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Delaware | 36-3228107 |
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(State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) |
8700 West Bryn Mawr Avenue, Chicago, Illinois | 60631 |
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(Address of principal executive offices) | (Zip Code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes:__X__ No:_____
Indicate by check mark 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. __X__
The aggregate market value of the registrants voting stock held by non-affiliates of the registrant as of February 29, 2000 was approximately $610.8 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 February 29, 2000, 23,579,618 shares of the registrant's common stock were outstanding.
Except as otherwise stated, the information contained in this Form 10-K is as of December 31, 1999, the end of the registrant's last fiscal year. The information in this Form 10-K 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.
Bally Total Fitness Holding Corporation, a Delaware corporation, is the largest commercial operator of fitness centers in North America in terms of revenues, number of members, and number and square footage of facilities. We were a wholly owned subsidiary of Bally Entertainment Corporation until January 9, 1996, when Bally Entertainment Corporation distributed all the shares of our common stock to its shareholders. As of February 29, 2000, we operated approximately 370 fitness centers and had approximately four million members. Our fitness centers are concentrated in major metropolitan areas in 27 states and Canada, with approximately 305 fitness centers located in 24 of the top 25 metropolitan areas in the United States and Canada. We operate fitness centers in a total of 49 metropolitan areas representing 63% of the United States population and 14% of the Canadian population. Our members made more than 100 million visits to our fitness centers in each of the past three years.
Bally offers value to its members by providing access to state-of-the-art fitness facilities with affordable membership programs. Our fitness centers feature an outstanding selection of cardiovascular, conditioning and strength equipment and offer extensive aerobic and other specialty group fitness training programs. Our new fitness center prototype achieves efficiency by focusing on those fitness services our members use most frequently. In addition, many of our fitness centers include pools, running tracks, racquet courts or other athletic facilities. We have clustered our fitness centers in major metropolitan areas in order to achieve marketing and operating efficiencies. Over 80% of our fitness centers are located in metropolitan areas in which we have five or more facilities, with our largest concentrations in the New York City, Los Angeles, Chicago, Baltimore/Washington D.C., Dallas, Houston, Detroit, San Francisco, Toronto, Seattle, Philadelphia and Miami areas.
The majority of our fitness centers use the service mark "Bally Total Fitness®", including 11 upscale centers that are known as "Bally Sports ClubsSM". The nationwide use of the service mark enhances brand identity and adds advertising efficiencies. Pursuant to our strategy of targeted market segmentation, we have opened new facilities during the past few years that operate under upscale brands, including 10 fitness centers as "The Sports Clubs of Canada", eight as "Pinnacle Fitness®" and five as "Gorilla SportsSM" and plan to further expand the use of these brands.
Our 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. We market ourselves to these consumer segments through the use of a variety of membership options and payment plans. Our membership options range from single-club memberships to our most popular premium memberships, which provide additional amenities and access to all of our fitness centers nationwide. Similarly, we offer a broad range of payment alternatives. Typically, our members pay an initial membership fee which can either be financed or paid in full at the time of joining. Members who choose to finance their initial membership fee generally do so for up to 36 months, subject to state and local regulations and minimum down payment requirements. In addition to the initial membership fee, members are generally required to pay monthly membership dues in order to use our fitness facilities. We believe the various memberships and payment plans offered, in addition to our strong brand identity and the convenience of multiple locations, constitute distinct competitive advantages.
In October 1996, a new management team began to implement a business strategy designed to improve our operating results. These efforts have contributed to recent improvements, including growing net income before cumulative effect of a change in accounting principle to $42.4 million and $13.3 million in 1999 and 1998, respectively, from a loss before extraordinary charge of $23.5 million and $24.9 million in 1997 and 1996, respectively.
In 1997, this management team identified three primary strategic objectives to improve the overall business value. The three objectives identified were:
Improve the operating margins of our fitness center membership operations--our core business.
Increase the number of fitness centers we operate based on our more profitable fitness center prototype.
Introduce new products and services to our members.
We developed and implemented a number of key strategic initiatives to meet these objectives.
Improve Core Business Operating Margins
The primary approach to improving operating margins was to grow and improve the quality of revenues while leveraging the largely fixed cost structure of our business. We focused on the following strategic initiatives:
Emphasize the Sale of Higher Margin All-Club Membership Plans. In late 1997, we completed a common stock offering. The proceeds provided working capital, allowing us to increase our emphasis on the sale of higher margin all-club membership plans with greater long-term cash flows but lower amounts of immediate cash. The previous strategy focused on near-term cash needs, resulting in an emphasis on lower margin single-club membership plans. Our all-club membership is historically our most popular membership plan, and its initial membership fees are typically financed, subject to down payment requirements. This emphasis contributed to a 29% increase in the weighted-average price of memberships sold since 1997.
Increase Dues Revenue. We believe our monthly dues are substantially less than those charged by most of our competitors and believe we can continue to raise monthly dues at a rate consistent with past periods without a material loss in membership. In addition, we significantly reduced promotions offering discounted or waived monthly dues. These initiatives contributed to an increase in monthly dues collected of 18% and 6% in 1999 and 1998, respectively.
Upgrade and Expand Existing Fitness Centers. In late 1997, we began to upgrade and expand many of our existing facilities and much of our exercise equipment beyond normal maintenance requirements. We believe these upgrades will increase our membership base and more effectively capitalize on our streamlined marketing and administrative functions. During 1999 and 1998, we invested extensively to refurbish and make major upgrades to the majority of our fitness centers, including adding and upgrading exercise equipment and refreshing interior and exterior finishes to improve club ambiance.
Improve Collections of Financed Initial Membership Fees. We continue to focus on increasing down payments on financed membership plans and securing installment payments electronically through direct withdrawal from a member's bank account or charge to a members credit card. Our experience has shown that electronic payments and higher down payments result in higher quality membership receivables. In addition, we continue to develop improved collection practices based on information provided by credit scoring and behavioral modeling, among others, which, we believe, will also improve the yield from our membership receivables portfolio.
Continue to Leverage Fixed Cost Base. A significant percentage of our core business operating costs are fixed in nature. By leveraging our fixed cost base, including expanding our product and service offerings, and controlling variable costs, we have grown margins for earnings before interest, taxes, depreciation and amortization to 17% in 1999 from 11% in 1996, a 55% improvement.
New Facilities Expansion
To build upon our improved core operations and accelerate the growth of our business, we have invested in facilities expansion in two ways:
Replicate the New Fitness Center Prototype. In 1998, we initiated a plan to increase new facility openings of our more profitable new fitness center prototype. The prototype is designed to cost less to build and maintain than our older facilities and, on average, provides almost 40% more useable space for our members in the same average square footage. The new facilities are generally developed pursuant to long-term lease arrangements and currently require, on average, approximately $1.8 million per fitness center to fund leasehold improvements and exercise equipment. During 1999, we opened 22 of these facilities and a number were under construction at the end of the year.
Selectively Acquire Fitness Center Operations. From time to time, we identify opportunities to acquire existing fitness center operations, at attractive prices, that fit our strategic goals. During 1999, we acquired 24 existing fitness centers: 10 in the Toronto area operating as The Sports Clubs of Canada, two in the San Francisco area operating as Pinnacle Fitness, one club in each of the Chicago and Los Angeles areas operating as Gorilla Sports, six clubs in the Fresno area, where we previously had no fitness centers, and four clubs in the Seattle area now operating as Bally Total Fitness.
Add Products and Services
Since mid-1997, we have been successfully increasing and diversifying our revenues by offering our members a number of new ancillary products and services. These strategic initiatives focused primarily on products and services delivered to members within our facilities and include:
Personal Training. We have added fee-based personal training services for members in most of our fitness centers. Since January 1997, we have added over 2,200 personal trainers to our staff and grown revenues from this service to more than $31.0 million in 1999. Our research indicates the availability of personal training services enhances the perceived value of membership, and we believe demand for these services is growing.
Private-Label Nutritional Products. We began offering a private-label line of Bally-branded nutritional products to our members in mid-1997. These products currently include, among others:
In mid-1999, the number of products offered was increased nearly three-fold, contributing to a nearly 80% increase in sales to over $19.0 million in 1999. We continue to test market other nutritional products to further enhance and expand the product line. As a policy, we require suppliers of our nutritional products to maintain significant amounts of product liability insurance.
Retail Stores. During 1999, we opened approximately 120 retail stores inside our fitness centers, bringing the total number of retail outlets within our fitness centers to approximately 220. These stores contributed $12.6 million of revenue in 1999, including $4.1 million from Bally-branded nutritional products, a 200% increase over 1998, selling primarily nutritional products, workout apparel and related soft goods and accessories. We plan to continue to increase the number of retail stores in our fitness centers during 2000.
Sports Medicine Services. In 1998, we implemented a strategy to provide sports medicine services in many of our fitness centers. We have contracted with several providers of these services and, as of February 29, 2000, offer these services within 34 of our clubs.
We offer prospective members a choice of membership plans. These membership plans are distinguished primarily by their priority of access to in-club services and access to other fitness centers we operate, either locally or system wide. From time to time, we also offer special membership plans which limit a member's access to a single fitness center and to certain days and non-peak hours. The one-time initial membership fees for joining our fitness centers, excluding limited special offers and corporate programs, range from approximately $650 to $1,600 and can be financed for up to 36 months, subject to down payment requirements and state, provincial and local regulations. Generally, the initial membership fee is based on:
The membership plan selected;
The diversity of facilities and services available at the fitness center of enrollment;
Market conditions; and
Seasonal promotional strategies.
In addition to one-time initial membership fees, members generally pay monthly dues in order to maintain membership privileges. Monthly dues are generally fixed as to rate while the member is paying their financed initial membership fee and may increase thereafter, subject to stated terms and limits. At December 31, 1999, approximately 90% of our dues-paying members paid monthly dues ranging from $3.00 to $20.00 per month, with an average collected of approximately $7.50 per month. The average annual growth rate of our monthly dues revenues was over 10% from 1996 through 1999. We expect the annual increases in monthly dues revenues will continue due to the contractual terms of current membership plans. Additionally, we believe we can continue to increase monthly dues for our members who are beyond their initial financing period without material loss in membership. Recent experience has shown that over 70% of our members faced with a membership renewal decision for the first time made dues payments during their initial renewal period. Members making a renewal decision for subsequent periods renewed at a rate of over 86%.
Members electing to finance their one-time initial membership fees can choose from several payment methods and down payment options. We continue to focus on down payment levels and the method of payment as strategies to improve the quality of membership receivables. See "Account Servicing."
Generally, we offer financing terms of 36 months. Shorter terms are offered on a promotional basis or as required by applicable state or local regulations. Initial membership fees are financed at a fixed annual percentage rate, which generally is between 16% and 18%, except where limited by applicable state laws. Financed portions of initial membership fees may be prepaid without penalty at any time during the financing term. Based on experience in 1999, we expect in excess of 90% of all new memberships originated during 2000 will be financed to some extent.
We currently provide members with three payment methods for financed initial membership fees and monthly dues: electronic payments, monthly statements and coupon books. Members may change their payments to an electronic or monthly statement method at any time. These methods are described as follows:
Electronic Payments. This is the most popular method for payment of financed initial membership fees and monthly dues. Under this method, on approximately the same date each month, a fixed payment is either automatically (a) transferred from a member's bank account, or (b) charged to a member's designated credit card. Memberships sold where the member selected an electronic payment method consistently exceeds 70% of new memberships sold.
Monthly Statements. We implemented a monthly statement program in October 1998. New members electing not to pay by an electronic payment method are sent monthly statements setting forth the amount due and owing for their initial membership fees and monthly dues. Members then remit payments to one of our member processing and collection centers.
Coupon Books. This mechanism requires members to send payments and payment coupons to one of our member processing and collection centers. In October 1998, this payment option was discontinued in favor of monthly statements, as described above.
Minimum down payments are specified for financed initial membership fees to adequately defray both the initial account set-up cost as well as collection costs should the account become immediately delinquent. As a result, we cover the incremental cost of new membership processing and collection through the down payment and do not perform individual credit checks on members prior to sign up. We manage our credit risk by measuring, from past performance, the expected realizable value of financed initial membership fees for members paying by each of the aforementioned payment methods. For example, our historical analysis indicates the collection experience for electronic payments is approximately 50% better than coupon book accounts. As of December 31, 1999, approximately 64% of financed initial membership fees were being paid by electronic payment methods compared to 29% at December 31, 1992, when we first started emphasizing electronic payment methods for membership payments.
Most of our fitness centers are located near regional, urban and suburban shopping areas and business districts of major cities. Fitness centers vary in size, available facilities and types of services provided. All of our 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 group exercise programs or personal training instruction stressing cardiovascular conditioning, strength development or improved appearance. We require completion of a comprehensive educational training program by our sales, fitness and service personnel. New members are offered orientations on the recommended use of exercise equipment by our personnel.
Our current prototype fitness center generally focuses on those fitness services our members most frequently use, such as well-equiped cardiovascular and advanced training areas along with a wide variety of group fitness classes. Services that receive a lower degree of member use, such as pools, running tracks, racquet courts or other athletic facilities are being deemphasized. Our prototype fitness center, which tends to range from 15,000 to 35,000 square feet, has recently averaged approximately 26,000 square feet and $1.4 million to construct, exclusive of purchased real estate and exercise equipment and net of landlord contributions. The prototype is designed to cost less to construct and maintain than our older facilities and has the capacity to accommodate significantly more members than older fitness centers of the same size because it focuses on the most widely used amenities. We generally invest approximately $400,000 for exercise equipment in a prototype fitness center, all or a portion of which may be leased or financed. The fitness centers we developed in the 1980s average 35,000 square feet and often 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 or squash courts.
We continuously upgrade and expand our facilities in order to increase our membership base and more effectively capitalize on our marketing and administrative functions. Approximately $25 million is invested annually to maintain and make minor upgrades to our existing facilities. These improvements include:
Exercise equipment upgrades;
Heating, ventilation and air conditioning and other operating equipment upgrades and replacements; and
Locker room and workout area refurbishment.
In addition, we are in the later stages of the general refurbishment program begun two years ago to refurbish and make major expansions and/or upgrades to the majority of our fitness centers, including updating exercise equipment and décor to improve club ambiance. We have also invested over the past two years in new facilities generally based on our new fitness center prototype: 22 of these facilities opened in 1999, and seven opened in 1998. We expect to continue to open 20 to 25 fitness centers annually generally based on our prototype.
Presently four fitness centers in Upstate New York, including two facilities we previously owned, are operated by a third party, pursuant to a franchise agreement, under the service mark "Bally Total Fitness." We continue to seek additional franchise relationships in smaller markets.
We devote substantial resources to the marketing and promotion of our fitness centers and their services. We believe strong marketing support is critical to attracting new members at both existing and new fitness centers. The majority of our fitness centers use the service mark "Bally Total Fitness," including 11 upscale centers fitness centers that are known as "Bally Sports Clubs." The nationwide use of the service mark enhances brand identity and adds advertising efficiencies. Pursuant to our strategy of targeted market segmentation, we have opened new facilities during the past few years that operate under upscale brands, including 10 fitness centers as "The Sports Clubs of Canada", eight as "Pinnacle Fitness" and five as "Gorilla Sports" and plan to further expand the use of these brands.
We operate approximately 305 fitness centers in 24 of the top 25 metropolitan areas in the United States and Canada. We operate fitness centers in a total of 49 metropolitan areas representing 63% of the United States population and 14% of the Canadian population. Concentrating our fitness centers in major metropolitan areas increases the efficiency of our marketing and advertising programs.
We spent approximately $47.8 million in 1999, $45.0 million in 1998 and $44.6 million in 1997 for advertising and promotion and expect to spend similar amounts during 2000, with some additional spending anticipated to support new media markets. Historically, we have primarily advertised on television and, to a lesser extent, through newspapers, telephone directories, direct mail, radio, outdoor signage and other promotional activities. Currently, we are placing greater emphasis on direct mail and other promotions based on extensive research activities we are undertaking.
Our 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. Advertisements are augmented with individual sales presentations made by sales personnel in our fitness centers. We believe the various membership and payment plans, in addition to our strong brand identity and the convenience of multiple locations, constitute distinct competitive advantages.
Our marketing efforts also include corporate membership sales and in-club marketing programs. Open houses and other activities for members and their guests are used to foster member loyalty and introduce fitness centers to prospective members. Referral incentive programs involve current members in the process of new member enrollments and enhance member loyalty.
Direct mail reminders encourage renewal of existing memberships. We have approximately 140 employees within our regional member processing and collection centers dedicated primarily to inbound renewal programs and outbound telemarketing programs to existing members. Telemarketing is used, but not extensively, to attract prospective new members.
We also attract membership interest from internet visitors to our home page at www.ballyfitness.com. At the end of 1999, we launched our redesigned website and have begun a concerted effort to develop strategic web-based partnerships. During 1999, 1.8 million unique users visited the site, resulting in the issuance of 49,000 guest passes and the collection of approximately 31,000 dues payments. More recent activity during 2000 indicates substantial increases to those levels.
In 1999, we continued to benefit from new and existing strategic marketing alliances to heighten public awareness of our fitness centers and the Bally Total Fitness brand. Our licensed Bally Total Fitness line of portable exercise equipment is now carried in more than 1,000 retail stores in the United States and Canada. Existing strategic alliances with Visa USA, Incorporated, Mastercard®, Time Warner, and Sports Display, Inc. have been joined by new relationships with Pepsi-Cola Company, Procter and Gamble Corporation, Rexall Showcase International, Inc., Sunkist Growers, Muzak LLC, and Novartis (Lamasil AT ). These alliances provide products for our members to use and/or sample as well as an incremental source of revenue for us.
Membership contracts are administered and collected under uniform procedures implemented by our two member processing and collection centers. These centers enable us to centralize:
All collections for past-due accounts are initially handled internally by the member processing and collection centers. We systematically pursue past-due accounts by utilizing a series of computer-generated correspondence and telephone contacts. Power dialer assisted collectors with varying levels of experience are responsible for handling delinquent accounts, depending on the period of delinquency. At 60 days past due, members are generally denied entry to the fitness centers. Delinquent accounts are generally written off after 90 or 180 days without payment, depending on delinquency history. Accounts that are written off are reported to credit reporting bureaus, and selected accounts are then sold to a third-party collection group.
We continue to investigate opportunities to enhance our collection efforts based on information provided by credit scoring and behavioral modeling, among others, which we believe will improve the yield from our membership receivables portfolio. We prioritize our collection approach based on credit scores and club usage, among others, at various levels of delinquency. By tailoring our membership collection approach to reflect a delinquent member's likelihood of payment, we believe that we can collect more of our membership receivables at a lower cost. We use a national bureau, which charges a nominal fee per account to credit score. We also believe that other collection techniques, such as monthly statements, which have been used since October 1998 for all new members who financed their initial membership fee and did not elect an electronic payment method, will result in better collection of our membership receivables.
Bally is the largest commercial operator of fitness centers in North America in terms of revenues, number of members, and number and square footage of facilities. We are the largest operator, or among the largest operators, of fitness centers in every major market in which we operate fitness centers. Within each market, we compete with other commercial fitness centers, physical fitness and recreational facilities established by local governments, hospitals, and businesses for their employees, the YMCA and similar organizations, and, to a certain extent, with racquet, tennis and other athletic clubs, country clubs, weight-reducing salons and the home-use fitness equipment industry. We also compete, to some extent, with entertainment and retail businesses for the discretionary income of our target markets. However, we believe our brand identity, operating experience, ability to allocate advertising and administration costs over all of our fitness centers, nationwide operations, purchasing power and account processing and collection infrastructure, provide us with distinct competitive advantages. We may not be able to continue to compete effectively in each of our markets in the future.
We believe competition has increased to some extent in certain markets, reflecting the public's enthusiasm for fitness and the decrease in the cost of entry into the market due to financing available from, among others, landlords, equipment manufacturers and private equity sources. We believe our brand identity is strong, membership plans are affordable and we have the flexibility to be responsive to economic conditions.
Our pursuit of new business initiatives, particularly the sale of nutritional products and apparel, has us competing against large, established companies with more experience selling products on a retail basis. In some instances, our competitors for these products have substantially greater financial resources than we have. We may not be able to compete effectively against these established companies.
We operate approximately 370 fitness centers in 27 states and Canada. At December 31, 1999, we owned 40 fitness centers and leased either the land, building or both for the remainder of our fitness centers. Aggregate rent expense, including office and administrative space, was $96.1 million, $91.4 million and $86.8 million for 1999, 1998 and 1997, respectively. Most of our leases require us 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 us from large increases in annual rental payments. Only one fitness center accounted for between 1% to 2% of our net revenues during 1999. We believe our properties are adequate for our current membership.
The leases for fitness centers we have entered into 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 give us at least one five-year option to renew and often two or more such options.
Our executive offices are located in Chicago, Illinois. The lease expires in January 2003. We also lease space in Norwalk, California and Towson, Maryland for our member processing and collection centers.
The majority of our fitness centers use the service mark "Bally Total Fitness", including 11 upscale centers that are known as "Bally Sports Clubs." The nationwide use of the service mark enhances brand identity and adds advertising efficiencies. Pursuant to our strategy of targeted market segmentaion, we have opened new facilities during the past few years that operate under upscale brands, including 10 fitness centers as "The Sports Clubs of Canada," eight as "Pinnacle Fitness" and five as "Gorilla Sports" and plan to further expand the use of these brands.
In January 1996, we entered into a 10-year trademark license agreement with our former parent corporation which allows us to use certain marks, including the "Bally Total Fitness" service mark, in connection with our fitness center business. The name "Bally Total Fitness" is a service mark of Park Place Entertainment Corporation. We pay a license fee of $1.0 million per year. Following the initial 10-year term, we have the option to renew the license for an additional five-year period at a rate equal to the greater of the fair market value or $1.0 million per year.
Historically, we experienced greater membership fee originations in the first quarter and lower membership fee originations in the fourth quarter. Our new products and services may have the effect of further increasing the seasonality of our business.
At December 31, 1999, we had approximately 16,350 employees, including approximately 8,600 part-time employees. The distribution of our employees is summarized as follows:
Approximately 15,320 employees are involved in fitness center operations, including sales personnel, instructors, personal trainers, supervisory and facility personnel;
Approximately 880 employees are involved in the operation of our member processing and collection centers, including management information systems;
Approximately 60 employees are product and service development and operations support personnel; and
Approximately 90 employees are accounting, marketing, human resources, real estate, legal and administrative support personnel.
We are not a party to a collective bargaining agreement with any of our employees. Although we experience high turnover of non-management personnel, historically we have not experienced difficulty in obtaining adequate replacement personnel. Periodically, our sales personnel become somewhat more difficult to replace due, in part, to increased competition for skilled retail sales personnel.
Our operations and business practices are subject to regulation at federal, state, provincial and local levels. The general rules and regulations of the Federal Trade Commission and of other federal, provincial state and local consumer protection agencies apply to our advertising, sales and other trade practices.
State and provincial statutes and regulations affecting the fitness industry have been enacted or proposed in all of the states and provinces in which we conduct business. Typically, these statutes and regulations prescribe certain forms and regulate the terms and provisions of membership contracts, including:
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 financing term of contracts.
In addition, we are subject to numerous other types of federal, state and provincial 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 and provincial laws governing the collection of debts. These laws and regulations are subject to varying interpretations by a large number of state, provincial and federal enforcement agencies and the courts. We maintain internal review procedures in order to comply with these requirements and believe our activities are in substantial compliance with all applicable statutes, rules and decisions.
Under so-called "cooling-off" statutes in most states and provinces, new members of fitness centers have the right to cancel their memberships for a period of three to 10 days after the date the contract was entered into and are entitled to refunds of any payment made. The amount of time new members have to cancel their membership contract depends on the applicable state and provincial law. Further, our 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. In addition, 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 and provincial 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 upon cancellation, and we may offset that amount against any refunds owed.
We are a party to several state and federal consent orders. From time to time, we make minor adjustments to our operating procedures to comply with those consent orders. The consent orders essentially require continued compliance with applicable laws and require us to refrain from activities not in compliance with applicable laws.
The provision of rehabilitative and physical therapy services is affected by federal, state, provincial 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. These laws and regulations are summarized as follows:
The opening of a rehabilitation facility may require approval from state, provincial and/or local governments and re-licensing from time to time, both of which may be subject to a number of conditions.
A substantial number of recipients of rehabilitative and physical therapy services have fees paid by governmental programs, as well as private third-party payers. Governmental reimbursement programs such as 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 payers 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.
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 our provision of rehabilitative and physical therapy services.
We are involved in various claims and lawsuits incidental to our business, including claims arising from accidents at our fitness centers. In the opinion of management, we are 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 our financial condition or results of operations.
Item 4 is inapplicable.
Lee S. Hillman has been a director of Bally since September 1992 and was elected President and Chief Executive Officer in October 1996. Additionally, Mr. Hillman was Treasurer of Bally from April 1991 to October 1996, Executive Vice President from September 1995 to October 1996, Senior Vice President from April 1991 to September 1995 and Chief Financial Officer from April 1991 to May 1994. Mr. Hillman was Vice President, Chief Financial Officer and Treasurer of Bally Entertainment Corporation between November 1991 and December 1996, Executive Vice President between August 1992 and December 1996, and Senior Vice President between November 1991 and July 1992. 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 Holmes Place, Plc. (an operator of fitness centers in the United Kingdom). Mr. Hillman is 44 years of age.
John W. Dwyer was elected Executive Vice President of Bally in November 1997, Treasurer in October 1996, a Senior Vice President in 1995 and Vice President and Chief Financial Officer in May 1994. Mr. Dwyer was Corporate Controller of Bally Entertainment Corporation between June 1992 and December 1996 and a Vice President 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 47 years of age.
William G. Fanelli was elected Senior Vice President, Operations of Bally in November 1997 and was Vice President, Strategic Operations from November 1996 to November 1997. Mr. Fanelli was Director, Business Development of Bally Entertainment Corporation 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 37 years of age.
Cary A. Gaan was elected Senior Vice President and General Counsel of Bally in January 1991 and Secretary in April 1996. Mr. Gaan served as a Vice President from 1987 to 1991. Mr. Gaan is 54 years of age.
Harold Morgan has been employed by Bally since August 1991 and was elected a Vice President in January 1992 and Senior Vice President, Human Resources in September 1995. Mr. Morgan was Vice President, Human Resources of Bally Entertainment Corporation 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 43 years of age.
Paul A. Toback was elected Senior Vice President, Corporate Development of Bally in March 1998, Vice President, Corporate Development in November 1997 and Vice President 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, prior to that, an attorney at the law firm of Katten, Muchin & Zavis. Mr. Toback is 36 years of age.
John H. Wildman was elected Senior Vice President, Sales and Marketing of Bally in November 1996 and Vice President, Sales and Marketing in September 1995. For approximately four years prior thereto, Mr. Wildman was a Senior Area Director for Bally. Mr. Wildman is 40 years of age.
Our common stock is currently traded on the New York Stock Exchange ("NYSE") under the symbol "BFT". Prior to commencement of trading on the NYSE on April 2, 1998, our 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 our common stock as reported on NASDAQ or NYSE.
High Low ----------- ----------- 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 1998: First quarter $ 31 9/16 $ 19 1/16 Second quarter 36 13/16 28 Third quarter 37 9/16 14 9/16 Fourth quarter 25 3/8 10 1/2 1999: First quarter $ 26 11/16 $ 19 1/8 Second quarter 29 3/4 20 Third quarter 34 3/8 26 13/16 Fourth quarter 30 3/8 21 3/8
As of February 29, 2000, there were 8,991 holders of record of our common stock.
We have not paid a cash dividend on our common stock since we became a public company in January 1996 and do not anticipate paying dividends in the foreseeable future. The terms of our revolving credit agreement restrict us from paying dividends without the consent of the lenders during the term of the agreement. In addition, the indenture for our subordinated promissory notes generally limits dividends paid by us to the aggregate of 50% of consolidated net income, as defined, earned after January 1, 1998 and the net proceeds to us from any stock offerings and the exercise of stock options and warrants.
In the first quarter of 1999, in accordance with AICPA Statement of Position 98-5, Reporting Costs of Start-up Activities, we wrote off unamortized start-up costs of $.3 million ($.01 per share) as a cumulative effect of a change in accounting principle. In 1997, we recognized an extraordinary loss on extinguishment of debt of $21.4 million ($1.37 per share) resulting from a refinancing of our subordinated debt and revolving credit facility. In 1996, we recognized a net extraordinary gain on extinguishment of debt consisting of (1) a gain of $9.9 million ($.81 per share) from a $15.2 million tax obligation to our former parent, Bally Entertainment Corporation, which was forgiven as part of the December 1996 merger of Bally Entertainment with and into Hilton Hotels Corporation and (2) a charge of $4.2 million ($.35 per share) from a refinancing of our securitization facility.
EBITDA is defined as operating income (loss) before depreciation and amortization. We have presented EBITDA supplementally because we believe this information is useful given the significance of our depreciation and amortization and because of our highly leveraged financial position. This data should not be considered as an alternative to any measure of performance or liquidity as promulgated under generally accepted accounting principles (such as net income/loss or cash provided by/used in operating, investing and financing activities), nor should they be considered as an indicator of our overall financial performance. Also, the EBITDA definition used herein may not be comparable to similarly titled measures reported by other companies.
Year ended December 31 ------------------------------------------------ 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (Dollar amounts in millions, except per share data) Statement of Operations Data Net revenues $ 861.1 $ 744.3 $ 661.8 $ 639.2 $ 653.4 Depreciation and amortization 52.9 48.3 52.9 55.9 57.4 Operating income 93.3 52.8 19.9 19.1 5.0 Before extraordinary items and cumulative effect of a change in accounting principle: Income (loss) 42.4 13.3 (23.5) (24.9) (31.4) Basic earnings (loss) per common share (pro forma for 1995) (a) 1.81 0.59 (1.51) (2.04) (3.25) Diluted earnings (loss) per common share (pro forma for 1995) (a) 1.56 0.51 (1.51) (2.04) (3.25) Balance Sheet Data (at December 31) Cash and equivalents $ 23.5 $ 64.4 $ 61.7 $ 16.5 $ 21.3 Installment contracts receivable, net 486.1 422.1 343.6 300.2 303.4 Total assets 1,348.6 1,128.8 967.6 893.3 936.5 Long-term debt, less current maturities 593.9 482.2 405.4 376.4 368.0 Stockholders' equity 212.5 161.8 70.3 24.2 31.7 Other Financial Data EBITDA $ 146.2 $ 101.1 $ 72.8 $ 75.0 $ 62.4 Cash provided by (used in): Operating activities 39.1 (32.0) (35.9) (5.3) (9.9) Investing activities (138.0) (79.0) (16.1) (9.8) (42.1) Financing activities 58.0 113.7 97.2 10.4 (60.4)
The net loss for 1995 reflects a federal income tax benefit arising from our prior tax sharing agreement with Bally Entertainment of $7.1 million. Pro forma loss per common share for 1995 (which is unaudited) has been determined giving effect to (1) adjustments made to reflect the income tax benefit as if we had filed our own separate consolidated income tax return for the year, which results in a pro forma net loss of $38.5 million, and (2) the distribution of 11,845,161 shares of our common stock to Bally Entertainment stockholders as if such distribution had taken place as of the beginning of the year.
Our three primary strategic objectives have been to: improve the operating margins of our fitness center membership operations--our core business; increase the number of fitness centers we operate based on our more profitable fitness center prototype; and introduce new products and services to our members. To meet these objectives, the following strategic initiatives were developed and implemented:
Improve Core Business Operating Margins. The primary approach to improving the operating margins was to grow and improve the quality of revenues while leveraging the largely fixed cost structure of our business. In late 1997, we increased our emphasis on the sale of higher margin all-club memberships, which are typically financed, rather than the sale of lower margin single-club memberships. In late 1998, we significantly increased the monthly charge to new members for dues. We also continued our focus on maintaining higher down payments on financed membership plans and securing installment payments electronically. This resulted in a 12% growth in average down payments from 1997 to 1999. In addition, the financed initial membership fees in our receivables portfolio using an electronic payment method grew to approximately 64% at December 31, 1999. These efforts contributed to a 55% improvement in margins, including products and services, for earnings before interest, taxes, depreciation and amortization to 17% in 1999 from 11% in 1996. We believe that all of these actions, some of which initially reduced new membership unit sales and revenues, will continue to improve cash flows and operating income and margins.
New Facilities Expansion. In 1998, we initiated a plan to increase new facility openings of our more profitable new fitness center prototype. Seven of these facilities were opened during 1998, and 22 were opened in 1999. Due to deferral accounting, new fitness centers generally require nearly a full year before generating incremental earnings before interest, taxes, depreciation and amortization and operating income and require, on average, three or more years to approach maturity. From time to time, we identify opportunities to acquire existing fitness center operations, at attractive prices, that fit our strategic goals. Recently acquired fitness center operations generally were immediately accretive on a per share basis in terms of earnings before interest, taxes, depreciation and amortization, and operating income. During 1999, we acquired 24 existing fitness centers: 10 in the Toronto area operating as The Sports Clubs of Canada, two in the San Francisco area operating as Pinnacle Fitness, one club in each of the Chicago and Los Angeles areas operating as Gorilla Sports, six clubs in the Fresno area, where we previously had no fitness centers, and four clubs in the Seattle area now operating as Bally Total Fitness. During 1998, we acquired nine existing fitness centers in the San Francisco area, where we previously had no previous fitness centers, seven operating as Pinnacle Fitness and two as Gorilla Sports, and one additional fitness center in Chicago operating as Bally Total Fitness.
Add Products and Services. We also believe significant opportunities exist to increase revenues beyond those generated by the sale of membership plans and receipt of monthly dues. These additional revenues do not require significant capital investment. Beginning in mid-1997, we implemented and greatly expanded during 1998 and 1999 our product and service offerings, including:
Personal training services now offered at most of our fitness centers;
An exclusive line of Bally-branded nutritional products sold to our members; and
Retail stores, currently located in approximately 220 of our fitness centers, which sell nutritional products, workout apparel and related soft goods.
Revenues from products and services have grown six-fold since 1997, to $62.6 million in 1999, while earnings before interest, taxes, depreciation and amortization has grown to $21.0 million. We expect the benefits from these new products and services to continue to grow in 2000.
Comparison of the years ended December 31, 1999 and 1998
Net revenue for 1999 was $861.1 million compared to $744.3 million in 1998, an increase of $116.8 million (16%). Net revenue from comparable fitness centers increased 10%. This increase in net revenues resulted from the following:
The weighted-average price of memberships sold increased 6% over the prior year, and total membership units sold during 1999 increased 5%. Membership fees originated increased $44.7 million (10%).
Dues collected increased $37.8 million (18%) from 1998, reflecting the continued improvements in member retention and pricing strategies and an increase attributable to fitness centers operating under our four upscale brands, which generally charge higher dues.
Finance charges earned increased $9.3 million (19%) in 1999 due to the growth in size and consistent higher quality of our membership receivables portfolio. Membership receivables written off in 1999, as a percent of average membership receivables, was consistent with the prior year. Additionally, the percentage of accounts current with all contractual payments improved to 86% as of December 31, 1999 from 85% as of December 31, 1998. Average interest rates for finance charges to members was substantially unchanged during the periods.
Products and services revenues increased $30.1 million (93%) over 1998, primarily reflecting the continued growth of personal training services and nutritional and other retail products.
Fees and other revenue increased $2.0 million (22%) over 1998 due principally to the continuing growth of licensing revenue.
Deferral accounting decreased revenues by $7.2 million more in 1999 than in 1998.
The weighted-average number of fitness centers increased to 343 during 1999 from 320 during 1998, a 7% increase, including an increase in the weighted-average number of centers operating under our four upscale brands from 11 to 22. During 1999, we opened 22 new fitness centers within our major metropolitan areas and acquired 24 additional fitness centers: 10 in the Toronto area operating as "The Sports Clubs of Canada", two in the San Francisco area operating as "Pinnacle Fitness", one club in each of the Chicago and Los Angeles areas operating as "Gorilla Sports", six clubs in the Fresno area, where we previously had no fitness centers, and four clubs in the Seattle area now operating as "Bally Total Fitness". At December 31, 1999, we operated a total of 33 upscale fitness centers: 10 known as "Bally Sports Clubs," 10 as "The Sports Clubs of Canada", eight as "Pinnacle Fitness" and five as "Gorilla Sports".
Operating income for 1999 was $93.3 million compared to $52.8 million in 1998. The increase of $40.5 million (77%) was due to a $116.8 million increase in net revenue (16%), offset, in part, by an increase in operating costs and expenses of $71.6 million (11%) and a $4.7 million increase in depreciation and amortization. The operating margin before depreciation and amortization increased to 17% from 14% for 1998. Excluding the provision for doubtful receivables and the effect of deferral accounting, operating costs and expenses increased $49.5 million (8%) from 1998. Fitness center operating expenses increased $21.7 million (5%) due principally to incremental costs of operating new fitness centers and additional commissions from the growth in initial membership fees originated. A substantial portion of commission expense is deferred through deferral accounting. The deferral accounting expense offset decreased expenses by $5.7 million less in 1999 than in 1998. Products and services expenses increased $19.2 million (86%) to support the revenue growth of product and service offerings. Operating income from products and services, net of related development, pre-opening and start-up costs, increased to $21.0 million from $10.1 million in the prior year, with an operating margin of 34% in 1999 compared to 31% in 1998. Member processing and collection center expenses and general and administrative expenses were substantially unchanged from the prior year. Advertising expenses increased 6% compared to the prior year due to increased market research, new club marketing and direct mail programs used to grow initial membership fees. Depreciation and amortization expense increased $4.7 million (10%) largely as a result of the significant increase in purchases and construction of property and equipment during 1999 and 1998.
The provision for doubtful receivables, including the provision for cancellations which is reported in the financial statements as a direct reduction of initial membership fees on financed memberships originated, totaled 41% of the gross financed portion of new membership fees originated in both periods.
Interest expense was $52.4 million in 1999 compared to $41.5 million in 1998. The increase of $10.9 million (26%) was due to higher levels of debt incurred and a slightly higher average interest rate offset, in part, by an increase in the amount of capitalized interest.
Comparison of the years ended December 31, 1998 and 1997
Net revenue for 1998 was $744.3 million compared to $661.8 million in 1997, an increase of $82.5 million (12%). Net revenue from comparable fitness centers increased 11%. This significant increase in net revenues resulted from the following:
The weighted-average price of memberships sold increased 21% over the prior year. As a result, membership fees originated increased $33.7 million (8%), consisting of a $61.5 million (17%) increase in financed memberships originated offset, in part, by a $27.8 million (48%) decrease in paid-in-full memberships originated. Total membership units sold during 1998 declined slightly compared to the prior year period reflecting the planned curtailment of sales of the lower priced, lower margin, single-club and discounted upgrade and add-on membership plans in 1998. Unit sales of all other memberships increased year over year by 11%
As a result of our long-term strategy to improve the total yield from individual membership plans, including the monthly dues component, the slight decline in the number of individual memberships during 1998 consisted entirely of memberships with monthly dues of less than $3. This strategy to continually improve membership yield, combined with significantly lower member attrition, improved monthly dues collected $11.0 million (6%) from 1997.
Finance charges earned increased $10.9 million (28%) in 1998 due to the growth in size and improved quality of our membership receivables portfolio. Membership receivables written off in 1998, as a percent of average membership receivables, improved 10% compared to the prior year. Additionally, the percentage of accounts current with all contractual payments improved to 85% as of December 31, 1998 from 83% as of December 31, 1997. The average interest rate for finance charges to members was substantially unchanged during the periods.
Products and services revenue increased $22.5 million (223%) over 1997, primarily reflecting the revenue sale of personal training services and renewal and other retail products.
Fees and other revenues increased $2.2 million (34%) over 1997 primarily due to the growth in licensing revenue.
Deferral accounting increased revenues by $2.2 million more in 1998 than in 1997.
The weighted-average number of fitness centers increased to 320 during 1998 from 317 during 1997, less than a 1% increase. During 1998, we closed six older, typically smaller and less profitable facilities while opening seven new, larger facilities, based on our new fitness center prototype. In addition, during 1998 we acquired 10 fitness centers: nine located in the San Francisco area and one in Chicago.
Operating income for 1998 was $52.8 million compared to $19.9 million in 1997. The increase of $32.9 million (165%) was due to the increase in revenues partially offset by a $49.2 million (8%) increase in operating costs and expenses, which included a $22.5 million increase in the provision for doubtful receivables. Excluding the provision for doubtful receivables and the effect of deferral accounting, operating costs and expenses increased $33.3 million (6%) from 1997. Fitness center operating expenses increased $25.3 million (7%) due, in part, to increased spending to improve fitness center operations and appearance, additional commissions from the growth in initial membership fees originated and the incremental cost of operating new fitness centers. A substantial portion of commission expense is deferred through deferral accounting. The deferral accounting expense offset decreased expenses by $6.6 million more in 1998 than in 1997. Products and services expenses increased $13.9 million (162%) to support revenue growth of product and service offerings. Operating income from products and services, net of related development, pre-opening and start-up costs, increased to $10.1 million from $1.9 million in 1997 with an operating margin of 31% in 1998 compared to 22% in 1997. General and administrative expenses decreased $2.9 million (10%), reflecting that the 1997 period included charges related to vesting of 1996 restricted stock awards. Member processing and collection center expenses increased $1.6 million (4%). In addition, advertising expenses remained substantially unchanged and depreciation and amortization expense, as expected, declined $4.6 million largely as the result of amortization in 1997 related to the 1996 restricted stock awards.
The provision for doubtful receivables, including the provision for cancellations which is reported in the financial statements as a direct reduction of initial membership fees on financed memberships originated, totaled 41% of the gross financed portion of new membership fees originated in both periods.
Interest expense was $41.5 million in 1998 compared to $45.0 million in 1997. The decrease of $3.5 million (8%) was primarily due to lower average interest rates offset, in part, by a higher average level of debt.
The income tax provisions for 1999, 1998 and 1997 reflect state and Canadian income taxes only. The federal provision for 1999 and 1998 was offset by the utilization of prior years' net operating losses. No federal tax benefit was provided in 1997 due to the uncertainty that we would ultimately be able to use additional deferred tax assets.
During 1999, we expanded our capacity to attract new members and better serve existing members by investing $79.0 million to construct new clubs (22 were opened during 1999), acquire 24 additional clubs, and upgrade and expand over 60 existing clubs. In addition, we are in the later stages of a general refurbishment program begun two years ago, which has included the updating of equipment and décor in the majority of our fitness centers. During 1999, approximately $19.0 million was spent to support this program. An additional $2.0 million was spent to add additional retail outlets to our fitness centers, and $8.0 million was spent to acquire real estate, including existing leaseholds. Finally, approximately $24.0 million was spent and capitalized during 1999 for normal replacements.
From time to time, we identify opportunities to acquire existing fitness center operations, at attractive prices, that fit our strategic goals. During 1999, we acquired 24 existing fitness centers: 10 in the Toronto area operating as "The Sports Clubs of Canada", two in the San Francisco area operating as "Pinnacle Fitness", one club in each of the Chicago and Los Angeles areas operating as "Gorilla Sports", six clubs in the Fresno area, where we previously had no fitness centers, and four clubs in the Seattle area now operating as "Bally Total Fitness". The total purchase price of the 24 centers was $47.4 million consisting of debt, including assumed and seller-financed debt, cash and shares of our common stock. Certain seller notes, which had a value of $8.9 million on the date issued, are exchangeable into 275,312 shares of our common stock at the note holder's option on or before July 2001.
In May 1998, we sold 2,800,000 shares of our common stock to the public for net proceeds of $82.7 million, and in December 1998, we completed a $75.0 million private placement of 9 7/8% Series C senior subordinated notes due October 15, 2007. We used these proceeds to fund our growth strategies to open new fitness centers, to acquire fitness center operations in strategic geographic markets and to selectively acquire club-related real estate. We are currently engaged in various stages of discussions to acquire local and regional fitness center operators. None of the individual negotiations are for a material acquisition of fitness centers or club-related real estate.
In August 1998, we announced our intention to repurchase up to 1,500,000 shares of our common stock on the open market from time to time. As of March 1, 2000, we have repurchased 625,100 shares at an average price of $18 per share. No purchases have been made since November 1999.
In November 1999, we amended our three-year bank credit facility, increasing the aggregate amount available to $175.0 million consisting of a five-year $75.0 million term loan and a $100.0 million three-year revolving credit facility. The proceeds from the term loan were primarily used to repay principal outstanding on our revolving credit facility. The amount available under the revolving credit facility is reduced by any outstanding letters of credit, which cannot exceed $30.0 million. At December 31, 1999, the revolving credit facility was unused except for outstanding letters of credit totaling $6.0 million. The $75.0 million term loan is repayable in 20 quarterly installments of $250,000, with the final installment of $70.3 million due in November 2004. We have no scheduled principal payments under our subordinated debt until October 2007, and the principal amount of the certificates under our securitization facility remains fixed at $160.0 million through July 2001. Our debt service requirements, including interest, during 2000 are approximately $66.2 million. We believe that we will be able to satisfy our 2000 requirements for debt service, capital expenditures and any stock repurchases, out of available cash balances, cash flow from operations and, if necessary, borrowings on the revolving credit facility.
Cash flow from operating activities for 1999 was a source of $39.1 million compared to a use of $32.0 million in 1998. Net installment contracts receivable grew $64.0 million during 1999 compared to $78.4 million in 1998. Excluding the growth in receivables, cash provided by operating activities totaled $103.1 million for 1999 compared to $46.4 million for 1998.
We completed an assessment of whether our systems and those of third parties, which could have a material impact on our business, will function properly with respect to dates in 2000 and thereafter. All critical system modifications were completed and implemented prior to December 31, 1999 and, as such, we did not experience any material effects as a result of a year 2000 problem. Additionally, we did not experience any significant year 2000 problems with our non-information technology systems, such as embedded microcontrollers, or with the financial institutions that process our collections of installment receivables and monthly dues by electronic payment methods.
Forward-looking statements in this Form 10-K, including, without limitation, statements relating to our plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These factors include, among others, the following: general economic and business conditions; competition; success of operating initiatives, advertising and promotional efforts; existence of adverse publicity or litigation; acceptance of new product 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 or in other of our filings with the Securities and Exchange Commission. We are under no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
We are exposed to market risk from changes in the interest rates on certain of our outstanding debt. The outstanding loan balance under our bank credit facility and $14.5 million of the $160.0 million securitization facility bear interest at variable rates based on prevailing short-term interest rates in the United States and Europe. Based on 1999's average outstanding balance of these variable rate obligations, a 100 basis point change in interest rates would change interest expense by approximately $.3 million. For fixed rate debt, such as our senior notes and the securitization facility, interest rate changes affect their fair market value but do not impact earnings or cash flows.
We have purchased an 8.99% London Interbank Offer Rate cap as required by the $14.5 million variable rate portion of the $160.0 million securitization facility. We presently do not use other financial derivative instruments to manage our interest costs. We are subject to minimal foreign exchange and no commodity risk.
Index Report of independent auditors 20 Consolidated balance sheet 21 Consolidated statement of operations 23 Consolidated statement of stockholders' equity 24 Consolidated statement of cash flows 25 Notes to consolidated financial statements 27 Supplementary data: Quarterly consolidated financial information (unaudited) 41
We have audited the accompanying consolidated balance sheets of Bally Total Fitness Holding Corporation as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders equity and cash flows for each of the three years in the period ended December 31, 1999. 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 Companys 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 auditing standards generally accepted in the United States. 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, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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.
As discussed in the Summary of Significant Accounting Policies footnote to the consolidated financial statements, in 1999 the Company changed its method of accounting for start-up costs.
ERNST & YOUNG LLP
Chicago, Illinois The accompanying consolidated financial statements include the
accounts of Bally Total Fitness Holding Corporation (the Company)
and the subsidiaries that it controls. The Company, through its subsidiaries, is
a nationwide commercial operator of fitness centers with approximately 370
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 areas in the
United States and Canada. Unless otherwise specified in the text, references to
the Company include the Company and its subsidiaries. The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting principles, which
require the Companys management to make estimates and assumptions that
affect the amounts reported therein. Actual results could vary from such
estimates. 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. 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. 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 $47,580, $41,788 and $45,739 for
1999, 1998 and 1997, respectively. Deferred finance costs are amortized over the terms of the
related debt using the bonds outstanding method. Included in Other
assets at December 31, 1999 and 1998 were deferred finance costs of
$14,252 and $10,872, respectively, net of accumulated amortization of $6,761 and
$3,710, respectively. 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 40 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 Companys expected future cash flows were less than the
carrying value of the Companys long-lived assets and identifiable
intangibles, an impairment loss would be recognized equal to the amount by which
the carrying value of the Companys 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 existed at
December 31, 1999. However, if future operations do not perform as
expected, or if the Companys strategic plans for its business were to
change, a reduction in the carrying value of these assets may be required. The Companys fitness centers primarily offer a dues
membership, which permits members, upon paying an initial membership fee, 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 have been calculated to be 36 months
and 22 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.
Components of deferred revenues as of December 31, 1999 and 1998 are as follows: Components of the change in deferred revenues for the years ended December 31,
1999, 1998 and 1997 are as follows: Components of the change in deferred membership origination costs for the years
ended December 31, 1999, 1998 and 1997 are as follows: Basic earnings (loss) per common share is computed by dividing
income (loss) before extraordinary charge and cumulative effect of a change in
accounting principle, extraordinary loss on extinguishment of debt, cumulative
effect of a change in accounting principle and net income (loss) by the
weighted-average number of shares of common stock outstanding during each year,
which totaled 23,382,288 shares, 22,424,172 shares and 15,557,491 shares for
1999, 1998 and 1997, respectively. Diluted earnings (loss) per common share is
computed by dividing income (loss) before extraordinary charge and cumulative
effect of a change in accounting principle, extraordinary loss on extinguishment
of debt, cumulative effect of a change in accounting principle and net income
(loss) by the weighted-average number of shares of common stock and common stock
equivalents outstanding during each year, which totaled 27,235,831 shares,
26,171,404 shares and 15,557,491 shares for 1999, 1998 and 1997, respectively.
Common stock equivalents represent the dilutive effect of the assumed exercise
of outstanding warrants and stock options and the conversion of exchangeable
notes. Common stock equivalents increased the weighted-average number of shares
outstanding for diluted earnings per common share by 3,853,543 shares and
3,747,232 shares for 1999 and 1998, respectively. The assumed exercise of
outstanding warrants and stock options for diluted loss per common share was not
applicable in 1997 because its effect was anti-dilutive. The extraordinary loss on extinguishment of debt for 1997 of
$21,414 ($1.37 per share) resulted from a refinancing of the Companys
subordinated debt and revolving bank credit facility. In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-5, Reporting the
Costs of Start-up Activities, and was effective beginning on January 1, 1999.
SOP 98-5 required that start-up costs, including organization costs capitalized
prior to January 1, 1999, be written off and any future start-up costs be
expensed as incurred. The Companys unamortized start-up costs at January
1, 1999 were written off and reported as a cumulative effect of a change in
accounting principle, net of tax. During 1999, the Company acquired 24 fitness centers: 10 upscale
centers in the Toronto, Canada area, six in the Fresno, California area, four in
the Seattle area, two in the San Francisco area and one each in the Los Angeles
and Chicago areas. The total purchase price of the 24 centers was $47,434,
consisting of debt, including assumed and seller financed debt, cash and shares
of the Companys common stock. Certain seller notes, which had a value of
$8,947 on the date issued, are exchangeable at the option of the note holder for
275,312 shares of the Companys common stock on or before July 2001. The carrying amount of installment contracts receivable at
December 31, 1999 and 1998 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. In November 1999, the Company amended its three-year bank credit
facility, increasing the aggregate amount available to $175,000, consisting of a
five-year, $75,000 term loan due November 2004 and a $100,000 three-year
revolving credit facility maturing November 2002. The amount available under the
revolving credit facility is reduced by any outstanding letters of credit, which
cannot exceed $30,000. At December 31, 1999, the revolving credit facility
was unused except for outstanding letters of credit totaling $6,041. The rate of
interest on borrowings is at the Companys option, generally based upon
either the agent banks prime rate plus 2.00% or a Eurodollar rate plus
3.00% for the revolving credit facility and the agent banks prime rate
plus 2.50% or a Eurodollar rate plus 3.50% for the term loan. A fee of 2.00% on
outstanding letters of credit is payable quarterly. A commitment fee of one-half
of 1% is payable quarterly on the unused portion of the revolving credit
facility. The credit facility is secured by substantially all real and personal
property (excluding installment contracts receivable) of the Company. The
$75,000 term loan is repayable in 20 quarterly installments of $250 commencing
March 31, 2000, with the final installment of $70,250 due in November 2004. 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). In
April 1999, the Company amended the Securitization, extending the initial
maturity to July 2001. The Floating Certificates bear interest (9.47%, 8.11% and
8.55% at December 31, 1999, 1998 and 1997, respectively) at 3.01% above the
London Interbank Offer Rate (LIBOR), with the LIBOR rate on the
Floating Certificates capped at 8.99% 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 Companys 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 2001, 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 2001, after
which collections of installment contracts receivable will be used first to fund
interest requirements and then to repay principal on the certificates. The
amortization period ends upon the earlier to occur of the certificates being
repaid in full or August 2004. The Company leases certain fitness center facilities and
equipment under capital leases expiring in periods ranging from one to 20 years.
Included in Property and equipment at December 31, 1999 and 1998
were assets under capital leases of $30,823 and $24,118, respectively, net of
accumulated amortization of $8,840 and $4,640, respectively. In October 1997, the Company refinanced its subordinated debt by
issuing $225,000 aggregate principal amount of 9 7/8% Series B Senior
Subordinated Notes due 2007 (the Series B 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 (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. In December 1998, the Company, through a private placement,
issued $75,000 aggregate principal amount of 9 7/8% Series C Senior Subordinated
Notes due 2007 (the Series C Notes) at a discount to yield an
interest rate of 10.2%. The Series C Notes were pari passu with the
$225,000 Series B Notes issued in 1997. In June 1999, the Company exchanged the Series B and Series C
Notes for a like principal amount of 9 7/8% Series D Senior Subordinated Notes
due 2007 (the Series D Notes). The terms of the Series D Notes are
substantially identical to the terms of the Series B and Series C Notes. The
Series D 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 Series D
and the Series B Notes not exchanged is subordinated to the payment in full of
all senior indebtedness of the Company, as defined (approximately $303,000 at
December 31, 1999). The revolving credit agreement and the indentures for the 9 7/8%
Series B and Series D 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. Maturities of long-term debt and future minimum payments under
capital leases, together with the present value of future minimum rentals as of
December 31, 1999, are as follows: The fair value of the Companys long-term debt at
December 31, 1999 and 1998 approximates its carrying amount except for the
Companys subordinated debt, which had a fair market value (based on quoted
market prices) of $289,500 and $294,000 at December 31, 1999 and 1998,
respectively. The fair values are not necessarily indicative of the amounts the
Company could acquire the debt for in a purchase or redemption. The income tax provision applicable to income (loss) before
income taxes, extraordinary charge and cumulative effect of a change in
accounting principle consists of the following: 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 Companys
deferred tax assets and liabilities as of December 31, 1999 and 1998, along
with their classification, are as follows: Federal tax loss and Alternative Minimum Tax (AMT)
credit carryforwards were allocated to the Company from Bally Entertainment
Corporation (its former parent) 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 (IRS) adjustments. At
December 31, 1999, estimated federal AMT credit and tax loss carryforwards
of $2,987 and $480,916, respectively, have been recorded by the Company. The AMT
credits can be carried forward indefinitely, while the tax loss carryforwards
expire through 2019. In addition, the Company has substantial state tax loss
carryforwards, which begin to expire in 2000 and fully expire through 2019.
Based upon the Companys past performance and the expiration dates of its
carryforwards, the ultimate realization of all of the Companys 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. A reconciliation of the income tax provision with amounts
determined by applying the U.S. statutory tax rate to income (loss) before
income taxes, extraordinary charge, and cumulative effect of change in
accounting principle is as follows: 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 the Companys common stock, par
value $.01 per share, (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 anti-dilution
provisions. The Board of Directors of the Company adopted a stockholders
rights plan (the Stockholder Rights Plan) and issued and distributed
a stock purchase right (Right) for each share of Common Stock. 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) 10 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 (15% for certain institutional holders) (an
Acquiring Person), or (ii) 10 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
the Company, directors of the Company on January 5, 1996 who are also
officers of the Company, Bally Entertainment Corporation and any person holding
the warrant to purchase 2,942,805 shares of Common Stock initially issued to
Bally Entertainment Corporation. 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 Companys 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, 1999, 6,811,025 shares of Common Stock were
reserved for future issuance (3,192,805 shares in connection with outstanding
warrants and 3,618,220 shares in connection with certain stock plans). 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. The Company has issued warrants, currently held by the Chairman
of the Board of Directors and the President and Chief Executive Officer,
entitling them to acquire 2,942,805 shares of Common Stock at an exercise price
of $5.26 per share. The warrants expire December 2005. 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. Initially, 100,000 shares of Common Stock were reserved for
issuance under the Directors Plan and, at December 31, 1999, 60,000 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 November 1997 and June 1999, the Incentive Plan was amended to increase
the aggregate number of shares of Common Stock that may be granted under the
Incentive Plan to an aggregate of 4,600,000 shares. At December 31, 1999,
463,744 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 1999, 1998 and 1997 have 10-year terms. A summary of 1999, 1998 and 1997 stock option activity under the
Directors Plan and Incentive Plan is as follows: 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 Companys stock options equals the market price of
the Common Stock on the date of grant, no compensation expense is recognized. Had compensation cost been determined for the Companys
stock option portion of the plans based on the fair value at the grant dates for
awards under those plans consistent with the alternative method set forth under
SFAS No. 123, the Companys pro forma net income (loss) would be: The fair value for the stock options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1999, 1998 and 1997: risk-free interest rate of
6.48%, 4.72% and 5.67%, respectively; no dividend yield; volatility factor of
the expected market price of the common stock of 0.414, 0.356 and 0.164,
respectively; and a weighted-average expected life of the options of five 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 Companys 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
managements 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 1998, the Compensation Committee awarded 190,000 shares of
restricted Common Stock to certain key executives of the Company. These shares
were issued in the employees name and are held by the Company until the
restrictions lapse. The restrictions on these shares lapse upon a change in
control of the Company, the employees death, termination of employment due
to disability or the first date prior to December 31, 2002 which follows seven
consecutive trading days on which the trading price equals or exceeds the
targeted stock price of $42 per share. As of December 31, 1999, no compensation
expense has been recognized. Unearned compensation of $7,978 is included in
stockholders equity. 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 received a cash payment from the Company upon the lapse of
restrictions in an amount sufficient to insure that the recipient received 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 the targeted stock prices in 1997. 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 employees elected payroll deduction, with a maximum payroll
deduction equal to 10% of eligible compensation, as defined. The first offering
under the Stock Purchase Plan commenced on January 1, 1998 and expired 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, 1999, 163,380 shares of Common Stock were available for future
purchases under the Stock Purchase Plan. Pursuant to APB No. 25, no expense was
recorded by the Company in connection with this plan. 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 Companys matching
contributions related to the plans totaled $1,412, $1,312 and $1,106 for 1999,
1998 and 1997, respectively. The Company leases various fitness center facilities, office
facilities, and equipment under operating leases expiring in periods ranging
from one to 25 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 $97,542, $92,816 and $89,384 for 1999, 1998 and 1997,
respectively. Minimum future rent payments under long-term noncancellable
operating leases in effect as of December 31, 1999, exclusive of taxes,
insurance, other expenses payable directly by the Company and contingent rent,
are $101,135, $97,955, $94,164, $90,795 and $88,205 for 2000 through 2004,
respectively, and $479,546 thereafter. Included in the amounts above are leases with real estate
partnerships in which certain of the Companys then-current executive
officers had ownership interests. Rent expense under these leases was $0, $169
and $808 for 1999, 1998 and 1997, respectively. The Company is involved in various 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. The Company's operations are subject to seasonal
factors. The Company wrote off the net book value of start-up
costs as required by Statement of Position 98-5, Reporting Costs of Start-up
Activities in the first quarter of 1999. Item 9 is inapplicable. Part III (except for certain information relating to Executive
Officers included in Part I) is omitted. The Company intends to file with the
Securities and Exchange Commission within 120 days of the close of the fiscal
year ended December 31, 1999 a definitive proxy statement containing such
information pursuant to Regulation 14A of the Securities Exchange Act of 1934,
and such information shall be deemed to be incorporated herein by reference from
the date of filing such document. 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. 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. Notes: Amounts are included as a component of the deferred
revenue computation as set forth in the "Summary of significant accounting
policies - Membership revenue recognition" note to the consolidated financial
statements. Additions charged to accounts other than costs and
expenses primarily consist of charges to revenues, principally for
cancellations. Deductions include write-offs of uncollectible
amounts, net of recoveries. S-1
February 9, 2000
BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Balance Sheet
December 31
-------------------------
1999 1998
----------- -----------
(In thousands)
ASSETS
Current assets:
Cash and equivalents $ 23,450 $ 64,382
Installment contracts receivable, net 241,450 199,979
Other current assets 46,185 34,212
----------- -----------
Total current assets 311,085 298,573
Installment contracts receivable, net 244,693 222,147
Property and equipment, at cost:
Land 35,105 24,588
Buildings 132,665 112,094
Leasehold improvements 519,269 437,978
Equipment and furnishings 168,969 127,342
----------- -----------
856,008 702,002
Accumulated depreciation and amortization (382,897) (340,702)
----------- -----------
Net property and equipment 473,111 361,300
Intangible assets, less accumulated
amortization of $64,554 and $58,844 137,156 101,815
Deferred income taxes 39,444 17,430
Deferred membership origination costs 106,195 97,901
Other assets 36,873 29,679
----------- -----------
$ 1,348,557 $ 1,128,845
=========== ===========
See accompanying notes.
BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Balance Sheet
December 31
-------------------------
1999 1998
----------- -----------
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 49,629 $ 40,957
Income taxes payable 3,063 2,608
Deferred income taxes 40,933 18,919
Accrued liabilities 59,197 48,596
Current maturities of long-term debt 9,505 5,799
Deferred revenues 290,123 282,806
----------- -----------
Total current liabilities 452,450 399,685
Long-term debt, less current maturities 593,903 482,199
Other liabilities 6,531 6,226
Deferred revenues 83,214 78,952
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, $0.1 par value; 60,200,000 shares
authorized; 24,369,433 and 23,917,132 shares
issued 243 239
Contributed capital 498,093 488,046
Accumulated deficit (267,124) (309,306)
Unearned compensation (restricted stock) (7,978) (7,978)
Common stock in treasury, at cost, 614,039 and
543,739 shares (10,775) (9,218)
----------- -----------
Total stockholders' equity 212,459 161,783
----------- -----------
$ 1,348,557 $ 1,128,845
=========== ===========
See accompanying notes.
BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statement of Operations
Year ended December 31
----------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands, except share data)
Net revenues:
Membership revenues -
Initial membership fees on financed
memberships originated $ 465,443 $ 414,190 $ 352,661
Initial membership fees on paid-in-full
memberships originated 23,721 30,318 58,117
Dues collected 242,952 205,104 194,084
Change in deferred revenues (4,078) 3,122 961
---------- ---------- ----------
728,038 652,734 605,823
Finance charges earned 59,449 50,160 39,218
Products and services 62,616 32,474 10,046
Fees and other 10,995 8,976 6,697
---------- ---------- ----------
861,098 744,344 661,784
Operating costs and expenses:
Fitness center operations 423,001 401,282 375,978
Products and services 41,570 22,409 8,536
Member processing and collection centers 41,213 41,024 39,393
Advertising 47,766 45,035 44,629
General and administrative 27,169 26,097 28,952
Provision for doubtful receivables 139,627 118,604 96,078
Depreciation and amortization 52,857 48,255 52,878
Change in deferred membership origination
costs (5,444) (11,164) (4,597)
---------- ---------- ----------
767,759 691,542 641,847
---------- ---------- ----------
Operating income 93,339 52,802 19,937
Interest income 2,369 2,514 1,928
Interest expense (52,394) (41,494) (45,021)
---------- ---------- ----------
Income (loss) before income taxes,
extraordinary charge and cumulative effect
of a change in accounting principle 43,314 13,822 (23,156)
Income tax provision 870 525 300
---------- ---------- ----------
Income (loss) before extraordinary charge
and cumulative effect of a change in
accounting principle 42,444 13,297 (23,456)
Extraordinary loss on extinguishment of
debt (21,414)
Cumulative effect of a change in
accounting principle (262)
---------- ---------- ----------
Net income (loss) $ 42,182 $ 13,297 $ (44,870)
========== ========== ==========
Basic earnings (loss) per common share:
Income (loss) before extraordinary
charge and cumulative effect of a
change in accounting principle $ 1.81 $ .59 $ (1.51)
Extraordinary loss on extinguishment
of debt (1.37)
Cumulative effect of a change in
accounting principle (.01)
---------- ---------- ----------
Net income (loss) per common share $ 1.80 $ .59 $ (2.88)
========== ========== ==========
Average common shares outstanding 23,382,288 22,424,172 15,557,491
Diluted earnings (loss) per common share:
Income (loss) before extraordinary
charge and cumulative effect of a
change in accounting principle $ 1.56 $ .51 $ (1.51)
Extraordinary loss on extinguishment
of debt (1.37)
Cumulative effect of a change in
accounting principle (.01)
---------- ---------- ----------
Net income (loss) per common share $ 1.55 $ .51 $ (2.88)
========== ========== ==========
Average diluted common shares outstanding
(includes 3,853,543 and 3,747,232 common
equivalent shares in 1999 and 1998) 27,235,831 26,171,404 15,557,491
See accompanying notes.
BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statement of Stockholders' Equity
Common stock Unearned Total
----------------- compensation Common stock-
Par Contributed Accumulated (restricted stock in holders'
Shares value capital deficit stock) treasury equity
---------- ----- ----------- ----------- ------------- --------- ---------
(In thousands, except share data)
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
Net income 13,297 13,297
Issuance of common stock through
public offering 2,800,000 28 82,716 82,744
Issuance of common stock for
acquisitions of businesses 230,769 2 3,423 3,425
Acquisition of business with
treasury stock 11,061 42 310 352
Issuance of common stock under
stock purchase and option plans 121,271 1 1,169 1,170
Issuance of common stock under
long-term incentive plan 190,000 2 7,978 (7,978) 2
Purchases of common stock (554,800) (9,528) (9,528)
---------- ----- --------- ---------- -------- --------- ---------
Balance at December 31, 1998 23,373,393 239 488,046 (309,306) (7,978) (9,218) 161,783
Net income 42,182 42,182
Issuance of common stock for
acquisitions of businesses 141,723 1 7,798 7,799
Issuance of common stock under
stock purchase and option plans 310,578 3 2,249 2,252
Purchases of common stock (70,300) (1,557) (1,557)
---------- ----- --------- ---------- -------- --------- ---------
Balance at December 31, 1999 23,755,394 $ 243 $ 498,093 $ (267,124) $ (7,978) $ (10,775) $ 212,459
========== ===== ========= ========== ======== ========= =========
See accompanying notes.
BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statement of Cash Flows
Year ended December 31
----------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
OPERATING:
Income (loss) before extraordinary charge
and cumulative effect of a change in
accounting principle $ 42,444 $ 13,297 $ (23,456)
Adjustments to reconcile to cash provided
(used) -
Depreciation and amortization, including
amortization included in interest
expense 56,175 50,585 55,287
Provision for doubtful receivables 139,627 118,604 96,078
Change in operating assets and
liabilities (199,164) (214,486) (163,845)
---------- ---------- ----------
Cash provided by (used in) operating
activities 39,082 (32,000) (35,936)
INVESTING:
Purchases and construction of property
and equipment (119,089) (76,432) (27,065)
Proceeds from sale of property and
equipment 10,946
Acquisitions of businesses (13,241) (2,521)
Other, net (5,680)
---------- ---------- ----------
Cash used in investing activities (138,010) (78,953) (16,119)
FINANCING:
Debt transactions -
Proceeds from long-term borrowings 75,000 73,501 225,052
Repayments of long-term debt (11,274) (30,871) (208,034)
Debt issuance costs (6,425) (3,362) (8,466)
---------- ---------- ----------
Cash provided by debt transactions 57,301 39,268 8,552
Equity transactions -
Proceeds from issuance of common stock
through public offering 82,744 88,390
Proceeds from issuance of common stock
upon exercise of stock options and
stock purchase plans 2,252 1,172 258
Purchases of common stock for treasury (1,557) (9,528)
---------- ---------- ----------
Cash provided by financing activities 57,996 113,656 97,200
---------- ---------- ----------
Increase (decrease) in cash and equivalents (40,932) 2,703 45,145
Cash and equivalents, beginning of year 64,382 61,679 16,534
---------- ---------- ----------
Cash and equivalents, end of year $ 23,450 $ 64,382 $ 61,679
========== ========== ==========
See accompanying notes.
BALLY TOTAL FITNESS HOLDING CORPORATION
Consolidated Statement of Cash Flows-(continued)
Years ended December 31
----------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
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 $ (203,644) $ (196,990) $ (140,096)
Increase in other current and other
assets (8,987) (3,765) (8,402)
Increase in deferred membership
origination costs (5,444) (11,164) (4,597)
Increase (decrease) in accounts payable 10,076 3,689 (4,657)
Increase in income taxes payable 455 607 84
Increase (decrease) in accrued and other
liabilities 4,302 (3,741) (5,216)
Increase (decrease) in deferred revenues 4,078 (3,122) (961)
---------- ---------- ----------
$ (199,164) $ (214,486) $ (163,845)
========== ========== ==========
Cash payments for interest and income taxes
were as follows -
Interest paid $ 49,612 $ 40,029 $ 48,427
Interest capitalized (1,449) (540) (511)
Income taxes paid (refunded), net 415 (83) 216
Investing and financing activities exclude
the following non-cash transactions -
Acquisition of property and equipment
through capital leases/borrowings $ 25,118 $ 9,968 $ 14,044
Acquisitions of businesses with common
stock 7,800 3,425
Acquisition of business with treasury
stock 352
Common stock issued under long-term
incentive plan 7,978
Debt, including debt assumed, related to
acquisitions of businesses 26,393
See accompanying notes.
Notes to Consolidated Financial Statements
(All dollar amounts in thousands, except share data)
Summary of significant accounting policies
Basis of presentation
Cash equivalents
Property and equipment
Deferred finance costs
Intangible assets
Membership revenue recognition
1999 1998
---------------------------- ---------------------------
Current Long-term Total Current Long-term Total
-------- --------- -------- -------- --------- --------
Financed initial
membership fees
deferred $221,664 $ 51,468 $273,132 $201,988 $ 48,050 $250,038
Paid-in-full initial
membership fees
deferred 23,823 14,890 38,713 39,818 19,875 59,693
Prepaid dues 44,636 16,856 61,492 41,000 11,027 52,027
-------- -------- -------- -------- -------- --------
$290,123 $ 83,214 $373,337 $282,806 $ 78,952 $361,758
======== ======== ======== ======== ======== ========
1999 1998 1997
---------- ---------- ----------
Financed initial membership fees:
Originating $ (465,443) $ (414,190) $ (352,661)
Less provision for doubtful receivables 139,627 118,604 96,078
---------- ---------- ----------
Originating, net (325,816) (295,586) (256,583)
Recognized 302,723 258,748 223,270
---------- ---------- ----------
Increase in deferral (23,093) (36,838) (33,313)
Paid-in-full initial memberships fees:
Originating (23,721) (30,318) (58,117)
Recognized 44,700 68,780 90,666
---------- ---------- ----------
Decrease in deferral 20,979 38,462 32,549
(Increase) decrease in prepaid dues,
exclusive of dues related to acquired
businesses (1,964) 1,498 1,725
---------- ---------- ----------
Change in deferred revenues $ (4,078) $ 3,122 $ 961
========== ========== ==========
1999 1998 1997
---------- ---------- ----------
Incurred $ (109,089) $ (99,302) $ (84,104)
Amortized 103,645 88,138 79,507
---------- ---------- ----------
Change in deferred membership origination
costs $ (5,444) $ (11,164) $ (4,597)
========== ========== ==========
Earnings (loss) per common share
Extraordinary loss
Cumulative effect of a change in accounting
principle
Reclassifications
Certain prior-year amounts have been reclassified to conform to the current-year presentation.
Acquisitions
Installment contracts receivable
1999 1998
----------- -----------
Current:
Installment contracts receivable $ 355,029 $ 294,880
Unearned finance charges (41,515) (35,792)
Allowance for doubtful receivables and
cancellations (72,064) (59,109)
----------- -----------
$ 241,450 $ 199,979
=========== ===========
Long-term:
Installment contracts receivable $ 319,034 $ 287,443
Unearned finance charges (20,367) (18,104)
Allowance for doubtful receivables and
cancellations (53,974) (47,192)
----------- -----------
$ 244,693 $ 222,147
=========== ===========
Accrued liabilities
1999 1998
----------- -----------
Payroll and benefit-related liabilities $ 21,436 $ 17,908
Interest 7,165 6,254
Taxes other than income taxes 10,133 6,392
Other 20,463 18,042
----------- -----------
$ 59,197 $ 48,596
=========== ===========
Long-term debt
1999 1998
----------- -----------
Nonsubordinated:
Securitization facility $ 160,000 $ 160,000
Term loan, due 2004 75,000
Capital lease obligations 24,559 18,759
Other secured and unsecured obligations 45,164 10,726
Subordinated:
9 7/8% Series B Senior Subordinated Notes due 2007 236 225,000
9 7/8% Series C Senior Subordinated Notes due 2007,
less unamortized discount of $1,487 73,513
9 7/8% Series D Senior Subordinated Notes due 2007,
less unamortized discount of $1,315 298,449
----------- -----------
Total long-term debt 603,408 487,998
----------- -----------
Current maturities of long-term debt (9,505) (5,799)
----------- -----------
Long-term debt, less current maturities $ 593,903 $ 482,199
=========== ===========
Long-term Capital
debt leases Total
---------- ---------- ----------
2000 $ 3,997 $ 7,770 $ 11,767
2001 77,684 6,068 83,752
2002 106,038 4,724 110,762
2003 3,166 4,301 7,467
2004 80,767 2,463 83,230
Thereafter 307,197 13,206 320,403
---------- ---------- ----------
578,849 38,532 617,381
Less amount representing interest (13,973) (13,973)
---------- ---------- ----------
$ 578,849 $ 24,559 $ 603,408
========== ========== ==========
Income taxes
1999 1998 1997
---------- ---------- ----------
Deferred $ 16,950 $ 6,180 $
Reversal of valuation allowance (16,950) (6,180)
State and other (all current) 870 525 300
---------- ---------- ----------
$ 870 $ 525 $ 300
========== ========== ==========
1999 1998
---------------------- ----------------------
Assets Liabilities Assets Liabilities
--------- ----------- --------- -----------
Installment contract revenues $ $ 63,585 $ $ 37,521
Amounts not yet deducted for
tax purposes:
Bad debts 51,759 45,604
Other 11,042 9,600
Amounts not yet deducted for
book purposes:
Deferred membership
origination costs 43,436 41,595
Depreciation and capitalized
costs 4,143 5,315
Tax loss carryforwards 211,266 208,083
Other, net 13,996 11,895
--------- --------- --------- ---------
278,210 $ 121,017 268,602 $ 91,011
========= =========
Valuation allowance (158,682) (179,080)
--------- ---------
$ 119,528 $ 89,522
========= =========
Current $ 22,841 $ 63,774 $ 18,974 $ 37,893
Long-term 96,687 57,243 70,548 53,118
--------- --------- --------- ---------
$ 119,528 $ 121,017 $ 89,522 $ 91,011
========= ========= ========= =========
1999 1998 1997
---------- ---------- ----------
Provision (benefit) at U.S. statutory
tax rate (35%) $ 15,068 $ 4,838 $ (8,105)
Add (deduct):
Provision (benefit) for change in
valuation allowance (16,950) (6,180) 6,748
State income taxes, net of related
federal income tax effect and
valuation allowance 517 341 195
Amortization of cost in excess of
acquired assets 1,643 1,419 1,412
Other, net 592 107 50
---------- ---------- ----------
Income tax provision $ 870 $ 525 $ 300
========== ========== ==========
Stockholders equity
Warrants
Stock plans
Number
of shares Weighted- Range of
represented average exercise
by options price prices
----------- --------- --------------
Outstanding at December 31, 1996 -
none of which were exercisable 1,344,660 $ 4.25 $ 4.13 - 5.13
Granted 729,000 16.32 12.00 - 17.56
Exercised (59,931) 4.13 4.13
Forfeited (109,268) 4.13 4.13
---------
Outstanding at December 31, 1997 -
391,820 of which were exercisable 1,904,461 8.88 4.13 - 17.56
Granted 664,000 20.73 18.50 - 36.00
Exercised (78,645) 5.89 4.13 - 17.56
Forfeited (20,991) 9.40 4.13 - 18.50
---------
Outstanding at December 31, 1998 -
970,136 of which were exercisable 2,468,825 12.16 4.13 - 36.00
Granted 780,450 32.01 24.38 - 32.94
Exercised (266,584) 5.31 4.13 - 18.50
Forfeited (51,595) 17.59 4.13 - 36.00
---------
Outstanding at December 31, 1999 -
1,508,120 of which are exercisable 2,931,096 17.97 4.13 - 36.00
=========
1999 1998 1997
---------- ---------- ----------
Net income (loss)
As reported $ 42,184 $ 13,297 $ (44,870)
Pro forma 39,193 11,266 (45,783)
Net income (loss) per common share
As reported 1.80 .59 (2.88)
Pro forma 1.68 .50 (2.94)
Weighted-average fair value of options
granted 14.70 8.11 2.88
Savings plans
Commitments and Contingencies
Operating leases
Litigation
BALLY TOTAL FITNESS HOLDING CORPORATION
Quarterly Consolidated Financial Information (unaudited)
Quarter ended
--------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- -------------- -------------- --------------
1999 1998 1999 1998 1999 1998 1999 1998
------ ------ ------ ------ ------ ------ ------ ------
(In millions, except share data)
Net revenues $208.4 $184.5 $209.5 $181.4 $219.1 $190.3 $224.1 $188.1
Operating income 18.3 11.9 21.1 11.6 25.1 13.8 28.8 15.5
Income before cumulative
effect of a change in
accounting principle 6.7 2.1 9.1 2.0 12.2 4.3 14.4 4.9
Cumulative effect of a
change in accounting
principle (0.2)
Net income 6.5 2.1 9.1 2.0 12.2 4.3 14.4 4.9
Basic earnings per common
share:
Income before cumulative
effect of a change in
accounting principle $ .29 $ .10 $ .39 $ .09 $ .52 $ .18 $ .61 $ .21
Cumulative effect of a
change in accounting
principle (.01)
Net income .28 .10 .39 .09 .52 .18 .61 .21
Diluted earnings per
common share:
Income before cumulative
effect of a change in
accounting principle $ .25 $ .09 $ .34 $ .08 $ .45 $ .16 $ .53 $ .19
Cumulative effect of a
change in accounting
principle (.01)
Net income .24 .09 .34 .08 .45 .16 .53 .19 0.19
__________
ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
PART IV
ITEM 14. EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
(a) 1. Index to Financial Statements
Report of independent auditors 20
Consolidated balance sheet at December 31, 1999 and 1998 21
For each of the three years in the period ended December 31, 1999:
Consolidated statement of operations 23
Consolidated statement of stockholders' equity 24
Consolidated statement of cash flows 25
Notes to consolidated financial statements 27
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, 1999 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 Bally
Entertainment Corporation 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 Bally Entertainment Corporation 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 (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, 1997).
*4.7 First Amendment dated as of August 5, 1997 to the Warrant
Agreement between the Company and Ladenburg Thalmann Capital
Corporation (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, 1997).
*4.8 Registration Rights Agreement dated as of July 11, 1997 between
the Company and Ladenburg Thalmann Capital Corporation (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, 1997).
*4.9 Indenture dated as of December 16, 1998 between the Company and
U.S. Bank Trust National Association, as Trustee, including the
form of Series C Notes and form of Series D Notes (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, 1998).
*4.10 Registration Rights Agreement dated as of December 16, 1998 among
the Company and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner
& Smith Incorporated and Jefferies & Company, Inc. (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, 1998).
*4.11 Amended Rights Agreement effective as of July 15, 1999 between the
Company and LaSalle National Bank (filed as an exhibit to the
Company's Form 8-K, file no. 0-27478, dated July 15, 1999).
10.1 Amended and Restated Credit Agreement dated as of November 10,
1999 among the Company, several banks and financial institutions
which are parties thereto and The Chase Manhattan Bank, as Agent.
*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 Bally Entertainment Corporation (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 Bally Entertainment Corporation 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 Bally
Entertainment Corporation 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 Bally Entertainment Corporation 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
Bally Entertainment Corporation 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
Bally Entertainment Corporation 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).
*10.12 Management Agreement dated as of January 9, 1996 between Bally
Entertainment Corporation 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 (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, 1997).
*10.16 Second Amendment dated as of February 24, 1998 to the Company's
1996 Long-Term Incentive 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, 1997).
*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 (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, 1997).
*10.20 The Company's 1997 Bonus 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, 1997).
*10.21 First Amendment dated as of February 24, 1998 to the Company's
1997 Bonus 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, 1997).
*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 Amended and Restated Employment Agreement effective as of January
1, 1998 between the Company and Lee S. Hillman (filed as an
exhibit to the Company's Quarterly Report on Form 10-Q, file no.
0-27478, for the quarter ended September 30, 1998).
10.24 Employment Agreement effective as of January 1, 2000 between the
Company and John W. Dwyer.
10.25 Employment Agreement effective as of January 1, 2000 between the
Company and Harold Morgan.
10.26 Employment Agreement effective as of January 1, 2000 between the
Company and John Wildman.
10.27 Employment Agreement effective as of January 1, 2000 between the
Company and William Fanelli.
*10.28 First Amendment dated as of April 27, 1999 to the Series 1996-1
Supplement to Amended and Restated Pooling and Servicing Agreement
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 Quarterly Report on Form 10-Q, file no. 0-27478, for the
quarter ended March 31, 1999).
*10.29 First Amendment dated June 10, 1999 to Employment Agreement
between the Company and Lee S. Hillman (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q, file no. 0-27478, for the
quarter ended June 30, 1999).
10.30 Employment Agreement effective as of January 1, 2000 between the
Company and Paul Toback.
21 List of subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule for December 31, 1999 (filed
electronically only).
27.2 Restated Financial Data Schedules for December 31, 1998 and
December 31, 1997 (filed electronically only).
__________
* Incorporated herein by reference as indicated.
SIGNATURES
BALLY TOTAL FITNESS HOLDING CORPORATION
Dated March 30, 2000
By:
/s/ Lee S. Hillman
-------------------------------------------------------------
Lee S. Hillman
President, Chief Executive Officer and Director
Dated March 30, 2000
By:
/s/ Lee S. Hillman
-------------------------------------------------------------
Lee S. Hillman
President, Chief Executive Officer and Director
(principal executive officer)
Dated March 30, 2000
By:
/s/ John W. Dwyer
-------------------------------------------------------------
John W. Dwyer
Executive Vice President, Chief Financial Officer and
Treasurer (prinicipal financial officer)
Dated March 30, 2000
By:
/s/ Geoffrey M. Scheitlin
-------------------------------------------------------------
Geoffrey M. Scheitlin
Vice President and Controller
(princiapl accounting officer)
Dated March 30, 2000
By:
/s/ Arthur M. Goldberg
-------------------------------------------------------------
Arthur M. Goldberg
Chairman of the Board of Directors
Dated March 30, 2000
By:
/s/ Aubrey C. Lewis
-------------------------------------------------------------
Aubrey C. Lewis
Director
Dated March 30, 2000
By:
/s/ J. Kenneth Looloian
------------------------------------------------------------
J. Kenneth Looloian
Director
Dated March 30, 2000
By:
/s/ James F. McAnally, M.D.
-------------------------------------------------------------
James F. McAnally, M.D.
Director
Dated March 30, 2000
By:
/s/ Liza M. Walsh
-------------------------------------------------------------
Liza M. Walsh
Director
BALLY TOTAL FITNESS HOLDING CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1999, 1998 and 1997
Charged
to costs Charged
Balance at and to other Balance
beginning expenses accounts Deductions at end
Description of year (a) (b) (c) of year
---------------- ---------- -------- -------- ---------- --------
(In thousands)
1999:
Allowance for doubtful
receivables and
cancellations $106,301 $139,627 $152,696 $272,586 $126,038
1998:
Allowance for doubtful
receivables and
cancellations $ 80,531 $118,604 $134,590 $227,424 $106,301
1997:
Allowance for doubtful
receivables and
cancellations $ 86,095 $ 96,078 $107,660 $209,302 $ 80,531
__________
|