SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number: 0-27478
BALLY TOTAL FITNESS HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3228107
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
8700 West Bryn Mawr Avenue, Chicago, Illinois 60631
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (773) 380-3000
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Series A Junior Participating Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes: X No:
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of the registrant's voting stock held by
nonaffiliates of the registrant as of June 30, 1997 was approximately $108
million, based on the closing price of the registrant's common stock as reported
by the NASDAQ National Market System at that date. For purposes of this
computation, affiliates of the registrant include the registrant's executive
officers and directors. As of June 30, 1997, 12,510,380 shares of the
registrant's common stock were outstanding.
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PART I
Except as otherwise stated, the information contained in this Form 10-K/A is as
of December 31, 1996, the end of the registrant's last fiscal year. The
information contained in this Form 10-K/A contains forward-looking statements
which involve known and unknown risks, uncertainties and other factors that may
cause the actual results, performance or achievements of the registrant to be
materially different from any future results, performance or achievements
expressed or implied by such forward- looking statements. See "Forward-Looking
Statements" in Item 7 of this Form 10-K/A.
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
GENERAL
The registrant, Bally Total Fitness Holding Corporation, formerly Bally's Health
& Tennis Corporation (the "Company" or "Bally"), is incorporated in Delaware and
was a wholly owned subsidiary of Bally Entertainment Corporation
("Entertainment") until the consummation of Entertainment's spin-off of the
Company. On November 6, 1995, the Board of Directors of Entertainment declared a
distribution in the form of a dividend (the "Spin-off") to holders of record of
its common stock as of the close of business on November 15, 1995 (the "Record
Date") on the basis of one share of common stock, par value $.01 per share (the
"Common Stock") of the Company, along with an associated stock purchase right
issued pursuant to a stockholder rights plan (a "Right"), for every four shares
of Entertainment common stock held on the Record Date. On January 9, 1996,
11,845,161 shares of Common Stock were distributed. Unless otherwise specified
in the text, references to the Company include the Company and its subsidiaries.
The Company is the largest (and only nationwide) commercial operator of fitness
centers in the United States in terms of revenues, the number of members, and
the number and square footage of facilities. As of March 31, 1997, the
Company operated approximately 320 fitness centers concentrated in major
metropolitan areas in 27 states and Canada and had approximately four million
members. During 1996, Bally's members made more than 100 million visits to its
fitness centers.
The Company offers its members value by providing access to state-of-the-art
fitness facilities with affordable membership programs. Bally's fitness centers
feature an outstanding selection of cardiovascular, conditioning and strength
equipment and offer extensive aerobic training programs. The Company's new club
prototype achieves efficiency by focusing on those fitness services that receive
a high degree of member use. Most of the Company's current fitness centers
include pools, racquet courts or other athletic facilities that receive a lower
degree of member use. The Company has clustered its fitness centers in major
metropolitan areas in order to achieve marketing and operating efficiencies.
These markets include, among others, New York, Los Angeles, Chicago, Houston,
Dallas, Detroit, Baltimore, Washington, D.C., Philadelphia, Miami, Cleveland,
Atlanta, Milwaukee, Seattle, Minneapolis, Orlando, Denver, Phoenix, St. Louis,
Boston, and Kansas City. In 1996, the Company completed the process of renaming
its fitness centers so they all use the servicemark "Bally Total Fitness",
thereby enhancing brand identity, concentrating advertising and eliminating the
prior practice of using more than 25 different regional servicemarks and trade
names.
The Company's primary target market for new members is the 18 to 34-year old,
middle income segment of the population. Bally markets itself to this consumer
segment through the use of a variety of membership options and payment plans.
The membership options offered by the Company range from single-club memberships
to premium memberships which provide additional amenities and the use of all of
Bally's fitness centers nationwide. Similarly, the Company offers a broad range
of payment alternatives. Typically, members pay an initiation fee which can
either be financed (generally for 36 months and subject to downpayment
requirements) or paid-in-full at the time of joining. Members are also required
to pay monthly membership dues in order to use the Company's fitness facilities.
Management believes the various memberships and payment plans, in addition to
Bally's strong brand identity and the convenience of its multiple locations,
provide the Company distinct competitive advantages.
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MEMBERSHIP PLANS
The Company currently offers prospective members a number of membership plans
that differ primarily by the inclusion of additional in-club services (such as
racquet sports and child care) and access to other fitness centers operated by
the Company, either locally or nationally. From time to time, the Company also
offers special membership plans which limit access to fitness centers to certain
days and non-peak hours. The initial membership fees for access to the Company's
fitness center facilities range from approximately $349 to $1,179 depending on
the membership plan selected, the diversity of facilities and services available
at the club of enrollment, the local competitive environment, as well as the
effects of seasonal promotional strategies.
In addition to the one-time initial membership fee, members pay monthly
membership dues in order to maintain their membership privileges. Monthly dues
for memberships generally range from $4.00 to $5.50 during the typical financing
period for a membership plan and vary based on the type of plan purchased by the
member. Some seasonal promotional programs offered by the Company in the past
have required no dues payments for up to 36 months if the member pays the
initiation fee in full at the time of joining. Renewal dues (those paid after
the typical 36 month initial period ends) range from as little as $2.00 to as
much as $25.00 per month, with increases as contractually permitted. At March
31, 1997, approximately 90% of the Company's members were being charged dues
ranging from $2.00 to $15.00 per month, with the overall average approximately
$7.75 per month. The Company has experienced an annual growth rate of dues
revenues of 7% from 1992 to 1996. The Company expects the annual increases in
dues revenues will continue in the future due to the contractual terms of
current membership plans and the Company's belief that it can significantly
increase dues for its members who are beyond their initial financing period
without any material loss in membership. The Company also offers renewal dues
that vary depending on the member's historical usage of the fitness center
facilities. The Company's recent experience has shown that members faced with a
membership renewal decision for the first time renewed at a rate of
approximately 58% and members faced with a membership renewal decision for
subsequent periods renewed at a rate of approximately 84%.
Members selecting finance membership plans can choose from several payment
mechanisms and downpayment options. The Company expects to continue its focus on
increasing the downpayment it receives on financed membership contracts and on
securing payment by electronic funds transfer ("EFT"). The Company believes that
both these strategies result in better quality receivables. Further, the Company
intends to modify its collection efforts, based on the information provided by
"credit scoring", which management believes will also improve the yield from the
receivables portfolio. See "Account Servicing".
FINANCING OF INITIAL MEMBERSHIP FEE
Financed portions of initial membership fees may be prepaid without penalty at
any time during the financing term. Generally, financing terms of 36 months are
offered. Shorter terms are offered on a promotional basis or as required by
applicable state law. Contracts are financed at a fixed annual percentage rate
(generally between 16% and 18%, except as otherwise limited by applicable state
retail installment laws). Management expects that approximately 80% to 85% of
all new membership contracts originated during 1997 will be financed.
The Company offers two payment methods for financed portions of initial
membership fees: coupon books and EFT. EFT plans are the most popular mechanism
for payment of the financed portion of initial membership fees. Under an EFT
plan, on the same date each month a predetermined amount is either (i)
automatically transferred from a member's bank checking or savings account to
the Company or (ii) automatically charged to a member's designated credit card.
Currently, more than 60% of all financed memberships sold are paid by EFT. The
other mechanism for payment financing is the use of a coupon book. This
mechanism requires the member to mail a check monthly, accompanied by a payment
coupon, to the regional service center ("RSC") responsible for administering the
membership account. Members have the option of changing their payment method.
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On average, the Company received a downpayment of approximately $75 on contracts
that were financed during 1996. This downpayment adequately defrays both the
initial account set-up cost as well as any collection costs should the account
become immediately delinquent. As a result, the Company is able to attract new
members who might otherwise be rejected while covering the incremental cost of
new membership processing and collection through the downpayment. The Company
does not perform individual credit checks on prospective members. This is due,
in part, to the high cost associated with performing credit checks on the large
volume of prospective members, but also due to the Company's ability, from past
performance, to measure the average value of contracts between coupon book and
EFT payers and satisfactorily manage credit risk. Historical analysis performed
by the Company indicates that the collection experience of EFT accounts is
approximately 50% better than that of coupon book accounts. As of December 31,
1996, approximately 51% of membership contract receivables consisted of
EFT-financed memberships compared to 29% at December 31, 1992, when emphasis on
payments by EFT was introduced by management.
FITNESS CENTERS
Most of the Company's fitness centers are located near regional, urban and
suburban shopping areas and in downtown areas of major cities and are generally
operated under long-term leases. Fitness centers vary in size, available
facilities and types of services provided. Fitness centers contain a wide
variety of state-of-the-art progressive resistance, cardiovascular and
conditioning exercise equipment as well as free weights. A member's use of a
fitness center may include planned exercise programs and instruction stressing
cardiovascular conditioning, strength development and improved appearance. The
Company also has a comprehensive training program for its service personnel on
the use of exercise equipment.
Generally, the Company's fitness centers constructed prior to 1980 are smaller
in size and have fewer amenities than the fitness centers constructed in the
1980's which average 35,000 square feet and generally include a colorful workout
area, sauna and steam facilities, a lap pool, free-weight rooms, aerobic
exercise rooms, an indoor jogging track and, in some cases, racquetball courts.
The Company's prototype fitness center focuses on those fitness services that
the Company's members most frequently use rather than on a broader range of
fitness services that generally receive a lower degree of member use such as
pools, racquet courts or other athletic facilities. These "dry" clubs, which
tend to be approximately 20,000 to 30,000 square feet, have recently averaged
approximately $800,000 to construct, exclusive of real estate and exercise
equipment costs and net of any landlord contribution. The Company invests
approximately $500,000 for exercise equipment for a typical new fitness center.
SALES AND MARKETING
The Company devotes substantial resources to the marketing and promotion of its
fitness centers and their services because the Company believes strong marketing
support is critical to attracting new members both at existing and new fitness
centers. In 1996, the Company completed the process of renaming its fitness
centers so they all use the servicemark "Bally Total Fitness", thereby enhancing
brand identity, concentrating advertising and eliminating the prior practice of
using more than 25 different regional servicemarks and trade names.
The Company's strategy is to cluster numerous fitness centers in major media
markets in order to increase the efficiency of its marketing and advertising
programs. The Company operates 262 clubs in 26 of the top 30 U.S. media markets.
The Company expects to spend approximately $45 million for advertising and
promotion during 1997 compared to approximately $47 million in 1996, $50 million
in 1995 and $48 million in 1994. The Company primarily advertises on television,
and, to a lesser extent, newspapers, telephone directories, radio and other
promotional activities.
The Company's sales and marketing programs emphasize the benefits of health,
physical fitness and exercise by appealing to the public's desire to look and
feel better. The Company's advertisements are augmented by individual sales
presentations made by its sales personnel in the fitness centers. Management
believes the various memberships
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and payment plans, in addition to Bally's strong brand identity and the
convenience of its multiple locations, provide the Company distinct competitive
advantages.
The Company's marketing efforts also include corporate membership sales and
insurance-eligible programs which are designed to reduce workers' compensation
costs and improve productivity. In addition to its advertising, personal sales
presentations and targeted marketing efforts, the Company is increasingly
utilizing in-club marketing programs. Open houses and contests for members and
their guests foster member loyalty and introduce fitness centers to prospective
members. Referral incentive programs involve current members in the process of
new member enrollments.
Direct mail reminders encourage renewal of existing memberships. The Company has
a group of approximately 100 individuals located at the Towson, Maryland RSC
dedicated primarily to inbound telemarketing renewal programs to existing
members, although telemarketing is not currently used to attract prospective new
members.
ACCOUNT SERVICING
The Company administers and collects amounts owing under its membership
contracts according to uniform procedures implemented by its two RSCs. The RSCs
enable the Company to conduct centralized data processing of all membership
accounts. The RSCs employ approximately 800 people in the account processing and
collection areas, including approximately 165 employees dedicated to customer
service, approximately 235 employees dedicated to account processing and
administration and approximately 300 employees dedicated to account collections.
The two RSCs collectively receive, deposit and post more than $550 million of
membership transactions annually, including the processing of downpayments and
cash sales, and collections of financed receivables and dues. In addition, the
RSCs process, on average, 3,000 new membership accounts per day. The RSCs are
also responsible for responding to member inquiries and maintaining membership
data.
All collections for past-due accounts are handled internally by the RSCs. The
Company systematically collects accounts that are past due by utilizing a series
of computer-generated correspondence and telephone contacts. Computer-generated
correspondence is sent to a delinquent member at 7 and 20 days after an account
becomes past due. Collectors with varying levels of experience are responsible
for handling delinquent accounts, depending on the period of delinquency. At 30
and 60 days past due, the accounts are assigned to power dialer assisted
collectors initially as a reminder and later as a demand for payment. Accounts
that have not been collected for a 90-day period are transferred to a group of
the most experienced collectors (unless the first scheduled payment has not been
received on such accounts, in which case they are generally written-off and any
downpayment received is not refunded). All remaining delinquent accounts are
written-off after 180 days without payment. Written-off accounts are reported to
credit reporting bureaus and sold to a third-party collection group. The Company
intends to modify its collection efforts based on the information provided by
"credit scoring", which management believes will improve the yield from the
receivables portfolio. For example, the Company would not make costly collection
calls to a member with a strong credit history until late in the collection
cycle. Likewise, the Company would aggressively pursue collection tactics on a
member with poor credit scoring early in the delinquency period and reduce
collection efforts if results were not quickly realized. By tailoring its
collection approach to reflect a delinquent member's likeliness to pay, the
Company believes it can collect more of its receivables at a lower cost. The
Company uses a national bureau which charges the Company a nominal fee per
credit score. Beginning in March 1997, the Company has credit scored a majority
of its financed members.
OPERATING STRATEGIES
In October 1996, Lee S. Hillman was named President and Chief Executive Officer
of the Company. This completed the transition of senior management of the
Company from predominantly marketing oriented managers, including the original
founders of the Company, to managers with more financial and operational
orientation. Until December 1996, a number of the Company's top executives,
including Mr. Hillman, also performed significant functions for Entertainment,
the owner of the Company until
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January 1996. The Company filed a Registration Statement with the Securities and
Exchange Commission to offer additional shares of its common stock which has not
yet been declared effective (the "Offering"). The Company intends to use (i)
approximately $20 million to $30 million of the proceeds of the Offering for
capital expenditures to develop 15 to 25 new facilities over the next three
years and more extensively refurbish and make major upgrades to approximately
25% of its facilities over the next two years, (ii) $7.5 million to repay a loan
to an affiliate of an underwriter of the Offering, (iii) as much as $3 million
to support the introduction of new initiatives described below and (iv) the
balance, if any, for general corporate and working capital purposes. The Company
expects that completion of the Offering will alleviate the need to use the
discounting techniques described above. Pending such uses, the Company may
temporarily invest available funds from the Offering in short-term securities
and/or reduce indebtedness under its revolving credit agreement. Current
management intends to pursue a number of operating strategies, which the Company
believes will improve the results of its core business. If the Company does not
complete the Offering in the near future, implementation of the first two
strategies discussed below will be slower and take a significantly longer time
to complete. Planned operating strategies include:
- Reduce Discount Pricing on Paid-In-Full Membership Plans-- Since late
1990, the Company has managed its pricing structure to generate
immediate cash for liquidity by significantly discounting its membership
plans and by emphasizing paid-in-full instead of financed membership
plans. Additional working capital will allow the Company to sell more
financed membership plans, which historically have generated better
long-term returns for the Company including streams of recurring dues
revenues, rather than selling discounted paid-in-full memberships for
which dues are frequently waived for up to three years.
- Upgrade and Expand Fitness Centers-- The Company intends to expand and
upgrade its facilities in order to increase its membership base and more
effectively capitalize on its streamlined marketing and administrative
functions. Management plans to make capital expenditures of
approximately $10 million to $12 million over the next twelve months to
maintain and make minor upgrades to the Company's existing facilities,
which include exercise equipment upgrades, heating, ventilation and air
conditioning ("HVAC") and other operating equipment upgrades and
replacements, and locker room and workout area refurbishments, among
others. In addition, the Company expects to invest approximately $5
million to $10 million of the proceeds from the Offering over the next
two years to extensively refurbish and make major upgrades to
approximately 25% of its clubs, which include converting low-usage pools
and racquet areas into expanded exercise areas and to a lesser extent
retail and outpatient rehabilitation service areas, adding and upgrading
exercise equipment, and refreshing interior and exterior finishes to
improve club ambience, among others. The Company also intends to spend
approximately $15 million to $25 million of the proceeds from the
Offering over the next three years to open 15 to 25 new facilities based
on its new prototype. These facilities are designed to cost less to
construct and maintain than the Company's older facilities. The
facilities are expected to range in size from 10,000 to 45,000 square
feet and have the capacity to accommodate significantly more members
than older clubs of the same size because the new facilities will
contain only the most widely used amenities.
- Increase Dues Revenues-- The Company believes that its dues are
substantially less than those charged by its competitors and that it can
significantly increase dues for its members who are beyond their initial
financing period without any material loss in membership.
- Improve Collections on Financed Contracts-- The Company plans to
continue its focus on increasing the downpayment on financed membership
plans and securing payment by EFT, which the Company's experience has
shown results in higher quality receivables. Further, the Company
intends to institute more focused collection efforts based on
information provided by "credit scoring", which management believes will
also improve the yield from the receivables portfolio.
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- Continue Cost Reduction Policies-- The Company's operating costs and
expenses for 1996 were more than $75 million lower than in 1994.
Management believes that other opportunities exist to cut additional
costs in the areas of administration, advertising and self-insured
losses incurred.
GROWTH OPPORTUNITIES
The Company currently generates substantially all of its revenues from the sale
of membership plans and the receipt of dues. Management believes that it can
increase and diversify its revenues by leveraging its strong brand identity,
extensive distribution infrastructure (approximately 320 facilities),
significant member base (approximately four million members) and frequency of
visitation (in excess of 100 million visits in 1996) by offering a number of
ancillary products and services. In order to pursue these growth opportunities,
the Company plans to:
- Sell Nutritional Products-- The Company has successfully concluded test
marketing certain nutritional products, predominantly vitamins and
weight control supplements, and is launching the sale of these products
to members through its fitness centers and telemarketing.
- Provide Outpatient Rehabilitation Services-- The Company plans to
contract with providers of health care programs and services whereby
certain of the Company's existing facilities will also be used for
comprehensive outpatient rehabilitation services. The Company believes
it has opportunities with a number of third party providers and managers
of health care programs and services to provide similar outpatient
rehabilitation services in additional fitness centers, and expects to
offer these services within three years to members and non-members alike
in up to 100 of its facilities primarily using equipment already
on-hand. Among others, the Company has recently contracted with
Continucare Corporation to provide such services in certain, initially
four, of the Company's fitness centers. The Company plans to spend
approximately $1 million of the proceeds from the Offering to upgrade an
initial group of its facilities to provide rehabilitation services.
- Offer Other Goods and Services-- The Company plans to sell work-out and
related apparel and market certain financial services and direct
marketing programs provided by third parties to its members such as a
co-branded credit card, credit life insurance, dining clubs and ATMs in
its clubs through in-club sales efforts and direct marketing programs.
The Company has entered into agreements with various entities to test market the
provision by third parties of financial services to its members including the
sale of credit life insurance, pursuant to which a participant's unpaid credit
card debts are paid-off if the participant dies. The programs are typically
designed such that the Company shares in either the revenue generated by or net
profit resulting from members purchasing the offered services. Test marketing
and, ultimately, the provision of services of this type by third parties to the
Company's members do not require significant capital expenditures by the
Company. Consequently, the Company expects to explore the sale of other similar
or complimentary services and expects to make those products that are most
successful available to all of its members.
COMPETITION
The Company is the largest (and only nationwide) commercial operator of fitness
centers in the United States in terms of revenues, the number of members and the
number and square footage of facilities. The Company is the largest operator, or
among the largest operators, of fitness centers in every major market in which
it has fitness centers. The Company believes its fitness centers generally offer
a high level of amenities to its primary target market for new members, the 18
to 34-year old, middle income segment of the population. Within each market, the
Company competes with other fitness centers, physical fitness and recreational
facilities established by local governments and hospitals and by businesses for
their employees, the YMCA and similar organizations and, to a certain extent,
with racquet and tennis and other athletic clubs, country clubs, weight reducing
salons and the home-use fitness equipment
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industry. However, the Company believes that its operating experience, its
ability to allocate advertising and administration costs over all of its fitness
centers, its nationwide operations and its account processing and collection
infrastructure provide the Company distinct competitive advantages. There can be
no assurance that the Company will be able to compete effectively in the future
in the markets in which it operates.
The Company believes that competition has increased in certain markets. The
Company believes that this increase reflects the public's enthusiasm for fitness
and the decrease in the cost of entering the market due to financing available
from landlords and equipment manufacturers. The Company believes that its
membership plans are affordable and have the flexibility to be responsive to
economic conditions. However, the Company also competes with other entertainment
and retail businesses for the discretionary income of its target market.
When the Company embarks on its new initiatives, particularly the sale of
nutritional products and apparel, the Company will be competing against large,
established companies with more experience selling such products on a retail
basis and, in some instances, with substantially greater financial resources
than the Company. There can be no assurance that the Company will be able to
compete effectively against such established companies.
PROPERTIES
The Company operates approximately 320 fitness centers in 27 states and Canada.
The Company owns approximately 30 fitness centers and leases either the land or
the building or both for the remainder of its fitness centers. Aggregate rent
expense (including office and administrative space) was $86.7 million, $85.9
million and $83.3 million for 1996, 1995 and 1994, respectively. Most leases
require the Company to pay real estate taxes, insurance, maintenance and, in the
case of shopping center and office building locations, common area maintenance
fees. A limited number of leases also provide for percentage rental based on
receipts. Various leases also provide for rent adjustments based on changes in
the Consumer Price Index, most with limits provided to protect the Company. Two
fitness centers each accounted for between 1% to 2% of the Company's net
revenues during 1996. The Company believes its properties are adequate for its
current membership.
Leases for fitness centers 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 for fitness centers contain at least one five-year option to renew
and often two or more such options.
The Company's executive offices are located in Chicago, Illinois where it is
co-tenant at a monthly base rental cost to the Company of $43,700. The lease
expires in January 2003. The Company also leases space in Huntington Beach,
California and Towson, Maryland for RSC operations.
TRADEMARKS AND TRADE NAMES
In 1996, the Company completed the process of renaming its fitness centers so
they all use the servicemark "Bally Total Fitness", thereby enhancing brand
identity, concentrating advertising and eliminating the prior practice of using
more than 25 different regional servicemarks or trade names. The name "Bally
Total Fitness" is a servicemark of Hilton Hotels Corporation as successor to
Entertainment. In January 1996, the Company and Entertainment entered into a
10-year trademark license agreement to allow the Company to use certain marks,
including the "Bally Total Fitness" servicemark, in connection with its fitness
center business. The Company paid no royalty or license fee for the first year
of the license and now pays a fee of $1.0 million per year. Following the
initial ten-year term, the Company has the option to renew the license for an
additional five-year period at a rate equal to the greater of the fair market
value or $1.0 million per year.
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SEASONAL MEMBERSHIP FEE ORIGINATIONS
Historically, the Company has experienced greater membership fee originations in
the first quarter and lower membership fee originations in the fourth quarter.
Certain of the new initiatives the Company plans to undertake may have the
effect of further increasing the seasonality of the Company's business.
EMPLOYEES
The Company has approximately 12,600 employees, including approximately 6,300
part-time employees. Approximately 11,540 employees are involved in club
operations, including sales personnel, instructors, supervisory or custodial
personnel, approximately 800 are involved in the operation of the RSCs and
approximately 260 are administrative support personnel, including accounting,
legal, human resources, real estate and other national services.
The Company is not a party to any collective bargaining agreement with its
employees. Although the Company experiences high turnover of non-management
personnel, the Company historically has not experienced difficulty in obtaining
adequate replacement personnel, except with respect to sales personnel, which
the Company believes have become somewhat more difficult to replace due, in
part, to increased competition for skilled retail sales personnel.
GOVERNMENT REGULATION
The operations and business practices of the Company are subject to regulation
at federal, state and, in some cases, local levels. General rules and
regulations of the Federal Trade Commission, and of state and local consumer
protection agencies, apply to the Company's advertising, sales and other trade
practices.
Statutes and regulations affecting the fitness industry have been enacted or
proposed in all of the states in which the Company conducts business. Typically,
these statutes and regulations prescribe certain forms and regulate the terms
and provisions of membership contracts, giving the member the right to cancel
the contract, in most cases, within three business days after signing, requiring
an escrow for funds received from pre-opening sales or the posting of a bond or
proof of financial responsibility and, in some cases, establishing maximum
prices and terms for membership contracts and limitations on the term of
contracts. In addition, the Company is subject to numerous other types of
federal and state regulations governing the sale, financing and collection of
memberships including, among others, the Truth-in-Lending Act and Regulation Z
adopted thereunder, as well as state laws governing the collection of debts.
These laws and regulations are subject to varying interpretations by a large
number of state and federal enforcement agencies and the courts. The Company
maintains internal review procedures in order to comply with these requirements
and it believes that its activities are in substantial compliance with all
applicable statutes, rules and decisions.
Under so-called state "cooling-off" statutes, members of fitness centers have
the right to cancel their memberships for a period of three to ten days after
the date the contract was entered into (depending on the applicable state law)
and are entitled to refunds of any payment made. In addition, the Company's
membership contracts provide that a member may cancel his or her membership at
any time for qualified medical reasons or if the member relocates a certain
distance away from the health club, and a membership may be canceled in the
event of a member's death. The specific procedures for cancellation in these
circumstances vary according to differing state laws. In each instance, the
canceling member is entitled to a refund of prepaid amounts only. Furthermore,
where permitted by law, a cancellation fee is due to the Company upon
cancellation and the Company may offset such amount against any refunds owed.
The Company is a party to several state and federal consent orders. From time to
time, the Company makes minor adjustments in its operating procedures to comply
with such consent orders. The consent orders essentially require continued
compliance with applicable laws and require that the Company refrain from
activities that are not in compliance with applicable laws.
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The provision of rehabilitation services is affected by federal, state and local
laws and regulations concerning the development and operation of physical
rehabilitation health programs, licensing, certification and reimbursement and
other matters, which may vary by jurisdiction and which are subject to periodic
revision. The opening of a rehabilitation facility may require approval from
state and/or local governments and re-licensure from time to time, both of which
may be subject to a number of conditions. In addition, a substantial number of
recipients of rehabilitation services have fees paid by governmental programs as
well as private third-party payors. Governmental reimbursement programs
(including Medicare and Medicaid) generally require facilities and services to
meet certain standards promulgated by the federal and/or state government.
Additionally, reimbursement levels by governmental and private third-party
payors are subject to change which could limit or reduce reimbursement levels
and could have a material adverse effect on the demand for rehabilitation
services. Further, in a number of states and in certain circumstances pursuant
to federal law, the referral of patients to rehabilitation services is subject
to limitations imposed by law, the violation of which may, in certain
circumstances, constitute a felony. Recently, federal and state governments have
focused significant attention on health care reform and costs control. These
proposals include cut-backs to Medicare and Medicaid programs. It is uncertain
at this time what legislation and health care reform may ultimately be enacted
or whether other changes in the administration or interpretation of government
health care programs will occur. There can be no assurance that future health
care legislation or other changes in the administration or interpretation of
government health care programs will not have a material adverse effect on the
provision of rehabilitation services by the Company.
ITEM 3. LEGAL PROCEEDINGS
A class action entitled Jackson v. Health & Tennis Corporation of America was
filed in the state district court in Bexar County, Texas on May 8, 1995. The
complaint alleges that the defendant, a subsidiary of the Company, charged
excessive amounts on its financed memberships in violation of the Texas Credit
Code and the Texas Deceptive Trade Practices--Consumer Protection Act. The
relief sought is damages equal to the alleged overpayments and statutory
remedies. The Company is currently unable to estimate the amount sought in this
action because the potential size of the class and the amount of damages for
each member of the putative class are currently unknown. The Company is
vigorously defending this action. The outcome of this litigation is not
currently determinable and, consequently, the Company cannot predict whether it
will have a material adverse effect on the Company's financial condition or
results of operations in any future period.
The Company is involved in various other claims and lawsuits incidental to its
business, including claims arising from accidents at its fitness centers. In the
opinion of management, the Company is adequately insured against such claims and
lawsuits, and any ultimate liability arising out of such claims and lawsuits
will not have a material adverse effect on the financial condition or results of
operations of the Company.
9
<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollar amounts in millions, except per share data)
(As restated)(a)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenues $640.2 $653.6 $682.0 $666.7 $688.6
Depreciation and amortization 55.9 57.4 58.9 60.4 57.8
Operating income (loss) 20.0 5.2 (16.1) (18.1) (19.3)
Loss before extraordinary
item and cumulative
effect on prior years
of change in accounting
for income taxes (b)(c) (24.9) (31.4) (39.5) (31.4) (33.6)
Loss per common share (pro
forma for 1995 and 1994)(d) (2.04) (3.25) (4.61)
BALANCE SHEET DATA
(AT END OF YEAR)
Cash and equivalents $ 16.5 $ 21.3 $ 12.8 $ 11.0 $ 10.7
Installment contracts
receivable, net 300.2 303.4 284.1 322.7 327.8
Total assets 893.3 936.5 951.0 1,016.7 1,012.4
Long-term debt, less
current maturities 376.4 368.0 289.7 305.7 269.8
Stockholders' equity (c) 24.2 31.7 34.8 50.6 146.8
OTHER FINANCIAL DATA
EBITDA(e) $ 75.9 $ 62.6 $ 42.8 $ 42.3 $ 38.5
Cash provided by (used in):
Operating activities (5.3) (9.9) 32.8 49.9 64.5
Investing activities (9.8) (42.1) (21.4) (36.1) (25.1)
Financing activities 10.4 60.4 (9.6) (13.6) (41.8)
</TABLE>
- ------------
(a) The selected financial data presented herein have been restated to reflect
a change in the Company's method of recognizing membership revenue. See
"Consolidated Financial Statements".
(b) In 1995, the Company recognized a net extraordinary gain on extinguishment
of debt consisting of (i) a gain (net of taxes) of $9.9 million ($.81 per
share) resulting from indebtedness owed Entertainment which was forgiven
as part of the December 1996 merger of Entertainment with and into Hilton
Hotels Corporation and (ii) a charge (net of taxes) of $4.2 million ($.35
per share) resulting from the refinancing of the Company's prior
securitization facility by a new securitization facility. In 1993, the
Company recognized an extraordinary loss on extinguishment of debt of $6.0
million (net of taxes) resulting from a refinancing of certain
indebtedness.
(c) In 1993, the Company changed its method of accounting for income taxes as
required by Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." As permitted by SFAS No. 109, the Company
elected to use the cumulative effect approach rather than to restate the
consolidated financial statements of any prior years to apply the
provisions of SFAS No. 109, which resulted in a charge of $69.0 million in
1993.
10
<PAGE>
(d) The net loss for the years ended December 31, 1995 and 1994 reflects a
federal income tax benefit arising from the Company's prior tax sharing
agreement with Entertainment of $7.1 million and $15.2 million,
respectively. Pro forma loss per common share (which is unaudited) was
calculated giving effect to (i) adjustments made to reflect the income tax
provision/benefit as if the Company had filed its own separate consolidated
income tax return for each year and (ii) the distribution of 11,845,161
shares of Common Stock to Entertainment stockholders as if such
distribution had taken place as of the beginning of each year.
(e) EBITDA is defined as operating income (loss) before depreciation and
amortization. The Company has presented EBITDA supplementally because
management believes this information is useful given the significance of
the Company's depreciation and amortization and because of its highly
leveraged financial position. These 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 the Company's overall
financial performance. Also, the EBITDA definition used herein may not be
comparable to similarly titled measures reported by other companies.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The primary strategic initiative of management involves improving the results of
its core business and, as capital is available, replicating the profitable new
fitness center model through expansion. In 1993, the Company began building more
efficient fitness centers by eliminating pools and other wet areas and racquet
sports (all of which are costly to build and maintain and which have
significantly lower utilization rates), and replacing much of that space with
expanded workout areas which receive a higher degree of member use. At
approximately the same time, the Company emphasized member payment plans using
EFT for financed initial membership fees by adjusting sales commissions and
member incentives. The Company's experience has indicated better collection
results for financed memberships sold under EFT plans compared to those sold
with standard coupon book payment plans. EFT-financed memberships represented
approximately 51% of the total financed initial membership fee contracts in the
receivables portfolio at December 31, 1996. Over the past several years,
membership types and pricing options were standardized, making the selling
process less complicated for both the customer and the sales personnel. In
August 1994, the Company implemented a program to increase monthly dues for
contracts sold after that date and in late 1995 began to curtail the practice of
discounting dues for multiple year renewal offers. The Company believes all of
these actions, certain of which reduced new membership unit sales and revenues,
will ultimately improve cash flows and operating income.
In addition, management made certain changes designed to integrate operations
and reduce operating costs including personnel costs, advertising expenses and
other operating expenses. As part of its continuing cost reduction program, the
Company began a long-term consolidation project in 1991 and computer conversion
in 1994 for its regional service centers ("RSCs"). The consolidation of five
RSCs into two remaining RSCs was completed in the third quarter of 1995, and the
elimination of cost redundancies continued throughout 1996. The primary phase of
the computer conversion was completed in the fourth quarter of 1995. With the
addition of new hardware and software, the Company has streamlined its
processing procedures and developed efficiencies that enable the RSCs to service
members better while reducing costs.
Management also believes significant opportunities exist to increase revenues
beyond those generated by the sale of memberships without significant capital
expenditures. To capitalize on the Company's strong brand identity, extensive
distribution infrastructure (approximately 320 facilities), significant member
base (approximately four million members) and frequency of visitation (in excess
of 100 million visits in 1996), management has begun to pursue the following
growth opportunities: (i) the sale of nutritional products to its members
through its fitness centers and telemarketing; (ii) the provision of
comprehensive outpatient rehabilitation services to both members and
non-members; and (iii) the sale of other goods and services, including apparel
and other items in retail shops located within its fitness centers and certain
financial services to its members.
RESULTS OF OPERATIONS
Accounting change
In connection with the Offering, the Staff of the Securities and Exchange
Commission (the "SEC Staff") advised the Company it now requires all registrants
operating fitness centers with membership plans that include initial membership
fees to follow a "deferral method" of accounting with respect to the recognition
of revenue from initial membership fees. The accompanying consolidated financial
statements have been restated from those originally reported because this
"deferral method" differed from the revenue recognition method historically used
by the Company. See "Consolidated Financial Statements".
12
<PAGE>
Comparison of the years ended December 31, 1996 and December 31, 1995
Net revenues for 1996 were $640.2 million compared to $653.6 million in 1995.
The decrease in revenues results, in part, because the average number of fitness
centers selling memberships decreased from 332 in 1995 to 322 in 1996,
reflecting the closure of 25 older, typically smaller and less profitable
facilities and the sale of a fitness center to Entertainment offset, in part, by
the opening of 13 new, larger facilities over the two-year period. Initial
membership fees originated decreased $29.7 million (7%) primarily due to a 12%
decline in the number of contracts sold offset, in part, by a 6% increase in the
average selling price as a result of the sale of more premium memberships. Dues
collected increased $5.1 million (3%) over 1995 despite the 3% reduction in the
average number of facilities operated, reflecting the Company's continuing
strategy of increasing renewal dues. Finance charges earned decreased $.5
million (1%) in 1996 compared to 1995. Fees and other revenues decreased $1.3
million (8%) primarily due to the reduction of personal trainer revenue in 1996
as a result of temporarily outsourcing the service and non-recurring income in
1995 pertaining to insurance recoveries.
Operating income for 1996 was $20.0 million compared to $5.2 million in 1995.
The increase of $14.8 million was due to a $28.3 million (4%) reduction in
operating costs and expenses offset, in part, by the aforementioned decrease in
revenues. The reduction in operating costs and expenses was achieved despite an
$8.3 million increase in the provision for doubtful receivables and a $5.1
million charge related to restricted stock awards issued in conjunction with the
Spin-off for which restrictions lapsed due to the increase in the market price
of the Common Stock. Excluding the provision for doubtful receivables and charge
related to restricted stock awards, operating costs and expenses decreased $41.6
million (7%) in 1996 compared to 1995 primarily due to reductions in fitness
center operating expenses and member processing and collection center expenses.
Fitness center operating expenses for 1996 decreased $30.1 million (8%) from
1995 primarily due to a reduction in payroll and related costs and other
variable costs as a result of the continuing cost reduction program and the 3%
reduction in the average number of fitness centers operated in 1996 compared to
1995. In addition, insurance expenses declined due to favorable experience in
controlling general liability risks, and commissions decreased as a result of
the decline in initial membership fees originated. Member processing and
collection center expenses decreased $8.0 million (16%) primarily due to the
aforementioned RSC consolidation and computer projects.
The provision for doubtful receivables for 1996 was $80.4 million compared to
$72.1 million in 1995, an increase of $8.3 million (12%). Management believes
the additional provision for doubtful receivables in 1996 adequately reserves
for collection experience that may ultimately be realized from sales programs in
general, and specifically from sales promotions allowing very low downpayments
offered from time to time between July 1995 and October 1996 that have shown
indications of underperforming historical collection experience.
Interest expense, net of capitalized interest, was $47.6 million in 1996
compared to $43.8 million in 1995, an increase of $3.8 million (9%) principally
reflecting a higher average level of debt offset, in part, by lower average
interest rates.
As a result of the Spin-off, the Company is no longer included in the
consolidated federal income tax return of Entertainment and is required to file
its own separate consolidated federal income tax return. Accordingly, the income
tax benefit for 1996 reflects a benefit equal to the federal provision allocated
to the extraordinary item (no additional benefit has been provided due to the
uncertainty of tax loss realization), net of a state income tax provision.
Pursuant to a tax sharing agreement with Entertainment, the effective rate of
the income tax benefit for 1995 was lower than the U.S. statutory tax rate (35%)
due principally to operating losses without a current year tax benefit and
non-deductible amortization of costs in excess of acquired assets.
13
<PAGE>
Comparison of the years ended December 31, 1995 and December 31, 1994
Net revenues for 1995 were $653.6 million compared to $682.0 million in 1994.
Dues collected increased by $4.2 million (2%) reflecting the Company's strategy
of increasing renewal dues. Initial membership fees originated decreased $20.0
million (5%) in 1995 primarily due to a 6% decline in the number of contracts
sold offset, in part, by a 4% increase in the average selling price, generally
reflecting the Company's strategy of realigning its sales mix to include more
financed contracts and somewhat fewer cash contracts, although some promotions
were offered with an emphasis on cash contracts. Management believes that
initial membership fees originated were also negatively impacted by the general
retail climate and increased competition. The average number of fitness centers
selling memberships decreased from 336 in 1994 to 332 in 1995, reflecting the
closure of 26 older, typically smaller facilities and the sale of a fitness
center to Entertainment offset, in part, by the opening of 13 new, larger
facilities over the two-year period.
Operating income for 1995 was $5.2 million compared to an operating loss of
$16.1 million in 1994. The improvement of $21.3 million was due to a $49.8
million (7%) reduction in operating costs and expenses offset, in part, by the
aforementioned decrease in revenues. Excluding the provision for doubtful
receivables, operating costs and expenses decreased $18.0 million (3%) in 1995
compared to 1994 primarily due to a reduction in fitness center operating
expenses. Fitness center operating expenses for 1995 decreased $10.6 million
(3%) from 1994 primarily due to a reduction in salaries and other variable costs
as a result of the continuing cost reduction program and, to a lesser extent,
reduced commissions as a result of the decline in initial membership fees
originated. In addition, member processing and collection center expenses
decreased $1.8 million (4%) primarily due to the aforementioned RSC
consolidation project.
The provision for doubtful receivables for 1995 was $72.1 million compared to
$103.9 million in 1994, a decrease of $31.8 million (31%). The reduction was
primarily due to additional reserves recorded in 1994 in conjunction with
management's reevaluation of collection risks associated with financed sales and
due to the improving collection experience of installment contracts receivable,
primarily the reduction in first payment defaults and an increase in EFT
contracts within the receivables portfolio.
Interest expense, net of capitalized interest, was $43.8 million in 1995
compared to $38.6 million in 1994, an increase of $5.2 million (13%) principally
reflecting a higher average level of debt offset, in part, by lower average
interest rates.
Pursuant to a tax sharing agreement with Entertainment, the effective rates of
the income tax benefit for 1995 and 1994 were lower than the U.S. statutory tax
rate (35%) due principally to operating losses without a current year tax
benefit and non-deductible amortization of costs in excess of acquired assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company has no scheduled principal payments under its $200 million principal
amount of 13% Senior Subordinated Notes due 2003 (the "13% Notes") until January
2003. Through July 1999, the principal amount of the certificates under the
Company's securitization facility remains fixed at $160 million. In addition,
the Company's revolving credit agreement, which provides for borrowings of up to
$20 million, expires in June 1998. Accordingly, debt service requirements of the
Company for the next twelve months are principally for interest and are expected
to be approximately $51 million.
The Company's recent losses and the terms of its revolving credit agreement have
limited the Company's ability to borrow significant amounts of additional funds.
Consequently, the Company has been dependent on availability under its revolving
credit agreement ($4.4 million at March 31, 1997) and its operations to provide
for cash needs. The Company has managed liquidity requirements in recent years
by utilizing membership plan discounting techniques designed to increase its
cash sales and down- payments and to accelerate collections and dues payments to
increase available cash reserves and, to a lesser extent, sales of non-strategic
assets and sale/leaseback arrangements. Management believes use of these
discounting techniques has had a negative impact on both current and long term
results and, if needed in the future,
14
<PAGE>
such discounting and acceleration techniques may be increasingly costly and less
effective.
The Company intends to expand and upgrade its facilities in order to increase
its membership base and more effectively capitalize on its streamlined marketing
and administrative functions. Using cash generated by operations and through
leasing arrangements, management plans to make capital expenditures of
approximately $10 million to $12 million over the next twelve months to maintain
and make minor upgrades to the Company's existing facilities, which include
exercise equipment upgrades, HVAC and other operating equipment upgrades and
replacements, and locker room and workout area refurbishments, among others. For
the last several years, the Company has spent $6 million to $15 million
annually, as funds were available, to open new or replacement facilities. The
Company expects to continue those expenditures as funds are available.
The Company filed a Registration Statement with the Securities and Exchange
Commission to offer additional shares of its common stock which has not yet been
declared effective. The Company intends to use (i) approximately $20 million to
$30 million of the proceeds of the Offering for capital expenditures to develop
15 to 25 new facilities over the next three years and more extensively refurbish
and make major upgrades to approximately 25% of its facilities over the next two
years, (ii) $7.5 million to repay a loan to an affiliate of an underwriter of
the Offering, (iii) as much as $3 million to support the introduction of new
initiatives and (iv) the balance, if any, for general corporate and working
capital purposes. The Company expects that completion of the Offering will
alleviate the need to use the discounting techniques described above. Pending
such uses, the Company may temporarily invest available funds from the Offering
in short-term securities and/or reduce indebtedness under its revolving credit
agreement.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this Form 10-K/A including, without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve known and unknown risks, uncertainties,
and other factors which may cause the actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. These factors include, among others, the following: general economic
and business conditions; competition; success of operating initiatives,
advertising and promotional efforts; existence of adverse publicity or
litigation; acceptance of new product offerings; changes in business strategy or
plans; quality of management; availability, terms, and development of capital;
business abilities and judgment of personnel; changes in, or the failure to
comply with, government regulations; regional weather conditions; and other
factors mentioned in this Form 10-K/A. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
CASH EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
("CASH EBITDA")
The indenture governing the 13% Notes requires the disclosure of information
with respect to Cash EBITDA (as calculated using accounting principles in effect
in January 1993, when the 13% Notes were issued) in this Form 10-K/A. Cash
EBITDA 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 it be considered as an indicator of the
Company's overall financial performance.
15
<PAGE>
<TABLE>
Cash EBITDA is calculated as follows (in millions):
<CAPTION>
Years ended December 31,
-------------------------
1996 1995
-------- --------
<S> <C> <C>
Loss before income taxes and
extraordinary item $ (27.6) $ (38.6)
Adjustments to reconcile to Cash EBITDA:
Interest expense (excluding $14.8
million and $7.3 million of interest
on the securitization facilities) 32.8 36.5
Depreciation and amortization 55.9 57.4
Provision for doubtful receivables 80.4 72.1
Increase in installment contracts
receivable (75.5) (91.4)
Decrease in deferred revenues (29.8) (16.8)
Decrease in deferred membership
origination costs 4.1 .4
Other non-cash items .8 2.5
Pro forma decrease in installment
contracts receivable (related to
securitization facilities) 10.0 150.0
-------- --------
Cash EBITDA $ 51.1 $ 172.1
======== ========
</TABLE>
Cash EBITDA was $51.1 million for 1996 compared to $172.1 million for 1995, a
decrease of $121.0 million attributed to the $147.5 million net effect of the
securitization facilities offset by increased collections (due to various
operating improvements) and reduced cash expenditures. Accounting principles in
January 1993 treated this type of financing as a sale, and therefore a reduction
in receivables, rather than as indebtedness with related interest expense.
Excluding the $10.0 million and $150.0 million reductions in receivables and
adding back the related interest expense in 1996 and 1995, Cash EBITDA increased
from $29.4 million in 1995 to $55.9 million in 1996.
16
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
Reference
Report of independent auditors 18
Consolidated balance sheet 19
Consolidated statement of operations 21
Consolidated statement of stockholders' equity 22
Consolidated statement of cash flows 23
Notes to consolidated financial statements 25
Supplementary data:
Quarterly consolidated financial information (unaudited) 41
17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Bally Total Fitness Holding Corporation
We have audited the accompanying consolidated balance sheet of Bally Total
Fitness Holding Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)2.
These financial statements and the schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Bally
Total Fitness Holding Corporation at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The consolidated financial statements referred to above have been restated as
discussed in the "Summary of significant accounting policies -- Restatement and
Membership revenue recognition" notes to the consolidated financial statements.
ERNST & YOUNG LLP
Chicago, Illinois
February 25, 1997, except for the "Summary of signifi-
cant accounting policies -- Restatement, Member-
ship revenue recognition and Impact of recently
issued accounting standards" and "Income taxes" notes,
as to which the date is July 14, 1997
18
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
(As restated)
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 16,534 $ 21,263
Installment contracts receivable, net 153,235 155,504
Deferred income taxes 6,953
Other current assets 24,075 20,216
-------- --------
Total current assets 193,844 203,936
Long-term installment contracts receivable, net 146,972 147,856
Property and equipment, at cost:
Land 22,550 22,550
Buildings 108,361 106,945
Leasehold improvements 400,340 393,418
Equipment and furnishings 99,073 119,253
-------- --------
630,324 642,166
Accumulated depreciation and amortization 304,865 293,698
-------- --------
Net property and equipment 325,459 348,468
Intangible assets, less accumulated
amortization of $49,619 and $45,117 105,725 110,227
Deferred income taxes 13,656
Deferred membership origination costs 82,140 86,253
Other assets 25,506 39,771
-------- --------
$893,302 $936,511
======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
19
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED BALANCE SHEET-(CONTINUED)
(In thousands, except share data)
(As restated)
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 41,565 $ 43,740
Income taxes payable 2,258 2,241
Deferred income taxes 15,145
Accrued liabilities 55,063 64,977
Current maturities of long-term debt 8,401 1,481
Deferred revenues 265,465 285,153
-------- --------
Total current liabilities 387,897 397,592
Long-term debt, less current maturities 376,397 368,032
Tax obligation to Bally Entertainment Corporation 15,200
Deferred income taxes 8,442
Other liabilities 6,824 7,596
Deferred revenues 98,032 107,960
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; 12,495,161 and 11,845,161 shares
issued and outstanding 125 118
Contributed capital 303,811 290,062
Accumulated deficit (277,733) (258,491)
Unearned compensation (restricted stock) (2,051)
-------- --------
Total stockholders' equity 24,152 31,689
-------- --------
$893,302 $936,511
======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
20
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share data)
(As restated)
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues:
Membership revenues--
Initial membership fees on
paid-in-full memberships originated $ 85,624 $ 95,695 $ 102,961
Initial membership fees on financed
memberships originated 290,378 309,974 322,752
Dues collected 182,909 177,783 173,549
Change in deferred revenues 29,791 16,813 26,975
---------- ---------- ----------
588,702 600,265 626,237
Finance charges earned 36,405 36,889 34,877
Fees and other 15,080 16,399 20,929
---------- ---------- ----------
640,187 653,553 682,043
Operating costs and expenses:
Fitness center operations 366,466 396,564 407,119
Member processing and collection centers 42,257 50,255 52,080
Advertising 47,428 50,037 47,578
General and administrative 23,586 21,603 21,925
Provision for doubtful receivables 80,350 72,145 103,930
Depreciation and amortization 55,940 57,359 58,856
Change in deferred membership
origination costs 4,113 428 6,692
---------- ---------- ----------
620,140 648,391 698,180
---------- ---------- ----------
Operating income (loss) 20,047 5,162 (16,137)
Interest expense 47,644 43,750 38,556
---------- ---------- ----------
Loss before income taxes and
extraordinary item (27,597) (38,588) (54,693)
Income tax benefit (2,700) (7,188) (15,213)
---------- ---------- ----------
Loss before extraordinary item (24,897) (31,400) (39,480)
Extraordinary gain on
extinguishment of debt 5,655
---------- ---------- ----------
Net loss $ (19,242) $ (31,400) $ (39,480)
========== ========== ==========
Pro forma net loss reflecting income
taxes on a separate return basis $ (38,469) $ (54,640)
========== ==========
Per common share (pro forma for 1995
and 1994):
Loss before extraordinary item $ (2.04) $ (3.25) $ (4.61)
Extraordinary gain on
extinguishment of debt .46
---------- ---------- ----------
Net loss $ (1.58) $ (3.25) $ (4.61)
========== ========== ==========
Average common shares outstanding
(pro forma for 1995 and 1994) 12,174,601 11,845,161 11,845,161
========== ========== ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
21
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(As restated)
<CAPTION>
Common stock Retained Unearned
------------------- earnings compensation Total
Number Par Contributed (accumulated (restricted stockholders'
of shares value capital deficit) stock) equity
---------- ------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993,
as originally reported 19,000,000 $ 190 $ 238,007 $ 23,118 $ $ 261,315
Cumulative effect of change in
accounting for membership revenue (210,729) (210,729)
---------- ------ ----------- ----------- ------------ ------------
Balance at December 31, 1993, as
restated 19,000,000 190 238,007 (187,611) 50,586
Net loss (39,480) (39,480)
Settlement of
pre-acquisition contingency (7,669) (7,669)
Forgiveness of income tax
obligation by Bally
Entertainment Corporation 31,400 31,400
---------- ------ ----------- ----------- ------------ ------------
Balance at December 31, 1994 19,000,000 190 261,738 (227,091) 34,837
Net loss (31,400) (31,400)
Effects of spin-off from Bally
Entertainment Corporation:
Forgiveness of income tax
obligation by Bally
Entertainment Corporation 44,507 44,507
Increase in income tax
valuation allowance due to
adjustments to the income
tax basis of certain assets (20,147) (20,147)
Excess of sales price over
historical basis of assets sold
to Bally Entertainment Corporation 3,892 3,892
Reduction in number of shares
issued and outstanding (7,154,839) (72) 72 -
---------- ------ ----------- ----------- ------------ ------------
Balance at December 31, 1995 11,845,161 118 290,062 (258,491) 31,689
Net loss (19,242) (19,242)
Common stock issued under long-term
incentive plan 650,000 7 4,389 (4,396) -
Capital contributions by Bally
Entertainment Corporation 9,360 9,360
Amortization of unearned compensation 2,345 2,345
---------- ------ ----------- ----------- ------------ ------------
Balance at December 31, 1996 12,495,161 $ 125 $ 303,811 $ (277,733) $ (2,051) $ 24,152
========== ====== =========== =========== ============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
22
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(As restated)
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
OPERATING:
Loss before extraordinary item $(24,897) $(31,400) $(39,480)
Adjustments to reconcile to cash
provided (used)-
Depreciation and amortization, including
amortization included in interest expense 59,124 60,701 60,760
Provision for doubtful receivables 80,350 72,145 103,930
Change in operating assets and liabilities (119,764) (112,922) (94,150)
Other, net (114) 1,622 1,774
-------- -------- --------
Cash provided by (used in) operating
activities (5,301) (9,854) 32,834
INVESTING:
Purchases and construction of property and
equipment (20,612) (22,469) (21,357)
Reserve fund deposit refunded (paid) pursuant
to securitization facility 10,000 (20,000)
Other, net 833 353 (19)
-------- -------- --------
Cash used in investing activities (9,779) (42,116) (21,376)
FINANCING:
Debt transactions -
Proceeds from securitization facility 160,000 150,000
Proceeds from other long-term borrowings 2,318
Repayment of securitization facility (153,613)
Net repayments under revolving credit
agreement (77,000) (3,910)
Repayments of other long-term debt (2,299) (5,917) (5,149)
Debt issuance costs (2,815) (6,654) (575)
-------- -------- --------
Cash provided by (used in)
debt transactions 3,591 60,429 (9,634)
Equity transaction -
Capital contribution by Bally
Entertainment Corporation 6,760
-------- -------- --------
Cash provided by (used in)
financing activities 10,351 60,429 (9,634)
-------- -------- --------
Increase (decrease) in cash and equivalents (4,729) 8,459 1,824
Cash and equivalents, beginning of year 21,263 12,804 10,980
-------- -------- --------
Cash and equivalents, end of year $ 16,534 $ 21,263 $ 12,804
======== ======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
23
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS-(CONTINUED)
(In thousands)
(As restated)
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOWS INFORMATION:
Changes in operating assets and liabilities,
net of effects from acquisitions or
sales, were as follows-
Increase in installment contracts
receivable $ (75,491) $(91,422) $(65,890)
(Increase) decrease in other current and
other assets (4,063) 1,589 (3,081)
Decrease in deferred membership
origination costs 4,113 428 6,692
Decrease in accounts payable (475) (498) (85)
Decrease in income taxes payable (2,866) (503) (6,257)
Increase (decrease) in accrued and other
liabilities (11,191) (5,703) 1,446
Decrease in deferred revenues (29,791) (16,813) (26,975)
--------- -------- --------
$(119,764) $112,922) $(94,150)
========= ======== ========
Cash payments for interest and income
taxes were as follows-
Interest paid $ 44,604 $ 42,221 $ 36,499
Interest capitalized (236) (278) (253)
Income taxes paid (refunded), net 166 (6,685) (8,956)
Investing and financing activities exclude
the following non-cash activities-
Forgiveness of income tax obligations by
Bally Entertainment Corporation/Hilton
Hotels Corporation $ 15,200 $ 44,507 $ 31,400
Acquisition of property and equipment
through capital leases 5,266 2,445
Common stock issued under long-term
incentive plan 4,396
Capital contribution by Bally
Entertainment Corporation 2,600
Increase in income tax valuation allowance
due to adjustments to the income tax
basis of certain assets upon spin-off
from Bally Entertainment Corporation 20,147
Excess of sales price over historical basis
of assets sold to Bally Entertainment
Corporation 3,892
Reduction of intangible assets resulting
from settlement of pre-acquisition
contingency 10,331
<FN>
See accompanying notes.
</FN>
</TABLE>
24
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of Bally
Total Fitness Holding Corporation (the "Company") and the subsidiaries which it
controls. The Company, through its subsidiaries, is a nationwide commercial
operator of fitness centers with approximately 320 facilities concentrated in 27
states and Canada. The Company operates in one industry segment, and all
significant revenues arise from the commercial operation of fitness centers,
primarily in major metropolitan markets in the United States. Unless otherwise
specified in the text, references to the Company include the Company and its
subsidiaries.
The Company was a wholly owned subsidiary of Bally Entertainment Corporation
("Entertainment") until the consummation of Entertainment's spin-off of the
Company. On November 6, 1995, the Board of Directors of Entertainment declared a
distribution in the form of a dividend (the "Spin-off") to holders of record of
its common stock as of the close of business on November 15, 1995 (the "Record
Date") on the basis of one share of common stock, par value $.01 per share (the
"Common Stock") of the Company, along with an associated stock purchase right (a
"Right") issued pursuant to a stockholder rights plan (the "Stockholders Rights
Plan"), for every four shares of Entertainment common stock held on the Record
Date. On January 9, 1996 (the "Distribution Date"), 11,845,161 shares of Common
Stock were distributed. For financial accounting purposes, the Company has
reflected the effect of the Spin-off as of December 31, 1995.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which require the
Company's management to make estimates and assumptions that affect the amounts
reported therein. Actual results could vary from such estimates.
RESTATEMENT
The Staff of the Securities and Exchange Commission (the "SEC Staff") has
advised the Company, in connection with a Registration Statement filed by the
Company, it will now require all registrants operating fitness centers with
membership plans that include initial membership fees to follow a "deferral
method" of accounting with respect to the recognition of such initial membership
fees. The Company's fitness centers primarily offer a dues membership, which
permits members, upon paying initial membership fees, which may be financed, to
maintain their membership on a month-to-month basis as long as monthly dues
payments are made. Since 1985, the Company has recognized the initial membership
fee portion of the membership as revenue at the time the membership was sold
(when contractually enforceable) and deferred the dues portion of such
membership (when the dues were waived or prepaid) under a method that
approximated the "selling and service" method. In connection with the
Registration Statement, the SEC Staff informed the Company it no longer agreed
with this methodology and the Company should change its method of recognizing
initial membership fees to a "deferral method", which recognizes the initial
membership fee over the weighted average expected life of the memberships sold.
Following a series of extensive discussions with the SEC Staff, the Company has
agreed to restate its consolidated financial statements for all years presented
to this new method. See "-- Membership revenue recognition". Accordingly, the
accompanying consolidated financial statements have been restated from those
originally reported to reflect the resolution of these discussions between the
Company and the SEC Staff regarding revenue recognition methods. The deferral of
historical revenues resulting from the change in the method of recognizing
membership revenue had no impact on the Company's liquidity or cash flows; and
summarized financial information illustrating
25
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
the effect of the restatement on the Company's consolidated financial statements
is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- --------------------
As As As
originally As originally As originally As
reported restated reported restated reported restated
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Financial position --
Deferred membership
origination costs $ - $ 82,140 $ - $ 86,253
Current deferred
revenues 55,927 265,465 61,881 285,153
Long-term deferred
revenues 26,440 98,032 29,686 107,960
Stockholders' equity 216,507 24,152 240,347 31,689
Results of operations --
Net revenues $ 625,640 $640,187 $ 661,740 $653,553 $ 661,505 $682,043
Operating income (loss) 3,744 20,047 7,591 5,162 (37,248) (16,137)
Loss before extraordinary
item (41,200) (24,897) (25,160) (31,400) (50,791) (39,480)
Net loss (35,545) (19,242) (25,160) (31,400) (50,791) (39,480)
Net loss per common share
(pro forma for 1995 and
1994) (2.92) (1.58) (3.08) (3.25) (6.44) (4.61)
</TABLE>
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents. The carrying amount of
cash equivalents approximates fair value due to the short maturity of those
instruments.
PROPERTY AND EQUIPMENT
Depreciation of buildings, equipment and furnishings is provided on the
straight-line method over the estimated economic lives of the related assets and
amortization of leasehold improvements is provided on the straight-line method
over the lesser of the estimated economic lives of the improvements or the lease
periods. Depreciation and amortization of property and equipment was $48,444,
$51,999 and $53,476 for 1996, 1995 and 1994, respectively.
DEFERRED FINANCE COSTS
Deferred finance costs are amortized over the terms of the related debt using
the bonds outstanding method. Included in "Other assets" at December 31, 1996
and 1995 were deferred finance costs of $8,252 and $10,971, respectively, net of
accumulated amortization of $4,430 and $4,034, respectively.
INTANGIBLE ASSETS
Intangible assets consist principally of cost in excess of net assets of
acquired businesses (goodwill), which is being amortized on the straight-line
method over periods ranging up to forty years from dates of acquisition, and
amounts assigned to acquired operating lease rights, which are being amortized
on the straight-line method over the remaining lease periods.
26
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
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 was less than the carrying
value of the Company's long-lived assets and identifiable intangibles, an
impairment loss would be recognized equal to the amount by which the carrying
value of the Company's long-lived assets and identifiable intangibles exceeded
their fair value. Based on present operations and strategic plans, the Company
believes that no impairment of goodwill exists at December 31, 1996. However, if
future operations do not perform as expected, or if the Company's strategic
plans for its business were to change, a reduction in the carrying value of
these assets may be required.
MEMBERSHIP REVENUE RECOGNITION
The Company's fitness centers primarily offer a dues membership, which permits
members, upon paying initial membership fees, which may be financed, to maintain
their membership on a month-to-month basis as long as monthly dues payments are
made. Initial membership fees may be paid-in-full when members join or may be
financed via installment contracts over periods ranging up to 36 months.
Revenues from initial membership fees are deferred and recognized straight-line
over the weighted average expected life of the memberships, which for
paid-in-full memberships and financed memberships sold after December 31, 1993
has been calculated to be 36 months and 22 months, respectively (previously 34
months and 20 months, respectively). Costs directly related to the origination
of memberships (substantially all of which are sales commissions paid, which are
included in "Fitness center operations") are also deferred and are amortized
using the same methodology as for initial membership fees described above. 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, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------- ------------------------------
Current Long-term Total Current Long-term Total
-------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Paid-in-full initial
membership fees
deferred $ 75,614 $55,278 $130,892 $ 81,563 $ 58,400 $139,963
Financed initial
membership fees
deferred 148,251 31,981 180,232 162,918 35,967 198,885
Prepaid dues 41,600 10,773 52,373 40,672 13,593 54,265
-------- ------- -------- -------- -------- --------
$265,465 $98,032 $363,497 $285,153 $107,960 $393,113
======== ======= ======== ======== ======== ========
</TABLE>
27
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
Components of the change in deferred revenues for the years ended December 31,
1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Paid-in-full initial memberships fees --
Originating $ (85,624) $ (95,695) $(102,961)
Recognized 94,870 116,608 138,654
--------- --------- ---------
Decrease in deferral 9,246 20,913 35,693
Financed initial membership fees --
Originating (290,378) (309,974) (322,752)
Less provision for doubtful receivables 80,350 72,145 103,930
--------- --------- ---------
Originating, net (210,028) (237,829) (218,822)
Recognized 228,681 220,885 215,270
--------- --------- ---------
Decrease (increase) in deferral 18,653 (16,944) (3,552)
Decrease (increase) in prepaid dues 1,892 12,844 (5,166)
--------- --------- ---------
Change in deferred revenues $ 29,791 $ 16,813 $ 26,975
========= ========= =========
</TABLE>
Components of the change in deferred membership origination costs for the years
ended December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Incurred (substantially all of which are
sales commissions paid, which are included
in "Fitness center operations") $ (77,257) $ (82,720) $ (85,704)
Amortized 81,370 83,148 92,396
--------- --------- ---------
Change in deferred membership origination costs $ 4,113 $ 428 $ 6,692
========= ========= =========
</TABLE>
INCOME TAXES
For tax periods after January 9, 1996, the Company is required to file its own
separate consolidated federal income tax return. For tax periods prior to and
including January 9, 1996, taxable income or loss of the Company was included in
the consolidated federal income tax return of Entertainment. Pursuant to a tax
sharing agreement with Entertainment, income taxes were allocated to the Company
based on amounts the Company would pay or receive if it filed a separate
consolidated federal income tax return, except that the Company received from
Entertainment an amount equal to the tax benefit of the Company's net operating
losses and tax credits, if any, that could be utilized in Entertainment's
consolidated federal income tax return, whether or not such losses or credits
could be utilized by the Company on a separate return basis. As a result of the
Spin-off, the Company and Entertainment entered into the Tax Allocation and
28
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
Indemnity Agreement that defines the parties' rights and obligations with
respect to deficiencies and refunds of federal income taxes for tax periods
through January 9, 1996. In connection therewith, Entertainment assumed
substantially all responsibility for any federal income tax adjustments related
to the Company for tax periods through January 9, 1996. The Tax Allocation and
Indemnity Agreement was amended in 1996 to include a portion of the Company's
losses in Entertainment's consolidated federal income tax return. As a result,
capital contributions totaling $9,360 were received by the Company ($6,760 in
cash and $2,600 as an offset to certain indebtedness) representing a portion of
the benefit that Entertainment receives from the utilization of the Company's
loss carrybacks.
LOSS PER COMMON SHARE
Loss per common share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the year, which totaled
12,174,601 shares for 1996. Certain restricted stock was issued subject to
forfeiture unless certain conditions are met. These contingent shares are
considered common stock equivalents and are excluded from the loss per share
computation until the conditions are met because their effect would be
anti-dilutive.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", which
provides new accounting and reporting standards for sales, securitizations, and
servicing of receivables and other financial assets, secured borrowing and
collateral transactions, and extinguishments of liabilities occurring after
December 31, 1996. SFAS No. 125 addresses whether a transfer of financial assets
constitutes a sale and, if so, the determination of any resulting gain or loss.
SFAS No. 125 is based on a "financial-components approach" that focuses on
control. Under this approach, following a transfer of financial assets
(including portions of financial assets), an entity recognizes the assets it
controls and liabilities it has incurred, and derecognizes financial assets for
which control has been surrendered and financial liabilities that have been
extinguished. The Company has determined that SFAS No. 125 does not have any
impact on the accounting for its securitization facility.
EXTRAORDINARY ITEM
The extraordinary gain on extinguishment of debt for 1996 consists of (i) a gain
of $9,880 ($.81 per share), net of income taxes of $5,320, resulting from a
$15,200 tax obligation to Entertainment which was forgiven as part of the
December 1996 merger (the "Merger") of Entertainment with and into Hilton Hotels
Corporation ("Hilton") and (ii) a charge of $4,225 ($.35 per share), net of
income taxes of $2,270, resulting from the refinancing of the Company's
securitization facility.
29
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
<TABLE>
INSTALLMENT CONTRACTS RECEIVABLE
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Current:
Installment contracts receivable $226,173 $244,522
Less --
Unearned finance charges 24,467 27,128
Allowance for doubtful receivables and cancellations 48,471 61,890
-------- --------
$153,235 $155,504
======== ========
Long-term:
Installment contracts receivable $195,978 $211,549
Less --
Unearned finance charges 11,382 13,055
Allowance for doubtful receivables and cancellations 37,624 50,638
-------- --------
$146,972 $147,856
======== ========
</TABLE>
The carrying amount of installment contracts receivable at December 31, 1996 and
1995 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.
<TABLE>
ACCRUED LIABILITIES
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Payroll and benefit-related liabilities $ 16,384 $ 18,263
Interest 11,938 12,041
Taxes other than income taxes 3,853 7,389
Other 22,888 27,284
-------- --------
$ 55,063 $ 64,977
======== ========
</TABLE>
<TABLE>
LONG-TERM DEBT
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Nonsubordinated:
Securitization facility $160,000 $150,000
Revolving credit agreement - -
Capital lease obligations 6,686 2,176
Other secured and unsecured obligations 18,112 17,337
Subordinated:
13% Senior Subordinated Notes due 2003 200,000 200,000
-------- --------
Total long-term debt 384,798 369,513
Current maturities of long-term debt (8,401) (1,481)
-------- --------
Long-term debt, less current maturities $376,397 $368,032
======== ========
</TABLE>
In December 1996, the Company refinanced its $150,000 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")
30
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
were issued as undivided interests in the H&T Master Trust (the "Trust"). The
Floating Certificates bear interest (8.175% at December 31, 1996) at 2.57% above
the London Interbank Offer Rate ("LIBOR"), with the interest rate on the
Floating Certificates capped at 9.43% pursuant to an interest rate cap
agreement. The Trust was created for the issuance of asset-backed securities and
was formed pursuant to a pooling and servicing agreement. The Trust includes a
portfolio of substantially all of the Company's installment contracts receivable
from membership sales and the proceeds thereof. The amount by which installment
contracts receivable in the Trust exceed the $160,000 principal amount of
certificates issued by the Trust is generally retained by the Company. The
Company services the installment contracts receivable held by the Trust and
earns a servicing fee which approximates the servicing costs incurred by the
Company. Through July 1999, the principal amount of the certificates remains
fixed and collections of installment contracts receivable flow through to the
Company in exchange for the securitization of additional installment contracts
receivable, except that collections are first used to fund interest
requirements. The amortization period commences in August 1999, after which
collections of installment contracts receivable will be used first to fund
interest requirements and then to repay principal on the certificates. The
amortization period ends upon the earlier to occur of the certificates being
repaid in full or August 2002.
The Company's revolving credit agreement was amended in February 1997 to provide
for a $20,000 line of credit, which is reduced by the amount of any outstanding
letters of credit in excess of $10,000 (which excess may not exceed $10,000).
The maximum amount available under this revolving credit agreement, including
letters of credit, is $30,000. The rate of interest on borrowings is at the
Company's option, based upon either the agent bank's prime rate plus 2% or a
Eurodollar rate plus 3%. A fee of 2.25% on outstanding letters of credit is
payable quarterly. A commitment fee of 1/2 of 1% is payable quarterly on the
unused portion of the credit facility. At December 31, 1996, the entire line of
credit was unused and outstanding letters of credit totalled $12,687. The
revolving credit agreement is secured by substantially all real and personal
property (excluding installment contracts receivable) of the Company.
The Company leases certain fitness equipment under capital leases expiring in
periods ranging from three to five years. Included in "Property and equipment"
at December 31, 1996 and 1995 were assets recorded under capital leases of
$11,981 and $6,018, respectively, net of accumulated amortization of $3,318 and
$1,611, respectively.
The 13% Senior Subordinated Notes due 2003 (the "13% Notes") are not subject to
any sinking fund requirement, but may be redeemed beginning in January 1998, in
whole or in part, with premiums ranging from 6.5% in 1998 to zero in 2000 and
thereafter. The payment of the 13% Notes is subordinated to the prior payment in
full of all senior indebtedness of the Company, as defined (approximately
$198,000 at December 31, 1996).
The Company is restricted from paying cash dividends by the terms of its 13%
Notes and its revolving credit agreement. The covenants also limit the amounts
available for capital expenditures, restrict additional borrowings, and require
maintenance of certain financial ratios.
31
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
Maturities of long-term debt and future minimum payments under capital leases
together with the present value of future minimum rentals as of December 31,
1996 are as follows:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL
DEBT LEASES TOTAL
--------- ------- --------
<S> <C> <C> <C>
1997 $ 6,725 $ 2,398 $ 9,123
1998 6,711 2,420 9,131
1999 66,187 1,956 68,143
2000 95,414 1,341 96,755
2001 743 267 1,010
Thereafter 202,332 202,332
-------- ------- --------
378,112 8,382 386,494
Less amount representing interest 1,696 1,696
-------- ------- --------
$378,112 $ 6,686 $384,798
======== ======= ========
</TABLE>
The fair value of the Company's long-term debt at December 31, 1996 and 1995
approximates its carrying amount, except for the 13% Notes which had a fair
market value (based on quoted market prices) of $190,875 and $161,500 at
December 31, 1996 and 1995, respectively. The fair values are not necessarily
indicative of the amounts the Company could acquire the debt for in a purchase
or redemption.
INCOME TAXES
The income tax provision (benefit) applicable to loss before income taxes and
extraordinary item consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Federal (all current) $ (3,050) $ (7,069) $(15,160)
State and other (all current) 350 (119) (53)
-------- -------- --------
$ (2,700) $ (7,188) $(15,213)
======== ======== ========
</TABLE>
32
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial accounting
and income tax purposes. Significant components of the Company's deferred tax
assets and liabilities as of December 31, 1996 and 1995, along with their
classification, are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Installment contract revenues $ 27,466 $ $ 73,503 $
Amounts not yet deducted for
tax purposes:
Bad debts 33,509 48,630
Other 14,275 13,253
Amounts not yet deducted for
book purposes:
Deferred membership
origination costs 32,412 38,064
Depreciation and capitalized
costs 2,308 5,791
Tax loss carryforwards 118,313 49,817
Other, net 1,460 2,012
-------- -------- -------- --------
193,563 $ 36,180 185,203 $ 45,867
======== ========
Valuation allowance (158,872) (140,825)
-------- ---------
$ 34,691 $ 44,378
======== ========
Current $ 7,420 $ 22,565 $ 33,964 $ 27,011
Long-term 27,271 13,615 10,414 18,856
-------- -------- -------- --------
$ 34,691 $ 36,180 $ 44,378 $ 45,867
======== ======== ======== ========
</TABLE>
Upon consummation of the Spin-off, a portion of Entertainment's federal tax loss
and Alternative Minimum Tax ("AMT") credit carryforwards were allocated to the
Company pursuant to U.S. Treasury Regulations. The amount of carryforwards
allocated to the Company may ultimately be different as a result of Internal
Revenue Service (the "IRS") adjustments. At December 31, 1996, estimated federal
AMT credit and tax loss carryforwards of $2,987 and $243,508, respectively, have
been recorded by the Company. The AMT credits can be carried forward
indefinitely, while the tax loss carryforwards expire through 2011. In addition,
the Company has substantial state tax loss carryforwards which begin to expire
in 1997 and fully expire through 2011. 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 can not be assured. Accordingly, a
valuation allowance has been recorded to reduce deferred tax assets to a level
which, more likely than not, will be realized.
33
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
A reconciliation of the income tax benefit with amounts determined by applying
the U.S. statutory tax rate to loss before income taxes and extraordinary item
is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Benefit at U.S. statutory tax rate (35%) $(9,659) $(13,506) $(19,143)
Add (deduct):
Operating losses without a current year
tax benefit 5,509 4,904 3,309
State income taxes, net of related federal
income tax effect and valuation allowance 770 96 (695)
Amortization of cost in excess of acquired
assets 1,411 1,391 1,393
Prior years' taxes (5) (336) (327)
Other, net (726) 263 250
-------- -------- --------
Income tax benefit $ (2,700) $ (7,188) $(15,213)
======== ======== ========
</TABLE>
In May 1994, the Company, Entertainment and the IRS reached a settlement with
respect to certain income tax matters. As the Company adequately provided
deferred and current taxes in connection therewith, the settlement did not have
an adverse effect on the Company's consolidated financial position or results of
operations. For financial accounting purposes, this settlement resulted in a
reversal of previously recorded pre-acquisition contingencies totaling $10,331,
which was reflected as a reduction of intangible assets. Since Entertainment had
agreed to indemnify the Company for a substantial portion of such contingencies,
the settlement resulted in a $7,669 reduction of contributed capital.
STOCKHOLDERS' EQUITY
The Series A Junior Participating Preferred Stock, $.10 par value (the "Series A
Junior Stock"), if issued, will have a minimum preferential quarterly dividend
payment equal to the greater of (i) $1.00 per share and (ii) an amount equal to
100 times the aggregate dividends declared per share of Common Stock during the
related quarter. In the event of liquidation, the holders of the shares of
Series A Junior Stock will be entitled to a preferential liquidation payment
equal to the greater of (a) $100 per share and (b) an amount equal to 100 times
the liquidation payment made per share of Common Stock. Each share of Series A
Junior Stock will have 100 votes, voting together with the shares of Common
Stock. Finally, in the event of any merger, consolidation or other transaction
in which shares of Common Stock are exchanged, each share of Series A Junior
Stock will be entitled to receive 100 times the amount received per share of
Common Stock. These rights are protected by customary antidilution provisions.
The Board of Directors of the Company adopted the Stockholder Rights Plan and
issued and distributed a Right for each share of Common Stock distributed to
Entertainment stockholders pursuant to the Spin-off. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Junior Stock at a price of $40.00 per one one-hundredth of a share of
Series A Junior Stock, subject to adjustment (the "Purchase Price").
34
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
The Rights are not exercisable or transferable apart from the Common Stock until
the occurrence of one of the following: (i) ten days (or such later date as may
be determined by action of the Board of Directors of the Company prior to such
time as any person or group of affiliated persons becomes an Acquiring Person)
after the date of public announcement that a person (other than an Exempt
Person, as defined below) or group of affiliated or associated persons has
acquired, or obtained the right to acquire, beneficial ownership of 10% or more
of the Common Stock (an "Acquiring Person"), or (ii) ten days after the date of
the commencement of a tender offer or exchange offer by a person (other than an
Exempt Person) or group of affiliated or associated persons, the consummation of
which would result in beneficial ownership by such person or group of 20% or
more of the outstanding shares of Common Stock. "Exempt Persons" include the
Company, any subsidiary of the Company, employee benefit plans of the Company,
directors of the Company on January 5, 1996 who are also officers of the
Company, Entertainment and any person holding the warrant to purchase shares of
Common Stock initially issued to Entertainment.
In the event that, at any time after a person or group of affiliated or
associated persons has become an Acquiring Person, (i) the Company consolidates
with or merges with or into any person and is not the surviving corporation,
(ii) any person merges with or into the Company and the Company is the surviving
corporation, but the shares of Common Stock are changed or exchanged, or (iii)
50% or more of the Company's assets or earning power are sold, each holder of a
Right will thereafter have the right to receive, upon the exercise thereof at
the then current exercise price of the Right, that number of shares of Common
Stock (or under certain circumstances, an economically equivalent security or
securities) of such other person which at the time of such transaction would
have a market value of two times the exercise price of the Right. The Rights,
which do not have voting privileges, are subject to adjustment to prevent
dilution and expire on January 5, 2006. The Company may redeem or exchange all,
but not less than all, of the Rights at a price of $.01 per Right, payable in
cash or Common Stock, at any time prior to such time as a person or group of
affiliated or associated persons becomes an Acquiring Person.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights that are or were owned beneficially by the
Acquiring Person (which, from and after the later of the Rights distribution
date and the date of the earliest of any such events, will be void), will
thereafter have the right to receive, upon exercise thereof at the then current
exercise price of the Right, that number of shares of Common Stock (or, under
certain circumstances, an economically equivalent security or securities of the
Company) having a market value of two times the exercise price of the Right.
At December 31, 1996, 4,492,805 shares of Common Stock were reserved for future
issuance (2,942,805 shares in connection with outstanding warrants and 1,550,000
shares in connection with certain stock plans).
SAVINGS PLANS
The Company sponsors several defined contribution plans that provide retirement
benefits for certain full-time employees. Eligible employees may elect to
participate by contributing a percentage of their pre-tax earnings to the plans.
Employee contributions to the plans, up to certain limits, are matched in
various percentages by the Company. The expense related to the plans totaled
$974, $557 and $807 in 1996, 1995 and 1994, respectively.
35
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
STOCK PLANS
In January 1996, the Board of Directors of the Company adopted the 1996
Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). The
Directors' Plan provides for the grant of non-qualified stock options to
non-employee directors of the Company. Initially, 100,000 shares of Common Stock
were reserved for issuance under the Directors' Plan and at December 31, 1996,
80,000 shares of Common Stock were available for future grant under the
Directors' Plan. Stock options may not be granted under the Directors' Plan
after January 3, 2006.
Pursuant to the Directors' Plan, non-employee directors of the Company are
granted an option to purchase 5,000 shares of Common Stock upon the commencement
of service on the Board of Directors, with another option to purchase 5,000
shares of Common Stock granted on the second anniversary thereof. Options under
the Directors' Plan are generally granted with an exercise price equal to the
fair market value of the Common Stock at the date of grant. Option grants under
the Directors' Plan become exercisable in three equal annual installments
commencing one year from the date of grant and have a 10-year term.
Also in January 1996, the Board of Directors of the Company adopted the 1996
Long-Term Incentive Plan (the "Incentive Plan"). The Incentive Plan provides for
the grant of non-qualified stock options, incentive stock options and
compensatory restricted stock awards (collectively "Awards") to officers and key
employees of the Company. Initially, 2,100,000 shares of Common Stock were
reserved for issuance under the Incentive Plan and at December 31, 1996, 125,340
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"). Option grants in 1996 under
the Incentive Plan have a 10-year term and are exercisable in four equal annual
installments commencing one year from the date of grant except, if at any time
on or before the third anniversary of the date of grant the fair market value of
the Common Stock reaches a targeted stock price, vesting of such options is
accelerated so that they become exercisable in three equal annual installments
commencing one year from the date of grant.
A summary of 1996 stock option activity under the Directors' Plan and Incentive
Plan is as follows:
<TABLE>
<CAPTION>
Number Weighted-
of shares average Range of
represented exercise exercise
by options price prices
----------- ---------- ------------
<S> <C> <C> <C>
Granted 1,594,580 $4.23 $4.125-5.125
Forfeited (249,920) 4.125 4.125
-----------
Outstanding at December 31, 1996,
none of which were exercisable 1,344,660 4.25 4.125-5.125
===========
</TABLE>
36
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
The Company has elected to follow Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees" and related Interpretations
in accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under SFAS No. 123, "Accounting for
Stock-Based Compensation" requires use of option valuation models that were not
developed for use in valuing stock options. Under APB No. 25, because the
exercise price of the Company's stock options equals the market price of the
Common Stock on the date of grant, no compensation expense is recognized.
SFAS No. 123 requires pro forma net loss and loss per share information be
provided as if the Company had accounted for stock options under the fair value
method prescribed by SFAS No. 123, which for 1996 is $20,032 and $1.65,
respectively. In addition, the weighted-average fair value of stock options
granted in 1996 was $1.93 per share. The fair value for stock options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1996: risk- free interest rate of
6.22%; no dividend yield; volatility factor of the expected market price of the
Common Stock of 0.413; and a weighted-average expected life of the options of
five years. Pro forma results under SFAS No. 123 in 1996 are not likely to be
representative of future pro forma results because, for example, options vest
over several years and additional awards may be made in future years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
Pursuant to the Incentive Plan, restricted stock awards are rights granted to an
employee to receive shares of stock without payment but subject to forfeiture
and other restrictions as set forth in the Incentive Plan. Generally, the
restricted stock awarded, and the right to vote such stock or to receive
dividends thereon, may not be sold, exchanged or otherwise disposed of during
the restricted period. Except as otherwise determined by the Compensation
Committee, the restrictions and risks of forfeiture will lapse in three equal
annual installments commencing one year after the date of grant.
In 1996, the Compensation Committee awarded 650,000 shares of restricted Common
Stock to certain executive officers of the Company. Restrictions on these shares
generally lapse based upon the market price of the Common Stock reaching certain
targeted stock prices unless less than half of such shares awarded vest within
two years after the date of grant, at which time a number of shares will vest so
that the total number of vested shares equals 50% of the original grants. In
addition, a recipient of these restricted stock awards will receive a cash
payment from the Company upon the lapse of restrictions in an amount sufficient
to insure that the recipient will receive the Common Stock net of all taxes
imposed upon the recipient because of the receipt of such Common Stock and cash
payment. Restrictions applicable to 433,355 of these shares generally lapsed
upon reaching certain targeted stock prices in 1996 and, accordingly, the fair
value of these shares ($2,345) was amortized to expense in connection therewith.
The weighted-average fair value of restricted Common Stock awarded in 1996 was
$4.87 per share as determined under SFAS No. 123.
37
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
Prior to the Spin-off, certain officers and key employees of the Company
participated in the 1989 Incentive Plan of Entertainment (the "1989 Plan"),
pursuant to which Entertainment granted these individuals options (generally
becoming exercisable in three equal annual installments commencing one year
after the date of grant) to purchase Entertainment common stock at a price equal
to the fair market value of the stock at the date of grant. Pursuant to the 1989
Plan, following the Spin-off, these officers and key employees no longer
affiliated with Entertainment could no longer participate in this plan. As a
result, their unexercisable options were cancelled on January 9, 1996, and their
vested options terminated 90 days thereafter to the extent not exercised prior
thereto.
COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases various fitness center facilities, office facilities, and
equipment under operating leases expiring in periods ranging from one to
twenty-five years excluding optional renewal periods. Certain of the leases
contain contingent rental provisions generally related to cost of living
criteria or revenues of the respective fitness centers. Rent expense under
operating leases was $86,717, $85,857 and $83,288 for 1996, 1995 and 1994,
respectively.
Minimum future rent payments under long-term noncancellable operating leases in
effect as of December 31, 1996, exclusive of taxes, insurance, other expenses
payable directly by the Company and contingent rent, are $82,441, $82,638,
$81,295, $75,248 and $70,036 for 1997 through 2001, respectively, and $447,357
thereafter.
Included in the amounts above are leases with real estate partnerships in which
certain of the Company's current or former executive officers have ownership
interests. Rent expense under these leases was $2,002, $1,991 and $1,953 for
1996, 1995 and 1994, respectively. In addition, these leases require minimum
rent payments of $1,954 for 1997.
LITIGATION
A class action entitled Jackson v. Health & Tennis Corporation of America was
filed in the state district court in Bexar County, Texas on May 8, 1995. The
complaint alleges that the defendant, a subsidiary of the Company, charged
excessive amounts on its financed memberships in violation of the Texas Credit
Code and the Texas Deceptive Trade Practices--Consumer Protection Act. The
relief sought is damages equal to the alleged overpayments and statutory
remedies. The Company is currently unable to estimate the amount sought in this
action because the potential size of the class and the amount of damages for
each member of the putative class are currently unknown. The Company is
vigorously defending this action. The outcome of this litigation is not
currently determinable and, consequently, the Company cannot predict whether it
will have a material adverse effect on the Company's financial condition or
results of operations in any future period.
The Company is involved in various other claims and lawsuits incidental to its
business, including claims arising from accidents at its fitness centers. In the
opinion of management, the Company is adequately insured against such claims and
lawsuits, and any ultimate liability arising out of such claims and lawsuits
will not have a material adverse effect on the financial condition or results of
operations of the Company.
38
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
TRANSACTIONS WITH ENTERTAINMENT
In connection with the Spin-off, the Company issued Entertainment a warrant (the
"Warrant") entitling Entertainment to acquire 2,942,805 shares of Common Stock
at an exercise price of $5.26 per share (equal to 110% of the average daily
closing price of the Common Stock for the twenty consecutive trading days
beginning on the first trading day after the Distribution Date). At the time of
the Merger, Entertainment sold the Warrant to two directors and executive
officers of the Company. The Warrants are exercisable until December 31, 2005.
In January 1996, the Company and Entertainment entered into a Trademark License
Agreement pursuant to which Entertainment (Hilton after the Merger) licenses the
use of the name "Bally" and certain trademarks, trade names and servicemarks to
the Company in connection with its fitness center business. The license is for a
period of ten years, subject to termination in certain circumstances. The
Company paid no royalty or license fee for the first year and pays a fee of
$1,000 per year thereafter. Following the initial ten-year term, the Company has
an option to renew the license for an additional five-year period at a rate
equal to the greater of the then market rate or $1,000 per year.
In connection with the Spin-off, Entertainment purchased a fitness center from
the Company for $6,200. The Company and Entertainment entered into a management
agreement pursuant to which the Company provides certain administrative services
to Entertainment in connection with the operation of this fitness center,
including membership contract processing, membership card issuance, collections,
processing cash receipts and renewal solicitation. Entertainment pays the
Company a management fee equal to 4% of membership revenues and 2% of total
revenues of this fitness center for these services, which was $279 for 1996. In
addition, Entertainment purchased from the Company all of the shares of capital
stock and warrants to purchase shares of capital stock of Holmes Place PLC owned
by the Company, as well as a note receivable from Holmes Place PLC held by the
Company, for $1,800. For financial accounting purposes, because of
Entertainment's ownership interest at the time, the excess of the sales price
over the historical net book value of the fitness center and Holmes Place PLC
assets of $5,988 was accounted for as an increase to stockholders' equity, net
of income taxes of $2,096.
In January 1996, the Company and Entertainment entered into a Transitional
Services Agreement pursuant to which Entertainment provided the Company certain
services for a period of one year following the Spin-off. The services provided
to the Company by Entertainment included services relating to insurance, tax
matters, accounting and other financial services and the administration of
employee benefit programs. The Company provided payroll services to
Entertainment during this period. The net amount charged to the Company by
Entertainment in 1996 pursuant to the Transitional Services Agreement was
$2,344, based on the costs incurred for such services. Prior to the Spin-off,
the Company and Entertainment reimbursed each other for the proportionate share
of costs (salaries, benefits, rent, etc.) related to employees performing
functions on behalf of both companies, based on estimates of time spent on
behalf of each company. The net amount charged to (by) Entertainment in 1995 and
1994 was $(3,045) and $1,510, respectively. The costs charged to (by)
Entertainment varied in amount from year to year primarily due to changes in the
time devoted to each company by personnel based on events at both companies.
Management believes that the method used to allocate these costs was reasonable.
In addition, certain of the Company's insurance coverage was obtained by
Entertainment pursuant to corporate-wide programs and Entertainment charged the
Company its proportionate share of the respective insurance premiums, which
totaled $4,625, $5,668 and $7,176 for 1996, 1995 and 1994, respectively.
39
<PAGE>
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(All dollar amounts in thousands, except share data)
Pursuant to the Transitional Services Agreement, the Company indemnified
Entertainment against (i) debts and liabilities of the Company and (ii)
liabilities relating to litigation currently pending or claims, controversies or
other causes of action relating to the Company's business arising through the
Distribution Date. The Transitional Services Agreement also provided for the
payment by the Company of $15,200 due Entertainment under the prior tax sharing
agreement (plus interest at 10% per annum from the Distribution Date). At the
time of the Merger, the $15,200 of indebtedness was forgiven by Hilton, which
the Company reflected as an extraordinary gain. The Company also paid interest,
calculated primarily at a prime rate, on advances from Entertainment. Interest
paid to Entertainment was $1,551, $430 and $720 for 1996, 1995 and 1994,
respectively.
PRO FORMA INFORMATION (UNAUDITED)
The net loss for the years ended December 31, 1995 and 1994 reflects a federal
income tax benefit arising from the Company's prior tax sharing agreement with
Entertainment of $7,069 and $15,160, respectively. Pro forma net loss and
related per share amounts have been presented on the consolidated statement of
operations giving effect to (i) adjustments made to reflect the income tax
provision/benefit as if the Company had filed its own separate consolidated
income tax return for each year and (ii) the distribution of 11,845,161 shares
of Common Stock to Entertainment stockholders as if such distribution had taken
place as of the beginning of each year.
40
<PAGE>
<TABLE>
BALLY TOTAL FITNESS HOLDING CORPORATION
SUPPLEMENTARY DATA
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) (All
dollar amounts in millions, except share data)
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------- -------------- -------------- -------------
1996 1995 1996 1995 1996 1995 1996 1995
------ ------ ------ ------ ------ ------ ------ ------
(As restated)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $163.9 $165.1 $159.0 $160.2 $157.0 $163.2 $160.4 $165.1
Operating income (loss) -- 1.0 4.2 (.9) 3.0 (1.4) 12.8 6.4
Income (loss) before
extraordinary item
(pro forma for 1995) (12.0) (9.0) (7.9) (11.6) (9.2) (12.9) 4.2 (5.0)
Extraordinary gain on
extinguishment of debt 5.7
Net income (loss)
(pro forma for 1995) (12.0) (9.0) (7.9) (11.6) (9.2) (12.9) 9.9 (5.0)
Per common share
(pro forma for 1995):
Income (loss) before
extraordinary item $(.98) $(.76) $(.65) $(.98) $(.76) $(1.09) $.35 $(.42)
Extraordinary gain
on extinguishment
of debt .46
Net income (loss) (.98) (.76) (.65) (.98) (.76) (1.09) .81 (.42)
<FN>
- -------------
1. The quarterly consolidated financial information presented herein has been
restated to reflect a change in the Company's method of recognizing
membership revenue. See "Summary of significant accounting policies -
Restatement" in notes to the consolidated financial statements.
2. The Company's operations are subject to seasonal factors.
3. The Company was a wholly owned subsidiary of Entertainment until January 9,
1996, the date 11,845,161 shares of Common Stock were distributed by
Entertainment in the Spin-off. For financial accounting purposes, the
Company has reflected the effect of the Spin-off as of December 31, 1995.
4. Pro forma net loss and related per share amounts for each of the 1995
quarters were calculated giving effect to (i) adjustments made to reflect
the income tax provision/benefit as if the Company had filed its own
separate consolidated income tax return for each quarter and (ii) the
distribution of 11,845,161 shares of Common Stock to Entertainment
stockholders as if such distribution had taken place as of the beginning of
each quarter.
5. The extraordinary gain on extinguishment of debt for the quarter ended
December 31, 1996 consists of (i) a gain (net of taxes) of $9.9 million
($.81 per share) resulting from indebtedness owed Entertainment which was
forgiven as part of the December 1996 merger of Entertainment with and into
Hilton Hotels Corporation and (ii) a charge (net of taxes) of $4.2 million
($.35 per share) resulting from the December 1996 refinancing of the
Company's securitization facility.
</FN>
</TABLE>
41
<PAGE>
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)1. Index to Financial Statements
Reference
Report of independent auditors 18
Consolidated balance sheet at December 31, 1996 and 1995 19
For each of the three years in the period ended December 31, 1996:
Consolidated statement of operations 21
Consolidated statement of stockholders' equity 22
Consolidated statement of cash flows 23
Notes to consolidated financial statements 25 Supplementary data:
Quarterly consolidated financial information (unaudited) 41
(a)2. Index to Financial Statement Schedules
Reference
Schedule II Valuation and qualifying accounts for each of the
three years in the period ended December 31, 1996 S-1
All other schedules specified under Regulation S-X for the Company are
omitted because they are either not applicable or required under the
instructions, or because the information required is already set forth in
the consolidated financial statements or related notes thereto.
(a)3. Index to Exhibits
* 3.1 Restated Certificate of Incorporation of the Company (filed as an
exhibit to the Company's registration statement on Form S-1 filed
January 3, 1996, registration no. 33-99844). * 3.2 Amended and
Restated By-Laws of the Company (filed as an exhibit to the
Company's registration statement on Form S-1 filed January 3,
1996, registration no. 33-99844).
* 4.1 Registration Statement on Form 8-A/A dated January 3, 1996 (file no.
0-27478).
* 4.2 Form of Rights Agreement dated as of January 5, 1996 between the
Company and LaSalle National Bank (filed as an exhibit to the
Company's registration statement on Form S-1 filed January 3, 1996,
registration no.
33-99844).
* 4.3 Indenture dated as of January 15, 1993 between the Company and
Amalgamated Bank of Chicago, as Trustee (filed as an exhibit to
Entertainment's Annual Report on Form 10-K, file no. 1-7244, for the
fiscal year ended December 31, 1993).
* 4.4 Warrant Agreement dated as of December 29, 1995 between
Entertainment and the Company (filed as an exhibit to the Company's
registration statement on Form S-1 filed January 3, 1996,
registration no. 33-99844).
* 4.5 Registration Rights Agreement dated as of December 29, 1995
between Entertainment and the Company (filed as an exhibit to the
Company's registration statement on Form S-1 filed January 3, 1996,
registration no.
33-99844).
42
<PAGE>
*10.1 Amended and Restated Credit Agreement dated as of June 26, 1995
among the Company and a group of banks with Chemical Bank, as agent
(filed as an exhibit to the Company's Quarterly Report on Form 10-Q,
file no. 33-52868, for the quarter ended June 30, 1995).
*10.2 First Amendment dated as of June 30, 1995 to the Amended and
Restated Credit Agreement dated as of June 26, 1995 among the
Company and a group of banks with Chemical Bank, as agent (filed as
an exhibit to the Company's registration statement on Form S-1 filed
January 3, 1996, registration no. 33-99844).
*10.3 Second Amendment dated as of August 25, 1995 to the Amended and
Restated Credit Agreement dated as of June 26, 1995 among the
Company and a group of banks with Chemical Bank, as agent (filed as
an exhibit to the Company's registration statement on Form S-1 filed
January 3, 1996, registration no. 33-99844).
*10.4 Third Amendment dated as of October 24, 1995 to the Amended and
Restated Credit Agreement dated as of June 26, 1995 among the
Company and a group of banks with Chemical Bank, as agent (filed as
an exhibit to the Company's registration statement on Form S-1 filed
January 3, 1996, registration no. 33-99844).
*10.5 Fourth Amendment dated as of January 4, 1996 to the Amended and
Restated Credit Agreement dated as of June 26, 1995 among the
Company and a group of banks with Chemical 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, 1995).
10.6 Fifth Amendment dated as of December 2, 1996 to the Amended and
Restated Credit Agreement dated as of June 26, 1995 among the
Company and a group of banks with Chemical Bank, as agent.
10.7 Sixth Amendment dated as of February 21, 1997 to the Amended and
Restated Credit Agreement dated as of June 26, 1995 among the
Company and a group of banks with Chase Manhattan Bank (formerly
known as Chemical Bank), as agent.
*10.8 Pooling and Service Agreement dated as of June 26, 1995 among H&T
Receivable Funding Corporation, as Transferor, Bally Total Fitness
Corporation, as Servicer and Texas Commerce Bank, as Trustee (filed
as an exhibit to the Company's Quarterly Report on Form 10-Q, file
no. 33-52868,
for the quarter ended June 30, 1995).
*10.9 Series 1995-1 Supplement dated as of June 26, 1995 to the Pooling
and Service Agreement among H&T Receivable Funding Corporation, as
Transferor, Bally Total Fitness Corporation, as Servicer and Texas
Commerce Bank, as Trustee (filed as an exhibit to the Company's
Quarterly Report on Form 10- Q, file no. 33-52868, for the quarter
ended June 30, 1995).
*10.10 Back-up Servicing Agreement dated as of June 26, 1995 among H&T
Receivable Funding Corporation, as Transferor, Bally Total Fitness
Corporation, as Servicer and Texas Commerce Bank, as Trustee (filed
as an exhibit to the Company's Quarterly Report on Form 10-Q, file
no. 33-52868, for the quarter ended June 30, 1995).
10.11 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.
10.12 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.
43
<PAGE>
10.13 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.
*10.14 Tax Sharing Agreement dated as of April 6, 1983 between the Company
and Entertainment (filed as an exhibit to the Company's registration
statement on Form S-1 filed January 15, 1993, registration no.
33-52868).
*10.15 Tax Allocation and Indemnity Agreement dated as of January 9, 1996
between Entertainment and the Company (filed as an exhibit to the
Company's Annual Report on Form 10-K, file no. 0-27478, for the
fiscal year ended December 31, 1995).
*10.16 First Amendment dated as of May 20, 1996 to the Tax Allocation and
Indemnity Agreement dated as of January 9, 1996 between
Entertainment and the Company (filed as an exhibit to the Company's
Quarterly Report on Form 10-Q, file no. 0-27478, for the quarter
ended June 30, 1996).
*10.17 Transitional Services Agreement dated as of January 9, 1996 between
Entertainment and the Company (filed as an exhibit to the Company's
Annual Report on Form 10-K, file no. 0-27478, for the fiscal year
ended December 31, 1995).
*10.18 Trademark License Agreement dated as of January 9, 1996 between
Entertainment and the Company (filed as an exhibit to the Company's
Annual Report on Form 10-K, file no. 0-27478, for the fiscal year
ended December 31, 1995).
*10.19 Asset Purchase Agreement dated as of December 29, 1995 between
Entertainment and Vertical Fitness and Racquet Club Ltd. (filed as
an exhibit to the Company's registration statement on Form S-1 filed
January 3, 1996, registration no. 33-99844).
*10.20 Management Agreement dated as of January 9, 1996 between
Entertainment and the Company (filed as an exhibit to the Company's
Annual Report on Form 10-K, file no. 0-27478, for the fiscal year
ended December 31, 1995).
*10.21 Stock Purchase Agreement dated as of December 29, 1995 between
Entertainment and the Company with respect to shares of capital
stock of Holmes Place PLC (filed as an exhibit to the Company's
registration statement on Form S-1 filed January 3, 1996,
registration no. 33-99844).
*10.22 Amended and Restated Stock Purchase Agreement dated as of December
29, 1995 between Entertainment and the Company with respect to
shares of capital stock of Holmes Place PLC (filed as an exhibit to
the Company's Annual Report on Form 10-K, file no. 0-27478, for the
fiscal year ended December 31, 1995).
*10.23 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).
10.24 First Amendment dated as of November 19, 1996 to the Company's
Management Retirement Savings Plan.
*10.25 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).
*10.26 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).
44
<PAGE>
*10.27 Employment Agreement effective as of January 9, 1996 between the
Company and Arthur M. Goldberg (filed as an exhibit to the Company's
Annual Report on Form 10-K, file no. 0-27478, for the fiscal year
ended December 31, 1995).
*10.28 Employment Agreement effective as of January 9, 1996 between the
Company and Lee S. Hillman (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).
*10.29 Employment Agreement effective as of January 1, 1996 between the
Company, Entertainment and John W. Dwyer (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q, file no. 0-27478, for the
quarter ended June 30, 1996).
*10.30 Employment Agreement effective as of May 4, 1992 between the Company
and Cary A. Gaan (filed as an exhibit to the Company's registration
statement on Form S-1 filed January 15, 1993, registration no.
33-52868).
10.31 Employment Agreement effective as of March 20, 1997 between the
Company and Cary A. Gaan.
10.32 Letter Agreement dated as of December 28, 1994 between the Company
and David M. Tolmie.
10.33 Employment Agreement effective as of October 7, 1996 between the
Company and John H. Wildman, Jr.
10.34 Severance Agreement and Complete Release dated as of January 14
1997 between the Company and Michael G. Lucci, Sr.
*10.35 Employment Agreement effective as of January 1, 1996 between the
Company, Entertainment and Harold Morgan (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q, file no. 0-27478, for the
quarter ended June 30, 1996).
21 List of subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Restated Financial Data Schedule (filed electronically only).
- ----------
* Incorporated herein by reference as indicated.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BALLY TOTAL FITNESS HOLDING CORPORATION
Dated: July 16, 1997 By: /s/ Lee S. Hillman
-------------------
Lee S. Hillman
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated. This report may be signed in
multiple identical counterparts all of which, taken together, shall constitute a
single document.
Dated: July 16, 1997 By: /s/ Lee S. Hillman
-------------------
Lee S. Hillman
President, Chief Executive Officer and Director
(principal executive officer)
Dated: July 16, 1997 By: /s/ John W. Dwyer
------------------
John W. Dwyer
Senior Vice President, Chief Financial Officer
and Treasurer
(principal financial officer)
Dated: July 16, 1997 By: /s/ Julie Adams
----------------
Julie Adams
Vice President and Controller
(principal accounting officer)
Dated: July 16, 1997 By: /s/ Arthur M. Golberg
----------------------
Arthur M. Goldberg
Chairman of the Board of Directors
Dated: July 16, 1997 By: /s/ Aubrey C. Lewis
--------------------
Aubrey C. Lewis
Director
Dated: July 16, 1997 By: /s/ J. Kenneth Looloian
------------------------
J. Kenneth Looloian
Director
Dated: July 16, 1997 By: /s/ James F. Mc Anally, M.D.
-----------------------------
James F. Mc Anally, M.D.
Director
Dated: July 16, 1997 By: /s/ Liza M. Walsh
------------------
Liza M. Walsh
Director
46
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996, THE CONSOLIDATED STATEMENT
OF OPERATIONS AND THE CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE
TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 16,534
<SECURITIES> 0
<RECEIVABLES> 386,302<F1>
<ALLOWANCES> 86,095<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 193,844
<PP&E> 630,324
<DEPRECIATION> 304,865
<TOTAL-ASSETS> 893,302
<CURRENT-LIABILITIES> 387,897
<BONDS> 376,397
0
0
<COMMON> 125
<OTHER-SE> 24,027
<TOTAL-LIABILITY-AND-EQUITY> 893,302
<SALES> 0
<TOTAL-REVENUES> 640,187
<CGS> 0
<TOTAL-COSTS> 418,007<F2>
<OTHER-EXPENSES> 42,257<F3>
<LOSS-PROVISION> 80,350
<INTEREST-EXPENSE> 47,644
<INCOME-PRETAX> (27,597)
<INCOME-TAX> (2,700)
<INCOME-CONTINUING> (24,897)
<DISCONTINUED> 0
<EXTRAORDINARY> 5,655
<CHANGES> 0
<NET-INCOME> (19,242)
<EPS-PRIMARY> (1.58)
<EPS-DILUTED> 0
<FN>
<F1>THIS AMOUNT IS INCLUDED IN THE SHORT-TERM AND LONG-TERM INSTALLMENT
CONTRACTS RECEIVABLE LINES OF THE CONSOLIDATED BALANCE SHEET AT DECEMBER 31,
1996 AND IS NET OF UNEARNED FINANCE CHARGES.
<F2>THIS AMOUNT IS INCLUDED IN THE FITNESS CENTER OPERATIONS LINE, THE
ADVERTISING LINE AND THE CHANGE IN DEFERRED MEMBERSHIP ORIGINATION COSTS
LINE OF THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1996.
<F3>THIS AMOUNT IS INCLUDED IN THE MEMBER PROCESSING AND COLLECTION CENTERS
LINE OF THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1996.
</FN>
</TABLE>
