,999 for 1997, 1996 and 1995,
respectively.
DEFERRED FINANCE COSTS
Deferred finance costs are amortized over the terms of the related debt using
the bonds outstanding method. Included in "Other assets" at December 31, 1997
and 1996 were deferred finance costs of $9,828 and $8,252, respectively, net of
accumulated amortization of $2,511 and $4,430, respectively.
25
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
INTANGIBLE ASSETS
Intangible assets consist principally of cost in excess of net assets of
acquired businesses (goodwill), which is being amortized on the straight-line
method over periods ranging up to forty years from dates of acquisition, and
amounts assigned to acquired operating lease rights, which are being amortized
on the straight-line method over the remaining lease periods.
The Company evaluates annually whether the remaining estimated useful life of
goodwill may warrant revision or the remaining balance of goodwill may not be
recoverable, generally considering expectations of future profitability and cash
flows (undiscounted and without interest charges) on a consolidated basis. If
the sum of the Company's expected future cash flows were less than the carrying
value of the Company's long-lived assets and identifiable intangibles, an
impairment loss would be recognized equal to the amount by which the carrying
value of the Company's long-lived assets and identifiable intangibles exceeded
their fair value. Based on present operations and strategic plans, the Company
believes that no impairment of goodwill exists at December 31, 1997. However, if
future operations do not perform as expected, or if the Company's strategic
plans for its business were to change, a reduction in the carrying value of
these assets may be required.
MEMBERSHIP REVENUE RECOGNITION
The Company's fitness centers primarily offer a dues membership, which permits
members, upon paying initial membership fees, which may be financed, to maintain
their membership on a month-to-month basis as long as monthly dues payments are
made. Initial membership fees may be paid-in-full when members join or may be
financed via installment contracts over periods ranging up to 36 months.
Revenues from initial membership fees (net of any related allowances) are
deferred and recognized ratably over the weighted average expected life of the
memberships, which for paid-in-full memberships and financed memberships sold
after December 31, 1993 have been calculated to be 36 months and 22 months,
respectively (previously 34 months and 20 months, respectively). Costs directly
related to the origination of memberships (substantially all of which are sales
commissions paid, which are included in "Fitness center operations") are also
deferred and are amortized using the same methodology as for initial membership
fees described above. The allowance for cancellations of memberships under
so-called "cooling-off" statutes in most states, contractually permitted
cancellations and first payment defaults is charged directly against membership
revenue. The provision for doubtful receivables represents the allowance for all
other uncollectible memberships. Dues revenue is recorded as monthly services
are provided. Accordingly, when dues are prepaid, the prepaid portion is
deferred and recognized over the applicable term. Installment contracts bear
interest at, or are adjusted for financial accounting purposes at the time the
contracts are sold to, rates for comparable consumer financing contracts.
Unearned finance charges are amortized over the term of the contracts on the
sum-of-the-months-digits method, which approximates the interest method.
26
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
Components of deferred revenues as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
CURRENT LONG-TERM TOTAL CURRENT LONG-TERM TOTAL
-------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Financed initial
membership fees
deferred $169,298 $ 43,901 $213,199 $148,251 $ 31,981 $180,232
Paid-in-full initial
membership fees
deferred 61,453 36,703 98,156 75,614 55,278 130,892
Prepaid dues 40,102 10,385 50,487 41,600 10,773 52,373
-------- ------- -------- -------- -------- --------
$270,853 $90,989 $361,842 $265,465 $ 98,032 $363,497
======== ======= ======== ======== ======== ========
</TABLE>
Components of the change in deferred revenues for the years ended December 31,
1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Financed initial membership fees:
Originating $(352,661) $(290,378) $(309,974)
Less provision for doubtful
receivables 96,078 80,350 72,145
-------- --------- ---------
Originating, net (256,583) (210,028) (237,829)
Recognized 223,270 228,681 220,885
--------- --------- ---------
Decrease (increase) in deferral (33,313) 18,653 (16,944)
Paid-in-full initial memberships fees:
Originating (58,117) (85,624) (95,695)
Recognized 90,666 94,870 116,608
--------- --------- ---------
Decrease in deferral 32,549 9,246 20,913
Decrease in prepaid dues 1,725 1,892 12,844
--------- --------- ---------
Change in deferred revenues $ 961 $ 29,791 $ 16,813
========= ========= =========
</TABLE>
27
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
Components of the change in deferred membership origination costs for the years
ended December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Incurred $ (84,104) $ (77,257) $ (82,720)
Amortized 79,507 81,370 83,148
--------- --------- ---------
Change in deferred membership
origination costs $ (4,597) $ 4,113 $ 428
========= ========= =========
</TABLE>
INCOME TAXES
For tax periods after January 9, 1996, the Company files its own separate
consolidated federal income tax return. For tax periods prior to and including
January 9, 1996, taxable income or loss of the Company was included in the
consolidated federal income tax return of Entertainment. Pursuant to a tax
sharing agreement with Entertainment, income taxes were allocated to the Company
based on amounts the Company would pay or receive if it filed a separate
consolidated federal income tax return, except that the Company received from
Entertainment an amount equal to the tax benefit of the Company's net operating
losses and tax credits, if any, that could be utilized in Entertainment's
consolidated federal income tax return, whether or not such losses or credits
could be utilized by the Company on a separate return basis. As a result of the
Spin-off, the Company and Entertainment entered into the Tax Allocation and
Indemnity Agreement that defines the parties' rights and obligations with
respect to deficiencies and refunds of federal income taxes for tax periods
through January 9, 1996. In connection therewith, Entertainment assumed
substantially all responsibility for any federal income tax adjustments related
to the Company for tax periods through January 9, 1996. The Tax Allocation and
Indemnity Agreement was amended in 1996 to include a portion of the Company's
losses in Entertainment's consolidated federal income tax return. As a result,
capital contributions totaling $9,360 were received by the Company ($6,760 in
cash and $2,600 as an offset to certain indebtedness) representing a portion of
the benefit that Entertainment receives from the utilization of the Company's
loss carrybacks.
EARNINGS (LOSS) PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is computed similarly to the
way fully diluted earnings per share was computed pursuant to Accounting
Principles Board Opinion ("APB") No. 15. Earnings (loss) per share amounts for
all years have been presented to conform to SFAS No. 128.
Basic and diluted earnings (loss) per common share are computed by dividing loss
before extraordinary item, extraordinary gain (loss) on extinguishment of debt,
and net loss by the weighted average number of shares of common stock
outstanding during each year, which totaled 15,557,491 shares and 12,174,601
shares for 1997 and 1996, respectively. The assumed exercise of outstanding
warrants and stock options for diluted earnings (loss) per common share was not
applicable in either 1997 or 1996 because their effect was anti-dilutive. See
"Pro forma information (unaudited)" regarding 1995's pro forma loss per common
share.
28
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
EXTRAORDINARY ITEMS
The extraordinary loss on extinguishment of debt for 1997 of $21,414 ($1.37 per
share) results from a refinancing of the Company's subordinated debt and credit
facility.
The extraordinary gain on extinguishment of debt for 1996 consists of (i) a gain
of $9,880 ($.81 per share), net of income taxes of $5,320, resulting from a
$15,200 tax obligation to Entertainment which was forgiven as part of the
December 1996 merger (the "Merger") of Entertainment with and into Hilton Hotels
Corporation ("Hilton") and (ii) a charge of $4,225 ($.35 per share), net of
income taxes of $2,270, resulting from a refinancing of the Company's
securitization facility.
INSTALLMENT CONTRACTS RECEIVABLE
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current:
Installment contracts receivable $239,448 $226,173
Unearned finance charges (27,709) (24,467)
Allowance for doubtful receivables and
cancellations (43,728) (48,471)
-------- --------
$168,011 $153,235
======== ========
Long-term:
Installment contracts receivable $226,735 $195,978
Unearned finance charges (14,357) (11,382)
Allowance for doubtful receivables and
cancellations (36,803) (37,624)
-------- --------
$175,575 $146,972
======== ========
</TABLE>
The carrying amount of installment contracts receivable at December 31, 1997 and
1996 approximates fair value based on discounted cash flow analyses, using
interest rates in effect at the end of each year comparable to similar consumer
financing contracts.
ACCRUED LIABILITIES
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Payroll and benefit-related liabilities $ 19,530 $ 16,384
Interest 6,603 11,938
Taxes other than income taxes 3,922 3,853
Other 20,409 22,888
-------- --------
$ 50,464 $ 55,063
======== ========
</TABLE>
29
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
LONG-TERM DEBT
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Nonsubordinated:
Revolving credit agreement $ - $ -
Securitization facility 160,000 160,000
Capital lease obligations 13,126 6,686
Other secured and unsecured obligations 11,889 18,112
Subordinated:
9 7/8% Senior Subordinated Notes due 2007 225,000
13% Senior Subordinated Notes due 2003 22,555 200,000
-------- --------
Total long-term debt 432,570 384,798
13% Senior Subordinated Notes due 2003,
called for 1998 redemption (22,555)
Other current maturities of long-term debt (4,590) (8,401)
-------- --------
Long-term debt, less current maturities $405,425 $376,397
======== ========
</TABLE>
In November 1997, the Company entered into a new revolving credit agreement with
a group of banks which provides for a three-year $70,000 credit line. The amount
available under the credit line is reduced by any outstanding letters of credit,
which cannot exceed $30,000. At December 31, 1997, the revolving credit
agreement was unused except for outstanding letters of credit totaling $7,157.
The rate of interest on borrowings is at the Company's option, generally based
upon either the agent bank's prime rate plus 2% or a Eurodollar rate plus 3%. A
fee of 2.25% on outstanding letters of credit is payable quarterly. A commitment
fee of 1/2 of 1% is payable quarterly on the unused portion of the credit
facility. The revolving credit agreement is secured by substantially all real
and personal property (excluding installment contracts receivable) of the
Company.
In December 1996, the Company refinanced its securitization facility by
completing a private placement of asset-backed securities (the "Securitization")
pursuant to which $145,500 of 8.43% Accounts Receivable Trust Certificates and
$14,500 of Floating Rate Accounts Receivable Trust Certificates (the "Floating
Certificates") were issued as undivided interests in the H&T Master Trust (the
"Trust"). The Floating Certificates bear interest (8.55% at December 31, 1997)
at 2.57% above the London Interbank Offer Rate ("LIBOR"), with the interest rate
on the Floating Certificates capped at 9.43% pursuant to an interest rate cap
agreement. The Trust was created for the issuance of asset-backed securities and
was formed pursuant to a pooling and servicing agreement. The Trust includes a
portfolio of substantially all of the Company's installment contracts receivable
from membership sales and the proceeds thereof. The amount by which installment
contracts receivable in the Trust exceeds the $160,000 principal amount of
certificates issued by the Trust is generally retained by the Company. The
Company services the installment contracts receivable held by the Trust and
earns a servicing fee which approximates the servicing costs incurred by the
Company. Through July 1999, the principal amount of the certificates remains
fixed and collections of installment contracts receivable flow through to the
Company in exchange for the securitization of additional installment contracts
receivable, except that collections are first used to fund interest
requirements. The amortization period commences in August 1999, after which
collections of installment contracts receivable will be used first to fund
interest requirements and then to repay principal on the certificates.
30
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
The amortization period ends upon the earlier to occur of the certificates being
repaid in full or August 2002.
The Company leases certain fitness center facilities and equipment under capital
leases expiring in periods ranging from one to twenty years. Included in
"Property and equipment" at December 31, 1997 and 1996 were assets under capital
leases of $18,194 and $7,125, respectively, net of accumulated amortization of
$1,751 and $586, respectively.
In October 1997, the Company refinanced its subordinated debt by issuing
$225,000 aggregate principal amount of 9 7/8% Senior Subordinated Notes due 2007
(the "9 7/8% Notes") and completing a tender offer and consent solicitation (the
"Tender Offer") with respect to its $200,000 aggregate principal amount of 13%
Senior Subordinated Notes due 2003 (the "13% Notes"). Pursuant to the Tender
Offer, the Company purchased $177,445 aggregate principal amount of the 13%
Notes, substantially all at a price of 108.3% of the principal amount, together
with accrued and unpaid interest. In January 1998, the Company redeemed the
remaining $22,555 aggregate principal amount of the 13% Notes not tendered in
the Tender Offer at a price of 106.5% of the principal amount, together with
accrued and unpaid interest. The 9 7/8% Notes are not subject to any sinking
fund requirement, but may be redeemed beginning in October 2002, in whole or in
part, with premiums ranging from 4.9% in 2002 to zero in 2005 and thereafter.
The payment of the 9 7/8% Notes is subordinated to the prior payment in full of
all senior indebtedness of the Company, as defined (approximately $192,000 at
December 31, 1997).
The revolving credit agreement and the indenture for the 9 7/8% Notes contain
covenants that, among other things and subject to certain exceptions, restrict
the ability of the Company to incur additional indebtedness, pay dividends,
prepay certain indebtedness, dispose of certain assets, create liens and make
certain investments or acquisitions. The revolving credit agreement also
requires the maintenance of certain financial covenants.
31
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
Maturities of long-term debt (excluding the $22,555 aggregate principal amount
of the 13% Notes redeemed in January 1998) and future minimum payments under
capital leases together with the present value of future minimum rentals as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL
DEBT LEASES TOTAL
--------- ------- --------
<C> <C> <C> <C>
1998 $ 2,527 $ 3,498 $ 6,025
1999 67,054 3,129 70,183
2000 96,092 2,076 98,168
2001 1,118 1,523 2,641
2002 3,002 1,413 4,415
Thereafter 227,096 16,177 243,273
--------- ------- --------
396,889 27,816 424,705
Less amount representing interest (14,690) (14,690)
--------- ------- --------
$ 396,889 $13,126 $410,015
========= ======= ========
</TABLE>
The fair value of the Company's long-term debt at December 31, 1997 and 1996
approximates its carrying amount except for the Company's subordinated debt,
which had a fair market value (based on quoted market prices) of $251,666 and
$190,875 at December 31, 1997 and 1996, respectively. The fair values are not
necessarily indicative of the amounts the Company could acquire the debt for in
a purchase or redemption.
INCOME TAXES
The income tax benefit (provision) applicable to loss before income taxes and
extraordinary item consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal (all current) $ - $ 3,050 $ 7,069
State and other (all current) (300) (350) 119
-------- -------- --------
$ (300) $ 2,700 $ 7,188
======== ======== ========
</TABLE>
32
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial accounting
and income tax purposes. Significant components of the Company's deferred tax
assets and liabilities as of December 31, 1997 and 1996, along with their
classification, are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Installment contract revenues $ 1,677 $ $ 27,466 $
Amounts not yet deducted for
tax purposes:
Bad debts 33,259 33,509
Other 13,079 14,275
Amounts not yet deducted for
book purposes:
Deferred membership
origination costs 36,042 32,412
Depreciation and capitalized
costs 2,439 2,308
Tax loss carryforwards 174,105 118,313
Other, net 2,359 1,460
-------- -------- ------- --------
224,559 $ 38,401 193,563 $ 36,180
======== ========
Valuation allowance (187,647) (158,872)
-------- --------
$ 36,912 $ 34,691
======== ========
Current $ 19,538 $ 25,198 $ 7,420 $ 22,565
Long-term 17,374 13,203 27,271 13,615
-------- -------- -------- --------
$ 36,912 $ 38,401 $ 34,691 $ 36,180
======== ======== ======== ========
</TABLE>
Upon consummation of the Spin-off, a portion of Entertainment's federal tax loss
and Alternative Minimum Tax ("AMT") credit carryforwards were allocated to the
Company pursuant to U.S. Treasury Regulations. The amount of carryforwards
allocated to the Company may ultimately be different as a result of Internal
Revenue Service (the "IRS") adjustments. At December 31, 1997, estimated federal
AMT credit and tax loss carryforwards of $2,987 and $366,873, respectively, have
been recorded by the Company. The AMT credits can be carried forward
indefinitely, while the tax loss carryforwards expire through 2012. In addition,
the Company has substantial state tax loss carryforwards which begin to expire
in 1998 and fully expire through 2012. Based upon the Company's past performance
and the expiration dates of its carryforwards, the ultimate realization of all
of the Company's deferred tax assets cannot be assured. Accordingly, a valuation
allowance has been recorded to reduce deferred tax assets to a level which, more
likely than not, will be realized.
33
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
A reconciliation of the income tax benefit (provision) with amounts determined
by applying the U.S. statutory tax rate to loss before income taxes and
extraordinary item is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Benefit at U.S. statutory tax rate (35%) $ 8,105 $ 9,659 $ 13,506
Add (deduct):
Operating losses without a current year
tax benefit (6,748) (5,509) (4,904)
State income taxes, net of related federal
income tax effect and valuation allowance (195) (770) (96)
Amortization of cost in excess of acquired
assets (1,412) (1,411) (1,391)
Other, net (50) 731 73
-------- -------- --------
Income tax benefit (provision) $ (300) $ 2,700 $ 7,188
======== ======== ========
</TABLE>
STOCKHOLDERS' EQUITY
The Series A Junior Participating Preferred Stock, $.10 par value (the "Series A
Junior Stock"), if issued, will have a minimum preferential quarterly dividend
payment equal to the greater of (i) $1.00 per share and (ii) an amount equal to
100 times the aggregate dividends declared per share of Common Stock during the
related quarter. In the event of liquidation, the holders of the shares of
Series A Junior Stock will be entitled to a preferential liquidation payment
equal to the greater of (a) $100 per share and (b) an amount equal to 100 times
the liquidation payment made per share of Common Stock. Each share of Series A
Junior Stock will have 100 votes, voting together with the shares of Common
Stock. Finally, in the event of any merger, consolidation or other transaction
in which shares of Common Stock are exchanged, each share of Series A Junior
Stock will be entitled to receive 100 times the amount received per share of
Common Stock. These rights are protected by customary antidilution provisions.
The Board of Directors of the Company adopted the Stockholder Rights Plan and
issued and distributed a Right for each share of Common Stock distributed to
Entertainment stockholders pursuant to the Spin-off. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Junior Stock at a price of $40.00 per one one-hundredth of a share of
Series A Junior Stock, subject to adjustment (the "Purchase Price").
The Rights are not exercisable or transferable apart from the Common Stock until
the occurrence of one of the following: (i) ten days (or such later date as may
be determined by action of the Board of Directors of the Company prior to such
time as any person or group of affiliated persons becomes an Acquiring Person)
after the date of public announcement that a person (other than an Exempt
Person, as defined below) or group of affiliated or associated persons has
acquired, or obtained the right to acquire, beneficial ownership of 10% or more
of the Common Stock (an "Acquiring Person"), or (ii) ten days after the date of
the commencement of a tender offer or exchange offer by a person (other than an
Exempt Person) or group of affiliated or associated persons, the consummation of
which would result in beneficial ownership by such person or group of 20% or
more of the outstanding shares of Common Stock. "Exempt Persons" include the
Company, any subsidiary of the Company, employee benefit plans of
34
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
the Company, directors of the Company on January 5, 1996 who are also officers
of the Company, Entertainment and any person holding the warrant to purchase
2,942,805 shares of Common Stock initially issued to Entertainment.
In the event that, at any time after a person or group of affiliated or
associated persons has become an Acquiring Person, (i) the Company consolidates
with or merges with or into any person and is not the surviving corporation,
(ii) any person merges with or into the Company and the Company is the surviving
corporation, but the shares of Common Stock are changed or exchanged, or (iii)
50% or more of the Company's assets or earning power are sold, each holder of a
Right will thereafter have the right to receive, upon the exercise thereof at
the then current exercise price of the Right, that number of shares of Common
Stock (or under certain circumstances, an economically equivalent security or
securities) of such other person which at the time of such transaction would
have a market value of two times the exercise price of the Right. The Rights,
which do not have voting privileges, are subject to adjustment to prevent
dilution and expire on January 5, 2006. The Company may redeem or exchange all,
but not less than all, of the Rights at a price of $.01 per Right, payable in
cash or Common Stock, at any time prior to such time as a person or group of
affiliated or associated persons becomes an Acquiring Person.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights that are or were owned beneficially by the
Acquiring Person (which, from and after the later of the Rights distribution
date and the date of the earliest of any such events, will be void), will
thereafter have the right to receive, upon exercise thereof at the then current
exercise price of the Right, that number of shares of Common Stock (or, under
certain circumstances, an economically equivalent security or securities of the
Company) having a market value of two times the exercise price of the Right.
At December 31, 1997, 6,432,874 shares of Common Stock were reserved for future
issuance (3,192,805 shares in connection with outstanding warrants and 3,240,069
shares in connection with certain stock plans).
WARRANTS
In July 1997, in connection with a $7,500 bridge loan provided to the Company by
an affiliate of an underwriter of the August 1997 public offering of Common
Stock, the Company issued warrants entitling the affiliate to acquire 250,000
shares of Common Stock at an exercise price of $10.05 per share, expiring in
July 2002.
In connection with the Spin-off, the Company issued a warrant entitling
Entertainment to acquire 2,942,805 shares of Common Stock at an exercise price
of $5.26 per share (equal to 110% of the average daily closing price of the
Common Stock for the twenty consecutive trading days beginning on the first
trading day after the Distribution Date), expiring in December 2005. At the time
of the Merger, Entertainment sold the warrant to the Chairman of the Board of
Directors and the President and Chief Executive Officer of the Company.
STOCK PLANS
In January 1996, the Board of Directors of the Company adopted the 1996
Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). The
Directors' Plan provides for the grant of non-qualified stock options to
non-employee directors of the Company.
35
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
Initially, 100,000 shares of Common Stock were reserved for issuance under the
Directors' Plan and at December 31, 1997, 80,000 shares of Common Stock were
available for future grant under the Directors' Plan. Stock options may not be
granted under the Directors' Plan after January 3, 2006.
Pursuant to the Directors' Plan, non-employee directors of the Company are
granted an option to purchase 5,000 shares of Common Stock upon the commencement
of service on the Board of Directors, with another option to purchase 5,000
shares of Common Stock granted on the second anniversary thereof. Options under
the Directors' Plan are generally granted with an exercise price equal to the
fair market value of the Common Stock at the date of grant. Option grants under
the Directors' Plan become exercisable in three equal annual installments
commencing one year from the date of grant and have a 10-year term.
Also in January 1996, the Board of Directors of the Company adopted the 1996
Long-Term Incentive Plan (the "Incentive Plan"). The Incentive Plan provides for
the grant of non-qualified stock options, incentive stock options and
compensatory restricted stock awards (collectively "Awards") to officers and key
employees of the Company. Initially, 2,100,000 shares of Common Stock were
reserved for issuance under the Incentive Plan. In 1997, the Incentive Plan was
amended to increase the aggregate number of shares of Common Stock which may be
granted under the Incentive Plan to 3,600,000 shares. At December 31, 1997,
1,005,608 shares of Common Stock were available for future grant under the
Incentive Plan. Awards may not be granted under the Incentive Plan after January
3, 2006.
Pursuant to the Incentive Plan, non-qualified stock options are generally
granted with an exercise price equal to the fair market value of the Common
Stock at the date of grant. Incentive stock options must be granted at not less
than the fair market value of the Common Stock at the date of grant. Option
grants become exercisable at the discretion of the Compensation Committee of the
Board of Directors (the "Compensation Committee"), generally in three equal
annual installments commencing one year from the date of grant. Option grants in
1997 and 1996 have a 10-year term.
A summary of 1996 and 1997 stock option activity under the Directors' Plan and
Incentive Plan is as follows:
<TABLE>
<CAPTION>
Number Weighted-
of shares average Range of
represented exercise exercise
by options price prices
----------- ---------- ------------
<S> <C> <C> <C>
Granted 1,594,580 $ 4.23 $4.125-5.125
Forfeited (249,920) 4.125 4.125
-----------
Outstanding at December 31, 1996,
none of which were exercisable 1,344,660 4.25 4.125-5.125
Granted 729,000 16.32 12.00-17.5625
Exercised (59,931) 4.125 4.125
Forfeited (109,268) 4.125 4.125
-----------
Outstanding at December 31, 1997,
391,820 of which were exercisable 1,904,461 8.88 4.125-17.5625
===========
</TABLE>
36
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
The Company has elected to follow APB No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for its stock options
because, as discussed below, the alternative fair value accounting provided for
under SFAS No. 123, "Accounting for Stock-Based Compensation" requires use of
option valuation models that were not developed for use in valuing stock
options. Under APB No. 25, because the exercise price of the Company's stock
options equals the market price of the Common Stock on the date of grant, no
compensation expense is recognized.
SFAS No. 123 requires the disclosure of pro forma net loss and loss per share
information as if the Company had accounted for stock options under the fair
value method prescribed by SFAS No. 123, which for 1997 is $45,783 and $2.94 per
share, and for 1996 is $20,032 and $1.65 per share, respectively. In addition,
the weighted-average fair value of stock options granted in 1997 and 1996 was
$2.88 per share and $1.93 per share, respectively. The fair value for stock
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1997 and 1996:
risk-free interest rate of 5.67% and 6.22%, respectively; no dividend yield;
volatility factor of the expected market price of the Common Stock of 0.164 and
0.413, respectively; and a weighted-average expected life of the options of five
years. Pro forma results under SFAS No. 123 in 1997 and 1996 are not likely to
be representative of future pro forma results because, for example, options vest
over several years and additional awards may be made in future years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
Pursuant to the Incentive Plan, restricted stock awards are rights granted to an
employee to receive shares of stock without payment but subject to forfeiture
and other restrictions as set forth in the Incentive Plan. Generally, the
restricted stock awarded, and the right to vote such stock or to receive
dividends thereon, may not be sold, exchanged or otherwise disposed of during
the restricted period. Except as otherwise determined by the Compensation
Committee, the restrictions and risks of forfeiture will lapse in three equal
annual installments commencing one year after the date of grant.
In 1996, the Compensation Committee awarded 650,000 shares of restricted Common
Stock to certain executive officers of the Company. Restrictions on these shares
generally lapsed based upon the market price of the Common Stock reaching
certain targeted stock prices unless less than half of such shares awarded
vested within two years after the date of grant, at which time a number of
shares would vest so that the total number of vested shares equaled 50% of the
original grants. In addition, a recipient of these restricted stock awards
receives a cash payment from the Company upon the lapse of restrictions in an
amount sufficient to insure that the recipient receives the Common Stock net of
all taxes imposed upon the recipient because of the receipt of such Common Stock
and cash payment. Restrictions applicable to these shares generally lapsed upon
reaching certain targeted stock prices in 1997 and 1996 and, accordingly, the
fair value of these shares was amortized to expense ($2,051 in 1997 and $2,345
in 1996) in connection therewith. In addition, the tax gross-up expense related
to these restricted shares totaled $3,856 and $2,764 in 1997 and 1996,
respectively. The
37
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
weighted-average fair value of restricted Common Stock awarded in 1996 was $4.87
per share as determined under SFAS No. 123.
In November 1997, the Board of Directors of the Company adopted the Bally Total
Fitness Holding Corporation Employee Stock Purchase Plan (the "Stock Purchase
Plan"). The Stock Purchase Plan provides for the purchase of Common Stock by
eligible employees (as defined) electing to participate in the plan. The stock
can generally be purchased semi-annually at a price equal to the lesser of: (i)
95% of the fair market value of the Common Stock on the date when a particular
offering commences or (ii) 95% of the fair market value of the Common Stock on
the date when a particular offering expires. For each offering made under the
Stock Purchase Plan, each eligible employee electing to participate in the Stock
Purchase Plan will automatically be granted shares of Common Stock equal to the
number of full shares which may be purchased from the employee's elected payroll
deduction, with a maximum payroll deduction equal to 10% of eligible
compensation, as defined. The first offering under this plan commenced on
January 1, 1998 and expires on March 31, 1998. Thereafter, offerings shall
commence on each April 1 and October 1 and expire on the following September 30
and March 31, respectively, until the Stock Purchase Plan is terminated or no
additional shares are available for purchase. At December 31, 1997, 250,000
shares of Common Stock were available for future purchases under the Stock
Purchase Plan. Pursuant to APB No. 25, no expense is recorded by the Company in
connection with this plan.
Prior to the Spin-off, certain officers and key employees of the Company
participated in the 1989 Incentive Plan of Entertainment (the "1989 Plan"),
pursuant to which Entertainment granted these individuals options (generally
becoming exercisable in three equal annual installments commencing one year
after the date of grant) to purchase Entertainment common stock at a price equal
to the fair market value of the stock at the date of grant. Pursuant to the 1989
Plan, following the Spin-off, these officers and key employees no longer
affiliated with Entertainment could no longer participate in this plan. As a
result, their unexercisable options were cancelled on January 9, 1996, and their
vested options terminated 90 days thereafter to the extent not exercised prior
thereto.
SAVINGS PLANS
The Company sponsors several defined contribution plans that provide retirement
benefits for certain full-time employees. Eligible employees may elect to
participate by contributing a percentage of their pre-tax earnings to the plans.
Employee contributions to the plans, up to certain limits, are matched in
various percentages by the Company. The expense related to the plans totaled
$1,106, $974 and $557 in 1997, 1996 and 1995, respectively.
COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases various fitness center facilities, office facilities, and
equipment under operating leases expiring in periods ranging from one to
twenty-five years excluding optional renewal periods. Certain of the leases
contain contingent rental provisions generally related to cost of living
criteria or revenues of the respective fitness centers. Rent expense under
operating leases was $89,384, $90,060 and $90,318 for 1997, 1996 and 1995,
respectively.
38
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
Minimum future rent payments under long-term noncancellable operating leases in
effect as of December 31, 1997, exclusive of taxes, insurance, other expenses
payable directly by the Company and contingent rent, are $84,519, $82,807,
$78,265, $73,782 and $70,353 for 1998 through 2002, respectively, and $405,425
thereafter.
Included in the amounts above are leases with real estate partnerships in which
certain of the Company's then current executive officers had ownership
interests. Rent expense under these leases was $808, $2,002 and $1,991 for 1997,
1996 and 1995, respectively. In addition, these leases require minimum rent
payments of $845 for 1998.
LITIGATION
A class action which has been certified entitled Jackson v. Health & Tennis
Corporation of America was filed in the state district court in Bexar County,
Texas on May 8, 1995. The complaint alleges that the defendant, a subsidiary of
the Company, charged excessive amounts on its financed memberships in violation
of the Texas Credit Code and the Texas Deceptive Trade Practices--Consumer
Protection Act. A purported class action which has not been certified entitled
Vasquez et al. v. Bally Total Fitness Corporation, d/b/a Bally's was filed in
state district court in Bexar County, Texas on September 18, 1997. The complaint
alleges that the defendant, a subsidiary of the Company, charged excessive
amounts on its financed memberships in violation of the Texas Credit Code, the
Federal Truth-in-Lending Act and Federal Reserve Board regulations. The relief
sought in both cases is damages equal to the alleged overpayments and statutory
remedies. The Company is currently unable to accurately determine within a
meaningful range the amount sought in these actions because Texas law on what
constitutes actual damages for any class member is unclear. The Company is
vigorously defending these actions. The outcome of this litigation is not
currently determinable and, consequently, the Company cannot predict whether it
will have a material adverse effect on the Company's financial condition or
results of operations in any future period.
The Company is involved in various other claims and lawsuits incidental to its
business, including claims arising from accidents at its fitness centers. In the
opinion of management, the Company is adequately insured against such claims and
lawsuits, and any ultimate liability arising out of such claims and lawsuits
will not have a material adverse effect on the financial condition or results of
operations of the Company.
TRANSACTIONS WITH ENTERTAINMENT
In January 1996, the Company and Entertainment entered into a Trademark License
Agreement pursuant to which Entertainment (Hilton after the Merger) licenses the
use of the name "Bally" and certain trademarks, trade names and service marks to
the Company in connection with its fitness center business. The license is for a
period of ten years, subject to termination in certain circumstances. The
Company paid no royalty or license fee for 1996 and pays a fee of $1,000 per
year thereafter. Following the initial ten-year term, the Company has an option
to renew the license for an additional five-year period at a rate equal to the
greater of the then market rate or $1,000 per year.
In connection with the Spin-off, Entertainment purchased a fitness center from
the Company for $6,200. The Company and Entertainment entered into a management
agreement pursuant to which the Company provides certain administrative services
to Entertainment in connection with the operation of this fitness center,
including membership contract
39
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
processing, membership card issuance, collections, processing cash receipts and
renewal solicitation. Entertainment pays the Company a management fee equal to
4% of membership revenues and 2% of total revenues of this fitness center for
these services, which was $213 and $279 for 1997 and 1996, respectively. In
addition, Entertainment purchased from the Company all of the shares of capital
stock and warrants to purchase shares of capital stock of Holmes Place PLC owned
by the Company, as well as a note receivable from Holmes Place PLC held by the
Company, for $1,800. For financial accounting purposes, because of
Entertainment's ownership interest at the time, the excess of the sales price
over the historical net book value of the fitness center and Holmes Place PLC
assets of $5,988 was accounted for as an increase to stockholders' equity, net
of income taxes of $2,096.
In January 1996, the Company and Entertainment entered into a Transitional
Services Agreement pursuant to which Entertainment provided the Company certain
services for a period of one year following the Spin-off. The services provided
to the Company by Entertainment included services relating to insurance, tax
matters, accounting and other financial services and the administration of
employee benefit programs. The Company provided payroll services to
Entertainment during this period. The net amount charged to the Company by
Entertainment in 1996 pursuant to the Transitional Services Agreement was
$2,344, based on the costs incurred for such services. Prior to the Spin-off,
the Company and Entertainment reimbursed each other for the proportionate share
of costs (salaries, benefits, rent, etc.) related to employees performing
functions on behalf of both companies, based on estimates of time spent on
behalf of each company. The net amount charged by Entertainment in 1995 was
$3,045. Management believes that the method used to allocate these costs was
reasonable. In addition, certain of the Company's insurance coverage was
obtained by Entertainment pursuant to corporate-wide programs and Entertainment
charged the Company its proportionate share of the respective insurance
premiums, which totaled $4,625 and $5,668 for 1996 and 1995, respectively.
Pursuant to the Transitional Services Agreement, the Company indemnified
Entertainment against (i) debts and liabilities of the Company and (ii)
liabilities relating to litigation currently pending or claims, controversies or
other causes of action relating to the Company's business arising through the
Distribution Date. The Transitional Services Agreement also provided for the
payment by the Company of $15,200 due Entertainment under the prior tax sharing
agreement (plus interest at 10% per annum from the Distribution Date). At the
time of the Merger, the $15,200 of indebtedness was forgiven by Hilton, which
the Company reflected as an extraordinary gain. The Company also paid interest,
calculated primarily at a prime rate, on advances from Entertainment. Interest
paid to Entertainment was $1,551 and $430 for 1996 and 1995, respectively.
PRO FORMA INFORMATION (UNAUDITED)
The net loss for 1995 reflects a federal income tax benefit arising from the
Company's prior tax sharing agreement with Entertainment of $7,069. Pro forma
loss per common share for 1995 has been determined giving effect to (i)
adjustments made to reflect the income tax benefit as if the Company had filed
its own separate consolidated income tax return for the year, which results in a
pro forma net loss of $38,469, and (ii) the distribution of 11,845,161 shares of
Common Stock to Entertainment stockholders as if such distribution had taken
place as of the beginning of the year.
40
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
SUPPLEMENTARY DATA
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
(All dollar amounts in millions, except share data and footnotes)
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------- ------------- ------------- -------------
1997 1996 1997 1996 1997 1996 1997 1996
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $168.4 $163.7 $161.8 $158.7 $165.1 $156.6 $165.7 $160.2
Operating income (loss) 6.2 (.2) 3.2 4.0 .9 2.8 9.6 12.5
Income (loss) before
extraordinary item (5.7) (12.0) (7.3) (7.9) (10.3) (9.2) (.2) 4.2
Extraordinary gain (loss)
on extinguishment of
debt (21.4) 5.7
Net income (loss) (5.7) (12.0) (7.3) (7.9) (10.3) (9.2) (21.6) 9.9
Basic earnings (loss) per
common share:
Income (loss) before
extraordinary item $(.46) $(.98) $(.59) $(.65) $(.60) $(.76) $(.01) $.35
Extraordinary gain
(loss) on extin-
guishment of debt (1.04) .46
Net income (loss) (.46) (.98) (.59) (.65) (.60) (.76) (1.05) .81
Diluted earnings (loss)
per common share:
Income (loss) before
extraordinary item $(.46) $(.98) $(.59) $(.65) $(.60) $(.76) $(.01) $.33
Extraordinary gain
(loss) on extin-
guishment of debt (1.04) .44
Net income (loss) (.46) (.98) (.59) (.65) (.60) (.76) (1.05) .77
- -------------
<FN>
1. The Company's operations are subject to seasonal factors.
2. The Company was a wholly owned subsidiary of Entertainment until January 9,
1996, the date 11,845,161 shares of Common Stock were distributed by
Entertainment in the Spin-off. For financial accounting purposes, the
Company has reflected the effect of the Spin-off as of December 31, 1995.
3. The extraordinary loss on extinguishment of debt for the quarter ended
December 31, 1997 results from a refinancing of the Company's subordinated
debt and credit facility. The extraordinary gain on extinguishment of debt
for the quarter ended December 31, 1996 consists of (i) a gain of $9.9
million ($.81 per share basic and $.77 per share diluted) resulting from a
$15.2 million tax obligation to Entertainment which was forgiven as part of
the December 1996 merger of Entertainment with and into Hilton and (ii) a
charge of $4.2 million ($.35 per share basic and $.33 per share diluted)
resulting from a refinancing of the Company's securitization facility.
</FN>
</TABLE>
41
<PAGE>
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS
Pursuant to the Restated Certificate of Incorporation of the Company (the
"Company Certificate") and the Amended and Restated By-Laws of the Company (the
"Company Bylaws"), the Board of Directors of the Company (the "Board") shall
consist of not less than three and not more than seventeen individuals divided
into three classes, with each director serving a three-year term (after the
initial term). Set forth below is certain information as to persons who
currently serve as directors and executive officers of the Company. The Class II
directors hold office until the Annual Meeting of Stockholders in 1998,
currently scheduled for June 1998, the Class III directors hold office until the
Annual Meeting of Stockholders in 1999 and the Class I directors hold office
until the Annual Meeting of Stockholders in 2000. Thereafter, stockholders will
elect the directors of each class at the appropriate succeeding Annual Meeting
of Stockholders.
DIRECTORS OF THE REGISTRANT
Class II
Lee S. Hillman has been a director of the Company since September 1992 and was
elected President and Chief Executive Officer of the Company in October 1996.
Additionally, Mr. Hillman was Treasurer of the Company from April 1991 to
October 1996, Executive Vice President of the Company from September 1995 to
October 1996, Senior Vice President of the Company from April 1991 to September
1995 and Chief Financial Officer of the Company from April 1991 to May 1994. Mr.
Hillman was Vice President, Chief Financial Officer and Treasurer of
Entertainment between November 1991 and December 1996 and Executive Vice
President of Entertainment between August 1992 and December 1996. From October
1989 to April 1991, Mr. Hillman was a partner with the accounting firm of Ernst
& Young LLP. Mr. Hillman is also a director of Continucare Corporation (a
manager of outpatient rehabilitation programs) and Holmes Place, Plc. (an
operator of fitness centers in the United Kingdom). Mr. Hillman is 42 years of
age.
James F. Mc Anally, M.D. was elected a director of the Company in December 1995.
Dr. Mc Anally is a private practitioner who specializes in hypertension and
kidney disease. He has been in private practice since 1980. Dr. Mc Anally has
been the Medical Director of Nephrology Services at Elizabeth General Medical
Center in Elizabeth, New Jersey since 1984. Dr. Mc Anally has also been Chief of
Nephrology at St. Elizabeth's Hospital in Elizabeth, New Jersey since 1981. Dr.
Mc Anally is 48 years of age.
Class III
Arthur M. Goldberg has been a director of the Company since 1990, has served as
Chairman of the Board of Directors of the Company since September 1995, and was
the Company's Chief Executive Officer from September 1995 until October 1996.
Mr. Goldberg also serves as Executive Vice President, President - Gaming
Operations and a director of Hilton (an operator of full-service hotels and
hotel-casinos), and he was Chairman of the Board of Directors and Chief
Executive Officer of Entertainment between October 1990 and December 1996, and
President of Entertainment between January 1993 and December 1996. In addition,
Mr. Goldberg has been Chairman of the Board of Directors, President and Chief
Executive Officer of Di Giorgio Corporation (a food distributor) since February
1990. Mr. Goldberg is also a director of First Union Corporation (a financial
services company) and Managing Partner of Arveron Investments L.P. (an
investment partnership). Mr. Goldberg is 56 years of age.
J. Kenneth Looloian was elected a director of the Company in December 1995. Mr.
Looloian is an Executive Vice President of Di Giorgio Corporation, a former
partner in Arveron Investments L.P. and a former Executive Vice President of
International Controls Corporation. Mr. Looloian is also a director of
Continucare Corporation. Mr. Looloian is 75 years of age.
42
<PAGE>
Class I
Aubrey C. Lewis was initially elected a director of the Company in December
1995. Mr. Lewis has been a Vice President of Woolworth Corporation (a global
retailer) since 1967. Mr. Lewis is also a director of the United States Naval
Academy Foundation, the University of Notre Dame, the Port Authority of New York
and New Jersey, the New Jersey State Chamber of Commerce and the Y.M.C.A. of
Chinatown in New York City. Mr. Lewis is 63 years of age.
Liza M. Walsh was initially elected a director of the Company in December 1995.
Ms. Walsh has been an attorney at the law firm of Connell, Foley & Geiser since
1986 and has been a partner of the firm since 1992, concentrating in commercial
litigation. Ms. Walsh has also served as an Arbitrator for the United States
District Court for the District of New Jersey since 1990. Ms. Walsh is 39 years
of age.
OFFICERS OF THE REGISTRANT
Executive Officers
Information with respect to Lee S. Hillman, an executive officer who is also a
director of the Company, is set forth above. Certain information with respect to
other executive officers is as follows.
John W. Dwyer was elected Vice President and Chief Financial Officer of the
Company in May 1994, a Senior Vice President of the Company in September 1995,
Treasurer of the Company in October 1996 and Executive Vice President of the
Company in November 1997. Mr. Dwyer was Corporate Controller of Entertainment
between June 1992 and December 1996 and a Vice President of Entertainment
between December 1992 and December 1996. From October 1986 to June 1992, Mr.
Dwyer was a partner with the accounting firm of Ernst & Young LLP. Mr. Dwyer is
45 years of age.
William G. Fanelli was elected Senior Vice President, Operations of the Company
in November 1997 and was Vice President, Strategic Operations of the Company
from November 1996 to November 1997. Mr. Fanelli was Director, Business
Development of Entertainment from October 1993 to December 1996 and, for
approximately nine years prior to October 1993, was employed by the accounting
firm of Ernst & Young LLP. Mr. Fanelli is 35 years of age.
Cary A. Gaan was elected Senior Vice President and General Counsel of the
Company in January 1991 and Secretary of the Company in April 1996. Mr. Gaan
served as a Vice President of the Company from 1987 to 1991. Mr. Gaan is 52
years of age.
Harold Morgan has been employed by the Company since August 1991 and was elected
a Vice President of the Company in January 1992 and Senior Vice President, Human
Resources of the Company in September 1995. Mr. Morgan was Vice President, Human
Resources of Entertainment between December 1992 and December 1996. From 1985
until August 1991, Mr. Morgan was Director of Employee and Labor Relations of
the Hyatt Corporation. Mr. Morgan is 41 years of age.
Paul A. Toback was elected Senior Vice President, Corporate Development of the
Company in March 1998, Vice President, Corporate Development of the Company in
November 1997 and Vice President of the Company in September 1997. From January
1995 to August 1997, Mr. Toback was Senior Vice President and Chief Operating
Officer of Globetrotters Engineering Corp. and from January 1993 to December
1994, he served as Executive Assistant to the Chief of Staff at the White House.
Prior to January 1993, Mr. Toback was Director of Administration for Mayor Daley
in the City of Chicago and an attorney at the law firm of Katten, Muchin &
Zavis. Mr. Toback is 34 years of age.
John H. Wildman was elected Senior Vice President, Sales and Marketing of the
Company in November 1996 and Vice President, Sales and Marketing of the Company
in September 1995. For approximately four years prior thereto, Mr. Wildman was a
Senior Area Director of the Company. Mr. Wildman is 38 years of age.
43
<PAGE>
Other Corporate Officers
Julie Adams was elected Vice President, Membership Services of the Company in
November 1997. Ms. Adams was Vice President and Controller of the Company from
January 1994 to November 1997, Controller of the Company from December 1992 to
January 1994 and Director of Financial Reporting of the Company from August 1985
to December 1992. Ms. Adams is 52 years of age.
Jason M. Conviser, Ph.D. was elected Vice President, Clinical Services of the
Company in November 1997. From January 1991 until November 1997, Dr. Conviser
was President of JMC & Associates. Dr. Conviser is 43 years of age.
Paul E. Heckmann was elected Vice President, Real Estate and Construction of the
Company in September 1995. For approximately 13 years prior thereto, Mr.
Heckmann was Director, Construction of the Company. Mr. Heckmann is 58 years of
age.
Michael A. Karoff was elected Vice President, Product Marketing of the Company
in November 1997 and was Senior Director, New Product Marketing of the Company
from January 1997 to November 1997. From May 1993 until January 1997, Mr. Karoff
was President of Compass Financial Services, which provided consulting services
to the Company. Mr. Karoff is 44 years of age.
Geoffrey M. Scheitlin was elected Vice President and Controller of the Company
in November 1997 and was Assistant Treasurer of the Company from July 1988 to
November 1997. Mr. Scheitlin is 39 years of age.
David D. Southern was elected Vice President, Public and Investor Relations of
the Company in November 1997. From November 1990 until November 1997, Mr.
Southern was the National Director of Sales and Marketing for the Health Care
Industry Services practice of the accounting firm of Ernst & Young LLP. Mr.
Southern is 40 years of age.
Regional Officers
Sandor Feher was elected Regional Vice President of the Company in November
1997. For approximately eight years prior thereto, Mr. Feher was a Senior Area
Director of the Company. Mr. Feher is 54 years of age.
Howard Reser was elected Regional Vice President of the Company in November
1997. Mr. Reser was a Senior Area Director of the Company for approximately ten
years prior thereto except from October 1993 to March 1995, when he served as
Vice President, Operations of the Company. Mr. Reser is 56 years of age.
Daniel L. Tobol was elected Regional Vice President of the Company in November
1997. For approximately six years prior thereto, Mr. Tobol was a Senior Area
Director of the Company. Mr. Tobol is 42 years of age.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company is required to identify any director, executive officer, beneficial
owner of more than ten percent of the Common Stock or any other person subject
to Section 16 of the Exchange Act that failed to file on a timely basis, as
disclosed in their forms, reports required by Section 16(a) of the Exchange Act.
Based on a review of forms submitted to the Company, the Company believes that
during 1997 all such filing requirements were complied with by its directors and
executive officers except for late filings of Form 4's for Mr. Morgan and Mr.
Wildman for shares of Common Stock acquired at the time of the 1997 Stock
Offering, and David M. Tolmie for shares of Common Stock sold in September 1997.
Mr. Tolmie served as Senior Vice President, New Business Development of the
Company through September 12, 1997, when he resigned as an officer and employee
of the Company.
44
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Members of the Board of Directors who are also employees of the Company do not
receive any additional compensation for service on the Board or any committees
of the Board. Members of the Board who are not employees of the Company
presently receive an annual retainer of $27,500 plus a $1,000 stipend for each
Board meeting attended. Non-employee directors presently receive additional
stipends for service on committees of the Board of $500 per year for committee
members and $1,000 per year for committee chairmen.
The following table sets forth, for each of the years indicated, the
compensation paid by the Company to its Chief Executive Officer during 1997, and
the four other most highly compensated executive officers of the Company as of
December 31, 1997 (collectively, the "Named Executive Officers"). During these
years, the Named Executive Officers were compensated in accordance with the
plans and policies of the Company. All reference to securities in the following
table relate to awards of options to purchase Common Stock.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------- -------------------------
OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
COMPENSATION STOCK AWARDS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) (1) ($) (2) OPTIONS(#) ($)
- --------------------------- ---- --------- -------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lee S. Hillman (3) 1997 375,000 125,000(4) 3,499,700(5) - 125,000 19,704(6)
President and Chief 1996 34,000 - - 721,875 150,000 -
Executive Officer 1995 - - - - - -
John W. Dwyer (7) 1997 225,000 75,000(4) 1,407,381(5) - 45,000 12,204(6)
Executive Vice President, 1996 170,600 - - 288,750 35,000 -
Chief Financial Officer 1995 - - - - - -
and Treasurer
Cary A. Gaan 1997 225,000 45,000(4) 1,407,381(5) - 15,000 954(6)
Senior Vice President, 1996 225,000 40,000 - 288,750 35,000 12,091
Secretary and General 1995 225,000 70,000 - - - 40,263
Counsel
Harold Morgan (8) 1997 175,000 40,000(4) 1,407,381(5) - 15,000 9,502(6)
Senior Vice President, 1996 158,100 - - 288,750 35,000 -
Human Resources 1995 - - - - - -
John H. Wildman 1997 200,000 70,000(9) 1,407,381(5) - 15,000 -
Senior Vice President, 1996 200,000 40,000 - 288,750 45,000 -
Sales and Marketing 1995 175,000 70,400 - - - -
</TABLE>
- -------------
(1) Certain incidental personal benefits to executive officers of the Company
may result from expenses incurred by the Company in the interest of
attracting and retaining qualified personnel. These incidental personal
benefits made available to the Named Executive Officers during 1997 are not
described herein because the incremental cost to the Company of such
benefits is below the Securities and Exchange Commission (the "Commission")
disclosure threshold.
(2) The number of shares of restricted stock awarded to Messrs. Hillman, Dwyer,
Gaan, Morgan and Wildman during 1996 was 150,000, 60,000, 60,000, 60,000
and 60,000, respectively. The value of such shares was determined by the
closing price of the Common Stock at the date of grant. Restrictions on
these shares generally lapsed based upon the market price of the Common
Stock reaching certain targeted stock prices unless less than half of such
shares awarded vested within two years
45
<PAGE>
after the date of grant, at which time a number of shares would vest so
that the total number of vested shares equaled 50% of the original grants.
In addition, a recipient of these restricted stock awards receives a cash
payment from the Company upon the lapse of restrictions in an amount
sufficient to insure that the recipient receives the Common Stock net of
all taxes imposed upon the recipient because of the receipt of such Common
Stock and cash payment.
(3) Mr. Hillman served as Executive Vice President and Treasurer of the Company
through October 7, 1996, when he became President and Chief Executive
Officer of the Company. For serving in such capacities, Mr. Hillman
received (i) an annual base salary of $22,500 through December 18, 1996
pursuant to his former employment agreement with the Company and (ii) an
annual base salary of $375,000 from December 19, 1996 through December 31,
1997 pursuant to an employment arrangement with the Company. In addition,
Mr. Hillman served as Executive Vice President, Chief Financial Officer and
Treasurer of Entertainment until December 18, 1996. For serving in such
capacities, Mr. Hillman received compensation from Entertainment and was
awarded non-qualified options to purchase shares of Entertainment common
stock during 1996 and 1995. The compensation paid to Mr. Hillman by
Entertainment for the years covered was for services rendered to
Entertainment and all of its subsidiaries.
(4) Represents 50% of the bonus earned in 1997 by the Named Executive Officer
under the Company's 1997 Bonus Plan, which was paid in March 1998. The
remaining 50% is to be paid by March 15, 1999, subject to certain
forfeiture provisions. See "The Company's 1997 Bonus Plan."
(5) Represents amount paid by the Company to the Named Executive Officer for
the tax gross-up upon the final vesting in August 1997 of the restricted
stock awards described in Note (2) above.
(6) Represents amounts matched by the Company in connection with the Named
Executive Officer's participation in the Company's savings plans. See "The
Company's Retirement Savings Plan" and "The Company's Savings Plan."
(7) Mr. Dwyer also served as Vice President and Corporate Controller of
Entertainment until December 18, 1996. For serving in such capacities, Mr.
Dwyer received compensation from Entertainment and was awarded
non-qualified options to purchase shares of Entertainment common stock
during 1996 and 1995. Pursuant to the Transitional Services Agreement with
Entertainment, 75% of Mr. Dwyer's salary was allocated to the Company
through December 18, 1996, at which time the Company began paying all of
Mr. Dwyer's salary.
(8) Mr. Morgan also served as Vice President, Human Resources of Entertainment
until December 18, 1996. For serving in such capacities, Mr. Morgan
received compensation from Entertainment and was awarded non-qualified
options to purchase shares of Entertainment common stock during 1996 and
1995. Pursuant to the Transitional Services Agreement with Entertainment,
90% of Mr. Morgan's salary was allocated to the Company through December
18, 1996, at which time the Company began paying all of Mr. Morgan's
salary.
(9) Represents a $40,000 bonus earned in and paid to Mr. Wildman in 1997 and
50% ($30,000) of the bonus earned in 1997 by Mr. Wildman under the
Company's 1997 Bonus Plan, which was paid in March 1998. The remaining 50%
is to be paid by March 15, 1999, subject to certain forfeiture provisions.
See "The Company's 1997 Bonus Plan."
46
<PAGE>
EMPLOYMENT AGREEMENTS
Mr. Hillman and the Company have reached an agreement in principal with respect
to his employment effective as of January 1, 1998. The agreement will be for a
three-year term through December 31, 2000 and provide for a base salary of
$450,000, participation in Company bonus plans and a bonus payable at the
discretion of the Company. In the event a change in control of the Company
occurs and Mr. Hillman is asked to leave the employ of the Company or, absent
cause, Mr. Hillman elects to terminate his employment because he has been
constructively terminated, Mr. Hillman will be entitled to receive a lump sum
payment equal to 36 months base salary and two times the average of bonuses
(other than for 1996), if any, paid to Mr. Hillman by the Company for the three
prior years, and assignment of insurance policies and health protection plans
provided by the Company. In addition, if any of these payments precipitate an
excise tax, Mr. Hillman will be entitled to be paid the amount of those excise
taxes plus a tax gross-up payment with respect to the excise tax payment. Under
the terms contemplated by the agreement in principal, if a change in control of
the Company were to occur on April 15, 1998 and Mr. Hillman were asked to leave
the employ of the Company or, absent cause, constructively terminated, Mr.
Hillman would be entitled to a payment of $1,850,000. Additionally, if a change
in control of the Company were to occur on April 15, 1998, Mr. Hillman would be
permitted to elect, at his option, to terminate his employment agreement and
receive a lump sum of six months salary ($225,000). The agreement in principal
also provides that Mr. Hillman will receive a demand registration right which
will require the Company to file a shelf registration statement under the
Securities Act of 1933, as amended, registering the 735,701 shares of Common
Stock underlying the warrant held by Mr. Hillman.
Mr. Dwyer, the Company and Entertainment entered into an employment agreement
effective as of January 1, 1996 for an initial term of three years, after which
the agreement will continue from year to year unless terminated by any party in
his or its sole discretion on 90 days' notice given prior to the expiration of
the term. Effective December 19, 1996, Entertainment's obligations under this
employment agreement terminated. The agreement provides for an annual base
salary of $225,000 and a bonus payable at the discretion of the Company.
Mr. Gaan and the Company entered into an employment agreement effective as of
March 20, 1997 for an initial term of three years, after which the agreement
will continue from year to year unless terminated by either party in its
discretion on six months' notice given prior to the expiration of the term. The
agreement provides for a base salary of $225,000 per year and a bonus payable at
the discretion of the Company. In the event of a change in control of the
Company and Mr. Gaan were asked to leave the Company or, absent cause, Mr. Gaan
elects to terminate his employment because he has been constructively
terminated, Mr. Gaan will be paid a lump sum equal to 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 the bonuses, if any,
paid by the Company to Mr. Gaan for the three prior years and the bonus, if any,
for the prior year. If a change in control of the Company were to occur on
April 15, 1998 and Mr. Gaan were asked to leave the employ of the Company, Mr.
Gaan would be entitled to a payment of $540,000 under his employment agreement.
Mr. Morgan, the Company and Entertainment entered into an employment agreement
effective as of January 1, 1996 for an initial term of three years, after which
the agreement will continue from year to year unless terminated by any party in
his or its sole discretion on 60 days' notice given prior to the expiration of
the term. Effective December 19, 1996, Entertainment's obligations under this
employment agreement terminated. The agreement provides for an annual base
salary of $175,000 and a bonus payable at the discretion of the Company.
Mr. Wildman and the Company entered into an employment agreement effective as of
October 7, 1996 for an initial term of two years, after which the agreement will
continue from year to year unless terminated by either party in his or its sole
discretion on 60 days' notice given prior to the expiration of the term. The
agreement provides for an annual base salary of $200,000 and a bonus payable at
the discretion of the Company, which shall not be less than $40,000. In the
event of a change in control of the Company and the successor in control,
without cause, terminates the agreement, Mr. Wildman will be paid a lump sum
equal to 12 months base salary or an
47
<PAGE>
amount equal to his base salary for the balance of the two-year term, whichever
is greater, and the greater of the average of the bonuses, if any, paid by the
Company to Mr. Wildman for the two prior years and the bonus, if any, for the
prior year. For purposes of the agreement, if Mr. Wildman is constructively
terminated by the successor in control, the successor in control shall be deemed
to have terminated Mr. Wildman without cause. If a change in control of the
Company were to occur on April 15, 1998 and Mr. Wildman were asked to leave the
employ of the Company, Mr. Wildman would be entitled to a payment of $300,000
under his employment agreement.
STOCK OPTION AND SAR GRANTS
The following table sets forth certain information regarding options to purchase
Common Stock granted to the Named Executive Officers during 1997.
<TABLE>
<CAPTION>
OPTION/SAR(1) GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED(#)(2) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- --------------- ------------- ------------ -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Lee S. Hillman 125,000 17.1 17.5625 11/21/07 1,380,620 3,498,763
John W. Dwyer 20,000 2.7 12.00 8/6/07 150,935 382,498
25,000 3.4 17.5625 11/21/07 276,124 699,753
Cary A. Gaan 15,000 2.1 17.5625 11/21/07 165,674 419,852
Harold Morgan 15,000 2.1 17.5625 11/21/07 165,674 419,852
John H. Wildman 15,000 2.1 17.5625 11/21/07 165,674 419,852
- -----------
<FN>
(1) There have been no SARs granted by the Company to date.
(2) One-third of the options granted may be exercised on the first anniversary
of the date of grant, two-thirds after two years from the date of grant and
100% after three years from the date of grant. Each grant was made on the
date which is ten years prior to the date of expiration set forth in the
table.
(3) The potential realizable values represent future opportunity and have not
been reduced to present value in 1997 dollars. The dollar amounts included
in these columns are the result of calculations at assumed rates set by the
Commission for illustration purposes. These rates are not intended to be a
forecast of the Common Stock price and are not necessarily indicative of the
values that may be realized by the Named Executive Officer. The potential
realizable values are based on arbitrarily assumed annualized rates of stock
price appreciation of 5% and 10% over the full ten-year term of the options.
For example, in order for an individual named above who received options
with an exercise price of $17.5625 per share to realize the potential values
set forth in the 5% and 10% columns in the table above, the price per share
of the Common Stock would have to be approximately $28.61 and $45.55,
respectively.
</FN>
</TABLE>
48
<PAGE>
STOCK OPTIONS AND SAR EXERCISES
The following table sets forth certain information concerning exercises of stock
options during 1997 by each of the Named Executive Officers and their stock
options outstanding as of December 31, 1997.
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES (1)
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FISCAL AT FISCAL
YEAR-END(#) YEAR-END($) (2)
SHARES ---------------- ----------------
ACQUIRED ON VALUE EXERCISABLE(E)/ EXERCISABLE(E)/
NAME EXERCISE (#) REALIZED($) UNEXERCISABLE(U) UNEXERCISABLE(U)
- ---------------- ------------ ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Lee S. Hillman - - - - 50,000(E) 837,500(E)
225,000(U) 2,214,063(U)
John W. Dwyer - - - - 11,667(E) 207,089(E)
68,333(U) 719,473(U)
Cary A. Gaan - - - - 11,667(E) 207,089(E)
38,333(U) 478,848(U)
Harold Morgan - - - - 11,667(E) 207,089(E)
38,333(U) 478,848(U)
John H. Wildman - - - - 15,000(E) 266,250(E)
45,000(U) 597,188(U)
- -------------
<FN>
(1) There have been no SARs granted by the Company to date.
(2) Value is based on the closing price of a share of Common Stock as of
December 31, 1997 ($21.875) minus the exercise price.
</FN>
</TABLE>
BENEFIT PLANS
The Company's 1996 Non-Employee Directors' Stock Option Plan
The Directors' Plan is intended to encourage non-employee directors of the
Company to acquire or increase their ownership of Common Stock on reasonable
terms, and to foster a strong incentive to put forth maximum effort for the
continued success and growth of the Company. The Directors' Plan provides for
the granting of non-qualified stock options to purchase an aggregate of 100,000
shares of Common Stock to current and future non-employee directors of the
Company.
Under the Directors' Plan, each of the non-employee directors of the Company was
granted options to purchase 5,000 shares of Common Stock in both January 1996
and January 1998. Pursuant to the Directors' Plan, any director who subsequently
joins the Board will be granted on the first business day following the first
day of his term, an option to purchase 5,000 shares of Common Stock. On the
second anniversary of that date, such director that is still a director will be
granted an option to purchase an additional 5,000 shares of Common Stock. If the
number of shares available for grant under the Directors' Plan on a scheduled
grant date is insufficient to make all the grants, then each eligible director
will receive an option to purchase a pro rata number of the available shares.
The option price per share for grants under the Directors' Plan will be the fair
market value of the shares of Common Stock on the date of grant. Under the
Directors' Plan,
49
<PAGE>
fair market value is generally the closing price of the Common Stock on
NASDAQ/NYSE on the last business day prior to the date on which the value is to
be determined.
Options granted under the Directors' Plan will be exercisable for a term of ten
years from the date of grant, subject to earlier termination, and may be
exercised as follows: one-third after one year from the date of grant,
two-thirds after two years from the date of grant and 100% after three years
from the date of grant.
In the event that a director ceases to be a member of the Board (other than by
reason of death or disability), an option may be exercised by the director (to
the extent the director was entitled to do so at the time he ceased to be a
member of the Board) at any time within the later of (i) three months after he
ceases to be a member of the Board and (ii) nine months after the most recent
grant of an option to such director under the Directors' Plan, but not beyond
the term of the option. If the director dies or becomes disabled while he is a
member of the Board, an option may be exercised in full by a legatee of the
director under his will, or by him or his personal representative or
distributees, as the case may be, at any time within 12 months after his death
or disability, but not beyond the term of the option; provided, that in the
event of disability, an option may not be exercised prior to the six-month
anniversary of the date the option was granted. If a director, following the
termination of his directorship, dies within the later of (i) three months after
he ceases to be a member of the Board and (ii) nine months after the most recent
grant of an option to such director under the Directors' Plan, an option may be
exercised (to the extent the director was entitled to do so at the time of his
death) by a legatee of the director under his will, or by his personal
representative or distributees, as the case may be, at any time within 12 months
after his death, but not beyond the term of the option.
Options granted under the Directors' Plan will be subject to adjustment upon a
recapitalization, stock split, stock dividend, merger, reorganization,
liquidation, extraordinary dividend, or other similar event affecting the Common
Stock. Options will not be transferable other than by will or pursuant to the
laws of descent and distribution or pursuant to a qualified domestic relations
order, and will be exercisable during the lifetime of an option holder only by
such holder or his personal representative in the event of disability.
Upon a change in control of the Company (as defined in the Directors' Plan),
each option granted under the Directors' Plan will terminate on the later of (i)
90 days after the occurrence of the change in control and (ii) seven months
following the date of grant of each option, and an option holder will have the
right, commencing at least five days prior to the change in control and subject
to any other limitation on the exercise of the option in effect on the date of
exercise, to immediately exercise any options in full, to the extent they
previously have not been exercised.
The Directors' Plan will terminate on January 3, 2006, and options may not be
granted under the Directors' Plan after that date, although the terms of any
option may be amended in accordance with the Directors' Plan at any date prior
to the end of the term of that option. Any options outstanding at the time of
termination of the Directors' Plan will continue in full force and effect
according to the terms and conditions of the option and the Directors' Plan.
The Directors' Plan may be amended by the Board, provided that stockholder
approval will be necessary if required under Rule 16b-3 ("Rule 16b-3") of the
General Rules and Regulations of the Exchange Act, and no amendment may impair
any of the rights of any holder of an option previously granted under the
Directors' Plan without the holder's consent, and provided that certain
provisions of the Directors' Plan may not be amended more than once every six
months. As of February 28, 1998, 60,000 shares of Common Stock were available
for future grant under the Directors' Plan.
The Directors' Plan will be administered by the Compensation Committee. The
principal terms of the option grants are fixed in the Directors' Plan.
Therefore, the Compensation Committee will have no discretion to select which
directors receive options, the number of shares of Common Stock included in any
grant, or the exercise price of options.
50
<PAGE>
The Company's 1996 Long-Term Incentive Plan
In January 1996, the Board adopted the Incentive Plan. The Incentive Plan is
intended to encourage ownership of Common Stock by officers, other key employees
and consultants of the Company, to encourage their continued involvement with
the Company and to provide them with additional incentives to promote the
success of the Company.
The Incentive Plan authorizes the grant to the Company's officers and key
employees (including consultants providing key services to the Company) of
awards ("Awards") consisting of "incentive stock options," as that term is
defined under the provisions of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), non-qualified stock options and restricted stock
awards. Initially, 2,100,000 shares of Common Stock were available to grant
Awards under the Incentive Plan. In 1997, the Incentive Plan was amended to
increase the aggregate number of shares of Common Stock which may be granted
under the Incentive Plan to 3,600,000 shares. The Compensation Committee
administers the Incentive Plan and has sole discretion to determine those
employees to whom Awards are granted, the number of Awards granted, the
provisions applicable to each Award and the time periods during which Awards may
be exercisable; provided, however, that no employee may receive options, and/or
restricted stock subject to performance-based vesting, to acquire more than
500,000 shares of Common Stock during any given year.
The Compensation Committee may grant incentive stock options, non-qualified
stock options, or a combination of the two. The exercise price of each incentive
stock option may not be less than the fair market value of the Common Stock on
the date the option is granted. Under the Incentive Plan, fair market value is
generally the closing price of the Common Stock on NASDAQ/NYSE on the last
business day prior to the date on which the value is to be determined. Unless
the Compensation Committee determines otherwise, the option price per share of
any non-qualified stock option shall be the fair market value of the Common
Stock on the date the option is granted. The exercise price of each incentive
stock option granted to any stockholder possessing more than 10% of the combined
voting power of all classes of capital stock of the Company, or, if applicable,
a parent or subsidiary of the Company, on the date of grant must not be less
than 110% of the fair market value on that date, and no such option may be
exercisable more than five years after the date of grant.
Options granted will be exercisable for a term of not more than ten years from
the date of grant. In addition, no employee may be granted an incentive stock
option to the extent the aggregate fair market value, as of the date of grant,
of the Common Stock with respect to which incentive stock options are first
exercisable by such employee during any calendar year exceeds $100,000.
Restricted stock awards are rights granted by the Compensation Committee to
receive shares of Common Stock subject to forfeiture and other restrictions
determined by the Compensation Committee. Until the restrictions with respect to
any restricted stock award lapse, the shares will be held by the Company and may
not be sold or otherwise transferred by the employee. Except as otherwise
determined by the Compensation Committee, until the restrictions lapse, the
shares will be forfeited if the employee's employment is terminated for any
reason other than death, disability or retirement on or after the employee's
attainment of 65 years of age. Except as otherwise determined by the
Compensation Committee, all restrictions shall lapse upon the earliest of the
death, disability or retirement of the recipient employee on or after the
employee's attainment of 65 years of age. Unless the Compensation Committee
determines otherwise, one-third of the shares subject to a restricted stock
award will vest on each anniversary of the date of grant. Certain grants of
restricted stock awards will vest, in part or in whole, on the achievement of
specified performance targets. The Compensation Committee granted 650,000 shares
of restricted stock awards in 1996, which shares fully vested in August 1997
after the achievement of specified performance targets.
The Company may make cash payments to an employee who receives an Award of
restricted stock in an amount equal to the aggregate amount of federal, state
and local income taxes which such employee would be required to pay as a result
of (i) the receipt or vesting of shares of Common Stock pursuant to any Award of
restricted stock and (ii)
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<PAGE>
his receipt of any such cash payment. The recipients of the restricted stock
awarded in 1996 received such a payment in August 1997.
Awards granted under the Incentive Plan will be subject to adjustment upon a
recapitalization, stock split, stock dividend, merger, reorganization,
liquidation, extraordinary dividend, or other similar event affecting the Common
Stock. Awards, other than incentive stock options, may be granted which permit
transfer by a recipient to immediate family members, including trusts,
partnerships, limited liability companies or certain other entities existing for
their benefit. Otherwise, other than by will or the laws of descent and
distribution or, in certain circumstances, pursuant to a qualified domestic
relations order, an Award may not be transferred. An Award may be exercised
during the lifetime of the holder of the Award only by the holder, or by the
holder's personal representative in the event of disability.
In the case of a change in control of the Company, the Board may, in its sole
discretion, determine, on a case by case basis, taking into account the purposes
of the Incentive Plan, that each Award granted under the Incentive Plan will
terminate 90 days after the occurrence of such change in control, but, in the
event of any such termination (i) an option holder will generally have the
right, commencing at least five days prior to the change in control and subject
to any other limitation on the exercise of the option in effect on the date of
exercise, to immediately exercise any options in full to the extent they
previously have not been exercised and (ii) restricted stock awards will vest.
The Incentive Plan will terminate on January 3, 2006, and Awards shall not be
granted under the Incentive Plan after that date although the terms of any Award
may be amended in accordance with the Incentive Plan at any date prior to the
end of the term of such Award. Any Awards outstanding at the time of termination
of the Incentive Plan will continue in full force and effect according to the
terms and conditions of the Award and the Incentive Plan.
The Incentive Plan may be amended by the Board, provided that stockholder
approval may be necessary pursuant to Section 422 of the Code or Rule 16b-3 of
the regulations of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and provided further that no amendment may impair any rights of
any holder of an Award previously granted under the Incentive Plan without the
holder's consent. As of February 28, 1998, 1,008,885 shares of Common Stock were
available for future grant under the Incentive Plan.
The Company's Retirement Savings Plan
The Board has adopted the Bally Total Fitness Holding Corporation Management
Retirement Savings Plan (the "Retirement Plan"). The Retirement Plan is a
deferred compensation plan designed to permit a select group of management or
highly compensated employees to enhance the security of themselves and their
beneficiaries following retirement or other termination of their employment. The
Retirement Plan is intended to be an unfunded "employee pension benefit plan"
under the Employee Retirement Income Security Act of 1974, as amended, and is
maintained by the Company. The Retirement Plan is not intended to be qualified
under the Code. The Board, in its sole discretion, designates those members of
management or highly compensated employees who are eligible to participate in
the Retirement Plan.
The amount of compensation that may be deferred is presently limited pursuant to
a schedule based upon the age of the participant at the beginning of or during
the compensation year. For participants who are less than 50 years of age, a
maximum of 25% of compensation may be deferred; for those who are 50 to 54 years
of age, a maximum of 50% of compensation may be deferred; for those who are 55
to 59 years of age, a maximum of 75% of compensation may be deferred; and for
those participants who are 60 years of age or older, a maximum of 100% of
compensation may be deferred. During 1997, the Company provides a matching
contribution of 50% of the first 10% of eligible compensation the participant
defers and 0% thereafter. Matching contributions are credited to a participant's
matching account and become vested as follows: after one but less than two Years
of Deferral (as defined) they become 33 1/3% vested, after two but less than
three Years of Deferral they become 66 2/3% vested, and after more than
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<PAGE>
three Years of Deferral they become fully vested. For this purpose, a "Year of
Deferral" is credited with respect to a matching contribution for each completed
calendar year commencing after the calendar year for which the matching
contribution was made. A participant who separates from service will receive his
benefits under the Retirement Plan in a lump sum. As soon as possible (but not
later than five business days) after a change in control of the Company (as
defined), all of the participants' accounts will become 100% vested.
For 1997, the Company will contribute $387,332 to the accounts of all
participants in the Retirement Plan, of which $48,411 is allocated to the
accounts of all executive officers of the Company as a group. Named Executive
Officers receiving allocations are as follows: Mr. Hillman $18,750, Mr. Dwyer
$11,250, and Mr. Morgan $8,548.
The Company's Savings Plan
The Bally's Employee Savings Trust for Employees of Bally Total Fitness Holding
Corporation (the "Savings Plan") was adopted by the Board effective as of
October 1, 1996. The Savings Plan replaced two similar plans that were sponsored
by Entertainment and has been qualified under Section 401(a) of the Code and the
regulations thereunder. Generally, the Savings Plan covers employees who have
completed one year of service. A participant may elect to contribute 0% to 10%
(in 1% increments) of compensation received or made available during the plan
year (limited by tax laws to a maximum of $9,500 in 1997). The Company provides
a matching contribution in an amount equal to 50% of a participant's
contribution of the first $500 and, beyond that, 25% of each additional dollar
contributed up to $3,000. Matching contributions vest immediately and are
nonforfeitable. Participant and matching contributions are invested in the
investment fund or funds selected by the participant in accordance with the
Savings Plan. For 1997, the Company will contribute $718,914 to the accounts of
all participants in the Savings Plan, of which $4,344 is allocated to the
accounts of all executive officers of the Company as a group. Named Executive
Officers receiving allocations are as follows: Mr. Hillman $954, Mr. Dwyer $954,
Mr. Gaan $954, and Mr.
Morgan $954.
The Company's 1997 Bonus Plan
In February 1997, the Compensation Committee of the Board adopted the Bally
Total Fitness Holding Corporation 1997 Bonus Plan (the "Bonus Plan"). The
purpose of the Bonus Plan is to provide an additional performance incentive for
certain senior executive and area management of the Company for 1997, 1998 and
1999 (the "Plan Years"). The Compensation Committee, based upon the
recommendation of the Company's management, determines those employees who
participate in the Bonus Plan.
Two pools of participants are designated, with Pool One limited to the Company's
senior executive management and Pool Two limited to the Company's senior area
management. The bonuses for each of the pools of participants are based on
increases in the Company's earnings for a Plan Year before interest, taxes,
depreciation and amortization ("EBITDA") from the immediately preceding year
(without giving effect, for Plan Year 1997, to the restatement of the Company's
1996 consolidated financial statements). Pool One and Pool Two receive
allocations of 10% and 6% of the EBITDA increases for a Plan Year, respectively.
Each participant in a pool has a determined participation percentage of the
amount allocated to the respective pool, which is based upon the participant's
responsibilities and contributions for the Plan Year. The participation
percentages are designated by the Compensation Committee and are awarded in a
manner such that the sum of the participation percentages relating to each pool
will not exceed 100% of that pool. Each participant's share of the bonus amount
for a Plan Year will equal the individual's participation percentage for the
Plan Year multiplied by the amount allocated to the respective pool for such
Plan Year. The bonus amounts are payable by March 15th of the calendar year
following the Plan Year as follows: Plan Year 1997 bonus--50% of the bonus for
1997 to be paid by March 15, 1998; Plan Year 1998 bonus--50% of the bonus for
1997 and 50% of the bonus for 1998 to be paid by March 15, 1999; and Plan Year
1999 bonus--50% of the bonus for 1998 and 100% of the bonus for 1999 to be paid
by March 15, 2000; provided, however, if the Company's EBITDA for the year
following a Plan Year does not equal or exceed the EBITDA for that Plan Year,
any unpaid bonus relating to that Plan Year (the 50% to be paid in the second
year
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<PAGE>
following the Plan Year) is limited by a Carryover Maximum (as defined), and any
excess of the unpaid bonus over the Carryover Maximum shall be forfeited. To the
extent that the Company's federal income tax deduction for remuneration to a
participant is limited by Section 162(m) of the Code, payments under the Bonus
Plan are deferred (with interest) until Section 162(m) no longer limits the
deduction.
The determination of the participants and their participation percentages by the
Compensation Committee remains in effect until participation ceases. A person
ceases to be a participant immediately upon termination of employment with the
Company for any reason whatsoever. A person who ceases to be a participant
forfeits entitlement to future payments hereunder, other than amounts deferred
because of the Section 162(m) limitation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Common Stock as
of April 15, 1998 by the Named Executive Officers and directors of the Company
and all executive officers and directors of the Company as a group, as well as
by any beneficial owner of more than 5% of the Common Stock based upon such
owner's reported ownership of Common Stock in filings made with the Commission
pursuant to Sections 13(d) and 13(g) of the Exchange Act. The information in
this table was supplied by the named individuals/companies.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED (1)(2)(3)
------------------------------
PERCENT OF
NAME NUMBER OF SHARES CLASS
------------------------------------ ---------------- -----------
<S> <C> <C>
Arthur M. Goldberg 2,591,179 11.4%
380 Middlesex Avenue
Carteret, New Jersey 07008
Lee S. Hillman 985,201 4.6%
John W. Dwyer 93,254 *
Cary A. Gaan 83,604 *
Harold Morgan 87,755 *
John H. Wildman 107,500 *
Aubrey C. Lewis 4,129 *
J. Kenneth Looloian 5,834 *
James F. Mc Anally, M.D. 5,334 *
Liza M. Walsh 4,334 *
All executive officers and directors 3,985,874 16.8%
as a group (12 persons)
FMR Corporation 1,450,900 7.0%
82 Devonshire Street
Boston, Massachusetts 02109
Janus Capital Corporation 1,334,935 6.5%
100 Fillmore Street
Denver, Colorado 80206
Kingdon Capital Management Corporation 1,082,200 5.3%
152 West 57th Street
New York, New York 10019
<FN>
* Less than 1%
</FN>
</TABLE>
54
<PAGE>
(1) Includes, in certain instances, shares of Common Stock held in the name of
the executive officer's or director's spouse, minor children, or relatives
sharing the executive officer's or director's home, and in the case of Mr.
Goldberg, shares held by Nugget Partners, L.P., a New Jersey limited
partnership, whose sole general partner is Mr. Goldberg, the reporting of
which is required by applicable rules of the Commission, but as to which
shares of Common Stock the executive officer or director may have
disclaimed beneficial ownership.
(2) Includes the following numbers of shares of Common Stock that the following
persons have or had, within 60 days after April 15, 1998, the right to
acquire upon the exercise of stock options: Mr. Hillman, 50,000; Mr. Dwyer,
23,334; Mr. Gaan, 23,334; Mr. Morgan, 23,334; Mr. Wildman, 30,000; Mr.
Lewis, 3,334; Mr. Looloian, 3,334; Dr. Mc Anally, 3,334; Ms. Walsh, 3,334;
and all current executive officers and directors (including the foregoing)
as a group, 173,338.
(3) Includes the following numbers of shares of Common Stock that the following
persons have or had, within 60 days after April 15, 1998, the right to
acquire upon the exercise of warrants: Mr. Goldberg, 2,207,104; Mr.
Hillman, 735,701; and all current executive officers and directors
(including the foregoing) as a group, 2,942,805.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT
A partnership in which Mr. Goldberg is a 20% limited partner purchased a
facility in February 1993 from the Federal Deposit Insurance Corporation and
sold the facility in March 1998. The Company leases this facility for one of its
fitness centers. The rent did not change as a result of these transfers pursuant
to the lease for this facility. Rent is approximately $808,000 per year and is
subject to 15% increases at five and ten-year intervals. The proportionate share
of the 1997 rent payments for Mr. Goldberg was approximately $162,000. The
Company believes that the terms of this lease are at least as favorable to the
Company as those which could be obtained from unrelated parties. During 1997,
the Company paid approximately $815,000 for goods and services from a company
which employed a relative of Mr. Hillman. Based on the Company's receipt of
competitive bids for similar items, the Company believes that the terms of these
arrangements are at least as favorable to the Company as those which could be
obtained from unrelated parties.
55
<PAGE>
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A)1. INDEX TO FINANCIAL STATEMENTS
Report of independent auditors 18
Consolidated balance sheet at December 31, 1997 and 1996 19
For each of the three years in the period ended
December 31, 1997:
Consolidated statement of operations 21
Consolidated statement of stockholders' equity 22
Consolidated statement of cash flows 23
Notes to consolidated financial statements 25
Supplementary data:
Quarterly consolidated financial information (unaudited) 41
(A)2. INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule II Valuation and qualifying accounts for each of
the three years in the period ended December 31, 1997 S-1
All other schedules specified under Regulation S-X for the Company are
omitted because they are either not applicable or required under the
instructions, or because the information required is already set forth in
the consolidated financial statements or related notes thereto.
(A)3. INDEX TO EXHIBITS
* 3.1 Restated Certificate of Incorporation of the Company (filed as an
exhibit to the Company's registration statement on Form S-1 filed
January 3, 1996, registration no. 33-99844).
* 3.2 Amended and Restated By-Laws of the Company (filed as an exhibit to
the Company's registration statement on Form S-1 filed January 3,
1996, registration no. 33-99844).
* 4.1 Registration Statement on Form 8-A/A dated January 3, 1996 (file no.
0-27478).
* 4.2 Form of Rights Agreement dated as of January 5, 1996 between the
Company and LaSalle National Bank (filed as an exhibit to the
Company's registration statement on Form S-1 filed January 3, 1996,
registration no.
33-99844).
* 4.3 Indenture dated as of October 7, 1997 between the Company and
First Trust National Association, as Trustee, including the form of
Old Note and form of New Note (filed as an exhibit to the Company's
registration statement on Form S-4 filed October 31, 1997,
registration no. 333-39195).
* 4.4 Warrant Agreement dated as of December 29, 1995 between
Entertainment and the Company (filed as an exhibit to the Company's
registration statement on Form S-1 filed January 3, 1996,
registration no. 33-99844).
* 4.5 Registration Rights Agreement dated as of December 29, 1995
between Entertainment and the Company (filed as an exhibit to the
Company's registration statement on Form S-1 filed January 3, 1996,
registration no.
33-99844).
** 4.6 Warrant Agreement dated as of July 11, 1997 between the Company and
Ladenburg Thalmann Capital Corporation.
** 4.7 First Amendment dated as of August 5, 1997 to the Warrant Agreement
between the Company and Ladenburg Thalmann Capital Corporation.
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<PAGE>
** 4.8 Registration Rights Agreement dated as of July 11, 1997 between the
Company and Ladenburg Thalmann Capital Corporation.
*10.1 Credit Agreement dated as of November 18, 1997 among the Company, the
several banks and financial institutions which are parties thereto
and The Chase Manhattan Bank, as Agent (filed as an exhibit to the
Company's registration statement on Form S-4 filed December 11, 1997,
registration no. 333-39195).
*10.2 Guarantee and Collateral Agreement dated as of November 18, 1997 made
by the Company and certain of its subsidiaries in favor of The Chase
Manhattan Bank, as Collateral Agent (filed as an exhibit to the
Company's registration statement on Form S-4 filed December 11, 1997,
registration no. 333-39195).
*10.3 Amended and Restated Pooling and Servicing Agreement dated as of
December 16, 1996 among H&T Receivable Funding Corporation, as
Transferor, Bally Total Fitness Corporation, as Servicer and Texas
Commerce Bank National Association, as Trustee (filed as an exhibit
to the Company's Annual Report on Form 10-K, file no. 0-27478, for
the fiscal year ended December 31, 1996).
*10.4 Series 1996-1 Supplement dated as of December 16, 1996 to the Pooling
and Servicing Agreement dated as of December 16, 1996 among H&T
Receivable Funding Corporation, as Transferor, Bally Total Fitness
Corporation, as Servicer and Texas Commerce Bank National
Association, as Trustee (filed as an exhibit to the Company's Annual
Report on Form 10-K, file no. 0-27478, for the fiscal year ended
December 31, 1996).
*10.5 Amended and Restated Back-up Servicing Agreement dated as of December
16, 1996 among H&T Receivable Funding Corporation, as Transferor,
Bally Total Fitness Corporation, as Servicer and Texas Commerce Bank
National Association, as Trustee (filed as an exhibit to the
Company's Annual Report on Form 10-K, file no. 0-27478, for the
fiscal year ended December 31, 1996).
*10.6 Tax Sharing Agreement dated as of April 6, 1983 between the Company
and Entertainment (filed as an exhibit to the Company's registration
statement on Form S-1 filed January 15, 1993, registration no.
33-52868).
*10.7 Tax Allocation and Indemnity Agreement dated as of January 9, 1996
between Entertainment and the Company (filed as an exhibit to the
Company's Annual Report on Form 10-K, file no. 0-27478, for the
fiscal year ended December 31, 1995).
*10.8 First Amendment dated as of May 20, 1996 to the Tax Allocation and
Indemnity Agreement dated as of January 9, 1996 between Entertainment
and the Company (filed as an exhibit to the Company's Quarterly
Report on Form 10-Q, file no. 0-27478, for the quarter ended June 30,
1996).
*10.9 Transitional Services Agreement dated as of January 9, 1996 between
Entertainment and the Company (filed as an exhibit to the Company's
Annual Report on Form 10-K, file no. 0-27478, for the fiscal year
ended December 31, 1995).
*10.10 Trademark License Agreement dated as of January 9, 1996 between
Entertainment and the Company (filed as an exhibit to the Company's
Annual Report on Form 10-K, file no. 0-27478, for the fiscal year
ended December 31, 1995).
*10.11 Asset Purchase Agreement dated as of December 29, 1995 between
Entertainment and Vertical Fitness and Racquet Club Ltd. (filed as an
exhibit to the Company's registration statement on Form S-1 filed
January 3, 1996, registration no. 33-99844).
57
<PAGE>
*10.12 Management Agreement dated as of January 9, 1996 between
Entertainment and the Company (filed as an exhibit to the Company's
Annual Report on Form 10-K, file no. 0-27478, for the fiscal year
ended December 31, 1995).
*10.13 The Company's 1996 Non-Employee Directors' Stock Option Plan (filed
as an exhibit to the Company's registration statement on Form S-1
filed January 3, 1996, registration no. 33-99844).
*10.14 The Company's 1996 Long-Term Incentive Plan (filed as an exhibit to
the Company's registration statement on Form S-1 filed January 3,
1996, registration no. 33-99844).
**10.15 First Amendment dated as of November 21, 1997 to the Company's 1996
Long-Term Incentive Plan.
**10.16 Second Amendment dated as of February 24, 1998 to the Company's 1996
Long-Term Incentive Plan.
*10.17 The Company's Management Retirement Savings Plan (filed as an exhibit
to the Company's Annual Report on Form 10-K, file no. 0-27478, for
the fiscal year ended December 31, 1995).
*10.18 First Amendment dated as of November 19, 1996 to the Company's
Management Retirement Savings Plan (filed as an exhibit to the
Company's Annual Report on Form 10-K, file no. 0-27478, for the
fiscal year ended December 31, 1996).
**10.19 Second Amendment dated as of February 24, 1998 to the Company's
Management Retirement Savings Plan.
**10.20 The Company's 1997 Bonus Plan.
**10.21 First Amendment dated as of February 24, 1998 to the Company's 1997
Bonus Plan.
*10.22 Employment Agreement effective as of January 9, 1996 between the
Company and Arthur M. Goldberg (filed as an exhibit to the Company's
Annual Report on Form 10-K, file no. 0-27478, for the fiscal year
ended December 31, 1995).
*10.23 Employment Agreement effective as of January 1, 1996 between the
Company, Entertainment and John W. Dwyer (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q, file no. 0-27478, for the
quarter ended June 30, 1996).
*10.24 Employment Agreement effective as of March 20, 1997 between the
Company and Cary A. Gaan (filed as an exhibit to the Company's Annual
Report on Form 10-K, file no. 0-27478, for the fiscal year ended
December 31, 1996).
*10.25 Employment Agreement effective as of January 1, 1996 between the
Company, Entertainment and Harold Morgan (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q, file no. 0-27478, for the
quarter ended June 30, 1996).
*10.26 Employment Agreement effective as of October 7, 1996 between the
Company and John H. Wildman (filed as an exhibit to the Company's
Annual Report on Form 10-K, file no. 0-27478, for the fiscal year
ended December 31, 1996).
**21 List of subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
**27.1 Financial Data Schedule for December 31, 1997 (filed electronically
only).
58
<PAGE>
**27.2 Restated Financial Data Schedule for December 31, 1996 (filed
electronically only).
*99.1 Physical Rehabilitation Services Development Agreement between
Continucare Outpatient Rehabilitation Management, Inc. and BFIT
Rehabilitation Services, Inc. (filed as an exhibit to the Company's
registration statement on Form S-3 filed July 16, 1997, registration
no. 333-24175).
- ----------
* Incorporated herein by reference as indicated.
** Filed previously.
59
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Dated: April 22, 1998 By: /s/ Lee S. Hillman
Lee S. Hillman
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated. This report may be signed in
multiple identical counterparts all of which, taken together, shall constitute a
single document.
Dated: April 22, 1998 By: /s/ Lee S. Hillman
Lee S. Hillman
President, Chief Executive Officer and Director
(principal executive officer)
Dated: April 22, 1998 By: /s/ John W. Dwyer
John W. Dwyer
Executive Vice President, Chief Financial Officer
and Treasurer
(principal financial officer)
Dated: April 22, 1998 By: /s/ Geoffrey M. Scheitlin
Geoffrey M. Scheitlin
Vice President and Controller
(principal accounting officer)
Dated: April 22, 1998 By: /s/ Arthur M. Golberg
Arthur M. Goldberg
Chairman of the Board of Directors
Dated: April 22, 1998 By: /s/ Aubrey C. Lewis
Aubrey C. Lewis
Director
Dated: April 22, 1998 By: /s/ J. Kenneth Looloian
J. Kenneth Looloian
Director
Dated: April 22, 1998 By: /s/ James F. Mc Anally, M.D.
James F. Mc Anally, M.D.
Director
Dated: April 22, 1998 By: /s/ Liza M. Walsh
Liza M. Walsh
Director
60
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8) pertaining to the 1996 Long-Term Incentive Plan of Bally Total Fitness
Holding Corporation and in the Registration Statement (Form S-8) pertaining to
the Bally Total Fitness Holding Corporation Employee Stock Purchase Plan of our
report dated February 17, 1998, with respect to the consolidated financial
statements and schedule of Bally Total Fitness Holding Corporation included in
the Annual Report (Form 10-K/A) for the year ended December 31, 1997.
ERNST & YOUNG LLP
Chicago, Illinois
April 21, 1998
