AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 2003
REGISTRATION NO. 333-_________________
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BALLY TOTAL FITNESS HOLDING CORPORATION
(Exact names of registrants as specified in their charters)
DELAWARE 36-3228107 7991
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(State or other jurisdiction of (I.R.S. Employer Identification No.) (Primary Standard Industrial
incorporation or organization) Classification Code Number)
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8700 WEST BRYN MAWR AVENUE
CHICAGO, ILLINOIS 60631
773-380-3000
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(Address, including zip code, and telephone number, including area code,
of each of the registrants' principal executive offices)
SEE TABLE OF ADDITIONAL REGISTRANTS
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CARY A. GAAN
SR. VICE PRESIDENT
8700 WEST BRYN MAWR AVENUE
CHICAGO, ILLINOIS 60631
773-380-3000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPIES TO:
IRV BERLINER
KAHN KLEINMAN
2600 ERIEVIEW TOWER
1301 EAST NINTH STREET
CLEVELAND, OHIO 44114-1824
(216) 696-3311
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED EXCHANGE OFFER: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are being
offered in connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED NOTE(1) PRICE(1) REGISTRATION FEE
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10.5% Senior Notes due 2011 $235,000,000 100% $235,000,000 $19,011.50
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Guarantees of the 10.5% Senior Notes due 2011 $235,000,000 N/A N/A (2)
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f) under the Securities Act.
(2) No additional registration fee is due for guarantees pursuant to Rule 457(n)
under the Securities Act.
THE CO-REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
TABLE OF ADDITIONAL REGISTRANTS
JURISDICTION OF I.R.S. EMPLOYER
EXACT NAME OF ADDITIONAL REGISTRANTS INCORPORATION IDENTIFICATION NUMBER
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59th Street Gym LLC New York 36-4474644
708 Gym LLC New York 36-4474644
Ace, LLC New York 36-4474644
Bally Fitness Franchising, Inc. Illinois 36-4029332
Bally Franchise RSC, Inc. Illinois 36-4028744
Bally Franchising Holdings, Inc. Illinois 36-4024133
Bally Total Fitness Clinics, Inc. Delaware 36-4261426
Bally Total Fitness Corporation Delaware 36-2762953
Bally Total Fitness International, Inc. Michigan 36-1692238
Bally Total Fitness of Missouri, Inc. Missouri 36-2779045
Bally Total Fitness of Toledo, Inc. Ohio 38-1803897
Bally's Fitness and Racquet Clubs, Inc. Florida 36-3496461
BFIT Rehabilitation Services, Inc. Delaware 36-4133500
BFIT Rehab of Boca Raton, Inc. Florida 36-4154175
BFIT Rehab of Kendall, Inc. Florida 36-4154172
BFIT Rehab of West Palm Beach, Inc. Florida 36-4154170
Connecticut Coast Fitness Centers, Inc. Connecticut 36-3209546
Connecticut Valley Fitness Centers, Inc. Connecticut 36-3209543
Crunch LA LLC New York 36-4474644
Crunch World LLC New York 36-4474644
Flambe LLC New York 36-4474644
Greater Philly No. 1 Holding Company Pennsylvania 36-3209566
Greater Philly No. 2 Holding Company Pennsylvania 36-3209557
Health & Tennis Corporation of New York Delaware 36-3628768
Holiday Health Clubs of the East Coast, Inc. Delaware 52-1271028
Holiday Health & Fitness Centers of New York, Inc. New York 36-3209544
Holiday Health Clubs and Fitness Centers, Inc. Colorado 84-0856432
Holiday Health Clubs of the Southeast, Inc. South Carolina 52-1230906
Holiday/Southeast Holding Corp. Delaware 52-1289694
Holiday Spa Health Clubs of California California 36-2763344
JURISDICTION OF I.R.S. EMPLOYER
EXACT NAME OF ADDITIONAL REGISTRANTS INCORPORATION IDENTIFICATION NUMBER
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Holiday Universal, Inc. Delaware 52-0820531
Crunch Fitness International, Inc. Delaware 36-4474644
Jack La Lanne Fitness Centers, Inc. New York 95-3445399
Jack La Lanne Holding Corp. New York 95-3445400
Manhattan Sports Club, Inc. New York 36-3407784
Mission Impossible, LLC California 36-4474644
New Fitness Holding Co., Inc. New York 36-3209555
Nycon Holding Co., Inc. New York 36-3209533
Physical Fitness Centers of Philadelphia, Inc. Pennsylvania 36-3209542
PowerFlex Corporation Delaware 36-4318103
Providence Fitness Centers, Inc. Rhode Island 36-3209549
Rhode Island Holding Company Rhode Island 36-3261314
Scandinavian Health Spa, Inc. Ohio 34-1114683
Scandinavian US Swim & Fitness, Inc. Ohio 84-1035840
Soho Ho LLC New York 36-4474644
Sportslife, Inc. Georgia 58-1611545
Sportslife Gwinnett, Inc. Georgia 58-1953453
Sportslife Roswell, Inc. Georgia 58-1849570
Sportslife Stone Mountain, Inc. Georgia 58-2069477
Sportslife Town Center II, Inc. Georgia 58-2454078
Tidelands Holiday Health Clubs, Inc. Virginia 52-1229398
U.S. Health, Inc. Delaware 52-1137373
West Village Gym at the Archives LLC New York 36-4474644
The address for service of each of the additional registrants is c/o Bally
Total Fitness Holding Corporation, 8700 West Bryn Mawr Avenue, 2nd Floor,
Chicago, Illinois 60631, telephone 773-380-3000. The primary industrial
classification number for each of the additional registrants is 7991.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to completion, dated September 30, 2003.
BALLY TOTAL FITNESS HOLDING CORPORATION
OFFER TO EXCHANGE
$235,000,000 PRINCIPAL AMOUNT OF ITS 10.5% SERIES B SENIOR NOTES DUE 2011,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OF ITS OUTSTANDING 10.5% SERIES A SENIOR NOTES DUE 2011
Bally is offering to exchange its 10.5% Series B Senior Notes due 2011,
or the notes, for its currently outstanding 10.5% Series A Senior Notes due
2011, or the old notes. The notes are substantially identical to the old notes,
except that the notes have been registered under the federal securities laws,
will not bear any legend restricting their transfer, and the holders of the
notes will not be entitled to certain rights under the registration rights
agreement, including the provisions for an increase in the interest rate on the
old notes in some circumstances relating to the timing of the exchange offer.
The notes will represent the same debt as the old notes, and Bally will issue
the exchange notes under the same indenture.
The notes will be Bally's unsecured senior obligations and will rank
senior to all its existing and future subordinated debt. The notes will be
effectively subordinated to Bally's existing and future secured debt, including
debt under its new senior credit facility. The notes will be guaranteed by
certain of Bally's existing and future restricted subsidiaries with
unconditional guarantees that will be unsecured and senior to existing and
future subordinated debt of these subsidiaries.
The principal features of the exchange offer are as follows:
- The exchange offer expires at 5:00 p.m., New York City time,
on _____________, 2003, unless extended.
- Bally will exchange all outstanding notes that are validly
tendered and not validly withdrawn prior to the expiration of the
exchange offer.
- You may withdraw tendered outstanding notes at any time prior
to the expiration of the exchange offer.
- The exchange of outstanding notes for exchange notes pursuant
to the exchange offer will not be a taxable event for U.S. federal
income tax purposes.
- Bally will not receive any proceeds from the exchange offer.
Broker-dealers receiving exchange notes in exchange for outstanding
notes acquired for their own account though market-making or other trading
activities must deliver a prospectus in any resale of the exchange notes.
INVESTING IN THE EXCHANGE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 12.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is , 2003.
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. The letter of
transmittal delivered with this prospectus states that by acknowledging this
commitment and by delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act of
1933. This prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of notes received in
exchange for outstanding notes that it acquired as a result of market-making
activities or other trading activities. Bally has agreed that, for a period of
180 days after the completion of the exchange offer, we will make this
prospectus available to any broker-dealer to use in connection with any resales.
See "Plan of Distribution."
TABLE OF CONTENTS
PAGE
Where You Can Find More Information 1
Forward-Looking Statements 1
Market and Industry Data 2
Prospectus Summary 3
Risk Factors 12
The Exchange Offer 19
Use of Proceeds 25
Capitalization 26
Selected Historical Consolidated Financial Data 27
Management's Discussion and Analysis of Financial Condition
and Results of Operations 30
Business 37
Management 49
Security Ownership of Certain Beneficial Owners and Management 54
Certain Relationships and Related Transactions 56
Description of Other Indebtedness 57
Description of the Notes 58
Book-Entry; Delivery and Form 91
Certain Federal Income Tax Consequences 92
Plan of Distribution 93
Legal Matters 93
Experts 93
Index to Consolidated Financial Statements F-1
WHERE YOU CAN FIND MORE INFORMATION
Bally Total Fitness Holding Corporation and the subsidiary guarantors
have filed with the U.S. Securities and Exchange Commission, or the SEC, the
exchange offer registration statement on Form S-4, which term shall encompass
all amendments, exhibits, annexes and schedules thereto, pursuant to the
Securities Act of 1933, as amended, and the rules and regulations thereunder,
which we refer to collectively as the Securities Act, covering the exchange
notes being offered. THIS PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND
FINANCIAL INFORMATION THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS PROSPECTUS.
THIS INFORMATION IS AVAILABLE TO YOU WITHOUT CHARGE AT LEAST FIVE (5) DAYS AFTER
YOUR WRITTEN OR ORAL REQUEST TO US AT: 8700 WEST BRYN MAWR AVENUE, CHICAGO,
ILLINOIS 60631, ATTENTION: SECRETARY, OR BY CALLING (773) 380-3000. For further
information with respect to Bally Total Fitness Holding Corporation, the
subsidiary guarantors and the exchange offer, please refer to the exchange offer
registration statement. Statements made in this prospectus as to the contents of
any contract, agreement or other documents referred to are not necessarily
complete. For a more complete understanding and description of each contract,
agreement or other document filed as an exhibit to the exchange offer
registration statement, we encourage you to read the documents contained in the
exhibits.
You may read and copy any document we file with the SEC at the SEC's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
room. Our SEC filings are also available to the public at the SEC's web site at
http://www.sec.gov. You may also review reports and other information concerning
us at the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") including, without
limitation, statements relating to our plans, strategies, objectives,
expectations, intentions and adequacy of resources. These forward-looking
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
involve known and unknown risks, uncertainties, and other factors that may cause
our actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by the
forward-looking statements. These factors include, among others, the following:
- general economic and business conditions;
- the impact of our debt structure;
- availability and terms of capital;
- competition;
- changes in business strategy or plans;
- success of operating initiatives, advertising and promotional
efforts;
- existence of adverse publicity or litigation;
- acceptance of new product offerings;
- quality of management;
- business abilities and judgment of personnel;
- changes in, or the failure to comply with, government
regulations;
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- protection of our trademarks;
- and other factors described in this prospectus or in our
filings with the SEC.
We are under no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Our actual results, performance or achievements could
differ materially from those expressed in, or implied by, the forward-looking
statements. We can give no assurances that any of the events anticipated by the
forward-looking statements will occur or, if any of them do, what impact they
will have on our results of operations and financial condition. You are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this prospectus.
MARKET AND INDUSTRY DATA
The market and industry data contained in this prospectus are sourced
from reports produced by the International Health, Racquet & Sports Club
Association unless otherwise noted. Although we believe that these independent
sources are reliable, we have not independently verified and cannot assure you
as to the accuracy or completeness of this information. As a result, you should
be aware that the market and industry data contained in this prospectus, and our
beliefs and estimates based on such data, may not be reliable.
Our trademarks, service marks and trade names include "Bally Total
Fitness(R)", "Bally Sports Clubs(SM)", "Crunch Fitness(SM)", "The Sports Clubs
of Canada(TM)", "Pinnacle Fitness(R)" and "Gorilla Sports(SM)". This prospectus
also contains trademarks, service marks, copyrights and trade names of other
companies.
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PROSPECTUS SUMMARY
The following summary contains basic information about us and this
offering. It likely does not contain all of the information that is important to
you. For a more complete understanding of this offering, we encourage you to
read this entire document and the documents we have referred you to. As used
herein, "Bally," the "Company," refer to Bally Total Fitness Holding Corporation
and "we," "us," and "our" refer to Bally and its subsidiaries on a consolidated
basis.
OUR COMPANY
We are the largest commercial operator of fitness centers in North
America. Our fitness centers offer members state-of-the-art fitness facilities
featuring a wide selection of cardiovascular and strength equipment and
extensive personal training, weight-management and group exercise services. In
addition, many of our fitness centers include pools, racquet courts, or other
athletic facilities. As of June 30, 2003, we operated 415 fitness centers
serving 4.0 million members. Our fitness centers are concentrated in major
metropolitan areas in 29 states and Canada, with 348 fitness centers located in
the top 25 metropolitan areas in the United States and Toronto, Canada. We
operate fitness centers in over 50 major metropolitan areas representing 63% of
the United States' population. By clustering our fitness centers in major
metropolitan areas, we are able to reach more existing and potential members
while achieving marketing and operating efficiencies.
Our members made an estimated 150 million visits to our fitness centers
in 2002. Our active member base provides a ready market for ancillary services
such as personal training, weight management, and group fitness training
programs and for products sold through our on-site Fitness Formula retail
stores. We have created several lines of Bally-branded products that are
marketed both to our members and to other consumers through third-party retail
outlets. One of our most successful product lines is our private-label diet and
performance nutritional supplements. In addition, we have licensed the Bally
brand to third-party manufacturers of fitness equipment.
Our primary target market is the 18 to 34-year old, middle income
segment of the population. This market segment is serviced by the majority of
our fitness centers which use the Bally Total Fitness(R) service mark. The
nationwide use of this service mark enhances brand identity and increases
advertising efficiencies. To supplement the Bally-branded clubs and to
facilitate our market segmentation strategy, we have opened or acquired 47
facilities during the past few years that operate under upscale brands, such as
Crunch Fitness, The Sports Clubs of Canada, Pinnacle Fitness and Gorilla Sports.
These upscale brands primarily target the 18 to 49-year old, upper income
segment of the population.
INDUSTRY OVERVIEW
The fitness industry has benefited from several key growth drivers,
including increased focus on health and physical fitness, increased research and
medical journal publications discussing the benefits of exercise in reducing the
risk of many diseases, and the aging of the baby boomer generation and their
children. Additionally, the industry has benefited from government reports from
the Surgeon General (Report on Physical Activity & Health (1996) and the Call to
Action to Prevent and Decrease Overweight and Obesity (2002)), which have
emphasized the importance of exercise and physical fitness.
The national fitness industry includes approximately 17,000 clubs with
approximately 33.8 million members. The industry's compound annual growth rate
of revenues was 8.2% from $6.5 billion in 1993 to $12.2 billion in 2001, and its
compound annual growth in the total number of clubs increased at a rate of 4.8%,
from 11,655 in 1993 to 16,983 in 2001. The demand for club memberships rose in
the same period at a faster pace than supply, as memberships increased at a
compound annual growth rate of 5.0% from 22.9 million in 1993 to 33.8 million in
2001.
Although the fitness industry benefits from tremendous growth over the
last several years, the industry remains fragmented with less than 10% of
commercial health clubs in the U.S. owned and operated by companies that own
more than 25 clubs.
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COMPANY STRENGTHS
Largest Fitness Center Operator in North America. We are the largest
commercial operator of fitness centers in North America in terms of revenues,
number of members, and number and square footage of facilities and have over 40
years of operating experience. We hold a leading market position in many large
metropolitan areas, including New York City, Los Angeles, Chicago,
Baltimore/Washington D.C., Boston, Dallas, Houston, Detroit, San Francisco,
Toronto, Portland, Seattle, Philadelphia, Atlanta and Miami. As of June 30,
2003, we operated 415 fitness centers serving approximately 4.0 million members.
Over 86% of our fitness centers are located in markets in which we have five or
more facilities. We believe that our scale and concentration in major
metropolitan areas achieves marketing and operating efficiencies, enhancing our
value to members.
Significant Brand Recognition. We believe the Bally brand is the most
recognized name in the fitness industry and that this brand awareness increases
the likelihood potential members will recognize our clubs as opposed to those of
our competitors. This brand awareness has also allowed us to benefit from
strategic marketing alliances with leading consumer product companies such as
AOL Time Warner, PepsiCo, Colgate-Palmolive, Unilever, Gatorade, Kellogg Company
and Kraft Foods. We are also capitalizing on the strength of our brand to expand
franchising and joint venture programs domestically and internationally. Through
these programs, we are extending the Bally brand into China, South Korea,
Southeast Asia, the Bahamas, Mexico, and several secondary markets in the United
States. We have also entered licensing arrangements with two of the leading
fitness equipment manufacturers for the manufacture and distribution of
Bally-branded home fitness equipment in the United States and Asia. Further, our
licensed Bally Total Fitness line of portable exercise equipment, including hand
and ankle weights, jump ropes and other personal fitness related merchandise, is
carried in more than 4,000 retail stores in the United States and Canada and our
Bally-branded nutritional products are sold in approximately 4,000 retail
outlets. We believe this brand awareness drives our strong member retention,
enhances our ability to grow sales of ancillary Bally-branded products and
services and facilitates strategic marketing alliances with major consumer
product companies.
Industry Leading Member Retention. We believe we have the highest
member retention rates in our industry with an average annual retention of over
80%, compared with our competitors' annual retention which we believe to be
between 50-70%. Our retention success is driven by the quality and affordability
of our membership plans and the commitment made by the joining member. In
addition, we have the systems and expertise to track member usage of our
facilities and deliver pricing discounts and special offers to retain members.
Predictable and Growing Cash Flow. Our high member retention rates,
large member base and substantially fixed operating costs result in predictable
and growing cash flows. Nearly 90% of new members elect to finance their initial
membership fee for up to 36 months, creating a liquid asset on our balance sheet
with a history of stable and consistent cash flows. Our industry leading
retention rates contribute to growing and predictable recurring dues collected
from our members. These cash flows offset a substantially fixed cost operating
structure, stable maintenance capital expenditure requirements of $30-$35
million per year and limited expansion plans for clubs, resulting in predictable
and growing cash flow.
Large Investment in Fitness Centers. During the past five years we have
invested approximately $400 million in opening or acquiring fitness centers, as
well as improving our existing fitness facilities. This investment has provided
us with a strong base of modern, well-equipped facilities of which 30%, or
approximately 140 clubs, are immature (which we define as having been in
operation for less than five years). Our extensive experience has shown it takes
nearly 10 years for a club's membership base to fully mature, with the facility
achieving its most significant membership growth during the third to seventh
year. As a result, the earnings potential and return on capital invested in our
immature clubs is yet to be fully realized.
Product and Service Offerings. Prior to 1997, we provided only minimal
services outside of membership programs. Today we employ over 6,000 personal
trainers providing customized, interactive sessions to our members. We also
offer a wide variety of private-label products, including diet and nutritional
supplements, energy bars and performance drinks through our on-site retail
stores. Revenue from products and services has grown from approximately $10.0
million in 1997 to over $215.0 million in 2002. We intend to leverage our broad
membership base and brand strength to continue to expand our health-related
products and services. During 2003, we expect
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revenues from products and services to be enhanced by the continuing penetration
of existing programs and the addition of new offerings such as our recently
launched Weight Management Program.
Flexible Membership Plans. We offer a variety of membership options and
payment plans. Our membership options range from single-club memberships to
premium memberships, which provide additional amenities and access to all of our
fitness centers nationwide. Similarly, we offer a broad range of payment
alternatives. Most memberships sold consist of a substantial up front initial
fee and relatively low monthly dues. We provide financing of the initial fee for
up to 36 months at typical retail consumer interest rates. We also offer
"pay-as-you-go" memberships, which require a smaller initial fee paid in cash
and higher monthly payments for the duration of the membership. We believe
offering membership financing requires a high level of technical infrastructure
and operational expertise and, as a result, we are the only major fitness center
operator currently offering both the financing and the pay-as-you-go options. We
believe that this flexibility has greatly improved member retention, allowing us
to offer more affordable membership programs and providing significant
competitive advantages.
Experienced Management Team. We believe that our management team is one
of the most experienced in the industry. Seven of our senior executives average
over 14 years experience in the industry. In August 2003, we augmented our
management team by adding a new senior vice president and chief marketing
officer with extensive marketing and strategy-related experience. We believe
that our management team has the depth, experience and motivation to manage our
controlled growth strategy.
BUSINESS STRATEGY
Our continuing business focus is to maximize our yield-per-member and
grow our membership base. We define yield-per-member as the dollar amount
generated per member through initiation fees, monthly dues, products and
services revenues and finance charges earned. Our average yield-per-member has
increased from $148 in 1997 to $262 in 2002. We expect to continue to maximize
our yield-per-member as well as grow our membership base using the following
strategies:
Optimize Our Product and Service Offerings. We are increasingly using
our clubs for the delivery of value-added products and services such as personal
training, private-label nutritional products, group exercise classes, fitness
related merchandise, member magazines and our recently launched Weight
Management Program. Integrating these ancillary products and services into our
core fitness center operations positions Bally as the primary source for all of
our members' wellness and fitness needs. In addition, our private-label
nutritional products are sold in approximately 4,000 select retail, grocery and
drug store outlets and our licensed portable exercise equipment is sold in over
4,000 retail outlets. We are committed to the continuing development and
integration of new and innovative products and services. Our extensive groupings
of club operations and brand mix allow us to "test-market" new products and
services without exposing our entire operation to the outcome of the
introduction.
Realize the Benefit of Recent Investments. Over the past five years we
have invested approximately $400 million in greenfield expansion, acquisitions,
and expansion of existing facilities. In order to strengthen operating results
and cash flows, we began scaling back our club expansion plans during 2002 and
will continue to do so for the next several years. We intend to focus our
attention on improving operating margins and cash flows in our existing fitness
centers to capitalize on our recent investments and to realize the benefits of
reduced capital expenditures. Due to deferral accounting, our immature fitness
centers generally require nearly a full year of operations before generating
incremental operating income. By slowing club expansion, we intend to realize
the cash flow benefits from reduced capital expenditures as well as the natural
maturation of our existing clubs. During 2002 we had 134 immature clubs. We
expect the immature clubs, as they mature, to contribute higher levels of
operating income.
Expand and Optimize Our Marketing. We will continue to leverage the
position of the Bally brand, which we believe is the most recognized brand name
of fitness centers in North America. While we historically have relied on
television advertising as the primary vehicle for marketing, we currently are
exploring the use of other media outlets as well as nationally supported member
referral programs. We have also begun to place a greater emphasis on corporate
alliances and in-club marketing programs. Additionally, the Internet represents
a relatively untapped opportunity to market the Bally brand. We have recently
developed strategic web-based partnerships and added
5
functionality to our web site to capture leads and contact information through
the Internet for use in sourcing new members. Internationally, we continue to
market the Bally brand through our joint venture and franchise program in China
and our franchise programs in South Korea, Southeast Asia, Mexico and the
Bahamas. Through these international relationships, over the next five years we
believe it is possible to franchise over 50 fitness centers. We believe our
targeted marketing initiatives in combination with our branded product and
service offerings will lead to increased membership and profitability.
Improve Operating Efficiencies. After a period of rapid expansion by
adding new clubs in addition to the acquisition of most of our upscale brands,
we are consolidating our operations to realize economies of scale. In
particular, we have launched several initiatives to improve operating
efficiencies and reduce operating costs, including staff reductions. We have
also begun to eliminate local area offices, as well as to modify some of our
incentive and compensation programs to reward profitability. In the second
quarter of 2003, we launched several cost saving initiatives, which are expected
to result in over $20 million of annualized cost savings.
Our ratio of earnings to fixed charges was 1.2, 1.5, 1.5, 1.7 and 1.0
for the years ended December 31, 1998, 1999, 2000, 2001 and 2002, respectively.
The ratio was 1.8 and 1.5 for the six months ended June 30, 2002 and 2003,
respectively.
The ratio of earnings to fixed charges is computed by dividing fixed
charges into earnings from continuing operations before income taxes plus fixed
charges and amortization of capitalized interest less interest capitalized.
Fixed charges consist of interest expense, interest capitalized and the
estimated interest component of rent expense.
Bally is incorporated under the laws of the State of Delaware. Our
executive offices are located at 8700 West Bryn Mawr Avenue, Chicago, Illinois
60631. Our telephone number is (773) 380-3000.
We maintain a web site at www.ballyfitness.com that provides
information about club locations, program offerings and on-line promotions.
Information contained on this web site, however, is not incorporated into or
otherwise a part of this prospectus.
6
THE OFFERING
On July 2, 2003, the Company completed an offering of $200.0 million in
aggregate principal amount of its 10.5% Series A Senior Notes due 2011, which
was exempt from registration under the Securities Act. On July 22, 2003, the
Company completed an offering of $35.0 million in the aggregate principal amount
of its 10.5% Series A Senior Notes due 2011, which was exempt from registration
under the Securities Act.
Old Notes The Company sold old notes to Deutsche Bank
Securities Inc. and others, as initial
purchasers, on July 2, 2003, and to Deutsch
Bank Securities, Inc. as initial purchaser
on July 22, 2003. The initial purchasers
subsequently resold the old notes to
qualified institutional buyers pursuant to
Rule 144A under the Securities Act and to
non-U.S. persons outside the United States
in reliance on Regulation S under the
Securities Act.
Registration Rights Agreement In connection with the sale of the old
notes, Bally and its subsidiary guarantors
entered into registration rights agreements
with the initial purchasers. Under the terms
of those agreements, Bally and its
subsidiary guarantors agreed, at its
expense, to:
- within 90 days after July 2, 2003,
file a registration statement on Form
S-4 with the SEC relating to a
registered exchange offer for the notes
under the Securities Act;
- use its commercially reasonable efforts
to cause the exchange offer registration
statement to be declared effective under
the Securities Act within 150 days after
July 2, 2003;
- use its commercially reasonable efforts
to consummate the exchange offer within
180 days after July 2, 2003, and
- if necessary under certain
circumstances, file a shelf registration
statement for the sale of the old notes
and use all commercially reasonable
means to cause such shelf registration
statement to become effective under the
Securities Act.
If Bally and its subsidiary guarantors fail
to timely file the registration statement,
the SEC fails to declare the registration
statement effective within 150 days after
July 2, 2003, or Bally and its subsidiary
guarantors fail to consummate the exchange
offer within 45 days after the registration
statement is declared effective, Bally must
pay additional interest on all old notes
until the exchange offer is completed or the
registration statement is declared
effective. This exchange offer is made
pursuant to the registration rights
agreement and is intended to satisfy the
rights granted under that agreement, which
will terminate upon completion of the
exchange offer. If Bally or its subsidiary
guarantors do not meet the third
requirement, Bally must pay additional
interest on those old notes not previously
exchanged until the shelf registration is
declared effective.
7
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The following is a brief summary of terms of the exchange offer. For a
more complete description of the exchange offer, see "The Exchange Offer."
Securities Offered $235,000,000 in aggregate principal amount
of 10.5% Senior Notes due 2011.
Exchange Offer The notes are being offered in exchange for
a like principal amount of old notes. Bally
will accept any and all old notes validly
tendered and not withdrawn prior to 5:00
p.m., New York City time, on _____________,
2003. Holders may tender some or all of
their old notes pursuant to the exchange
offer. However, old notes may be tendered
only in integral multiples of $1,000 in
principal amount. The form and terms of the
notes are the same as the form and terms of
the old notes except that:
- the notes have been registered under
the federal securities laws and will
not bear any legend restricting their
transfer;
- the notes bear a different CUSIP
number than the old notes; and
- the holders of the notes will not be
entitled to certain rights under the
registration rights agreement,
including the provisions for an
increase in the interest rate on the
old notes in some circumstances
relating to the timing of the exchange
offer.
See "The Exchange Offer."
Expiration Date The exchange offer will expire at 5:00 p.m.,
New York City time, on _____________, 2003,
unless we decide to extend the exchange
offer.
Conditions to the Exchange Offer The exchange offer is subject to a number of
customary conditions, some of which may be
waived by us. See "The Exchange
Offer--Conditions to the Exchange Offer."
Procedures for Tendering Old If you wish to accept the exchange offer,
Notes you must complete, sign and date the letter
of transmittal, or a facsimile of the letter
of transmittal, in accordance with the
instructions contained in this prospectus
and in the letter of transmittal. You should
then mail or otherwise deliver the letter of
transmittal, or facsimile, together with the
old notes to be exchanged and any other
required documentation, to the exchange
agent at the address set forth in this
prospectus and in the letter of transmittal.
By executing the letter of transmittal, you
will represent to Bally that, among other
things:
- any exchange notes to be received by
you will be acquired in the ordinary
course of business;
- you have no arrangement or
understanding with any person to
participate in the distribution (within
the meaning of the Securities Act) of
the exchange notes in violation of the
provisions of the Securities Act;
- you are not an "affiliate" (within the
meaning of Rule 405 under Securities
Act) of Bally; and
- if you are a broker-dealer that will
receive notes for your own account in
8
exchange for old notes that were
acquired as a result of market-making
or other trading activities, then you
will deliver a prospectus in connection
with any resale of such notes.
See "The Exchange Offer--Procedures for
Tendering" and "Plan of Distribution."
Effect of Not Tendering Any old notes that are not tendered or that
are tendered but not accepted will remain
subject to the restrictions on transfer.
Since the old notes have not been registered
under the federal securities laws, they bear
a legend restricting their transfer absent
registration or the availability of a
specific exemption from registration. Upon
the completion of the exchange offer, we
will have no further obligations, except
under limited circumstances, to provide for
registration of the old notes under the
federal securities laws. See "The Exchange
Offer--Purpose and Effect."
Interest on the Notes and the The notes will bear interest from the most
Old Notes recent interest payment date to which
interest has been paid on the old notes or,
if no interest has been paid, from July 2,
2003. Interest on the old notes accepted for
exchange will cease to accrue upon the
issuance of the exchange notes.
Withdrawal Rights Tenders of old notes may be withdrawn at any
time prior to 5:00 p.m., New York City time,
on the expiration date.
Federal Tax Consequences There will be no federal income tax
consequences to you if you exchange your old
notes for exchange notes in the exchange
offer. See "Certain Federal Income Tax
Consequences."
Use of Proceeds Bally will not receive any proceeds from the
issuance of notes pursuant to the exchange
offer.
Exchange Agent U.S. Bank National Association, the trustee
under the indenture, is serving as exchange
agent in connection with the exchange offer.
9
SUMMARY OF THE TERMS OF THE NOTES
The following is a brief summary of the terms of the notes. The
financial terms and covenants of the notes are the same as the old notes. For a
more complete description of the terms of the notes, see "Description of the
Notes."
Issuer........................... Bally Total Fitness Holding Corporation.
Securities Offered............... $235,000,000 principal amount of 10 1/2%
senior notes due 2011.
Maturity......................... July 15, 2011.
Interest Rate.................... 10 1/2% per year (calculated using a 360-day
year).
Interest Payment Dates........... January 15 and July 15, beginning on January
15, 2004. The notes will be sold with
accrued interest from July 2, 2003.
Guarantees....................... All payments of the notes, including
principal and interest, will be jointly and
severally guaranteed on a senior unsecured
basis by certain of Bally's existing and
future restricted subsidiaries. The
guarantees may be released under certain
circumstances.
Ranking.......................... The notes and the guarantees will rank:
- equal in right of payment to
all of Bally's and the guarantors'
existing and future senior
indebtedness;
- senior in right of payment to
Bally's and the guarantors'
existing and future subordinated
indebtedness; and
- effectively junior to Bally's
and the guarantors' secured
indebtedness.
As of June 30, 2003, after giving effect to
the sale of the old notes and the other
refinancing transactions that took place on
July 2, 2003, and the use of the proceeds
from the sale of additional old notes on
July 22, 2003 we estimate that we and our
subsidiaries would have had $210.9 million
of secured debt outstanding and
approximately $94.0 million, subject to
certain limitations, available to borrow
under the new credit facility.
Optional Redemption.............. Except as noted below, Bally cannot redeem
the notes until July 15, 2007. Thereafter
Bally may redeem some or all of the notes at
the redemption prices listed in the
"Description of Notes" section under the
heading "Redemption," plus accrued and
unpaid interest, if any.
At any time (which may be more than once)
before July 15, 2006, Bally can choose to
redeem up to 35% of the outstanding notes
with money that it raises in one or more
equity offerings, so long as:
- Bally pays 110.50% of the face
amount of the notes plus accrued
and unpaid interest;
- Bally redeems the notes within
90 days of completing the equity
offering; and
10
- at least 65% of the aggregate
principal amount of the notes
originally issued remains
outstanding afterwards.
Change of Control Offer.......... If Bally experiences a change in control,
Bally must, subject to certain conditions,
give holders of the notes the opportunity to
sell it their notes at 101% of their
principal amount, plus accrued and unpaid
interest, if any.
Asset Sale Proceeds.............. If Bally or its restricted subsidiaries
engage in asset sales, Bally generally must
either invest the net cash proceeds from
such sales in its business within a period
of time, repay debt under its credit
facility or, under certain conditions, make
an offer to purchase a principal amount of
the notes equal to the excess net cash
proceeds. The purchase price of the notes
will be 100% of their principal amount, plus
accrued and unpaid interest, if any.
Certain Indenture Provisions..... The indenture governing the notes contains
covenants that, among other things, limit
Bally's (and certain of our restricted
subsidiaries') ability to:
- incur additional debt;
- pay dividends or distributions
on capital stock or repurchase
capital stock;
- issue preferred stock of
subsidiaries;
- make certain investments;
- create liens on our assets to
secure debt;
- enter into transactions with
affiliates;
- merge or consolidate with
another company; and
- transfer and sell assets.
These covenants are subject to a number of
important limitations and exceptions. See
"Description of Notes--Certain Covenants."
Risk Factors..................... Investing in the notes involves substantial
risks. See "Risk Factors" for a description
of certain of the risks you should consider
before investing in the notes.
11
RISK FACTORS
Investing in the notes involves a high degree of risk. You should
carefully consider the following risk factors and all other information
contained in this prospectus before making an investment decision. The
occurrence of any one or more of the following could materially adversely affect
your investment in the notes or our business and operating results.
RISKS RELATING TO THIS OFFERING
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THESE NOTES.
We have now and, after this offering, will continue to have a
significant amount of indebtedness. On June 30, 2003, after giving pro forma
effect to the sale of $235.0 million principal amount of old notes and the use
of the proceeds thereof, we would have had total indebtedness of $753.5 million
(including outstanding letters of credit of $6.0 million). Long-term debt was
approximately 58% of total capitalization.
Our substantial indebtedness could have important consequences to you.
For example, it could:
- make it more difficult for us to satisfy our obligations with
respect to these notes;
- increase our vulnerability to general adverse economic and
industry conditions;
- require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, thereby reducing
the availability of our cash flow to fund working capital,
capital expenditures and other general corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate;
- place us at a competitive disadvantage compared to our
competitors that have less debt; and
- limit our ability to borrow additional funds.
COVENANT RESTRICTIONS UNDER OUR INDEBTEDNESS MAY LIMIT OUR ABILITY TO OPERATE
OUR BUSINESS AND, IN SUCH AN EVENT, WE MAY NOT HAVE SUFFICIENT ASSETS TO PAY
AMOUNTS DUE TO YOU ON THE NOTES.
Bally's new credit facility, the indenture governing the notes and
certain of our other agreements regarding our indebtedness contain, among other
things, covenants that may restrict our and our restricted subsidiaries' ability
to finance future operations or capital needs or to engage in other business
activities. The indenture governing our existing senior subordinated notes
contains covenants that limit our ability to incur additional indebtedness, pay
dividends, prepay certain indebtedness, dispose of certain assets, create liens
and make certain investments or acquisitions. The new credit facility and the
indenture do restrict, among other things, our ability and the ability of our
restricted subsidiaries to:
- borrow money;
- pay dividends or make distributions;
- purchase or redeem stock;
- make investments and extend credit;
- engage in sale-leaseback transactions;
12
- consummate certain asset sales;
- effect a consolidation or merger or sell, transfer, lease or
otherwise dispose of all or substantially all of our assets;
and
- create liens on our assets.
In addition, the new credit facility requires Bally to maintain
specified financial ratios and satisfy certain financial condition tests that
may require that Bally take action to reduce our debt or to act in a manner
contrary to its business objectives. Events beyond our control, including
changes in general economic and business conditions, may affect Bally's ability
to meet those financial ratios and financial condition tests. We cannot assure
you that Bally will meet those tests or that the lenders will waive any failure
to meet those tests. A breach of any of these covenants would result in a
default under the new credit facility and a cross-acceleration of the notes
under the indenture and the indenture governing our Series D Subordinated Notes.
If an event of default under the new credit facility occurs, the lenders could
elect to declare all amounts outstanding thereunder, together with accrued
interest, to be immediately due and payable. In such an event, Bally cannot
assure you that we would have sufficient assets to pay amounts due on the notes.
As a result, you may receive less than the full amount you would be otherwise
entitled to receive on the notes.
DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND OUR SUBSIDIARIES MAY STILL BE ABLE
TO INCUR SUBSTANTIALLY MORE DEBT. THIS COULD FURTHER EXACERBATE THE RISKS
ASSOCIATED WITH OUR EXISTING LEVERAGE.
We and our subsidiaries may be able to incur substantial additional
indebtedness, including additional secured debt, in the future. The terms of the
indenture do not fully prohibit us or our subsidiaries from doing so. As of June
30, 2003, on an as adjusted basis after giving effect to the sale of $235.0
million principal amount of old notes, the new credit facility would permit
additional borrowings of up to $94.0 million after giving effect to outstanding
letters of credit of $6.0 million. If new debt is added to our and our
subsidiaries' current debt levels, the related risks that we and they now face
could intensify. See "Description of Other Indebtedness" for additional
information.
TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR
ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS, SOME OF WHICH ARE BEYOND OUR
CONTROL.
Our ability to make payments on and to refinance our indebtedness,
including these notes, and to fund planned capital expenditures depends on our
ability to generate cash in the future. This, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control.
We cannot assure you that our business will generate sufficient cash
flow from operations, that currently anticipated cost savings and operating
improvements will be realized on schedule or that future borrowings will be
available to us under our new credit facility in an amount sufficient to enable
us to pay our indebtedness, including these notes, or to fund our other
liquidity needs. Bally's existing senior subordinated notes and the new credit
facility will mature prior to these notes. In addition, $30 million of principal
on our Series 2001-1 accounts receivable-backed variable funding certificates
issued under our securitization facility is scheduled to begin amortizing in
November 2003. We have extended the commitment on the balance of the facility on
a revolving basis through July 2005. We may need to refinance all or a portion
of our indebtedness, including these notes, on or before maturity. We cannot
assure you that we will be able to refinance any of our indebtedness, including
our new credit facility and these notes, on commercially reasonable terms or at
all.
YOUR RIGHT TO RECEIVE PAYMENTS ON THESE NOTES IS EFFECTIVELY SUBORDINATED TO THE
RIGHTS OF OUR EXISTING AND FUTURE SECURED CREDITORS. FURTHER, THE GUARANTEES OF
THESE NOTES ARE EFFECTIVELY SUBORDINATED TO ALL OUR GUARANTORS' EXISTING AND
FUTURE SECURED INDEBTEDNESS.
Holders of our secured indebtedness and the secured indebtedness of the
guarantors have claims that are prior to your claims as holders of the notes to
the extent of the value of the assets securing that other indebtedness. Notably,
we and certain of our subsidiaries, including the guarantors, are parties to the
new credit facility, which is
13
secured by liens on substantially all of our assets and the assets of the
guarantors. The notes will be effectively subordinated to all that secured
indebtedness. In the event of any distribution or payment of our assets in any
foreclosure, dissolution, winding-up, liquidation, reorganization, or other
bankruptcy proceeding, holders of secured indebtedness will have prior claim to
those of our assets that constitute their collateral. Holders of the notes will
participate ratably with all holders of our senior unsecured indebtedness, and
with all of our other general creditors, based upon the respective amounts owed
to each holder or creditor, in our remaining assets. Our existing senior
subordinated notes, the Series 2001-1 accounts receivable-backed variable
funding certificates and the new credit facility will mature prior to these
notes. In any of the foregoing events, we cannot assure you that there will be
sufficient assets to pay amounts due on the notes. As a result, holders of notes
may receive less, ratably, than holders of secured indebtedness.
As of June 30, 2003, on an as adjusted basis after giving effect to the
sale of $235.0 million principal amount of old notes, the aggregate amount of
our secured indebtedness and the secured indebtedness of our subsidiaries would
have been approximately $210.9 million, and approximately $94.0 million would
have been available for additional borrowing under the new credit facility after
giving effect to outstanding letters of credit of $6.0 million. We will be
permitted, subject to certain conditions, to borrow substantial additional
indebtedness, including senior debt, in the future under the terms of the
indenture. See "Description of Other Indebtedness."
YOUR RIGHT TO RECEIVE PAYMENTS ON THESE NOTES COULD BE ADVERSELY AFFECTED IF ANY
OF OUR NON-GUARANTOR SUBSIDIARIES DECLARE BANKRUPTCY, LIQUIDATE OR REORGANIZE.
Some but not all of our subsidiaries guarantee the notes. In the event
of a bankruptcy, liquidation or reorganization of any of our non-guarantor
subsidiaries, holders of their indebtedness and their trade creditors will
generally be entitled to payment of their claims from the assets of those
subsidiaries before any assets are made available for distribution to us.
Assuming Bally completed the sale of $235.0 million principal amount of
old notes on June 30, 2003, these notes would have been effectively junior to
$155.1 of indebtedness and other liabilities (including trade payables) of our
non-guarantor subsidiaries and approximately $0.5 million would have been
available to those subsidiaries for future borrowing under their credit
facilities. Our non-guarantor subsidiaries generated 3.5% of our consolidated
revenues in the twelve-month period ended June 30, 2003 and held 36% of our
consolidated assets as of June 30, 2003. See our condensed consolidating
financial statements contained in the notes to our financial statements at the
back of this prospectus.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURE.
Upon the occurrence of certain specific kinds of change of control
events, Bally will be required to offer to repurchase all outstanding notes at
101% of the principal amount thereof plus accrued and unpaid interest, if any,
to the date of repurchase. However, it is possible that Bally will not have
sufficient funds at the time of the change of control to make the required
repurchase of notes. In addition, restrictions in the new credit facility will
limit Bally's ability to repurchase the notes. Our future debt agreements may
contain similar restrictions and provisions. If the holders of the notes
exercise their right to require us to repurchase all of the notes upon a change
of control, the financial effect of this repurchase could cause a default under
our other debt, even if the change of control itself would not cause a default.
Furthermore, certain important corporate events, such as leveraged
recapitalizations that would increase the level of our indebtedness, would not
constitute a "Change of Control" under the indenture. See "Description of
Notes."
14
FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
GUARANTEES AND REQUIRE NOTE HOLDERS TO RETURN PAYMENTS RECEIVED FROM GUARANTORS.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, a guarantee could be voided, or claims in respect of a
guarantee could be subordinated to all other debts of that guarantor if, among
other things, the guarantor, at the time it incurred the indebtedness evidenced
by its guarantee:
- incurred the guarantee of the notes with the intent of
hindering, delaying or defrauding current or future creditors;
or
- received less than reasonably equivalent value or fair
consideration for the incurrence of such guarantee and such
guarantor:
- was insolvent or rendered insolvent by reason of such
incurrence; or
- was engaged in a business or transaction for which the
guarantor's remaining assets constituted unreasonably small
capital; or
- intended to incur, or believed that it would incur, debts
beyond its ability to pay such debts as they mature.
In addition, any payment by that guarantor pursuant to its guarantee
could be voided and required to be returned to the guarantor, or to a fund for
the benefit of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer
laws will vary depending upon the law applied in any proceeding to determine
whether a fraudulent transfer has occurred. Generally, however, a guarantor
would be considered insolvent if, at the time it incurred the debt or issued the
guarantee:
- the sum of its debts, including contingent liabilities, was
greater than the fair saleable value of all of its assets; or
- if the present fair saleable value of its assets was less than
the amount that would be required to pay its probable
liability on its existing debts, including contingent
liabilities, as they become absolute and mature; or
- it could not pay its debts as they become due.
On the basis of historical financial information, recent operating
history and other factors, we believe that each guarantor, after giving effect
to its guarantee of these notes, will not be insolvent, will not have
unreasonably small capital for the business in which it is engaged and will not
have incurred debts beyond its ability to pay such debts as they mature. We
cannot assure you, however, as to what standard a court would apply in making
these determinations or that a court would agree with our conclusions in this
regard.
If a guarantee is voided as a fraudulent conveyance or found to be
unenforceable for any other reason, you will not have a claim against that
guarantor and will only be a creditor of Bally and any guarantor whose
obligation was not set aside or found to be unenforceable.
YOU MAY BE ADVERSELY AFFECTED IF YOU DO NOT EXCHANGE YOUR NOTES.
If you do not exchange your old notes for notes pursuant to the
exchange offer, you will continue to be subject to the transfer restrictions on
your old notes. You will have no further registrations rights. The transfer
restrictions on your old notes arise because we issued the old notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, you may only offer or sell the old notes if they are registered under
the Securities Act and applicable state securities laws, or offered and sold
pursuant to an exemption from those requirements. Bally does not intend to
register the old notes under the Securities Act. In addition, if you exchange
your old notes in the exchange offer for the purpose of
15
participating in a distribution of the new notes, you may be deemed to have
received restricted securities. In those circumstances, you will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. To the extent old
notes are tendered and accepted in the exchange offer, the trading market, if
any, for the old notes would be adversely affected.
THERE IS NO PUBLIC MARKET FOR THE NOTES, SO YOU MAY BE UNABLE TO SELL THEM.
Bally will not list the notes on any securities exchange. These notes
are new securities for which there is currently no market. The notes may trade
at a discount from their initial offering price, depending upon prevailing
interest rates, the market for similar securities, our performance and other
factors. We have been advised by the initial purchasers that they intend to
make a market in the notes, as well as the old notes, as permitted by applicable
laws and regulations. However, they are not obligated to do so and their market
making activities may be limited during our exchange offer. Therefore, we cannot
assure you that an active market for the notes will develop.
IF A MARKET DEVELOPS FOR THE NOTES, THE NOTES MIGHT TRADE AT VOLATILE PRICES.
If a market develops for the notes, the notes might trade at prices
higher or lower than their initial public offering price. The trading price
would depend on many factors, such as prevailing interest rates, the market for
similar securities, general economic conditions and our financial condition,
performance and prospects.
YOU MUST TENDER THE OLD NOTES IN ACCORDANCE WITH PROPER PROCEDURES IN ORDER TO
ENSURE THE EXCHANGE WILL OCCUR.
Bally will only exchange old notes for notes if you follow the proper
procedures, as detailed in this prospectus. Bally will issue the notes in
exchange for the old notes if the exchange agent receives the old notes or a
book-entry confirmation, a properly completed and executed transmittal letter,
or an agent's message, and all other required documentation in a timely manner.
If you want to tender your old notes in exchange for notes, you should allow
sufficient time to ensure timely delivery. Neither Bally nor the exchange agent
is under any duty to give you notification of defects or irregularities with
respect to tenders of old notes for exchange. In addition, if you are an
affiliate of Bally or you tender the old notes in the exchange offer in order
to participate in a distribution of the notes, you will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. For additional information, please
refer to the sections entitled "The Exchange Offer" and "Plan of Distribution."
RISKS RELATING TO OUR BUSINESS
THE POSITIVE RESULTS ACHIEVED FROM INTRODUCING PRODUCTS AND SERVICES DURING THE
MOST RECENT THREE YEARS MAY NOT CONTINUE IN THE FUTURE.
We have introduced a number of business initiatives to capitalize on
our brand identity, distribution infrastructure, significant member base and
frequency of visitation. These initiatives primarily focus on selling ancillary
products and services to our members within our fitness centers and include:
providing personal training services; selling private-label nutritional
products; opening retail stores within our fitness centers that sell nutritional
products, work-out apparel and related accessories; and rehabilitative and
physical therapy services. However, before 1998, we had not previously generated
significant revenues from any of these new business initiatives and they may not
continue to be successful in the future. We have limited experience in marketing
products to our members. The sale and marketing of nutritional products and
workout apparel and related accessories and the provision of rehabilitative and
physical therapy services involve significant risk of competition. See
"Business--Competition."
16
WE MAY NOT BE ABLE TO CONTINUE TO COMPETE EFFECTIVELY IN EACH OF OUR MARKETS IN
THE FUTURE.
The fitness club industry is highly competitive. Within each market in
which we operate, we compete with other commercial fitness centers, physical
fitness and recreational facilities established by local governments, hospitals
and businesses for their employees, the YMCA and similar organizations and, to a
certain extent, with racquet, tennis and other athletic clubs, country clubs,
weight reducing salons and the home-use fitness equipment industry. We also
compete, to some extent, with entertainment and retail businesses for the
discretionary income of our target markets. We may not be able to continue to
compete effectively in each of our markets in the future. Additionally,
competitive conditions may limit our ability to maintain or increase pricing of
initial membership fees and may impact our ability to attract new members.
As we pursue new business initiatives, particularly the sale of
nutritional products and apparel, we will be competing against large,
established companies with more experience selling products on a retail basis.
In some instances, our competitors for these products have substantially greater
financial resources than us. We may not be able to compete effectively against
these established companies.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND CHANGES IN THESE
REGULATIONS COULD HAVE A NEGATIVE EFFECT ON OUR FINANCIAL CONDITION.
Our operations and business practices are subject to federal, state and
local government regulations in the various jurisdictions in which our fitness
centers are located and where our nutritional products are sold, including:
- general rules and regulations of the Federal Trade Commission
(the "FTC"), state and local consumer protection agencies and
state statutes that prescribe provisions of membership
contracts and that govern the advertising, sale, financing and
collection of membership fees and dues;
- state and local health regulations; and
- federal regulation of health and nutritional supplements.
We are also a party to several state and federal consent orders. These
consent orders essentially require continued compliance with applicable laws and
require us to refrain from activities not in compliance with applicable laws.
From time to time, we make minor adjustments to our operating procedures to
remain in compliance with applicable laws and we believe our operations are in
material compliance with all applicable statutes, rules and regulations. Our
failure to comply with these statutes, rules and regulations may result in fines
or penalties. These may include regulatory or judicial orders enjoining or
curtailing aspects of our operations. It is difficult to predict the future
development of such laws or regulations, and although we are not aware of any
proposed changes, any changes in such laws could have a material adverse effect
on our financial condition and results of operations.
We are, and have been in the past, named as defendants in a number of
purported class action lawsuits based on alleged violations of state and local
consumer protection laws and regulations governing the sale, financing and
collection of membership fees. To date we have successfully defended or settled
such lawsuits without a material adverse effect on our financial condition or
results of operation. However, we cannot assure you that we will be able to
successfully defend or settle all pending or future purported class action
claims, and our failure to do so may have a material adverse effect on our
financial condition. See "Business--Government Regulation."
OUR TRADEMARKS AND TRADE NAMES MAY BE MISAPPROPRIATED OR SUBJECT TO CLAIMS OF
INFRINGEMENT.
We attempt to protect our trademarks and trade names through a
combination of trademark and copyright laws, as well as licensing agreements and
third-party nondisclosure and assignment agreements. Our failure to obtain or
maintain adequate protection of our intellectual property rights for any reason
could have a material adverse effect on our business, results of operations and
financial condition.
17
IF WE DO NOT RETAIN OUR KEY PERSONNEL OR FAIL TO ATTRACT AND RETAIN OTHER HIGHLY
SKILLED EMPLOYEES OUR BUSINESS WILL SUFFER.
The success of our business is heavily dependent on the leadership of
our key management personnel, including: Paul Toback, our Chairman, President
and Chief Executive Officer; John Dwyer, our Chief Financial Officer; William
Fanelli, our Senior Vice President, Finance; Cary Gaan, our General Counsel;
Harold Morgan, our Chief Administrative Officer and John Wildman, our Chief
Operating Officer. Currently we have entered into employment agreements with
Messrs. Toback, Dwyer, Fanelli, Gaan, Morgan and Wildman. If any of these
persons were to leave, it might be difficult to replace them, and our business
could be harmed. See "Management." In addition, we cannot assure you that we can
attract and retain sufficient qualified personnel to meet our business needs.
WE COULD BE SUBJECT TO CLAIMS RELATED TO HEALTH OR SAFETY RISKS AT OUR CLUBS.
Use of our clubs poses some potential health or safety risks to members
or guests through the use of our services and facilities. We cannot assure you
that claims against us by members or their guests will not be asserted or that
we would be able to successfully defend any such claim. We also cannot assure
you that we will be able to maintain our general liability insurance on
acceptable terms in the future or that such insurance will provide adequate
coverage against potential claims.
THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS ARE BASED ON OUR
PREDICTIONS OF FUTURE PERFORMANCE. AS A RESULT, YOU SHOULD NOT PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS.
This prospectus includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act
including, in particular, the statements about our plans, strategies, and
prospects under the headings "Prospectus Summary," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business."
Although we believe that our plans, intentions and expectations reflected in or
suggested by these forward-looking statements are reasonable, we cannot assure
you that our plans, intentions or expectations will be achieved. Important
factors that could cause actual results to differ materially from the
forward-looking statements we make in this prospectus are set forth above in
this "Risk Factors" section and elsewhere in this prospectus. All
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by these cautionary statements.
18
THE EXCHANGE OFFER
PURPOSE AND EFFECT
Bally, and its subsidiary guarantors, entered into registration rights
agreements, dated as of July 2 and July 22, 2003, respectively, with the initial
purchaseres of the old notes, which require that Bally file a registration
statement under the Securities Act, at its own expense, with respect to the
notes and, upon the effectiveness of that registration statement, offer to the
holders of the old notes the opportunity to exchange their old notes for a like
principal amount of notes. The notes will be issued without a restrictive legend
and generally may be reoffered and resold without registration under the
Securities Act. The registration rights agreements further provide that Bally
must use all commercially reasonable efforts to cause the registration statement
with respect to the exchange offer to be declared effective within 150 days of
July 2, 2003 (the "Issue Date"). It further provides that we must use all
commercially reasonable efforts to consummate the exchange offer within 180 days
after the Issue Date.
Except as described below, upon the completion of the exchange offer,
our obligations with respect to the registration of the old notes and the notes
will terminate. Copies of the registration rights agreements have been filed as
exhibits to the registration statement of which this prospectus is a part, and
this summary of the material provisions of the registration rights agreements
does not purport to be complete and is qualified in its entirety by reference to
the complete registration rights agreements. As a result of the timely filing
and the effectiveness of the registration statement, Bally will not have to pay
certain additional interest on the old notes as provided in the registration
rights agreements. Following the completion of the exchange offer, holders of
old notes not tendered will not have any further registration rights other than
as set forth in the paragraphs below, and those old notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for the old notes could be adversely affected upon consummation of the
exchange offer.
In order to participate in the exchange offer, a holder must represent
to Bally, among other things, that:
- any notes received by it will be acquired in the ordinary
course of business;
- at the time of the commencement of the exchange offer, it has
no arrangement or understanding with any person to participate
in the distribution (within the meaning of the Securities Act)
of the notes in violation of the provisions of the Securities
Act;
- it is not an "affiliate" (as defined in Rule 405 of the
Securities Act) of ours;
- if the holder is not a broker-dealer, that it is not engaged
in, and does not intend to engage in, the distribution of
notes; and
- if the holder is a broker-dealer, that it will receive notes
for its own account in exchange for old notes that were
acquired as a result of market-making or other trading
activities, and that it will deliver a prospectus in
connection with any resale of such notes.
Under certain circumstances specified in the registration rights
agreements, we may be required to file a "shelf" registration statement for a
continuous offering in connection with certain of the old notes pursuant to Rule
415 under the Securities Act.
Based on an interpretation by the SEC's staff set forth in no-action
letters issued to third parties unrelated to us, we believe that, with the
exceptions set forth below, the notes issued in the exchange offer may be
offered for resale, resold and otherwise transferred by the holder of such notes
without compliance with the registration and prospectus delivery requirements of
the Securities Act, unless the holder:
- acquired the notes other than in the ordinary course of the
holder's business;
- has an arrangement with any person to engage in the
distribution of notes;
- is an "affiliate" of ours, within the meaning of Rule 405
under the Securities Act; or
19
- is a broker-dealer who purchased old notes directly from us
for resale under Rule 144A or Regulation S or any other
available exemption under the Securities Act.
Any holder who tenders in the exchange offer for the purpose of
participating in a distribution of the notes cannot rely on this interpretation
by the SEC's staff and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. Each broker-dealer that receives notes for its own account in
exchange for old notes, where such old notes were acquired by such broker-dealer
as a result of market making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such notes. See "Plan of Distribution." Broker-dealers who acquired old notes
directly from us and not as a result of market making activities or other
trading activities may not rely on the SEC's staff's interpretations discussed
above or participate in the exchange offer and must comply with the prospectus
delivery requirements of the Securities Act in order to sell the old notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal, Bally will accept any and all
outstanding old notes validly tendered and not withdrawn prior 5:00 p.m., New
York City time, on _________, 2003 or such date and time to which Bally extends
the offer.
The notes will evidence the same debt as the old notes and will be
issued under the terms of, and entitled to the benefits of, the applicable
indenture relating to the old notes.
As of the date of this prospectus, old notes representing $235.0
million in aggregate principal amount of 10.5% Series A Notes due 2011 were
outstanding and there was one registered holder, a nominee of the Depository
Trust Company. This prospectus, together with the letter of transmittal, is
being sent to the registered holder and to others believed to have beneficial
interests in the old notes. Bally intends to conduct the exchange offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the SEC promulgated under the Exchange Act.
Bally will be deemed to have accepted validly tendered old notes when,
as, and if Bally has given oral or written notice thereof to U.S. Bank National
Association, the exchange agent. The exchange agent will act as agent for the
tendering holders for the purpose of receiving the notes from us. If any
tendered old notes are not accepted for exchange because of an invalid tender,
the occurrence of certain other events set forth under the heading "--Conditions
to the Exchange Offer" or otherwise, certificates for any such unaccepted old
notes will be returned, without expense, to the tendering holder of those old
notes as promptly as practicable after the expiration date unless the exchange
offer is extended.
Holders who tender old notes in the exchange offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
letter of transmittal, transfer taxes with respect to the exchange of old notes
in the exchange offer. We will pay all charges and expenses, other than certain
applicable taxes, applicable to the exchange offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The expiration date shall be 5:00 p.m., New York City time, on _______,
2003, unless Bally, in its sole discretion, extends the exchange offer, in which
case the expiration date shall be the latest date and time to which the exchange
offer is extended. In order to extend the exchange offer, Bally will notify the
exchange agent and each registered holder of any extension by oral or written
notice prior to 9:00 a.m., New York City time, on the next business day after
the previously scheduled expiration date. Bally reserves the right, in its sole
discretion:
- to delay accepting any old notes, to extend the exchange offer
or, if any of the conditions set forth under "--Conditions to
the Exchange Offer" shall not have been satisfied, to
terminate the exchange offer, by giving oral or written notice
of that delay, extension or termination to the exchange agent,
or
- to amend the terms of the exchange offer in any manner.
In the event that Bally makes a fundamental change to the terms of the
exchange offer, Bally will file a post-effective amendment to the registration
statement.
20
PROCEDURES FOR TENDERING
Only a holder of old notes may tender old notes in the exchange offer.
Except as set forth under the heading "--Book-Entry Transfer," to tender in the
exchange offer a holder must complete, sign, and date the letter of transmittal,
or a copy of the letter of transmittal, have the signatures on the letter of
transmittal guaranteed if required by the letter of transmittal, and mail or
otherwise deliver the letter of transmittal or copy to the exchange agent prior
to the expiration date. In addition:
- certificates for the old notes must be received by the
exchange agent along with the letter of transmittal prior to
the expiration date;
- a timely confirmation of a book-entry transfer, which we refer
to as a book-entry confirmation, of the old notes, if that
procedure is available, into the exchange agent's account at
The Depository Trust Company, which we refer to as the
book-entry transfer facility, following the procedure for
book-entry transfer described below, must be received by the
exchange agent prior to the expiration date; or
- you must comply with the guaranteed delivery procedures
described below.
To be tendered effectively, the letter of transmittal and other
required documents must be received by the exchange agent at the address set
forth under the heading "--Exchange Agent" prior to the expiration date.
Your tender, if not withdrawn before the expiration date will
constitute an agreement between you and us in accordance with the terms and
subject to the conditions set forth herein and in the letter of transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT YOUR ELECTION AND RISK.
INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT YOU USE AN OVERNIGHT OR HAND
DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO US. YOU MAY REQUEST YOUR BROKERS,
DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THESE
TRANSACTIONS FOR YOU.
Any beneficial owner whose old notes are registered in the name of a
broker, dealer, commercial bank, trust company, or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. If the beneficial
owner wishes to tender on the owner's own behalf, the owner must, prior to
completing and executing the letter of transmittal and delivering the owner's
outstanding notes, either make appropriate arrangements to register ownership of
the outstanding notes in the beneficial owner's name or obtain a properly
completed bond power from the registered holder. The transfer of registered
ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act, which is referred to as an
eligible institution, unless outstanding notes tendered pursuant thereto are
tendered:
- by a registered holder who has not completed the box entitled
"Special Issuance Instruction" on the letter of transmittal;
or
- for the account of an eligible institution.
If signatures on a letter of transmittal or a notice of withdrawal, as
the case may be, are required to be guaranteed, the guarantee must be by any
eligible guarantor institution that is a member of or participant in the
Securities Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Signature Program, Stock Exchange Medallion Program or any other
eligible guarantor institution as defined in Rule 17Ad-15 of the Exchange Act.
If the letter of transmittal is signed by a person other than the
registered holder of any old notes listed in the letter of transmittal, the old
notes must be endorsed or accompanied by a properly completed bond power, signed
by the registered holder as that registered holder's name appears on the old
notes.
21
If the letter of transmittal or any outstanding notes or bond powers
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations, or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and evidence
satisfactory to us of their authority to so act must be submitted with the
letter of transmittal unless waived by us.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance, and withdrawal of tendered old notes will be determined by
Bally in its sole discretion, and its determination will be final and binding.
Bally reserves the absolute right to reject any and all old notes not properly
tendered or any old notes our acceptance of which would, in the opinion of its
counsel, be unlawful. Bally also reserves the right to waive any defects,
irregularities or conditions of tender as to particular old notes. Bally's
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of old notes must be cured within such time as Bally shall determine. Although
Bally intends to notify holders of defects or irregularities with respect to
tenders of old notes, neither Bally, the exchange agent, nor any other person
shall incur any liability for failure to give that notification. Tenders of old
notes will not be deemed to have been made until such defects or irregularities
have been cured or waived. Any old notes received by the exchange agent that are
not properly tendered and as to which the defects or irregularities have not
been cured or waived will be returned by the exchange agent to the tendering
holders, unless otherwise provided in the letter of transmittal, as soon as
practicable following the expiration date, unless the exchange offer is
extended.
In addition, Bally reserves the right in its sole discretion to
purchase or make offers for any old notes that remain outstanding after the
expiration date or, as set forth under the heading "--Conditions to the Exchange
Offer," to terminate the exchange offer and, to the extent permitted by
applicable law, purchase old notes in the open market, in privately negotiated
transactions, or otherwise. The terms of any such purchases or offers could
differ from the terms of the exchange offer.
By tendering, you will be representing to Bally that, among other
things:
- any notes to be received by you will be acquired in the
ordinary course of business;
- you have no arrangement or understanding with any person to
participate in the distribution (within the meaning of the
Securities Act) of the notes in violation of the provisions of
the Securities Act;
- you are not an "affiliate" (within the meaning of Rule 405
under Securities Act) of ours; and
- if you are a broker-dealer that will receive notes for your
own account in exchange for old notes that were acquired as a
result of market-making or other trading activities, that you
will deliver a prospectus in connection with any resale of
such notes.
In all cases, issuance of notes for old notes that are accepted for
exchange in the exchange offer will be made only after timely receipt by the
exchange agent of certificates for such old notes or a timely book-entry
confirmation of such outstanding notes into the exchange agent's account at the
book-entry transfer facility, a properly completed and duly executed letter of
transmittal or, with respect to The Depository Trust Company and its
participants, electronic instructions in which the tendering holder acknowledges
its receipt of and agreement to be bound by the letter of transmittal, and all
other required documents. If any tendered old notes are not accepted for any
reason set forth in the terms and conditions of the exchange offer or if old
notes are submitted for a greater principal amount than the holder desires to
exchange, such unaccepted or non-exchanged old notes will be returned without
expense to the tendering holder or, in the case of outstanding notes tendered by
book-entry transfer into the exchange agent's account at the book-entry transfer
facility according to the book-entry transfer procedures described below, those
non-exchanged old notes will be credited to an account maintained with that
book-entry transfer facility, in each case, as promptly as practicable after the
expiration or termination of the exchange offer.
Each broker-dealer that receives notes for its own account in exchange
for outstanding old notes, where those outstanding old notes were acquired by
such broker-dealer as a result of market making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of those notes. See "Plan of Distribution."
22
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with
respect to the old notes at the book-entry transfer facility for purposes of the
exchange offer within two business days after the date of this prospectus, and
any financial institution that is a participant in the book-entry transfer
facility's systems may make book-entry delivery of old notes being tendered by
causing the book-entry transfer facility to transfer such old notes into the
exchange agent's account at the book-entry transfer facility in accordance with
that book-entry transfer facility's procedures for transfer. However, although
delivery of old notes may be effected through book-entry transfer at the
book-entry transfer facility, the letter of transmittal or copy of the letter of
transmittal, with any required signature guarantees and any other required
documents, must, in any case other than as set forth in the following paragraph,
be transmitted to and received by the exchange agent at the address set forth
under the heading "--Exchange Agent" on or prior to the expiration date or the
guaranteed delivery procedures described below must be complied with.
The Depository Trust Company's Automated Tender Offer Program, or ATOP,
is the only method of processing exchange offers through The Depository Trust
Company. To accept the exchange offer through ATOP, participants in The
Depository Trust Company must send electronic instructions to The Depository
Trust Company through The Depository Trust Company's communication system
instead of sending a signed, hard copy letter of transmittal. The Depository
Trust Company is obligated to communicate those electronic instructions to the
exchange agent. To tender old notes through ATOP, the electronic instructions
sent to The Depository Trust Company and transmitted by The Depository Trust
Company to the exchange agent must contain the character by which the
participant acknowledges its receipt of and agrees to be bound by the letter of
transmittal.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the old notes desires to tender old notes and
the old notes are not immediately available, or time will not permit that
holder's old notes or other required documents to reach the exchange agent
before the expiration date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if:
- the tender is made through an eligible institution;
- prior to the expiration date, the exchange agent receives from
that eligible institution a properly completed and duly
executed letter of transmittal or a facsimile of a duly
executed letter of transmittal and notice of guaranteed
delivery, substantially in the form provided by us, by
telegram, telex, fax transmission, mail or hand delivery,
setting forth the name and address of the holder of old notes
and the amount of old notes tendered and stating that the
tender is being made by guaranteed delivery and guaranteeing
that within three New York Stock Exchange, Inc., or NYSE,
trading days after the date of execution of the notice of
guaranteed delivery, the certificates for all physically
tendered old notes, in proper form for transfer, or a
book-entry confirmation, as the case may be, will be deposited
by the eligible institution with the exchange agent; and
- the certificates for all physically tendered old notes, in
proper form for transfer, or a book-entry confirmation, as the
case may be, are received by the exchange agent within three
NYSE trading days after the date of execution of the notice of
guaranteed delivery.
WITHDRAWAL RIGHTS
Tenders of old notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the expiration date.
For a withdrawal of a tender of old notes to be effective, a written
or, for The Depository Trust Company participants, electronic ATOP transmission
notice of withdrawal, must be received by the exchange agent at its address set
forth under the heading "--Exchange Agent" prior to 5:00 p.m., New York City
time, on the expiration date. Any such notice of withdrawal must:
- specify the name of the person having deposited the old notes
to be withdrawn, whom we refer to as the depositor;
- identify the old notes to be withdrawn, including the
certificate number or numbers and principal amount of such old
notes;
23
- be signed by the holder in the same manner as the original
signature on the letter of transmittal by which such old notes
were tendered, including any required signature guarantees, or
be accompanied by documents of transfer sufficient to have the
trustee register the transfer of such old notes into the name
of the person withdrawing the tender; and
- specify the name in which any such old notes are to be
registered, if different from that of the depositor.
All questions as to the validity, form, eligibility and time of receipt
of such notices will be determined by Bally, whose determination shall be final
and binding on all parties. Any old notes so withdrawn will be deemed not to
have been validly tendered for exchange for purposes of the exchange offer. Any
old notes which have been tendered for exchange but which are not exchanged for
any reason will be returned to the holder of those old notes without cost to
that holder as soon as practicable after withdrawal, rejection of tender, or
termination of the exchange offer. Properly withdrawn old notes may be
retendered by following one of the procedures under the heading "--Procedures
for Tendering" at any time on or prior to the expiration date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, Bally will
not be required to accept for exchange, or to issue exchange notes in exchange
for, any old notes and may terminate or amend the exchange offer if at any time
before the acceptance of those old notes for exchange or the exchange of the
notes for those old notes, Bally determines that the exchange offer violates any
applicable law or applicable interpretation of the Staff of the SEC.
The foregoing conditions are for Bally's sole benefit and may be
asserted by it regardless of the circumstances giving rise to any such condition
or may be waived by it in whole or in part at any time and from time to time in
its sole discretion. The failure by Bally at any time to exercise any of the
foregoing rights shall not be deemed a waiver of any of those rights and each of
those rights shall be deemed an ongoing right which may be asserted at any time
and from time to time.
In addition, Bally will not accept for exchange any old notes tendered,
and no notes will be issued in exchange for those old notes, if at such time any
stop order shall be threatened or in effect with respect to the registration
statement of which this prospectus constitutes a part. We are required to use
commercially reasonable efforts to obtain the withdrawal of any stop order at
the earliest possible time.
EXCHANGE AGENT
All executed letters of transmittal should be directed to the exchange
agent. US Bank National Association has been appointed as exchange agent for the
exchange offer. Questions, requests for assistance and requests for additional
copies of this prospectus or of the letter of transmittal should be directed to
the exchange agent addressed as follows:
BY MAIL, HAND DELIVERY OR OVERNIGHT COURIER:
U.S. Bank National Association
60 Livingston Avenue
St. Paul, Minnesota 55107
Attn: Specialized Finance Department
BY FACSIMILE:
(651) 495-8097
CONFIRM BY TELEPHONE:
(800) 934-6802
FOR INFORMATION CALL:
(800) 934-6802
24
Originals of all documents sent by facsimile should be sent promptly by
registered or certified mail, by hand or by overnight delivery service.
FEES AND EXPENSES
Bally will not make any payments to brokers, dealers or others
soliciting acceptances of the exchange offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by our officers and employees. The estimated cash expenses to be
incurred in connection with the exchange offer will be paid by us and will
include accounting, legal, printing, and related fees and expenses.
TRANSFER TAXES
Holders who tender their old notes for exchange will not be obligated
to pay any transfer taxes in connection with that tender or exchange, except
that holders who instruct us to register notes in the name of, or request that
old notes not tendered or not accepted in the exchange offer be returned to, a
person other than the registered tendering holder will be responsible for the
payment of any applicable transfer tax on those old notes.
USE OF PROCEEDS
This exchange offer is intended to satisfy our obligations under the
registration rights agreements, dated July 2, 2003 and July 22, 2003, by and
among Bally, our subsidiary guarantors and the initial purchasers for the old
notes. Bally will not receive any proceeds from the issuance of the notes in the
exchange offer. Bally will receive in exchange old notes in like principal
amount. Bally will retire or cancel all of the old notes tendered in the
exchange offer.
On July 2, 2003, Bally issued and sold $200.0 million principal amount
of old notes. On July 22, 2003, Bally issued and sold $35.0 million principal
amount of old notes. The net proceeds of the offerings of the old notes, after
deducting fees and expenses, was $228.8 million. Bally used the net proceeds
from the offerings of the old notes to repay indebtedness outstanding under our
old credit facility and our Securitization Series 2001 and for general working
capital purposes.
Borrowings under the new credit facility bear interest at a variable
rate that, generally is based at Bally's option, upon either the agent banks
prime rate plus 2.75% or a Eurodollar note plus 3.75%. The new credit facility
matures on June 30, 2008.
25
CAPITALIZATION
The following table sets forth our consolidated cash and capitalization
as of June 30, 2003 on an actual and as adjusted basis to give effect to the
sales of the old notes and the application of the net proceeds. This table
should be read in conjunction with our consolidated financial statements and
related notes contained elsewhere in this prospectus. All amounts are presented
in millions.
AS OF JUNE 30, 2003
-------------------------
ACTUAL AS ADJUSTED
-------- -----------
Cash and cash equivalents.............................. $ 16.5 $ 30.5 (1)
======== ========
Senior Debt:
New credit facility.................................. $ -- $ -- (2)
Term loan due 2004................................... 132.0 --
Existing credit facility............................. 54.5 --
Securitization, Series 2001-1........................ 155.0 130.0
Capital lease obligations............................ 32.5 32.5
Other secured and unsecured obligations.............. 50.3 50.3
Senior notes offered hereby.......................... -- 235.4
-------- --------
Total senior debt................................. 424.3 448.2
9 7/8% Senior Subordinated Notes due 2007(incl.
discount)......................................... 299.3 299.3
-------- --------
Total debt........................................ 723.6 747.5
-------- --------
Stockholders' equity................................. 531.9 531.9
-------- --------
Total capitalization.............................. $1,255.5 $1,279.4
======== ========
- --------------
(1) As of June 30, 2003 our revolver balance and cash balance were $54.5 million
and $16.5 million, respectively. Our current revolver balance was zero
as of September 24, 2003, $54.5 million less than the balance at
June 30, 2003.
(2) Does not reflect $94.0 million available under the new credit facility
($100.0 million of total availability reduced by $6.0 million of outstanding
letters of credit).
26
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected historical consolidated
financial information for each of the years in the five year period ended
December 31, 2002 and as of the end of each of such years and for each of the
six month periods ended June 30, 2003 and June 30, 2002 and as of the end of
each such six month period. The selected consolidated financial and other data
as of December 31, 2002 and 2001, and for each of the years in the three year
period ended December 31, 2002 were derived from our audited consolidated
financial statements included elsewhere in this prospectus. The selected
consolidated financial and other data as of December 31, 2000, 1999 and 1998,
and for each of the two years ended December 31, 1999 have been derived from our
audited consolidated financial statements which are not included in this
prospectus. The selected historical consolidated financial data as of and for
the six months ended June 30, 2003 and June 30, 2002 have been derived from our
unaudited consolidated financial statements, included elsewhere in this
prospectus. The results for the six month period ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the entire year.
In the second quarter of 2003, we changed our accounting (effective
January 1, 2003) for the recognition of recoveries of unpaid dues on inactive
membership contracts from accrued-based estimations to a cash basis of
recognition, which is considered a preferable method. As a result, a cumulative
non-cash charge of $15.4 million (net of tax effect of $4.9 million was
recorded). The financial statements show the pro forma effect of this change on
income from continuing operations, net income and earnings per share. In the
first quarter of 2003 we adopted the provisions of Statement of Financial
Accounting Standards No. 143, Accounting for Asset Retirement obligations and
recorded a $.2 million cumulative effect adjustment to reflect this accounting
change. In the first quarter of 2002, we reduced our tax valuation allowance
against net operating losses realized in prior periods by $4.0 million ($.12 per
diluted share). This adjustment decreased the income tax provision, increasing
net income. In the third quarter of 2002, we recorded a special charge of $6.5
million ($.15 per diluted share) to settle a class action lawsuit arising in the
early 1990's. In the fourth quarter of 2002, we recorded a special charge
totaling $65.7 million ($1.54 per diluted share). This charge included $55.0
million ($1.29 per diluted share) netted against net revenues, to increase our
receivable reserves based on assuming an accelerated monetization scenario and
the belief that strengthening of the receivable reserves was warranted, $7.3
million ($.17 per diluted share) to provide for amounts related to a separation
agreement entered into when our former CEO retired, and $3.4 million ($.08 per
diluted share) to write down inventory. In 2002, we adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
and ceased amortization of goodwill and indefinite lived trademarks, in
accordance with the provisions of this standard. In the third quarter of 2001,
we recorded a net benefit of special items of $8.3 million ($.27 per diluted
share) to record special charges primarily related to the September 11th tragedy
and a one-time markdown of retail apparel, offset by a reduction of our tax
valuation allowance as a result of our continued improved operating results and
trends. In the fourth quarter of 2000, we recorded a one-time non-cash charge of
$6.5 million ($.24 per diluted share) to write off third-party Internet
investments. In the third quarter of 2000, as a result of our improved operating
results and trends, we reduced our tax valuation allowance by $20.0 million
($.72 per diluted share). In the first quarter of 1999, in accordance with AICPA
Statement of Position 98-5, Reporting Costs of Start-up Activities, we wrote off
unamortized start-up costs of $.3 million ($.01 per share) as a cumulative
effect of a change in accounting principle.
EBITDA is defined as net income (loss) before depreciation and
amortization, income taxes, interest expense, discontinued operations and other
(and cumulative effect of accounting change, where applicable). We have
presented EBITDA supplementally because we believe this information is useful
given the significance of our depreciation and amortization and because of our
highly leveraged financial position. The table below includes a reconciliation
from net income to EBITDA. This data should not be considered as an alternative
to any measure of performance or liquidity as promulgated under generally
accepted accounting principles (such as cash provided by/used in operating,
investing and financing activities), nor should this data be considered as an
indicator of our overall financial performance. Also, the EBITDA definition used
by us may not be comparable to similarly titled measures reported by other
companies.
You should read the table below in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and related notes included elsewhere in
this prospectus. All amounts are presented in thousands, except club-related
data and ratios.
27
SIX MONTHS
YEAR ENDED DECEMBER 31 ENDED JUNE 30
--------------------------------------------------- ------------------
1998 1999 2000 2001 2002 2002 2003
------- ------- ------- ------- ------- ------- -------
(in millions, except club, member, ratio and per share data)
STATEMENT OF OPERATIONS DATA
Net revenues:
Membership revenue $ 534.1 $ 589.4 $ 659.3 $ 689.5 $ 730.6 $ 371.0 $ 346.4
Products and services 32.5 62.6 110.9 144.9 217.7 105.7 149.4
Miscellaneous revenue 9.0 11.0 15.7 17.1 19.6 9.9 9.7
Special charge to
membership receivable reserve - - - - (55.0) - -
------- ------- ------- ------- ------- ------- -------
Total net revenues 575.6 663.0 785.9 851.5 912.9 486.6 505.5
Operating costs and expenses:
Fitness center operations 390.7 418.8 466.7 496.9 557.8 277.9 281.6
Products and services 22.4 41.6 71.7 91.4 141.6 66.8 94.5
Member processing and
collection centers 40.5 40.9 43.5 42.3 45.3 22.0 23.6
Advertising 45.0 47.7 51.5 54.0 55.6 32.9 32.1
General and administrative 26.1 27.2 29.0 27.3 32.0 15.8 16.7
Special charges - - 6.5 6.7 17.2 - -
Depreciation and amortization 48.3 52.9 65.6 72.9 74.3 36.4 38.6
------- ------- ------- ------- ------- ------- -------
Operating income (loss) 2.6 33.9 51.4 60.0 (10.9) 34.8 18.4
Finance charges earned 50.2 59.4 68.5 67.3 67.8 35.1 37.3
Interest expense (41.5) (52.4) (62.1) (58.8) (55.5) (28.2) (27.9)
Other, net 2.5 2.4 1.8 0.7 (0.6) 0.2 (1.8)
Income from continuing operations
before income taxes 13.8 43.3 59.6 69.2 0.8 41.9 26.0
Income tax benefit (provision) (0.5) (0.9) 19.0 13.7 4.2 (5.7) (6.2)
------- ------- ------- ------- ------- ------- -------
Income from continuing operations 13.3 42.4 78.6 82.9 5.0 36.2 19.8
Discontinued operations:
Loss from discontinued
operations, net of tax - - - (2.2) (1.5) (0.7) (0.6)
Loss on disposal - - - - - - (1.7)
------- ------- ------- ------- ------- ------- -------
Loss from discontinued operations - - - (2.2) (1.5) (0.7) (2.3)
Income before cumulative effect of
changes in accounting principles 13.3 42.4 78.6 80.7 3.5 35.5 17.5
Cumulative effect of changes in
accounting principles, net of tax - (0.2) - - - - (15.6)
------- ------- ------- ------- ------- ------- -------
Net income $ 13.3 $ 42.2 $ 78.6 $ 80.7 $ 3.5 $ 35.5 $ 1.9
======= ======= ======= ======= ======= ======= =======
Basic earnings per common share:
Income from continuing operations $ 0.59 $ 1.81 $ 3.29 $ 2.99 $ 0.16 $ 1.13 $ 0.61
Loss from discontinued operations - - - (0.08) (0.05) (0.02) (0.07)
Cumulative effect of changes in
accounting principles - (0.01) - - - - (0.48)
------- ------- ------- ------- ------- ------- -------
Net income per common share $ 0.59 $ 1.80 $ 3.29 $ 2.91 $ 0.11 $ 1.11 $ 0.06
======= ======= ======= ======= ======= ======= =======
Diluted earnings per common share:
Income from continuing operations $ 0.51 $ 1.56 $ 2.84 $ 2.78 $ 0.15 $ 1.08 $ 0.60
Loss from discontinued operations - - - (0.08) (0.04) (0.02) (0.07)
Cumulative effect of changes in
accounting principles - (0.01) - - - - (0.47)
------- ------- ------- ------- ------- ------- -------
Net income per common share $ 0.51 $ 1.55 $ 2.84 $ 2.70 $ 0.11 $ 1.06 $ 0.06
======= ======= ======= ======= ======= ======= =======
28
SIX MONTHS
YEAR ENDED DECEMBER 31 ENDED JUNE 30
-------------------------------------------------------- --------------------
1998 1999 2000 2001 2002 2002 2003
-------- -------- -------- -------- -------- -------- --------
BALANCE SHEET DATA (AT PERIOD END):
Cash and equivalents $ 64.4 $ 23.5 $ 13.1 $ 9.3 $ 12.9 $ 13.3 $ 16.5
Installment contracts receivable, net 406.4 469.3 540.3 528.0 522.6 592.0 537.9
Total assets 1,128.8 1,348.6 1,560.6 1,716.9 1,771.9 1,840.3 1,752.6
Total long-term debt 488.0 603.4 691.9 665.2 726.8 716.9 723.7
Stockholders' equity 161.8 212.5 297.8 512.7 529.5 560.0 531.9
OTHER FINANCIAL DATA:
Cash provided by (used in):
Operating activities $ (32.0) $ 39.1 $ 49.2 $ 101.8 $ 53.5 $ 26.9 $ 31.4
Investing activities (79.0) (138.0) (112.5) (121.9) (93.3) (60.8) (20.6)
Financing activities 113.7 58.0 52.9 16.3 43.4 37.8 (7.2)
Ratio of total debt to EBITDA (1) 4.8 4.1 3.6 3.2 3.6 6.7 7.7
Ratio of EBITDA (1) to interest expense 2.4 2.8 3.1 3.5 3.7 3.8 3.4
Ratio of earnings to fixed charges (2) 1.2 1.5 1.5 1.7 1.0 1.8 1.5
CLUB-RELATED DATA:
Total number of clubs at end of period 324 363 384 405 410 415 415
Clubs opened or acquired 17 46 31 37 21 16 6
Clubs closed 6 7 10 16 16 6 1
Members at end of period 3,630 3,698 3,827 3,936 3,957 3,978 3,978
Yield per average number of members (1) $ 170 $ 197 $ 227 $ 239 $ 262 $ 132 $ 137
(1) EBITDA as adjusted (excludes special charges).
(2) The ratio of earnings to fixed charges is computed by dividing fixed charges
into earnings from continuing operations before income taxes plus fixed
charges and amortization of capitalized interest less interest capitalized.
Fixed charges consist of interest expense, interest capitalized and the
estimated interest component of rent expense.
RECONCILIATION OF NET INCOME TO EBITDA
SIX MONTHS
YEAR ENDED DECEMBER 31 ENDED JUNE 30
---------------------------------------------- ----------------
1998 1999 2000 2001 2002 2002 2003
------ ------ ------ ------ ------ ------ ------
Net Income $ 13.3 $ 42.2 $ 78.6 $ 80.7 $ 3.5 $ 35.5 $ 1.9
Add: Depreciation and amortization 48.3 52.9 65.6 72.9 74.3 36.4 38.6
Interest expense 41.5 52.4 62.1 58.8 55.5 28.2 27.9
Income tax benefit (provision) 0.5 0.9 (19.0) (13.7) (4.2) 5.7 6.2
Loss from discontinued operations - - - 2.2 1.5 0.7 2.3
Cumulative effect of accounting
changes - 0.2 - - - - 15.6
------ ------ ------ ------ ------ ------ ------
EBITDA 103.6 148.6 187.3 200.9 130.6 106.5 92.5
Add (deduct):
Stock-based compensation - - - - 0.9 - 0.1
Special charges - - 6.5 6.7 72.2
Other, net (2.5) (2.4) (1.8) (0.7) 0.6 (0.2) 1.8
------ ------ ------ ------ ------ ------ ------
EBITDA as adjusted $101.1 $146.2 $192.0 $206.9 $204.3 $106.3 $ 94.4
====== ====== ====== ====== ====== ====== ======
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this prospectus.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenues from initial membership fees (net of any related allowances)
are deferred and recognized ratably over the weighted-average expected life of
the memberships, which for paid-in-full memberships and financed memberships
sold have been calculated to be 36 months and 22 months, respectively. Costs
directly related to the origination of memberships (substantially all of which
are sales commissions paid) are also deferred and are amortized using the same
methodology as for initial membership fees described above. The provision for
doubtful receivables and cancellations is charged directly against membership
revenue. 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. Revenue from the sale of multiple session personal training
packages is deferred and recognized as training sessions are performed.
In the second quarter of 2003, we changed our accounting method
(effective January 1, 2003) related to the recognition of recoveries of unpaid
dues under inactive membership contracts from accrual-based estimations to a
cash basis of recognition, which is considered a preferable method of accounting
for such past due amounts. The effect of this change was a cumulative non-cash
charge of $15.4 million (net of tax effect of $4.9 million) or $.47 per diluted
share. Other than to reflect the cumulative effect of this change in accounting
method, the first quarter 2003 results will not be restated due to the
immaterial effect of such change on quarterly results. The pro forma effect on
previously reported 2002, 2001 and 2000 diluted earnings per share would be a
decrease of $0.12 and $0.20 per share in 2001 and 2000 and an increase of $0.04
per share in 2002, had this cash basis accounting method been utilized in those
periods.
RESULTS OF OPERATIONS
Comparison of the Six Months Ended June 30, 2003 and 2002
Net revenues for the first six months of 2003 were $505.5 million
compared to $486.7 million in 2002, an increase of $18.9 million (4%). Net
revenues from comparable fitness centers increased 2%. The $18.9 million
increase in net revenues resulted from the following:
- Total membership revenue decreased $24.6 million or 7% (an 8%
decline at same clubs), resulting from a $3.6 million or 2%
increase in dues revenue recognized (1% related to same
clubs), offset by a $28.2 million or 15% decline in initial
membership fees recognized during the period (16% related to
same clubs).
- Products and services revenue increased $43.7 million (41%)
over the prior year period, primarily reflecting the continued
growth of personal training services, nutritional product
sales and the introduction of our Weight Management Program.
- Miscellaneous revenue totaled $9.7 million, a decrease of $.2
million from the prior year period.
The weighted-average number of fitness centers increased to 412 from
409 in the first six months of 2002.
Gross committed membership fees originated during the first six months
decreased 2% compared to the 2002 period, with a 4% decrease at same clubs. The
number of new members joining increased 6% during the first six months of 2003
compared with the same period a year ago, with a 3% increase at same clubs. The
average committed duration of memberships originated during the first six months
of 2003 was 30.6 months versus 30.5 months in the prior year period. The gross
committed monthly membership fees originated during the first six months of 2003
averaged $40.76 versus $44.19 in the year ago period, an 8% decrease. The
decrease in the monthly average resulted from a decrease in average membership
price during the period including a slight decrease in the proportion of
multiple-club memberships sold due to apparent price sensitivity of new members.
Operating income for the first six months of 2003 was $18.4 million
compared to $34.8 million in 2002. Net revenues increased $18.9 million (4%) for
the first six months of 2003, offset by a $33.0 million (8%) increase in
operating costs and expenses ($27.8 million of which is related to the growth in
products and services
30
revenues), and an increase in depreciation and amortization of $2.3 million.
Earnings before interest, taxes, depreciation and amortization, discontinued
operations and other (cumulative effect of an accounting change, where
applicable) ("EBITDA") as adjusted, was $94.5 million, a decrease of $11.8
million from the prior year period. The EBITDA margin was 17% for the first six
months of 2003, compared to 20% in the 2002 period. These decreases are due, in
part, to the continuing trend of lower initial membership fees originated. The
following table is a reconciliation of net income to EBITDA from continuing
operations and EBITDA as adjusted (in thousands):
SIX MONTHS ENDED
JUNE 30
----------------------
2002 2003
--------- ---------
Net income $ 35,477 $ 1,869
Add:
Depreciation and amortization 36,370 38,642
Interest expense 28,190 27,921
Income tax provision 5,704 6,242
Loss from discontinued operations 759 2,318
Cumulative effect of accounting changes 15,579
--------- ---------
EBITDA 106,500 92,571
Add (deduct):
Stock-based compensation 122
Other, net (163) 1,820
--------- ---------
EBITDA as adjusted $ 106,337 $ 94,513
========= =========
Fitness center operating expenses increased $3.7 million (1%) in the first six
months of 2003 compared to the prior year, due to incremental costs of operating
new fitness centers and planned increases in rent, utilities, insurance and
other fixed costs. Products and services expenses increased $27.8 million (42%)
to support the revenue growth of product and service offerings. Direct operating
margin from products and services increased to $54.9 million from $39.0 million
in the 2002 period, a 41% increase (33% related to same clubs), with a margin of
37% in both periods. Member processing and collection center expenses increased
$1.6 million (7%) compared to the prior year period, reflecting increased
telecommunication and member mailing costs. Advertising expenses decreased $.9
million (3%) compared to the prior year period. General and administrative
expenses increased $.8 million (5%) compared to the prior year period.
Depreciation and amortization expense increased $2.3 million (6%), resulting
from additional fitness centers and other depreciable assets since the prior
year period.
Finance charges earned in excess of interest expense totaled $9.4
million in the first six months of 2003, an increase of $2.5 million over the
prior year period resulting principally from lower interest rates on the
Company's borrowings and higher finance charges earned.
The income tax provision was $6.2 million for the six months ended June
30, 2003, compared to $5.7 million in the 2002 period. This increase of $.5
million is attributable to lower income from continuing operations in the 2003
period offset by the increase in the Company's federal income tax rate for
reporting purposes to 20%, which became effective April 1, 2002.
Comparison of the years ended December 31, 2002 and 2001
Net revenue for 2002 was $912.9 million compared to $851.5 million in
2001, an increase of $61.4 million (7%), inclusive of $73.0 million (9%)
attributable to Crunch Fitness and offset by a special charge of $55.0 million
to strengthen our installment contracts receivable reserves. Net revenue from
comparable fitness centers, exclusive of the special charge, increased 3%. The
increase in total net revenues, exclusive of the special charge, resulted from
the following:
- Membership revenue increased $41.0 million (6%) from the
prior year, including a 28% increase in dues revenue (9% related to
same clubs) recognized during the year. Dues revenue for the year
equaled more than half of total membership revenue. The provision for
doubtful receivables and cancellations, included as a direct reduction
of membership revenue, was 41% of the gross financed portion of
originations for both periods;
31
- Products and services revenue increased $72.7 million
(50%) over 2001, primarily reflecting the continued growth of personal
training services, nutritional product sales and the addition of Crunch
Fitness, which accounted for $19.5 million of the increase; and
- Miscellaneous revenue increased $2.6 million (15%) over
2001, reflecting increases in sub-rental income, franchise fees and
co-marketing revenue.
The weighted-average number of fitness centers during 2002 increased to
412 from 385 during 2001, a 7% increase, including a 56% increase in the
weighted-average number of centers operating under our upscale brands from 36 to
56, largely resulting from the acquisition of Crunch Fitness. During 2002, we
opened 14 new fitness centers within our major metropolitan areas. In April 2002
we acquired seven additional fitness centers with our acquisition of Planet
Fitness in the Boston area. At December 31, 2002, we operated a total of 56
upscale fitness centers: 23 as "Crunch Fitness", 10 as "Bally Sports Clubs", 10
as "The Sports Clubs of Canada", seven as "Pinnacle Fitness" and six as "Gorilla
Sports."
Gross committed membership fees is a measure which includes the total
potential future value of all initial membership fee revenue, dues revenue,
earned finance charges and membership-related products and services revenue from
new membership sales originations in a period. It is measured on a gross basis
before consideration of our provision for doubtful accounts and cancellations
and without deferral of initiation fee revenue, and includes the future
potential collection of dues revenue over the initial term of membership. We
track gross committed membership revenue as an indicator of the success of our
current sales activities and believe it to be a useful measure to allow
investors to understand current trends in membership sales which may not be
apparent under deferral accounting for the initiation fee component of
membership revenue.
The following table reconciles total gross committed membership fees
during 2002, 2001 and 2000 to initial membership fees originated, net:
2000 2001 2002
----------- ----------- -----------
Gross committed membership fees $ 1,073,775 $ 1,073,619 $ 1,132,634
Less: Committed monthly dues (141,286) (144,939) (233,039)
Provision for doubtful receivables
and cancellations (337,076) (335,628) (329,308)
Unearned finance charges and other (165,976) (169,103) (172,947)
Products and services revenues
included in membership programs (41,888) (55,155) (78,246)
----------- ----------- -----------
Initial membership fees originated, net $ 387,549 $ 368,794 $ 319,094
=========== =========== ===========
Gross committed membership fees increased 5%, compared to 2001. The
gross committed monthly membership fees originated during 2002 averaged $43
versus $40 in 2001, a 7% increase. This increase results primarily from higher
monthly dues included in memberships originated at our Bally Total Fitness
clubs, the addition of Crunch Fitness with its higher membership fee structure,
and an increase in new memberships originated which include a personal training
component. The number of new members joining increased 2% during 2002 compared
with a year ago, with a 2% decrease at our Bally Total Fitness clubs. The
average committed duration of memberships originated during 2002 was 30.4 months
versus 31.0 months in the prior year, a 2% decrease. This decrease results
primarily from the shorter commitment term of memberships offered at Crunch
Fitness, the addition of five new clubs in states and provinces that limit
contract duration to twelve months, and an increase in the number of shorter
commitment membership programs available at Bally Total Fitness clubs.
The operating loss for 2002 was $10.9 million compared to operating
income of $60.0 million in 2001. Our operating loss resulted principally from
special charges of $72.2 million in 2002 described fully in the following
paragraph. Operating income for 2002 excluding the 2002 special charges was
$61.3 million compared to $66.7 million, excluding special charges of $6.7
million, in 2001. This decrease of $5.4 million (8%) was due to a $116.3 million
increase in net revenue (14%), offset by an increase in operating costs and
expenses of $120.3 million (17%)
32
and an increase in depreciation and amortization of $1.4 million. The 2001
results included $7.6 million of goodwill amortization which, under current
accounting standards, is no longer amortized. EBITDA was $130.6 million in 2002
versus $200.9 million in 2001, a 35% decline, due primarily to the special
charges recorded in 2002 (see Item 6, Selected Financial Data, in the notes
accompanying our consolidated financial statements included elsewhere in this
prospectus for a reconciliation of net income or loss to EBITDA). EBITDA
exclusive of the impact of the special charges, was $204.3 million in 2002
versus $206.9 million in 2001, a 1% decline. The EBITDA margin was 13% for 2002
compared to 22% in 2001. This decline results primarily from the 2002 special
charges. The EBITDA margin, before special charges, was 20% for 2002 compared to
23% in 2001. This decrease is due, in part, to the continuing trend of lower new
membership originations at mature clubs, the proportion of clubs open less than
five years, and the initially lower margins attributable to the 19 Crunch
Fitness centers acquired at the end of 2001 and the seven centers acquired in
the Boston area in April 2002. Fitness center operating expenses increased $60.8
million (12%), due principally to incremental costs of operating new fitness
centers, including Crunch Fitness, which represented approximately $36.3 million
of the increase. Products and services expenses increased $50.2 million (55%) to
support the revenue growth of product and service offerings. Direct operating
margin from products and services increased to $76.1 million from $53.6 million
in 2001, a 42% increase (23% related to same clubs), with a margin of 35% in
2002 compared to 37% in 2001. Member processing and collection center expenses
increased $3.0 million (7%) from 2001, reflecting increased costs to serve the
higher number of clubs and members as compared to the prior year. Advertising
expenses increased $1.5 million (3%) compared to the prior year. General and
administrative expenses increased $4.7 million (17%) compared to the prior year
to support our overall growth strategy. Depreciation and amortization expense
increased $1.4 million (2%) largely as a result of increased expenditures for
property and equipment and acquired fitness centers during the past two years,
offset by the elimination of goodwill amortization in 2002 as the result of new
accounting standards.
The special charges in 2002 included $55.0 million recorded as a
reduction to net revenues to strengthen our installment contracts receivable
reserves. In connection with our intentions to seek alternatives for the
financing portion of our business model, we undertook a study to determine the
net realizable values of recent years' sales activity and membership installment
contracts receivable on an accelerated monetization basis. Our previous method
for estimating the adequacy of balance sheet reserves did not assume an
accelerated monetization scenario. Given that the receivables portfolio may be
substantially monetized during the next 12 to 18 months, strengthening our
receivables reserves was warranted and resulted in the special charge. Special
charges in 2002 also included $7.3 million to provide for amounts related to a
separation agreement entered into when our former CEO retired, $3.4 million to
write-down inventory shortages, and $6.5 million to settle a class action
lawsuit arising in the early 1990's. Special charges in 2001 related to
cancelled or reformatted marketing events and other direct and indirect costs
from disruptions and shutdowns of various club operations and programs resulting
from the September 11th terrorist events and separately, our repositioning of
in-club retail stores. Comparisons made in the previous paragraph which exclude
these special charges from our results have been made because we believe the
unusual nature of these charges should be taken into consideration when the
trend of our operating results is used by investors.
Finance charges earned in excess of interest expense totaled $12.3
million in 2002, an increase of $3.9 million over last year resulting
principally from lower interest rates on our borrowings, and higher installment
contracts receivable offset by a decrease in finance rates earned.
At December 31, 2002, for accounting purposes, we had approximately
$114 million of unrecognized federal net operating loss carryforwards.
Separately, our alternative minimum tax ("AMT") net operating loss carryforwards
have been substantially recognized. Therefore, having fully recognized AMT net
operating loss carryforwards for reporting purposes, our federal income tax rate
increased to 20% during the second quarter of 2002. The 20% rate will remain in
effect until such time as all AMT credits are fully utilized, which is not
currently expected before 2005. In the first quarter of 2002 and the third
quarter of 2001, we reduced our valuation allowance against our net operating
loss carryforwards by approximately $4 million and $15 million, respectively,
which offset charges related to our provision for alternative minimum taxes and
state income and other taxes. These adjustments were reflected as reductions of
the tax provision, increasing net income.
33
Comparison of the Years Ended December 31, 2001 and 2000
Net revenue for 2001 was $851.5 million compared to $785.9 million in
2000, an increase of $65.6 million (8%). Net revenue from comparable fitness
centers increased 6%. The increase in total net revenues resulted from the
following:
- Membership revenue increased $30.3 million (5%) over the
prior year, including a 5% increase in dues revenue recognized during
the year. The provision for doubtful receivables and cancellations,
included as a direct reduction of membership revenue, was 41% of the
gross financed portion of originations for both periods;
- Products and services revenue increased $34.1 million
(31%) over 2000, primarily reflecting the continued growth of personal
training services and nutritional product sales; and
- Miscellaneous revenue increased $1.3 million (8%) over
2000, primarily reflecting additional revenue from co-marketing
partnerships.
The weighted-average number of fitness centers during 2001 increased to
387 from 376 during 2000, a 3% increase, including an increase in the
weighted-average number of centers operating under our upscale brands from 34 to
38. During 2001, we opened 18 new fitness centers within our major metropolitan
areas. On December 31, 2001, we acquired 19 additional fitness centers (with our
acquisition of Crunch Fitness) that are not reflected in our 2001 results or
averages. At December 31, 2001, we operated a total of 55 upscale fitness
centers: 19 as "Crunch Fitness"; 12 as "Bally Sports Clubs"; 11 as "The Sports
Clubs of Canada"; seven as "Pinnacle Fitness"; and six as "Gorilla Sports".
Gross committed membership fees were approximately unchanged compared
to 2000. The gross committed monthly membership fees originated during 2001 and
2000 averaged $40. The number of new members joining increased 8% during 2001
compared with 2000, with a 7% increase at our Bally Total Fitness clubs. The
average committed duration of memberships originated was 31.0 months during 2001
compared to 32.8 months in 2000. This decrease resulted from an increase in the
number of shorter term commitment membership programs available at Bally Total
Fitness clubs.
Operating income for 2001 was $60.0 million compared to $51.5 million
in 2000, a 17% increase. The increase of $8.5 million (17%) was due to a $65.6
million increase in net revenue (8%), offset, in part, by an increase in
operating costs and expenses of $57.1 million (7%) including a $7.3 million
increase in depreciation and amortization. EBITDA was $200.9 million in 2001
versus $187.3 million in 2000, a 7% increase. The EBITDA margin was 22% in both
periods. In 2001, the margin was negatively impacted by increases in utilities
costs system-wide and by new club growth which, due to deferred revenue
accounting, initially results in higher incremental operating costs than
recognized revenues. Fitness center operating expenses increased $30.2 million
(6%), due principally to incremental costs of operating new fitness centers and
higher energy costs. Products and services expenses increased $19.7 million
(27%) to support the revenue growth of product and service offerings. Direct
operating margin from products and services increased to $53.6 million from
$39.2 million in 2000 (37%), with a margin of 37% in 2001 compared to 35% in
2000. Member processing and collection center expenses decreased $1.2 million
(3%) as a result of expense reimbursements from servicing fees associated with
servicing the portions of the installment contracts receivable portfolio that
were sold in 2001 to a major financial institution. Advertising expenses
increased $2.6 million (5%) compared to 2000 due to a change in advertising
strategy to reach new segments of prospective customers and to support clubs in
new markets. General and administrative expenses decreased $1.7 million (6%)
compared to 2000. Depreciation and amortization expense increased $7.3 million
(11%) largely as a result of increased expenditures for property and equipment
and acquired fitness centers during the past two years.
In 2001 we recorded special charges of $6.7 million related to
cancelled or reformatted marketing events and other direct and indirect costs
from disruptions and shutdowns of various club operations and programs resulting
from the September 11th terrorist events and a one-time markdown of retail
apparel in connection with management's strategic repositioning of in-club
retail stores, adding juice bars to replace slow moving, lower
34
margin fashion apparel. In 2000 we recorded a special charge of $6.5 million
which represented a one-time non-cash charge to write off third-party Internet
investments.
Finance charges earned in excess of net interest costs totaled $9.2
million in 2001, an increase of $1.0 million over 2000 resulting from a
reduction in our net borrowings, offset in part, by reductions in finance
charges earned due to the sale of receivables in 2001.
The income tax provisions for 2001 and 2000 reflect state and Canadian
income taxes. The federal provisions were offset by the utilization of prior
years' net operating losses. In addition, as a result of our improved operating
results and trends, we reduced our tax valuation allowance by $15.0 million and
$20.0 million in the third quarters of 2001 and 2000, respectively. These
adjustments were reflected as reductions of the tax provision, increasing net
income.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities were $31.4 million in the first
six months of 2003, compared to $26.9 million in the 2002 period. Over the past
two years, the Company sold a portion of its installment contracts receivable
portfolio to a major financial institution in three bulk sales at net book
value, with combined proceeds of approximately $128 million. Excluding the
impact of the sales of receivables and net of the change in dues prepayments
during the periods, cash flows from operating activities were $50.3 million in
the first six months of 2003, compared to $55.3 million in 2002.
The following table sets forth cash flows from operating activities on
a comparable basis to exclude the impact of sales of receivables, to add back
actual cash collections on the sold portfolios, and to reflect the impact of
changes in dues prepayments during each year and for the six months ended June
30 (in thousands):
YEAR ENDED DECEMBER 31 SIX MONTHS ENDED
----------------------------------- JUNE 30,
2000 2001 2002 2002 2003
--------- --------- --------- --------- ---------
Cash provided by operating activities, as reported $ 49,167 $ 101,772 $ 53,501 $ 26,916 $ 31,377
Acceleration of collections through bulk sale of
installment contracts receivable - (105,000) (23,345) - -
Collections on installment contracts receivable sold - 44,691 57,930 31,100 19,553
Change in dues prepayments (2,729) 16,192 151 (2,762) (634)
--------- --------- --------- --------- ---------
Cash flows from operating activities
on a comparable basis $ 46,438 $ 57,655 $ 88,237 $ 55,254 $ 50,296
========= ========= ========= ========= =========
Capital expenditures totaled $20.6 million in the first six months of
2003 compared to $60.8 million in the 2002 period. Capital expenditures for 2003
are not expected to exceed $50 million. The following table details cash used in
investing activities during the past five years and for the six months ended
June 30, 2003 and 2002 (in thousands):
35
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1998 1999 2000 2001 2002 2002 2003
-------- -------- -------- -------- -------- -------- --------
Club improvements $ 29,998 $ 11,582 $ 20,967 $ 26,400 $ 21,556 $ 11,449 $ 6,945
New clubs 23,083 38,762 42,362 41,959 36,110 20,343 7,950
Club remodels and expansions 12,714 37,286 36,661 12,289 12,730 9,023 3,356
Administrative and systems 10,637 8,689 4,749 10,523 4,744 2,350 1,948
Real estate purchases and other 2,521 41,691 7,721 30,692 18,120 17,602 412
-------- -------- -------- -------- -------- -------- --------
$ 78,953 $138,010 $112,460 $121,863 $ 93,260 $ 60,767 $ 20,611
======== ======== ======== ======== ======== ======== ========
As a result of the decrease in second quarter capital expenditures, our
free cash flow (cash provided by operating activities, less cash used in
investing activities) was $1.3 million, compared to a deficit of $24.7 million
in the 2002 quarter. We are disclosing free cash flow because management
believes that it is an important measure of liquidity and investors are focused
on our ability to reduce our overall debt. The following table is a
reconciliation of cash provided by operating activities to free cash flow
(deficit) during each year and for the six months ended June 30, 2003 and 2002
(in thousands):
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30,
----------------------------------- ----------------------
2000 2001 2002 2002 2003
--------- --------- --------- --------- ---------
Cash provided by operating activities, as reported $ 49,167 $ 101,772 $ 53,501 $ 26,916 $ 31,377
Less: Cash used in investing activities (112,460) (121,863) (93,260) (60,767) (20,611)
--------- --------- --------- --------- ---------
Free cash flow (deficit) $ (63,293) $ (20,091) $ (39,759) $ (33,851) $ 10,766
========= ========= ========= ========= =========
At the end of the second quarter the Company announced the completion
of the refinancing of its existing $132.5 million term loan and $63.5 million
outstanding on its revolving credit agreement by issuing $235 million in
aggregate principal of old notes in an offering under Rule 144A and Regulation S
under the Securities Act of 1933, as amended, and had entered into the new
credit facility. These transactions were funded in July 2003. The amount
available under the new credit facility is reduced by any outstanding letters of
credit, which cannot exceed $30.0 million. As of July 31, 2003, the Company had
outstanding $6 million in letters of credit and availability of $84 million on
the new credit facility (subsequently increased to $100 million credit facility
during August 2003). The Company will write off unamortized issuance costs from
extinguished debt in the third quarter of 2003. In addition, in July 2003 the
Company paid down $25 million on its Securitization Series 2001-1 and extended
the revolving period on $100 million of the balance through July 2005. The
balance of $30 million of principal on the securitization which was not extended
will begin amortizing in November 2003. As of June 30, 2003, our debt service
requirements, including interest, through June 30, 2004 were approximately $77.6
million, exclusive of principal payments on the securitization. We believe that
we will be able to satisfy these short-term requirements for debt service and
capital expenditures out of available cash balances, cash flow from operations
and borrowings on the revolving credit facility.
We are authorized to repurchase up to 1,500,000 shares of our common
stock on the open market from time to time. We repurchased 625,100 shares
between August 1998 and November 1999 at an average price of $18 per share, and
54,500 shares in February 2002 at $16 per share.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in the interest rates on
certain of our outstanding debt. The outstanding loan balance under our bank
credit facility and the Series 2001-1 accounts receivable-backed variable
funding certificates bear interest at variable rates based on prevailing
short-term interest rates in the United States and Europe. Based on 2002's
average outstanding balance of these variable rate obligations, a 100 basis
point
36
change in interest rates would change interest expense in 2002 by approximately
$3.3 million. We have purchased an 8.50% interest rate cap on the Series 2001-1
accounts receivable-backed variable funding certificates. In September 2003 we
entered into an interest rate swap agreement whereby our fixed interest
commitment on $200 million of outstanding principal on our senior subordinated
notes varies based on the short-term interest rate in Europe. A 100 basis point
change in the interest rate on the portion of the debt subject to the new swap
agreement would change interest expense on an annual basis by $2.0 million. For
fixed rate debt, interest rate changes affect their fair market value but do not
impact earnings or cash flows. We presently do not use other financial
derivative instruments to manage our interest costs. We are subject to minimal
foreign exchange and commodity risk.
BUSINESS
GENERAL
We are the largest commercial operator of fitness centers in North
America. Our fitness centers offer members state-of-the-art fitness facilities
featuring a wide selection of cardiovascular and strength equipment and
extensive personal training, weight-management and group exercise services. In
addition, many of our fitness centers include pools, racquet courts, or other
athletic facilities. As of June 30, 2003, we operated 415 fitness centers
serving 4.0 million members. Our fitness centers are concentrated in major
metropolitan areas in 29 states and Canada, with 348 fitness centers located in
the top 25 metropolitan areas in the United States and Toronto, Canada. We
operate fitness centers in over 50 major metropolitan areas representing 63% of
the United States' population. By clustering our fitness centers in major
metropolitan areas, we are able to reach more existing and potential members
while achieving marketing and operating efficiencies.
Our members made an estimated 150 million visits to our fitness centers
in 2002. Our active member base provides a ready market for ancillary services
such as personal training, weight management, and group fitness training
programs and for products sold through our on-site Fitness Formula retail
stores. We have created several lines of Bally-branded products that are
marketed both to our members and to other consumers through third-party retail
outlets. One of our most successful product lines is our private-label diet and
performance nutritional supplements. In addition, we have licensed the Bally
brand to third-party manufacturers of fitness equipment.
Our primary target market is the 18 to 34-year old, middle income
segment of the population. This market segment is serviced by the majority of
our fitness centers which use the Bally Total Fitness(R) service mark. The
nationwide use of this service mark enhances brand identity and increases
advertising efficiencies. To supplement the Bally-branded clubs and to
facilitate our market segmentation strategy, we have opened or acquired 47
facilities during the past few years that operate under upscale brands, such as
Crunch Fitness, The Sports Clubs of Canada, Pinnacle Fitness and Gorilla Sports.
These upscale brands primarily target the 18 to 49-year old, upper income
segment of the population.
INDUSTRY OVERVIEW
The fitness industry has benefited from several key growth drivers,
including increased focus on health and physical fitness, increased research and
medical journal publications discussing the benefits of exercise in reducing the
risk of many diseases, and the aging of the baby boomer generation and their
children. Additionally, the industry has benefited from government reports from
the Surgeon General (Report on Physical Activity & Health (1996) and the Call to
Action to Prevent and Decrease Overweight and Obesity (2002)), which have
emphasized the importance of exercise and physical fitness.
The national fitness industry includes approximately 17,000 clubs with
approximately 33.8 million members. The industry's compound annual growth rate
of revenues was 8.2% from $6.5 billion in 1993 to $12.2 billion in 2001, and its
compound annual growth in the total number of clubs increased at a rate of 4.8%,
from 11,655 in 1993 to 16,983 in 2001. The demand for club memberships rose in
the same period at a faster pace than supply, as memberships increased at a
compound annual growth rate of 5.0% from 22.9 million in 1993 to 33.8 million in
2001.
37
Although the fitness industry benefits from tremendous growth over the
last several years, the industry remains fragmented with less than 10% of
commercial health clubs in the U.S. owned and operated by companies that own
more than 25 clubs.
COMPANY STRENGTHS
Largest Fitness Center Operator in North America. We are the largest
commercial operator of fitness centers in North America in terms of revenues,
number of members, and number and square footage of facilities and have over 40
years of operating experience. We hold a leading market position in many large
metropolitan areas, including New York City, Los Angeles, Chicago,
Baltimore/Washington D.C., Boston, Dallas, Houston, Detroit, San Francisco,
Toronto, Portland, Seattle, Philadelphia, Atlanta and Miami. As of June 30,
2003, we operated 415 fitness centers serving 4.0 million members. Over 86% of
our fitness centers are located in markets in which we have five or more
facilities. We believe that our scale and concentration in major metropolitan
areas achieves marketing and operating efficiencies, enhancing our value to
members.
Significant Brand Recognition. We believe the Bally brand is the most
recognized name in the fitness industry and that this brand awareness increases
the likelihood potential members will recognize our clubs as opposed to those of
our competitors. This brand awareness has also allowed us to benefit from
strategic marketing alliances with leading consumer product companies such as
AOL Time Warner, PepsiCo, Colgate-Palmolive, Unilever, Gatorade, Kellogg Company
and Kraft Foods. We are also capitalizing on the strength of our brand to expand
franchising and joint venture programs domestically and internationally. Through
these programs, we are extending the Bally brand into China, South Korea,
Southeast Asia, the Bahamas, Mexico, and several secondary markets in the United
States. We have also entered licensing arrangements with two of the leading
fitness equipment manufacturers for the manufacture and distribution of
Bally-branded home fitness equipment in the United States and Asia. Further, our
licensed Bally Total Fitness line of portable exercise equipment, including hand
and ankle weights, jump ropes and other personal fitness related merchandise, is
carried in more than 4,000 retail stores in the United States and Canada and our
Bally-branded nutritional products are sold in approximately 4,000 retail
outlets. We believe this brand awareness drives our strong member retention,
enhances our ability to grow sales of ancillary Bally-branded products and
services and facilitates strategic marketing alliances with major consumer
product companies.
Industry Leading Member Retention. We believe we have the highest
member retention rates in our industry with an average annual retention of over
80%, compared with our competitors' annual retention which we believe to be
between 50-70%. Our retention success is driven by the quality and affordability
of our membership plans and the commitment made by the joining member. In
addition, we have the systems and expertise to track member usage of our
facilities and deliver pricing discounts and special offers to retain members.
Predictable and Growing Cash Flow. Our high member retention rates,
large member base and substantially fixed operating costs result in predictable
and growing cash flows. Nearly 90% of new members elect to finance their initial
membership fee for up to 36 months, creating a liquid asset on our balance sheet
with a history of stable and consistent cash flows. Our industry leading
retention rates contribute to growing and predictable recurring dues collected
from our members. These cash flows offset a substantially fixed cost operating
structure, stable maintenance capital expenditure requirements of $30--$35
million per year and limited expansion plans for clubs, resulting in predictable
and growing cash flow.
Large Investment in Fitness Centers. During the past five years we have
invested approximately $400 million in opening or acquiring fitness centers, as
well as improving our existing fitness facilities. This investment has provided
us with a strong base of modern, well-equipped facilities of which 30%, or
approximately 140 clubs, are immature (which we define as having been in
operation for less than five years). Our extensive experience has shown it takes
nearly 10 years for a club's membership base to fully mature, with the facility
achieving its most significant membership growth during the third to seventh
year. As a result, the earnings potential and return on capital invested in our
immature clubs is yet to be fully realized.
Product and Service Offerings. Prior to 1997, we provided only minimal
services outside of membership programs. Today we employ over 6,000 personal
trainers providing customized, interactive sessions to our members. We also
offer a wide variety of private-label products, including diet and nutritional
supplements, energy
38
bars and performance drinks through our on-site retail stores. Revenue from
products and services has grown from approximately $10.0 million in 1997 to over
$215.0 million in 2002. We intend to leverage our broad membership base and
brand strength to continue to expand our health-related products and services.
As of June 30, 2003, revenues from products and services have increased 41% from
the six months ended June 30, 2002, due to the continuing penetration of
existing programs and the addition of new offerings such as our recently
launched Weight Management Program.
Flexible Membership Plans. We offer a variety of membership options and
payment plans. Our membership options range from single-club memberships to
premium memberships, which provide additional amenities and access to all of our
fitness centers nationwide. Similarly, we offer a broad range of payment
alternatives. Most memberships sold consist of a substantial up front initial
fee and relatively low monthly dues. We provide financing of the initial fee for
up to 36 months at typical retail consumer interest rates. We also offer
"pay-as-you-go" memberships, which require a smaller initial fee paid in cash
and higher monthly payments for the duration of the membership. We believe
offering membership financing requires a high level of technical infrastructure
and operational expertise and, as a result, we are the only major fitness center
operator currently offering both the financing and the pay-as-you-go options. We
believe that this flexibility has greatly improved member retention, allowing us
to offer more affordable membership programs and providing significant
competitive advantages.
Experienced Management Team. We believe that our management team is one
of the most experienced in the industry. Seven of our senior executives average
over 14 years experience in the industry. In August 2003, we augmented the
management team by adding a new senior vice president and chief marketing
officer with extensive marketing and strategy-related experience. We believe
that our management team has the depth, experience and motivation to manage our
controlled growth strategy.
BUSINESS STRATEGY
Our continuing business focus is to maximize our yield-per-member and
grow our membership base. We define yield-per-member as the dollar amount
generated per member through initiation fees, monthly dues, products and
services revenues and finance charges earned. Our average yield-per-member has
increased from $148 in 1997 to $262 in 2002. We expect to continue to maximize
our yield-per-member as well as grow our membership base using the following
strategies:
Optimize Our Product and Service Offerings. We are increasingly using
our clubs for the delivery of value-added products and services such as personal
training, private-label nutritional products, group exercise classes, fitness
related merchandise, member magazines and our recently launched Weight
Management Program. Integrating these ancillary products and services into our
core fitness center operations positions Bally as the primary source for all of
our members' wellness and fitness needs. In addition, our private-label
nutritional products are sold in approximately 4,000 select retail, grocery and
drug store outlets and our licensed portable exercise equipment is sold in over
4,000 retail outlets. We are committed to the continuing development and
integration of new and innovative products and services. Our extensive groupings
of club operations and brand mix allow us to "test-market" new products and
services without exposing our entire operation to the outcome of the
introduction.
Realize the Benefit of Recent Investments. Over the past five years we
have invested approximately $400 million in greenfield expansion, acquisitions,
and expansion of existing facilities. In order to strengthen operating results
and cash flows, we began scaling back our club expansion plans during 2002 and
will continue to do so for the next several years. We intend to focus our
attention on improving operating margins and cash flows in our existing fitness
centers to capitalize on our recent investments and to realize the benefits of
reduced capital expenditures. Due to deferral accounting, our immature fitness
centers generally require nearly a full year of operations before generating
incremental operating income. By slowing club expansion, we intend to realize
the cash flow benefits from reduced capital expenditures as well as the natural
maturation of our existing clubs. During 2002 we had 134 immature clubs. We
expect the immature clubs, as they mature, to contribute higher levels of
operating income.
Expand and Optimize Our Marketing. We will continue to leverage the
position of the Bally brand, which we believe is the most recognized brand name
of fitness centers in North America. While we historically have relied
39
on television advertising as the primary vehicle for marketing, we currently are
exploring the use of other media outlets as well as a nationally supported
member referral programs. We have also begun to place a greater emphasis on
corporate alliances and in-club marketing programs. Additionally, the Internet
represents a relatively untapped opportunity to market the Bally brand. We have
recently developed strategic web-based partnerships and added functionality to
our website to capture leads and contact information through the Internet for
use in sourcing new members. Internationally, we continue to market the Bally
brand through our joint venture and franchise program in China and our franchise
programs in South Korea, Southeast Asia, Mexico and the Bahamas. Through these
international relationships, over the next five years we believe it is possible
to franchise over 50 fitness centers. We believe our targeted marketing
initiatives in combination with our branded product and service offerings will
lead to increased membership and profitability.
Improve Operating Efficiencies. After a period of rapid expansion by
adding new clubs in addition to the acquisition of most of our upscale brands,
we are consolidating our operations to realize economies of scale. In
particular, we have launched several initiatives to improve operating
efficiencies and reduce operating costs, including staff reductions. We have
also begun to eliminate local area offices, as well as to modify some of our
incentive and compensation programs to reward profitability. In the second
quarter of 2003, we launched several cost saving initiatives, which are expected
to result in over $20 million of annualized cost savings.
FITNESS CENTERS
Most of our fitness centers are located near regional, urban and
suburban shopping areas and business districts of major cities. Fitness centers
vary in size, available facilities and types of services provided. All of our
fitness centers contain a wide variety of state-of-the-art progressive
resistance, cardiovascular and conditioning exercise equipment, as well as free
weights. A member's use of a fitness center may include group exercise programs
or personal training instruction stressing cardiovascular conditioning, strength
development or improved appearance. We require our sales, fitness and club
operations personnel to complete a comprehensive educational training program.
New members are offered orientations on the recommended use of exercise
equipment by our personnel.
Our current prototype fitness center generally focuses on those fitness
services our members most frequently use, such as well-equipped cardiovascular,
strength and free weight training areas along with a wide variety of group
fitness classes. Services that receive a far-lower degree of member use, such as
swimming pools, running tracks, racquet courts or other athletic facilities have
been de-emphasized. Our prototype fitness center, which tends to range from
25,000 to 30,000 square feet, has recently averaged approximately 26,000 square
feet and cost $1.8 million to construct, exclusive of purchased real estate and
exercise equipment and net of landlord contributions. The prototype is designed
to cost less to construct and maintain than our older facilities and has the
capacity to accommodate significantly more members than older fitness centers of
the same size because it focuses on the most widely used amenities. We generally
invest approximately $400,000 ($300,000 through lease programs) for exercise
equipment in a prototype fitness center.
We have substantially completed our expansion and general refurbishment
program undertaken in 1998 to refurbish and make major expansions and/or
upgrades to the majority of our fitness centers, including updating exercise
equipment and decor to improve club ambiance. We have also invested over the
past four years in 68 new facilities generally based on our new fitness center
prototype.
Presently five fitness centers in Upstate New York, including two
facilities we previously owned, one fitness center in Nassau, Bahamas and one
fitness center in Beijing, China are operated pursuant to franchise agreements
under the service mark "Bally Total Fitness", and we have executed franchise
agreements for South Korea, Thailand, Malaysia, Singapore, Taiwan, the
Philippines and Mexico. We continue to seek additional franchise relationships
in smaller domestic markets and select international locations.
Products and Services
Our fitness center operations provide a unique platform for the
delivery of value-added products and services to our fitness-conscious members.
Prior to 1997, we provided only minimal additional services outside of
membership programs. By 2002, revenue from products and services accounted for
over 23% of our net revenue and
40
has grown by 50% during 2002. By integrating personal training, private-label
nutritional products, and our new Weight Management Program into our core
fitness center operations, we have positioned the Bally Total Fitness brand as
the total source for all of our members' wellness and fitness needs.
- Personal Training. We offer fee-based personal training
services in most of our clubs and currently have over 6,000 personal
trainers on staff. Our revenue from personal training has grown to
$128.4 million in 2002, doubling from 2001, and we added 1,762 trainers
during 2002. We continue to integrate personal training services into
our new membership programs in order to introduce new members to this
important first step toward meeting their fitness goals. In 2002 we
introduced an electronic funds transfer monthly payment option to our
personal training program, providing members a convenient monthly
payment alternative to purchasing multiple-session personal training
packages. As a result of our acquisition of Crunch Fitness, we have
revised our approach to marketing personal training services to our
Bally Total Fitness members based on the very successful targeted
personal training sales model created by Crunch Fitness. As we continue
to integrate these practices into Bally Total Fitness brand clubs, we
believe we can further leverage our existing personal trainer staff and
continue to expand this area of our business as the demand for these
services continues to increase.
- Private-Label Nutritional Products. In order to further
capitalize on our brand identity with our members, we have developed a
full line of Bally-branded nutritional products. We currently offer
ready-to-drink meal replacement shakes and drinks, energy bars, snack
bars, high protein bars, weight loss products, multi-vitamins and meal
replacement powdered drinks. Our Rapid Results Diet System products
provide for key elements of our integrated weight loss program. During
2002, sales of private-label nutritional products generated $47.9
million in revenue, representing a 6% growth from 2001. Several of
these products have been integrated into our new membership programs in
order to assist new members in meeting nutritional goals as they start
their new fitness program, while introducing them to our private label
line of nutritional products. We continue to test and bring to market
new products to meet customer demand. As a policy, we require
manufacturers and suppliers of our nutritional products to maintain
significant amounts of product liability insurance.
To further capitalize on the Bally brand outside our clubs, we
have also begun limited distribution of our private-label nutritional
products in select retail, grocery and drug store chains. Bally Total
Fitness branded nutritional products are currently sold in approximately
4,000 outside retail stores nationwide.
- Fitness Formula Retail Stores. Our members make over 150
million workout visits to our clubs annually, providing a captive
market of fitness conscious consumers. Our on-site Fitness Formula
retail stores have been designed to provide products most needed by our
members before, during and after their workout. With 391 stores in
operation during 2002, we increased revenue during the year by 24% over
2001 to $53.4 million selling nutritional products (Bally-branded as
well as other nationally recognized brands), basic workout apparel,
packaged drinks and other fitness-related convenience products. In 163
of our higher-workout volume clubs, our Fitness Formula retail stores
include a juice bar providing prepared fruit juice drinks and
supplement-enhanced nutritional drinks and other on-demand nutritional
products. Our juice bar stores have the additional impact of promoting
retail store sales of other products through increased member traffic
through the stores.
- Weight Management Program. The final testing phases were
completed late in 2002, and in January 2003 we announced the nationwide
introduction of our new Weight Management Program. Bally's Weight
Management Program is a comprehensive nutrition and exercise program
customized to an individual's unique metabolism by determining specific
calorie needs based on an individual's resting metabolic rate and
specific weight goals. Since most of our new members join with a weight
loss goal in mind, the new Weight Management Program provides a
framework to meet those objectives all within the four walls of our
fitness centers as an alternative to specialty weight-loss service
providers. Using computer-based and manual food logging methods, the
program provides for food counseling, personal training and exercise,
and integrates our Rapid Results Diet System private-label nutritional
products in a comprehensive lifestyle health and fitness program. We
believe the integration of weight loss services into our existing
infrastructure of fitness services provides us with a unique
competitive advantage over outside
41
providers of weight loss services, which lack the fitness and targeted
nutritional components to weight loss solutions.
- Financial Services. In late 1995, in conjunction with a
significant financial institution, we implemented a program offering
selected members the opportunity to transfer the balance of their
financed membership fee to a pre-approved Visa account. As of December
31, 2002, over 265,000 credit cards have been issued. During the second
quarter of 2003, we discontinued our practice of transferring balances
under our credit card program with a third party financial institution.
We continue to investigate and evaluate other opportunities to offer
financial services to our members.
- Licensed Products. With our brand recognition and national
advertising presence, we have licensed the Bally Total Fitness brand to
third-party suppliers of fitness-related products. In January 2003 we
announced agreements with Life Fitness, licensing a line of Bally Total
Fitness branded home fitness equipment for sale to consumers in the
United States and Canada, and with Johnson Health Tech Co. Ltd. for
sales in South Korea. Our continuing licensing agreement with Sports &
Leisure Technology has resulted in Bally-branded portable fitness
products being sold in over 4,000 retail chain stores across the United
States and Canada. In 2002 we entered an agreement with Franklin Covey
to sell a line of Bally Total Fitness daily planners, which include
daily fitness tips and workout logs, in 175 Franklin Covey retail
stores. We believe licensing of our brand further enhances our brand
recognition and further positions us as the total source for consumers'
wellness and fitness needs.
EXPANSION AND ACQUISITION
To build upon our improved core operations and expanding products and
services business, we have invested in facilities expansion during the past five
years. In order to strengthen operating results and maximize cash flows we have
scaled back our new club expansion plans during 2002 and beyond in order to
further concentrate on bringing our immature and acquired club base to full
profitability. While most maturity occurs in the first three to seven years of
operation, a new fitness center takes approximately seven to ten years for its
dues-paying member base to fully reach maturity, and consequently, its earnings
contribution and cash flow potential. The following table summarizes the average
direct club EBITDA for the year ended December 31, 2002 grouped by range of club
maturity:
NUMBER OF YEARS OF OPERATION
AT DECEMBER 31, 2002 0-to-5 6-to-10 Over 10 Total
- ----------------------------- --------- --------- -------- ---------
(in thousands, except club data)
Direct club EBITDA $ 77,318 $ 59,700 $ 270,636 $ 407,654
Less: Indirect and corporate
charges (38,557) (29,771) (134,961) (203,289)
--------- --------- --------- ---------
EBITDA as adjusted $ 38,761 $ 29,929 $ 135,675 $ 204,365
========= ========= ========= =========
Average number of clubs 134 50 228 412
Average direct club EBITDA $ 577 $ 1,194 $ 1,187 $ 989
========= ========= ========= =========
We initiated a plan to increase new facilities openings of our more
profitable new fitness center prototype designed to cost less to build and
maintain than our older facilities and provide approximately 40% more space
devoted to the fitness services our members most frequently use in the same
average square footage. The new facilities are generally developed pursuant to
long-term lease arrangements and currently require, on average, approximately
$1.9 million per fitness center to fund leasehold improvements and exercise
equipment. During 2002, we opened 12 of these facilities.
We also upgraded and expanded certain of our existing facilities
well-beyond normal maintenance requirements, including adding and upgrading
exercise equipment, adding additional space and refreshing interior and exterior
finishes to improve club ambiance. We believe these upgrades and expansions have
enabled us to continue to attract and retain a strong membership base, increase
revenues and more effectively capitalize on our marketing and administrative
infrastructure.
42
Finally, due to our relative size in a fragmented industry, we have
been well-positioned to identify opportunities to selectively acquire existing
fitness center operations at attractive prices. In 2002, we acquired seven
fitness centers in the Boston area. On December 31, 2001, we acquired Crunch
Fitness International, Inc., which had 19 fitness centers. In 2000 we acquired
13 fitness centers in Portland, Oregon where we previously had no fitness
centers, three centers in San Diego, California and one in Pittsburgh,
Pennsylvania. These acquisitions fit our strategic goal of expanding our reach,
increasing penetration in key markets, and leveraging our overall
infrastructure. We have no near term plans for further expansion through
acquisitions.
In 2001, we debuted our first Bally-branded facility in Nassau, Bahamas
through a franchise agreement with Doctor's Hospital, a leading for-profit
medical institution in the Caribbean region. In 2002, we signed a joint venture
agreement and opened one club with China Sports Industry Co., Ltd, the largest
publicly traded company related to sports and fitness in China, to expand Bally
Total Fitness to Asia. Presently there are two clubs open in China (one joint
venture club and one franchise club) and signed leases for three additional
franchise locations. We currently have agreements with unaffiliated third
parties to develop franchise locations in South Korea, five countries in
Southeast Asia including Thailand, Taiwan, Malaysia, the Philippines and
Singapore and Mexico. Through these international relationships, over the next
five years we believe it is possible to franchise over 50 fitness centers.
International franchise arrangements provide further leverage of our brand
identity into new and developing markets without the inherent risk and capital
requirements of direct foreign investment.
MEMBERSHIP PLANS
We offer prospective members a choice of membership plans. These
membership plans are distinguished primarily by their priority of access to
in-club services and access to other fitness centers we operate, either locally
or system wide and by the level of fitness-related products and services
included in the membership program. From time to time, we also offer special
membership plans, which limit a member's access to a single fitness center and
to certain days and non-peak hours. Similarly, we offer a broad range of payment
alternatives. Most memberships sold require a substantial initiation fee and
relatively low month dues. We also offer "pay-as-you-go" memberships, which
require higher monthly payments for the duration of the membership.
The one-time initial membership fees for joining our Bally Total
Fitness brand fitness centers, excluding limited special offers and corporate
programs, generally range from approximately $700 to $1,600 and can be financed
for up to 36 months, subject to down payment requirements and state, provincial
and local regulations. Generally, the initial membership fee is based on:
- The membership plan selected;
- The diversity of facilities and services available at
the fitness center of enrollment;
- Market conditions; and
- Seasonal promotional strategies.
In addition to one-time initial membership fees, Bally Total Fitness
brand club members generally pay monthly dues to maintain membership privileges.
Monthly dues are generally charged at a fixed rate during the finance period and
may increase thereafter, subject to stated terms. At June 30, 2003,
approximately 40% of our members were in their initial membership period and
were committed to, or had prepaid, average monthly payments of $38, and 60% of
our members were past their initial membership period and were making monthly
payments averaging approximately $11 per month.
Our upscale branded clubs-The Sports Clubs of Canada, Gorilla Sports,
Pinnacle Fitness and Crunch Fitness-offer memberships with lower initial
membership fees generally ranging from $50 to $225, but carrying monthly dues
ranging from $49 to $94 per month during an initial obligatory term, generally
between 12 and 24 months, and subject to increase thereafter. Our upscale Bally
Sports Clubs branded clubs offer memberships similar to Bally Total Fitness
brand clubs in terms of 36 month financing of the initial membership fee, but
ranging from
43
$1,400 to $2,100, in addition to monthly dues during the initial financing
period, and dues ranging from $29 to $54 thereafter, subject to increase.
The average annual growth rate of our monthly dues revenues was over
12% from 1996 through 2002. We expect the annual increases in monthly dues
revenues will continue due to the contractual terms of current membership plans
and the increase in upscale brand clubs carrying higher monthly dues.
Additionally, we believe we can continue to increase monthly dues for our Bally
Total Fitness brand members who are beyond their initial financing period
without material loss in membership. Recent experience has shown that over 75%
of our members faced with a membership renewal decision for the first time,
generally at the end of their third year of membership, made dues payments
continuing into their initial renewal year. Members making a renewal decision
for subsequent years renewed at a rate of 87%.
FINANCING OF INITIAL MEMBERSHIP FEES
Members electing to finance their one-time initial membership fees can
choose from several payment methods and down payment options. We continue to
focus on down payment levels and the method of payment as strategies to improve
the quality of membership receivables and collection experience.
Generally, we offer financing terms of 36 months for one-time
initiation fees. Shorter terms are offered on a promotional basis or as required
by applicable state, provincial or local regulations. As of June 30, 2003,
approximately 20% of our clubs offered maximum financing terms that were shorter
than 36 months. Initial membership fees are financed at a fixed annual
percentage rate, which generally is between 16% and 18%, except where limited by
applicable state and provincial laws. Financed portions of initial membership
fees may be prepaid without penalty at any time during the financing term. Based
on experience in 2002, we expect in excess of 90% of all new memberships
originated during 2003 will be financed to some extent.
We currently provide members with two payment methods for financed
initial membership fees and monthly dues: electronic payments and monthly
statements. Members may change their payment method between the electronic and
monthly statement method at any time. These methods are described as follows:
- Electronic Payments. This is the most popular method for
payment of financed initial membership fees and monthly dues. Under this
method, on approximately the same date each month, a fixed payment is
either automatically (a) transferred via debit from a member's bank
account, or (b) charged to a member's designated credit card. Electronic
payment methods are consistently selected by more than 70% of new
members at the time of origination.
- Monthly Statements. New members electing not to pay by an
electronic payment method are sent monthly statements setting forth the
amount due and owing for their initial membership fees and monthly dues.
Members then remit their payments to our processing and collection
center in Norwalk, California.
Minimum down payments are specified for financed initial membership
fees to adequately defray both the initial account set-up cost as well as
collection costs should the account become immediately delinquent. As a result,
we cover the incremental cost of new membership processing and collection
through the down payment and do not perform individual credit checks on members
prior to sign up. We manage our credit risk by measuring, from past performance,
the expected realizable value of financed initial membership fees for members
paying by each of the payment methods and down payment levels. For example, our
historical analysis indicates the collection experience for electronic payments
is approximately 50% better than monthly statement accounts. As of December 31,
2002 and 2001, approximately 63% of financed initial membership fees were being
paid by electronic payment methods.
SALES AND MARKETING
We devote substantial resources to the marketing and promotion of our
fitness centers and their services under each of the brands we operate. We
believe strong marketing support is critical to attracting new members at both
existing and new fitness centers. The majority of our fitness centers use the
branded service mark "Bally Total Fitness," including nine upscale fitness
centers that are known as "Bally Sports Clubs." The nationwide use of the
service mark enhances brand identity and increases advertising efficiencies.
Pursuant to our strategy of targeted
44
market segmentation, we have opened or acquired new facilities during the past
few years that operate under more trendy or upscale brands, including 26 fitness
centers as "Crunch Fitness", ten fitness centers as "The Sports Clubs of
Canada", seven as "Pinnacle Fitness" and four as "Gorilla Sports."
We operate fitness centers in over 50 major metropolitan areas
representing 63% of the United States population and over 16% of the Canadian
population, with 348 of our fitness centers located in the top 25 metropolitan
areas in the United States and Toronto, Canada. Concentrating our fitness
centers in major metropolitan areas increases the efficiency of our marketing
and advertising programs and enhances brand identity and word-of-mouth
marketing.
We spent $55.5 million in 2002, $54.0 million in 2001 and $51.4 million
in 2000, for advertising and promotion. Historically, we have primarily
advertised on television and, to a lesser extent, through direct mail,
newspapers, telephone directories, radio, outdoor signage and other promotional
activities. We have placed increased emphasis in recent years on direct mail and
other promotions based on extensive research activities we have undertaken.
Our sales and marketing programs emphasize the benefits of health,
physical fitness and exercise by appealing to the public's desire to look and
feel better. Advertisements are augmented with individual sales presentations
made by sales personnel in our fitness centers. We believe the various
membership and payment plans, in addition to our strong brand identity and the
convenience of multiple locations, constitute distinct competitive advantages.
Our marketing efforts also include corporate membership sales and
in-club marketing programs. Open houses and other activities for members and
their guests are used to foster member loyalty and introduce fitness centers to
prospective members. Our nationally supported member referral program involves
current members in the process of new member enrollments and enhance member
loyalty.
Direct mail reminders encourage renewal of existing memberships. We
have approximately 130 employees at our regional member processing and
collection centers dedicated primarily to inbound renewal programs and outbound
telemarketing programs to existing members. Telemarketing is used predominately
to offer services to members and, to a lesser extent, to attract prospective new
members.
We also attract membership interest from Internet visitors to our home
page at www.ballyfitness.com and have developed strategic web-based
partnerships. During 2002, the level of activity grew to more than 7 million
unique users visiting the site, resulting in the issuance of over 220,000 guest
passes and the collection of over 103,000 dues payments.
In 2002, we continued to benefit from new and existing strategic
marketing alliances heightening public awareness of our fitness centers and the
Bally Total Fitness brand. Our licensed Bally Total Fitness line of portable
exercise equipment is carried in more than 4,000 retail stores in the United
States and Canada. In addition, we have strategic marketing alliances with
leading consumer product companies such as AOL Time Warner, PepsiCo,
Colgate-Palmolive, Unilever, Gatorade, Kellogg Company and Kraft Foods. These
alliances provide products for our members to use and/or sample as well as an
incremental source of revenue for us.
ACCOUNT SERVICING
In August 2003, we completed the consolidation of member processing and
collection activities from our Towson, Maryland regional service center into our
Norwalk, California regional service center. All of our member services,
collection and new member processing activities are now handled by the Norwalk
facility allowing for further efficiencies through centralization of these high
volume activities.
All collections for past-due accounts are initially handled internally
by the member processing and collection center. We systematically pursue
past-due accounts by utilizing a series of computer-generated correspondence and
telephone contacts. Our power-dialer system assists in the efficient
administration of our in-house collection efforts. Based on the period of
delinquency, members are contacted by collectors with varying degrees of
expertise, with our less experienced collectors concentrating on early
delinquencies, and our more
45
experienced collectors pursuing seriously delinquent accounts. At 60 days past
due, members are generally denied entry to the fitness centers. Delinquent
accounts are generally written off after 90 or 180 days without payment,
depending on delinquency history. Accounts that are written off are reported to
credit reporting bureaus, and selected accounts are then sold to a third-party
collection group.
We prioritize our collection approach based on credit scores and club
usage, among others, at various levels of delinquency. By tailoring our
membership collection approach to reflect a delinquent member's likelihood of
payment, we believe that we can collect more of our membership receivables at a
lower cost. To credit score, we use a national bureau, which charges a nominal
fee per account.
COMPETITION
We are the largest commercial operator of fitness centers in North
America in terms of revenues, number of members, and number and square footage
of facilities. We are the largest operator, or among the largest operators, of
fitness centers in every major market in which we operate fitness centers.
Within each market, we compete with other commercial fitness centers, physical
fitness and recreational facilities established by local governments, hospitals,
and businesses for their employees, the YMCA and similar organizations, and, to
a certain extent, with racquet, tennis and other athletic clubs, country clubs,
weight-reducing salons and the home-use fitness equipment industry. We also
compete, to some extent, with entertainment and retail businesses for the
discretionary income of our target markets. However, we believe our brand
identity, operating experience, membership options, ability to allocate
advertising and administration costs over all of our fitness centers, nationwide
operations, purchasing power and account processing and collection
infrastructure, provide us with distinct competitive advantages. Future
competitive factors may emerge which may lessen our ability to compete as
effectively.
We believe competition has increased to some extent in certain markets,
reflecting the public's enthusiasm for fitness and the decrease in the barriers
to entry into the market due to financing available from, among others,
landlords, equipment manufacturers and private equity sources. We believe our
brand identity is strong, membership plans are affordable and we have the
flexibility to be responsive to economic conditions.
Our pursuit of new business initiatives, particularly the sale of
weight loss services, nutritional products and apparel, has us competing against
large, established companies with more experience selling products on a retail
basis. In some instances, our competitors for these products have substantially
greater financial resources than we have. We may not be able to compete
effectively against these established companies.
PROPERTIES
At June 30, 2003, we operated 415 fitness centers in 29 states and
Canada. At June 30, 2003, we owned 50 fitness centers and leased either the
land, building or both for the remainder of our fitness centers. Aggregate rent
expense, including office and administrative space, was $129.2 million in 2002,
$114.1 million in 2001 and $108.0 million in 2000. Most of our leases require us
to pay real estate taxes, insurance, maintenance and, in the case of shopping
center and office building locations, common-area maintenance fees. A limited
number of leases also provide for percentage rental based on receipts. Various
leases also provide for periodic rent adjustments based on changes in the
Consumer Price Index, most with limits provided to protect us from large
increases in annual rental payments. One fitness center accounted for between 1%
to 2% of our net revenues during 2002. We believe we can accommodate increases
in memberships with the existing capacity at our properties.
The leases for fitness centers we have entered into in the last five
years generally provide for an initial term of 15 years. Most leases give us at
least one five-year option to renew and often two or more such options.
Our executive office is located in leased office space in Chicago,
Illinois. We also lease space in Norwalk, California for our member processing
and collection center, and at Towson, Maryland for our information systems and
telemarketing facilities.
46
TRADEMARKS AND TRADE NAMES
The majority of our fitness centers use the service mark "Bally Total
Fitness", including nine upscale centers that are known as "Bally Sports Clubs."
The nationwide use of the service mark enhances brand identity and increases
advertising efficiencies. Pursuant to our strategy of targeted market
segmentation, we have opened or acquired new facilities during the past few
years that operate under upscale brands, including 26 fitness centers as "Crunch
Fitness", ten fitness centers as "The Sports Clubs of Canada", seven as
"Pinnacle Fitness" and four as "Gorilla Sports."
SEASONALITY OF BUSINESS
Historically, we experience greater membership fee originations in the
first quarter and lower membership fee originations in the fourth quarter, while
advertising expenditures are typically lower during the fourth quarter. Our
products and services business have the effect of further increasing the
seasonality of our business.
EMPLOYEES
At June 30, 2003, we had approximately 22,500 employees, including
approximately 11,600 part-time employees. The distribution of our employees is
summarized as follows:
- Approximately 21,465 employees are involved in fitness
center operations, including sales personnel, instructors, personal
trainers, supervisory and facility personnel;
- Approximately 850 employees are involved in the operation of
our member processing and collection centers, and management
information systems;
- Approximately 70 employees are product and service
development and operations support personnel; and
- Approximately 115 employees are accounting, marketing, human
resources, real estate, legal and administrative support personnel.
We are not a party to a collective bargaining agreement with any of our
employees. Although we experience high turnover of non-management personnel,
historically we have not experienced difficulty in obtaining adequate
replacement personnel. Periodically, our sales personnel become somewhat more
difficult to replace due, in part, to increased competition for skilled retail
sales personnel.
GOVERNMENT REGULATION
Our operations and business practices are subject to regulation at
federal, state, provincial and local levels. The general rules and regulations
of the FTC and of other federal, state, provincial and local consumer protection
agencies apply to our advertising, sales and other trade practices.
State and provincial statutes and regulations affecting the fitness
industry have been enacted or proposed in all of the states and provinces in
which we conduct business. Typically, these statutes and regulations prescribe
certain forms and regulate the terms and provisions of membership contracts,
including:
- Giving the member the right to cancel the contract, in most
cases, within three business days after signing;
- Requiring an escrow for funds received from pre-opening
sales or the posting of a bond or proof of financial responsibility;
and, in some cases,
- Establishing maximum prices and terms for membership
contracts and limitations on the financing term of contracts.
47
In addition, we are subject to numerous other types of federal, state
and provincial regulations governing the sale, financing and collection of
memberships, including, among others, the Truth-in-Lending Act and Regulation Z
adopted thereunder, as well as state and provincial laws governing the
collection of debts. These laws and regulations are subject to varying
interpretations by a large number of state, provincial and federal enforcement
agencies and the courts. We maintain internal review procedures in order to
comply with these requirements and believe our activities are in substantial
compliance with all applicable statutes, rules and decisions.
Under so-called "cooling-off" statutes in most states and provinces we
operate in, new members of fitness centers have the right to cancel their
memberships for a period of three to 15 business days after the date the
contract was entered into and are entitled to refunds of any payment made. The
amount of time new members have to cancel their membership contract depends on
the applicable state and provincial law. Further, our membership contracts
provide that a member may cancel his or her membership at any time for qualified
medical reasons or if the member relocates a certain distance away from our
fitness center. In addition, a membership may be cancelled in the event of a
member's death. The specific procedures for cancellation in these circumstances
vary according to differing state and provincial laws. In each instance, the
canceling member is entitled to a refund of prepaid amounts only. Furthermore,
where permitted by law, a fee is due upon cancellation, and we may offset that
amount against any refunds owed.
We are a party to several state and federal consent orders. The consent
orders essentially require continued compliance with applicable laws and require
us to refrain from activities not in compliance with applicable laws. From time
to time, we make minor adjustments to our operating procedures to remain in
compliance with those consent orders.
Our nutritional products are subject to regulation by one or more
federal agencies, including the Food and Drug Administration (the "FDA") and the
FTC. For example, the FDA regulates the formulation, manufacture and labeling of
vitamin and other nutritional supplements in the United States while the FTC is
principally charged with regulating marketing and advertising claims.
LEGAL PROCEEDINGS
We are involved in various claims and lawsuits incidental to our
business, including claims arising from accidents at our fitness centers. In the
opinion of management, we are adequately insured against such claims and
lawsuits, and any ultimate liability arising out of such claims and lawsuits
will not have a material adverse effect on our financial condition or results of
operations. In addition, from time to time, customer complaints are investigated
by governmental bodies. In the opinion of management, none of the complaints or
investigations currently pending will have a material adverse effect on our
financial condition or results of operations.
48
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning Bally's
executive officers and directors.
NAME AGE POSITION
- --------------------------- --- --------------------------------------------------------------
Paul A. Toback............. 40 Chairman, President and Chief Executive Officer
John W. Dwyer.............. 51 Executive Vice President, Chief Financial Officer and Director
William G. Fanelli......... 41 Senior Vice President, Finance
Julie Adams................ 58 Senior Vice President, Membership Services
Cary A. Gaan............... 57 Senior Vice President, Secretary and General Counsel
Harold Morgan.............. 47 Senior Vice President, Chief Administrative Officer
John H. Wildman............ 44 Senior Vice President, Chief Operating Officer
Martin Pazzani............. 46 Senior Vice President, Chief Marketing Officer
Martin E. Franklin......... 38 Director
J. Kenneth Looloian........ 81 Director
James F. McAnally, M.D..... 54 Director
John W. Rogers, Jr......... 45 Director
Stephen C. Swid............ 62 Director
Paul A. Toback was named Chairman of the Board of Directors in May 2003
and was elected a Director in March 2003 and President and Chief Executive
Officer in December 2002, was Executive Vice President from February 2002 to
December 2002, Chief Operating Officer from June 2001 to December 2002 and was
Senior Vice President, Corporate Development from March 1998 to June 2001 and
Vice President, Corporate Development in November 1997. From January 1995 to
August 1997, Mr. Toback was Senior Vice President and Chief Operating Officer of
Globetrotters Engineering Corp., and from January 1993 to December 1994, he
served as Executive Assistant to the Chief of Staff at the White House. Prior to
January 1993, Mr. Toback was Director of Administration for Mayor Daley in the
City of Chicago. Mr. Toback is an attorney licensed to practice in the state of
Illinois.
John W. Dwyer was elected a Director in August 2001, Executive Vice
President in November 1997, a Senior Vice President in 1995, Vice President and
Chief Financial Officer in May 1994 and was Treasurer from October 1996 to June
2001. Mr. Dwyer was Corporate Controller of Bally Entertainment Corporation
between June 1992 and December 1996 and a Vice President between December 1992
and December 1996.
Julie Adams was elected Senior Vice President, Membership Services in
February 2003, was Vice President, Membership Services from September 1997 to
February 2003, Vice President, Controller from 1993 to September 1997,
Controller from March 1991 to 1993 and Director of Financial Reporting from
August 1985 to March 1991.
William G. Fanelli was elected Senior Vice President, Finance in June
2001, was Senior Vice President, Operations from November 1997 to June 2001 and
was Vice President, Strategic Operations from November 1996 to November 1997.
Mr. Fanelli was Director, Business Development of Bally Entertainment
Corporation from October 1993 to December 1996.
Cary A. Gaan was elected Senior Vice President and General Counsel in
January 1991 and Secretary in April 1996. Mr. Gaan served as a Vice President
from 1987 to 1991.
Harold Morgan was elected Senior Vice President, Chief Administrative
Officer in February 2003, was Senior Vice President, Human Resources from
September 1995 to February 2003 and was Vice President from January 1992 to
September 1995. Mr. Morgan was Vice President, Human Resources of Bally
Entertainment Corporation between December 1992 and December 1996.
49
John H. Wildman was elected Senior Vice President, Chief Operating
Officer in December 2002, was Senior Vice President, Sales and Marketing from
November 1996 to December 2002 and Vice President, Marketing in September 1995.
For approximately four years prior thereto, Mr. Wildman was a Senior Area
Director.
Martin Pazzani was elected Senior Vice President and Chief Marketing
Officer in August 2003. Prior to joining the Company, Mr. Pazzani was President
and Founder of The Global Marketing Revolution, Inc., a marketing consultancy,
from October 2002 to August 2003. From June 1997 to October 2002, Mr. Pazzani
was Corporate Senior Vice President and Worldwide Director of Foote, Cone and
Belding Worldwide's global business and strategy consulting division. Prior to
June 1997, Mr, Pazzani held various marketing and strategy-related positions at
DDB Needham Worldwide, Western International Media (now Initiative Media),
Rocket Science Advertising and Heublein/RJR Nabisco/Grand Metropolitan Plc. (now
Diago).
Martin E. Franklin has served as a Director since March 2003. Mr.
Franklin is the Chairman and Chief Executive Officer of Jarden Corporation, a
provider of niche consumer products used in the home. Mr. Franklin is also a
principal and executive officer of a number of private investment entities,
including Marlin Holdings, Inc. Mr. Franklin was the Chairman of the Board of
Directors of Bolle Inc. from February 1997 until February 2000. Mr. Franklin has
previously held positions as Chairman and Chief Executive Officer of Lumen
Technologies, Inc. from May 1996 to December 1998, and Benson Eyecare
Corporation from October 1992 to May 1996. Since January 2002, Mr. Franklin has
served as the Chairman of the Board and a Director of Find/SVP, Inc.
J. Kenneth Looloian has served as a Director since 1995. Mr. Looloian
is a consultant to Di Giorgio Corporation and served as the Sr. Vice President,
Chief Financial Officer of New Jersey Bell Telephone Company and Bellcore (now
Telecordia Technologies) before his retirement.
James F. McAnally, M.D. has served as a Director since 1995. Dr.
McAnally is a private practitioner who specializes in hypertension and kidney
disease. Dr. McAnally is also the Medical Director of Nephrology Services at
Trinitas Hospital in Elizabeth, New Jersey and the Chief of Nephrology at Seton
Hall University, School of Graduate Medical Education.
John W. Rogers, Jr. has served as a Director since April 2003. Mr.
Rogers is the Chairman and Chief Executive Officer of Ariel Capital Management,
Inc. and also serves as a Director on the boards of Aon Corporation, Bank One
Corporation, Exelon Corporation, GATX Corporation, Ariel Mutual Funds and
McDonald's Corporation.
Stephen C. Swid has served as a Director since March 2003. Mr. Swid is
Chairman and Chief Executive Officer of SESAC, Inc., one of three performing
rights organizations in the United States.
50
EXECUTIVE COMPENSATION
The following table sets forth, for each of the years indicated, the
compensation paid by Bally to both its current and former Chief Executive
Officers during 2002, and the four other most highly compensated executive
officers of Bally as of December 31, 2002 (collectively, the "Named Executive
Officers"). During these years, the Named Executive Officers were compensated in
accordance with our plans and policies.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -----------------------
------------------------------------------- RESTRICTED
OTHER ANNUAL STOCK SECURITIES ALL OTHER
SALARY BONUS COMPENSATION AWARDS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) ($)(3) OPTIONS (#) ($)(4)(5)
- ---------------------------------- ---- ------- ------- ------------ ---------- ----------- ------------
Paul A. Toback 2002 298,308 300,000 14,915
President, Chief Executive 2001 260,000 200,000 706,650 30,000 13,014
Officer and Director 2000 260,000 190,000 749,700 20,000 12,596
John W. Dwyer 2002 372,885 300,000 29,665
Executive Vice President, 2001 325,000 275,000 706,650 30,000 33,500
Chief Financial Officer and 2000 325,000 325,000 374,850 30,000 36,952
Director
William G. Fanelli 2002 250,000 160,000 21,500
Senior Vice President, 2001 250,000 160,000 403,800 20,000 21,750
Finance 2000 250,000 165,000 499,800 20,000 21,577
Cary A. Gaan 2002 325,000 160,000 1,000
Senior Vice President, 2001 325,000 130,000 302,850 10,000 1,000
Secretary and General Counsel 2000 283,000 145,000 20,000 1,000
John H. Wildman 2002 250,000 165,000
Senior Vice President, 2001 250,000 165,000 403,800 20,000
Chief Operating Officer 2000 250,000 175,000 187,425 20,000
Lee S. Hillman 2002 638,654 1,641,750 4,863,600
Former Chairman, President 2001 550,000 300,000 1,211,400 60,000 50,000
and Chief Executive Officer 2000 550,000 450,000 50,000 60,000
- -------------------
(1) The 2002 bonus represents the bonus earned in 2002 and paid in March
2003. The 2001 bonus represents the bonus earned in 2001 and paid in
March 2002. The 2000 bonus represents the bonus earned in 2000 and paid
in March 2001.
(2) Certain incidental personal benefits to executive officers of Bally may
result from expenses incurred by Bally in the interest of attracting
and retaining qualified personnel. These incidental personal benefits
made available to the Named Executive Officers during 2002 are not
described herein because the incremental cost to Bally of such benefits
is below the required disclosure threshold.
(3) In 2002, Mr. Hillman was awarded 75,000 shares of restricted stock. In
2001, the number of shares of restricted stock awarded to Messrs.
Hillman, Toback, Dwyer, Fanelli, Gaan and Wildman was 60,000, 35,000,
35,000, 20,000, 15,000 and 20,000, respectively. In 2000, the number of
shares of restricted stock awarded to Messrs. Toback, Dwyer, Fanelli
and Wildman was 30,000, 15,000, 20,000 and 7,500, respectively. The
value of such shares was determined by the closing price of the common
stock at the date of grant, net of consideration paid by each
recipient. These shares were issued in the recipient's name and are
held by Bally until the restrictions lapse. The restrictions on these
shares lapse upon a change in control of Bally, the recipient's death,
termination of employment due to disability or the first date prior to
December 31, 2005 which follows seven consecutive trading days on which
the trading price equals or exceeds the targeted stock price of $42 per
share. If the restrictions do not lapse prior to December 31, 2005, the
shares will be forfeited to Bally.
(4) Represents amounts matched by Bally in connection with participation in
Bally's savings plans.
51
(5) In 2002, with regards to our former Chairman, President, and Chief
Executive Officer, this amount includes current and future cash
payments through 2004 pursuant to a separation agreement with the
Company and $926,100 for vesting of restricted stock.
EMPLOYMENT AGREEMENTS
Bally entered into employment agreements with Mr. Toback, Mr. Dwyer,
Mr. Fanelli, Mr. Gaan, and Mr. Wildman effective as of January 1, 2003 for terms
of three years through December 31, 2005. Commencing January 1, 2005, such
employment period shall be extended each day by one day to create a new one-year
term. At any time at or after January 1, 2005, either the Company or the
executive may deliver notice to the other party that the employment period shall
expire on the last day of the one-year period commencing on the date of delivery
of such notice. The agreements provide for an annual base salary ($475,000 for
Mr. Toback and Mr. Dwyer, $375,000 for Mr. Gaan, and $325,000 for Mr. Fanelli
and Mr. Wildman), subject to increases at the discretion of Bally, and a bonus
payable at the discretion of Bally. In the event of a change in control of Bally
and the successor in control, without cause, terminates the agreement, or
employment is constructively terminated, the executive will be paid a lump sum
equal to a percentage of his annual target bonus for the year based on the
number of days passed until the date of termination, plus two times the
executive's annual salary and target bonus. If it is determined that any
payment, distribution or benefit received by the executive from the Company
pursuant to his agreement or any stock award or option plan would result in the
imposition of excise tax, the Company will pay the executive an additional
amount related to the excise tax. Under these employment agreements, if a change
in control of Bally had occurred on June 30, 2003 and the executive was
subsequently asked to leave the employ of Bally, Mr. Toback and Mr. Dwyer would
be entitled to a payment of $1,698,125, Mr. Gaan a payment of $1,171,875 and Mr.
Fanelli and Mr. Wildman a payment of $1,015,625, plus a percentage of their
target bonus based on the number of days worked up to their date of termination,
excluding excise tax related payments, if any, referred to above. In addition,
Mr. Gaan's agreement allows him to voluntarily end his employment after December
31, 2003 and be paid a lump sum equal to his annual salary and target bonus plus
a percentage of his annual target bonus for the year based on the number of days
passed until the date of termination.
MANAGEMENT RETIREMENT SAVINGS PLAN
The board of directors of Bally has adopted the Bally Total Fitness
Holding Corporation Management Retirement Savings Plan (the "Retirement Plan").
The Retirement Plan is a deferred compensation plan designed to permit a select
group of management or highly compensated employees to enhance the security of
themselves and their beneficiaries following retirement or other termination of
their employment. The Retirement Plan is intended to be an unfunded "employee
pension benefit plan" under the Employee Retirement Income Security Act of 1974,
as amended, and is maintained by Bally. The Retirement Plan is not intended to
be qualified under the Internal Revenue Code of 1986, as amended (the "Code").
The board of directors, in its sole discretion, designates those members of
management or highly compensated employees who are eligible to participate in
the Retirement Plan.
The amount of compensation that may be deferred is presently limited
pursuant to a schedule based upon the age of the participant at the beginning of
or during the compensation year. For participants who are less than 50 years of
age, a maximum of 25% of compensation may be deferred; for those who are 50 to
54 years of age, a maximum of 50% of compensation may be deferred; for those who
are 55 to 59 years of age, a maximum of 75% of compensation may be deferred; and
for those participants who are 60 years of age or older, a maximum of 100% of
compensation may be deferred. During 2002, Bally provided a matching
contribution of 50% of the first 10% of eligible compensation the participant
deferred and 0% thereafter. Matching contributions are credited to a
participant's matching account and become vested as follows: after one but less
than two Years of Deferral (as defined) they become 33 1/3% vested, after two
but less than three Years of Deferral they become 66 2/3% vested, and after more
than three Years of Deferral they become fully vested. For this purpose, a Year
of Deferral is credited with respect to a matching contribution for each
completed calendar year commencing after the calendar year for which the
matching contribution was made. A participant who separates from service will
receive his benefits under the Retirement Plan in a lump sum. As soon as
possible (but not later than five business days) after a change in control of
Bally (as defined), all of the participants' accounts will become 100% vested.
52
For 2002, Bally contributed $588,240 to the accounts of all
participants in the Retirement Plan, of which $65,935 was allocated to the
accounts of all executive officers of Bally as a group. Named Executive Officers
receiving allocations are as follows: Mr. Toback, $14,915, Mr. Dwyer, $28,788
and Mr. Fanelli, $20,500.
2000 BONUS PLAN
In 2000, the Compensation Committee of the board of directors of Bally
adopted the Bally Total Fitness Holding Corporation 2000 Bonus Plan (the "Bonus
Plan"). The purpose of the Bonus Plan was to provide an additional performance
incentive for certain senior executive and other key employees of Bally for
2000, 2001 and 2002 (the "Plan Years"). The Compensation Committee, based upon
the recommendation of Bally's management, determined those employees who
participated in the Bonus Plan.
Bonuses for each participant were part of a pool consisting of a
maximum of 14% of the increases in Bally's earnings before interest, taxes,
depreciation and amortization, for a plan year from the immediately preceding
plan year. Each participant had a determined participation percentage of the
amount allocated to the pool, which was based upon the participant's
responsibilities and contributions for the plan year. The participation
percentages were designated by the Compensation Committee and awarded in a
manner such that the sum of the participation percentages did not exceed 100% of
the pool. Each participant's share of the bonus amount for a plan year equaled
the individual's participation percentage for the plan year multiplied by the
amount allocated to the pool for such plan year. The bonus amounts were payable
by March 15th of the calendar year following the plan year. To the extent that
Bally's federal income tax deduction for remuneration to a participant was
limited by Section 162(m) of the Code, payments under the Bonus Plan were
deferred until Section 162(m) no longer limits the deduction.
The determination of the participants and their participation
percentages by the Compensation Committee remained in effect until participation
ceases. A person ceased to be a participant immediately upon termination of
employment with Bally for any reason whatsoever. A person who ceased to be a
participant forfeited entitlement to future payments under the plan, other than
amounts deferred because of the Section 162(m) limitation.
STOCK OPTION AND SAR GRANTS
The Company did not grant any options to purchase common stock to the
Named Executive Officers during 2002. There have been no stock appreciation
rights granted by Bally to date.
STOCK OPTION AND SAR EXERCISES
The following table sets forth certain information concerning exercises
of stock options during 2002 by each of the Named Executive Officers and their
stock options outstanding as of December 31, 2002. There have been no stock
appreciation rights granted by Bally to date.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
OPTION VALUES AT END OF LAST FISCAL YEAR
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT VALUE OF UNEXERCISED IN-THE-MONEY
DECEMBER 31, 2002 OPTIONS AT DECEMBER 31, 2002 (1)
SHARES VALUE -------------------------- ---------------------------------
ACQUIRED ON REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME EXERCISE (#) ($) (#) (#) ($) ($)
- ------------------ ------------ -------- ----------- ------------- ----------- -------------
Paul A. Toback 93,333 26,667
John W. Dwyer 175,000 30,000 103,775
William G. Fanelli 115,000 20,000 44,475
Cary A. Gaan 46,666 13,334
John H. Wildman 105,000 20,000 103,775
Lee S. Hillman 435,000 294,750
- -----------------
(1) Based on the closing price of common stock on the New York Stock Exchange on
December 31, 2002, which was $7.09 per share.
53
COMPENSATION OF DIRECTORS
Members of the board of directors who are also employees of Bally do
not receive any additional compensation for service on the board of directors or
any committees of the board of directors. Members of the board of directors who
are not employees of Bally presently receive an annual retainer of $30,000 plus
a $2,000 stipend for each board of directors meeting attended. Non-employee
directors presently receive additional stipends for service on committees of the
board of directors of $1,000 per year for committee members and $2,000 per year
for committee chairman. In addition, in 2002 the then non-employee directors
received $17,500 for service on a special committee of the board of directors.
Also, pursuant to Bally's 1996 Non-Employee Directors' Stock Option Plan (the
"Directors' Plan"), each non-employee director of Bally is granted an option to
purchase 5,000 shares of common stock upon the commencement of service on the
board of directors, with another option to purchase 5,000 shares of common stock
granted on the second anniversary thereof. Additional grants of options may be
made from time to time pursuant to the Directors' Plan. 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. Under the Directors'
Plan, each of the then non-employee directors of Bally was granted options to
purchase 5,000 shares of common stock in September 2001, December 2000, January
1998 and January 1996.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In general, "beneficial ownership" includes those shares a stockholder
has the power to vote or transfer and stock options or warrants that are
exercisable currently or within 60 days. Unless otherwise indicated, all
information with respect to ownership of common stock is as of September 15,
2003. On September 15, 2003, Bally had outstanding 33,969,827 shares of common
stock. The Common Shares Owned column includes, in certain circumstances, shares
of common stock held in the name of the director's or executive officer's
spouse, minor children, or relatives sharing the director's or executive
officer's home, the reporting of which is required by applicable rules of the
Securities and Exchange Commission, but as to which shares of common stock the
director or executive officer may have disclaimed beneficial ownership. As used
in the following tables, an asterisk in the Percentage of Outstanding Stock
column means less than 1%.
54
COMMON OPTIONS/WARRANTS TOTAL PERCENTAGE
SHARES EXERCISABLE BENEFICIAL OUTSTANDING
BENEFICIAL OWNER OWNED WITHIN 60 DAYS OWNERSHIP STOCK
- --------------------------------------------------------- --------- ---------------- ---------- -----------
Paul A. Toback 301,803 103,333 405,136 1.2%
President, Chief Executive Officer and Director
John W. Dwyer 260,872 185,000 445,872 1.3%
Executive Vice President, Chief Financial Officer
and Director
William G. Fanelli 155,967 121,666 277,633 *
Senior Vice President, Finance
Cary A. Gaan 93,103 50,000 143,103 *
Senior Vice President, Secretary and General Counsel
John H. Wildman 155,000 111,666 266,666 *
Senior Vice President, Chief Operating Officer
Martin E. Franklin, Director (2) - - - *
J. Kenneth Looloian, Director 2,500 16,666 19,166 *
James F. McAnally, M.D., Director 5,000 16,666 21,666 *
John W. Rogers, Jr., Director 10,000 - 10,000 *
Stephen C. Swid, Director (3) 269,300 - 269,300 *
Lee S. Hillman 2,250 1,170,701 1,172,951 3.4%
Former Chairman, President and Chief
Executive Officer
All directors and executive officers as a
group (12 persons) (9) 1,431,966 769,164 2,201,130 6.3%
SLS Management, LLC (1)(4) 3,211,541 3,211,541 9.5%
140 West 57th Street
Suite 7B
New York, New York 10019
Janus Capital Management LLC(1)(5) 2,531,715 2,531,715 7.5%
Janus Special Situations Fund (1)(5)
100 Fillmore Street
Denver, CO 80206
Liberty Wanger Asset Management, L.P. ("WAM") (1) (6) 2,498,900 2,498,900 7.4%
WAM Acquisition GP, Inc., the general
partner of WAM (1)(6)
Liberty Acorn Trust (1)(6)
227 West Monroe Street, Suite 3000
Chicago, IL 60606
Douglas Levine (1)(7) 2,280,348 2,280,348 6.7%
17 E. 17th Street, Apt. 7
New York, NY 10013
Wellington Management Company, LLP (1)(8) 1,754,800 1,754,800 5.2%
75 State Street
Boston, MA 02109
- ------------------
(1) Represents a beneficial owner of more than 5% of the common stock based
on the owner's reported ownership of shares of common stock in filings
made with the Securities and Exchange Commission
55
pursuant to Section 13(d) and 13(g) of the Securities Exchange Act of
1934, as amended. Information with respect to each beneficial owner is
generally as of the date of the most recent filing by the beneficial
owner with the Securities and Exchange Commission and is based solely
on information contained in such filings.
(2) Does not include 35,326 shares of common stock held in escrow ("escrow
shares") pursuant to the terms of the Escrow Agreement, dated December
31, 2001, among the Company, Marlin Holdings, Inc., Douglas Levine, and
other former stockholders of Crunch Fitness International, Inc., a
Delaware corporation, including Marlin Capital L.P. and Bank of New
York as escrow agent. Mr. Franklin is an executive officer of the
general partner, Marlin Capital L.P.. Mr. Franklin disclaims beneficial
ownership of the escrow shares.
(3) Includes 25,000 shares held in trusts for which Mr. Swid's daughters
are beneficiaries and of which Mr. Swid is a trustee and includes
55,000 shares owned by The Wall Street Trust. Mr. Swid is the principal
of the entity which is the investment manager of that trust.
(4) SLS Management, LLC, is a Delaware limited liability company
("Management"). Management's principal business is managing a number of
accounts containing securities over which Management has discretionary
voting and dispositive power. One or more of management's advisory
clients is the owner of 3,185,941 shares of common stock. Investment
advisory arrangements with its advisory clients grant to Management
voting and investment discretion over the securities owned by its
advisory clients. Accordingly, Management may be deemed, for purposes
of Regulation 13D-G under the Securities Exchange Act of 1934, the
beneficial owner of 3,185,941 shares of common stock. Management has
sole voting and dispositive power with respect to 2,981,486 of such
shares of common stock and (in the case of one advisory client which
retains the right to require Management to liquidate securities
positions in its account under certain limited circumstances) may be
deemed to share voting and dispositive power with respect to 204,455 of
such shares of common stock.
(5) Janus Capital is a registered investment adviser which furnishes
investment advice to several investment companies registered under
Section 8 of the Investment Company Act of 1940 and individual and
institutional clients. These investment companies and other clients
hold the shares of common stock that are reported in this chart. Janus
Capital may be deemed to be the beneficial owner of common stock held
by these investment companies and clients but disclaims any ownership
of the common stock. Janus Special Situations Fund is an investment
company registered under the Investment Company Act of 1940 and is one
of the investment companies to which Janus Capital renders advice.
Janus Special Situations Fund beneficially owns 1,919,170 shares.
(6) Liberty Acorn Trust is an Investment Company under Section 8 of the
Investment Company Act of 1940. WAM is an Investment Adviser registered
under Section 203 of the Investment Advisers Act of 1940; WAM
Acquisition GP, Inc., is the General Partner of the Investment Adviser.
Liberty Acorn Trust beneficially owns 1,823,000 shares.
(7) Includes 267,614 shares of common stock held in escrow (the "escrow
shares") pursuant to the terms of an escrow agreement, dated December
31, 2001, among the Company, Mr. Levine and other former stockholders
of Crunch Fitness International, Inc., a Delaware corporation, Marlin
Holdings, Inc., and Bank of New York, as escrow agent. Mr. Levine
disclaims beneficial ownership of the escrow shares. Mr. Levine may be
deemed to have shared voting and dispositive power of 100,000 shares of
common stock beneficially owned by the Douglas and Kasia Levine Family
Support Foundation and disclaims beneficial ownership over any shares
held by that foundation.
(8) Wellington Management Company, LLP ("WMC") in its capacity as
investment advisor, may be deemed to beneficially own 1,754,800 shares
of common stock which are held of record by clients of WMC. WMC has the
shared power to vote or to direct the vote of 1,632,500 shares of
common stock and the shared power to dispose or to direct the
disposition of 1,754,800 shares of common stock.
(9) Does not include Lee S. Hillman, our former Chairman, President and
Chief Executive Officer.
CERTAIN TRANSACTIONS
During 2002, we paid approximately $1.1 million for goods and services
from a company which employed a relative of Mr. Hillman and approximately $1.4
million for goods and services from a company which employed a relative of Mr.
Wildman. We believe that the terms of these arrangements were at least as
favorable to us as those which could be obtained from unrelated parties.
56
DESCRIPTION OF OTHER INDEBTEDNESS
CREDIT FACILITY
Bally has a five-year $100.0 million senior secured revolving credit
facility maturing June 30, 2008. This credit facility is secured by
substantially all of our real and personal property (excluding installment
contracts receivable) and is guaranteed by substantially all of our existing
(and future) restricted subsidiaries. The amount available under the credit
facility will be reduced by any outstanding letters of credit, which cannot
exceed $30.0 million. The rate of interest on borrowings will be, at Bally's
option, generally based upon either the agent bank's prime rate plus 2.25% to
2.75% depending on Bally's leverage ratio or a Eurodollar rate plus 3.25% to
3.75%, in each case, depending on its leverage ratio. A commitment fee of
one-half of 1% will be payable quarterly on the unused portion of the new credit
facility or, if Bally uses 33% or less of the new credit facility, the
commitment fee will be 0.75% of the unused portion of the credit facility. The
new credit facility contains covenants that limit our ability to incur
additional indebtedness, guarantee obligations, dispose of certain assets,
prepay certain indebtedness and make certain investments or acquisitions.
SENIOR SUBORDINATED NOTES DUE 2007
In 1999, Bally exchanged the majority of its $225.0 million aggregate
principal amount of 9 7/8% Senior Subordinated Series B Notes due 2007 and all
of all of its $75.0 million aggregate principal amount of 9 7/8% Series
Subordinated C Senior Notes due 2007 for a like principal amount of 9 7/8%
Series D Senior Subordinated Notes due 2007. The Series B Notes not exchanged
and the Series D Notes, which are referred to collectively as our Senior
Subordinated Notes, mature on October 15, 2007. The Senior Subordinated Notes
are not subject to any sinking fund requirement but are redeemable at Bally's
option, in whole or in part, with premiums ranging from a current premium of
4.9% to zero in 2005 and thereafter. Payment of the Senior Subordinated Notes is
subordinated to the payment in full of all Bally's senior indebtedness,
including the notes and borrowings under the new credit facility. Interest on
the Senior Subordinated Notes is payable semiannually on April 15 and October 15
of each year. The indenture governing the Senior Subordinated Notes contains
covenants that limit our ability to incur additional indebtedness, pay
dividends, prepay certain indebtedness, dispose of certain assets, create liens
and make certain investments or acquisitions.
SECURITIZATION
We have a master trust receivables securitization program through H & T
Master Trust, which is comprised of a portfolio of membership fee installment
sales contracts originated by Bally Total Fitness Corporation and its
affiliates. The trust has from time to time issued series of certificates
representing fractional ownership interests in the trust. As of June 30, 2003,
the only series outstanding under this program was the $155.0 million Series
2001-1 certificates, a variable funding series issued in November 2001. In July
2003, the maturity of $100 million of principal outstanding under this series
was extended to July 2005 and the Company paid down $25 million of principal.
The remaining $30 million of principal balance on our Series 2001-1 Certificates
is scheduled to begin amortizing in November 2003. The certificates under this
series are held and funded through a commercial paper conduit having a
commitment to purchase the certificates issued by the trust on a revolving
basis.
CAPITAL LEASE OBLIGATIONS AND MORTGAGES
From time to time in the ordinary course of our business we enter into
capital leases and other secured obligations, principally mortgages, to finance
our operations. As of June 30, 2003, we had approximately $80.9 million of
outstanding capitalized lease and other secured obligations. These obligations
are generally secured by the underlying assets relating to such capital leases
or mortgages. As a result, the notes will be effectively subordinated to these
capitalized leases and other secured obligations to the extent of the assets
that constitute collateral securing these obligations.
57
DESCRIPTION OF NOTES
GENERAL
The old notes were issued and the notes will be issued under an
indenture, dated as of July 2, 2003, as supplemented on July 22, 2003, among
Bally, the subsidiary guarantors and U.S. Bank National Association, as trustee.
The following summary of the indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Trust
Indenture Act of 1939, as amended and to all of the provisions of the indenture
(a copy of the form of which may be obtained from us), including the definitions
of certain terms therein and those terms made a part of the indenture by
reference to the Trust Indenture Act as in effect on the Issue Date. The
definitions of most of the capitalized terms used in the following summary are
set forth below under "--Certain Definitions."
The notes will be Bally's senior unsecured obligations, ranking equal
in right of payment to all of Bally's unsubordinated debt. The notes will be
effectively subordinated to all of our existing and future secured debt to the
extent of the assets securing such debt. After giving effect to the sale of the
old notes and the other refinancing transactions and the application of the
proceeds therefrom, at June 30, 2003, the aggregate outstanding principal amount
of our secured debt and the secured debt of our subsidiaries would have been
approximately $210.9 million and Bally would have approximately $94.0 million of
secured borrowings available under the new credit facility after giving effect
to outstanding letters of credit of $6.0 million.
PRINCIPAL, MATURITY AND INTEREST
The notes will be unlimited in aggregate principal amount, with $235.0
million aggregate principal amount to be issued in this offering. Additional
notes may be offered from time to time subject to the limitations set forth
under "--Certain Covenants--Incurrence of Indebtedness."
The notes will be issued in fully registered form without coupons, in
denominations of $1,000 and integral multiples of $1,000. The notes will mature
on July 15, 2011.
Interest on the notes will accrue at the rate of 10 1/2% per annum and
will be payable semi-annually in arrears on January 15 and July 15, commencing
on January 15, 2004. Bally will make each interest payment to the holders of
record of the notes on the immediately preceding January 1 and July 1.
Interest on the notes will accrue from July 2, 2003. Interest will be
computed on the basis of a 360-day year made up of twelve 30-day months.
PAYMENTS ON THE NOTES
All principal of, premium, if any, and interest on the notes will be
payable at Bally's office or agency in the City of New York maintained for this
purpose. Initially, payments will be made at the corporate trust office of the
trustee. However, Bally can make interest payments by check mailed to the
holders at their address set forth in the security register.
Payments of principal of and interest on the notes will be made in
funds which are available the same day. The notes will trade in the same day
funds settlement system of DTC until maturity, and secondary market trading
activity for the notes will therefore settle in same day funds.
The notes will not be entitled to the benefit of any mandatory sinking
fund.
TRANSFER AND EXCHANGE
You may transfer or exchange the notes in accordance with the
indenture. The transfer or exchange will be made at Bally's office or agency in
the City of New York maintained for this purpose, which will initially be the
corporate trust office of the trustee. No service charge will be made for any
registration of transfer, exchange or redemption of notes, except in certain
circumstances for any tax or other governmental charge that may be imposed.
58
The registered holder of a note will be treated as the owner of it for
all purposes.
REDEMPTION
At any time, or from time to time, on or prior to July 15, 2006, Bally
may redeem up to 35% of the aggregate principal amount of notes originally
issued under the indenture at a redemption price of 110.50% of the principal
amount thereof, plus accrued and unpaid interest to the redemption date, with
the net cash proceeds of one or more Public Equity Offerings. However,
(1) at least 65% of the notes must remain outstanding immediately
after the redemption;
(2) the redemption must be completed within 90 days of the closing
of the Public Equity Offering; and
(3) Bally must mail a notice of redemption no later than 60 days
after the closing of the Public Equity Offering.
Except pursuant to the preceding paragraph, the notes will not be
redeemable at our option prior to July 15, 2007.
Beginning July 15, 2007, Bally may redeem the notes, in integral
multiples of $1,000, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest, if any, to
the applicable redemption date:
REDEMPTION
IF WE REDEEM ON OR AFTER: PRICE
------------------------- ----------------
July 15, 2007................. 105.250%
July 15, 2008................. 102.625%
July 15, 2009 and thereafter.. 100.000%
Bally will give between 30 and 60 days prior notice of any optional
redemption described in this paragraph.
If less than all the notes are going to be redeemed, the trustee will
select the notes or portions to be redeemed pro rata, by lot or by any other
method the trustee deems fair and reasonable.
GUARANTEES
The Guarantors will jointly and severally guarantee Bally's obligations
under the indenture and the notes on a senior unsecured basis. The obligations
of each Guarantor under its Guarantee are limited as necessary to prevent the
Guarantee from constituting a fraudulent conveyance or fraudulent transfer under
applicable law. Some but not all of Bally's subsidiaries will guarantee the
notes. In the event of a bankruptcy, liquidation or reorganization of any of the
non-guarantor subsidiaries, holders of their indebtedness and their trade
creditors will generally be entitled to payment of their claims from the assets
of the non-guarantor subsidiaries before any assets are made available for
distribution to Bally. After giving effect to this offering and the other
refinancing transactions and the application of the proceeds therefrom, at June
30, 2003, the notes would have been effectively junior to approximately $155.1
million of indebtedness and other liabilities (including trade payables) of the
non-guarantor subsidiaries and approximately $0.5 million would have been
available to those subsidiaries for future borrowing under their credit
facilities. The non-guarantor subsidiaries generated 3.5% of our consolidated
revenues in the twelve-month period ended June 30, 2003 and held 36% of our
consolidated assets as of June 30, 2003.
Each Guarantor may consolidate with or merge into or sell its assets to
Bally or another Guarantor that is a Subsidiary of Bally without limitation, or
with other Persons upon the terms and conditions set forth in the indenture. See
"--Certain Covenants--Merger, Consolidation or Sale of Assets." In the event a
Guarantor ceases to
59
be a Subsidiary of Bally in a transaction that complies with the provisions set
forth in "--Certain Covenants--Asset Sales" and the other covenants contained in
the indenture, then the Guarantor's Guarantee will be released.
CHANGE OF CONTROL
If a Change of Control occurs, each holder of notes will have the right
to require Bally to purchase all or any part of that holder's notes, in integral
multiples of $1,000. In the Change of Control Offer, Bally will offer to pay the
Change of Control Purchase Price in cash equal to 101% of the aggregate
principal amount of notes repurchased plus accrued and unpaid interest, if any,
to the date of purchase. Within 30 days following any Change of Control, Bally
will notify the trustee and mail a notice to each holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase the notes for the Change of Control Purchase Price on the Change
of Control Payment Date specified in the notice. The Change of Control Payment
Date will be between 30 and 60 days from the date that the notice is first
mailed. Bally will comply with the applicable tender offer rules and any other
applicable securities laws or regulations in connection with the repurchase of
the notes as a result of a Change of Control.
Certain of Bally's Senior Debt, including the Senior Credit Facility,
currently prohibits Bally from purchasing any notes. If a Change of Control
occurs at a time when Bally is prohibited from purchasing the notes, Bally could
seek the consent of its senior lenders to the purchase of the notes or could
attempt to refinance the borrowings that contain the prohibition. If Bally does
not obtain a consent or repay the borrowings, Bally will remain prohibited from
purchasing the notes. Even if Bally obtained the consent or repaid the
borrowings, Bally may not have available funds sufficient to pay the Change of
Control Purchase Price for all the notes that might be tendered by holders of
the notes seeking to accept the Change of Control Offer. In either case, Bally's
failure to make or complete the Change of Control Offer or pay the Change of
Control Purchase Price when due will be an Event of Default under the indenture
which could, in turn, constitute a default under the Senior Debt.
Bally's requirement to make a Change of Control Offer may deter a third
party from acquiring Bally in a Change of Control transaction.
In addition to Bally's requirements under the notes upon a Change of
Control, the indebtedness under the Senior Credit Facility will become
immediately due and payable upon a "change of control" as defined in the Senior
Credit Facility. Furthermore, the indenture governing Bally's Subordinated Notes
contains a provision similar to the Change of Control provisions relating to the
notes that requires Bally to make a change of control offer with respect to its
Subordinated Notes upon a change of control.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the assets of Bally. The term "all or substantially all" has not been
interpreted under New York law, which governs the indenture, to represent a
specific quantitative test. Accordingly, the ability of a holder of notes to
require Bally to repurchase their notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of Bally to
another Person or group may be uncertain.
CERTAIN COVENANTS
Under the indenture, Bally and its Subsidiaries are subject to, among
others, the covenants described in this section. However, Bally's Unrestricted
Subsidiaries will not be subject to any of the restrictive covenants described
in this section.
Asset Sales. Neither Bally nor its Subsidiaries will consummate an
Asset Sale unless:
(1) Bally or the Subsidiary, as the case may be, receives
consideration at the time of the Asset Sale at least equal to the Fair
Market Value of the shares or assets issued or sold or otherwise
disposed of;
(2) such Fair Market Value is determined by Bally's board
of directors and evidenced by a resolution of the board of directors;
and
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(3) at least 75% of the consideration received by Bally
or the Subsidiary is in the form of cash or Cash Equivalents;
Within 360 days after the receipt of any Net Cash Proceeds from an
Asset Sale, Bally or the Subsidiary may apply the Net Cash Proceeds at its
option:
(1) to repay Indebtedness under the Senior Credit
Facility or any other Senior Secured Debt (and, in each case, effect a
corresponding permanent reduction in the availability under such Senior
Credit Facility or to the outstanding amount of such Senior Secured
Debt) or to repay unsecured Senior Debt that has provisions requiring
Bally to make an offer to purchase upon an Asset Sale; provided,
however, that if Bally repays such unsecured Senior Debt it must make a
ratable offer to all holders of notes as provided in the following
paragraph;
(2) to acquire properties and assets that replace the
properties and assets that were the subject of the Asset Sale; or
(3) to acquire properties and assets that will be used in
the businesses of Bally or its Subsidiaries existing on the Issue Date
or in businesses reasonably related or complementary.
Any Net Cash Proceeds from Asset Sales that are not applied or invested
as provided in the preceding paragraph will constitute Excess Proceeds. When the
aggregate amount of Excess Proceeds exceeds $15.0 million:
(1) Bally will make an offer to purchase an aggregate
principal amount of notes equal to the Excess Proceeds multiplied by a
fraction, the numerator of which is the outstanding aggregate principal
amount of notes, and the denominator of which is the outstanding
aggregate principal amount of the notes and any unsecured Senior Debt
that has provisions requiring Bally to make an offer to purchase upon
an Asset Sale, and
(2) Bally will make an offer to purchase any unsecured
Senior Debt that has provisions requiring Bally to make an offer to
purchase upon an Asset Sale, in an aggregate principal amount equal to
the remaining Excess Proceeds after the purchase described in paragraph
(1) above.
The offer price for the notes will be equal to 100% of principal amount
plus accrued and unpaid interest, if any, to the date of purchase, and will be
payable in cash. If any Excess Proceeds remain after these purchases, Bally may
use the remaining Excess Proceeds for any purpose not otherwise prohibited by
the indenture. If the aggregate principal amount of notes tendered in these
purchases exceeds the amount of Excess Proceeds, the trustee shall select the
notes to be purchased on a pro rata basis. Upon completion of these purchases,
the amount of Excess Proceeds shall be reset at zero.
Bally will complete the purchase of any notes and any unsecured Senior
Debt that has provisions requiring Bally to make an offer to purchase upon an
Asset Sale between 30 and 60 days from the date the holders receive notice of
the purchase offer, or later as may be necessary to comply with the requirements
under the Exchange Act. Bally will comply with the applicable tender offer
rules, including Rule 14e-1 under the Exchange Act, and any other applicable
securities laws or regulations in connection with this offer to purchase notes
and such unsecured Senior Debt.
Restricted Payments. Except for Permitted Investments, neither Bally
nor its Subsidiaries will:
(1) declare or pay any dividend on, or make any other
payment or distribution to, any shares of Bally's Capital Stock, other
than dividends or distributions payable solely in shares of its
Qualified Capital Stock or in options, warrants or other rights to
acquire shares of Qualified Capital Stock;
(2) purchase, redeem or otherwise acquire or retire for
value the Capital Stock of Bally or any Affiliate of Bally, other than
Capital Stock of any Wholly Owned Subsidiary;
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(3) make any principal payment on, or repurchase, redeem,
defease, retire or otherwise acquire for value, any Subordinated
Indebtedness, except a scheduled principal payment, sinking fund
payment or maturity;
(4) declare or pay any dividend or distribution on any
Capital Stock of any Subsidiary or purchase, redeem or otherwise
acquire or retire for value any Capital Stock of any Subsidiary, in
either case, other than to or from Bally or any of its Wholly Owned
Subsidiaries;
(5) incur, create or assume any guarantee of Indebtedness
of any Affiliate of Bally, other than a Wholly Owned Subsidiary; or
(6) make any Investment in any Person (all payments and
other actions described in paragraphs (1) through (6) above
collectively referred to as "Restricted Payments"),
unless, immediately before and immediately after giving effect to the
Restricted Payment:
(1) no Default or Event of Default exists or would exist,
after notice or lapse of time, or both, under the terms of any
Indebtedness of Bally or its Subsidiaries;
(2) Bally could incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness or Permitted Subsidiary
Indebtedness) under the covenant described below under "--Incurrence of
Indebtedness"; and
(3) the Restricted Payment, together with the aggregate amount
of all other Restricted Payments made by Bally and its Subsidiaries
after October 7, 1997 plus Permitted Payments described in clause (7)
of the next succeeding paragraph, is less than $5.0 million plus the
sum of:
(a) 50% of the aggregate Consolidated Net Income of
Bally accrued on a cumulative basis during the period
beginning on January 1, 1998 and ending on the last day of
Bally's last fiscal quarter ending before the date of the
Restricted Payment (or, if the aggregate cumulative
Consolidated Net Income is a loss, minus 100% of such loss);
plus
(b) the aggregate Net Cash Proceeds received after
October 7, 1997 by Bally either (x) as capital contributions
in the form of common equity to Bally or (y) from the issuance
or sale, other than to any of its Subsidiaries, of Qualified
Capital Stock of Bally or any options, warrants or rights to
purchase Qualified Capital Stock of Bally (except, in each
case, to the extent those proceeds are used to purchase,
redeem or otherwise retire Capital Stock or Subordinated
Indebtedness as described in clause (2) or (3) of the next
succeeding paragraph) in each case, other than Net Cash
Proceeds received from the issuance or sale of Qualified
Capital Stock or options, warrants or rights to purchase
Qualified Capital Stock in, or otherwise received in
connection with, the Refinancing; plus
(c) the aggregate Net Cash Proceeds received after
October 7, 1997 by Bally, other than from any of its
Subsidiaries, upon the exercise of any options, warrants or
rights to purchase Qualified Capital Stock of Bally; plus
(d) the aggregate Net Cash Proceeds received after
October 7, 1997 by Bally from the conversion or exchange, if
any, of debt securities or Redeemable Capital Stock of Bally
or its Subsidiaries into or for Qualified Capital Stock of
Bally plus, to the extent those debt securities or Redeemable
Capital Stock were issued after October 7, 1997, the aggregate
of Net Cash Proceeds from their original issuance; plus
(e) in the case of the disposition or repayment of
any Investment constituting a Restricted Payment made after
October 7, 1997, an amount equal to the lesser of the return
of capital with respect to that Investment and the initial
amount of that Investment, in either case, less the cost of
the disposition of that Investment.
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So long as no Default exists, the preceding provisions will not
prohibit the following Permitted Payments:
(1) the payment of any dividend within 60 days after the
date of declaration;
(2) the redemption, repurchase, retirement, or other
acquisition of any shares of any class of Capital Stock of Bally in
exchange for, or out of the Net Cash Proceeds of a substantially
concurrent sale, other than to a Subsidiary, of other shares of
Qualified Capital Stock of Bally; provided that the Net Cash Proceeds
from the issuance of Qualified Capital Stock will, to the extent used,
be excluded from clause (3)(b) of the preceding paragraph;
(3) the repurchase, redemption, defeasance, retirement or
acquisition for value or payment of principal of any Subordinated
Indebtedness or Redeemable Capital Stock in exchange for, or in an
amount not in excess of the Net Cash Proceeds of, a substantially
concurrent issuance and sale for cash, other than to any Subsidiary, of
any Qualified Capital Stock of Bally, provided that the Net Cash
Proceeds from the issuance of the shares of Qualified Capital Stock
are, to the extent so used, excluded from clause (3)(b) of the
preceding paragraph;
(4) the repurchase, redemption, defeasance, retirement,
refinancing, acquisition for value or payment of principal of any
Subordinated Indebtedness, other than Redeemable Capital Stock (a
"refinancing"), through the substantially concurrent issuance of new
Subordinated Indebtedness of Bally, provided that any such new
Subordinated Indebtedness:
(a) shall be in a principal amount that is not
greater than the principal amount so refinanced, plus the
lesser of:
(i) the stated amount of any premium or
other payment required to be paid to complete a
refinancing, or
(ii) the amount of premium or other
payment actually paid at the time of refinancing the
Indebtedness, plus, in either case, the amount of
expenses Bally incurred in connection with the
refinancing;
(b) has an Average Life to Stated Maturity
greater than the remaining Average Life to Stated Maturity of
the notes;
(c) has a Stated Maturity for its final
scheduled principal payment later than the Stated Maturity for
the final scheduled principal payment of the notes; and
(d) is expressly subordinated in right of
payment to the notes at least to the same extent as the
Subordinated Indebtedness to be refinanced;
(5) the repurchase, redemption, defeasance, retirement,
refinancing, acquisition for value or payment of principal (a
"refinancing") of the Subordinated Notes, through the substantially
concurrent issuance of Senior Debt, provided that:
(a) such Senior Debt shall be in a principal
amount that is not greater than the principal amount of
Subordinated Notes so refinanced, plus the lesser of:
(i) the stated amount of any premium or
other payment required to be paid to complete a
refinancing of such Subordinated Notes, or
(ii) the amount of premium or other
payment actually paid at the time of refinancing such
Subordinated Notes, plus, in either case, the amount
of expenses Bally incurred in connection with the
refinancing; and
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(b) the incurrence of such Senior Debt shall be
permitted by clause (11) of the definition of Permitted
Indebtedness (as defined below under the caption "Incurrence
of Indebtedness");
(6) the repurchase, redemption, defeasance, retirement,
refinancing, acquisition for value or payment of any Redeemable Capital
Stock through the substantially concurrent issuance of new Redeemable
Capital Stock of Bally, provided that any new Redeemable Capital Stock:
(a) will have an aggregate liquidation
preference that does not exceed the aggregate liquidation
preference of the amount being refinanced;
(b) has an Average Life to Stated Maturity
greater than the remaining Average Life to Stated Maturity of
the notes; and
(c) has a Stated Maturity later than the Stated
Maturity for the final scheduled principal payment of the
notes; and
(7) the repurchase of shares of, or options or warrants to
purchase shares of, common stock of Bally or any of its Subsidiaries
from employees, former employees, directors or former directors of
Bally or any of its Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors), pursuant
to the terms of the agreements (including employment agreements) or
plans (or amendments thereto) approved by the board of directors of
Bally under which those individuals purchase or sell or are granted the
option to purchase or sell, shares of common stock in an aggregate
amount not to exceed $500,000 in any calendar year or an aggregate of
$2.5 million from and after the Issue Date.
Incurrence of Indebtedness. Bally will not incur any Indebtedness,
including Acquired Debt. However, Bally may incur Indebtedness, including
Acquired Debt, if the Consolidated Fixed Charge Coverage Ratio for the most
recently ended four full fiscal quarters for which financial statements are
available immediately preceding the date on which the additional Indebtedness is
incurred, taken as one period, would have been at least 2.0 to 1, determined on
a pro forma basis (including a pro forma application of the net proceeds
therefrom), as if:
(1) the additional Indebtedness had been incurred on the
first day of the four-quarter period;
(2) the incurrence, repayment or retirement of any other
Indebtedness since the first day of the four-quarter period had
occurred on the first day of the four-quarter period;
(3) in the case of Acquired Debt, the related acquisition
had taken place on the first day of the four-quarter period; and
(4) any acquisition or disposition of any company or any
business or any assets out of the ordinary course of business since the
first day of the four-quarter period had been completed on the first
day of the four-quarter period.
Bally will not allow any of its Subsidiaries to incur any Indebtedness,
except for Permitted Subsidiary Indebtedness.
The preceding paragraphs will not prohibit the incurrence of any
Permitted Indebtedness, as defined below:
(1) Indebtedness under the Senior Credit Facility and the
Securitization Facility in an aggregate amount not to exceed, whichever
amount is greater, (a) $275.0 million or (b) $115.0 million plus 80% of
the net book value of the consolidated accounts receivable of Bally and
its Subsidiaries, calculated in accordance with GAAP, in each case
minus any permanent reductions of the amounts outstanding under the
Senior Credit Facility or the Securitization Facility as a result
repayments of such Indebtedness pursuant to the covenant described
above under the caption "Asset Sales";
(2) Indebtedness of Bally:
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(a) represented by the notes, or
(b) that is incurred and actually applied, in
any amount, and in whole or in part, to
(i) redeem all of the notes
outstanding, or
(ii) effect a Legal Defeasance or a
Covenant Defeasance;
(3) Indebtedness of Bally outstanding on the Issue Date;
(4) Indebtedness of Bally owing to a Subsidiary and not
transferring to any other Person:
(a) that is made pursuant to an intercompany
note and is expressly subordinated in right of payment to the
notes, and
(b) will not be due and payable upon an Event of
Default until it is cured, waived or rescinded;
(5) Interest Rate Agreements entered into in the ordinary
course of business as long as these obligations do not exceed the
aggregate principal amount of the Indebtedness then outstanding to
which the Interest Rate Agreements apply;
(6) Up to $50.0 million aggregate principal amount
outstanding at any one time of Capital Lease Obligations, Purchase
Money Obligations or other Indebtedness incurred or assumed in
connection with the acquisition, improvement or development of any real
or personal property, in each case incurred for the purpose of
financing or refinancing all or any part of the purchase price or cost
of construction or improvement of property used in the business of
Bally and any refinancings of such Indebtedness made in accordance with
paragraph (10) below; provided that the principal amount of any
Indebtedness permitted under this paragraph (6) was not, at the time of
incurrence, more than the cost of the acquired or constructed asset or
improvement that was financed;
(7) Indebtedness of Bally in respect of performance
bonds, surety bonds and replevin bonds provided by Bally in the
ordinary course of business;
(8) other Indebtedness of Bally that is not greater than
$50.0 million in the aggregate at any one time outstanding;
(9) Indebtedness arising from a bank or other financial
institution honoring a check, draft or other financial instrument drawn
against insufficient funds in the ordinary course of business, provided
that it is extinguished within four business days of its incurrence;
and
(10) any renewals, extensions, substitutions, refundings,
refinancings or replacements of any Indebtedness described in
paragraphs (3) and (4) of this definition of "Permitted Indebtedness,"
including any successive refinancings if:
(a) the borrower is Bally or, if not Bally, the
same as the borrower of the Indebtedness being refinanced;
(b) the aggregate principal amount of
Indebtedness as of the Issue Date is not increased by more
than the lesser of:
(i) the stated amount of any premium or
other payment required to be paid to complete a
refinancing; or
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(ii) the amount of premium or other
payment actually paid at the time of refinancing the
Indebtedness, plus, in either case, the amount of
expenses of Bally incurred in connection with the
refinancing; and
(c) (i) in the case of any refinancing of
Indebtedness that is Subordinated Indebtedness, the
new Indebtedness is made subordinate to the notes at
least to the same extent as the Indebtedness being
refinanced, and
(ii) in the case of Senior Debt or
Subordinated Indebtedness, as the case may be, the
refinancing does not reduce the Average Life to
Stated Maturity or the Stated Maturity of the
Indebtedness;
(11) Indebtedness of Bally used to make any Permitted
Payment set forth in clause (5) of the definition of Permitted Payments
(as defined above under the caption "--Restricted Payments"); provided,
that the Senior Leverage Ratio for the most recently ended four full
fiscal quarters for which financial statements are available
immediately preceding the date on which the additional Indebtedness is
incurred, taken as one period, does not exceed 2.75 to 1, determined on
a pro forma basis (including a pro forma application of the net
proceeds therefrom).
Liens. Bally will not, and will not cause or permit any of its
Subsidiaries to, directly or indirectly, create, incur, assume or permit or
suffer to exist any Liens upon any property or assets of Bally or any of its
Subsidiaries whether owned on the Issue Date or acquired after the Issue Date,
or any proceeds therefrom, or assign or otherwise convey any right to receive
income or profits therefrom unless:
(1) in the case of Liens securing Subordinated
Indebtedness, the notes or the Guarantee of such Guarantor, as the case
may be, are secured by a Lien on such property, assets or proceeds that
is senior in priority to such Liens; and
(2) in all other cases, the notes or the Guarantees, as
the case may be, are secured on an equal and ratable basis, except for
Permitted Liens and:
(a) Liens existing as of the Issue Date to the
extent and in the manner such Liens are in effect on the Issue
Date;
(b) Liens securing Indebtedness permitted by
clauses (1)and (6) of the definition of Permitted Indebtedness
(as defined in the "--Certain Covenants--Incurrence of
Indebtedness") and Liens securing Indebtedness constituting
Indebtedness referred to by the cross-reference to clause (1)
of the definition of Permitted Indebtedness contained in
clause (2) of the definition of Permitted Subsidiary
Indebtedness (including guarantees of Obligations owed under
the Senior Credit Facility) and, in each case, related
Obligations;
(c) Liens securing the notes and Guarantees;
(d) Liens of Bally or a Subsidiary on assets of
any Subsidiary and Liens on the assets of Bally in favor of a
Subsidiary that is a Guarantor;
(e) Liens securing Indebtedness that is incurred
to refinance any Indebtedness that has been secured by a Lien
permitted under the indenture and that has been incurred in
accordance with the provisions of the indenture; provided,
however, that such Liens:
(x) are no less favorable to the holders of
notes in any material respect, than the Liens in
respect of the Indebtedness being refinanced; and
(y) do not extend to or cover any property
or assets of Bally or any of its Subsidiaries not
securing the Indebtedness so refinanced, except in
the case of Liens securing Purchase Money
Obligations, then the Liens permitted by this clause
(e) may
66
extend to or cover a similar property or asset that
was subject to the Lien at the time such Purchase
Money Obligation was originally incurred; and
(f) Liens in favor of Bally.
Dividend and Other Payment Restrictions Affecting Subsidiaries. Neither
Bally nor its Subsidiaries will create or permit to exist any consensual
encumbrance or restriction on the ability of any Subsidiary to:
(1) pay dividends or make any other distributions on its
Capital Stock;
(2) pay any indebtedness owed to Bally or any other
Subsidiary;
(3) make any Investment in Bally or any other Subsidiary;
or
(4) transfer any of its properties or assets to Bally or
any other Subsidiary.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) any agreement in effect on the Issue Date;
(2) with respect to a Subsidiary that was not a
Subsidiary on the Issue Date, any agreement or otherwise in existence
at the time the Person becomes a Subsidiary and was not incurred in
connection with or in contemplation of, this Person becoming a
Subsidiary;
(3) customary non-assignment or subletting provisions in
leases, licenses or other contracts;
(4) restrictions entered into in the ordinary course of
business contained in any lease of any Subsidiary or any security
agreement or mortgage securing Indebtedness of any Subsidiary to the
extent the restriction restricts the transfer of property subject to
the security agreement, mortgage or lease;
(5) any restriction contained in an agreement pursuant to
which Permitted Subsidiary Indebtedness is incurred; and
(6) any amendments, substitutions, restructurings,
supplements, extensions, renewals, refinancings, replacements of or
other modifications to any agreement described in paragraphs (1)
through (5) above and this paragraph (6), provided that these are no
more restrictive in any material respect than those contained in the
agreements, as in effect on the Issue Date.
Merger, Consolidation or Sale of Assets. Bally will not, in one or more
related transactions: (1) consolidate or merge with or into another Person; (2)
sell, assign, transfer, convey, lease or otherwise dispose of all or
substantially all of its properties or assets to another Person; or (3) permit
any of its Subsidiaries to enter into any transaction or series of related
transactions if the transaction or series of related transactions, in the
aggregate, would result in a sale, assignment, conveyance, transfer, lease or
disposition of all or substantially all of the properties and assets of Bally
and its Subsidiaries on a Consolidated basis to another Person; unless:
(1) either: (a) Bally is the surviving corporation; or
(b) the Person formed by or surviving the consolidation or merger (if
other than Bally) or to which the sale, assignment, transfer,
conveyance or other disposition shall have been made is a corporation
organized and existing under the laws of the United States, any state
thereof or the District of Columbia;
(2) the Person formed by or surviving the consolidation
or merger (if other than Bally) or the Person to which the sale,
assignment, transfer, conveyance or other disposition shall have been
made expressly assumes all the obligations of Bally under the notes and
the indenture pursuant to agreements reasonably satisfactory to the
trustee;
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(3) immediately before and after the transaction no
Default or Event of Default exists;
(4) immediately before and after giving the transaction
pro forma effect and any related financing transactions as if the same
had occurred on the first day of the applicable four-quarter period,
Bally or the Person formed by or surviving the consolidation or merger
(if other than Bally) or the Person to which the sale, assignment,
transfer, conveyance or other disposition shall have been made, could
incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness or Permitted Subsidiary Indebtedness) pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described above under "--Incurrence of Indebtedness"; and
(5) The trustee has received the required documentation,
including an opinion of counsel, regarding the transaction's compliance
with the provisions of the indenture.
This "Merger, Consolidation or Sale of Assets" covenant will not apply
to a merger between Bally and any of its Subsidiaries, provided Bally is the
surviving corporation, or among Subsidiaries.
Transactions with Affiliates. Neither Bally nor its Subsidiaries will
enter into any transaction or series of related transactions with or for the
benefit of any Affiliate (each, an "Affiliate Transaction"), unless:
(1) it is no less favorable to Bally or the relevant
Subsidiary than would have been obtained in a comparable transaction by
Bally or such Subsidiary in arm's-length dealings with an unrelated
Person;
(2) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate value in excess
of $1.0 million, Bally delivers to the trustee an officers' certificate
certifying that such Affiliate Transaction complies with this covenant;
and
(3) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate value in excess
of $10.0 million, either Bally delivers to the trustee an opinion as to
the fairness to Bally or such Subsidiary of such Affiliate Transaction
from a financial point of view issued by an accounting, appraisal or
investment banking firm of national standing or the transaction or
series of related transactions has been approved by a majority of the
Disinterested Directors of Bally.
The following items shall not be deemed to be Affiliate Transactions
and, therefore, will not be subject to the provisions of the prior paragraph:
(1) any transaction with an employee or director of Bally
or any of its Subsidiaries entered into by Bally or the Subsidiary in
the ordinary course of business;
(2) transactions between or among Bally and/or its
Subsidiaries;
(3) any transaction related to the Securitization
Facility;
(4) Restricted Payments that are permitted by the
provisions of the indenture described above under "--Restricted
Payments" or Permitted Payments; and
(5) management or similar agreements between Bally or any
Subsidiary and Affiliates in which Bally or any Subsidiary has made an
Investment.
Preferred Stock of Subsidiaries. Except for the acquisition of all the
outstanding Preferred Stock of the Subsidiary, Bally will not permit:
(1) its Subsidiaries to issue any Preferred Stock, except
for
(a) Preferred Stock issued to Bally or a Wholly
Owned Subsidiary, and
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(b) Preferred Stock issued by a Person before that
Person becomes a Subsidiary, merges with or into a Subsidiary
or has a Subsidiary merge with or into them but not in
contemplation of any of these transactions,
(2) any Person, other than Bally or a Wholly Owned
Subsidiary, to acquire Preferred Stock of any Subsidiary from Bally or
any Subsidiary.
Unrestricted Subsidiaries. Neither Bally nor its Subsidiaries will
make, an Investment in Unrestricted Subsidiaries, unless
(1) the aggregate amount of the Investments would not
exceed the amount of Restricted Payments then allowed, or
(2) the Investment is a Permitted Investment.
Except for Permitted Investments, any Investment in an Unrestricted
Subsidiary must be made in accordance with the procedures described in
"--Restricted Payments" and may be made in cash or property.
Additional Subsidiary Guarantees. If the Company or any Subsidiary
transfers or causes to be transferred, in one transaction or a series of related
transactions, any property to any Domestic Subsidiary that is not a Guarantor
having total assets (after giving effect to such transfer) with a book value in
excess of $500,000, or if the Company or any of its Subsidiaries shall organize,
acquire or otherwise invest in another Domestic Subsidiary having total assets
with a book value in excess of $500,000, then such Domestic Subsidiary shall:
(1) execute and deliver to the trustee a supplemental
indenture in form reasonably satisfactory to the trustee pursuant to
which such Subsidiary shall unconditionally guarantee all of the
Company's obligations under the notes and the indenture on the terms
set forth in the indenture; and
(2) deliver to the trustee an opinion of counsel that
such supplemental indenture has been duly authorized, executed and
delivered by such Subsidiary and constitutes a legal, valid, binding
and enforceable obligation of such Subsidiary.
Thereafter, such Subsidiary shall be a Guarantor for all purposes of
the indenture; provided, however, that (i) if such Subsidiary is a Non-Guarantor
Subsidiary, it shall not be required to be a Guarantor hereunder and (ii) to the
extent that a Subsidiary is subject to any instrument governing Acquired Debt,
as in effect at the time of acquisition thereof, that prohibits such Subsidiary
from issuing a Guarantee, such Subsidiary shall not be required to execute such
a supplemental indenture until it is permitted to issue such Guarantee pursuant
to the terms of such Acquired Debt; provided, further, however, that
notwithstanding the above proviso, if any such Subsidiary, other than a
Non-Guarantor Subsidiary, incurs Indebtedness under or guarantees the Senior
Credit Facility, then such Subsidiary, other than a Non-Guarantor Subsidiary,
will guarantee the notes as well.
Reports. Whether or not required by the Commission, so long as any
notes are outstanding, Bally will furnish to the holders of notes and file with
the trustee, within 15 days of the time periods specified in the Commission's
rules and regulations:
(1) all quarterly and annual reports on Forms 10-Q and
10-K; and
(2) all current reports on Form 8-K.
In addition, whether or not required by the Commission, Bally will file
a copy of all of the information and reports referred to in paragraphs (1) and
(2) above with the Commission for public availability within the time periods
specified in the Commission's rules and regulations. If the Commission will not
accept such filings, then, upon written request and payment of reasonable
copying and delivery expenses, Bally will provide those documents to any
prospective holder of notes.
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EVENTS OF DEFAULT
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of
interest on the notes;
(2) default in payment when due of the principal of or
premium, if any, on the notes;
(3) failure by Bally to perform or comply with any
covenant or agreement contained in the indenture if the failure
continues for 30 days after written notice has been given to Bally by
the trustee or to Bally and the trustee by the holders of at least 25%
in aggregate principal amount of outstanding notes;
(4) failure by Bally to comply with the provisions
described in "--Certain Covenants-- Merger, Consolidation or Sale of
Assets," or failure to make the offer to purchase the notes as
described in "--Change of Control" and "--Certain Covenants--Asset
Sales";
(5) default under any agreement, indenture or instrument
under which Bally or any Subsidiary has outstanding Indebtedness of
greater than $10.0 million, individually or in the aggregate, if that
default:
(a) is caused by a failure to pay principal of
or premium, if any, or interest on the Indebtedness prior to
maturity; or
(b) results in the acceleration of the
Indebtedness prior to its express maturity;
(6) the rendering against Bally or any Subsidiary or any
of their respective properties of judgments, orders or decrees for the
payment of money aggregating more than $10.0 million (net of any
insurance coverage available), which was not discharged and which a
creditor has begun enforcement or which has not been stayed for a
period of 60 consecutive days;
(7) certain events of bankruptcy or insolvency with
respect to Bally or any of its Significant Subsidiaries; and
(8) any Guarantee of a Significant Subsidiary ceases to
be in full force and effect or any Guarantee of a Significant
Subsidiary is declared to be null and void and unenforceable or any
Guarantee of a Significant Subsidiary is found to be invalid or any
Guarantor that is a Significant Subsidiary denies its liability under
its Guarantee (in each case other than by reason of release of a
Guarantor in accordance with the terms of the indenture).
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to Bally, all outstanding notes, along
with accrued and unpaid interest, will become due and payable immediately
without further action or notice. If any other Event of Default occurs and is
continuing, the trustee or the holders of at least 25% in principal amount of
the then outstanding notes may declare all the notes to be due and payable
immediately.
The holders of a majority in aggregate principal amount of the notes
then outstanding may by notice to the trustee waive any past Default or Event of
Default and its consequences under the indenture except a continuing Default or
Event of Default (1) in the payment of interest on, or the principal of, the
notes or (2) of a covenant or provision of the indenture that cannot be modified
or amended without the consent of the holder of the note affected by the
modification or amendment.
After a declaration that all the notes are due and payable, but before
the trustee has obtained a judgment or decree for payment of the money, the
holders of a majority in aggregate principal amount of the notes then
outstanding, may rescind the declaration if:
(1) Bally has paid or deposited with the trustee:
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(a) all amounts advanced by the trustee and the
reasonable compensation, expenses, disbursements and advances
of the trustee, its agents and counsel;
(b) all overdue interest on all notes then
outstanding;
(c) the principal of and premium, if any, on the
notes then outstanding which are due and payable
notwithstanding this declaration; and
(d) to the extent it is lawful to do so,
interest upon overdue interest; and
(2) all Events of Default, other than the nonpayment of
principal of the notes which have become due and payable because of
this declaration, have been cured or waived.
If a declaration is rescinded, it will have no effect on any later
default or any right which the trustee or the holders of the notes can exercise.
If the trustee becomes a creditor of Bally, the Trust Indenture Act
limits the rights of the trustee to obtain payment of claims in certain cases or
to realize on certain property received by it in respect of those claims. If the
trustee acquires a conflicting interest it must eliminate the conflict upon an
Event of Default or must resign.
Bally is required to deliver to the trustee annually a written
statement regarding compliance with the indenture. Within ten business days of
any Default or Event of Default, Bally is required to deliver to the trustee a
statement specifying such Default or Event of Default.
DEFEASANCE OR COVENANT DEFEASANCE
Bally may discharge its obligations with respect to the outstanding
notes ("Legal Defeasance") except for:
(1) the rights of holders of outstanding notes to receive
payments in respect of the principal of, premium, if any, and interest
on the notes when such payments are due from the trust referred to
below;
(2) Bally's obligations with respect to the notes
concerning issuing temporary notes, registration of notes, mutilated,
destroyed, lost or stolen notes and the maintenance of an office or
agency for payment and money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of
the trustee, and Bally's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, Bally may elect to have its obligations released with
respect to most covenants that are contained in the indenture ("Covenant
Defeasance") and thereafter any omission to comply with those covenants shall
not constitute a Default or Event of Default with respect to the notes. In the
event Covenant Defeasance occurs, certain events (not including nonpayment,
bankruptcy and insolvency events) described under "Events of Default" will no
longer constitute an Event of Default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Bally must irrevocably deposit with the trustee, in
trust, for the benefit of the holders of the notes, cash in U.S.
dollars, U.S. Government Obligations (as defined in the indenture), or
a combination thereof, in such amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent public
accountants or a nationally recognized investment banking firm, to pay
the principal of, premium, if any, and interest on the outstanding
notes on the stated maturity or on the applicable redemption date,
after July 15, 2007 if Bally delivers to the trustee an irrevocable
notice to redeem all the outstanding notes on that date;
71
(2) in the case of Legal Defeasance, Bally shall have
delivered to the trustee an opinion of counsel confirming that (a)
Bally has received from, or there has been published by, the Internal
Revenue Service a ruling or (b) since the Issue Date, there has been a
change in the applicable federal income tax law, in either case to the
effect that, and based thereon such opinion of counsel shall confirm
that, the holders of the outstanding notes will not recognize income,
gain or loss for federal income tax purposes as a result of the Legal
Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if the Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, Bally shall have
delivered to the trustee an opinion of counsel confirming that the
holders of the outstanding notes will not recognize income, gain or
loss for federal income tax purposes as a result of the Covenant
Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred
and be continuing either: (a) on the date of such deposit (other than a
Default or Event of Default resulting from the borrowing of funds to be
applied to such deposit); or (b) or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance shall
not cause the trustee to have a conflicting interest as defined in the
indenture and for purposes of the Trust Indenture Act with respect to
any securities of Bally;
(6) such Legal Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a default under the
indenture or any other agreement or instrument to which Bally or any
Significant Subsidiary is a party or by which Bally or any Significant
Subsidiary is bound if the breach, violation or default would have a
material adverse effect on Bally and its Subsidiaries taken as a whole;
(7) such Legal Defeasance or Covenant Defeasance will not
result in the trust created by this deposit constituting an investment
company within the meaning of the Investment Company Act of 1940,
unless the trust is registered under that Act as exempt from that
registration;
(8) Bally must have delivered to the trustee an opinion
of counsel to the effect that after the 91st day following the deposit,
the trust funds will not be subject to avoidance under the Bankruptcy
Law;
(9) Bally must deliver to the trustee an officers'
certificate stating that the deposit was not made by Bally with the
intent of preferring the holders of notes over the other creditors of
Bally with the intent of defeating, hindering, delaying or defrauding
creditors of Bally or others;
(10) no event or condition shall exist that would prevent
Bally from making payments of the principal of, premium, if any, and
interest on the notes on the date of deposit or at any time ending on
the 91st day after the deposit; and
(11) Bally must deliver to the trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent relating to the Legal Defeasance or the Covenant Defeasance
have been complied with.
MODIFICATIONS AND AMENDMENTS
Without the consent of the holder affected, an amendment or waiver may
not:
(1) educe the principal amount of notes whose holders
must consent to a supplemental indenture or any waiver or compliance
with certain provisions of the indenture;
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(2) reduce the principal of or change the fixed maturity
of any note or alter the provisions with respect to the redemption of
the notes, other than provisions relating to the covenants described
above under "--Change of Control";
(3) reduce the rate of or change the time for payment of
interest on any note;
(4) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the notes, except a
rescission of acceleration of the notes by the holders of at least a
majority in aggregate principal amount of the notes and a waiver of the
payment default that resulted from such acceleration;
(5) make any note payable in money other than that stated
in the notes;
(6) impair the right to institute suit for the
enforcement of any payment after the fixed maturity of the note, or
after the redemption date, if appropriate;
(7) amend, change or modify the obligation of Bally to
make and complete an offer to purchase the notes upon an Asset Sale;
(8) amend, change or modify the obligation of Bally to
make and complete an offer to purchase the notes upon a Change of
Control;
(9) make any change in the provisions of the indenture
relating to supplemental indentures or relating to waivers of past
Defaults or waivers of certain covenants, except to increase the
percentage of outstanding notes required for these consents and
waivers;
(10) except as described under "--Certain
Covenants--Merger, Consolidation or Sale of Assets," consent to the
assignment or transfer by Bally of any of its rights and obligations
under the indenture;
(11) amend or modify any of the ranking provisions of the
indenture in any manner adverse to the holders of the notes; and
(12) release any Guarantor that is a Significant
Subsidiary from any of its obligations under its Guarantee or the
indenture otherwise than in accordance with the terms of the indenture.
Notwithstanding the preceding, without the consent of any holder of
notes, Bally, the Guarantors and the trustee may modify or amend the indenture:
(1) to cure any ambiguity, defect or inconsistency that
does not adversely affect the legal rights under the indenture of any
holder of notes;
(2) to provide for the assumption of Bally's obligations
to holders of notes in the case of a merger or consolidation or sale of
all or substantially all of Bally's assets;
(3) to comply with requirements of the Commission in
order to effect or maintain the qualification of the indenture under
the Trust Indenture Act.
(4) to add covenants of Bally for the benefit of the
holders of the notes or take away any right or power of Bally under the
indenture;
(5) to evidence and accept the appointment of a successor
trustee; or
(6) to give security for the payment and performance of
Bally's obligations under the indenture.
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The holders of a majority in aggregate principal amount of the notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the indenture.
SATISFACTION AND DISCHARGE
The indenture will be discharged and be of no further effect when:
(1) either:
(a) all notes issued and outstanding have been
delivered to the trustee for cancellation, or
(b) Bally has irrevocably deposited with the
trustee as trust funds in trust an amount sufficient to pay
and discharge the entire amount owing on all notes not
delivered to the trustee for cancellation and those notes:
(i) have become due and payable;
(ii) will become due and payable at
their Stated Maturity within one year; or
(iii) are to be called for redemption
within one year;
(2) Bally has paid all other sums payable under the
indenture; and
(3) Bally has delivered to the trustee an officers'
certificate and an opinion of independent counsel that:
(a) all conditions of the indenture relating to
the satisfaction and discharge of the indenture have been
satisfied; and
(b) the satisfaction and discharge will not
breach or constitute a default under, the indenture or any
other material agreement of Bally or any Subsidiary.
GOVERNING LAW
The indenture and the notes will be governed by, and construed in
accordance with, the laws of the State of New York.
CONCERNING THE TRUSTEE
If the trustee becomes a creditor of Bally, the indenture limits its
right to obtain payment of claims in certain cases, or to realize on certain
property received in respect of any such claim as security or otherwise. The
trustee will be permitted to engage in other transactions. However, if it
acquires any conflicting interest it must eliminate such conflict within 90
days, apply to the Commission for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding
notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
shall occur and be continuing, the trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
holder of notes, unless that holder shall have offered to the trustee security
and indemnity satisfactory to it against any loss, liability or expense.
74
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the indenture.
Reference is made to the indenture for a full disclosure of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
"Acquired Debt" means Indebtedness of a Person:
(1) existing at the time that Person becomes a Subsidiary
or merges with or into or consolidates with Bally or any Subsidiary; or
(2) assumed in connection with the acquisition of assets
from that Person.
However, Indebtedness incurred in connection with, or in contemplation
of, a Person becoming a Subsidiary or the acquisition of assets will not be
Acquired Debt. Acquired Debt is incurred on the date of the related acquisition
of assets or the date the acquired Person becomes a Subsidiary.
"Adjusted Consolidated Interest Expense" of any Person means, for any
period, the sum of:
(1) the interest expense of the Person and its
Consolidated Subsidiaries, not including deferred financing fees and
any premiums or penalties paid in connection with redeeming or retiring
any Indebtedness prior to its stated maturity for the period, on a
Consolidated basis, including,
(a) amortization of debt discount,
(b) the net cost under interest rate contracts,
including amortization of discounts,
(c) the interest portion of any deferred payment
obligation, and
(d) accrued interest, plus
(2) the interest component of the Capital Lease
Obligations paid, accrued and/or scheduled to be paid or accrued by the
Person during the period, plus
(3) all capitalized interest of such Person and its
Consolidated Subsidiaries, in each case as determined in accordance
with GAAP consistently applied.
"Affiliate" means, with respect to any specified Person:
(1) any other Person directly or indirectly controlling
or controlled by or under direct or indirect common control with the
specified Person;
(2) any other Person that owns, directly or indirectly,
(a) 10% or more of the specified Person's
Capital Stock, or, if the Person is a real estate investment
trust, 10% or more beneficial interest,
(b) any officer or director of the specified
Person or other Person, or
(c) with respect to any natural Person, any
person having a relationship with such Person by blood,
marriage or adoption not more remote than first cousin; or
(3) any other Person 10% or more of the Voting Stock of
which is beneficially owned or held directly or indirectly by the
specified Person.
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For the purposes of this definition, "control" when used with respect
to any specified Person means the power to direct the management and policies of
such Person, directly or indirectly, through ownership of voting securities, by
contract or otherwise.
The terms "controlling" and "controlled" have the meanings implied by
"control."
"Asset Sale" means any transfer, directly or indirectly, in one or a
series of related transactions, of:
(1) any Capital Stock of any Subsidiary;
(2) all or substantially all of the properties and assets
of any division or line of business of Bally or its Subsidiaries; or
(3) any other properties or assets of Bally or any
Subsidiary, other than in the ordinary course of business.
However, Asset Sale does not include any transfer of properties and
assets:
(1) governed by the provisions described under "--Certain
Covenants--Merger, Consolidation or Sale of Assets";
(2) between or among Bally and its Subsidiaries;
(3) of obsolete equipment or other obsolete assets in the
ordinary course of business;
(4) that constitutes a Restricted Payment that is
permitted by the covenant described above under the caption "--Certain
Covenants--Restricted Payments," including the making of a Permitted
Investment (other than pursuant to paragraph (5) of the definition of
"Permitted Investment," which refers to Investments in connection with
an Asset Sale);
(5) the Fair Market Value of which in the aggregate does
not exceed $1.0 million in any transaction or series of related
transactions; or
(6) that constitute sales of accounts receivable and
other transactions among Bally and its Subsidiaries pursuant to the
Securitization Facility.
"Average Life to Stated Maturity" means, as of the date of
determination with respect to any Indebtedness, the quotient obtained by
dividing:
(1) the sum of the products of
(a) the number of years from the date of
determination to the date or dates of each successive
scheduled principal payment of the Indebtedness multiplied by
(b) the amount of each principal payment; by
(2) the sum of all the principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978,
as amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding up, liquidation, reorganization or
relief of debtors or any amendment to, succession to or change in any such law.
"Banks" means the lenders under the Senior Credit Facility.
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"Capital Lease Obligation" of any Person means any obligation of the
Person and its Subsidiaries on a Consolidated basis under any capital lease of
real or personal property recorded as a capitalized lease obligation in
accordance with GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any
and all shares, interests, participations, rights or other equivalents,
however designated, of corporate stock;
(3) in the case of a partnership or limited liability
company, partnership or membership interests, whether general or
limited; and
(4) any other interest or participation that confers on a
Person the right to receive a share of the profits and losses of, or
distributions of assets of, the issuing Person.
"Cash Equivalents" means:
(1) Temporary Cash Investments;
(2) securities received by Bally or any Subsidiary from
the transferee in an Asset Sale that are promptly converted by Bally or
the Subsidiary into cash;
(3) the assumption of Indebtedness or other obligations
or liabilities of Bally or any Subsidiary in connection with an Asset
Sale and from which Bally or such Subsidiary is released; and
(4) in connection with an Asset Sale to a Person where
the assets transferred are included in a business which will be a party
to the Franchise Program, the net present value of payments by that
Person under the Franchise Program.
"Change of Control" means the happening of any of the following events:
(1) any "person" or "group" is or becomes the "beneficial
owner", directly or indirectly, of more than a majority of the total
outstanding Voting Stock of Bally;
(a) the terms "person" or "group" are used as
such terms are used in Sections 13(d) and 14(d) of the
Exchange Act, and
(b) the term "beneficial owner" is used as
defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a Person shall be deemed to have beneficial
ownership of all shares that such Person has the right to
acquire, whether such right is exercisable immediately or only
after the passage of time.
(2) during any period of two consecutive years,
individuals who at the beginning of this period constituted the board
of directors of Bally, along with any new directors whose election or
nomination was approved by 66 2/3% of the directors then still in
office who were either directors at the beginning of this period or
whose election or nomination was previously so approved, cease for any
reason to constitute a majority of the board of directors then in
office;
(3) Bally consolidates with or merges with or into any
Person or conveys, transfers or leases all or substantially all of its
assets to any Person, or any corporation consolidates with or merges
into or with Bally in any such event as a follow-up to a transaction in
which the outstanding Voting Stock of Bally is changed into or
exchanged for cash, securities or other property, other than:
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(a) any such transaction where the outstanding
Voting Stock of Bally is not changed or exchanged at all
(except to the extent necessary to reflect a change in the
jurisdiction of incorporation of Bally); or
(b) where the outstanding Voting Stock of Bally
is changed into or exchanged for:
(i) Voting Stock of the surviving
corporation which is not Redeemable Capital Stock, or
(ii) cash, securities and other property,
other than Capital Stock of the surviving
corporation, in an amount which could be paid by
Bally as a Restricted Payment as described under
"--Certain Covenants--Restricted Payments" (and such
amount will be treated as a Restricted Payment
subject to the provisions in the indenture described
under "--Certain Covenants--Restricted Payments");
and
(c) where no "person" or "group" owns
immediately after such transaction, directly or indirectly,
more than a majority of the total outstanding Voting Stock of
the surviving corporation; or
(4) Bally is liquidated or dissolved or adopts a plan of
liquidation or dissolution other than in a transaction which complies
with the provisions described under "--Certain Covenants--Merger,
Consolidation or Sale of Assets".
"Commission" means the United States Securities and Exchange
Commission.
"Consolidated Fixed Charge Coverage Ratio" of any Person means, for any
period, the ratio of EBITDA to the sum of Adjusted Consolidated Interest Expense
for the period and cash dividends paid on any Preferred Stock of that Person
during that period; provided that:
(1) in making such computation, the Adjusted Consolidated
Interest Expense attributable to interest on any Indebtedness will be
computed on a pro forma basis, and
(a) where that Indebtedness was outstanding
during the period and bore a floating interest rate, interest
will be computed as if the rate in effect on the date of
computation had been the applicable rate for the entire
period, and
(b) where that Indebtedness was not outstanding
during the period for which the computation is being made but
which bears, at the option of Bally, a fixed or floating rate
of interest, will be computed by applying either the fixed or
floating rates, and
(2) in making that computation, the Adjusted Consolidated
Interest Expense of the Person attributable to interest on any
Indebtedness under a revolving credit facility computed on a pro forma
basis will be computed based upon the average daily balance of the
Indebtedness during the applicable period.
"Consolidated Income Tax Expense" of any Person means, for any period,
the provision for federal, state, local and foreign income taxes of that Person
and its Consolidated Subsidiaries for the period as determined in accordance
with GAAP.
"Consolidated Net Income (Loss)" of any Person means, for any period,
the Consolidated net income (or loss) of the Person and its Subsidiaries for the
period on a Consolidated basis as determined in accordance with GAAP, adjusted,
to the extent included in calculating net income (or loss), by excluding,
without duplication,
(1) all extraordinary gains or losses (exclusive of all
fees and expenses relating to the gain or loss),
78
(2) the portion of net income (or loss) of the Person and
its Subsidiaries on a Consolidated basis allocable to minority
interests in unconsolidated Persons to the extent that cash dividends
or distributions have not actually been received by the Person or one
of its Subsidiaries,
(3) net income (or loss) of any Person combined with the
Person or any of its Subsidiaries on a "pooling of interests" basis
attributable to any period prior to the date of combination,
(4) any gain or loss, net of taxes, realized upon the
termination of any employee pension benefit plan,
(5) net gains (or losses) (except for all fees and
expenses relating to net gains or losses) in respect of dispositions of
assets other than in the ordinary course of business,
(6) the net income of any Subsidiary to the extent that
the declaration of dividends or similar distributions by that
Subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary or its stockholders,
(7) any gain arising from the acquisition of any
securities, or the extinguishment, under GAAP, of any Indebtedness of
such Person,
(8) transaction costs charged in connection with the
Refinancing, or
(9) amortization of intangible assets of the Person and
its Subsidiaries on a consolidated basis under GAAP.
"Consolidated Non-Cash Charges" of any Person means, for any period,
the aggregate depreciation, amortization and other non-cash charges of the
Person and its Subsidiaries on a Consolidated basis for the period, as
determined in accordance with GAAP. However, Consolidated Non-Cash Charges does
not include any non-cash charge which requires an accrual or reserve for cash
charges for any future period.
"Consolidation" means, with respect to any Person, the consolidation of
the accounts of the Person and each of its Subsidiaries if and to the extent
these accounts would normally be consolidated with those of the Person, all in
accordance with GAAP. The term "Consolidated" will have a similar meaning.
"Credit Card Program Guarantee" means Bally's obligation to remit funds
in excess of the sum of:
(1) $25.0 million, plus
(2) a reserve of up to 25% of the amount owed to Bally by
a member, which becomes an obligation due to the credit card issuer by
such member, pursuant to Bally's Credit Card Program Agreement dated
December 21, 1995, as that agreement may be amended, renewed, extended,
substituted, refinanced, restructured, replaced, supplemented, or
otherwise modified from time to time.
"Default" means any event which is, or after notice or passage of time
or both would be, an Event of Default.
"Disinterested Director" means, a member of the board of directors of
Bally who does not have any material direct or indirect financial interest in or
with respect to a transaction or series of related transactions.
"Domestic Subsidiary" means a Subsidiary incorporated or otherwise
organized and existing under the laws of the United States or any state thereof.
"EBITDA" means the sum of Consolidated Net Income, Adjusted
Consolidated Interest Expense, Consolidated Income Tax Expense and Consolidated
Non-Cash Charges deducted in computing Consolidated Net
79
Income of Bally and its Subsidiaries on a Consolidated basis, all determined in
accordance with GAAP consistently applied.
"Fair Market Value" means the sale value that would be obtained in an
arm's-length transaction between an informed and willing seller under no
compulsion to sell and an informed and willing buyer under no compulsion to buy.
Fair Market Value will be determined by the board of directors of Bally acting
in good faith and will be evidenced by a resolution of the board of directors.
"Franchise Program" means the program under which Bally and/or its
Subsidiaries grant franchises to third parties. These franchisees are required
to, among other things, pay fees to Bally and/or its Subsidiaries, and have the
right to receive training from Bally or its Subsidiaries or sell memberships to
use facilities of the franchisee and Bally or its Subsidiaries. The Franchise
Program may include the conversion of facilities owned by Bally or its
Subsidiaries to franchise facilities and includes such a program as it may be
amended, renewed, extended, substituted, restructured, replaced, supplemented or
otherwise modified from time to time.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, which
were in effect on the Issue Date.
"Guarantee" means each guarantee of the Bally's obligations under the
indenture and the notes by the Guarantors.
"Guarantor" means: (1) each of the Guarantors listed on Schedule A to
the indenture; and (2) each of the Bally's Subsidiaries that in the future
executes a supplemental indenture in which such Subsidiary agrees to be bound by
the terms of the indenture as a Guarantor; provided that any Person constituting
a Guarantor as described above shall cease to constitute a Guarantor when its
respective Guarantee is released in accordance with the terms of the indenture.
"Guaranteed Debt" of any Person means all Indebtedness of any other
Person guaranteed directly or indirectly in any manner by such Person, or in
effect guaranteed directly or indirectly by such Person through an agreement
(1) to pay or purchase the Indebtedness or to advance or
supply funds for the payment or purchase of the Indebtedness,
(2) to purchase, sell or lease (as lessee or lessor)
property, or to purchase or sell services, primarily for the purpose of
enabling the debtor to make payment of the Indebtedness or to assure
the holder of the Indebtedness against loss,
(3) to supply funds to, or in any other manner invest in,
the debtor, including any agreement to pay for property or services
without requiring that the property be received or the services be
rendered,
(4) to maintain working capital or equity capital of the
debtor, or otherwise to maintain the net worth, solvency or other
financial condition of the debtor, or
(5) otherwise to assure a creditor against loss.
However, "guarantee" does not include endorsements for collection or
deposit in the ordinary course of business or guarantees of operating leases.
"Indebtedness" means, with respect to any Person
(1) all obligations of the Person for borrowed money or
for the deferred purchase price of property or services,
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(a) excluding any trade payables and other
accrued current liabilities arising in the ordinary course of
business, but
(b) including all obligations, contingent or
otherwise, of the Person in connection with any letters of
credit issued
(i) under letter of credit facilities,
(ii) under acceptance facilities or other
similar facilities, and
(iii) in connection with any agreement to
purchase, redeem, exchange, convert or otherwise
acquire for value any Capital Stock of such Person,
or any warrants, rights or options to acquire such
Capital Stock,
(2) all obligations of the Person evidenced by bonds,
notes, debentures or other similar instruments,
(3) all obligations created or arising under any
conditional sale or other title retention agreement with respect to
property acquired by the Person (even if the rights and remedies of the
seller or lender under such agreement in the event of default are
limited to repossession or sale of such property), but excluding trade
payables arising in the ordinary course of business,
(4) all obligations under Interest Rate Agreements of the
Person,
(5) all Capital Lease Obligations of the Person,
(6) all Indebtedness referred to in paragraphs (1)
through (5) above of other Persons and all dividends of other Persons,
if the payment of the Indebtedness is secured by (or for which the
holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien, upon or with respect to
property, including accounts and contract rights, owned by such Person,
even though such Person has not assumed or become liable for the
payment of such Indebtedness,
(7) all Guaranteed Debt of the Person,
(8) all Redeemable Capital Stock issued by such Person
valued at the greater of its voluntary or involuntary maximum fixed
repurchase price plus accrued and unpaid dividends,
(9) the Credit Card Program Guarantee, and
(10) any amendment, supplement, modification, deferral,
renewal, extension, refunding or refinancing of any liability which
constitutes Indebtedness of the types referred to in paragraphs (1)
through (9) above.
As used in this definition of Indebtedness, the "maximum fixed
repurchase price" of any Redeemable Capital Stock which does not have a fixed
repurchase price will be calculated in accordance with the terms of such
Redeemable Capital Stock as if the repurchase occurred on the date on which
Indebtedness will be determined under the indenture. If such price is based upon
the Fair Market Value of such Redeemable Capital Stock, the Fair Market Value
will be determined in good faith by the board of directors of the issuer of such
Redeemable Capital Stock.
"Interest Rate Agreements" means any interest rate protection
agreement, including interest rate swaps, caps, floors, collars and other types
of interest rate hedging agreements.
"Investment" means:
(1) any advance, loan, guarantee or other extension of
credit or capital contribution;
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(2) any purchase, acquisition or ownership of any Capital
Stock, bonds, notes, debentures or other securities issued or owned by
any other Person; and
(3) all other items that would be classified as
investments on a balance sheet prepared in accordance with GAAP.
However, the ownership of any Capital Stock, bonds, notes, debentures
or other securities obtained without making any advance, loan, payment,
extension of credit or capital contribution is not an Investment.
"Issue Date" means the date the notes are originally issued under the
indenture.
"Lien" means any mortgage or deed of trust, charge, pledge, statutory
or other lien, privilege, security interest, assignment, deposit, arrangement,
easement, hypothecation, claim, preference, priority or other encumbrance upon
or with respect to any property of any kind. A Lien includes any conditional
sale, capital lease or other title retention agreement, any leases and any
agreement to give any security interest.
"Maturity", when used with respect to the notes means the date the
principal of the notes becomes due and payable as provided in the notes or in
the indenture, including:
(1) Stated Maturity,
(2) the Change of Control Payment Date,
(3) the redemption date, and
(4) any declaration of acceleration.
"Net Cash Proceeds" means
(1) with respect to all Asset Sales, the proceeds from
any Asset Sale in the form of cash or Temporary Cash Investments, net
of:
(a) brokerage commissions and other reasonable
fees and expenses related to the Asset Sale, including fees
and expenses of counsel and investment bankers;
(b) provisions for all taxes payable as a result
of the Asset Sale;
(c) payments made to satisfy any Indebtedness
that is secured by the assets which are the subject of the
Asset Sale;
(d) amounts required to be paid to any Person
owning a beneficial interest in the assets subject to the
Asset Sale, other than Bally or any Subsidiary; and
(e) appropriate amounts to be provided by Bally
or any Subsidiary, as a reserve, in accordance with GAAP,
against any liabilities associated with such Asset Sale and
retained by Bally or any Subsidiary, as the case may be, after
the Asset Sale; and
(2) with respect to any issuance or sale of Capital Stock
or options, warrants or rights to purchase Capital Stock, or debt
securities or Capital Stock that have been converted into or exchanged
for Capital Stock as referred to under "--Certain Covenants--Restricted
Payments", the proceeds from the issuance or sale in the form of cash
or Temporary Cash Investments, net of attorneys' fees, accountants'
fees and brokerage, consultation, underwriting and other fees and
expenses actually incurred in connection with the issuance or sale and
net of associated taxes paid or payable.
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"Non-Guarantor Subsidiary" means H&T Receivables Funding, Bally ARA
Corporation, Lincoln Indemnity Company and any other Wholly Owned Subsidiary of
Bally whose sole activity is engaging in receivables financing transactions or
real estate financing transactions and which Subsidiaries incur no Indebtedness
other than Indebtedness directly related to such receivables or real estate
financing transactions.
"Obligations" means any and all obligations with respect to the payment
of (a) any principal of or interest (including interest accruing on or after the
commencement of any insolvency, bankruptcy or liquidation proceeding, whether or
not a claim for post-filing interest is allowed in such proceeding) or premium
on any Indebtedness, including any reimbursement obligation in respect of any
letter of credit, (b) any fees, indemnification obligations, damages, expense
reimbursement obligations or other liabilities payable under the documentation
governing any Indebtedness and (c) any obligation to post cash collateral in
respect of letters of credit and any other obligations.
"Permitted Investment" means:
(1) Investments in any Subsidiary or any Person which, as
a result of the Investment,
(a) becomes a Subsidiary, or
(b) is merged or consolidated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated into, Bally or any Subsidiary;
(2) Indebtedness of Bally described under paragraph (4)
of the definition of "Permitted Indebtedness";
(3) Investments in any of the notes and Investments
represented by guarantees that are otherwise provided by the indenture;
(4) Temporary Cash Investments;
(5) Investments acquired by Bally or any Subsidiary in
connection with an Asset Sale permitted under "--Certain
Covenants--Asset Sales" to the extent the Investments are non-cash
proceeds as permitted under that covenant;
(6) Investments in existence on the Issue Date;
(7) Investments in the aggregate amount of $5.0 million
to purchase Capital Stock of any Subsidiary;
(8) any advance, loan, guarantee or other extension of
credit to any Person who purchases or acquires assets of Bally or any
Subsidiaries which are to be included in a business which will be or is
a party to the Franchise Program, which amount cannot be more than the
purchase or acquisition price of such assets; and
(9) up to $25.0 million aggregate amount outstanding at
any one time in any other Investments in joint ventures, partnerships,
real estate investment trusts or other Persons reasonably related or
complementary to the business of Bally on the Issue Date.
In connection with any assets or property contributed or transferred to
any Person as an Investment, the property and assets will be valued at the Fair
Market Value, as determined by the board of directors of Bally, at the time of
Investment.
"Permitted Liens" means the following types of Liens:
(1) Liens for taxes, assessments, governmental charges or
levies either
(a) not yet delinquent, or
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(b) the validity of which is being contested in
good faith in an appropriate manner diligently pursued and as
to which adequate reserves for the unpaid amount shall have
been set aside in conformity with GAAP;
(2) materialmen's, mechanics', landlord's, workmen's,
repairmen's, employees' or like liens arising in the ordinary course of
business to secure obligations not yet delinquent or being contested in
good faith and as to which adequate reserves for the unpaid amount
shall have been set aside in conformity with GAAP or as to which
adequate bonds or insurance shall have been obtained;
(3) deposits or pledges to secure the payment of, or to
secure Bally's or any Subsidiaries' obligations with respect to letters
of credit that secure the payment of workers' compensation,
unemployment insurance, social security or other retirements benefits
or obligations (exclusive of liens arising under ERISA) or to secure
the performance of bids, trade contracts, leases, public or statutory
obligations, surety or appeal bonds, and other obligations of a like
nature incurred in the ordinary course of business;
(4) judgment Liens not giving rise to an Event of
Default;
(5) easements, rights-of-way, zoning restrictions and
other similar charges or encumbrances in respect of real property not
interfering in any material respect with the ordinary conduct of the
business of Bally or of any of its Subsidiaries;
(6) any interest or title of a lessor under any
Capitalized Lease Obligation; provided that such Liens do not extend to
any property or asset which is not leased property subject to such
Capitalized Lease Obligation;
(7) Liens securing reimbursement obligations with respect
to commercial letters of credit which encumber documents and other
property relating to such letters of credit and products and proceeds
thereof;
(8) Liens encumbering deposits made to secure obligations
arising from statutory, regulatory, contractual or warranty
requirements of Bally or any of its Subsidiaries, including rights of
offset and setoff;
(9) Liens securing Interest Rate Agreements which
Interest Rate Agreements relate to Indebtedness that is otherwise
permitted under the indenture;
(10) Liens securing Acquired Debt incurred in accordance
with the covenant described under "--Certain Covenants--Incurrence of
Indebtedness"; provided that:
(a) such Liens secured such Acquired Debt at the
time of and prior to the incurrence of such Acquired Debt by
Bally or a Subsidiary and were not granted in connection with,
or in anticipation of, the incurrence of such Acquired Debt by
Bally or a Subsidiary; and
(b) such Liens do not extend to or cover any
property or assets of Bally or any of its Subsidiaries other
than the property or assets that secured the Acquired Debt
prior to the time such Indebtedness became Acquired Debt of
Bally or a Subsidiary and are no more favorable to the
lienholders than those securing the Acquired Debt prior to the
incurrence of such Acquired Debt by Bally or a Subsidiary;
(11) leases, subleases, licenses and sublicenses granted
to others that do not materially interfere with the ordinary course of
business of Bally and its Subsidiaries;
(12) banker's Liens, rights of setoff and similar Liens
with respect to cash and Cash Equivalents on deposit in one or more
bank accounts in the ordinary course of business;
84
(13) Liens arising from filing Uniform Commercial Code
financing statements regarding leases;
(14) Liens related to credit card processing agreements
and cash management obligations in the ordinary course of business,
including any guarantees thereof by Bally or any Subsidiary; and
(15) non-monetary Liens which do not have an adverse
effect on the value or use of the property subject to such Liens;
(16) Liens securing Indebtedness permitted by the covenant
described under "--Incurrence of Indebtedness" that is incurred in
connection with a Person becoming a Subsidiary or in connection with
the acquisition of assets that constitute a business; provided, that
the amount of such Indebtedness to be secured by this clause (16)
shall, at the time such Indebtedness is incurred, not exceed an amount
equal to 1.5 times the EBITDA of such Person or acquired business for
the mostly recently ended four fiscal quarters for which internal
financial statements of such Person or acquired business are available;
and
(17) additional Liens not to exceed $10.0 million at any
one time.
"Permitted Subsidiary Indebtedness" means:
(1) Indebtedness of a Subsidiary owing to Bally or
another Subsidiary made pursuant to an intercompany note and that, upon
an Event of Default, will be immediately due and payable. However,
(a) any disposition, pledge or transfer of any
such Indebtedness to a Person, other than Bally or a
Subsidiary, will be an incurrence of such Indebtedness by the
obligor outside the definition of "Permitted Subsidiary
Indebtedness" pursuant to this paragraph (1), and
(b) any transaction pursuant to which any
Subsidiary ceases to be a Subsidiary will be deemed to be the
incurrence of Indebtedness by such Subsidiary that is not
within the definition of "Permitted Subsidiary Indebtedness"
pursuant to this paragraph (1);
(2) Indebtedness of a Subsidiary which would be permitted
by paragraphs (1), (3), (5), (6), (7), (8), (9) or (10) of the
definition of "Permitted Indebtedness" if incurred by Bally and
guarantees of Obligations owed under the Senior Credit Facility;
(3) Acquired Debt of a Subsidiary which would be
permitted to be incurred by Bally if such Acquired Debt were being
incurred by Bally;
(4) Indebtedness of a Subsidiary under the Securitization
Facility;
(5) Guarantees of the notes and guarantees of Bally's
Senior Debt; and
(6) guarantees of any Affiliate's Indebtedness if the
Investment in the Affiliate complies with the limitation on Restricted
Payments covenant of the indenture or constitutes a Permitted
Investment.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision.
"Preferred Stock" with respect to any Person means, any Capital Stock
of any class or classes which is preferred as to the payment of dividends or
distributions, or as to the distribution of assets upon any voluntary or
involuntary liquidation or dissolution of such Person, over the Capital Stock of
any other class in such Person.
"Public Equity Offering" means an underwritten public offering of
Capital Stock, other than Redeemable Capital Stock, pursuant to a registration
statement that has been declared effective by the Commission. However,
85
any public offering on a registration statement on Form S-8 or any successor
form or otherwise relating to equity securities issuable under any employee
benefit plan of Bally will not be a Public Equity Offering.
"Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to the business of Bally and its Subsidiaries and any additions
and accessions which are purchased at any time after the notes are issued so
long as:
(1) the security agreement or conditional sales or other
title retention contract pursuant to which the Lien on such assets is
created (collectively, a "Purchase Money Security Agreement") will be
entered into within 270 days after the purchase or substantial
completion of the construction of such assets and will at all times be
confined solely to the assets so purchased or acquired, any additions
and accessions and any proceeds,
(2) the aggregate principal amount of the outstanding
Indebtedness secured by the Purchase Money Security Agreement will not
be increased, except in connection with the purchase of additions and
accession and except in respect of fees and other obligations in
respect of the Indebtedness, and
(3) (a) the aggregate outstanding principal amount
of Indebtedness secured by the Purchase Money Security
Agreement (determined on a per asset basis in the case of any
additions and accessions) will not, at the time the Purchase
Money Security Agreement is entered into, exceed 100% of the
purchase price to Bally and its Subsidiaries of the assets
subject thereto, or
(b) the Indebtedness secured will be with
recourse solely to the assets so purchased or acquired, any
additions and accessions and any proceeds.
"Qualified Capital Stock" means any and all Capital Stock of a Person
other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any Capital Stock that, either by its
terms or by the terms of any security into which it is convertible or
exchangeable or otherwise,
(i) is, or upon the happening of any
event or passage of time would be, required to be
redeemed prior to any Stated Maturity of the
principal of the notes,
(ii) is redeemable at the option of the
holder of the Capital Stock at any time prior to any
Stated Maturity, or
(iii) is convertible into or exchangeable
for debt securities at any time prior to any such
Stated Maturity at the option of the holder.
"Refinancing" means (i) the offering and sale of the Company's 9- 7/8%
Senior Subordinated Notes due 2007 issued pursuant to the Indenture dated
October 7, 1997 (the "B Indenture") between the Company and the U.S. Bank Trust
National Association, as trustee, providing for the issuance of the Series B
Securities in the aggregate principal amount of $225,000,000, (ii) the
modification of the third amended and restated Credit Agreement, dated as of
June 26, 1997, among the Company, the Banks and The Chase Manhattan Bank, as
agent, and (iii) the consummation of the tender offer by the Company for its
Senior Subordinated Notes due 2003 outstanding prior to the date of the B
Indenture.
"Securitization Facility" means the asset-backed securities issued by
the H&T Master Trust on December 13, 1996 in the aggregate principal amount not
exceed (a) $160.0 million or (b) 80% of the net book value of the consolidated
accounts receivable of Bally and its Subsidiaries, calculated in accordance with
GAAP, including any amendments, renewals, extensions, substitutions,
refinancings, restructurings, replacements, supplements or other modifications.
"Senior Credit Facility" means the amended and restated Credit
Agreement dated as of July 2, 2003 among Bally, the Banks and JPMorgan Chase
Bank, as agent, including any guarantees, instruments and collateral security
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documents delivered in connection therewith and any amendments, renewals,
extensions, substitutions, refinancings, restructurings, replacements,
supplements or other modifications thereto, in whole or in part, whether or not
with the same lenders.
"Senior Debt" means all Indebtedness of Bally and its Subsidiaries on a
Consolidated basis which is not Subordinated Indebtedness, including without
limitation the notes and the Guarantees, Indebtedness arising under the Senior
Credit Facility and guarantees thereof and Indebtedness arising under the
Securitization Facility.
"Senior Leverage Ratio" means with respect to Bally and its
Subsidiaries on a Consolidated basis for the most recently ended four full
fiscal quarters twelve month period for which financial statements are
available, the ratio of (a) Senior Debt of Bally and its Subsidiaries on a
Consolidated basis on the last day of such period to (b) EBITDA for such period.
"Senior Secured Debt" means Senior Debt that is secured by a Lien
permitted by the covenant described under "--Liens".
"Series D Subordinated Notes" means Bally's Series D Senior
Subordinated Notes due 2007 issued in original principal amount equal to $300.0
million.
"Significant Subsidiary" means any Subsidiary that would be a
"Significant Subsidiary" of Bally within the meaning of Rule 1-02 under
Regulation S-X promulgated by the Commission.
"Stated Maturity" means the dates specified as the fixed date when the
principal of any Indebtedness or any installment of interest is due and payable.
"Subordinated Indebtedness" means Indebtedness of Bally which by its
term is expressly subordinated in right of payment to the notes.
"Subordinated Notes" means the Series D Subordinated Notes and Bally's
9 7/8 Series B Senior Subordinated Notes due 2007.
"Subsidiary" means any Person with a majority of the equity ownership
or the Voting Stock of which is at the time owned, directly or indirectly, by
Bally or by one or more other Subsidiaries, or by Bally and one or more other
Subsidiaries. However, an Unrestricted Subsidiary will not be a Subsidiary.
"Temporary Cash Investments" means
(1) any evidence of Indebtedness,
(a) maturing one year or earlier after the date
of acquisition,
(b) issued by the United States of America, or
an instrumentality or agency thereof, and
(c) guaranteed fully as to principal, premium,
if any, and interest by the United States of America;
(2) any certificate of deposit (or, with respect to
non-U.S. banking institutions, similar instruments)
(a) maturing one year or earlier after the date
of the acquisition,
(b) issued by a commercial banking institution
that is a member of the Federal Reserve System or a commercial
banking institution organized and located in a country
recognized by the United States of America,
87
(c) that has combined capital and surplus and
undivided profits of not less than $500 million, or the
foreign currency equivalent thereof, and
(d) whose debt has a rating, at the time any
investment is made,
(i) of at least "P-1" according to
Moody's Investors Service, Inc. ("Moody's") or any
successor rating agency, or
(ii) of at least "A-1" according to
Standard & Poor's Rating Group, a division of McGraw
Hill, Inc. ("S&P");
(3) commercial paper, maturing one year or earlier after
the date of acquisition, issued by a corporation, other than an
Affiliate or Subsidiary of Bally, organized and existing under the laws
of the United States of America with a rating, at the time when any
Investment is made, of at least "P-1" according to Moody's or at least
"A-1" according to S&P;
(4) any money market deposit accounts or demand deposit
accounts issued or offered by a domestic commercial bank or a
commercial banking institution organized and located in a country
recognized by the United States of America,
(a) having capital and surplus in excess of $500 million,
or the foreign currency equivalent thereof; and
(b) whose short-term debt has a rating, at the time of
investment, of at least "P-1" according to Moody's or of at least "A-1"
according to S&P; and
(5) any other Investments, that at any one time do not
exceed $100,000 in the aggregate, issued or offered by any domestic
commercial bank or any commercial banking institution organized and
located in a country recognized by the United States of America.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as
amended, or any successor statute.
"Unrestricted Subsidiary" means
(1) BTFCC, Inc.;
(2) BSPS LLC;
(3) BTF Canada Corporation;
(4) BTF Cincinnati Corporation;
(5) BTF Europe Corporation;
(6) BTFF Corporation;
(7) BTF Indianapolis Corporation;
(8) BTF Minneapolis Corporation;
(9) BTF PA Corporation;
(10) BTF PA LLC;
(11) Efit.COM Incorporated;
88
(12) Bally Real Estate I, LLC;
(13) any other Subsidiary of Bally that has been
designated by the board of directors of Bally as an Unrestricted
Subsidiary; and
(14) any subsidiary of an Unrestricted Subsidiary.
The board of directors of Bally may designate any subsidiary of Bally,
including any newly acquired or newly formed subsidiary, to be an Unrestricted
Subsidiary if all of the following conditions apply:
(1) neither Bally nor any of its Subsidiaries provides
credit support for Indebtedness of the Unrestricted Subsidiary,
including any undertaking, agreement or instrument evidencing the
Indebtedness;
(2) such Unrestricted Subsidiary is not liable, directly
or indirectly, with respect to any Indebtedness other than Unrestricted
Subsidiary Indebtedness or the Senior Credit Facility;
(3) any Investment by Bally in such Unrestricted
Subsidiary made as a result of designating such subsidiary an
Unrestricted Subsidiary will not violate the provisions described under
"--Certain Covenants--Unrestricted Subsidiaries"; and
(a) such Unrestricted Subsidiary is not party to
any agreement, contract, arrangement or understanding at the
designation time with Bally or any other subsidiary of Bally,
unless the terms of any the agreement, contract, arrangement
or understanding are no less favorable to Bally or such other
subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of Bally; or
(b) in the event the condition described in
subparagraph (a) is not satisfied, the value of the agreement,
contract, arrangement or understanding to such Unrestricted
Subsidiary will be considered an Investment; and
(4) such Unrestricted Subsidiary does not own any Capital
Stock in any subsidiary of Bally which is not simultaneously being
designated an Unrestricted Subsidiary.
Any such designation by the board of directors of Bally will be
evidenced to the trustee by the filing with the trustee:
(1) a board resolution giving effect to such designation,
and
(2) an officers' certificate certifying that such
designation complies with the foregoing conditions described in the
definition
Any Investment by Bally in any Unrestricted Subsidiary will be deemed a
Restricted Payment on the date of designation in an amount equal to the greater
of
(a) the net book value of such Investment, or
(b) the Fair Market Value of such Investment as
determined in good faith by Bally's board of directors.
The board of directors may designate any Unrestricted Subsidiary as a
Subsidiary, so long as
(a) if such Unrestricted Subsidiary has any
Indebtedness, that immediately after giving effect to the
designation, Bally could incur $1.00 of additional
Indebtedness pursuant to the restrictions under "--Certain
Covenants--Incurrence of Indebtedness", other than Permitted
Indebtedness or Permitted Subsidiary Indebtedness, and
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(b) all Indebtedness of such Subsidiary will be
considered to be incurred on the date the Unrestricted
Subsidiary becomes a Subsidiary.
"Unrestricted Subsidiary Indebtedness" means Indebtedness of any
Unrestricted Subsidiary
(1) that neither Bally nor any Subsidiary is directly or
indirectly liable, and
(2) upon the occurrence of a default with respect to the
Indebtedness, does not result in, or permit any holder of any
Indebtedness of Bally or any Subsidiary to declare a default on such
Indebtedness of Bally or any Subsidiary or cause the payment of the
Indebtedness to be accelerated or payable prior to its Stated Maturity.
"Voting Stock" means the class or classes of Capital Stock that allow
the stockholder, under ordinary circumstances, to have general voting power to
elect at least a majority of (1) the board of directors, (2) managers or (3)
trustees of a corporation, regardless of whether or not Capital Stock of any
other class or classes will have or might have voting power by reason of the
happening of any contingency.
"Wholly Owned Subsidiary" means a Subsidiary in which Bally or another
Wholly Owned Subsidiary owns all the Capital Stock, other than qualifying
shares, if any.
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BOOK-ENTRY; DELIVERY AND FORM
Except as described herein under the heading "Certificated Securities"
exchange notes will initially be represented by a permanent global note ("Global
Notes") in fully registrable form without interest coupons and will be deposited
with the trustee as custodian for the Depository Trust Company and registered in
the name of a nominee of such depository.
THE GLOBAL NOTES
We expect that pursuant to procedures established by DTC:
(1) upon the issuance of the Global Notes, DTC or its
custodian will credit, on its internal system, the principal amount of
notes of the individual beneficial interests represented by such Global
Notes to the respective accounts of persons who have accounts with such
depositary, and
(2) ownership of beneficial interests in the Global Notes
will be shown on, and the transfer of such ownership will be effected
only through:
- records maintained by DTC or its nominee
with respect to interests of persons who have
accounts with DTC "participants" and
- the records of participants with respect to
interests of persons other than participants.
So long as DTC, or its nominee, is the registered owner or holder of
the exchange notes, DTC or such nominee, as the case may be, will be considered
the sole owner or holder of the exchange notes represented by the Global Notes
for all purposes under the indenture. No beneficial owner of an interest in the
Global Notes will be able to transfer that interest except in accordance with
DTC's procedures, in addition to those provided for under the indenture with
respect to the exchange notes.
Payments of the principal of, premium, if any, and interest (including
additional interest) on the Global Notes will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of us, the trustee or any
paying agent will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global Notes or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
We expect that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, and interest (including additional interest) on the
Global Notes, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of the Global Notes as shown on the records of DTC or its nominee. We also
expect that payments by participants to owners of beneficial interests in the
Global Notes held through such participants will be governed by standing
instructions and customary practice, as is now the case with securities held for
the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary
way through DTC's same-day funds system in accordance with DTC rules and will be
settled in same-day funds. If a holder requires physical delivery of a
certificated note for any reason, including to sell exchange notes to persons in
states that require physical delivery of the notes, or to pledge such
securities, such holder must transfer its interest in the Global Notes, in
accordance with the normal procedures of DTC and with the procedures set forth
in the indenture. Consequently, the ability to transfer exchange notes or to
pledge notes as collateral will be limited to such extent.
Exchange notes that are issued as described below under "--Certificated
Securities," will be issued in registered definitive form without coupons (each,
a "Certificated Note"). Upon the transfer of Certificated Notes, such
certificated notes may, unless the Global Note has previously been exchanged for
certificated notes, be exchanged for an interest in the Global Note representing
the principal amount of exchange notes being transferred.
DTC has advised us that it will take any action permitted to be taken
by a holder of exchange notes (including the presentation of notes for exchange
as described below) only at the direction of one or more
91
participants to whose account the DTC interests in the Global Notes are credited
and only in respect of such portion of the aggregate principal amount of
exchange notes as to which such participant or participants has or have given
such direction. However, if there is an event of default under the indenture,
DTC will exchange the Global Notes for certificated notes, which it will
distribute to its participants.
DTC has advised us as follows: DTC is:
(1) limited-purpose trust company organized under the laws of the
State of New York,
(2) a member of the Federal Reserve System,
(3) a "clearing corporation" within the meaning of the New York
Uniform Commercial Code and
(4) a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act.
DTC was created to hold securities for its participants and facilitate
the clearance and settlement of securities transactions between participants
through electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in the global notes among participants of DTC,
it is under no obligation to perform such procedures and such procedures may be
discontinued at any time. Neither we nor the trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED SECURITIES
If DTC is at any time unwilling or unable to continue as a depositary
for the global notes and a successor depositary is not appointed by us within 90
days, certificated notes will be issued in exchange for the Global Notes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material federal income tax
considerations relevant to the exchange of old notes for notes pursuant to the
exchange offer, but does not purport to be a complete analysis of all potential
tax consequences. This discussion is based upon the Internal Revenue Code of
1986, as amended, Treasury regulations, Internal Revenue Service rulings and
pronouncements, and judicial decisions now in effect, all of which are subject
to change at any time. Any such changes may be applied retroactively in a manner
that could adversely affect your notes. We have not and will not seek any
rulings from the Internal Revenue Service with respect to the matters discussed
below. We cannot assure you that the Internal Revenue Service will not take
positions concerning tax consequences of the exchange offer which are different
from those discussed below. This discussion does not consider the effect of any
applicable foreign, state, local or other tax laws or estate or gift tax
considerations. This discussion also does not address the federal income tax
consequences to holders subject to special treatment under the federal income
tax laws, such as dealers in securities or foreign currency, tax-exempt
entities, banks, thrifts, insurance companies, persons that hold the notes as
part of a straddle, hedge or conversion transaction, persons that have a
functional currency other than the United States dollar, and investors in
pass-through entities.
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO YOU OF EXCHANGING OLD NOTES FOR NOTES PURSUANT TO THE EXCHANGE
OFFER, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX
LAWS.
The exchange of old notes for notes pursuant to the exchange offer will
not constitute a taxable exchange for federal income tax purposes. You will have
a tax basis in the notes equal to your tax basis in the old notes exchanged
therefor and your holding period for the notes will include your holding period
for the old notes exchanged therefor. Accordingly, the exchange should have no
material federal income tax consequences to you.
92
PLAN OF DISTRIBUTION
Each broker-dealer that receives notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus together with
any resale of those notes. This prospectus, as it may be amended or supplemented
from time to time, may be used by a broker-dealer in the resales of notes
received in exchange for old notes where those old notes were acquired as a
result of market-making activities or other trading activities. We have agreed
that for a period of up to 180 days after the expiration date, we will make this
prospectus, as amended or supplemented, available to any broker-dealer that
requests it in the letter of transmittal for use in any such resale.
We will not receive any proceeds from any sale of notes by
broker-dealers or any other persons. Notes received by broker-dealers for their
own account pursuant to the exchange offer may be sold from time to time in one
or more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such notes. Any broker-dealer that
resells notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The letter of transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
We have agreed to pay all expenses incident to our performance of, or
compliance with, the registration rights agreement and will indemnify the
holders of outstanding notes including any broker-dealers, and certain parties
related to such holders, against certain types of liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the notes offered hereby will be passed upon for us by
Latham & Watkins, LLP, Chicago, Illinois.
Certain matters concerning the Guarantors will be passed upon for us
by Cary A. Gaan, Senior Vice President, Secretary and General Counsel of Bally.
EXPERTS
Our consolidated balance sheets as of December 31, 2002 and 2001, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2002 included
in this prospectus have been audited by Ernst & Young LLP, independent auditors,
as stated in their report appearing herein and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
93
INDEX TO FINANCIAL STATEMENTS OF
BALLY TOTAL FITNESS HOLDING CORPORATION
Report of independent auditors F-2
Consolidated Balance Sheet at December 31, 2002 and 2001 F-3
Consolidated Statement of Income for the years ended December 31, 2002, 2001, and 2000 F-5
Consolidated Statement of Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000 F-6
Consolidated Statement of Cash Flows for the years ended December 31, 2002, 2001 and 2000 F-7
Notes to Consolidated Financial Statements for the years ended December 31, 2002, 2001 and 2000 F-9
Unaudited Condensed Consolidated Balance Sheet at June 30, 2003 F-33
Unaudited Consolidated Statement of Income for the three and six months ended June 30, 2003 and 2002 F-34
Unaudited Consolidated Statement of Stockholders' Equity for the six months ended June 30, 2003 F-36
Unaudited Consolidated Statement of Cash Flows for the six months ended June 30, 2003 and 2002 F-37
Notes to Unaudited Condensed Consolidated Financial Statements for the six months ended June 30, 2003 F-39
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Bally Total Fitness Holding Corporation
We have audited the accompanying consolidated balance sheets of Bally
Total Fitness Holding Corporation as of December 31, 2002 and 2001, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Bally Total Fitness Holding Corporation at December 31, 2002 and 2001, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.
As discussed in the Goodwill, trademarks and intangible assets note to
the consolidated financial statements, in 2002, the Company changed its method
of accounting for goodwill and intangible assets.
ERNST & YOUNG LLP
Chicago, Illinois
February 12, 2003, except for Note
"Condensed Consolidating Financial
Statements" as to which the date is
June 26, 2003 and Note "Subsequent
Events" as to which the date is
August 12, 2003
F-2
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31
----------------------------
2001 2002
------------- -------------
ASSETS
Current assets:
Cash and equivalents....................................... $ 9,310 $ 12,907
Installment contracts receivable, net...................... 254,412 271,531
Other current assets....................................... 99,098 92,764
------------- -------------
Total current assets.................................... 362,820 377,202
Installment contracts receivable, net........................ 273,607 251,074
Property and equipment, at cost:
Land....................................................... 38,125 43,415
Buildings.................................................. 140,972 150,228
Leasehold improvements..................................... 673,737 717,664
Equipment and furnishings.................................. 265,916 284,845
------------- -------------
1,118,750 1,196,152
Accumulated depreciation and amortization.................. (490,116) (538,613)
------------- -------------
Net property and equipment.............................. 628,634 657,539
Goodwill..................................................... 226,701 242,854
Trademarks................................................... 6,969 6,969
Intangible assets, less accumulated amortization of $8,873
and $9,453................................................. 3,367 2,786
Deferred income taxes........................................ 76,104 81,314
Deferred membership origination costs........................ 112,959 119,484
Other assets................................................. 25,729 32,652
------------- -------------
$ 1,716,890 $ 1,771,874
============= =============
See accompanying notes.
F-3
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31
----------------------------
2001 2002
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 50,471 $ 51,752
Income taxes payable....................................... 1,974 1,497
Deferred income taxes...................................... 32,346 29,303
Accrued liabilities........................................ 75,309 87,683
Current maturities of long-term debt....................... 25,302 28,904
Deferred revenues.......................................... 294,930 271,031
------------- -------------
Total current liabilities............................... 480,332 470,170
Long-term debt, less current maturities...................... 639,869 697,850
Other liabilities............................................ 12,555 10,689
Deferred revenues............................................ 71,400 63,689
Stockholders' equity:
Preferred stock, $.10 par value; 10,000,000 shares
authorized; none issued
Series A Junior Participating;
602,000 shares authorized; none issued
Common stock, $.01 par value;
60,200,000 shares authorized; 32,994,596 and
33,861,964 shares issued................................. 329 338
Contributed capital........................................ 657,546 670,561
Accumulated deficit........................................ (107,807) (104,279)
Unearned compensation (restricted stock)................... (26,559) (25,509)
Common stock in treasury, at cost, 614,039 and 668,539
shares.................................................. (10,775) (11,635)
------------- -------------
Total stockholders' equity.............................. 512,734 529,476
------------- -------------
$ 1,716,890 $ 1,771,874
============= =============
See accompanying notes.
F-4
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31
-------------------------------------------
2000 2001 2002
----------- -------------- --------------
Net revenues:
Membership revenue................................. $ 659,279 $ 689,547 $ 730,589
Products and services.............................. 110,869 144,926 217,667
Miscellaneous revenue.............................. 15,714 17,031 19,622
----------- -------------- --------------
785,862 851,504 967,878
Special charge to membership receivable reserve.... (55,000)
----------- -------------- --------------
785,862 851,504 912,878
Operating costs and expenses:
Fitness center operations.......................... 466,702 496,937 557,749
Products and services.............................. 71,716 91,376 141,570
Member processing and collection centers........... 43,486 42,304 45,340
Advertising........................................ 51,443 53,995 55,547
General and administrative......................... 28,964 27,291 32,004
Special charges.................................... 6,500 6,700 17,227
Depreciation and amortization...................... 65,605 72,924 74,346
----------- -------------- --------------
734,416 791,527 923,783
----------- -------------- --------------
Operating income (loss).............................. 51,446 59,977 (10,905)
Finance charges earned............................... 68,462 67,258 67,771
Interest expense..................................... (62,058) (58,848) (55,468)
Other, net........................................... 1,760 751 (566)
----------- -------------- --------------
8,164 9,161 11,737
----------- -------------- --------------
Income from continuing operations before income tax.. 59,610 69,138 832
Income tax benefit................................... 19,000 13,750 4,163
----------- -------------- --------------
Income from continuing operations.................... 78,610 82,888 4,995
Discontinued operations
Loss from discontinued operations (net of tax
benefit of $0.3 in 2002).......................... (2,181) (1,467)
----------- -------------- --------------
Net income........................................... $ 78,610 $ 80,707 $ 3,528
=========== ============== ==============
Basic earnings per common share
Income from continuing operations.................. $ 3.29 $ 2.99 $ 0.16
Loss from discontinued operations.................. -- (.08) (.05)
----------- -------------- --------------
Net income per common share........................ $ 3.29 $ 2.91 $ .11
=========== ============== ==============
Average common shares outstanding.................... 23,858,486 27,744,046 32,163,019
Diluted earnings per common share
Income from continuing operations.................. $ 2.84 $ 2.78 $ 0.15
Loss from discontinued operations.................. -- (.08) (.04)
----------- -------------- --------------
Net income per common share........................ $ 2.84 $ 2.70 $ .11
=========== ============== ==============
Average diluted common shares outstanding
(includes 3,793,551, 2,104,154 and 822,712
common equivalent shares in 2000, 2001 and
2002, respectively)................................ 27,652,037 29,848,200 32,985,731
Pro forma amounts, assuming the new accounting
principle is applied retroactively (see note
"Subsequent Events"):
Income from continuing operations................ $ 73,138 $ 79,051 $ 6,566
Net Income....................................... 73,138 76,870 5,099
Basic net income per common share................ 3.07 2.77 .16
Diluted net income per common share.............. 2.64 2.58 .15
See accompanying notes.
F-5
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK UNEARNED
------------------- COMPENSATION COMMON TOTAL
PAR CONTRIBUTED ACCUMULATED (RESTRICTED STOCK IN STOCKHOLDERS'
SHARES VALUE CAPITAL DEFICIT STOCK) TREASURY EQUITY
------ ----- ------- ------- ------ -------- ------
Balance at December 31,
1999................... 23,755,394 $ 243 $ 498,093 $ (267,124) $ (7,978) $ (10,775) $ 212,459
Net income............... 78,610 78,610
Issuance of common stock
for acquisitions of
businesses............. 295,151 3 4,691 4,694
Restricted stock
activity............... 90,000 1 3,779 (3,779) 1
Issuance of common stock
under stock purchase
and option plans....... 212,401 2 2,076 2,078
---------- ----- --------- ---------- --------- --------- -------------
Balance at December 31,
2000................... 24,352,946 249 508,639 (188,514) (11,757) (10,775) 297,842
Net income............... 80,707 80,707
Sale of common stock..... 2,238,821 22 53,805 53,827
Exercise of warrants..... 2,207,104 22 11,587 11,609
Issuance of common stock
for acquisitions of
businesses............. 2,987,865 30 61,863 61,893
Restricted stock
activity............... 352,500 4 14,802 (14,802) 4
Issuance of common stock
under stock purchase
and option plans....... 241,321 2 2,850 2,852
Income tax benefit from
stock options
exercised.............. 4,000 4,000
---------- ----- --------- ---------- --------- --------- -------------
Balance at December 31,
2001................... 32,380,557 329 657,546 (107,807) (26,559) (10,775) 512,734
Net income............... 3,528 3,528
Exercise of warrants..... 250,000 3 2,510 2,513
Issuance of common stock
for acquisitions of
businesses............. 382,827 4 8,851 8,855
Restricted stock
activity............... 110,000 1 (125) 1,050 926
Issuance of common stock
under stock purchase
and option plans....... 124,541 1 1,779 1,780
Purchases of common
stock.................. (54,500) (860) (860)
---------- ----- --------- ---------- --------- --------- -------------
Balance at December 31,
2002................... 33,193,425 $ 338 $ 670,561 $ (104,279) $ (25,509) $ (11,635) $ 529,476
========== ===== ========= ========== ========= ========= =============
See accompanying notes.
F-6
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
---------------------------------------
2000 2001 2002
------------- ------------- -----------
Operating:
Net income............................................ $ 78,610 $ 80,707 $ 3,528
Adjustments to reconcile to cash provided:
Depreciation and amortization, including
amortization included in interest expense........ 69,381 76,865 78,236
Changes in operating assets and liabilities........ (98,824) (55,800) (29,189)
Stock-based compensation........................... 926
------------ ------------ -----------
Cash provided by operating activities............ 49,167 101,772 53,501
Investing:
Purchases and construction of property and
equipment.......................................... (104,739) (91,171) (75,140)
Purchases of real estate.............................. (3,655) (11,510)
Acquisitions of businesses and other.................. (4,066) (30,692) (6,610)
------------ ------------ -----------
Cash used in investing activities................ (112,460) (121,863) (93,260)
Financing:
Debt transactions:
Net borrowings (repayments) under revolving
credit agreement................................. 69,500 (51,500) 31,500
Net borrowings (repayments) of other long-term
debt............................................. (18,661) 4,104 9,928
Debt issuance and refinancing costs................ (4,569) (1,505)
------------ ------------ -----------
Cash provided by (used in) debt
transactions.................................. 50,839 (51,965) 39,923
Equity transactions:
Proceeds from sale of common stock................. 53,827
Proceeds from exercise of warrants................. 11,609 2,513
Proceeds from issuance of common stock under
stock purchase and option plans.................. 2,078 2,856 1,780
Purchases of common stock for treasury............. (860)
------------ ------------ -----------
Cash provided by financing activities............ 52,917 16,327 43,356
------------ ------------ -----------
Increase (decrease) in cash and equivalents............. (10,376) (3,764) 3,597
Cash and equivalents, beginning of year................. 23,450 13,074 9,310
------------ ------------ -----------
Cash and equivalents, end of year....................... $ 13,074 $ 9,310 $ 12,907
============ ============ ===========
See accompanying notes.
F-7
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
--------------------------------------
2000 2001 2002
------------- ------------- -----------
Supplemental cash flows information:
Changes in operating assets and liabilities, net of
effects from acquisitions or sales, were as follows:
Decrease (increase) in installment contracts
receivable....................................... $ (65,226) $ 5,189 $ 5,414
Decrease (increase) in other current and other
assets........................................... (22,397) (3,195) 6,272
Decrease (increase) in deferred membership
origination costs................................ (7,934) 1,170 (6,525)
Increase (decrease) in accounts payable............ 1,974 (5,600) 1,281
Decrease in income taxes........................... (20,132) (16,780) (4,814)
Increase in accrued and other liabilities.......... 2,496 382 9,592
Increase (decrease) in deferred revenues........... 12,395 (36,966) (40,409)
----------- ----------- -----------
$ (98,824) $ (55,800) $ (29,189)
=========== =========== ===========
Cash payments for interest and income taxes were as follows:
Interest paid......................................... $ 61,982 $ 60,256 $ 53,936
Interest capitalized.................................. (3,959) (3,984) (2,942)
Income taxes paid, net................................ 1,132 3,029 403
Investing and financing activities exclude the following
non-cash transactions:
Acquisition of property and equipment through
capital leases/borrowings........................ $ 28,892 $ 23,472 $ 10,991
Acquisitions of businesses with common stock....... 4,695 62,132 8,855
Restricted stock activity.......................... 3,779 14,802 (1,050)
Assumed debt related to acquisitions of
businesses....................................... 7,577 3,862 2,846
Tax benefit from exercise of employee stock
options.......................................... 4,000
See accompanying notes.
F-8
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
that it controls. The Company, through its subsidiaries, is a nationwide
commercial operator of fitness centers with 412 facilities, at February 28,
2003, located in 29 states and Canada. The Company operates in one industry
segment, and all significant revenues arise from the commercial operation of
fitness centers, primarily in major metropolitan areas in the United States and
Canada. Unless otherwise specified in the text, references to the Company
include the Company and its subsidiaries.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which require the
Company's management to make estimates and assumptions that affect the amounts
reported therein. Actual results could vary from such estimates. Certain
prior-year amounts have been reclassified to conform to the current-year
presentation.
Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents. The carrying amount of
cash equivalents approximates fair value due to the short maturity of those
instruments.
Property and Equipment
Depreciation of buildings, equipment and furnishings (including assets under
capital leases) is provided on the straight-line method over the estimated
useful lives of the related assets. Buildings are depreciated over 30 years and
useful lives for equipment and furnishings range from three to 15 years.
Amortization of leasehold improvements is provided on the straight-line method
over the lesser of the estimated useful lives of the improvements or the lease
periods. Depreciation and amortization of property and equipment was $73,793,
$64,875 and $57,875 for 2002, 2001 and 2000, respectively.
Deferred Finance Costs
Deferred finance costs are amortized over the terms of the related debt
using the straight-line method. Included in "Other assets" at December 31, 2002
and 2001 were deferred finance costs of $10,015 and $12,056 respectively, net of
accumulated amortization of $17,517 and $13,874, respectively.
Membership Revenue Recognition
The Company's fitness centers primarily offer a dues membership, which
permits members, upon paying an initial membership fee, which may be financed,
to maintain their membership on a month-to-month basis as long as monthly dues
payments are made. Initial membership fees may be paid in full when members join
or may be financed via installment contracts over periods ranging up to 36
months. Revenues from initial membership fees (net of any related allowances)
are deferred and recognized ratably over the weighted-average expected life of
the memberships, which for paid-in-full memberships and financed memberships
sold have been calculated to be 36 months and 22 months, respectively. Costs
directly related to the origination of memberships (substantially all of which
are sales commissions paid) are also deferred and are amortized using the same
methodology as for initial membership fees described above. The provision for
doubtful receivables and cancellations is charged directly against membership
revenue. 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,
F-9
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
rates for comparable consumer financing. 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, 2002 and 2001 are as
follows:
CURRENT LONG-TERM TOTAL
----------- --------- -----------
2002:
Financed initial membership fees deferred... $ 194,414 $ 39,154 $ 233,568
Paid-in-full initial membership fees
deferred................................. 17,039 11,050 28,089
Prepaid dues................................ 59,578 13,485 73,063
----------- --------- -----------
$ 271,031 $ 63,689 $ 334,720
=========== ========= ===========
2001:
Financed initial membership fees deferred... $ 223,577 $ 44,440 $ 268,017
Paid-in-full initial membership fees
deferred................................. 18,123 11,995 30,118
Prepaid dues................................ 53,230 14,965 68,195
----------- --------- -----------
$ 294,930 $ 71,400 $ 366,330
=========== ========= ===========
Gross committed membership fees represent the gross contracted value of
memberships originated during the periods, inclusive of initial membership fees,
monthly dues, finance charges, and products and services included in membership
programs. It is measured on a gross basis before consideration of our provision
for doubtful accounts and cancellations and without deferral of initiation fee
revenue, and includes the future potential collection of dues revenue over the
initial term of membership. This data is presented in order to expand the
presentation of originating membership data as the Company now operates under
several brands, membership structures and an evolving menu of products and
services accompanying certain membership programs. The following is a
reconciliation of gross committed membership fees to initial membership fees
originated, net for the years ended December 31, 2002, 2001 and 2000:
2000 2001 2002
------------- ------------- -------------
Gross committed membership fees............. $ 1,073,775 $ 1,073,619 $ 1,132,634
Less: Committed monthly dues................ (141,286) (144,939) (233,039)
Provision for doubtful receivables and
cancellations.......................... (337,076) (335,628) (329,308)
Unearned finance charges and other........ (165,976) (169,103) (172,947)
Products and services revenues included
in membership programs................. (41,888) (55,155) (78,246)
------------- ------------- -------------
Initial membership fees originated,
net....................................... $ 387,549 $ 368,794 $ 319,094
============= ============= =============
Components of membership revenue as presented in the accompanying
consolidated statement of income for the years ended December 31, 2002, 2001 and
2000 are as follows:
2000 2001 2002
------------ ----------- -----------
Initial membership fees:
Originated, net................... $ 387,549 $ 368,794 $ 319,094
Decrease (increase) in deferral... (10,449) 24,011 36,478
----------- ----------- -----------
377,100 392,805 355,572
Dues:
Dues collected.................... 284,125 283,787 371,086
Decrease (increase) in deferral... (1,946) 12,955 3,931
----------- ----------- -----------
282,179 296,742 375,017
----------- ----------- -----------
Membership revenues................. $ 659,279 $ 689,547 $ 730,589
=========== =========== ===========
F-10
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Products and Services
2000 2001 2002
----------- ----------- -----------
Net revenues:
Retail and nutritional supplements:
Membership programs............... $ 23,507 $ 30,034 $ 28,787
Direct sales...................... 33,251 43,099 53,757
Personal training:
Membership programs............... 18,381 25,121 49,459
Direct sales...................... 31,203 39,347 78,968
Financial services................... 4,527 7,325 6,696
----------- ----------- -----------
110,869 144,926 217,667
Direct operating costs and expenses:
Retail and nutritional supplements... 41,183 51,629 64,201
Personal training.................... 30,533 39,747 77,369
----------- ----------- -----------
71,716 91,376 141,570
----------- ----------- -----------
Direct operating margin................ $ 39,153 $ 53,550 $ 76,097
=========== =========== ===========
The Company offers personal training services in most club locations and
operated approximately 392, 365 and 340 retail store locations within clubs as
of December 31, 2002, 2001 and 2000, respectively. The Company offers
Bally-branded and third-party nutritional supplements in its retail store
locations and through direct sales to members. Retail and nutritional product
inventory is carried at the lower of cost or market value. Sales of multiple-
session personal training packages are deferred and recognized as personal
training services are performed.
The Company also offers a number of new membership programs, which include
Bally-branded nutritional supplements and personal training services. The value
of products and services revenue included in new membership programs is
determined based on the retail value of such products and services, and is
recognized upon delivery to new members as "products and services" revenue in
the accompanying consolidated statement of income.
Stock-based Compensation
The Company has stock-based employee compensation plans which are described
more fully in the Stock plans note to the consolidated financial statements. The
Company has elected to account for stock-based compensation by applying
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB No. 25), because the alternative fair value accounting provided
for under Statements of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), 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.
EARNINGS PER COMMON SHARE
Basic earnings per common share is computed by dividing net income by the
weighted-average number of shares of common stock outstanding during each year,
which totaled 32,163,019 shares, 27,744,046 shares and 23,858,486 shares for
2002, 2001 and 2000, respectively. Diluted earnings per common share is computed
by dividing net income by the weighted-average number of shares of common stock
and common stock equivalents outstanding during each year, which totaled
32,985,731 shares, 29,848,200 shares and 27,652,037 shares for 2002, 2001 and
2000, respectively. Common stock equivalents represent the dilutive effect of
the assumed exercise of outstanding warrants and stock options. Common stock
equivalents increased the weighted-average number of shares outstanding for
diluted earnings per common share by 822,712 shares, 2,104,154 shares and
3,793,551 shares for 2002, 2001 and 2000, respectively. Options outstanding to
purchase 3,049,375 shares, 1,416,300 shares and 1,446,218 shares of common stock
at December 31, 2002, 2001, and 2000, respectively, were not included in the
computation of diluted earnings per share because the exercise prices of the
options
F-11
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
were greater than the average market prices of the Company's common shares. The
range of exercise prices per share for these options was between $12.00 and
$36.00, $21.38 and $36.00, and $26.25 and $36.00 at December 31, 2002, 2001, and
2000, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations (SFAS No. 143). SFAS No. 143 addresses the financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets. It requires that we recognize the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are then capitalized as part of the carrying amount of
the long-lived asset. In the first quarter of 2003, the Company implemented the
provisions of Statement of Financial Accounting Standards No. 143, Accounting
for Asset Retirement Obligations. As a result, a non-cash cumulative adjustment
of $165 was recorded to provide for estimated future restoration obligations on
the Company's leaseholds.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS
No. 146). SFAS No. 146 addresses the accounting and reporting for costs
associated with restructuring activities. This new standard changes the timing
of the recognition of restructuring charges. Liabilities for restructuring costs
will be required to be recognized when the liability is incurred rather than
when we commit to the plan. SFAS No. 146 is effective for restructuring activity
initiated after December 31, 2002. We do not anticipate that the adoption of
this statement will have a material impact on our financial position, results of
operations or cash flows.
GOODWILL, TRADEMARKS AND INTANGIBLE ASSETS
Prior to the implementation in the first quarter of 2002 of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142), goodwill had been amortized on the straight-line method over
periods ranging up to 40 years from dates of acquisition. Amounts assigned to
acquired operating lease rights, are being amortized on the straight-line method
over the remaining lease periods (six to 20 years). Also in 2000, we purchased
certain marks, including the "Bally Total Fitness" service mark, from their
owner. Prior to this purchase, the marks were used pursuant to a long-term
trademark license agreement. At December 31, 2002, these trademarks had a net
book value of $6,969. Prior to the implementation of SFAS No. 142 the Company
annually evaluated whether the carrying value of goodwill warranted revision,
generally considering expectations of future profitability and cash flows
(undiscounted and without interest charges) on a consolidated basis. No
revisions have been recorded. As a result of the adoption of SFAS No. 142 the
Company ceased amortization of goodwill and indefinite lived trademarks in 2002
in accordance with the provisions of this standard. Upon adoption, the Company
determined that the value of recorded goodwill was not impaired. Based on the
decline in the Company's common stock price below book value per share, the
Company performed an assessment of business valuation and concluded that no
impairment of goodwill has occurred based on current projections of future cash
flows. The following table presents prior year net income and earnings per share
adjusted to add back goodwill and trademark amortization:
F-12
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED 2000
--------------------------------------------------
EARNINGS PER SHARE
------------------------------
NET INCOME BASIC DILUTED
----------- ---------- ---------
As reported $ 78,610 $ 3.29 $ 2.84
Add back: amortization 7,051 0.30 0.26
----------- ---------- ---------
As adjusted $ 85,661 $ 3.59 $ 3.10
=========== ========== =========
YEAR ENDED 2001
--------------------------------------------------
EARNINGS PER SHARE
------------------------------
NET INCOME BASIC DILUTED
----------- ---------- ---------
As reported $ 80,707 $ 2.91 $ 2.70
Add back: amortization 7,632 0.27 0.26
----------- ---------- ---------
As adjusted $ 88,339 $ 3.18 $ 2.96
=========== ========== =========
ACQUISITIONS
In April 2002, we completed the acquisition of Planet Fitness, a fitness
chain in the New England area. The purchase price of approximately $12,200
included $3,350 in cash, $2,900 in assumed debt and approximately 383,000 shares
of the Company's common stock. The portion of the purchase price allocated to
goodwill was $11,521. On December 31, 2001, we acquired Crunch Fitness, a
privately held operator of 19 fitness centers located in New York City, Atlanta,
Chicago, San Francisco, Los Angeles and Miami. The purchase price of
approximately $90,000 included $23,500 in cash, $3,862 in assumed debt and
approximately three million shares of the Company's common stock. The portion of
the purchase price allocated to goodwill totaled approximately $89,000. On an
unaudited proforma basis, excluding goodwill amortization, Crunch had 2001 net
revenues of approximately $74,400 and operating income of approximately $10,100.
During 2000, we acquired 13 fitness centers in the Portland, Oregon area, three
fitness centers in the San Diego, California area and one fitness center in
Pittsburgh, Pennsylvania.
SPECIAL CHARGES
In connection with intentions to seek alternatives for the financing portion
of our business model, management undertook a study to determine the net
realizable values of recent years' sales activity and membership installment
contracts receivable on an accelerated monetization basis. Previously, the
method for estimating the adequacy of balance sheet reserves did not assume an
accelerated monetization scenario. Given that the receivables portfolio may be
substantially monetized during the next 12 to 18 months, strengthening of our
membership receivable reserves was warranted and a pretax non-cash charge of
$55,000 which was netted against net revenues has been provided in the fourth
quarter of 2002.
A fourth quarter 2002 special charge of $7,330 was recorded to provide for
amounts related to a separation agreement entered into when our former CEO
retired. Also in the fourth quarter, we recorded a $3,400 write down of
inventory to recognize inventory shortages discovered upon installation of a
more sophisticated in-club computer system. During the third quarter of 2002, we
recorded a special charge of $6,500 to settle a class action lawsuit arising in
the early 1990's. In the first quarter of 2002, we reduced our tax valuation
allowance against net operating losses realized in prior periods by $4,000. This
adjustment decreased the income tax provision, increasing net income.
In the third quarter of 2001, we recorded $6,700 of special charges of which
$4,200 was principally related to cancelled or reformatted marketing events and
other direct or indirect costs from disruptions and shutdowns of various club
operations
F-13
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
and programs resulting from the September 11th tragedies. Special charges also
included a one-time markdown of retail apparel in connection with management's
strategic repositioning of in-club retail stores, adding juice bars to replace
slow moving, lower margin fashion apparel.
In the fourth quarter of 2000, a non-cash charge of $6,500 was recorded for
the write off of third-party internet investments.
INSTALLMENT CONTRACTS RECEIVABLE
2001 2002
----------- -----------
Current:
Installment contracts receivable........................ $ 366,981 $ 404,707
Unearned finance charges................................ (44,898) (36,015)
Allowance for doubtful receivables and cancellations.... (67,671) (97,161)
----------- -----------
$ 254,412 $ 271,531
=========== ===========
Long-term:
Installment contracts receivable........................ $ 358,115 $ 343,749
Unearned finance charges................................ (21,675) (22,396)
Allowance for doubtful receivables and cancellations.... (62,833) (70,279)
----------- -----------
$ 273,607 $ 251,074
=========== ===========
The carrying amount of installment contracts receivable at December 31, 2002
and 2001 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. Installment contracts receivable are generally written-off
after 90 days for members who do not make a first payment and after 180 days for
other account delinquencies. The Company completed one bulk sale of its
membership receivable portfolio in 2002 and two bulk sales in 2001. These sales,
to a major financial institution at net book value, consisted of a random
cross-section of the Company's membership receivable portfolio and yielded
initial proceeds of $23,345 and $105,000 in 2002 and 2001, respectively. The
Company services the sold accounts and remits collections to the financial
institution less a servicing fee. The Company has retained in its installment
contracts receivable balance at December 31, 2002 and 2001, amounts by which the
sold portion of the portfolio exceeded the advance rate proceeds, which includes
the value of future accounts to be written-off, related allowances and expected
additional sales proceeds.
OTHER CURRENT ASSETS
2001 2002
----------- -----------
Dues receivable....................................... $ 42,785 $ 42,171
Inventory............................................. 17,161 12,967
Other................................................. 39,152 37,626
----------- -----------
$ 99,098 $ 92,764
=========== ===========
ACCRUED LIABILITIES
2001 2002
----------- -----------
Payroll and benefit-related liabilities $ 27,408 $ 32,526
Interest............................... 6,274 7,092
Taxes other than income taxes.......... 7,668 5,187
Other.................................. 33,959 42,878
----------- -----------
$ 75,309 $ 87,683
=========== ===========
F-14
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
LONG-TERM DEBT
2001 2002
----------- -----------
Nonsubordinated:
Securitization, Series 2001-1................................. $ 50,000 $ 155,000
Securitization, Series 1996-1................................. 74,581
Term loan, due 2004........................................... 134,750 132,910
Revolving credit facility..................................... 18,000 49,500
Capital lease obligations..................................... 34,044 35,548
Other secured and unsecured obligations....................... 54,771 54,602
Subordinated:
9 7/8% Series B Senior Subordinated Notes due 2007............ 236 236
9 7/8% Series D Senior Subordinated Notes due 2007, less
unamortized discount of $976 and $807...................... 298,789 298,958
----------- -----------
Total long-term debt............................................ 665,171 726,754
----------- -----------
Current maturities of long-term debt............................ (25,302) (28,904)
----------- -----------
Long-term debt, less current maturities......................... $ 639,869 $ 697,850
=========== ===========
In December 2001, the Company amended its three-year bank credit facility,
increasing the aggregate amount available to $225,000, consisting of a
three-year, $135,000 term loan due November 2004 and a $90,000 three-year
revolving credit facility maturing November 2004. The amount available under the
revolving credit facility is reduced by any outstanding letters of credit, which
cannot exceed $30,000. At December 31, 2002, $49,500 had been drawn on the
revolving credit facility and outstanding letters of credit totaled $4,610. The
rate of interest on borrowings is at the Company's option, generally based upon
either the agent bank's prime rate plus 1.75% or a Eurodollar rate plus 2.75%
for the revolving credit facility and the agent bank's prime rate plus 2.50% or
a Eurodollar rate plus 3.50% for the term loan. A fee of 1.75% on outstanding
letters of credit is payable quarterly. A commitment fee of one-half of 1% is
payable quarterly on the unused portion of the revolving credit facility. The
credit facility is secured by substantially all real and personal property
(excluding installment contracts receivable) of the Company. The term loan is
repayable in quarterly installments of $460, which commenced March 31, 2002 and
the final balance becomes due in November 2004.
In December 1996, the Company refinanced its securitization facility by
completing a private placement of asset-backed securities (the "Securitization")
pursuant to the H&T Master Trust (the "Trust"). The Trust includes a portfolio
of substantially all of the Company's installment contracts receivable from
membership sales and the proceeds thereof.
The amortization of Series 1996-1 commenced in August 2001, and the Series
1996-1 was repaid in full in August 2002. In November 2001, the Company
established a $155,000 floating rate accounts receivable-backed revolving
facility (the "Series 2001-1"), under the Trust to refinance the Series 1996-1
securitization. As of December 31, 2002, the revolving balance under the Series
2001-1 certificates was $155,000. The Series 2001-1 certificates bear interest
(1.41% at December 31, 2002) at a floating commercial paper rate capped at 8.50%
pursuant to an interest rate cap agreement. An administrative fee of 1.00% and a
program fee of .75% on the outstanding certificate amount is payable monthly. A
commitment fee of .50% of the total commitment, reduced by the outstanding
certificate amount is also payable monthly. Through November 2003, the principal
amount of the Series 2001-1 floating certificates is variable, 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 December 2003, 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 January 2007.
The Company leases certain equipment under capital leases expiring in
periods ranging from one to five years. Included in "Property and equipment" at
December 31, 2002 and 2001 were assets under capital leases of $46,740 and
$43,016, respectively, net of accumulated amortization of $31,043 and $22,198,
respectively.
F-15
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
In December 1998, the Company, through a private placement, issued
$75,000 aggregate principal amount of 9 7/8% Series C Senior Subordinated Notes
due 2007 (the "Series C Notes") at a discount to yield an interest rate of
10.2%. The Series C Notes were pari passu with the $225,000 Series B Notes
issued in 1997. In June 1999, the Company exchanged the Series B and Series C
Notes for a like principal amount of 9 7/8% Series D Senior Subordinated Notes
due 2007 (the "Series D Notes"). The terms of the Series D Notes are
substantially identical to the terms of the Series B and Series C Notes. The
Series D Notes are not subject to any sinking fund requirement but may be
redeemed beginning in October 2002, in whole or in part, with premiums ranging
from 4.9% in December 2002 to zero in 2005 and thereafter. The payment of the
Series D and the Series B Notes not exchanged is subordinated to the payment in
full of all senior indebtedness of the Company, as defined (approximately
$425,000 at December 31, 2002).
The revolving credit agreement and the indentures for the 9 7/8% Series
B and Series D Notes contain covenants that, among other things and subject to
certain exceptions, may limit the ability of the Company to incur additional
indebtedness, pay dividends, prepay certain indebtedness, dispose of certain
assets, create liens and make certain investments or acquisitions. The revolving
credit agreement also requires the maintenance of certain financial covenants.
Maturities of long-term debt and future minimum payments under capital
leases, together with the present value of future minimum rentals as of December
31, 2002, are as follows:
LONG-TERM CAPITAL
DEBT LEASES TOTAL
----------- ----------- -----------
2003................................ $ 17,607 $ 14,205 $ 31,812
2004................................ 350,890 10,965 361,855
2005................................ 6,867 7,502 14,369
2006................................ 4,430 3,212 7,642
2007................................ 308,266 1,687 309,953
Thereafter.......................... 3,146 10,697 13,843
----------- ----------- -----------
691,206 48,268 739,474
Less amount representing interest... (12,720) (12,720)
----------- ----------- -----------
$ 691,206 $ 35,548 $ 726,754
=========== =========== ===========
The fair value of the Company's long-term debt at December 31, 2002 and
2001 approximates its carrying amount except for the Company's subordinated
debt, which had a fair market value (based on quoted market prices) of $269,640
and $305,000 at December 31, 2002 and 2001, respectively. The fair values are
not necessarily indicative of the amounts the Company could acquire the debt for
in a purchase or redemption.
INCOME TAXES
The income tax benefit applicable to income from continuing operations
before income taxes consists of the following:
2000 2001 2002
------------ ------------ -----------
Current:
Federal......................... $ 266 $ 2,008 $ (1,654)
State and other................. 1,000 1,250 1,578
Deferred.......................... 22,438 22,618 817
Reversal of valuation allowance... (42,704) (39,626) (4,904)
----------- ----------- ----------
$ (19,000) $ (13,750) $ (4,163)
=========== =========== ==========
F-16
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, 2002 and 2001, along with
their classification, are as follows:
2001 2002
------------------------- -------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
----------- ----------- ----------- -----------
Installment contract revenues......... $ $ 53,637 $ $ 58,872
Amounts not yet deducted for tax
purposes:
Bad debts........................... 48,543 72,004
Other............................... 12,050 19,816
Amounts not yet deducted for book
purposes:
Deferred membership origination
costs............................ 46,701 48,951
Depreciation and capitalized
costs............................ 1,500 1,897
Other, net.......................... 18,220 26,915
Tax loss carryforwards................ 176,186 174,512
----------- ----------- ----------- -----------
238,279 $ 118,558 268,229 $ 134,738
=========== ===========
Valuation allowance................... (75,963) (81,480)
----------- -----------
$ 162,316 $ 186,749
=========== ===========
Current............................... $ 17,625 $ 49,971 $ 35,827 $ 65,130
Long-term............................. 144,691 68,587 150,922 69,608
----------- ----------- ----------- -----------
$ 162,316 $ 118,558 $ 186,749 $ 134,738
=========== =========== =========== ===========
At December 31, 2002, estimated federal Alternative Minimum Tax ("AMT")
credits and tax loss carryforwards of $3,289 and $362,267, respectively, have
been recorded by the Company. The AMT credits can be carried forward
indefinitely, while the tax loss carryfowards expire beginning in 2011 through
2021. In addition, the Company has substantial state tax loss carryforwards
which began to expire in 2002 and fully expire through 2022. Based upon the
Company's past performance and the expiration dates of its carryfowards, the
ultimate realization of all of the Company's deferred tax assets cannot be
assured. Accordingly, a valuation allowance has been recorded to reduce deferred
tax assets to a level which, more likely than not, will be realized.
In accordance with Statement of Financial Accounting Standards No. 109
Accounting for Income Taxes, the Company reviewed the likelihood of realizing
the future benefits of tax loss carryforwards. Based on consistent and growing
profitability, before special charges, over the past five years and reasonably
expected continuation of these trends, the Company reduced its tax valuation
allowance against net operating losses realized in prior periods by $4,000 and
$19,000 during 2002 and 2001, respectively. The adjustment in 2002 decreased the
income tax provision by $4,000, increasing net income. The adjustment in 2001
decreased the income tax provision by $15,000, increasing net income, and
increased paid-in-capital by $4,000. The increase to paid-in-capital was for the
tax benefit associated with the Company's stock option and stock purchase plans.
The Company will continue to review and evaluate the remaining valuation
allowance periodically.
F-17
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 income from continuing operations
before income taxes is as follows:
2000 2001 2002
------------ ------------ -----------
Provision (benefit) at U.S. statutory tax rate
(35%)........................................ $ 20,863 $ 24,198 $ 291
Add (deduct):
Benefit for change in valuation allowance.... (42,704) (39,626) (4,904)
State income taxes, net of related federal
income tax effect and valuation
allowance................................. 822 813 1,037
Amortization of cost in excess of acquired
assets.................................... 1,953 2,168
Other, net................................... 66 (1,303) (587)
----------- ----------- ----------
Income tax benefit............................. $ (19,000) $ (13,750) $ (4,163)
=========== =========== ==========
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 the Company's
common stock, par value $.01 per share, ("Common Stock") during the related
quarter. In the event of liquidation, the holders of the shares of Series A
Junior Stock will be entitled to a preferential liquidation payment equal to the
greater of (a) $100 per share and (b) an amount equal to 100 times the
liquidation payment made per share of Common Stock. Each share of Series A
Junior Stock will have 100 votes, voting together with the shares of Common
Stock. Finally, in the event of any merger, consolidation or other transaction
in which shares of Common Stock are exchanged, each share of Series A Junior
Stock will be entitled to receive 100 times the amount received per share of
Common Stock. These rights are protected by customary anti-dilution provisions.
The Board of Directors of the Company adopted a stockholders rights
plan (the "Stockholder Rights Plan") and issued and distributed a stock purchase
right ("Right") for each share of Common Stock. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Junior Stock at a price of $40.00 per one one-hundredth of a share of
Series A Junior Stock, subject to adjustment (the "Purchase Price").
The Rights are not exercisable or transferable apart from the Common
Stock until the occurrence of one of the following: (i) 10 days (or such later
date as may be determined by action of the Board of Directors of the Company
prior to such time as any person or group of affiliated persons becomes an
Acquiring Person) after the date of public announcement that a person (other
than an Exempt Person, as defined below) or group of affiliated or associated
persons has acquired, or obtained the right to acquire, beneficial ownership of
10% or more of the Common Stock (15% for certain institutional holders) (an
"Acquiring Person"), or (ii) 10 days after the date of the commencement of a
tender offer or exchange offer by a person (other than an Exempt Person) or
group of affiliated or associated persons, the consummation of which would
result in beneficial ownership by such person or group of 20% or more of the
outstanding shares of Common Stock. "Exempt Persons" include the Company, any
subsidiary of the Company, employee benefit plans of the Company, and directors
of the Company on January 5, 1996 who were also officers of the Company and
Bally Entertainment Corporation.
In the event that, at any time after a person or group of affiliated or
associated persons has become an Acquiring Person, (i) the Company consolidates
with or merges with or into any person and is not the surviving corporation,
(ii) any person merges with or into the Company and the Company is the surviving
corporation, but the shares of Common Stock are changed or exchanged, or (iii)
50% or more of the Company's assets or earning power are sold, each holder of a
Right will thereafter have the right to receive, upon the exercise thereof at
the then-current exercise price of the Right, that number of shares of Common
Stock (or under certain circumstances, an economically equivalent security or
securities) of such other person which at the time of such transaction would
have a market value of two times the exercise price of the Right. The
F-18
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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, 2002, 7,473,158 shares of Common Stock were reserved
for future issuance (735,701 shares in connection with outstanding warrants and
6,737,457 shares in connection with certain stock plans).
WARRANTS AND STOCK TRANSACTIONS
In July 1997, in connection with a $7,500 bridge loan provided to the
Company by an affiliate of an underwriter of the August 1997 public offering of
Common Stock, the Company issued warrants entitling the affiliate to acquire
250,000 shares of Common Stock at an exercise price of $10.05 per share. During
2002, these warrants were exercised, with net proceeds to the Company of
approximately $2,500.
The Company issued warrants in 1996, which as of December 31, 2002,
were held by the former Chairman of the Board of Directors, President and Chief
Executive Officer of the Company, entitling him to acquire 735,701 shares of
Common Stock at an exercise price of $5.26 per share, subject to reduction of
the exercise price by a maximum of $1.00 per share based on the closing price of
Common Stock on the day immediately prior to exercise of the warrant. The
warrants expire December 31, 2007.
In 2001, the Company sold 2,238,821 shares of common stock to the
public, and the Estate of Arthur M. Goldberg, the former Chairman of the
Company, exercised an outstanding warrant to purchase 2,207,104 shares of common
stock which were sold to the public. The Company received net proceeds from
these transactions of approximately $65,000, which was initially used to reduce
bank debt and subsequently to fund a portion of capital expenditures.
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, 2002, 30,000 shares of Common
Stock were available for future grant under the Directors' Plan. Stock options
may not be granted under the Directors' Plan after January 3, 2006.
Pursuant to the Directors' Plan, non-employee directors of the Company
are granted an option to purchase 5,000 shares of Common Stock upon the
commencement of service on the Board of Directors, with another option to
purchase 5,000 shares of Common Stock granted on the second anniversary thereof.
Additional grants of options may be made from time to time pursuant to the
Directors' Plan. In September 2001 and December 2000, options to purchase 5,000
shares of Common Stock were granted to each non-employee director of the
Company. Options under the Directors' Plan are generally granted with an
exercise price equal to the fair market value of the Common Stock at the date of
grant. Option grants under the Directors'
F-19
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Plan become exercisable in three equal annual installments commencing one year
from the date of grant and have a 10-year term.
Also in January 1996, the Board of Directors of the Company adopted the
1996 Long-Term Incentive Plan (the "Incentive Plan"). The Incentive Plan
provides for the grant of non-qualified stock options, incentive stock options
and compensatory restricted stock awards (collectively "Awards") to officers and
key employees of the Company. Initially, 2,100,000 shares of Common Stock were
reserved for issuance under the Incentive Plan. In November 1997, June 1999,
December 2000 and June 2002 the Incentive Plan was amended to increase the
aggregate number of shares of Common Stock that may be granted under the
Incentive Plan to an aggregate of 8,600,000 shares. At December 31, 2002,
2,803,979 shares of Common Stock were available for future grant under the
Incentive Plan. Awards may not be granted under the Incentive Plan after January
3, 2006.
Pursuant to the Incentive Plan, non-qualified stock options are
generally granted with an exercise price equal to the fair market value of the
Common Stock at the date of grant. Incentive stock options must be granted at
not less than the fair market value of the Common Stock at the date of grant.
Option grants become exercisable at the discretion of the Compensation Committee
of the Board of Directors (the "Compensation Committee"), generally in three
equal annual installments commencing one year from the date of grant. Option
grants in 2002, 2001 and 2000 have 10-year terms.
A summary of 2002, 2001 and 2000 stock option activity under the
Directors' Plan and Incentive Plan is as follows:
NUMBER
OF SHARES WEIGHTED- RANGE OF
REPRESENTED AVERAGE EXERCISE
BY OPTIONS PRICE PRICES
----------- --------- -------------
Outstanding at December 31, 1999 - 1,508,120 of which were exercisable 2,931,096 $ 17.97 $4.13 - 36.00
Granted 636,350 27.92 26.25 - 27.94
Exercised (171,741) 9.15 4.13 - 18.50
Forfeited (68,525) 25.24 4.13 - 36.00
---------
Outstanding at December 31, 2000 - 1,996,650 of which were exercisable 3,327,180 20.18 4.13 - 36.00
Granted 691,375 20.24 20.20 - 25.30
Exercised (201,567) 9.41 4.13 - 24.38
Forfeited (135,160) 16.89 4.13 - 36.00
---------
Outstanding at December 31, 2001 - 2,337,568 of which were exercisable 3,681,828 20.59 4.13 - 36.00
Granted 236,100 19.64 16.76 - 21.76
Exercised (63,540) 7.69 4.13 - 18.50
Forfeited (222,875) 25.08 4.13 - 36.00
---------
Outstanding at December 31, 2002 - 2,788,843 of which are exercisable 3,631,513 20.48 4.13 - 36.00
=========
F-20
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
A summary as of December 31, 2002, of options outstanding and options
exercisable is as follows:
Options outstanding Options exercisable
- ---------------------------------------------------------- ---------------------------
Weighted-
average
remaining Weighted- Weighted-
Range of Shares contractual average Shares average
exercise prices outstanding life (years) exercise price exercisable exercise price
- --------------- ----------- ------------ -------------- ----------- --------------
$ 4.13 - 5.13 582,138 3.3 $ 4.40 582,138 $ 4.40
12.00 - 18.50 1,004,047 5.6 17.46 904,047 17.54
20.20 - 29.00 1,453,378 8.2 23.87 710,708 25.31
32.94 - 36.00 591,950 6.6 33.10 591,950 33.10
- -------------- --------- ---------
$ 4.13 - 36.00 3,631,513 6.4 20.48 2,788,843 20.08
============== ========= =========
The Company has elected to follow APB No. 25, and related
Interpretations in accounting for its stock options because, as discussed below,
the alternative fair value accounting provided for under SFAS No. 123 requires
use of option valuation models that were not developed for use in valuing stock
options. Under APB No. 25, because the exercise price of the Company's stock
options equals the market price of the Common Stock on the date of grant, no
compensation expense is recognized.
Had compensation cost been determined for the Company's stock option
portion of the plans based on the fair value at the grant dates for awards under
those plans consistent with the alternative method set forth under SFAS No. 123,
the Company's pro forma net income (loss) would be:
2000 2001 2002
----------- ----------- ----------
Net income, before stock-based compensation
expense........................................... $ 78,610 $ 80,707 $ 4,454
Stock-based compensation expense.................. (926)
---------- ---------- ---------
Net income, as reported............................. 78,610 80,707 3,528
Less: stock-based compensation expense determined
under fair value based method.................. (4,634) (5,328) (5,357)
---------- ---------- ---------
Pro forma net income (loss)......................... $ 73,976 $ 75,379 $ (1,829)
========== ========== =========
Basic earnings (loss) per common share
As reported....................................... $ 3.29 $ 2.91 $ 0.11
Pro forma......................................... 3.10 2.72 (0.06)
Diluted earnings (loss) per common share
As reported....................................... 2.84 2.70 0.11
Pro forma......................................... 2.68 2.53 (0.06)
Weighted-average fair value of options granted...... 12.80 10.46 9.93
The fair value for the stock options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 2002, 2001 and 2000: risk-free interest rate of 2.63%, 4.58% and
5.07%, respectively; no dividend yield; volatility factor of the expected market
price of the common stock of 0.575, 0.543 and 0.445, respectively; and a
weighted-average expected life of the options of five years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's stock options have
F-21
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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 2002, 2001 and 2000, the Compensation Committee awarded 135,000
shares, 355,000 shares and 125,000 shares, respectively, of restricted Common
Stock to certain key executives of the Company. These shares were issued in the
employee's name and are held by the Company until the restrictions lapse. The
restrictions on these shares lapse upon a change in control of the Company, the
employee's death, termination of employment due to disability or the first date
prior to December 31, 2005 which follows seven consecutive trading days on which
the trading price equals or exceeds the targeted stock price of $42 per share.
Upon the retirement of our former CEO in December 2002, we recognized $926 of
compensation expense relating to the conversion of 135,000 shares of restricted
stock at a market price of $6.87 per share. Unearned compensation of $25,509 is
included in stockholders' equity for the remaining unvested shares.
In November 1997, the Board of Directors of the Company adopted the
Bally Total Fitness Holding Corporation Employee Stock Purchase Plan (the "Stock
Purchase Plan"). The Stock Purchase Plan provides for the purchase of Common
Stock by eligible employees (as defined) electing to participate in the plan.
The stock can generally be purchased semi-annually at a price equal to the
lesser of: (i) 95% of the fair market value of the Common Stock on the date when
a particular offering commences or (ii) 95% of the fair market value of the
Common Stock on the date when a particular offering expires. For each offering
made under the Stock Purchase Plan, each eligible employee electing to
participate in the Stock Purchase Plan will automatically be granted shares of
Common Stock equal to the number of full shares which may be purchased from the
employee's elected payroll deduction, with a maximum payroll deduction equal to
10% of eligible compensation, as defined. The first offering under the Stock
Purchase Plan commenced on January 1, 1998 and expired on March 31, 1998.
Thereafter, offerings commence on each April 1 and October 1 and expire on the
following September 30 and March 31, respectively, until the Stock Purchase Plan
is terminated or no additional shares are available for purchase. In December
2002, an additional 250,000 shares were reserved for future issuance. At
December 31, 2002, 271,965 shares of Common Stock were available for future
purchases under the Stock Purchase Plan. Pursuant to APB No. 25, no expense was
recorded by the Company in connection with this plan.
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 Company's matching
contributions related to the plans totaled $1,602, $1,631 and $1,579 for 2002,
2001 and 2000, respectively.
COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases various fitness center facilities, office
facilities, and equipment under operating leases expiring in periods ranging
from one to 25 years, excluding optional renewal periods. Certain 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 $129,249, $114,092 and $107,917 for 2002, 2001 and 2000, respectively.
F-22
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Minimum future rent payments under long-term noncancellable operating
leases in effect as of December 31, 2002, exclusive of taxes, insurance, other
expenses payable directly by the Company and contingent rent, are $136,767,
$138,513, $134,803, $126,521 and $113,484 for 2003 through 2007, respectively,
and $568,176 thereafter.
Litigation
The Company is involved in various claims and lawsuits incidental to
its business, including claims arising from accidents at its fitness centers. In
the opinion of management, the Company is adequately insured against such claims
and lawsuits, and any ultimate liability arising out of such claims and lawsuits
will not have a material adverse effect on the financial condition or results of
operations of the Company. In addition, from time to time, customer complaints
are investigated by governmental bodies. In the opinion of management, none of
the complaints or investigations currently pending will have a material adverse
effect on our financial condition or results of operations.
Other
The Company guarantees the lease on one fitness center, as part of a
joint venture with Holmes Place, Plc. The lease has a 15 year term which began
in May 2002, with current annual rental (subject to escalation) of $600.
SUBSEQUENT EVENTS
In the second quarter of 2003, the Company changed its accounting
method (effective January 1, 2003) for the recognition of recoveries of unpaid
dues on inactive membership contracts from accrual-based estimations to a cash
basis of recognition, which is considered a preferable method of accounting for
such past due amounts since it is less reliant on estimations. The effect of
this change was a cumulative non-cash charge of $15,414 (net of tax effect of
$4,868) or $.47 per diluted share.
The Company also reported as discontinued operations an internet-based
start-up company which was liquidated in the second quarter of 2003. The loss
from discontinued operations (net of tax) was $2,181 and 1,467 in 2001 and 2002,
respectively.
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following tables present the condensed consolidating balance sheet
at December 31, 2002 and 2001, and the condensed consolidating statements of
income and cash flows for the three years ended December 31, 2002, 2001 and
2000. The condensed consolidating financial statements present the accounts of
Bally Total Fitness Holding Corporation ("Parent"), and its Guarantor and
Non-Guarantor subsidiaries, as defined in the indenture to the Bally Total
Fitness Holding Corporation 10 1/2% Senior Notes due 2011 ("the Notes") issued
in July 2003. The Notes are unconditionally guaranteed, on a joint and several
basis, by the Guarantor subsidiaries including substantially all domestic
subsidiaries of Bally Total Fitness Holding Corporation. Non-Guarantor
subsidiaries include H & T Receivable Funding Corporation, Bally ARA
Corporation, Lincoln Indemnity Company, Bally Matrix Fitness Centre Ltd., BTF
Cincinnati Corporation, Bally Real Estate I, LLC, Bally Real Estate II, LLC,
Bally Real Estate III, LLC, Bally Real Estate IV, LLC, BTFCC, Inc., BSPS, LLC,
BTF Canada Corporation, BTF Europe Corporation, BTFF Corporation, BTF
Indianapolis Corporation, BTF Minneapolis Corporation, BTF PA Corporation, BTF
PA LLC and Efit.COM Incorporated.
F-23
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
-------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------- ------------- --------------- --------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and equivalents................ $ -- $ 9,198 $ 3,709 $ -- $ 12,907
Installment contracts
receivable, net................... -- 2,416 269,115 -- 271,531
Other current assets................ -- 91,073 1,691 -- 92,764
------------ ------------- ------------ --------------- --------------
Total current assets.............. -- 102,687 274,515 -- 377,202
Installment contracts
receivable, net..................... -- 2,230 248,844 -- 251,074
Net property and equipment,
at cost............................. -- 613,142 44,397 -- 657,539
Goodwill.............................. 31,390 187,762 23,702 -- 242,854
Trademarks............................ 6,767 202 -- -- 6,969
Intangible assets, net................ -- 2,786 -- -- 2,786
Deferred income taxes................. -- 81,314 -- -- 81,314
Deferred membership
origination costs................... -- 117,832 1,652 -- 119,484
Investment in and advances
to subsidiaries..................... 1,025,011 219,730 -- (1,244,741) --
Other assets.......................... 8,024 5,950 18,678 -- 32,652
------------ ------------- ------------ --------------- --------------
$ 1,071,192 $ 1,333,635 $ 611,788 $ (1,244,741) $ 1,771,874
============ ============= ============ =============== ==============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................... $ -- $ 51,264 $ 488 $ -- $ 51,752
Income taxes payable................ -- 1,493 4 -- 1,497
Deferred income taxes............... -- 28,252 1,051 -- 29,303
Accrued liabilities................. 13,832 72,336 1,515 -- 87,683
Current maturities of
long-term debt.................... 21,675 4,285 2,944 -- 28,904
Deferred revenues................... -- 267,317 3,714 -- 271,031
------------ ------------- ------------ --------------- --------------
Total current
liabilities..................... 35,507 424,947 9,716 -- 470,170
Long-term debt, less current
maturities.......................... 506,209 19,148 172,493 -- 697,850
Net affiliate payable................. -- 621,526 258,703 (880,229) --
Other liabilities..................... -- 10,185 504 -- 10,689
Deferred revenues..................... -- 62,761 928 -- 63,689
Stockholders' equity.................. 529,476 195,068 169,444 (364,512) 529,476
------------ ------------- ------------ --------------- --------------
$ 1,071,192 $ 1,333,635 $ 611,788 $ (1,244,741) $ 1,771,874
============ ============= ============ =============== ==============
F-24
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2002
------------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ -------------- ------------ -------------- ---------------
(IN THOUSANDS)
Net revenues:
Membership revenue..................... $ -- $ 704,249 $ 26,340 $ -- $ 730,589
Products and services.................. -- 211,531 6,136 -- 217,667
Miscellaneous revenue.................. -- 18,161 1,461 -- 19,622
----------- -------------- ----------- ------------- --------------
-- 933,941 33,937 -- 967,878
Special charge to membership
receivable reserve.................. -- (55,000) -- -- (55,000)
----------- -------------- ----------- ------------- --------------
-- 878,941 33,937 -- 912,878
Operating costs and expenses:
Fitness center operations.............. -- 536,956 20,793 -- 557,749
Products and services.................. -- 136,958 4,612 -- 141,570
Member processing and
collection centers.................. -- 27,378 17,962 -- 45,340
Advertising............................ -- 54,050 1,497 -- 55,547
General and administrative............. 4,146 26,257 1,601 -- 32,004
Special charges........................ 7,330 9,897 -- -- 17,227
Depreciation and amortization.......... -- 71,912 2,434 -- 74,346
----------- -------------- ----------- ------------- --------------
11,476 863,408 48,899 -- 923,783
----------- -------------- ----------- ------------- --------------
Operating income (loss).................. (11,476) 15,533 (14,962) -- (10,905)
Equity in net income of subsidiaries..... 47,834 -- -- (47,834) --
Finance charges earned................... -- 610 67,161 -- 67,771
Interest expense......................... (43,223) (2,109) (10,136) -- (55,468)
Other, net............................... -- 25 (591) -- (566)
----------- -------------- ----------- ------------- --------------
4,611 (1,474) 56,434 (47,834) 11,737
----------- -------------- ----------- ------------- --------------
Income from continuing operations
before income taxes.................... (6,865) 14,059 41,472 (47,834) 832
Income tax benefit (provision)........... 10,393 1,668 (7,898) -- 4,163
----------- -------------- ----------- ------------- --------------
Income from continuing operations........ 3,528 15,727 33,574 (47,834) 4,995
Loss from discontinued operations
(net of tax benefit of $354)........... -- -- (1,467) -- (1,467)
----------- -------------- ------------ ------------- --------------
Net income............................... $ 3,528 $ 15,727 $ 32,107 $ (47,834) $ 3,528
=========== ============== =========== ============= ==============
F-25
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------- ------------ ------------
(IN THOUSANDS)
OPERATING:
Net income................................. $ 3,528 $ 15,727 $ 32,107 $ (47,834) $ 3,528
Adjustments to reconcile to cash
provided--
Depreciation and amortization,
including amortization
included in interest
expense................................ 2,217 72,231 3,788 -- 78,236
Stock-based compensation................. 926 -- -- -- 926
Changes in operating assets and
liabilities............................ 6,143 (37,640) 2,308 -- (29,189)
------------ ------------ ------------ ------------ -----------
Cash provided by operating
activities............................. 12,814 50,318 38,203 (47,834) 53,501
INVESTING:
Purchases and construction of
property and equipment................... -- (64,827) (10,313) -- (75,140)
Purchases of real estate................... -- (11,510) -- -- (11,510)
Acquisitions of businesses and
other.................................... (4,212) (2,398) (6,610)
Investment in and advances to
subsidiaries............................. (41,706) -- -- 41,706 --
------------ ------------ ------------ ------------ -----------
Cash used in investing
activities............................. (41,706) (80,549) (12,711) 41,706 (93,260)
FINANCING:
Debt transactions--
Net borrowings under revolving
credit agreement....................... 31,500 -- -- -- 31,500
Net borrowings (repayments) of
other long-term debt................... (5,107) (10,520) 25,555 -- 9,928
Change in affiliate payable.............. -- 41,514 (47,642) 6,128 --
Debt issuance and refinancing
costs.................................. (934) -- (571) -- (1,505)
------------ ------------ ------------ ------------ -----------
Cash provided by (used in)
debt transactions................... 25,459 30,994 (22,658) 6,128 39,923
Equity transactions--
Proceeds from exercise of warrants......... 2,513 -- -- -- 2,513
Proceeds from issuance of common
stock under stock purchase and
option plans............................. 1,780 -- -- -- 1,780
Purchases of common stock for
treasury................................. (860) -- -- -- (860)
------------ ------------ ------------ ------------ -----------
Cash provided by (used in)
financing activities................ 28,892 30,994 (22,658) 6,128 43,356
------------ ------------ ------------ ------------ -----------
Increase in cash and equivalents............. -- 763 2,834 -- 3,597
Cash and equivalents, beginning of
year....................................... -- 8,435 875 -- 9,310
------------ ------------ ------------ ------------ -----------
Cash and equivalents, end of year............ $ -- $ 9,198 $ 3,709 $ -- $ 12,907
============ ============ ============ ============ ===========
F-26
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
--------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------- ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and equivalents......... $ -- $ 8,435 $ 875 $ -- $ 9,310
Installment contracts
receivable, net............ -- 2,643 251,769 -- 254,412
Other current assets......... -- 97,134 1,964 -- 99,098
----------- ----------- --------- ------------ -----------
Total current assets....... -- 108,212 254,608 -- 362,820
Installment contracts
receivable, net.............. -- 2,863 270,744 -- 273,607
Net property and equipment, at
cost......................... -- 592,040 36,594 -- 628,634
Goodwill....................... 31,390 172,145 23,166 -- 226,701
Trademarks..................... 6,767 202 -- -- 6,969
Intangible assets, net......... -- 3,367 -- -- 3,367
Deferred income taxes.......... -- 76,104 -- -- 76,104
Deferred membership
origination costs............ -- 111,472 1,487 -- 112,959
Investment in and advances to
subsidiaries................. 974,450 216,140 -- (1,190,590) --
Other assets................... 9,282 7,939 8,508 -- 25,729
----------- ----------- --------- ------------ -----------
$ 1,021,889 $ 1,290,484 $ 595,107 $ (1,190,590) $ 1,716,890
=========== =========== ========= ============ ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............. $ -- $ 50,042 $ 429 $ -- $ 50,471
Income taxes payable......... -- 2,027 (53) -- 1,974
Deferred income taxes........ -- 31,198 1,148 -- 32,346
Accrued liabilities.......... 7,664 66,371 1,274 -- 75,309
Current maturities of long-
term debt.................. 18,894 3,567 2,841 -- 25,302
Deferred revenues............ -- 291,093 3,837 -- 294,930
----------- ----------- --------- ------------ -----------
Total current
liabilities.............. 26,558 444,298 9,476 -- 480,332
Long-term debt, less current
maturities................... 482,597 16,792 140,480 -- 639,869
Net affiliate payable.......... -- 567,567 307,965 (875,532) --
Other liabilities.............. -- 12,045 510 -- 12,555
Deferred revenues.............. -- 70,441 959 -- 71,400
Stockholders' equity........... 512,734 179,341 135,717 (315,058) 512,734
----------- ----------- --------- ------------ -----------
$ 1,021,889 $ 1,290,484 $ 595,107 $ (1,190,590) $ 1,716,890
=========== =========== ========= ============ ===========
F-27
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2001
-------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
Net revenues
Membership revenue .............. $ -- $ 666,144 $ 23,403 $ -- $ 689,547
Products and services ........... -- 140,193 4,733 -- 144,926
Miscellaneous revenue ........... -- 13,200 3,831 -- 17,031
--------- --------- --------- --------- ---------
-- 819,537 31,967 -- 851,504
Operating costs and expenses:
Fitness center operations ....... -- 475,256 21,681 -- 496,937
Products and services ........... -- 87,765 3,611 -- 91,376
Member processing and
collection centers ........... -- 20,301 22,003 -- 42,304
Advertising ..................... -- 52,447 1,548 -- 53,995
General and administrative....... 4,111 23,130 50 -- 27,291
Special charges ................. -- 6,700 -- -- 6,700
Depreciation and amortization ... 1,949 68,064 2,911 -- 72,924
--------- --------- --------- --------- ---------
6,060 733,663 51,804 -- 791,527
--------- --------- --------- --------- ---------
Operating income (loss) ........... (6,060) 85,874 (19,837) -- 59,977
Equity in net income of
subsidiaries .................... 127,997 -- -- (127,997) --
Finance charges earned ............ -- 673 66,585 -- 67,258
Interest expense .................. (41,230) (2,036) (15,582) -- (58,848)
Other, net ........................ -- 425 326 -- 751
--------- --------- --------- --------- ---------
86,767 (938) 51,329 (127,997) 9,161
--------- --------- --------- --------- ---------
Income from continuing operations
before income tax ............... 80,707 84,936 31,492 (127,997) 69,138
Income tax benefit (provision)..... -- 14,905 (1,155) -- 13,750
--------- --------- --------- --------- ---------
Income from continuing operations.. 80,707 99,841 30,337 (127,997) 82,888
Loss from discontinued operations.. -- -- (2,181) -- (2,181)
--------- --------- --------- --------- ---------
Net income ........................ $ 80,707 $ 99,841 $ 28,156 $(127,997) $ 80,707
========= ========= ========= ========= =========
F-28
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001
---------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
OPERATING:
Net income.......................... $ 80,707 $ 99,841 $ 28,156 $ (127,997) $ 80,707
Adjustments to reconcile to cash
provided--
Depreciation and amortization,
including amortization included
in interest expense............. 3,879 68,265 4,721 -- 76,865
Changes in operating assets and
liabilities..................... 2,500 (69,247) 10,947 -- (55,800)
---------- --------- --------- ---------- ----------
Cash provided by operating
activities...................... 87,086 98,859 43,824 (127,997) 101,772
INVESTING:
Purchases and construction of
property and equipment............ -- (85,782) (5,389) -- (91,171)
Acquisitions of businesses and
other............................. -- (24,994) (5,698) -- (30,692)
Investment in and advances to
subsidiaries...................... (172,126) -- -- 172,126 --
---------- --------- --------- ---------- ----------
Cash used in investing
activities...................... (172,126) (110,776) (11,087) 172,126 (121,863)
FINANCING:
Debt transactions--
Net repayments under revolving
credit agreement................ (51,500) -- -- -- (51,500)
Net borrowings (repayments) of
other long-term debt............ 70,401 (27,152) (39,145) -- 4,104
Change in affiliate payable....... -- 37,674 6,455 (44,129) --
Debt issuance and refinancing
costs........................... (2,153) -- (2,416) -- (4,569)
---------- --------- --------- ---------- ----------
Cash provided by (used in)debt
transactions................. 16,748 10,522 (35,106) (44,129) (51,965)
Equity transactions--
Proceeds from sale of common
stock........................... 53,827 -- -- -- 53,827
Proceeds from exercise of
warrants........................ 11,609 -- -- -- 11,609
Proceeds from issuance of common
stock under stock purchase and
option plans.................... 2,856 -- -- -- 2,856
---------- --------- --------- ---------- ----------
Cash provided by (used in)
financing activities......... 85,040 10,522 (35,106) (44,129) 16,327
---------- --------- --------- ---------- ----------
Decrease in cash and equivalents...... -- (1,395) (2,369) -- (3,764)
Cash and equivalents, beginning of
year................................ -- 9,830 3,244 -- 13,074
---------- --------- --------- ---------- ----------
Cash and equivalents, end of year..... $ -- $ 8,435 $ 875 $ -- $ 9,310
========== ========= ========= ========== ==========
F-29
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2000
-----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
Net revenues:
Membership revenue........ $ -- $ 636,677 $ 22,602 $ -- $ 659,279
Products and services..... -- 107,875 2,994 -- 110,869
Miscellaneous revenue..... -- 14,573 1,141 -- 15,714
---------- --------- --------- ---------- ---------
-- 759,125 26,737 -- 785,862
Operating costs and
expenses:
Fitness center operations. -- 449,176 17,526 -- 466,702
Products and services..... -- 69,347 2,369 -- 71,716
Member processing and
collection centers..... -- 13,918 29,568 -- 43,486
Advertising............... -- 50,330 1,113 -- 51,443
General and
administrative......... 4,322 24,595 47 -- 28,964
Special charges........... -- 1,420 5,080 -- 6,500
Depreciation and
amortization........... 1,800 60,361 3,444 -- 65,605
---------- --------- --------- ---------- ---------
6,122 669,147 59,147 -- 734,416
---------- --------- --------- ---------- ---------
Operating income (loss)..... (6,122) 89,978 (32,410) -- 51,446
Equity in net income of
subsidiaries.............. 126,945 -- -- (126,945) --
Finance charges earned...... -- 411 68,051 -- 68,462
Interest expense............ (42,213) (2,001) (17,844) -- (62,058)
Other, net.................. -- 644 1,116 -- 1,760
---------- --------- --------- ---------- ---------
84,732 (946) 51,323 (126,945) 8,164
---------- --------- --------- ---------- ---------
Income before income taxes.. 78,610 89,032 18,913 (126,945) 59,610
Income tax benefit
(provision)............... -- 20,084 (1,084) -- 19,000
---------- --------- --------- ---------- ---------
Net income.................. $ 78,610 $ 109,116 $ 17,829 $ (126,945) $ 78,610
========== ========= ========= ========== =========
F-30
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2000
-------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
OPERATING:
Net income.......................... $ 78,610 $ 109,116 $ 17,829 $ (126,945) $ 78,610
Adjustments to reconcile to cash
provided--
Depreciation and amortization,
including amortization
included in interest
expense......................... 3,734 60,592 5,055 -- 69,381
Changes in operating assets and
liabilities..................... (2,299) (40,677) (55,848) -- (98,824)
---------- --------- --------- ---------- ----------
Cash provided by (used in)
operating activities............ 80,045 129,031 (32,964) (126,945) 49,167
INVESTING:
Purchases and construction of
property and equipment............ -- (99,295) (5,444) -- (104,739)
Purchases of real estate............ -- (3,655) -- -- (3,655)
Acquisitions of businesses and
other............................. -- (4,066) -- -- (4,066)
Investment in and advances to
subsidiaries...................... (166,219) (2,822) -- 169,041 --
---------- --------- --------- ---------- ----------
Cash used in investing
activities...................... (166,219) (109,838) (5,444) 169,041 (112,460)
FINANCING:
Debt transactions--
Net borrowings under revolving
credit agreement................ 69,500 -- -- -- 69,500
Net borrowings (repayments) of
other long-term debt............ 14,596 (30,648) (2,609) -- (18,661)
Change in affiliate payable..... -- -- 42,096 (42,096) --
---------- --------- --------- ---------- ----------
Cash provided by (used in)
debt transactions............ 84,096 (30,648) 39,487 (42,096) 50,839
Equity transactions--
Proceeds from issuance of common
stock under stock purchase and
option plans.................... 2,078 -- -- -- 2,078
---------- --------- --------- ---------- ----------
Cash provided by (used in)
financing activities......... 86,174 (30,648) 39,487 (42,096) 52,917
---------- --------- --------- ---------- ----------
Increase (decrease) in cash and
equivalents......................... -- (11,455) 1,079 -- (10,376)
Cash and equivalents, beginning of
year................................ -- 21,285 2,165 -- 23,450
---------- --------- --------- ---------- ----------
Cash and equivalents, end of year..... $ -- $ 9,830 $ 3,244 $ -- $ 13,074
========== ========= ========= ========== ==========
F-31
BALLY TOTAL FITNESS HOLDING CORPORATION
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
--------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------------- ----------------- ---------------- ------------------
2002 2001 2002 2001 2002 2001 2002 2001
----- ------- ------ ------- ------ ----- ------- ------
(In millions, except per share data)
Net revenues $240.4 $213.7 $246.3 $216.4 $243.1 $209.7 $183.1 $211.7
Operating income (loss) 17.3 17.2 17.6 17.4 7.5 10.1 (53.3) 15.3
Income (loss) from continuing
operations 19.8 19.0 16.4 19.9 7.6 27.2 (38.8) 16.8
Loss from discontinued operations (0.4) (0.3) (0.3) (0.7) (0.4) (0.7) (0.3) (0.5)
Net income (loss) 19.4 18.7 16.1 19.2 7.2 26.5 (39.2) 16.3
Basic earnings (loss) per
common share:
Income (loss) from continuing
operations $ 0.62 $ .76 $ 0.51 $ .69 $ 0.23 $ .95 $ (1.20) $ .59
Loss from discontinued operations (0.01) (0.01) (0.01) (0.02) (0.01) (0.03) (0.01) (0.02)
------ ------- ------ ------ ------- ------ ------- -------
Net income (loss) per common share $ 0.61 $ 0.75 $ 0.50 $ 0.67 $ 0.22 $ 0.92 $ (1.21) $ 0.57
====== ======= ====== ====== ======= ====== ======= =======
Diluted earnings (loss) per
common share:
Income (loss) from continuing
operations $ 0.60 $ 0.66 $ 0.49 $ 0.65 $ 0.23 $ 0.90 $ (1.20) $ 0.56
Loss from discontinued operations (0.01) (0.01) (0.01) (0.02) (0.01) (0.02) (0.01) (0.02)
------ ------- ------ ------ ------- ------ ------- -------
Net income (loss) per common share $ 0.59 $ 0.65 $ 0.48 $ 0.63 $ 0.22 $ 0.88 $ (1.21) $ 0.54
====== ======= ====== ====== ======= ====== ======= =======
Pro forma amounts, assuming the
new accounting principle is
applied retroactively:
Income (loss) from continuing
operations $21.7 $ 17.9 $16.7 $18.9 $ 7.2 $26.2 $(39.2) $ 15.8
Net income (loss) 21.3 17.6 16.4 18.2 6.8 25.5 (39.5) 15.3
Basic net income (loss) per
common share 0.67 0.71 0.51 0.64 0.21 0.89 (1.22) 0.53
Diluted net income (loss) per
common share 0.65 0.61 0.49 0.60 0.21 0.84 (1.22) 0.51
1. In the fourth quarter of 2002, we recorded a pretax non-cash charge of $55
million ($1.29 per diluted share), which was netted against net revenues to
strengthen our installment contracts receivable reserves. Upon the
retirement of our former CEO in December 2002, a fourth quarter 2002
special charge of $7.3 million ($.17 per diluted share) was recorded to
provide for amounts due pursuant to a separation agreement. Also in the
fourth quarter, we recorded a $3.4 ($.08 per diluted share) million write
down of inventory to recognize inventory shortages discovered upon
installation of a more sophisticated in-club computer system. During the
third quarter of 2002, we recorded a special charge of $6.5 million ($.15
per diluted share) to settle a class action lawsuit arising in the early
1990's. In the first quarter of 2002, we reduced our tax valuation
allowance against net operating losses realized in prior periods by $4
million. This adjustment decreased the income tax provision, increasing net
income.
2. In the third quarter of 2001, the Company recorded a net benefit of special
items of $8.3 million ($.27 per diluted share) to record special charges
primarily related to the September 11th tragedy and a one-time markdown of
retail apparel, offset by a reduction of a tax valuation allowance as a
result of continued improved operating results and trends.
3. In the second quarter of 2003, the Company changed its accounting method
(effective January 1, 2003) for the recognition of recoveries of unpaid
dues on inactive membership contracts from accrual-based estimations to a
cash basis of recognition, which is considered a preferable method of
accounting for such past due amounts since it is less reliant on
estimations. The quarterly information is shown above on a pro forma basis.
4. The Company's operations are subject to seasonal factors.
F-32
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
JUNE 30
2003
-----------
ASSETS
Current assets:
Cash and equivalents $ 16,482
Installment contracts receivable, net 288,062
Other current assets 72,618
-----------
Total current assets 377,162
Installment contracts receivable, net 249,813
Property and equipment, less accumulated depreciation
and amortization of $570,768 and $538,613 643,054
Goodwill 242,126
Trademarks 6,969
Intangible assets, less accumulated
amortization of $9,731 and $9,453 2,508
Deferred income taxes 81,431
Deferred membership origination costs 118,481
Other assets 31,036
-----------
$ 1,752,580
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 56,018
Income taxes payable 2,349
Deferred income taxes 28,450
Accrued liabilities 90,562
Current maturities of long-term debt 27,978
Deferred revenues 253,267
-----------
Total current liabilities 458,624
Long-term debt, less current maturities 695,672
Other liabilities 10,923
Deferred revenues 55,499
Stockholders' equity 531,862
-----------
$ 1,752,580
===========
See accompanying notes.
F-33
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED
JUNE 30
-----------------------
2003 2002
--------- ---------
Net revenues:
Membership revenue $ 172,194 $ 188,330
Products and services 74,292 53,318
Miscellaneous revenue 4,818 4,651
--------- ---------
251,304 246,299
Operating costs and expenses:
Fitness center operations 140,786 140,098
Products and services 47,538 33,752
Member processing and collection centers 12,611 11,041
Advertising 14,131 16,413
General and administrative 8,630 8,460
Depreciation and amortization 19,086 18,950
--------- ---------
242,782 228,714
--------- ---------
Operating income 8,522 17,585
Finance charges earned 18,479 17,442
Interest expense (13,936) (13,547)
Other, net (1,704) 89
--------- ---------
2,839 3,984
--------- ---------
Income from continuing operations before income taxes 11,361 21,569
Income tax provision (2,727) (5,176)
--------- ---------
Income from continuing operations 8,634 16,393
Discontinued operations
Loss from discontinued operations (net of tax benefit
of $74 and $100, in 2003 and 2002, respectively) (236) (318)
Loss on disposal (1,699)
--------- ---------
Loss from discontinued operations (1,935) (318)
--------- ---------
Net income $ 6,699 $ 16,075
========= =========
Basic earnings per common share:
Income from continuing operations $ 0.27 $ 0.51
Discontinued operations (0.06) (0.01)
--------- ---------
Net income per common share $ 0.21 $ 0.50
========= =========
Diluted earnings per common share:
Income from continuing operations $ 0.26 $ 0.49
Discontinued operations (0.06) (0.01)
--------- ---------
Net income per common share $ 0.20 $ 0.48
========= =========
Pro forma amounts, assuming the new accounting principle is applied retroactively:
Income from continuing operations $ 8,634 $ 16,683
Net income 6,699 16,365
Basic net income per common share 0.21 0.51
Diluted net income per common share 0.20 0.49
See accompanying notes.
F-34
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
(Unaudited)
SIX MONTHS ENDED
JUNE 30
-------------------------
2003 2002
---------- ---------
Net revenues:
Membership revenue $ 346,422 $ 371,024
Products and services 149,430 105,735
Miscellaneous revenue 9,669 9,900
---------- ---------
505,521 486,659
Operating costs and expenses:
Fitness center operations 281,575 277,902
Products and services 94,559 66,785
Member processing and collection centers 23,611 21,993
Advertising 32,064 32,922
General and administrative 16,683 15,842
Depreciation and amortization 38,642 36,370
---------- ---------
487,134 451,814
---------- ---------
Operating income 18,387 34,845
Finance charges earned 37,362 35,122
Interest expense (27,921) (28,190)
Other, net (1,820) 163
---------- ---------
7,621 7,095
---------- ---------
Income from continuing operations before income taxes 26,008 41,940
Income tax provision (6,242) (5,704)
---------- ---------
Income from continuing operations 19,766 36,236
Discontinued operations
Loss from discontinued operations (net of tax benefit
of $196 and $130, in 2003 and 2002, respectively) (619) (759)
Loss on disposal (1,699)
---------- ---------
Loss from discontinued operations (2,318) (759)
---------- ---------
Income before cumulative effect of changes in accounting principles 17,448 35,477
Cumulative effect of changes in accounting principles, net of taxes (15,579)
---------- ---------
Net income $ 1,869 $ 35,477
========== =========
Basic earnings per common share:
Income from continuing operations $ 0.61 $ 1.13
Loss from discontinued operations (0.07) (0.02)
Cumulative effect of changes in accounting principles (0.48)
---------- ---------
Net income per common share $ 0.06 $ 1.11
========== =========
Diluted earnings per common share:
Income from continuing operations $ 0.60 $ 1.08
Loss from discontinued operations (0.07) (0.02)
Cumulative effect of changes in accounting principles (0.47)
---------- ---------
Net income per common share $ 0.06 $ 1.06
========== =========
Pro forma amounts, assuming the new accounting principle is applied retroactively:
Income from continuing operations $ 19,766 $ 38,483
Net income 17,448 37,724
Basic net income per common share 0.53 1.18
Diluted net income per common share 0.53 1.13
See accompanying notes.
F-35
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
COMMON STOCK UNEARNED
------------ COMPENSATION COMMON TOTAL
PAR CONTRIBUTED ACCUMULATED (RESTRICTED STOCK IN STOCKHOLDERS'
SHARES VALUE CAPITAL DEFICIT STOCK) TREASURY EQUITY
---------- -------- ----------- ------------ ------------ --------- --------------
Balance at December 31, 2002 33,193,425 $ 338 $ 670,561 $ (104,279) $ (25,509) $ (11,635) $ 529,476
Net income 1,869 1,869
Restricted stock activity 710,000 7 4,281 (4,166) 122
Issuance of common stock under
stock purchase and option plans 73,069 1 394 395
---------- -------- ----------- ------------ ------------ --------- --------------
Balance at June 30, 2003 33,976,494 $ 346 $ 675,236 $ (102,410) $ (29,675) $ (11,635) $ 531,862
========== ======== =========== ============ ============ ========= ==============
See accompanying notes.
F-36
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30
--------------------------
2003 2002
--------- ----------
OPERATING:
Net income before cumulative effect of changes in accounting principles $ 17,448 $ 35,477
Adjustments to reconcile to cash provided --
Depreciation and amortization, including amortization
included in interest expense 40,667 38,440
Change in operating assets and liabilities (28,559) (47,001)
Loss on disposal of discontinued operation 1,699
Stock-based compensation 122
--------- ----------
Cash provided by operating activities 31,377 26,916
INVESTING:
Purchases and construction of property and equipment (20,199) (43,165)
Purchases of real estate (11,510)
Acquisitions of businesses and other (412) (6,092)
--------- ----------
Cash used in investing activities (20,611) (60,767)
FINANCING:
Debt transactions --
Net borrowings under revolving credit agreement 5,000 25,000
Net borrowings (repayments) of other long-term debt (12,128) 9,850
Debt issuance and refinancing costs (458)
--------- ----------
Cash provided by (used in) debt transactions (7,586) 34,850
Equity transactions --
Proceeds from exercise of warrants 2,513
Proceeds from issuance of common stock under
stock purchase and option plans 395 1,324
Purchases of common stock for treasury (860)
--------- ----------
Cash provided by (used in) financing transactions (7,191) 37,827
--------- ----------
Increase in cash and equivalents 3,575 3,976
Cash and equivalents, beginning of period 12,907 9,310
--------- ----------
Cash and equivalents, end of period $ 16,482 $ 13,286
========= ==========
See accompanying notes.
F-37
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
(In thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30
--------------------------
2003 2002
---------- ----------
SUPPLEMENTAL CASH FLOWS INFORMATION:
Changes in operating assets and liabilities:
Increase in installment contracts receivable $ (15,123) $ (63,912)
Decrease in other current and other assets 327 857
Decrease (increase) in deferred membership origination costs 1,003 (4,511)
Increase in accounts payable 4,285 11,622
Increase in income taxes payable and deferred income taxes 4,803 4,935
Increase in accrued and other liabilities 2,635 4,418
Decrease in deferred revenues (26,489) (410)
---------- ----------
Change in operating assets and liabilities $ (28,559) $ (47,001)
========== ==========
Cash payments for interest and income taxes
were as follows --
Interest paid $ 26,112 $ 28,141
Interest capitalized (453) (1,840)
Income taxes paid, net 1,245 736
Investing and financing activities exclude the following
non-cash transactions --
Acquisitions of property and equipment
through capital leases/borrowings $ 4,144 $ 7,716
Acquisitions of businesses with common stock 8,855
Restricted stock activity 4,281 4,619
Debt, including assumed debt related to
acquisition of businesses 2,846
See accompanying notes.
F-38
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data)
(Unaudited)
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of Bally Total Fitness Holding Corporation (the "Company") and the
subsidiaries that it controls. The Company, through its subsidiaries, is a
commercial operator of 415 fitness centers (at June 30, 2003) concentrated in 29
states and Canada. Additionally, the Company has eleven clubs operated pursuant
to franchise and joint venture agreements in the United States, Asia, and the
Caribbean. 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 and Canada. Unless otherwise
specified in the text, references to the Company include the Company and its
subsidiaries. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
All adjustments have been recorded which are, in the opinion of
management, necessary for a fair presentation of the condensed consolidated
balance sheet of the Company at June 30, 2003, its consolidated statements of
income for the three and six months ended June 30, 2003 and 2002, its
consolidated statement of stockholders' equity for the six months ended June 30,
2003, and its consolidated statement of cash flows for the six months ended June
30, 2003 and 2002. All such adjustments were of a normal recurring nature.
The accompanying condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles which
require the Company's management to make estimates and assumptions that affect
the amounts reported therein. Actual results could vary from such estimates. In
addition, certain reclassifications have been made to prior period financial
statements to conform with the 2003 presentation.
CHANGES IN ACCOUNTING PRINCIPLES
In the second quarter of 2003, the Company changed its accounting
method (effective January 1, 2003) for the recognition of recoveries of unpaid
dues on inactive membership contracts from accrual-based estimations to a cash
basis of recognition, which is considered a preferable method of accounting for
such past due amounts since it is less reliant on estimations. The effect of
this change was a cumulative non-cash charge of $15,414 (net of tax effect of
$4,868) or $.47 per diluted share. As a result of recording the cumulative
effect adjustment as of the beginning of the year, membership revenue increased
during the first quarter of 2003 by $1,149. Net income for the first quarter of
2003 increased by $873 and basic and diluted earnings per share increased by
$.03.
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations ("SFAS No. 143"). SFAS No. 143 addresses the financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets. It requires that the Company recognize the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are then capitalized as part of the carrying amount of
the long-lived asset. The Company has implemented the provisions of SFAS No. 143
as of January 1, 2003. As a result, a non-cash cumulative adjustment of $165 was
recorded to provide for estimated future restoration obligations on the
Company's leaseholds in the first quarter of 2003.
SEASONAL FACTORS
The Company's operations are subject to seasonal factors and,
therefore, the results of operations for the six months ended June 30, 2003 and
2002 are not necessarily indicative of the results of operations for the full
year.
F-39
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
(Unaudited)
INSTALLMENT CONTRACTS RECEIVABLE
JUNE 30 DECEMBER 31
2003 2002
--------- -----------
Current:
Installment contracts receivable $ 417,165 $ 404,707
Unearned finance charges (36,642) (36,015)
Allowance for doubtful receivables and cancellations (92,461) (97,161)
--------- ---------
$ 288,062 $ 271,531
========= =========
Long-term:
Installment contracts receivable $ 344,186 $ 343,749
Unearned finance charges (24,143) (22,396)
Allowance for doubtful receivables and cancellations (70,230) (70,279)
--------- ---------
$ 249,813 $ 251,074
========= =========
ALLOWANCE FOR DOUBTFUL RECEIVABLES AND CANCELLATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Balance at beginning of period $ 167,445 $ 134,032 $ 167,440 $ 130,504
Contract cancellations and
write-offs of uncollectible
amounts, net of recoveries (83,287) (86,387) (173,904) (177,220)
Provision for cancellations and
doubtful receivables 78,533 83,215 169,155 177,576
--------- --------- --------- ---------
Balance at end of period $ 162,691 $ 130,860 $ 162,691 $ 130,860
========= ========= ========= =========
F-40
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
(Unaudited)
MEMBERSHIP REVENUES
Gross committed membership fees is a measure which includes the total
potential future value of all initial membership fee revenue, dues revenue,
earned finance charges and membership-related products and services revenue from
new membership sales originated in a period. It is measured on a gross basis
before consideration of our provision for doubtful accounts and cancellations
and without deferral of initiation fee revenue, and includes the future
potential collection of dues revenue over the initial term of membership. We
track gross committed membership revenue as an indicator of current sales trends
and believe it to be a useful measure to allow investors to understand current
trends in membership sales which may not be apparent under deferral accounting
for the initiation fee component of membership revenue. The following is a
reconciliation of gross committed membership fees to initial membership fees
originated, net:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Gross committed membership fees $ 279,737 $ 279,981 $ 591,102 $ 600,728
Less: Committed monthly dues (65,440) (56,875) (132,911) (121,215)
Provision for doubtful receivables
and cancellations (78,533) (83,215) (169,155) (177,576)
Unearned finance charges and other (44,752) (37,716) (93,787) (80,232)
Products and services revenues
included in membership programs (32,859) (17,658) (65,320) (36,999)
--------- --------- --------- ---------
Initial membership fees originated, net $ 58,153 $ 84,517 $ 129,929 $ 184,706
========= ========= ========= =========
The following presents the components of membership revenue as
presented in the accompanying consolidated statements of income:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Initial membership fees:
Originated, net $ 58,153 $ 84,517 $ 129,929 $ 184,706
Decrease (increase) in deferral 18,411 6,507 24,644 (1,963)
--------- --------- --------- ---------
76,564 91,024 154,573 182,743
Dues:
Dues collected 94,332 95,393 190,004 185,908
Decrease in deferral 1,298 1,913 1,845 2,373
--------- --------- --------- ---------
95,630 97,306 191,849 188,281
--------- --------- --------- ---------
Membership revenue $ 172,194 $ 188,330 $ 346,422 $ 371,024
========= ========= ========= =========
F-41
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
(Unaudited)
PRODUCTS AND SERVICES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net revenues:
Retail and nutritional supplements --
Membership programs $ 5,387 $ 6,725 $ 11,377 $ 15,510
Other sales 14,550 14,409 29,615 28,233
Personal training --
Membership programs 27,472 10,933 53,943 21,489
Other sales 26,883 19,695 53,255 37,396
Financial services 1,556 1,240 3,107
-------- -------- -------- --------
74,292 53,318 149,430 105,735
Direct operating costs and expenses:
Retail and nutritional supplements 17,129 15,699 34,675 32,045
Personal training 30,409 18,053 59,884 34,740
-------- -------- -------- --------
47,538 33,752 94,559 66,785
-------- -------- -------- --------
Direct operating margin $ 26,754 $ 19,566 $ 54,871 $ 38,950
======== ======== ======== ========
Margin percentage 36% 37% 37% 37%
EARNINGS PER COMMON SHARE
Basic earnings per common share for each period is computed based on
the weighted average number of shares of common stock outstanding of 32,658,994
and 32,079,795 for the three months ended June 30, 2003 and 2002, respectively,
and 32,617,224 and 31,911,543 for the six months ended June 30, 2003 and 2002,
respectively. Diluted earnings per common share for each period includes the
addition of common stock equivalents of 434,724 and 1,484,481 for the three
months ended June 30, 2003 and 2002, respectively, and 380,648 and 1,436,788 for
the six months ended June 30, 2003 and 2002, respectively. Common stock
equivalents represent the dilutive effect of the assumed exercise of outstanding
warrants and stock options. Options outstanding to purchase 2,981,291 and
1,456,120 shares of common stock at June 30, 2003 and 2002, respectively, were
not included in the computation of diluted earnings per share because the
exercise prices of the options were greater than the average market prices of
the Company's common shares. The range of exercise prices per share for these
options was between $12.00 and $36.00 and $21.76 and $36.00 at June 30, 2003 and
2002, respectively.
INCOME TAXES
At June 30, 2003, for accounting purposes, the Company had
approximately $110,000 of unrecognized federal net operating loss carryforwards.
Separately, the Company's alternative minimum tax ("AMT") net operating loss
carryforwards have been substantially recognized. Therefore, having fully
recognized AMT net operating loss carryforwards for reporting purposes, the
Company's federal income tax rate increased to 20% during the second quarter of
2002. The 20% federal rate will remain in effect until such time as all of the
Company's AMT credits are fully utilized, which is not currently expected before
2005. The balance of the provision consists primarily of taxes owed to states
where local earnings are no longer offset by state net operating loss
carryforwards.
For federal income tax payment purposes, the Company has available net
operating loss carryforwards exceeding $349,000 and AMT net operating loss
carryfowards in excess of $209,000. Therefore, the Company currently does not
expect to make any significant federal tax payments earlier than 2005. At such
time, the Company will be required to pay
F-42
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
(Unaudited)
taxes at the 20% AMT rate for periods currently estimated to extend beyond 2005,
including those periods benefited by AMT credits.
STOCK PLANS
The Company accounts for its stock-based compensation plans, described
in the Company's 2002 Annual Report on Form 10-K, using the intrinsic value
method and in accordance with the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost related to option
plans was reflected in net income, as all options granted under those plans had
an exercise price equal to the fair market value of the underlying common stock
on the date of grant. The Company has recorded compensation expense related to
restricted stock grants. The following table illustrates, in accordance with the
provisions of Statement of Financial Accounting Standards No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure, the effect on net income
and earnings per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, to stock-based employee compensation.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- --------------------
2003 2002 2003 2002
------- -------- -------- --------
Net income, as reported $ 6,699 $ 16,075 $ 1,869 $ 35,477
Plus: stock-based compensation expense
included in net income, net of tax 93 93
Less: stock-based compensation expense determined
under fair value based method, net of tax (882) (1,171) (1,606) (2,715)
------- -------- -------- --------
Pro forma net income $ 5,910 $ 14,904 $ 356 $ 32,762
======= ======== ======== ========
Basic earnings per common share
As reported $ 0.21 $ 0.50 $ 0.06 $ 1.11
Pro forma 0.18 0.46 0.01 1.03
Diluted earnings per common share
As reported 0.20 0.48 0.06 1.06
Pro forma 0.18 0.44 0.01 0.98
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.
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following tables present the condensed consolidating balance sheet
at June 30, 2003 and December 31, 2002, the condensed consolidating statements
of income for the three months and six months ended June 30, 2003 and 2002, and
the condensed consolidating statement of cash flows for the six months ended
June 30, 2003 and 2002. The condensed consolidating financial statements present
the accounts of Bally Total Fitness Holding Corporation ("Parent"), and its
Guarantor and Non-Guarantor subsidiaries, as defined in the indenture to the
Bally Total Fitness Holding Corporation 10 1/2% Senior Notes due 2011 ("the
Notes") issued in July 2003. The Notes are unconditionally guaranteed, on a
joint and several basis, by the Guarantor subsidiaries including substantially
all domestic subsidiaries of Bally Total Fitness Holding Corporation.
Non-Guarantor subsidiaries include Canadian operations and special purpose
entities for accounts receivable and real estate finance programs.
F-43
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2003
--------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and equivalents $ - $ 15,776 $ 706 $ - $ 16,482
Installment contracts
receivable, net - - 288,062 - 288,062
Other current assets - 71,233 1,385 - 72,618
----------- ------------ ------------- ------------ ------------
Total current assets - 87,009 290,153 - 377,162
Installment contracts
receivable, net - - 249,813 - 249,813
Property and equipment, net - 600,427 42,627 - 643,054
Goodwill 31,390 188,164 22,572 - 242,126
Trademarks 6,767 202 - - 6,969
Intangible assets, net - 2,508 - - 2,508
Deferred income taxes - 81,431 - - 81,431
Deferred membership
origination costs - 116,614 1,867 - 118,481
Investment in and advances
to subsidiaries 1,024,637 221,315 - (1,245,952) -
Other assets 6,674 5,407 18,955 - 31,036
----------- ------------ ------------- ------------ ------------
$ 1,069,468 $ 1,303,077 $ 625,987 $ (1,245,952) $ 1,752,580
=========== ============ ============= ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ - $ 55,612 $ 406 $ - $ 56,018
Income taxes payable - 2,155 194 - 2,349
Deferred income taxes - 27,406 1,044 - 28,450
Accrued liabilities 11,498 77,876 1,188 - 90,562
Current maturities
of long-term debt 20,529 3,499 3,950 - 27,978
Deferred revenues - 249,239 4,028 - 253,267
----------- ------------ ------------- ------------ ------------
Total current liabilities 32,027 415,787 10,810 - 458,624
Long-term debt, less current
maturities 505,579 17,242 172,851 - 695,672
Net affiliate payable - 605,883 255,867 (861,750) -
Other liabilities - 10,419 504 - 10,923
Deferred revenues - 54,615 884 - 55,499
Stockholders' equity 531,862 199,131 185,071 (384,202) 531,862
----------- ------------ ------------- ------------ ------------
$ 1,069,468 $ 1,303,077 $ 625,987 $ (1,245,952) $ 1,752,580
=========== ============ ============= ============ ============
F-44
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
-------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------- ------------ -----------
(IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and equivalents $ - $ 9,198 $ 3,709 $ - $ 12,907
Installment contracts
receivable, net - 2,416 269,115 - 271,531
Other current assets - 91,073 1,691 - 92,764
----------- ------------ ------------- ------------ -----------
Total current assets 102,687 274,515 377,202
Installment contracts
receivable, net - 2,230 248,844 - 251,074
Property and equipment, net - 613,142 44,397 - 657,539
Goodwill 31,390 187,762 23,702 242,854
Trademarks 6,767 202 - - 6,969
Intangible assets, net - 2,786 - - 2,786
Deferred income taxes - 81,314 - - 81,314
Deferred membership
origination costs - 117,832 1,652 - 119,484
Investment in and advances
to subsidiaries 1,025,011 219,730 - (1,244,741) -
Other assets 8,024 5,950 18,678 - 32,652
----------- ------------ ------------- ------------ -----------
$ 1,071,192 $ 1,333,635 $ 611,788 $ (1,244,741) $ 1,771,874
=========== ============ ============= ============ ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ - $ 51,264 $ 488 $ - $ 51,752
Income taxes payable - 1,493 4 - 1,497
Deferred income taxes - 28,252 1,051 - 29,303
Accrued liabilities 13,832 72,336 1,515 - 87,683
Current maturities
of long-term debt 21,675 4,285 2,944 - 28,904
Deferred revenues - 267,317 3,714 - 271,031
----------- ------------ ------------- ------------ -----------
Total current liabilities 35,507 424,947 9,716 470,170
Long-term debt, less current
maturities 506,209 19,148 172,493 - 697,850
Net affiliate payable - 621,526 258,703 (880,229) -
Other liabilities - 10,185 504 - 10,689
Deferred revenues - 62,761 928 - 63,689
Stockholders' equity 529,476 195,068 169,444 (364,512) 529,476
----------- ------------ ------------- ------------ -----------
$ 1,071,192 $ 1,333,635 $ 611,788 $ (1,244,741) $ 1,771,874
=========== ============ ============= ============ ===========
F-45
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED JUNE 30, 2003
---------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
(UNAUDITED)
Net revenues:
Membership revenue $ - $ 165,737 $ 6,457 $ - $ 172,194
Products and services - 72,178 2,114 - 74,292
Miscellaneous revenue - 4,438 380 - 4,818
--------- ------------ ------------- ------------ ------------
- 242,353 8,951 - 251,304
Operating costs and expenses:
Fitness center operations - 135,774 5,012 - 140,786
Products and services - 45,803 1,735 - 47,538
Member processing and
collection centers - 7,502 5,109 - 12,611
Advertising - 13,758 373 - 14,131
General and administrative 1,011 7,295 324 - 8,630
Depreciation and amortization - 18,358 728 - 19,086
--------- ------------ ------------- ------------ ------------
1,011 228,490 13,281 - 242,782
--------- ------------ ------------- ------------ ------------
Operating income (loss) (1,011) 13,863 (4,330) - 8,522
Equity in net income of subsidiaries 15,443 - - (15,443) -
Finance charges earned - - 18,479 - 18,479
Interest expense (10,495) (1,019) (2,422) - (13,936)
Other, net - (1,763) 59 - (1,704)
--------- ------------ ------------- ------------ ------------
4,948 (2,782) 16,116 (15,443) 2,839
--------- ------------ ------------- ------------ ------------
Income from continuing operations
before income taxes 3,937 11,081 11,786 (15,443) 11,361
Income tax benefit (provision) 2,762 (2,660) (2,829) - (2,727)
--------- ------------ ------------- ------------ ------------
Income from continuing operations 6,699 8,421 8,957 (15,443) 8,634
Discontinued operations
Loss from discontinued operations
(net of tax benefit of $74) - - (236) - (236)
Loss on disposal - - (1,699) - (1,699)
--------- ------------ ------------- ------------ ------------
Loss from discontinued operations - - (1,935) - (1,935)
--------- ------------ ------------- ------------ ------------
Net income $ 6,699 $ 8,421 $ 7,022 $ (15,443) $ 6,699
========= ============ ============= ============ ============
F-46
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED JUNE 30, 2002
--------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
(UNAUDITED)
Net revenues:
Membership revenue $ - $ 181,829 $ 6,501 $ - $ 188,330
Products and services - 51,689 1,629 - 53,318
Miscellaneous revenue - 4,171 480 - 4,651
--------- ------------ ------------- ------------ ------------
- 237,689 8,610 - 246,299
Operating costs and expenses:
Fitness center operations - 135,347 4,751 - 140,098
Products and services - 32,589 1,163 - 33,752
Member processing and
collection centers - 6,333 4,708 - 11,041
Advertising - 16,019 394 - 16,413
General and administrative 1,025 7,036 399 - 8,460
Depreciation and amortization - 18,350 600 - 18,950
--------- ------------ ------------- ------------ ------------
1,025 215,674 12,015 - 228,714
--------- ------------ ------------- ------------ ------------
Operating income (loss) (1,025) 22,015 (3,405) - 17,585
Equity in net income of subsidiaries 24,937 - - (24,937) -
Finance charges earned - 174 17,268 - 17,442
Interest expense (10,635) (191) (2,721) - (13,547)
Other, net - 19 70 - 89
--------- ------------ ------------- ------------ ------------
14,302 2 14,617 (24,937) 3,984
--------- ------------ ------------- ------------ ------------
Income from continuing operations
before income taxes 13,277 22,017 11,212 (24,937) 21,569
Income tax benefit (provision) 2,798 (5,544) (2,430) - (5,176)
--------- ------------ ------------- ------------ ------------
Income from continuing operations 16,075 16,473 8,782 (24,937) 16,393
Loss from discontinued operations
(net of tax benefit of $100) - - (318) - (318)
--------- ------------ ------------- ------------ ------------
Net income $ 16,075 $ 16,473 $ 8,464 $ (24,937) $ 16,075
========= ============ ============= ============ ============
F-47
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2003
----------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------- ------------ ------------
(IN THOUSANDS)
(UNAUDITED)
Net revenues:
Membership revenue $ - $ 333,341 $ 13,081 $ - $ 346,422
Products and services - 145,326 4,104 - 149,430
Miscellaneous revenue - 8,948 721 - 9,669
------------ ------------ ------------ ------------ ------------
- 487,615 17,906 - 505,521
Operating costs and expenses:
Fitness center operations - 271,072 10,503 - 281,575
Products and services - 91,348 3,211 - 94,559
Member processing and
collection centers - 13,403 10,208 - 23,611
Advertising - 31,339 725 - 32,064
General and administrative 1,972 14,064 647 - 16,683
Depreciation and amortization - 37,206 1,436 - 38,642
------------ ------------ ------------ ------------ ------------
1,972 458,432 26,730 - 487,134
------------ ------------ ------------ ------------ ------------
Operating income (loss) (1,972) 29,183 (8,824) - 18,387
Equity in net income of subsidiaries 19,690 - - (19,690) -
Finance charges earned - - 37,362 - 37,362
Interest expense (21,477) (1,520) (4,924) - (27,921)
Other, net - (1,818) (2) - (1,820)
------------ ------------ ------------ ------------ ------------
(1,787) (3,338) 32,436 (19,690) 7,621
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations before income taxes (3,759) 25,845 23,612 (19,690) 26,008
Income tax benefit (provision) 5,628 (6,203) (5,667) - (6,242)
------------ ------------ ------------ ------------ ------------
Income from continuing operations 1,869 19,642 17,945 (19,690) 19,766
Discontinued operations
Loss from discontinued operations
(net of tax benefit of $196) - - (619) - (619)
Loss on disposal - - (1,699) - (1,699)
------------ ------------ ------------ ------------ ------------
Loss from discontinued operations - - (2,318) - (2,318)
------------ ------------ ------------ ------------ ------------
Income before cumulative effect of
changes in accounting principles 1,869 19,642 15,627 (19,690) 17,448
Cumulative effect of changes in
accounting principles, net of taxes - (15,579) - - (15,579)
------------ ------------ ------------ ------------ ------------
Net income $ 1,869 $ 4,063 $ 15,627 $ (19,690) $ 1,869
============ ============ ============ ============ ============
F-48
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2002
----------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------- ------------ ------------
(IN THOUSANDS)
(UNAUDITED)
Net revenues:
Membership revenue $ - $ 358,047 $ 12,977 $ - $ 371,024
Products and services - 102,566 3,169 - 105,735
Miscellaneous revenue - 9,080 820 - 9,900
------------ ------------ ------------ ------------ ------------
- 469,693 16,966 - 486,659
Operating costs and expenses:
Fitness center operations - 268,174 9,728 - 277,902
Products and services - 64,505 2,280 - 66,785
Member processing and
collection centers - 14,192 7,801 - 21,993
Advertising - 32,168 754 - 32,922
General and administrative 2,061 13,022 759 - 15,842
Depreciation and amortization - 35,185 1,185 - 36,370
------------ ------------ ------------ ------------ ------------
2,061 427,246 22,507 - 451,814
------------ ------------ ------------ ------------ ------------
Operating income (loss) (2,061) 42,447 (5,541) - 34,845
Equity in net income of subsidiaries 56,024 - - (56,024) -
Finance charges earned - 351 34,771 - 35,122
Interest expense (21,284) (616) (6,290) - (28,190)
Other, net - 25 138 - 163
------------ ------------ ------------ ------------ ------------
34,740 (240) 28,619 (56,024) 7,095
------------ ------------ ------------ ------------ ------------
Income from continuing operations
before income taxes 32,679 42,207 23,078 (56,024) 41,940
Income tax benefit (provision) 2,798 (5,568) (2,934) - (5,704)
------------ ------------ ------------ ------------ ------------
Income from continuing operations 35,477 36,639 20,144 (56,024) 36,236
Loss from discontinued operations
(net of tax benefit of $130) - - (759) - (759)
------------ ------------ ------------ ------------ ------------
Net income $ 35,477 $ 36,639 $ 19,385 $ (56,024) $ 35,477
============ ============ ============ ============ ============
F-49
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003
-------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
(UNAUDITED)
OPERATING:
Net income before cumulative effect of
changes in accounting principles $ 1,869 $ 19,642 $ 15,627 $ (19,690) $ 17,448
Adjustments to reconcile to
cash provided--
Depreciation and amortization,
including amortization
included in interest expense 1,355 37,387 1,925 - 40,667
Change in operating assets
and liabilities (2,338) (6,465) (19,756) - (28,559)
Loss on disposal of
discontinued operation - - 1,699 - 1,699
Stock-based compensation 122 - - - 122
--------- ------------ ------------- ------------ ------------
Cash provided by (used in)
operating activities 1,008 50,564 (505) (19,690) 31,377
INVESTING:
Purchases and construction
of property and equipment - (20,043) (156) - (20,199)
Acquisitions of businesses and other - - (412) - (412)
--------- ------------ ------------- ------------ ------------
Cash used in investing activities - (20,043) (568) - (20,611)
FINANCING:
Debt transactions--
Net borrowings under revolving
credit agreement 5,000 - - - 5,000
Net borrowing (repayments) of
other long-term debt (6,777) (6,715) 1,364 - (12,128)
Debt issuance and refinancing costs - - (458) - (458)
Change in net affiliate balances 374 (17,228) (2,836) 19,690 -
--------- ------------ ------------- ------------ ------------
Cash used in debt transactions (1,403) (23,943) (1,930) 19,690 (7,586)
Equity transactions--
Proceeds from issuance of
common stock under stock
purchase and option plans 395 - - - 395
--------- ------------ ------------- ------------ ------------
Cash used in financing
transactions (1,008) (23,943) (1,930) 19,690 (7,191)
--------- ------------ ------------- ------------ ------------
Increase (decrease) in cash and equivalents - 6,578 (3,003) - 3,575
Cash and equivalents, beginning of period - 9,198 3,709 - 12,907
--------- ------------ ------------- ------------ ------------
Cash and equivalents, end of period $ - $ 15,776 $ 706 $ - $ 16,482
========= ============ ============= ============ ============
F-50
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002
-------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
(UNAUDITED)
OPERATING:
Net income $ 35,477 $ 36,639 $ 19,385 $ (56,024) $ 35,477
Adjustments to reconcile to
cash provided--
Depreciation and amortization,
including amortization
included in interest expense 1,073 35,343 2,024 - 38,440
Change in operating assets
and liabilities (680) 19,429 (65,750) - (47,001)
--------- ------------ ------------- ------------ ------------
Cash provided by (used in)
operating activities 35,870 91,411 (44,341) (56,024) 26,916
INVESTING:
Purchases and construction
of property and equipment - (39,971) (3,194) - (43,165)
Purchases of real estate - (11,510) - - (11,510)
Acquisitions of businesses and other - (4,002) (2,090) - (6,092)
--------- ------------ ------------- ------------ ------------
Cash used in investing activities - (55,483) (5,284) - (60,767)
FINANCING:
Debt transactions--
Net borrowings under revolving
credit agreement 25,000 - - - 25,000
Net borrowings (repayments) of
other long-term debt (2,296) (10,308) 22,454 - 9,850
Change in net affiliate balances (61,551) (21,263) 26,790 56,024 -
--------- ------------ ------------- ------------ ------------
Cash provided by (used in)
debt transactions (38,847) (31,571) 49,244 56,024 34,850
Equity transactions--
Proceeds from exercise of warrants 2,513 - - - 2,513
Proceeds from issuance of
common stock under stock
purchase and option plans 1,324 - - - 1,324
Purchases of common stock
for treasury (860) - - - (860)
--------- ------------ ------------- ------------ ------------
Cash provided by (used in)
financing transactions (35,870) (31,571) 49,244 56,024 37,827
--------- ------------ ------------- ------------ ------------
Increase (decrease) in cash and equivalents - 4,357 (381) - 3,976
Cash and equivalents, beginning of period - 8,435 875 - 9,310
--------- ------------ ------------- ------------ ------------
Cash and equivalents, end of period $ - $ 12,792 $ 494 $ - $ 13,286
========= ============ ============= ============ ============
F-51
BALLY TOTAL FITNESS HOLDING CORPORATION
OFFER TO EXCHANGE
$235,000,000 PRINCIPAL AMOUNT OF ITS 10.5% SERIES B SENIOR NOTES DUE 2011,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT, FOR ANY AND ALL OF
ITS OUTSTANDING 10.5% SERIES A SENIOR NOTES DUE 2011
PROSPECTUS
________________, 2003
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits the indemnification
of the directors and officers of Bally. Bally's By-laws provide that we will
indemnify its officers, directors, employees and agents to the extent permitted
by the Delaware General Corporation Law.
Bally's Certificate of Incorporation provides for the indemnification of
directors and officers of Bally, and persons who serve or served at the request
of Bally as a director, officer, employee or agent of another corporation,
including service with respect to employee benefit plans, against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties in amounts paid or to be paid in settlement) reasonably
incurred with respect to any action, suit or proceeding, whether civil,
criminal, administrative or investigative; provided, however, Bally shall
indemnify any such person seeking indemnification in connection with a
proceeding initiated by such person only if such proceeding was authorized by
Bally's Board of Directors. In the event a claim for indemnification by any
person has not been paid in full by Bally after written request has been
received, the claimant may at any time thereafter bring suit against Bally to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall be entitled to be paid also the expense of prosecuting such
claim. The right to indemnification conferred in Bally's Certificate of
Incorporation is a contract right and shall include the right to be paid by
Bally the expenses incurred in defending any such proceeding in advance of its
final disposition. Bally maintains insurance, at its expense, to protect itself
and any director, officer, employee or agent of Bally against any such expense,
liability or loss, whether or not Bally would have the power to indemnify such
person against such expense, liability or loss under state law.
Bally has entered into indemnification agreements with each of its directors and
officers. The indemnification agreements require, among other things, Bally to
indemnify the officers and directors to the fullest extent permitted by law, and
to advance to such directors and officers all related expenses, subject to
reimbursement if it is subsequently determined that indemnification is not
permitted. Bally must also indemnify and advance all expenses incurred by such
directors and officers seeking to enforce their rights under the indemnification
agreements, and covers directors and officers under Bally's directors' and
officers' liability insurance. Although the indemnification agreements offer
substantially the same scope of coverage afforded by provisions in Bally's
Certificate of Incorporation, they provide greater assurance to directors and
officers that indemnification will be available because, as contracts, they
cannot be modified unilaterally in the future by the Board of Directors or
stockholders of Bally to eliminate the rights provided therein.
ITEM 21. EXHIBITS AND FINANCIAL DATA SCHEDULES
(a) 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).
3.3 * Articles of Organization of 59th Street Gym LLC
3.4 * Operating Agreement of 59th Street Gym LLC
3.5 * Articles of Organization of 708 Gym LLC
3.6 * Operating Agreement of 708 Gym LLC
3.7 * Amended Articles of Organization of Ace, LLC
3.8 * Operating Agreement of Ace, LLC
3.9 * Certificate of Incorporation of Bally Fitness Franchising, Inc.
II-1
3.10 * Bylaws of Bally Fitness Franchising, Inc.
3.11 * Certificate of Incorporation of Bally Franchise RSC, Inc.
3.12 * Bylaws of Bally Franchise RSC, Inc.
3.13 * Amended Articles of Incorporation of Bally Franchising Holdings,
Inc.
3.14 * Bylaws of Bally Franchising Holdings, Inc.
3.15 * Certificate of Incorporation of Bally Total Fitness Clinics, Inc.
3.16 * Bylaws of Bally Total Fitness Clinics, Inc.
3.17 * Amended Certificate of Incorporation of Bally Total Fitness
Corporation
3.18 * Bylaws of Bally Total Fitness Corporation
3.19 * Amended Articles of Incorporation of Bally Total Fitness
International, Inc.
3.20 * Bylaws of Bally Total Fitness International, Inc.
3.21 * Amended Articles of Incorporation of Bally Total Fitness of
Missouri, Inc.
3.22 * Bylaws of Bally Total Fitness of Missouri, Inc.
3.23 * Incorporation of Bally Total Fitness of Toledo, Inc.
3.24 * Bylaws of Bally Total Fitness of Toledo, Inc.
3.25 * Certificate of Incorporation of Bally's Fitness and Racquet Clubs,
Inc.
3.26 * Bylaws of Bally's Fitness and Racquet Clubs, Inc.
3.27 * Certificate of Incorporation of BFIT Rehabilitation Services, Inc.
3.28 * Bylaws of BFIT Rehabilitation Services, Inc.
3.29 * Articles of Incorporation of BFIT Rehab of Boca Raton, Inc.
3.30 * Bylaws of BFIT Rehab of Boca Raton, Inc.
3.31 * Certificate of Incorporation of BFIT Rehab of Kendall, Inc.
3.32 * Bylaws of BFIT Rehab of Kendall, Inc.
3.33 * Articles of Incorporation of BFIT Rehab of West Palm Beach, Inc.
3.34 * Bylaws of BFIT Rehab of West Palm Beach, Inc.
3.35 * Certificate of Incorporation of Connecticut Coast Fitness Centers,
Inc.
3.36 * Bylaws of Connecticut Coast Fitness Centers, Inc.
3.37 * Amended Certificate of Incorporation of Connecticut Valley Fitness
Centers, Inc.
3.38 * Bylaws of Connecticut Valley Fitness Centers, Inc.
3.41 * Certificate of Organization of Crunch LA LLC
3.42 * Operating Agreement of Crunch LA LLC
3.43 * Certificate of Incorporation of Crunch World LLC
3.44 * Operating Agreement of Crunch World LLC
3.45 * Certificate of Incorporation of Flambe LLC
3.46 * Operating Agreement of Flambe LLC
3.47 * Certificate of Incorporation of Greater Philly No. 1 Holding
Company
3.48 * Bylaws of Greater Philly No. 1 Holding Company
3.49 * Certificate of Incorporation of Greater Philly No. 2 Holding
Company
3.50 * Bylaws of Greater Philly No. 2 Holding Company
3.51 * Certificate of Incorporation of Health & Tennis Corporation of New
York
3.52 * Bylaws of Health & Tennis Corporation of New York
3.53 * Certificate of Incorporation of Holiday Health Clubs of the East
Coast, Inc.
3.54 * Bylaws of Holiday Health Clubs of the East Coast, Inc.
3.55 * Certificate of Incorporation of Holiday Health & Fitness Centers of
New York, Inc.
3.56 * Bylaws of Holiday Health & Fitness Centers of New York, Inc.
3.57 * Articles of Incorporation of Holiday Health Clubs and Fitness
Centers, Inc.
3.58 * Bylaws of Holiday Health Clubs and Fitness Centers, Inc.
3.59 * Certificate of Incorporation of Holiday Health Clubs of the
Southeast, Inc.
3.60 * Bylaws of Holiday Health Clubs of the Southeast, Inc.
3.61 * Articles of Incorporation of Holiday/Southeast Holding Corp.
3.62 * Bylaws of Holiday/Southeast Holding Corp.
3.63 * Certificate of Incorporation of Holiday Spa Health Clubs of
California
3.64 * Bylaws of Holiday Spa Health Clubs of California
3.65 * Amended Certificate of Incorporation of Holiday Universal, Inc.
3.66 * Bylaws of Holiday Universal, Inc.
3.67 * Amended Certificate of Incorporation of Crunch Fitness
International, Inc.
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3.68 * Bylaws of Crunch Fitness International, Inc.
3.69 * Certificate of Incorporation of Jack La Lanne Fitness Centers, Inc.
3.70 * Bylaws of Jack La Lanne Fitness Centers, Inc.
3.71 * Amended Certificate of Incorporation of Jack La Lanne Holding Corp.
3.72 * Bylaws of Jack La Lanne Fitness Centers, Inc.
3.73 * Certificate of Incorporation of Manhattan Sports Club, Inc.
3.74 * Bylaws of Manhattan Sports Club, Inc.
3.75 * Amended Certificate of Organization of Mission Impossible, LLC
3.76 * Operating Agreement of Mission Impossible, LLC
3.77 * Amended Certificate of Incorporation of New Fitness Holding Co.,
Inc.
3.78 * Bylaws of New Fitness Holding Co., Inc.
3.79 * Certificate of Incorporation of Nycon Holding Co., Inc.
3.80 * Bylaws of Nycon Holding Co., Inc.
3.81 * Certificate of Incorporation of Physical Fitness Centers of
Philadelphia, Inc.
3.82 * Bylaws of Physical Fitness Centers of Philadelphia, Inc.
3.83 * Amended Articles of Incorporation of PowerFlex Corporation
3.84 * Bylaws of PowerFlex Corporation
3.85 * Amended Articles of Incorporation of Providence Fitness Centers,
Inc.
3.86 * Bylaws of Providence Fitness Centers, Inc.
3.87 * Certificate of Incorporation of Rhode Island Holding Company
3.88 * Bylaws of Rhode Island Holding Company
3.89 * Certificate of Incorporation of Scandinavian Health Spa, Inc.
3.90 * Bylaws of Scandinavian Health Spa, Inc.
3.91 * Certificate of Incorporation of Scandinavian US Swim & Fitness,
Inc.
3.92 * Bylaws of Scandinavian US Swim & Fitness, Inc.
3.93 * Certificate of Incorporation of Soho Ho LLC
3.94 * Operating Agreement of Soho Ho LLC
3.95 * Certificate of Incorporation of Sportslife, Inc.
3.96 * Bylaws of Sportslife, Inc.
3.97 * Certificate of Incorporation of Sportslife Gwinnett, Inc.
3.98 * Bylaws of Sportslife Gwinnett, Inc.
3.99 * Certificate of Incorporation of Sportslife Roswell, Inc.
3.100 * Bylaws of Sportslife Roswell, Inc.
3.101 * Certificate of Incorporation of Sportslife Stone Mountain, Inc.
3.102 * Bylaws of Sportslife Stone Mountain, Inc.
3.103 * Articles of Incorporation of Sportslife Town Center II, Inc.
3.104 * Bylaws of Sportslife Town Center II, Inc.
3.105 * Amended Certificate of Incorporation of Tidelands Holiday Health
Clubs, Inc.
3.106 * Bylaws of Tidelands Holiday Health Clubs, Inc.
3.107 * Articles of Incorporation of U.S. Health, Inc.
3.108 * Bylaws of U.S. Health, Inc.
3.109 * Certificate of Organization of West Village Gym at the Archives LLC
3.110 * Operating Agreement of West Village Gym at the Archives LLC
4.1 Indenture dated as of July 2, 2003 among the Company and the
Subsidiary Guarantors and U.S. Bank Trust National Association, as
Trustee, including the form of Series A Senior Notes due 2011, the
form of Series B Senior Notes due 2011, and the form of the
Guarantee thereof (filed as an exhibit to the Company's Quarterly
Report on Form 10-Q, file no. 0-27478, for the quarter ended June
30, 2003).
4.2 First Supplemental Indenture dated as of July 22, 2003, among the
Company and the Subsidiary Guarantors and U.S. Bank Trust National
Association, as Trustee (filed as an exhibit to the Company's
Quarterly Report on Form 10-Q, file no. 0-27478, for the quarter
ended June 30, 2003).
4.3 Indenture dated as of December 16, 1998 between the Company and
U.S. Bank Trust National Association, as Trustee, including the
form of Series C Notes and form of Series D Notes (filed as an
exhibit to the
II-3
Company's Annual Report on Form 10-K, file no. 0-27478, for the
fiscal year ended December 31, 1998).
4.4 Indenture dated as of October 7, 1997 between the Company and First
Trust National Association, as Trustee, including the form of Old
Note and form of New Note (filed as an exhibit to the Company's
registration statement on Form S-4 filed October 31, 1997,
registration no. 333-39195).
5.1 * Opinion of Latham & Watkins, LLP.
5.2 * Opinion of Cary A. Gaan, Senior Vice President, Secretary and
General Counsel of Bally.
10.1 Guarantee and Collateral Agreement dated as of November 18, 1997
made by the Company and certain of its subsidiaries in favor of The
Chase Manhattan Bank, as Collateral Agent (filed as an exhibit to
the Company's registration statement on Form S-4 filed December 11,
1997, registration no. 333-39195).
10.2 Amended and Restated Pooling and Servicing Agreement dated as of
December 16, 1996 among H & T Receivable Funding Corporation, as
Transferor, Bally Total Fitness Corporation, as Servicer and Texas
Commerce Bank National Association, as Trustee (filed as an exhibit
to the Company's Annual Report on Form 10-K, file no. 0-27478, for
the fiscal year ended December 31, 1996).
10.3 Series 1996-1 Supplement dated as of December 16, 1996 to the
Pooling and Servicing Agreement dated as of December 16, 1996 among
H & T Receivable Funding Corporation, as Transferor, Bally Total
Fitness Corporation, as Servicer and Texas Commerce Bank National
Association, as Trustee (filed as an exhibit to the Company's
Annual Report on Form 10-K, file no. 0-27478, for the fiscal year
ended December 31, 1996).
10.4 Amended and Restated Back-up Servicing Agreement dated as of
December 16, 1996 among H & T Receivable Funding Corporation, as
Transferor, Bally Total Fitness Corporation, as Servicer and Texas
Commerce Bank National Association, as Trustee (filed as an exhibit
to the Company's Annual Report on Form 10-K, file no. 0-27478, for
the fiscal year ended December 31, 1996).
10.5 Tax Sharing Agreement dated as of April 6, 1983 between the Company
and Bally Entertainment Corporation (filed as an exhibit to the
Company's registration statement on Form S-1 filed January 15,
1993, registration no. 33-52868).
10.6 Tax Allocation and Indemnity Agreement dated as of January 9, 1996
between Bally Entertainment Corporation and the Company (filed as
an exhibit to the Company's Annual Report on Form 10-K, file no.
0-27478, for the fiscal year ended December 31, 1995).
10.7 First Amendment dated as of May 20, 1996 to the Tax Allocation and
Indemnity Agreement dated as of January 9, 1996 between Bally
Entertainment Corporation and the Company (filed as an exhibit to
the Company's Quarterly Report on Form 10-Q, file no. 0-27478, for
the quarter ended June 30, 1996).
10.8 Transitional Services Agreement dated as of January 9, 1996 between
Bally Entertainment Corporation and the Company (filed as an
exhibit to the Company's Annual Report on Form 10-K, file no.
0-27478, for the fiscal year ended December 31, 1995).
10.9 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).
10.10 The Company's 1996 Long-Term Incentive Plan (filed as an exhibit to
the Company's registration statement on Form S-1 filed January 3,
1996, registration no. 33-99844).
10.11 First Amendment dated as of November 21, 1997 to the Company's 1996
Long-Term Incentive Plan (filed as an exhibit to the Company's
Annual Report on Form 10-K, file no. 0-27478, for the fiscal year
ended December 31, 1997).
II-4
10.12 Second Amendment dated as of February 24, 1998 to the Company's
1996 Long-Term Incentive Plan (filed as an exhibit to the Company's
Annual Report on Form 10-K, file no. 0-27478, for the fiscal year
ended December 31, 1997).
10.13 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).
10.14 First Amendment dated as of November 19, 1996 to the Company's
Management Retirement Savings Plan (filed as an exhibit to the
Company's Annual Report on Form 10-K, file no. 0-27478, for the
fiscal year ended December 31, 1996).
10.15 Second Amendment dated as of February 24, 1998 to the Company's
Management Retirement Savings Plan (filed as an exhibit to the
Company's Annual Report on Form 10-K, file no. 0-27478, for the
fiscal year ended December 31, 1997).
10.16 The Company's 1997 Bonus Plan (filed as an exhibit to the Company's
Annual Report on Form 10-K, file no. 0-27478, for the fiscal year
ended December 31, 1997).
10.17 First Amendment dated as of February 24, 1998 to the Company's 1997
Bonus Plan (filed as an exhibit to the Company's Annual Report on
Form 10-K, file no. 0-27478, for the fiscal year ended December 31,
1997).
10.18 First Amendment dated as of April 27, 1999 to the Series 1996-1
Supplement to Amended and Restated Pooling and Servicing Agreement
among H & T Receivable Funding Corporation, as Transferor, Bally
Total Fitness Corporation, as Servicer, and Texas Commerce Bank
National Association, as Trustee (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q, file no. 0-27478, for the
quarter ended March 31, 1999).
10.19 Series 2001-1 Supplement dated as of November 30, 2001 to the
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
JPMorgan Chase Bank, as Trustee (filed as an exhibit to the
Company's Annual Report on Form 10-K, file no. 0-27478, for the
fiscal year ended December 31, 2001).
10.20 Certificate Purchase Agreement dated as of November 30, 2001 among
H & T Receivable Funding Corporation, as Transferor, Bally Total
Fitness Corporation, as Servicer, various financial institutions as
Conduit Purchasers and Canadian Imperial Bank of Commerce, as
Managing and Administrative 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, 2001).
10.21 Amended and Restated Credit Agreement dated as of November 18, 1997
as amended and restated as of July 2, 2003 among the Company,
several banks and financial institutions which are parties thereto
and JPMorgan Chase Bank, as Agent (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q, file no. 0-27478, for the
quarter ended June 30, 2003)..
10.22 Letter Agreement, dated March 19, 2003, between Bally Total Fitness
Holding Corporation, SLS Management, LLC., and Scott L. Swid (filed
as an exhibit to the Company's Current Report on Form 8-K, file no.
0-27478, dated March 21, 2003).
10.23 Letter Agreement, dated March 19, 2003, between Bally Total Fitness
Holding Corporation and Martin E. Franklin (filed as an exhibit to
the Company's Current Report on Form 8-K, file no. 0-27478, dated
March 21, 2003).
10.24 Employment Agreement effective as of January 1, 2003 between the
Company and Paul A. Toback (filed as an exhibit to the Company's
Annual Report on Form 10-K, file no. 0-27478, for the fiscal year
ended
II-5
December 31, 2002).
10.25 Employment Agreement effective as of January 1, 2003 between the
Company and John W. Dwyer (filed as an exhibit to the Company's
Annual Report on Form 10-K, file no. 0-27478, for the fiscal year
ended December 31, 2002).
10.26 Employment Agreement effective as of January 1, 2003 between the
Company and John H. Wildman (filed as an exhibit to the Company's
Annual Report on Form 10-K, file no. 0-27478, for the fiscal year
ended December 31, 2002).
10.27 Employment Agreement effective as of January 1, 2003 between the
Company and William G. Fanelli (filed as an exhibit to the
Company's Annual Report on Form 10-K, file no. 0-27478, for the
fiscal year ended December 31, 2002).
10.28 Employment Agreement effective as of January 1, 2003 between the
Company and Cary A. Gaan (filed as an exhibit to the Company's
Annual Report on Form 10-K, file no. 0-27478, for the fiscal year
ended December 31, 2002).
10.29 Employment Agreement effective as of January 1, 2003 between the
Company and Harold Morgan (filed as an exhibit to the Company's
Annual Report on Form 10-K, file no. 0-27478, for the fiscal year
ended December 31, 2002).
12 * Statement of Computation of Ratios of Earnings to Fixed Charges.
21 * List of subsidiaries of the registrants.
23.1 * Consent of Ernst & Young LLP.
23.2 * Consent of Latham & Watkins, LLP (contained in opinion filed as
Exhibit 5.1).
23.3 * Consent of Cary A. Gaan, Senior Vice President, Secretary and
General Counsel of Bally (contained in opinion filed as Exhibit
5.2).
24 * Powers of Attorney for registrants (set forth following the
signature page hereto).
25 * Form T-1 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939, as amended, of U.S. Bank National
Association, as Trustee.
* Filed herewith.
ITEM 22. UNDERTAKINGS
The undersigned registrants hereby undertake as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
The undersigned registrants hereby undertake that every prospectus (1)
that is filed pursuant to the immediately preceding paragraph or (2) that
purports to meet the requirements of Section 10(a)(3) of the Securities Act of
1933 and is used in connection with an offering of securities subject to Rule
415, will be filed as a part of an
II-6
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrants pursuant to the foregoing provisions, or otherwise, the
registrants have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrants
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by final
adjudication of such issue.
The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Bally Total
Fitness Holding Corporation has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Chicago, State of Illinois, on September 25, 2003.
BALLY TOTAL FITNESS HOLDING CORPORATION
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
59TH STREET GYM LLC
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Manager
708 GYM LLC
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Manager
ACE, LLC
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Manager
BALLY FITNESS FRANCHISING, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
II-8
BALLY FRANCHISE RSC, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
BALLY FRANCHISING HOLDINGS, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
BALLY TOTAL FITNESS CLINICS, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
BALLY TOTAL FITNESS CORPORATION
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
BALLY TOTAL FITNESS INTERNATIONAL, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
BALLY TOTAL FITNESS OF MISSOURI, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
II-9
BALLY TOTAL FITNESS OF TOLEDO, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
BALLY'S FITNESS AND RACQUET CLUBS, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
BFIT REHABILITATION SERVICES, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
BFIT REHAB OF BOCA RATON, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
BFIT REHAB OF KENDALL, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
BFIT REHAB OF WEST PALM BEACH, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
CONNECTICUT COAST FITNESS CENTERS, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
II-10
CONNECTICUT VALLEY FITNESS CENTERS, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
CRUNCH LA LLC
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Manager
CRUNCH WORLD LLC
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Manager
FLAMBE LLC
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Manager
GREATER PHILLY NO. 1 HOLDING COMPANY
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
GREATER PHILLY NO. 2 HOLDING COMPANY
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
HEALTH & TENNIS CORPORATION OF NEW YORK
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
II-11
HOLIDAY HEALTH CLUBS OF THE EAST COAST, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
HOLIDAY HEALTH & FITNESS CENTERS OF NEW YORK, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
HOLIDAY HEALTH CLUBS AND FITNESS CENTERS, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
HOLIDAY HEALTH CLUBS OF THE SOUTHEAST, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
HOLIDAY/SOUTHEAST HOLDING CORP.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
HOLIDAY SPA HEALTH CLUBS OF CALIFORNIA
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
HOLIDAY UNIVERSAL, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
II-12
CRUNCH FITNESS INTERNATIONAL, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
JACK LA LANNE FITNESS CENTERS, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
JACK LA LANNE HOLDING CORP.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
MANHATTAN SPORTS CLUB, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
MISSION IMPOSSIBLE, LLC
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Manager
NEW FITNESS HOLDING CO., INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
NYCON HOLDING CO., INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
II-13
PHYSICAL FITNESS CENTERS OF PHILADELPHIA, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
POWERFLEX CORPORATION
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
PROVIDENCE FITNESS CENTERS, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
RHODE ISLAND HOLDING COMPANY
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
SCANDINAVIAN HEALTH SPA, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
SCANDINAVIAN US SWIM & FITNESS, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
SOHO HO LLC
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Manager
II-14
SPORTSLIFE, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
SPORTSLIFE GWINNETT, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
SPORTSLIFE ROSWELL, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
SPORTSLIFE STONE MOUNTAIN, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
SPORTSLIFE TOWN CENTER II, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
TIDELANDS HOLIDAY HEALTH CLUBS, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
U.S. HEALTH, INC.
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Director
II-15
WEST VILLAGE GYM AT THE ARCHIVES LLC
By: /s/John W. Dwyer
----------------
Name: John W. Dwyer
Title: Executive Vice President, Chief Financial Officer and
Manager
II-16
POWER OF ATTORNEY
The undersigned directors and officers of Bally Total Fitness Holding
Corporation and each of the other registrants named herein hereby constitute and
appoint Paul A. Toback and John W. Dwyer with full power to act and with full
power of substitution and resubstitution, our true and lawful attorneys-in-fact
with full power to execute in our name and behalf in the capacities indicated
below this Registration Statement on Form S-4 and any and all amendments
thereto, including post-effective amendments to this Registration Statement and
to sign any and all additional registration statements relating to the same
offering of securities as this Registration Statement that are filed pursuant to
Rule 462(b) of the Securities Act of 1933, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and hereby ratify and confirm that said
attorney-in-fact, or his substitutes shall lawfully do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
BALLY TOTAL FITNESS HOLDING CORPORATION
SIGNATURE TITLE DATE
- ---------------------------------- ----------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President, Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ Theodore P. Noncek
- ---------------------------------- Vice President, Controller September 25, 2003
Theodore P. Noncek (principal accounting officer)
/s/ J. Kenneth Looloian
- ---------------------------------- Director September 25, 2003
J. Kenneth Looloian
/s/ James F. McAnally, M.D.
- ---------------------------------- Director September 25, 2003
James F. McAnally, M.D.
/s/ Martin E. Franklin
- ---------------------------------- Director September 25, 2003
Martin E. Franklin
/s/ John W. Rogers, Jr.
- ---------------------------------- Director September 25, 2003
John W. Rogers, Jr.
/s/ Stephen C. Swid
- ---------------------------------- Director September 25, 2003
Stephen C. Swid
II-17
59TH STREET GYM LLC
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Manager
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Manager
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Manager September 25, 2003
Cary A. Gaan
708 GYM LLC
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Manager
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Manager
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Manager September 25, 2003
Cary A. Gaan
ACE, LLC
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Manager
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Manager
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Manager September 25, 2003
Cary A. Gaan
II-18
BALLY FITNESS FRANCHISING, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
BALLY FRANCHISE RSC, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
BALLY FRANCHISING HOLDINGS, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
II-19
BALLY TOTAL FITNESS CLINICS, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ----------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- --------------------------------- Director September 25, 2003
Cary A. Gaan
BALLY TOTAL FITNESS CORPORATION
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ Theodore P. Noncek
- ---------------------------------- Vice President, Controller September 25, 2003
Theodore P. Noncek (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
BALLY TOTAL FITNESS INTERNATIONAL, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
II-20
BALLY TOTAL FITNESS OF MISSOURI, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
BALLY TOTAL FITNESS OF TOLEDO, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
BALLY'S FITNESS AND RACQUET CLUBS, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
II-21
BFIT REHABILITATION SERVICES, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
BFIT REHAB OF BOCA RATON, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
BFIT REHAB OF KENDALL, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
II-22
BFIT REHAB OF WEST PALM BEACH, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Director
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
CONNECTICUT COAST FITNESS CENTERS, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Director
/s/ William Fanelli
- ---------------------------------- Director September 25, 2003
William Fanelli
/s/ Jerome B. Kahn
- ---------------------------------- Director September 25, 2003
Jerome B. Kahn
/s/ George Jaconetti
- ---------------------------------- Director September 25, 2003
George Jaconetti
II-23
CONNECTICUT VALLEY FITNESS CENTERS, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Director
/s/ William Fanelli
- ---------------------------------- Director September 25, 2003
William Fanelli
/s/ Jerome B. Kahn
- ---------------------------------- Director September 25, 2003
Jerome B. Kahn
/s/ George Jaconetti
- ---------------------------------- Director September 25, 2003
George Jaconetti
CRUNCH LA LLC
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Manager
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Manager
/s/ Cary A. Gaan
- ---------------------------------- Manager September 25, 2003
Cary A. Gaan
CRUNCH WORLD LLC
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Director
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
II-24
FLAMBE LLC
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Manager
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Manager
/s/ Cary A. Gaan
- ---------------------------------- Manager September 25, 2003
Cary A. Gaan
GREATER PHILLY NO. 1 HOLDING COMPANY
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Director
/s/ William Fanelli
- ---------------------------------- Director September 25, 2003
William Fanelli
/s/ Jerome B. Kahn
- ---------------------------------- Director September 25, 2003
Jerome B. Kahn
/s/ George Jaconetti
- ---------------------------------- Director September 25, 2003
George Jaconetti
II-25
GREATER PHILLY NO. 2 HOLDING COMPANY
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ----------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ----------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Director
/s/ William Fanelli
- ----------------------------- Director September 25, 2003
William Fanelli
/s/ Jerome B. Kahn
- ----------------------------- Director September 25, 2003
Jerome B. Kahn
/s/ George Jaconetti
- ----------------------------- Director September 25, 2003
George Jaconetti
HEALTH & TENNIS CORPORATION OF NEW YORK
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Director
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
HOLIDAY HEALTH CLUBS OF THE EAST COAST, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Director
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
II-26
HOLIDAY HEALTH & FITNESS CENTERS OF NEW YORK, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ----------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ----------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Director
/s/ Cary A. Gaan
- ----------------------------------- Director September 25, 2003
Cary A. Gaan
/s/ Jerome B. Kahn
- ----------------------------------- Director September 25, 2003
Jerome B. Kahn
/s/ George Jaconetti
- ----------------------------------- Director September 25, 2003
George Jaconetti
HOLIDAY HEALTH CLUBS AND FITNESS CENTERS, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Director
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
HOLIDAY HEALTH CLUBS OF THE SOUTHEAST, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Director
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
II-27
HOLIDAY/SOUTHEAST HOLDING CORP.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
HOLIDAY SPA HEALTH CLUBS OF CALIFORNIA
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
HOLIDAY UNIVERSAL, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
II-28
CRUNCH FITNESS INTERNATIONAL, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
JACK LA LANNE FITNESS CENTERS, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Willam Fanelli
- ---------------------------------- Director September 25, 2003
Willam Fanelli
JACK LA LANNE HOLDING CORP.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
II-29
MANHATTAN SPORTS CLUB, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Director
/s/ Willam Fanelli
- ---------------------------------- Director September 25, 2003
Willam Fanelli
MISSION IMPOSSIBLE, LLC
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Manager
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Manager
/s/ Cary A. Gaan
- ---------------------------------- Manager September 25, 2003
Cary A. Gaan
NEW FITNESS HOLDING CO., INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Director
/s/ William Fanelli
- ---------------------------------- Director September 25, 2003
William Fanelli
/s/ Jerome B. Kahn
- ---------------------------------- Director September 25, 2003
Jerome B. Kahn
/s/ George Jaconetti
- ---------------------------------- Director September 25, 2003
George Jaconetti
II-30
NYCON HOLDING CO., INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Director
/s/ William Fanelli
- ---------------------------------- Director September 25, 2003
William Fanelli
/s/ Jerome B. Kahn
- ---------------------------------- Director September 25, 2003
Jerome B. Kahn
/s/ George Jaconetti
- ---------------------------------- Director September 25, 2003
George Jaconetti
PHYSICAL FITNESS CENTERS OF PHILADELPHIA, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Director
/s/ William Fanelli
- ---------------------------------- Director September 25, 2003
William Fanelli
/s/ Jerome B. Kahn
- ---------------------------------- Director September 25, 2003
Jerome B. Kahn
/s/ George Jaconetti
- ---------------------------------- Director September 25, 2003
George Jaconetti
II-31
POWERFLEX CORPORATION
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Director
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
PROVIDENCE FITNESS CENTERS, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Director
/s/ William Fanelli
- ---------------------------------- Director September 25, 2003
William Fanelli
/s/ Jerome B. Kahn
- ---------------------------------- Director September 25, 2003
Jerome B. Kahn
/s/ George Jaconetti
- ---------------------------------- Director September 25, 2003
George Jaconetti
II-32
RHODE ISLAND HOLDING COMPANY
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Director
/s/ William Fanelli
- ---------------------------------- Director September 25, 2003
William Fanelli
/s/ Jerome B. Kahn
- ---------------------------------- Director September 25, 2003
Jerome B. Kahn
/s/ George Jaconetti
- ---------------------------------- Director September 25, 2003
George Jaconetti
SCANDINAVIAN HEALTH SPA, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer, (principal accounting officer) and
Director
/s/ William Fanelli
- ---------------------------------- Director September 25, 2003
William Fanelli
/s/ Jerome B. Kahn
- ---------------------------------- Director September 25, 2003
Jerome B. Kahn
/s/ George Jaconetti
- ---------------------------------- Director September 25, 2003
George Jaconetti
II-33
SCANDINAVIAN US SWIM & FITNESS, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
SOHO HO LLC
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Manager
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Manager
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Manager September 25, 2003
Cary A. Gaan
SPORTSLIFE, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
II-34
SPORTSLIFE GWINNETT, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
SPORTSLIFE ROSWELL, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
SPORTSLIFE STONE MOUNTAIN, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
II-35
SPORTSLIFE TOWN CENTER II, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
TIDELANDS HOLIDAY HEALTH CLUBS, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
U.S. HEALTH, INC.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
II-36
WEST VILLAGE GYM AT THE ARCHIVES LLC
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------------------------- ------------------
/s/ Paul A. Toback
- ---------------------------------- Chairman of the Board, President and September 25, 2003
Paul A. Toback Chief Executive Officer, Director
/s/ John W. Dwyer
- ---------------------------------- Executive Vice President and Chief Financial September 25, 2003
John W. Dwyer Officer and Director
/s/ William G. Fanelli
- ---------------------------------- Senior Vice President, Finance September 25, 2003
William G. Fanelli (principal accounting officer)
/s/ Cary A. Gaan
- ---------------------------------- Director September 25, 2003
Cary A. Gaan
II-37