Bally Total Fitness Holding Corporation

founded: 1996

Contact Information:

headquarters: 8700 w. bryn mawr ave.
chicago, il 60631 phone: (773)380-3000 fax: (773)693-2982 email: mmessing@mww.com url: http://www.ballyfitness.com

OVERVIEW

Bally Total Fitness Holding Corporation is a commercial operator of fitness centers in North America. As of 2001, the company operated approximately 400 fitness centers in 28 states and Canada operating under the Bally, Crunch Fitness, Pinnacle Fitness and Gorilla Sports names, among others. Bally has locations in each of the top 25 metropolitan markets in the United States, where it is the only national commercial operator of fitness centers.

For its four million members, its facilities offer features such as exercise equipment, pools, aerobic programs, running tracks, and racquet courts. In many of its centers, it also provides personal trainers and sports medicine services. Bally also markets a line of private label nutritional products and sells health-related products through retail stores in about 120 of its clubs.

The company's business organization includes a back office infrastructure that allows it to efficiently support ongoing relationships with members.

Product and services business accounts for nearly 15 percent of Bally total revenues, which were about $750 million in 2000.

COMPANY FINANCES

In recent years, Bally has been posting strong numbers and showing steady and healthy gains. In 2001, the company recorded a net income of $72.4 million, an increase of 11 percent over the previous year. Operating income for 2001 was $64.5 million compared to $57.9 million in 2000. Net revenue for 2000 was $1,007.1 million compared to $861.1 million in 1999, an increase of $146 million or 17 percent. Operating income for 2000 was $126.4 million compared to $93.3 million in 1999. Net revenue for 1998 was $744.3 million in 1998, an increase of $116.8 million. Net revenue for 1997 was $661 million and $639 million for 1996.

ANALYSTS' OPINIONS

In 2001, Hayley Kissel, director of Merrill Lynch's Global Securities Research and Economics Division, commented that Bally Total Fitness was the only profitable U.S. publicly traded company in the Leisure Goods & Services sector. She pointed out that this resulted from the company's financial discipline and superior economic model. Another element, she said, was Bally's membership structure, which provides more visibility in revenue growth. Specifically, Bally's characteristic three-year membership plan results in a lower attrition rate.

HISTORY

Life truly began for the Bally Total Fitness Corporation in 1996. In its earlier incarnation, it was merely an unsuccessful subsidiary of the Bally Entertainment Corporation, which had been previously called Bally Manufacturing Corporation and was best known, perhaps, as a producer of pinball and video arcade games. The fitness subsidiary limped along until 1996, when it became a spinoff as a result of the merger of Bally Entertainment and Hilton Hotels Corporation. Bally Entertainment would go on to score big in the casino business. The subsidiary, on its own, would go on to become a robust organization, thanks in large part to Lee S. Hillman, whose name is pretty much synonymous with the new Bally Fitness.

Hillman joined Bally Total Fitness in 1991, when it was still part of Bally Entertainment Corporation. When he came on board, the subsidiary was struggling, as it suffered an increasingly severe cash flow problem and was facing almost inevitable bankruptcy. Hillman, its CFO at the time, would engineer the industry's most striking turnaround.

Bally started to shape up for real when Hillman was named CEO in 1996, the year the fitness subsidiary became a merger outcast and took on a life of its own. Once Hillman assumed the helm, he implemented a three-point strategy that changed the company's fortunes. This strategy included increasing the company's offerings. Starting in 1997, Bally offered a private label line of Bally branded nutritional products to its members. In 1998, the company entered joint venture agreements that enabled it to offer sports medicine services, including rehabilitative, chiropractic and massage therapy, in about 100 of its centers.

During 2000, the company opened approximately 120 retail stores. This brought the total number of retail outlets in its centers to approximately 340. In 2002, Bally purchased the fitness company Crunch in a deal worth $90 million.

STRATEGY

Bally states it has three current primary strategic objectives: improving the operating margins of its fitness center membership operations, its core business; increasing the number of fitness centers based on a more profitable fitness center prototype; and introducing new products and services to members. To meet these objectives, the company developed and implemented specific strategic initiatives.

The first initiative involves improving core business operations by growing and improving the quality of revenues while leveraging the largely fixed cost structure of its business. To accomplish this, it increased emphasis on the sale of higher margin all-club memberships, which are typically financed, unlike the sale of lower margin single-club memberships, and it significantly increased the monthly charge to new members for dues. Also, Bally continued focusing on maintaining higher down payments on financed membership plans and securing installment payments electronically, which resulted in a 14 percent growth in average down payments from 1997 to 2000. Emphasis on the sale of all-club memberships contributed to a 39 percent increase in the weighted-average price of memberships sold from 1997 to 2000.

The second initiative involved developing new facilities. It achieved facility expansion in three ways. In late 1997, the company started upgrading and expanding existing facilities and exercise equipment beyond normal maintenance requirements. In 1998, Bally initiated a plan to increase new facility openings of its more profitable new fitness center prototype. Seven of these facilities were opened during 1998, 22 were opened in 1999 and 14 in 2000. Also, it set about acquiring existing fitness center operations at attractive prices. That led to the purchase of the fitness centers that had operated under the names of The Sports Clubs of Canada, Pinnacle Fitness, and Gorilla Sports.

The third initiative involves adding products and services. The additions, the company pointed out, did not require significant capital investment. Revenues from products and services grew eleven-fold since 1997, to $111 million in 2000.

INFLUENCES

The appointment of Lee Hillman proved pivotal in the survival of the faltering fitness enterprise. His three-point strategy was responsible for making the company profitable. The first goal of Hillman's strategy was to alleviate the company's cash problems. When he accomplished that, he designed a "store model" that could be replicated through the chain to increase profitability. Finally, he added new products and services to the basic offerings that increased membership value to existing and potential customers. This also added additional revenue streams to the company.

By 1999, Bally was in the black. In recent years, the company's market capitalization has increased from $40 million to well over $500 million. Stock prices rose from $4.00 to more than $20.00 a share. The chain grew to include 400 centers across North America, a figure that represents 31 percent of all commercial fitness center members in the United States. Hillman attributed the success to his focus on customer service. Beyond his three core strategies, Hillman placed strong emphasis on this aspect. Bally, he was determined, would provide members with a wide range of fitness services that would be attractive to a broad population. As a result, Bally Fitness became more than just a gym.

Thanks to Hillman's vision, the company's new fitness center prototype achieves efficiency by focusing on fitness services its members use most frequently. It also started attracting new customers through expansion of existing clubs and the creation of new centers. During 2000, Bally invested $108.4 million in property and equipment, including approximately $74 million related to new fitness centers, and major upgrades and expansions including new equipment in existing centers. The company invested $4.8 million to purchase land and buildings for new clubs and existing leaseholds. In addition, it acquired 17 clubs with a net cash investment of $4.1 million.

FAST FACTS: About Bally Total Fitness Holding Corporation

Ownership: Bally Total Fitness Holding Corporation is a publicly owned company traded on the New York Stock Exchange.

Ticker Symbol: BFT

Officers: Lee Hillman, Chmn. and CEO, 45, 2000 salary $1,100,000; John Dwyer, CFO, EVP, and Treasurer, 48, $1,100,000; Paul Toback, COO, 37, $1,200,000; William Fanelli, Sr., VP Finance, 38; Cary Gaan, SVP, Gen. Counsel, and Sec., 55, $429,000

Employees: 12,500

Principal Subsidiary Companies: Bally Total Fitness Holding Corporation operates fitness centers under its flagship Bally Total Fitness brand name as well as under the Crunch Fitness, Sports Clubs of Canada, Gorilla Sports, and Pinnacle Fitness brands. The majority of Bally's 400 fitness centers use the Bally Total Fitness service mark.

Chief Competitors: Bally's main competitors include other organizations that operate fitness centers, such as Gold's Gym, the YMCA, and 24 Hour Fitness. As Bally has also branched out into the areas of nutritional products and exercise equipment in recent years, it faces other competition from companies such as Weider and General Nutrition Centers (GNC).

Also, Bally clustered its fitness centers in major metropolitan areas in order to achieve marketing and operating efficiencies. Over 86 percent of its fitness centers are located in markets in which the company has five or more facilities, with its 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.

CURRENT TRENDS

In 2001, Bally reduced its debt by nearly $30 million. Despite a difficult economy, it was able to increase revenues and exceed cash flow expectations as well as improve its sales processes and services for its members. Because of its improved centers and added services, Bally found that its existing members were staying with the company longer and were using the centers for longer periods of time, which increased sales of products and services such as such as drinks, group training and nutritional supplements.

Beyond 2002, Bally is looking to increase its business opportunities. It has entered into co-marketing agreements with Pepsi Cola Company, Eastman Kodak, Novartis Consumer Health, Inc., Sunkist Growers, Household International, Procter & Gamble, Sprint, Time Warner, and MBNA America and Sports Display, Inc. These companies want to work with Bally to reach its members, who they feel represent a potential target market.

The company is also focusing on increased acquisitions. It felt that acquiring Crunch Fitness in a $90 million deal would clear the way for other acquisitions beyond 2002.

In 2001, Bally announced plans to publish its own magazine, with the first issue of the proposed lifestyle health and fitness quarterly slated to be produced in spring 2002. It was looking to not only distribute the magazine to its members but to possibly extend sales to newsstands if the interest was there. The company sees the magazine as a revenue generator and a brand builder.

PRODUCTS

Bally Total Fitness Holding Corporation's primary product is, of course, its fitness centers. The company offers members affordable membership programs. The centers feature a selection of cardiovascular, conditioning, and strength equipment; extensive aerobic and other group fitness training programs; and pools, racquet courts, or other athletic facilities.

Cardiovascular equipment includes treadmills, elliptical trainers, stairclimbers, and exercise bikes. Weight training equipment includes a wide variety of plate-loaded equipment, weight machines, and a complete line of free weights ranging in size for beginners to advanced strength trainers. Group exercise areas have specially designed floors to reduce the impact to bone and joints.

Many centers also provide sports medicine services, including rehabilitative, chiropractic and massage therapy, and the company offers financial services to selected members by giving them the opportunity to transfer the balance of their financed membership fee to a pre-approved Visa account.

Bally Total Fitness also sells a licensed line of portable fitness equipment distributed by Sports & Leisure Technology Corporation of Yonkers, New York. The 70-item line is sold in national retail chains in the United States and Canada including Foot Locker, Champs, Lady Foot Locker, Zeller's, Modell's, Ames, Fingerhut, and Service Merchandise, as well as in the Amway and Avon catalogs.

Bally's nutritional products include meal-replacement powders, supplements such as vitamins and creatine, weight loss products, high protein bars, and ready-to-drink meal replacement shakes.

CHRONOLOGY: Key Dates For Bally Total Fitness Holding Corporation

1996:

Bally Total Fitness Holding Company is created when Bally Entertainment merges with Hilton Hotels

1996:

Lee S. Hillman is named CEO

1997:

Bally introduces a line of nutritional products

1998:

Bally begins offering sports medicine services at its fitness centers

1999:

The Bally chain grows to include 400 fitness centers

2000

Bally Total Fitness records total revenues of $750 million

2001:

Bally acquires the Sports Club of Canada chain

2002:

Bally purchases the fitness company Crunch in a deal worth $90 million

CORPORATE CITIZENSHIP

Bally Total Fitness Holding Corporation has created a "Stronger Communities" program that donates used exercise equipment to groups such as inner city schools, park districts, and police athletic leagues. As part of the program, which was started in 1997, Bally reconditions equipment that has been retired from its centers. Rather than turn the equipment back to the manufacturers in exchange for cash, Bally has decided to spend money on refurbishing the equipment. Since the program's inception, Bally has donated more than $10 million worth of fitness equipment, apparel, and memberships. Also as part of the program, Bally provides members of its Personal Training Team to train and educate those who will be using the equipment.

Bally Total Fitness also supports the Challenged Athletes Foundation, a non-profit organization dedicated to building self-esteem and the desire to succeed in people with physical disabilities through competitive athletics.

GLOBAL PRESENCE

When Bally acquired the Sports Club of Canada chain in 2001, with its 10 upscale commercial fitness centers, it increased its total number of fitness centers in the Toronto area to thirteen. These centers are run by the Sports Club's experienced management team, which will spearhead Bally's intended expansion into other areas of Canada.

EMPLOYMENT

Bally Total Fitness Holding Corporation employs 12,500 people in its 400 centers. When recruiting new employees, Bally seeks candidates with previous business experience and fluency in more than one language. The company offers both flexible full-time and part-time work schedules. Positions include sales personnel, service managers, certified personal trainers, receptionists, child care staff, group fitness instructors, equipment mechanics, and janitorial. Bally provides a drug-free workplace and is an equal opportunity employer.

HEALTHY ECONOMY MEANS HEALTHY FITNESS CLUBS

According to health club industry sources, the vitality of the fitness club industry is strongly reflected by the health of the U.S. economy. The better off the economy, the better shape fitness clubs are in. Since 1982, it has been shown that the number of U.S. health clubs has tended to rise and fall with the nation's gross domestic product. The reason? When times are bad, consumers generally cut out health club memberships. In the past, this has resulted in hundreds of health clubs going out of business.

Bally offers a minority internship program for minority undergraduate or graduate students majoring in exercise physiology. The 12-week intensive internship opens doors into the fitness industry and possible future employment with Bally Total Fitness.

SOURCES OF INFORMATION

Bibliography

"bally total fitness holding company," hoover's online, 8 april 2001. available at http://www.hoovers.com.

"company details—bally total fitness holding company," 8 april 2001. available at http://www.forbes.com.

"lee s. hillman, w'77: flexing his muscles in the fitness business." wharton alumni magazine, spring 1999. available at http://www.wharton.upenn.edu.

markey, patrick. "bally eyes more acquisitions." reuters, 15 january 2002.

"profile—bally total fitness." yahoo! finance, 8 april 2001. available at http://biz.yahoo.com/p/b/bft.html.

steele, jeffrey. "bally total fitness shapes up." chicago gsb class notes, 2001. available at http://gsbwww.uchicago.edu/news.

For an annual report:

on the internet at: http://biz.yahoo.com/e/010309/bft.html

For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. bally's primary sic codes are:

7991 physical fitness facilities

7997 membership

also investigate companies by their north american industry classification system codes, also known as naics codes. bally's naics codes are:

551112 offices of other holding companies

713940 fitness and recreational sports centers