| 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 registrant’s voting stock held by non-affiliates of the registrant as of February 28, 2001 was approximately $742.9 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, directors and the Estate of its former Chairman. As of February 28, 2001, 24,387,847 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, 2000, 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 its 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 28, 2001, we operated approximately 385 fitness centers and had approximately four million members. Our fitness centers are concentrated in major metropolitan areas in 28 states and Canada, with over 300 fitness centers located in the top 25 metropolitan areas in the United States. We operate fitness centers in over 50 major metropolitan areas representing over 62% of the United States population and 15% of the Canadian population. Our members made more than 100 million visits to our fitness centers in each of the past three years.
We offer value to our members by providing access to state-of-the-art fitness facilities with affordable membership programs. Bally fitness centers feature an outstanding selection of cardiovascular, conditioning and strength equipment and offer extensive aerobic and other group fitness training programs. In addition, many of our fitness centers include pools, racquet courts or other athletic facilities. Our new fitness center prototype achieves efficiency by focusing on those fitness services our members use most frequently. We have clustered our fitness centers in major metropolitan areas in order to achieve marketing and operating efficiencies. Over 86% of our fitness centers are located in markets 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, Portland, Seattle, Philadelphia and Miami areas.
The majority of our fitness centers use the service mark "Bally Total Fitness®", including 12 upscale centers that are known as "Bally Sports ClubsSM". The nationwide use of the service mark enhances brand identity and increases 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 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, the current management team began to implement a business strategy designed to improve our operating results. These efforts have contributed to significant improvements in financial performance, including growing net income in 2000 to $65.1 million before the net benefit of unusual items of $13.5 million, from net income before cumulative effect of a change in accounting principle of $42.4 million and $13.3 million in 1999 and 1998, respectively, and a loss before extraordinary charge of $23.5 million and $24.9 million in 1997 and 1996, respectively.
In developing the new strategy, the management team identified the following three primary strategic objectives to improve the overall business value:
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.
Since 1997, we have been able to meet these objectives by implementing a number of strategic initiatives.
Improve Core Business Operating Margins
Our 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 have grown margins for earnings before interest, taxes, depreciation and amortization to 19% in 2000 from 11% in 1996, a 73% improvement. We have accomplished this margin expansion by focusing 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 higher priced and typically financed, subject to down payment requirements. The emphasis on the sale of all-club memberships contributed to a 39% increase in the weighted-average price of memberships sold from 1997 to 2000. Revenue from the sale of all-club membership plans grew to 83% of membership sales revenue in 2000, compared to 69% of membership sales revenue in 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 dues collected of 16% and 18% in 2000 and 1999, respectively.
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 a member's credit card. Our experience has shown that electronic payments and higher down payments result in higher quality memberships. In addition, we continue to develop improved collection practices based on information provided by "credit scoring" and behavioral modeling, which we believe, will also improve customer service and the yield from our receivables portfolio.
Continue to Leverage Fixed Cost Base. A significant percentage of our 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 been able to achieve the margin growth noted above.
Develop New Facilities
To build upon our improved core operations and accelerate the growth of our business, we have invested in facilities expansion in three 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 new fitness center prototype is designed to cost less to build and maintain than our older facilities and, on average, provides 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 $1.9 million per fitness center to fund leasehold improvements and exercise equipment. During 2000, we opened 14 of these facilities and a number were under construction at the end of the year.
Upgrade and Expand Existing Fitness Centers. In late 1997, we began to upgrade and expand our existing facilities and much of our exercise equipment beyond normal maintenance requirements. 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. We believe these upgrades will enable us to continue to attract and retain a strong membership base and more effectively capitalize on our marketing and administrative infrastructure.
Selectively Acquire Fitness Center Operations. Due to our relative size in a fragmented market, we are well positioned to identify opportunities to selectively acquire existing fitness center operations at attractive prices. During 2000, we acquired 13 fitness centers in the Portland, Oregon area, where we previously had no fitness centers, three fitness centers in the San Diego, California area and one fitness center in Pittsburgh, Pennsylvania. These acquisitions continue to fit our strategic goals of expanding our reach, increasing penetration in key markets, and leveraging our overall fitness infrastructure.
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 nearly 3,000 personal trainers to our staff and grown revenues from this service to $49.6 million in 2000. Our research indicates the availability of personal training services enhances the perceived value of membership, and we believe demand for these services is growing.
Retail Stores and 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. In 2000, sales of these products totaled $34.5 million, a 74% increase over 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.
During 2000, we opened approximately 120 retail stores inside our fitness centers, bringing the total number of retail outlets within our fitness centers to approximately 340. For the year ended December 31, 2000, these stores contributed $30.6 million in revenue selling primarily nutritional products, workout apparel and related soft goods and accessories, including $8.4 million from Bally-branded nutritional products, a 106% increase over 1999.
Sports Medicine Services. In 1998, we implemented a strategy to provide sports medicine services, including rehabilitative, chiropractic and massage therapy, in many of our fitness centers. We have contracted with several third-party providers of these services and, as of December 31, 2000, offered these services in over 110 of our clubs.
Financial Services. In late 1995, in conjunction with a significant financial institution, we implemented a program offering selected members the opportunity to transfer the balance of their financed membership fee to a pre-approved Visa account. We receive reimbursement from the program for telemarketing costs and share in the program profitability. As of December 31, 2000, over 195,000 credit cards have been issued. We continue to investigate and evaluate other opportunities to offer financial services to our members.
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 $630 to $2,175 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, 2000, 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 $8.00 per month. The average annual growth rate of our monthly dues revenues was over 11% from 1996 through 2000. 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 75% 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 88%.
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 2000, we expect in excess of 90% of all new memberships originated during 2001 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, 2000, approximately 65% 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-equipped 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 de-emphasized. 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 $1.8 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 ($300,000 through lease programs) for exercise equipment in a prototype fitness center. 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 three 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: 14 of these facilities opened in 2000, and 22 opened in 1999. We expect to continue to open 20 to 25 fitness centers annually generally based on our prototype.
Presently five 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 12 upscale fitness centers that are known as "Bally Sports Clubs." The nationwide use of the service mark enhances brand identity and increases 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 fitness centers in over 50 major metropolitan areas representing over 62% of the United States population and 15% of the Canadian population. Over 300 of our fitness centers are located in the top 25 metropolitan areas in the United States. Concentrating our fitness centers in major metropolitan areas increases the efficiency of our marketing and advertising programs.
We spent $51.4 million, $47.8 million and $45.0 million in 2000, 1999 and 1998, respectively, for advertising and promotion. 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 160 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. During 2000, the level of activity increased substantially with over 4.0 million unique users visiting the site, resulting in the issuance of 110,000 guest passes and the collection of approximately 50,000 dues payments.
In 2000, 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 3,000 retail stores in the United States and Canada. Existing strategic alliances with Visa USA, Incorporated, Mastercard®, Time Warner, Sports Display, Inc., Pepsi-Cola Company, Sunkist Growers, Muzak LLC, and Novartis (Lamasil AT™) have been joined in 2000 by new relationships with Kodak, Sprint, Kraft and Kellogg's. 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.
We are 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.
At December 31, 2000, we operated approximately 385 fitness centers in 28 states and Canada. At December 31, 2000, we owned 49 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 $106.7 million, $96.1 million and $91.4 million for 2000, 1999 and 1998, 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 2000. 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 12 upscale centers that are known as "Bally Sports Clubs." The nationwide use of the service mark enhances brand identity and increases 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.
In October 2000, we purchased certain marks, including the "Bally Total Fitness" service mark, from their owner. Prior to this purchase, the marks were used pursuant to a long-term trademark license agreement.
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, 2000, we had approximately 18,975 employees, including approximately 9,590 part-time employees. The distribution of our employees is summarized as follows:
Approximately 17,965 employees are involved in fitness center operations, including sales personnel, instructors, personal trainers, supervisory and facility personnel;
Approximately 840 employees are involved in the operation of our member processing and collection centers, including management information systems;
Approximately 75 employees are product and service development and operations support personnel; and
Approximately 95 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 and operation 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. Further, professional and other personnel who provide rehabilitative and physical therapy services (e.g., chiropractors and physical therapists) may be subject to licensing requirements under state, provincial and/or local laws and regulations.
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 providers 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.
Federal and state governments continue to focus 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 at our facilities.
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. In addition, from time to time, customer complaints are investigated by governmental bodies. In the opinion of management, none of the complaints or investigations currently pending will 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 Chairman since November 2000. He 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 45 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 48 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 38 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 55 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 44 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 37 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 41 years of age.
| STOCKHOLDER MATTERS |
Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "BFT". 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 the NYSE.
High Low
----------- ----------
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
2000:
First quarter $ 27 9/16 $ 20 7/8
Second quarter 27 7/8 21 5/16
Third quarter 26 20 9/16
Fourth quarter 34 7/8 22 13/16
As of February 28, 2001, there were 8,504 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 senior 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 fourth quarter of 2000, we recorded a one-time non-cash charge of $6.5 million ($.24 per diluted share) to write off third-party internet investments. In the third quarter of 2000, as a result of our improved operating results and trends, we reduced our tax valuation allowance by $20.0 million ($.72 per diluted share). 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
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in millions, except per share data)
Statement of Operations Data
Net revenues $1,007.1 $ 861.1 $ 744.3 $ 661.8 $ 639.2
Depreciation and amortization 65.6 52.9 48.3 52.9 55.9
Operating income 126.4 93.3 52.8 19.9 19.1
Before extraordinary items and
cumulative effect of a change in
accounting principle:
Income (loss) 78.6 42.4 13.3 (23.5) (24.9)
Basic earnings (loss) per common
share 3.29 1.81 0.59 (1.51) (2.04)
Diluted earnings (loss) per common
share 2.84 1.56 0.51 (1.51) (2.04)
Balance Sheet Data (at December 31)
Cash and equivalents $ 13.1 $ 23.5 $ 64.4 $ 61.7 $ 16.5
Installment contracts receivable, net 559.5 486.1 422.1 343.6 300.2
Total assets 1,560.6 1,348.6 1,128.8 967.6 893.3
Long-term debt, less current maturities 674.3 593.9 482.2 405.4 376.4
Stockholders' equity 297.8 212.5 161.8 70.3 24.2
Other Financial Data
EBITDA $ 192.0 $ 146.2 $ 101.1 $ 72.8 $ 75.0
Cash provided by (used in):
Operating activities 49.2 39.1 (32.0) (35.9) (5.3)
Investing activities (112.5) (138.0) (79.0) (16.1) (9.8)
Financing activities 52.9 58.0 113.7 97.2 10.4
| RESULTS OF OPERATIONS |
The following discussion of the financial condition and results of operations of Bally should be read in conjunction with the Company's Consolidated Financial Statements and related Notes in Item 8 of this Report.
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. Our primary approach to improve 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 and have averaged over 17% growth in dues over the last two years.
We also continued our focus on maintaining higher down payments on financed membership plans and securing installment payments electronically. This resulted in a 14% growth in average down payments from 1997 to 2000. The emphasis on the sale of all-club memberships contributed to a 39% increase in the weighted-average price of memberships sold from 1997 to 2000. In addition, the financed initial membership fees in our receivable portfolio using an electronic payment method grew to 65% at December 31, 2000.
These efforts, along with the introduction of products and services, contributed to a 73% improvement in margins for earnings before interest, taxes, depreciation and amortization to 19% in 2000 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.
Develop New Facilities. To build upon our improved core operations and accelerate the growth of our business, we have invested in facilities expansion in three ways:
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, 22 were opened in 1999 and 14 in 2000. 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.
In late 1997, we began to upgrade and expand our existing facilities and much of our exercise equipment beyond normal maintenance requirements. We have 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. We believe these upgrades will enable us to continue to attract and retain a strong membership base and more effectively capitalize on our marketing and administrative infrastructure.
Due to our relative size in a fragmented market, we are well positioned to identify opportunities to selectively acquire existing fitness center operations at attractive prices. 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 2000, we acquired 13 fitness centers in the Portland, Oregon area, where we previously had no fitness centers, three fitness centers in the San Diego, California area and one fitness center in Pittsburgh, Pennsylvania. 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 eight existing fitness centers in the San Francisco area, where we
previously had no previous fitness centers, six 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 and leverage the growing distribution platform that our clubs have become. Beginning in mid-1997, we implemented and greatly expanded during 1998, 1999 and 2000 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 340 of our fitness centers, which sell nutritional products, workout apparel and related soft goods.
Revenues from products and services have grown eleven-fold since 1997, to $111.0 million in 2000, while earnings before interest, taxes, depreciation and amortization has grown to $38.6 million, an 83% increase over 1999.
Net revenue for 2000 was $1,007.1 million compared to $861.1 million in 1999, an increase of $146.0 million (17%). Net revenue from comparable fitness centers increased 9%. This increase in net revenues resulted from the following:
The weighted-average price of memberships sold increased 5% over the prior year, and total membership units sold during 2000 increased 6%. Membership fees originated increased $53.8 million (11%).
Dues collected increased $38.6 million (16%) from 1999, reflecting continued improvements in member retention and pricing strategies and an increase attributable to fitness centers operating under our four upscale brands.
Finance charges earned increased $9.0 million (15%) in 2000 due to the growth in size and consistent quality of the membership receivables portfolio. The percentage of accounts current with all contractual payments was 86% as of December 31, 2000 and 1999. Average interest rates for finance charges to members was substantially unchanged during the periods.
Products and services revenues increased $48.4 million (77%) over 1999, primarily reflecting the continued growth of personal training services and nutritional and other retail product sales.
Miscellaneous revenue increased $4.6 million (42%) over 1999, primarily reflecting the continued growth of licensing and co-marketing revenue.
Deferral accounting decreased revenues by $8.3 million more in 2000 than in 1999.
The weighted-average number of fitness centers during 2000 increased to 376 from 343 during 1999, a 10% increase, including an increase in the weighted-average number of centers operating under our four upscale brands from 22 to 34. During 2000, we opened 14 new fitness centers within our major metropolitan areas and acquired 17 additional fitness centers: 13 in the Portland, Oregon area, where we previously had no fitness centers, three in the San Diego, California area and one in Pittsburgh, Pennsylvania. At December 31, 2000, we operated a total of 34 upscale fitness centers: 11 known as "Bally Sports Clubs," 10 as "The Sports Clubs of Canada", eight as "Pinnacle Fitness" and five as "Gorilla Sports".
Operating income for 2000 was $126.4 million compared to $93.3 million in 1999. The increase of $33.1 million (35%) was due to a $146.0 million increase in net revenue (17%), offset, in part, by an increase in
operating costs and expenses of $100.2 million (14%) and a $12.7 million increase in depreciation and amortization. The operating margin before depreciation and amortization increased to 19% from 17% for 1999. Excluding the provision for doubtful receivables and the effect of deferral accounting, operating costs and expenses increased $96.4 million (15%) from 1999. Fitness center operating expenses increased $44.7 million (11%), due principally to incremental costs of operating new fitness centers and additional sales 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 $2.5 million more in 2000 than in 1999. Products and services expenses increased $30.8 million (74%) to support the revenue growth of product and service offerings. Operating income from products and services increased to $38.6 million from $21.0 million in the prior year (84%), with an operating margin of 35% in 2000 compared to 34% in 1999. Member processing and collection center expenses increased $2.7 million (6%) due to increased printing and postage costs to support the growth in the collection of membership fees and dues. General and administrative expenses were up 7% compared to the prior year to support the Company's overall growth. Advertising expenses increased 8% 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 $12.7 million (24%) largely as a result of the significant increase in purchases and construction of property and equipment during 2000 and 1999.
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 $62.1 million in 2000 compared to $52.4 million in 1999. The increase of $9.7 million (18%) 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.
Other expense represents a $6.5 million one-time non-cash charge recorded to write off third-party internet investments.
The income tax provisions for 2000 and 1999 reflect state and Canadian income taxes. The federal provisions were offset by the utilization of prior years' net operating losses. In addition, as a result of our improved operating results and trends, we reduced our tax valuation allowance by $20.0 million in the third quarter of 2000. This adjustment was reflected as a reduction of the tax provision, increasing net income.
Comparison of the years ended December 31, 1999 and 1998Net 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.
Miscellaneous 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.
The income tax provisions for 1999 and 1998 reflect state and Canadian income taxes. The federal provisions were offset by the utilization of prior years' net operating losses.
Cash flow from operating activities for 2000 was a positive $49.2 million compared to $39.1 million in 1999. The $10.1 million improvement principally reflects the continued growth in overall collections from installment contracts receivable and monthly dues, partially offset by growth in inventories of $8.6 million ($7.4 million during the fourth quarter of 2000) supporting increased nutritional and other retail sales, including the expansion of product offerings and a 54% increase in retail outlets to a total of 339 stores by the end of 2000. Seasonally, inventories peak at year-end to support the higher volume of retail traffic associated with first quarter activities. Net installment contracts receivable grew $73.3 million during 2000. Excluding this growth in receivables and inventories, cash provided by operating activities totaled $131.1 million for 2000, a $20.8 million improvement over 1999.
Over the past three years, we have expanded our capacity to attract new members and better serve existing members by adding new clubs and by refurbishing and expanding existing clubs. During 2000, we invested $108.4 million in property and equipment, including approximately $74.0 million related to new fitness centers, and major upgrades and expansions, including new equipment, of existing centers, and $4.8 million to purchase land and buildings for new clubs and existing leaseholds. In addition, we acquired 17 clubs with a net cash investment of $4.1 million. Finally, approximately $30.0 million was spent and capitalized during 2000 for normal replacements.
From time to time, we identify opportunities to acquire, at attractive prices, existing fitness center operations that fit our strategic goals. During 2000, we invested $4.1 million in cash in the acquisition of 17 clubs: 13 in the Portland, Oregon area, where we previously had no fitness centers, three in the San Diego, California area, and one in Pittsburgh, Pennsylvania.
We are authorized to repurchase up to 1,500,000 shares of our common stock on the open market from time to time. We repurchased 625,100 shares between August 1998 and November 1999 at an average price of $18 per share. No purchases have been made since November 1999.
In February 2001, we filed a registration statement to sell 1,408,821 shares of our common stock to the public and 2,591,179 shares owned by the Estate of Arthur M. Goldberg (our former Chairman) and a partnership 94% beneficially owned by the Estate. We will not receive any of the proceeds from the sale of shares being sold by the selling stockholders, except upon the exercise of the warrants to purchase common stock held by the Estate. At an assumed public offering price of $29.60 per share (based upon the closing price of a share of common stock on March 6, 2001), the net proceeds to be received by us from the sale of the shares of common stock (after deducting the underwriting discount and estimated expenses payable by us) will be approximately $50.6 million (including proceeds of $11.6 million from the exercise of warrants by one of the selling stockholders). We intend to use the proceeds from this offering for general corporate and working capital purposes, principally debt reduction.
In March 2001, we sold to a major financial institution approximately 8% of our receivables portfolio at net book value. We received initial proceeds of approximately $45.0 million from this transaction, which was used to reduce debt. The transaction includes future profit participation by Bally based on actual collection experience. We continue to investigate and evaluate similar and alternative strategies to monetize the remainder of our receivables portfolio.
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 March 8, 2001, after application of the proceeds from our receivable sale, we had drawn $41.0 million on the revolving credit facility and had outstanding letters of credit totaling $4.6 million. The $75.0 million term loan is repayable in 20 quarterly installments, commencing March 31, 2000, of $250,000, with a 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, at which time the entire securitization facility will be refinanced, or the approximate $65.5 million of principal payments due in 2001 will be funded from the proceeds of our stock offering, cash from operations and borrowings on our existing credit facility. Our debt service requirements, including interest, during 2001 are approximately $76.0 million, exclusive of the securitization amounts described above. We believe that we will be able to satisfy our 2001 requirements for debt service, capital expenditures and any stock repurchases, out of the proceeds from our stock offering, available cash balances, cash flow from operations and, if necessary, borrowings on the revolving credit facility.
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; the impact of our debt structure; risks related to acquisitions; 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 2000's average outstanding balance of these variable rate obligations, a 100 basis point change in interest rates would change interest expense by approximately $1.3 million. For fixed rate debt, such as our senior subordinated promissory 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 risk and no commodity risk.
| Report of independent auditors | 21 |
| Consolidated balance sheet | 22 |
| Consolidated statement of income | 24 |
| Consolidated statement of stockholders' equity | 25 |
| Consolidated statement of cash flows | 26 |
| Notes to consolidated financial statements | 28 |
| Supplementary data: |
| Quarterly consolidated financial information (unaudited) | 42 |
We have audited the accompanying consolidated balance sheets of Bally Total Fitness Holding Corporation as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a)2. These financial statements and the schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with 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, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, 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
February 13, 2001
except for Subsequent events note, as to which the date is
March 7, 2001
December 31
-------------------------
2000 1999
----------- -----------
(In thousands)
ASSETS
Current assets:
Cash and equivalents $ 13,074 $ 23,450
Installment contracts receivable, net 286,053 246,966
Other current assets 61,516 46,185
----------- -----------
Total current assets 360,643 316,601
Installment contracts receivable, net 273,421 239,177
Property and equipment, at cost:
Land 39,703 35,105
Buildings 137,686 132,665
Leasehold improvements 596,197 519,269
Equipment and furnishings 220,551 168,969
----------- -----------
994,137 856,008
Accumulated depreciation and amortization (435,860) (382,897)
----------- -----------
Net property and equipment 558,277 473,111
Intangible assets, less accumulated amortization
of $72,071 and $64,554 153,113 137,156
Deferred income taxes 68,115 39,444
Deferred membership origination costs 114,129 106,195
Other assets 32,926 36,873
----------- -----------
$ 1,560,624 $ 1,348,557
=========== ===========
December 31
-------------------------
2000 1999
----------- -----------
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 54,819 $ 49,629
Income taxes payable 3,703 3,063
Deferred income taxes 49,217 40,933
Accrued liabilities 66,566 59,197
Current maturities of long-term debt 17,589 9,505
Deferred revenues 306,493 290,123
----------- -----------
Total current liabilities 498,387 452,450
Long-term debt, less current maturities 674,349 593,903
Other liabilities 7,299 6,531
Deferred revenues 82,747 83,214
Stockholders' equity:
Preferred stock, $.10 par value; 10,000,000 shares
authorized; none issued
Series A Junior Participating; 300,000 shares
authorized; none issued
Common stock, $.01 par value; 60,200,000 shares
authorized; 24,966,985 and 24,369,433 shares
issued 249 243
Contributed capital 508,639 498,093
Accumulated deficit (188,514) (267,124)
Unearned compensation (restricted stock) (11,757) (7,978)
Common stock in treasury, at cost, 614,039 and
614,039 (10,775) (10,775)
----------- -----------
Total stockholders' equity 297,842 212,459
----------- -----------
$ 1,560,624 $ 1,348,557
=========== ===========
Year Ended December 31
------------------------------------
2000 1999 1998
---------- ---------- ----------
(In thousands, except share data)
Net revenues:
Membership revenues -
Initial membership fees on financed
memberships originated $ 518,413 $ 465,443 $ 414,190
Initial membership fees on paid-in-full
memberships originated 24,576 23,721 30,318
Dues collected 281,509 242,952 205,104
Change in deferred revenues (12,395) (4,078) 3,122
---------- ---------- ----------
812,103 728,038 652,734
Finance charges earned 68,462 59,449 50,160
Products and services 110,976 62,616 32,474
Miscellaneous revenue 15,607 10,995 8,976
---------- ---------- ----------
1,007,148 861,098 744,344
Operating costs and expenses:
Fitness center operations 467,705 423,001 401,282
Products and services 72,364 41,570 22,409
Member processing and collection centers 43,883 41,213 41,024
Advertising 51,442 47,766 45,035
General and administrative 28,946 27,169 26,097
Provision for doubtful receivables 158,729 139,627 118,604
Depreciation and amortization 65,605 52,857 48,255
Change in deferred membership origination costs (7,934) (5,444) (11,164)
---------- ---------- ----------
880,740 767,759 691,542
---------- ---------- ----------
Operating income 126,408 93,339 52,802
Interest income 1,760 2,369 2,514
Interest expense (62,058) (52,394) (41,494)
Other (6,500)
---------- ---------- ----------
Income before income taxes and cumulative effect
of a change in accounting principle 59,610 43,314 13,822
Income tax benefit (provision) 19,000 (870) (525)
---------- ---------- ----------
Income before cumulative effect of a change
in accounting principle 78,610 42,444 13,297
Cumulative effect of a change in accounting
principle (262)
---------- ---------- ----------
Net income $ 78,610 $ 42,182 $ 13,297
========== ========== ==========
Basic earnings per common share:
Income before cumulative effect of a change
in accounting principle $ 3.29 $ 1.81 $ .59
Cumulative effect of a change in accounting
principle (.01)
---------- ---------- ----------
Net income per common share $ 3.29 $ 1.80 $ .59
========== ========== ==========
Average common shares outstanding 23,858,486 23,382,288 22,424,172
Diluted earnings per common share:
Income before cumulative effect of a change in
accounting principle $ 2.84 $ 1.56 $ .51
Cumulative effect of a change in accounting
principle (.01)
---------- ---------- ----------
Net income per common share $ 2.84 $ 1.55 $ .51
========== ========== ==========
Average diluted common shares outstanding
(includes 3,793,551, 3,853,543 and 3,747,232
common equivalent shares in 2000, 1999 and
1998) 27,652,037 27,235,831 26,171,404
Common stock Unearned
----------------- compensation Common Total
Par Contributed Accumulated (restricted stock in stockholders'
Shares value capital deficit stock) treasury equity
---------- ----- ----------- ----------- ------------ --------- -------------
(In thousands, except share data)
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
Net income 78,610 78,610
Issuance of common stock for acquisitions
of businesses 295,151 3 4,691 4,694
Issuance/(cancellation) of common stock
under long-term incentive plan (net) 90,000 1 3,779 (3,779) 1
Issuance of common stock under stock
purchase and option plans 212,401 2 2,076 2,078
---------- ----- --------- ---------- ---------- --------- ---------
Balance at December 31, 2000 24,352,946 $ 249 $ 508,639 $ (188,514) $ (11,757) $ (10,775) $ 297,842
========== ===== ========= ========== ========== ========= =========
Year Ended December 31
------------------------------------
2000 1999 1998
---------- ---------- ----------
(In thousands)
OPERATING:
Income before extraordinary charge and
cumulative effect of a change in accounting
principle $ 78,610 $ 42,444 $ 13,297
Adjustments to reconcile to cash provided (used)-
Depreciation and amortization, including
amortization included in interest expense 69,381 56,175 50,585
Provision for doubtful receivables 158,729 139,627 118,604
Change in operating assets and liabilities (257,553) (199,164) (214,486)
---------- ---------- ----------
Cash provided by (used in) operating
activities 49,167 39,082 (32,000)
INVESTING:
Purchases and construction of property and
equipment (108,394) (119,089) (76,432)
Acquisitions of businesses (4,066) (13,241) (2,521)
Other, net (5,680)
---------- ---------- ----------
Cash used in investing activities (112,460) (138,010) (78,953)
FINANCING:
Debt transactions -
Proceeds from long-term borrowings 69,500 75,000 73,501
Repayments of long-term debt (18,661) (11,274) (30,871)
Debt issuance costs (6,425) (3,362)
---------- ---------- ----------
Cash provided by debt transactions 50,839 57,301 39,268
Equity transactions -
Proceeds from issuance of common stock
through public offering 82,744
Proceeds from issuance of common stock
upon exercise of stock options and
stock purchase plans 2,078 2,252 1,172
Purchases of common stock for treasury (1,557) (9,528)
---------- ---------- ----------
Cash provided by financing activities 52,917 57,996 113,656
---------- ---------- ----------
Increase (decrease) in cash and equivalents (10,376) (40,932) 2,703
Cash and equivalents, beginning of year 23,450 64,382 61,679
---------- ---------- ----------
Cash and equivalents, end of year $ 13,074 $ 23,450 $ 64,382
========== ========== ==========
Year Ended December 31
------------------------------------
2000 1999 1998
---------- ---------- ----------
(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 $ (231,753) $ (203,644) $ (196,990)
Increase in other current and other assets (14,599) (8,987) (3,765)
Increase in deferred membership origination
costs (7,934) (5,444) (11,164)
Increase in accounts payable 5,190 10,076 3,689
Increase (decrease) in income taxes payable (20,132) 455 607
Increase (decrease) in accrued and other
liabilities (720) 4,302 (3,741)
Increase (decrease) in deferred revenues 12,395 4,078 (3,122)
---------- ---------- ----------
$ (257,553) $ (199,164) $ (214,486)
========== ========== ==========
Cash payments for interest and income taxes
were as follows -
Interest paid $ 61,982 $ 49,612 $ 40,029
Interest capitalized (3,959) (1,449) (540)
Income taxes paid (refunded), net 1,132 415 (83)
Investing and financing activities exclude the
following non-cash transactions -
Acquisition of property and equipment through
capital leases/borrowings $ 28,892 $ 25,118 $ 9,968
Acquisitions of businesses with common stock 4,695 7,800 3,425
Acquisition of business with treasury stock 352
Common stock issued under long-term incentive
plan 3,779 7,978
Debt, including assumed debt, related to
acquisitions of businesses 7,577 26,393
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 385 facilities concentrated in 28 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 Company's management to make estimates and assumptions that affect the amounts reported therein. Actual results could vary from such estimates. Certain prior-year amounts have been reclassified to conform to the current-year presentation.
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 $57,875, $47,580 and $41,788 for 2000, 1999 and 1998, 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, 2000 and 1999 were deferred finance costs of $10,880 and $14,252, respectively, net of accumulated amortization of $10,368 and $6,761, 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 Company's expected future cash flows were less than the carrying value of the Company's long-lived assets and identifiable intangibles, an impairment loss would be recognized equal to the amount by which the carrying value of the Company's long-lived assets and identifiable intangibles exceeded their fair value. Based on present operations and strategic plans, the Company believes that no impairment of goodwill existed at December 31, 2000. However, if future operations do not perform as expected, or if the Company's strategic plans for its business were to change, a reduction in the carrying value of these assets may be required.
The Company's 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, 2000 and 1999 are as follows:
2000 1999
------------------------------- -------------------------------
Current Long-term Total Current Long-term Total
--------- --------- --------- --------- --------- ---------
Financed initial
membership fees
deferred $ 236,216 $ 53,437 $ 289,653 $ 221,664 $ 51,468 $ 273,132
Paid-in-full initial
membership fees
deferred 19,231 13,262 32,493 23,823 14,890 38,713
Prepaid dues 51,046 16,048 67,094 44,636 16,856 61,492
--------- --------- --------- --------- --------- ---------
$ 306,493 $ 82,747 $ 389,240 $ 290,123 $ 83,214 $ 373,337
========= ========= ========= ========= ========= =========
Components of the change in deferred revenues for the years ended December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998
---------- ---------- ----------
Financed initial membership fees:
Originating $ (518,413) $ (465,443) $ (414,190)
Less provision for doubtful receivables 158,729 139,627 118,604
---------- ---------- ----------
Originating, net (359,684) (325,816) (295,586)
Recognized 343,015 302,723 258,748
---------- ---------- ----------
Increase in deferral (16,669) (23,093) (36,838)
Paid-in-full initial memberships fees:
Originating (24,576) (23,721) (30,318)
Recognized 30,796 44,700 68,780
---------- ---------- ----------
Decrease in deferral 6,220 20,979 38,462
(Increase) decrease in prepaid dues, exclusive of
dues related to acquired businesses (1,946) (1,964) 1,498
---------- ---------- ----------
Change in deferred revenues $ (12,395) $ (4,078) $ 3,122
========== ========== ==========
Components of the change in deferred membership origination costs for the years ended December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998
---------- ---------- ----------
Incurred $ (121,186) $ (109,089) $ (99,302)
Amortized 113,252 103,645 88,138
---------- ---------- ----------
Change in deferred membership origination costs $ (7,934) $ (5,444) $ (11,164)
========== ========== ==========
Basic earnings per common share is computed by dividing income before cumulative effect of a change in accounting principle, cumulative effect of a change in accounting principle and net income by the weighted-average number of shares of common stock outstanding during each year, which totaled 23,858,486 shares, 23,382,288 shares and 22,424,172 shares for 2000, 1999 and 1998, respectively. Diluted earnings per common share is computed by dividing income before cumulative effect of a change in accounting principle, cumulative effect of a change in accounting principle and net income by the weighted-average number of shares of common stock and common stock equivalents outstanding during each year, which totaled 27,652,037 shares, 27,235,831 shares and 26,171,404 shares for 2000, 1999 and 1998, 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 3,793,551 shares, 3,853,543 shares and 3,747,232 shares for 2000, 1999 and 1998, respectively.
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 Company's unamortized start-up costs at January 1, 1999 were written off and reported as a cumulative effect of a change in accounting principle, net of tax.
During 2000, we acquired 13 fitness centers in the Portland, Oregon area, three fitness centers in the San Diego, California area and one fitness center in Pittsburgh, Pennsylvania.
In 2000, we purchased certain marks, including the "Bally Total Fitness" service mark, from their owner. Prior to this purchase, the marks were used pursuant to a long-term trademark license agreement.
In the fourth quarter of 2000, a non-cash charge of $6.5 million was recorded for the write off of third-party internet investments.
2000 1999
----------- -----------
Current:
Installment contracts receivable $ 403,777 $ 355,029
Unearned finance charges (49,601) (41,515)
Allowance for doubtful receivables and
cancellations (68,123) (66,548)
----------- -----------
$ 286,053 $ 246,966
=========== ===========
Long-term:
Installment contracts receivable $ 361,812 $ 319,034
Unearned finance charges (24,237) (20,367)
Allowance for doubtful receivables and
cancellations (64,154) (59,490)
----------- -----------
$ 273,421 $ 239,177
=========== ===========
The carrying amount of installment contracts receivable at December 31, 2000 and 1999 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.
2000 1999
----------- -----------
Payroll and benefit-related liabilities $ 25,805 $ 21,436
Interest 7,451 7,165
Taxes other than income taxes 7,998 10,133
Other 25,312 20,463
----------- -----------
$ 66,566 $ 59,197
=========== ===========
2000 1999
----------- -----------
Nonsubordinated:
Securitization facility $ 160,000 $ 160,000
Term loan, due 2004 74,000 75,000
Revolving credit facility 69,500
Capital lease obligations 42,500 24,559
Other secured and unsecured obligations 47,084 45,164
Subordinated:
9 7/8% Series B Senior Subordinated Notes
due 2007 236 236
9 7/8% Series D Senior Subordinated Notes
due 2007, less unamortized discount of
$1,146 and $1,487 298,618 298,449
----------- -----------
Total long-term debt 691,938 603,408
----------- -----------
Current maturities of long-term debt (17,589) (9,505)
----------- -----------
Long-term debt, less current maturities $ 674,349 $ 593,903
=========== ===========
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, 2000, $69,500 had been drawn on the revolving credit facility and outstanding letters of credit totaled $4,613. The rate of interest on borrowings is at the Company's option, generally based upon either the agent bank's prime rate plus 1.75% or a Eurodollar rate plus 2.75% for the revolving credit facility and the agent bank's prime rate plus 2.50% or a Eurodollar rate plus 3.50% for the term loan. A fee of 1.75% 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 (9.72%, 9.47% and 8.11% at December 31, 2000, 1999 and 1998, 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 Company's installment contracts receivable from membership sales and the proceeds thereof. The amount by which installment contracts receivable in the Trust exceeds the $160,000 principal amount of certificates issued by the Trust is generally retained by the Company.
The Company services the installment contracts receivable held by the Trust and earns a servicing fee which approximates the servicing costs incurred by the Company. Through July 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, 2000 and 1999 were assets under capital leases of $49,218 and $30,823, respectively, net of accumulated amortization of $15,018 and $8,840, respectively.
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 $392,000 at December 31, 2000).
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, 2000, are as follows:
Long-term Capital
debt leases Total
---------- ----------- ----------
2001 $ 7,059 $ 14,278 $ 21,337
2002 156,426 12,732 169,158
2003 100,110 10,438 110,548
2004 77,097 5,912 83,009
2005 2,499 3,509 6,008
Thereafter 306,247 11,908 318,155
---------- ---------- ----------
649,438 58,777 708,215
Less amount representing interest (16,277) (16,277)
---------- ---------- ----------
$ 649,438 $ 42,500 $ 691,938
========== ========== ==========
The fair value of the Company's long-term debt at December 31, 2000 and 1999 approximates its carrying amount except for the Company's subordinated debt, which had a fair market value (based on quoted market prices) of $282,750 and $289,500 at December 31, 2000 and 1999, 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 (benefit) applicable to income before income taxes and cumulative effect of a change in accounting principle consists of the following:
2000 1999 1998
---------- ---------- ----------
Deferred $ 22,438 $ 16,950 $ 6,180
Reversal of valuation allowance (42,704) (16,950) (6,180)
State and other (all current) 1,266 870 525
---------- ---------- ----------
$ (19,000) $ 870 $ 525
========== ========== ==========
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial accounting and income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 2000 and 1999, along with their classification, are as follows:
2000 1999
---------------------- ----------------------
Assets Liabilities Assets Liabilities
--------- ----------- --------- -----------
Installment contract revenues $ $ 74,506 $ $ 63,585
Amounts not yet deducted for tax purposes:
Bad debts 53,273 51,759
Other 9,923 11,042
Amounts not yet deducted for book purposes:
Deferred membership origination costs 46,849 43,436
Depreciation and capitalized costs 2,840 4,143
Tax loss carryforwards 210,457 211,266
Other, net 19,897 13,996
--------- --------- --------- ---------
276,493 $ 141,252 278,210 $ 121,017
========= =========
Valuation allowance (116,343) (158,682)
--------- ---------
$ 160,150 $ 119,528
========= =========
Current $ 27,465 $ 76,682 $ 22,841 $ 63,774
Long-term 132,685 64,570 96,687 57,243
--------- --------- --------- ---------
$ 160,150 $ 141,252 $ 119,528 $ 121,017
========= ========= ========= =========
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, 2000, estimated federal AMT credit and tax loss carryforwards of $3,253 and $472,731, respectively, have been recorded by the Company. The AMT credits can be carried forward indefinitely, while the tax loss carryforwards expire through 2020. In addition, the Company has substantial state tax loss carryforwards, which began to expire in 2000 and fully expire through 2020. Based upon the Company's past performance and the expiration dates of its carryforwards, the ultimate realization of all of the Company's deferred tax assets cannot be assured. Accordingly, a valuation allowance has been recorded to reduce deferred tax assets to a level which, more likely than not, will be realized. Included in the deferred tax asset and valuation allowance is $3,768 resulting from the exercise of stock options and the Company sponsored stock purchase plan. The related benefit will be included as additional paid-in capital.
In accordance with SFAS No. 109 Accounting for Income Taxes, the Company reviewed the likelihood of realizing the future benefits of tax loss carryforwards. Based on consistent and growing profitability over the past three years and reasonably expected continuation of these trends, the Company reduced its tax valuation allowance against net operating losses realized in prior periods by $20,000 during the third quarter of 2000. This adjustment decreased the income tax provision, increasing net income. The Company will continue to review and evaluate the remaining valuation allowance periodically.
A reconciliation of the income tax provision (benefit) with amounts determined by applying the U.S. statutory tax rate to income before income taxes and cumulative effect of change in accounting principle is as follows:
2000 1999 1998
---------- ---------- ----------
Provision at U.S. statutory tax rate (35%) $ 20,863 $ 15,068 $ 4,838
Add (deduct):
Benefit for change in valuation allowance (42,704) (16,950) (6,180)
State income taxes, net of related
federal income tax effect and valuation
allowance 822 517 341
Amortization of cost in excess of
acquired assets 1,953 1,643 1,419
Other, net 66 592 107
---------- ---------- ----------
Income tax provision (benefit) $ (19,000) $ 870 $ 525
========== ========== ==========
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 Company's 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 Company's assets or earning power are sold, each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then-current exercise price of the Right, that number of shares of Common Stock (or under certain circumstances, an economically equivalent security or securities) of such other person which at the time of such transaction would have a market value of two times the exercise price of the Right. The Rights, which do not have voting privileges, are subject to adjustment to prevent dilution and expire on January 5, 2006. The Company may redeem or exchange all, but not less than all, of the Rights at a price of $.01 per Right, payable in cash or Common Stock, at any time prior to such time as a person or group of affiliated or associated persons becomes an Acquiring Person.
In the event that any person or group of affiliated or associated persons becomes an Acquiring Person, proper provision shall be made so that each holder of a Right, other than Rights that are or were owned beneficially by the Acquiring Person (which, from and after the later of the Rights distribution date and the date of the earliest of any such events, will be void), will thereafter have the right to receive, upon exercise thereof at the then-current exercise price of the Right, that number of shares of Common Stock (or, under certain circumstances, an economically equivalent security or securities of the Company) having a market value of two times the exercise price of the Right.
At December 31, 2000, 8,011,124 shares of Common Stock were reserved for future issuance (3,192,805 shares in connection with outstanding warrants and 4,818,319 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, which as of December 31, 2000, were held by the Estate of our former Chairman and our Chairman of the Board of Directors, 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, 2000, 40,000 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. Additional grants of options may be made from time to time pursuant to the Directors' Plan. In December 2000, options to purchase 5,000 shares of Common Stock were granted to each non-employee director of the Company. 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, June 1999 and December 2000, 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 6,100,000 shares. At December 31, 2000, 1,328,419 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 2000, 1999 and 1998 have 10-year terms.
A summary of 2000, 1999 and 1998 stock option activity under the Directors' Plan and Incentive Plan is as follows:
Number
of shares Weighted- Range of
represented average exercise
by options price prices
----------- --------- -------------
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 were exercisable 2,931,096 17.97 4.13 - 36.00
Granted 636,350 27.92 26.25 - 27.94
Exercised (171,741) 9.15 4.13 - 18.50
Forfeited (68,525) 25.24 4.13 - 36.00
---------
Outstanding at December 31, 2000
- 1,996,650 of which are exercisable 3,327,180 20.18 4.13 - 36.00
=========
The Company has elected to follow APB No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation" requires use of option valuation models that were not developed for use in valuing stock options. Under APB No. 25, because the exercise price of the Company's stock options equals the market price of the Common Stock on the date of grant, no compensation expense is recognized.
Had compensation cost been determined for the Company's 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 Company's pro forma net income would be:
2000 1999 1998
---------- ---------- ----------
Net income
As reported $ 78,610 $ 42,182 $ 13,297
Pro forma 73,976 39,193 11,266
Basic earnings per common share
As reported 3.29 1.80 0.59
Pro forma 3.10 1.68 0.50
Weighted-average fair value of options granted 12.80 14.70 8.11
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 2000, 1999 and 1998: risk-free interest rate of 5.07%, 6.48% and 4.72%, respectively; no dividend yield; volatility factor of the expected market price of the common stock of 0.445, 0.414 and 0.356, 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 Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.
Pursuant to the Incentive Plan, restricted stock awards are rights granted to an employee to receive shares of stock without payment but subject to forfeiture and other restrictions as set forth in the Incentive Plan. Generally, the restricted stock awarded, and the right to vote such stock or to receive dividends thereon, may not be sold, exchanged or otherwise disposed of during the restricted period. Except as otherwise determined by the Compensation Committee, the restrictions and risks of forfeiture will lapse in three equal annual installments commencing one year after the date of grant.
In 1998 and 2000, the Compensation Committee awarded 190,000 shares and 125,000 shares, respectively, of restricted Common Stock to certain key executives of the Company. These shares were issued in the employee's 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 employee's 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, 2000, no compensation expense has been recognized. Unearned compensation of $11,757 is included in stockholders' equity.
In November 1997, the Board of Directors of the Company adopted the Bally Total Fitness Holding Corporation Employee Stock Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan provides for the purchase of Common Stock by eligible employees (as defined) electing to participate in the plan. The stock can generally be purchased semi-annually at a price equal to the lesser of: (i) 95% of the fair market value of the Common Stock on the date when a particular offering commences or (ii) 95% of the fair market value of the Common Stock on the date when a particular offering expires. For each offering made under the Stock Purchase Plan, each eligible employee electing to participate in the Stock Purchase Plan will automatically be granted shares of Common Stock equal to the number of full shares which may be purchased from the employee's elected payroll deduction, with a maximum payroll deduction equal to 10% of eligible compensation, as defined. The first offering under 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, 2000, 122,720 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 Company's matching contributions related to the plans totaled $1,579, $1,412 and $1,312 for 2000, 1999 and 1998, 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 $107,917, $97,542 and $92,816 for 2000, 1999 and 1998, respectively.
Minimum future rent payments under long-term noncancellable operating leases in effect as of December 31, 2000, exclusive of taxes, insurance, other expenses payable directly by the Company and contingent rent, are $103,093, $115,377, $112,776, $109,355 and $105,108 for 2001 through 2005, respectively, and $562,669 thereafter.
Included in the amounts above are leases with real estate partnerships in which certain of the Company's former executive officers had ownership interests. Rent expense under these leases was $169 in 1998.
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. In addition, from time to time, customer complaints are investigated by governmental bodies. In the opinion of management, none of the complaints or investigations currently pending will have a material adverse effect on our financial condition or results of operations.
In February 2001, we filed a registration statement to sell 1,408,821 shares of our common stock to the public and 2,591,179 shares owned by the Estate of Arthur M. Goldberg (our former Chairman) and a partnership 94% beneficially owned by the Estate. We will not receive any of the proceeds from the sale of shares being sold by the selling stockholders, except upon the exercise of the warrants to purchase common stock held by the Estate. At an assumed public offering price of $29.60 per share (based on the closing price of a share of common stock on March 6, 2001), the net proceeds to be received by us from the sale of shares of common stock (after deducting the underwriting discount and estimated expenses payable by us) are approximately $50.6 million (including proceeds of $11.6 million from the exercise of warrants by one of the selling stockholders). We intend to use the proceeds from the offering for general corporate and working capital purposes, principally debt reduction.
In March 2001, we sold to a major financial institution approximately 8% of our receivables portfolio at net book value. We received initial proceeds of approximately $45.0 million from this transaction, which was used to reduce debt. The transaction includes future profit participation by Bally based on actual collection experience. We continue to investigate and evaluate similar and alternative strategies to monetize the remainder of our receivables portfolio.
Quarter Ended
---------------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------- ---------------- --------------- ---------------
2000 1999 2000 1999 2000 1999 2000 1999
------ ------ ------ ------ ------ ------ ------ ------
(In millions, except share data)
Net revenues $249.3 $208.4 $250.9 $209.5 $254.8 $219.1 $252.2 $224.1
Operating income 29.8 18.3 31.7 21.1 32.4 25.1 32.5 28.8
Income before cumulative
effect of a change in
accounting principle 15.3 6.7 15.9 9.1 35.9 12.2 11.5 14.4
Cumulative effect of a
change in accounting
principle (0.2)
Net income 15.3 6.5 15.9 9.1 35.9 12.2 11.5 14.4
Basic earnings per common
share:
Income before cumulative
effect of a change in
accounting principle $ .65 $ .29 $ .67 $ .39 $ 1.50 $ .52 $ .48 $ .61
Cumulative effect of a
change in accounting
principle (.01)
Net income .65 .28 .67 .39 1.50 .52 .48 .61
Diluted earnings per
common share:
Income before cumulative
effect of a change in
accounting principle $ .56 $ .25 $ .58 $ .34 $ 1.30 $ .45 $ .41 $ .53
Cumulative effect of a
change in accounting
principle (.01)
Net income .56 .24 .58 .34 1.30 .45 .41 .53 0.19
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.
| FINANCIAL DISCLOSURE |
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, 2000 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.
Report of independent auditors 21
Consolidated balance sheet at December 31, 2000 and 1999 22
For each of the three years in the period ended December 31, 2000:
Consolidated statement of income 24
Consolidated statement of stockholders' equity 25
Consolidated statement of cash flows 26
Notes to consolidated financial statements 28
Supplementary data:
Quarterly consolidated financial information (unaudited) 42
Schedule II-Valuation and qualifying accounts for each of the
three years in the period ended December 31, 2000 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.
| *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 (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, 1999). | |
| *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 | 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). | |
| *10.11 | 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). | |
| *10.12 | 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). | |
| *10.13 | 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). | |
| *10.14 | 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). | |
| *10.15 | 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). | |
| *10.16 | 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). | |
| *10.17 | 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). | |
| *10.18 | 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). | |
| *10.19 | 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). | |
| *10.20 | 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). | |
| *10.21 | 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). | |
| *10.22 | Employment Agreement effective as of January 1, 2000 between the Company and John W. Dwyer (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, 1999). |
| *10.23 | Employment Agreement effective as of January 1, 2000 between the Company and Harold Morgan (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, 1999). | |
| *10.24 | Employment Agreement effective as of January 1, 2000 between the Company and John Wildman (filed as an exhibit to the Company’s Annual Report on Form 10-K, file no. 0-27478, for the fiscal year ended December 31, 1999). | |
| *10.25 | Employment Agreement effective as of January 1, 2000 between the Company and William Fanelli (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, 1999). | |
| *10.26 | 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). | |
| *10.27 | 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). | |
| *10.28 | Employment Agreement effective as of January 1, 2000 between the Company and Paul Toback (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, 1999). | |
| 10.29 | Employment Agreement effective as of June 1, 2000 between the Company and Cary A. Gaan. | |
| 21 | List of subsidiaries of the Company. | |
| 23 | Consent of Ernst & Young LLP. | |
| _______ | ||
| * | Incorporated herein by reference as indicated. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BALLY TOTAL FITNESS HOLDING CORPORATION |
| Dated March 09, 2001 | By: |
/s/ Lee S. Hillman ------------------------------------------------------------- Lee S. Hillman Chairman, President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. This report may be signed in multiple identical counterparts all of which, taken together, shall constitute a single document.
| Dated March 09, 2001 | By: |
/s/ Lee S. Hillman ------------------------------------------------------------- Lee S. Hillman Chairman, President and Chief Executive Officer (principal executive officer) |
| Dated March 09, 2001 | By: |
/s/ John W. Dwyer ------------------------------------------------------------- John W. Dwyer Executive Vice President, Chief Financial Officer and Treasurer (prinicipal financial officer) |
| Dated March 09, 2001 | By: |
/s/ Geoffrey M. Scheitlin ------------------------------------------------------------- Geoffrey M. Scheitlin Vice President and Controller (principal accounting officer) |
| Dated March 09, 2001 | By: |
/s/ Aubrey C. Lewis ------------------------------------------------------------- Aubrey C. Lewis Director |
| Dated March 09, 2001 | By: |
/s/ J. Kenneth Looloian ------------------------------------------------------------ J. Kenneth Looloian Director |
| Dated March 09, 2001 | By: |
/s/ James F. McAnally, M.D. ------------------------------------------------------------- James F. McAnally, M.D. Director |
| Dated March 09, 2001 | By: |
/s/ Liza M. Walsh ------------------------------------------------------------- Liza M. Walsh Director |
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)
2000:
Allowance for doubtful
receivables and
cancellations $126,038 $158,729 $178,347 $330,837 $132,277
======== ======== ======== ======== ========
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
======== ======== ======== ======== ========
__________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.