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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1997
REGISTRATION NO. 333-39195
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BALLY TOTAL FITNESS HOLDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 7991 36-3228107
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
8700 West Bryn Mawr Avenue
Chicago, Illinois, 60631
(773) 380-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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LEE S. HILLMAN
Bally Total Fitness Holding Corporation
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
Benesch, Friedlander, Coplan & Aronoff LLP
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114
(216) 363-4500
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective and
all other conditions to the exchange offer pursuant to the registration rights
agreement described in the enclosed Prospectus have been satisfied or waived.
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If 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 of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration 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 of the earlier effective registration statement for the
same offering. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT 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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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BALLY TOTAL FITNESS HOLDING CORPORATION
CROSS-REFERENCE SHEET
ITEM NUMBER IN FORM S-4 LOCATION IN PROXY STATEMENT/PROSPECTUS
- ------------------------------------------------ -------------------------------------------
1. Forepart of Registration Statement and Facing Page of the Registration Statement;
Outside Front Cover Page of Prospectus Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front Cover Page of Prospectus;
of Prospectus Available Information; Outside Back Cover
Page of Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Outside Front Cover Page of Prospectus;
Charges and Other Information Summary; Risk Factors; Selected
Consolidated Financial Data
4. Terms of the Transaction Outside Front Cover Page of Prospectus;
Summary; The Exchange Offer; Description of
the New Notes
5. Pro Forma Financial Information Summary Historical and Pro Forma
Consolidated Financial Data
6. Material Contracts with the Company Being *
Acquired
7. Additional Information Required for *
Reoffering by Persons and Parties Deemed
to be Underwriters
8. Interests of Named Experts and Counsel Legal Matters; Experts
9. Disclosure of Commission Position on *
Indemnification for Securities Act
Liabilities
10. Information with Respect to S-3 Registrants Summary; Summary Historical and Pro Forma
Consolidated Financial Data; Management's
Discussion and Analysis of Results of
Operations and Financial Condition;
Business; Consolidated Financial State-
ments
11. Incorporation of Certain Information by Incorporation of Certain Information by
Reference Reference
12. Information with Respect to S-2 or S-3 *
Registrants
13. Incorporation of Certain Information by *
Reference
14. Information with Respect to Registrants *
Other Than S-3 or S-2 Registrants
15. Information with Respect to S-3 Companies *
16. Information with Respect to S-2 or S-3 *
Companies
17. Information with Respect to Companies Other *
Than S-3 or S-2 Companies
18. Information if Proxies, Consents or *
Authorizations are to be Solicited
19. Information if Proxies, Consents or Management; The Exchange Offer
Authorizations are not to be Solicited or
in an Exchange Offer
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* Omitted because the item is inapplicable or the answer thereto is negative.
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PROSPECTUS
$225,000,000
LOGO
BALLY TOTAL FITNESS HOLDING CORPORATION
OFFER TO EXCHANGE
ALL OUTSTANDING
9 7/8% SERIES A SENIOR SUBORDINATED NOTES DUE 2007
($225,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR 9 7/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2007
The Exchange Offer (as defined) and withdrawal rights will expire at 5:00
p.m., New York City time, on January 15, 1998 (as such date may be extended, the
"Expiration Date").
Bally Total Fitness Holding Corporation, a Delaware corporation (the
"Company"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus, as it may be amended and supplemented from time to
time (the "Prospectus"), and the accompanying Letter of Transmittal (the "Letter
of Transmittal", and, together with the Prospectus, the "Exchange Offer"), to
exchange $1,000 in principal amount of its 9 7/8% Series B Senior Subordinated
Notes due 2007 (the "New Notes") for each $1,000 in principal amount of its
outstanding 9 7/8% Series A Senior Subordinated Notes due 2007 (the "Old Notes")
(the Old Notes and the New Notes are collectively referred to herein as the
"Notes") held by Eligible Holders (as defined), of which an aggregate principal
amount of $225 million is outstanding. See "The Exchange Offer". For purposes of
the Exchange Offer, "Eligible Holder" shall mean the registered owner of any
Registrable Securities (as defined) as reflected on the records of First Trust
National Association, a national banking corporation, as registrar for the Old
Notes (in such capacity, the "Registrar"), or any person whose Registrable
Securities are held of record by the Depositary (as defined), as of the Record
Date. For purposes of the Exchange Offer, "Registrable Securities" means each
Old Note until the earliest to occur of (i) the date on which such Old Note has
been exchanged for a New Note in the Exchange Offer, (ii) the date on which a
registration statement filed by the Company which covers the Old Note has been
declared effective under the Securities Act of 1933, as amended (the "Securities
Act"), and the Old Note is disposed of in accordance with such registration
statement, (iii) the date on which such Old Note is sold to the public pursuant
to Rule 144 (or any similar provision then in force, but not Rule 144A) under
the Securities Act, (iv) the date on which the Old Note ceases to be
outstanding, or (v) the date on which the Old Note can be sold by the holder
thereof without limitation as to holding period or volume.
The Company will accept for exchange any and all Old Notes that are validly
tendered prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders
of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Offer is not conditioned upon any
minimum principal amount of the Old Notes being tendered for exchange. However,
the Exchange Offer is subject to certain customary conditions, which may be
waived, in part or in whole, by the Company, and to the terms and provisions of
the Registration Rights Agreement, dated as of October 7, 1997 (the
"Registration Rights Agreement"), among the Company and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities Inc.,
Societe Generale Securities Corporation and Ladenburg Thalmann & Co. Inc.
(collectively, the "Initial Purchasers"). The Old Notes may be tendered only in
multiples of $1,000. See "The Exchange Offer".
(continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 17 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY ELIGIBLE HOLDERS IN
EVALUATING THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "SEC") OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SEC OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is December 11, 1997.
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An aggregate of $225 million principal amount of Old Notes were sold by the
Company to the Initial Purchasers on October 7, 1997 (the "Closing Date")
without registration under the Securities Act, in reliance upon exemptions
therefrom, pursuant to a Purchase Agreement dated September 29, 1997 (the
"Purchase Agreement") among the Company and the Initial Purchasers. The Initial
Purchasers subsequently resold the Old Notes in reliance on Rule 144A under the
Securities Act ("Rule 144A"), Regulation S under the Securities Act ("Regulation
S") and certain other exemptions under the Securities Act. The Company and the
Initial Purchasers also entered into the Registration Rights Agreement, pursuant
to which the Company granted certain registration rights for the benefit of the
holders of the Old Notes. The Exchange Offer is intended to satisfy certain of
the Company's obligations under the Registration Rights Agreement with respect
to the Old Notes. See "The Exchange Offer -- Purpose and Effect".
The Old Notes were, and the New Notes will be, issued under the Indenture
dated as of October 7, 1997 (the "Indenture") between the Company and First
Trust National Association, a national banking corporation, as trustee (in such
capacity, the "Trustee"). The form and terms of the New Notes will be identical
in all material respects to the form and terms of the Old Notes, except that (i)
the New Notes will have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof, (ii) holders of New
Notes will not be entitled to any Additional Interest (as defined) pursuant to
the Registration Rights Agreement in respect of Old Notes constituting
Registrable Securities held by such holders upon the occurrence of a
Registration Default (as defined), and (iii) holders of New Notes will not be,
and upon consummation of the Exchange Offer, Eligible Holders of Old Notes will
no longer be, entitled to certain rights under the Registration Rights Agreement
intended for the holders of Registrable Securities; provided, however, that (A)
an Eligible Holder of Old Notes who is not legally permitted to participate in
the Exchange Offer based upon advice of counsel to that effect or who does not
receive fully tradeable New Notes pursuant to the Exchange Offer, subject to
reasonable verification by the Company, and (B) the Initial Purchasers acquiring
a majority of the initial aggregate principal amount of Old Notes with respect
to Registrable Securities acquired directly from the Company, shall have the
right to require the Company to file a shelf registration statement pursuant to
Rule 415 under the Securities Act (a "Shelf Registration Statement") solely for
the benefit of such Eligible Holder of Old Notes and will be entitled to
Additional Interest following the occurrence of a Registration Default in
connection with the filing of such Shelf Registration Statement. The Exchange
Offer shall be deemed consummated upon the occurrence of the delivery by the
Company to the Registrar of New Notes in the same aggregate principal amount as
the aggregate principal amount of Old Notes that were tendered by Eligible
Holders pursuant to the Exchange Offer. See "The Exchange Offer -- Termination
of Certain Rights", "-- Procedures for Tendering Old Notes" and "Description of
the New Notes".
Interest on the New Notes is payable semiannually, in arrears, on April 15
and October 15 of each year (each, an "Interest Payment Date") commencing on
April 15, 1998. Interest on the New Notes will accrue from the last Interest
Payment Date on which interest was paid on the Old Notes surrendered in exchange
therefor or, if no interest has been paid on the Old Notes, from the date of
original issue of the Old Notes. Eligible Holders of Old Notes accepted for
exchange will be deemed to have waived the right to receive any other payments
or accrued interest on the Old Notes. The New Notes will mature on October 15,
2007. See "Description of the New Notes -- General".
The New Notes will be redeemable at the option of the Company, in whole or
in part, at any time on or after October 15, 2002, at the redemption prices set
forth herein, together with accrued and unpaid interest, if any, to the
redemption date. In addition, on or prior to October 15, 2000, the Company may
redeem up to 35% of the Notes originally issued, at a price of 109 7/8% of the
principal amount thereof, together with accrued and unpaid interest, if any, to
the redemption date, with the net proceeds of one or more Public Equity
Offerings (as defined), provided that not less than $146.3 million in principal
amount of the Notes is outstanding immediately after giving effect to such
redemption. Upon the occurrence of a Change of Control (as defined), each holder
of Notes, subject to the limitations described herein, will have the right to
require the Company to purchase all or a portion of such holder's Notes at a
purchase price in cash equal to 101% of the principal amount thereof, together
with accrued and unpaid interest, if any, to the date of purchase.
The Company is making the Exchange Offer in reliance on the position of the
staff of the Division of Corporation Finance of the SEC (the "SEC Staff") as set
forth in certain interpretive letters addressed to third
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parties in other transactions. However, the Company has not sought its own
interpretive letter and there can be no assurance that the SEC Staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the SEC
Staff, and subject to the following sentences, the Company believes that New
Notes issued pursuant to the Exchange Offer to an Eligible Holder in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by an
Eligible Holder (other than (i) a broker-dealer who purchased Old Notes directly
from the Company for resale pursuant to Rule 144A or any other available
exemption under the Securities Act, or (ii) a person that is an affiliate of the
Company within the meaning of Rule 405 under the Securities Act), without
further compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Eligible Holder is acquiring the New
Notes in the ordinary course of business and is not participating, and has no
arrangement or understanding with any person to participate, in the
"distribution" (within the meaning of the Securities Act) of the New Notes.
Eligible Holders wishing to accept the Exchange Offer must represent to the
Company, among other things, that such conditions have been met. Any Eligible
Holder of Old Notes who is an "affiliate" of the Company or who intends to
participate in the Exchange Offer for the purpose of participating in the
"distribution" of the New Notes, or any broker-dealer who purchased Old Notes
from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act, (a) will not be able to rely on the
interpretations of the SEC Staff set forth in the above-mentioned interpretive
letters, (b) will not be permitted or entitled to tender such Old Notes in the
Exchange Offer, and (c) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any sale or other
transfer of such Old Notes unless such sale is made pursuant to an exemption
from such requirement. See "The Exchange Offer -- Resales of the New Notes".
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer may be deemed to be a Statutory Underwriter, must acknowledge
that it acquired the Old Notes for its own account as a result of market-making
activities or other trading activities and must agree that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such New Notes. The Letter of Transmittal states that by so
acknowledging 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.
Based on the position taken by the SEC Staff in the interpretive letters
referred to above, the Company believes that broker-dealers who acquired Old
Notes for their own accounts, as a result of market-making or other trading
activities ("Participating Broker-Dealers"), may fulfill their prospectus
delivery requirements with respect to the New Notes received upon exchange of
such Old Notes with a prospectus meeting the requirements of the Securities Act,
which may be the prospectus prepared for an exchange offer so long as it
contains a description of the plan of distribution with respect to the resale of
such New Notes. Accordingly, this Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of New Notes received in exchange for Old Notes if such
Old Notes were acquired by such Participating Broker-Dealer for its own account
as a result of market-making or other trading activities. Subject to certain
conditions, the Company has agreed that this Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of such New Notes. See "Plan of Distribution". However,
a Participating Broker-Dealer who intends to use this Prospectus in connection
with the resale of New Notes received in exchange for Old Notes pursuant to the
Exchange Offer must notify the Company, or cause the Company to be notified, on
or prior to the Expiration Date, that it is a Participating Broker-Dealer. Such
notice may be given in the space provided for that purpose in the Letter of
Transmittal or may be delivered to the Exchange Agent at one of the addresses
set forth herein under "The Exchange Offer -- The Exchange Agent; Assistance".
Any Participating Broker-Dealer who is an "affiliate" of the Company may not
rely on such interpretive letters and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. See "The Exchange Offer -- Resales of the New Notes".
Each Participating Broker-Dealer who surrenders Old Notes pursuant to the
Exchange Offer will be deemed to have agreed that, upon receipt of notice from
the Company of the occurrence of any event or the discovery of any fact which
makes any statement contained in this Prospectus untrue in any material respect
or which causes this Prospectus to omit to state a material fact necessary in
order to make the statements contained herein, in light of the circumstances
under which they were made, not misleading or of the occurrence of certain other
events specified in the Registration Rights Agreement, such Participating
Broker-Dealer will suspend the sale of New
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Notes pursuant to this Prospectus until the Company has amended or supplemented
this Prospectus to correct such misstatement or omission and has furnished
copies of the amended or supplemented Prospectus to such Participating
Broker-Dealer or the Company has given notice that the sale of the New Notes may
be resumed, as the case may be.
There has previously been only a limited secondary market, and no public
market, for the Old Notes. The Old Notes are eligible for trading in the Private
Offering, Resales and Trading through Automatic Linkages ("PORTAL") system of
the National Association of Securities Dealers, Inc. (the "NASD"). There can be
no assurance that an active trading market for the New Notes will develop. If
such a trading market develops for the New Notes, future trading prices will
depend on many factors, including, among other things, prevailing interest
rates, the Company's results of operations and the market for similar
securities. Depending on such factors, the New Notes may trade at a discount
from their face value. See "Risk Factors -- Absence of Public Market for the New
Notes".
The Company will not receive any proceeds from the Exchange Offer, but,
pursuant to the Registration Rights Agreement, the Company will bear certain
registration expenses. No underwriter is being utilized in connection with the
Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
A PARTICIPATING BROKER-DEALER WHO INTENDS TO USE THIS PROSPECTUS IN
CONNECTION WITH THE RESALE OF NEW NOTES RECEIVED IN EXCHANGE FOR OLD NOTES
PURSUANT TO THE EXCHANGE OFFER MUST NOTIFY THE COMPANY, OR CAUSE THE COMPANY TO
BE NOTIFIED, ON OR PRIOR TO THE EXPIRATION DATE, THAT IT IS A PARTICIPATING
BROKER-DEALER. SUCH NOTICE MAY BE GIVEN IN THE SPACE PROVIDED FOR THAT PURPOSE
IN THE LETTER OF TRANSMITTAL OR MAY BE DELIVERED TO THE EXCHANGE AGENT AT ONE OF
THE ADDRESSES SET FORTH HEREIN UNDER "THE EXCHANGE OFFER -- THE EXCHANGE AGENT;
ASSISTANCE". IN ADDITION, BY TENDERING OLD NOTES PURSUANT TO THE EXCHANGE OFFER,
ELIGIBLE HOLDERS AND BENEFICIAL OWNERS (AS DEFINED) WILL BE DEEMED TO HAVE MADE
CERTAIN REPRESENTATIONS AND COVENANTS TO THE COMPANY. SEE "THE EXCHANGE OFFER
- -- PROCEDURES FOR TENDERING OLD NOTES".
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
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PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in this
Prospectus and is qualified by the more detailed information set forth elsewhere
in this Prospectus which should be read in its entirety. Unless otherwise
indicated, capitalized terms used in this Prospectus Summary have the respective
meanings ascribed to them elsewhere in this Prospectus. The information
contained in this Prospectus Summary contains forward-looking statements which
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. See "Special Note Regarding
Forward-Looking Statements" on page 14.
THE COMPANY
The Company is the largest (and only nationwide) commercial operator of
fitness centers in the United States in terms of revenues, the number of
members, and the number and square footage of facilities. As of September 30,
1997, the Company operated approximately 320 fitness centers concentrated in
major metropolitan areas in 27 states and Canada and had approximately four
million members. During 1996, Bally's members made more than 100 million visits
to its fitness centers. In August 1997, the Company completed a public offering
of 8,000,000 shares of its common stock, which provided net proceeds of $88.4
million to the Company (the "Stock Offering").
The Company offers its members value by providing access to
state-of-the-art fitness facilities with affordable membership programs. Bally's
fitness centers feature an outstanding selection of cardiovascular, conditioning
and strength equipment and offer extensive aerobic training programs. The
Company's new club prototype achieves efficiency by focusing on those fitness
services that receive a high degree of member use. Most of the Company's current
fitness centers include pools, racquet courts or other athletic facilities that
receive a lower degree of member use. The Company has clustered its fitness
centers in major metropolitan areas in order to achieve marketing and operating
efficiencies. These markets include, among others, New York, Los Angeles,
Chicago, Houston, Dallas, Detroit, Baltimore, Washington, D.C., Philadelphia,
Miami, Cleveland, Atlanta, Milwaukee, Seattle, Minneapolis, Orlando, Denver,
Phoenix, St. Louis, Boston and Kansas City. In 1996, the Company completed the
process of renaming its fitness centers so they all use the servicemark "Bally
Total Fitness", thereby enhancing brand identity, concentrating advertising and
eliminating the prior practice of using more than 25 different regional
servicemarks and trade names.
The Company's primary target market for new members is the 18 to 34-year
old, middle income segment of the population. Bally markets itself to this
consumer segment through the use of a variety of membership options and payment
plans. The membership options offered by the Company range from single-club
memberships to premium memberships which provide additional amenities and the
use of all of Bally's fitness centers nationwide. Similarly, the Company offers
a broad range of payment alternatives. Typically, members pay an initiation fee
which can either be financed (generally for 36 months and subject to downpayment
requirements) or paid-in-full at the time of joining. Members are also required
to pay monthly membership dues in order to use the Company's fitness facilities.
Management believes the various memberships and payment plans, in addition to
Bally's strong brand identity and the convenience of its multiple locations,
provide the Company distinct competitive advantages.
OPERATING STRATEGIES
In October 1996, Lee S. Hillman was named President and Chief Executive
Officer of the Company. This completed the transition of senior management of
the Company from predominantly marketing oriented managers, including the
original founders of the Company, to managers with more financial and
operational orientation. Until December 1996, a number of the Company's top
executives, including Mr. Hillman, also performed significant functions for
Bally Entertainment Corporation ("Entertainment"), the owner of the Company
until January 1996. Current management intends to pursue a number of operating
strategies, including the following, which the Company believes will improve the
results of its core business:
- Reduce Discount Pricing on Paid-In-Full Membership Plans -- Since late
1990, the Company has managed its pricing structure to generate immediate
cash for liquidity by significantly discounting its
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membership plans and by emphasizing paid-in-full instead of financed
membership plans. Additional working capital provided by the Stock
Offering will allow the Company to sell more financed membership plans,
which historically have generated better long-term returns for the
Company including streams of recurring dues revenues, rather than selling
discounted paid-in-full memberships for which dues are frequently waived
for up to three years.
- Upgrade and Expand Fitness Centers -- The Company intends to expand and
upgrade its facilities in order to increase its membership base and more
effectively capitalize on its streamlined marketing and administrative
functions. Management plans to make capital expenditures of approximately
$10 million to $12 million over the next twelve months to maintain and
make minor upgrades to the Company's existing facilities, which include
exercise equipment upgrades, heating, ventilation and air conditioning
("HVAC") and other operating equipment upgrades and replacements, and
locker room and workout area refurbishments, among others. In addition,
the Company intends to invest approximately $10 million of the net
proceeds from the Stock Offering over the next two years to extensively
refurbish and make major upgrades to approximately 25% of its clubs,
which include converting low-usage pools and racquet areas into expanded
exercise areas and to a lesser extent retail and outpatient
rehabilitation service areas, adding and upgrading exercise equipment,
and refreshing interior and exterior finishes to improve club ambience,
among others. The Company also intends to spend approximately $25 million
to $30 million of the net proceeds from the Stock Offering over the next
three years to open 20 to 30 new facilities based on its new prototype.
These facilities are designed to cost less to construct and maintain than
the Company's older facilities. The facilities are expected to range in
size from 10,000 to 45,000 square feet and have the capacity to
accommodate significantly more members than older clubs of the same size
because the new facilities will contain only the most widely used
amenities.
- Increase Dues Revenues -- The Company believes that its dues are
substantially less than those charged by its competitors and that it can
significantly increase dues for its members who are beyond their initial
financing period without any material loss in membership.
- Improve Collections on Financed Contracts -- The Company plans to
continue its focus on increasing the downpayment on financed membership
plans and securing payment by electronic funds transfer ("EFT"), which
the Company's experience has shown results in higher quality receivables.
Further, the Company intends to institute more focused collection efforts
based on information provided by "credit scoring", which management
believes will also improve the yield from the receivables portfolio.
- Continue Cost Reduction Policies -- The Company's operating costs and
expenses for 1996 were more than $75 million lower than in 1994.
Management believes that other opportunities exist to cut additional
costs in the areas of administration, advertising and self-insured losses
incurred.
GROWTH OPPORTUNITIES
The Company currently generates substantially all of its revenues from the
sale of membership plans and the receipt of dues. Management believes that it
can increase and diversify its revenues by leveraging its strong brand identity,
extensive distribution infrastructure (approximately 320 facilities),
significant member base (approximately four million members) and frequency of
visitation (in excess of 100 million visits in 1996) by offering a number of
ancillary products and services. In order to pursue these growth opportunities,
the Company plans to:
- Sell Nutritional Products -- The Company has successfully concluded test
marketing certain nutritional products, predominantly vitamins and weight
control supplements, and is launching the sale of these products to
members through its fitness centers and telemarketing.
- Provide Outpatient Rehabilitation Services -- The Company plans to
contract with providers of health care programs and services whereby
certain of the Company's existing facilities will also be used for
comprehensive outpatient rehabilitation services. The Company believes it
has opportunities with a number of third party providers and managers of
health care programs and services to provide similar outpatient
rehabilitation services in additional fitness centers, and expects to
offer these services within three years to members and non-members alike
in up to 100 of its facilities primarily using equipment
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already on-hand. Among others, the Company has recently contracted with
Continucare Corporation to provide such services in certain, initially
four, of the Company's fitness centers. The Company plans to spend
approximately $1 million of the net proceeds from the Stock Offering to
upgrade an initial group of its facilities to provide rehabilitation
services.
- Offer Other Goods and Services -- The Company plans to sell work-out and
related apparel and market certain financial services and direct
marketing programs provided by third parties to its members such as a
co-branded credit card, credit life insurance, dining clubs and automated
teller machines ("ATMs") in its clubs through in-club sales efforts and
direct marketing programs.
THE REFINANCING
In October 1997, the Company completed a refinancing (the "Refinancing")
which reduces interest expense, extends debt maturities and improves financial
flexibility. The components of the Refinancing were (i) the issuance by the
Company of $225 million aggregate principal amount of the Old Notes (the
"Offering"), (ii) the consummation of a tender offer and consent solicitation by
the Company (the "Tender Offer") with respect to its $200 million aggregate
principal amount of 13% Senior Subordinated Notes due 2003 (the "13% Notes"),
and (iii) the application of the net proceeds from the Offering to retire the
13% Notes. Pursuant to the Tender Offer, in October 1997 the Company purchased
$177.4 million aggregate principal amount of the 13% Notes and the Indenture
pursuant to which the 13% Notes were issued was substantially amended. The
Company has announced that in January 1998, it will redeem the remaining $22.6
million aggregate principal amount of the 13% Notes not tendered in the Tender
Offer at a price of 106.5% of the principal amount, together with accrued and
unpaid interest.
In addition to the Refinancing, in November 1997 the Company entered into a
three-year, $70 million revolving bank credit facility (the "Bank Credit
Facility") to replace its prior revolving credit agreement. The $70 million
available under the Bank Credit Facility is reduced by any outstanding letters
of credit, which cannot exceed $30 million. At September 30, 1997, outstanding
letters of credit totalled $9.8 million. The Bank Credit Facility is secured by
substantially all real and personal property (excluding installment contracts
receivable) of the Company.
ISSUANCE OF THE OLD NOTES
The Old Notes were sold by the Company to the Initial Purchasers on the
Closing Date pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Old Notes in reliance on Rule 144A, Regulation S under
the Securities Act and other available exemptions under the Securities Act. The
Company and the Initial Purchasers also entered into the Registration Rights
Agreement. The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement with respect to the Old
Notes. See "The Exchange Offer".
7
10
THE EXCHANGE OFFER
The Exchange Offer......... The Company hereby offers, upon the terms and
subject to the conditions set forth herein and in
the accompanying Letter of Transmittal, to exchange
$1,000 in principal amount of the New Notes for
each $1,000 in principal amount of the outstanding
Old Notes. As of the date of this Prospectus, $225
million aggregate principal amount of the Old Notes
were outstanding, the maximum amount authorized by
the Indenture for all Notes. Upon consummation of
the Exchange Offer, holders of Old Notes that were
not prohibited from participating in the Exchange
Offer and did not tender their Old Notes will not
have any registration rights under the Registration
Rights Agreement with respect to such nontendered
Old Notes (except pursuant to a request for a Shelf
Registration Statement by the Initial Purchasers
acquiring a majority of the initial aggregate
principal amount of the Old Notes with respect to
Registrable Securities acquired directly from the
Company) and, accordingly, such nontendered Old
Notes will continue to be subject to the
restrictions on transfer contained in the legend
thereon. See "The Exchange Offer -- Terms of the
Exchange Offer".
Expiration Date............ 5:00 p.m., New York City time, on January 15, 1998
as the same may be extended. See "The Exchange
Offer -- Expiration Date; Extensions; Amendments".
Conditions of the Exchange
Offer; Extensions;
Amendments.............. The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being
tendered for exchange. However, the Exchange Offer
is subject to certain customary conditions. The
Company expressly reserves the right, in its sole
and absolute discretion, (i) to delay accepting any
Old Notes by giving oral or written notice to the
Exchange Agent, (ii) to extend the Exchange Offer,
(iii) to terminate the Exchange Offer by giving
oral or written notice of such termination to the
Exchange Agent, and (iv) to waive any condition or
otherwise amend the terms of the Exchange Offer in
any manner. If the Exchange Offer is amended in a
manner determined by the Company to constitute a
material change, the Company will promptly disclose
such amendment by means of a prospectus supplement
that will be distributed to the Eligible Holders.
See "The Exchange Offer -- Expiration Date;
Extensions; Amendments" and " -- Conditions of the
Exchange Offer".
Termination of Certain
Rights..................... Eligible Holders of Old Notes have certain rights
pursuant to the Registration Rights Agreement and
the Old Notes. Holders of New Notes will not be
and, upon consummation of the Exchange Offer,
Eligible Holders of Old Notes will no longer be,
entitled to (i) the right to receive Additional
Interest upon the occurrence of Registration
Default, or (ii) certain other rights under the
Registration Rights Agreement intended for the
holders of unregistered securities; provided,
however, that (A) an Eligible Holder of Old Notes
who is not legally permitted to participate in the
Exchange Offer based upon advice of counsel to that
effect or who does not receive fully tradeable New
Notes pursuant to the Exchange Offer, subject to
reasonable verification by the Company, and (B) the
Initial Purchasers acquiring a majority of the
initial aggregate principal amount of Old Notes
with respect to Registrable Securities acquired
directly from the Company, shall have the right to
require the Company to file a Shelf Registration
Statement solely for the benefit of such Eligible
Holders of Old Notes and will be entitled to
receive Additional Interest following the
occurrence of a Registration Default in connection
with the filing of such Shelf Registra-
8
11
tion Statement. Notwithstanding anything to the
contrary in the foregoing, Old Notes not tendered
in the Exchange Offer will remain outstanding and
continue to accrue interest in accordance with
their terms. See "The Exchange Offer -- Termination
of Certain Rights" and "-- Procedures for Tendering
Old Notes" and "Description of the New Notes".
Accrued Interest on the
Old Notes............... Interest on the New Notes will accrue from the last
Interest Payment Date on which interest was paid on
the Old Notes surrendered in exchange therefor or,
if no interest has been paid on the Old Notes, from
the date of original issue of the Old Notes.
Eligible Holders of Old Notes accepted for exchange
will be deemed to have waived the right to receive
any other payments or accrued interest on the Old
Notes.
Procedures for Tendering
Old Notes.................. Unless a tender of Old Notes is effected pursuant
to the procedures for book-entry transfer as
provided herein, each Eligible Holder desiring to
accept the Exchange Offer must complete and sign
the Letter of Transmittal, have the signature
thereon guaranteed if received by the Letter of
Transmittal, and mail or deliver the Letter of
Transmittal, together with the Old Notes or a
Notice of Guaranteed Delivery and any other
required documents (such as evidence of authority
to act, if the Letter of Transmittal is signed by
someone acting in a fiduciary or representative
capacity), to the Exchange Agent (as defined) at
the address set forth on the back cover page of
this Prospectus prior to 5:00 p.m., New York City
time, on the Expiration Date; provided, however,
that the signature on the Letter of Transmittal is
not required to be guaranteed if the Old Notes
surrendered for exchange are tendered (i) by a
registered holder of the Old Notes who has not
completed the box entitled "Special Delivery
Instructions" in the Letter of Transmittal, or (ii)
for the account of an Eligible Institution (as
defined). Any Beneficial Owner (as defined) of the
Old Notes whose Old Notes are registered in the
name of a nominee, such as a broker, dealer,
commercial bank or trust company, and who wishes to
tender Old Notes in the Exchange Offer, should
instruct such entity or person to promptly tender
on such Beneficial Owner's behalf. Any Old Notes
not accepted for exchange for any reason will be
returned, without expense to the tendering Eligible
Holder thereof, as promptly as practicable after
the Expiration Date. See "The Exchange
Offer -- Procedures for Tendering Old Notes".
Guaranteed Delivery
Procedures................. Eligible Holders of Old Notes who wish to tender
their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver
their Old Notes, the Letter of Transmittal or any
other documents required by the Letter of
Transmittal to the Exchange Agent on or prior to
the Expiration Date, may tender their Old Notes
according to the guaranteed delivery procedures set
forth in the Letter of Transmittal. See "The
Exchange Offer -- Guaranteed Delivery Procedures".
Acceptance of Old Notes and
Delivery of New Notes... Upon satisfaction or waiver of all conditions of
the Exchange Offer, the Company will accept any and
all Old Notes that are properly tendered (and not
withdrawn) in the Exchange Offer prior to 5:00
p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer
will be delivered promptly after acceptance of the
Old Notes. See "The Exchange Offer -- Acceptance of
Old Notes for Exchange; Delivery of New Notes".
9
12
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. See "The Exchange Offer --
Withdrawal Rights".
The Exchange Agent......... First Trust National Association, a national
banking corporation, is the exchange agent (in such
capacity, the "Exchange Agent"). The address and
telephone number of the Exchange Agent are set
forth in "The Exchange Offer -- The Exchange Agent;
Assistance".
Fees and Expenses.......... All expenses incident to the Company's consummation
of the Exchange Offer and compliance with the
Registration Rights Agreement will be borne by the
Company. The Company will also pay certain transfer
taxes, if applicable, to the Exchange Offer. See
"The Exchange Offer -- Fees and Expenses".
Resales of the New Notes... The Company is making the Exchange Offer in
reliance on the position of the SEC Staff as set
forth in certain interpretive letters addressed to
third parties in other transactions. However, the
Company has not sought its own interpretive letter
and there can be no assurance that the SEC Staff
would make a similar determination with respect to
the Exchange Offer as it has in such interpretive
letters to third parties. Based on these
interpretations by the SEC Staff, and subject to
the following sentences, the Company believes that
New Notes issued pursuant to the Exchange Offer to
an Eligible Holder in exchange for Old Notes may be
offered for resale, resold and otherwise
transferred by an Eligible Holder (other than (i) a
broker-dealer who purchased Old Notes directly from
the Company for resale pursuant to Rule 144A or any
other available exemption under the Securities Act,
or (ii) a person that is an "affiliate" of the
Company within the meaning of Rule 405 under the
Securities Act), without further compliance with
the registration and prospectus delivery provisions
of the Securities Act, provided that such Eligible
Holder is acquiring the New Notes in the ordinary
course of business and is not participating, and
has no arrangement or understanding with any person
to participate, in the "distribution" (within the
meaning of the Securities Act) of the New Notes.
Eligible Holders wishing to accept the Exchange
Offer must represent to the Company, among other
things, that such conditions have been met. Any
Eligible Holder of Old Notes who is an "affiliate"
of the Company or who intends to participate in the
Exchange Offer for the purpose of participating in
the distribution of the New Notes, or any
broker-dealer who purchased Old Notes from the
Company to resell pursuant to Rule 144A or any
other available exemption under the Securities Act,
(a) will not be able to rely on the interpretations
of the SEC Staff set forth in the above-mentioned
interpretive letters, (b) will not be permitted or
entitled to tender such Old Notes in the Exchange
Offer, and (c) must comply with the registration
and prospectus delivery requirements of the
Securities Act in connection with any sale or other
transfer of such Old Notes unless such sale is made
pursuant to an exemption from such requirement. See
"The Exchange Offer -- Resales of the New Notes".
Each broker-dealer that receives New Notes for
its own account pursuant to the Exchange Offer may
be deemed to be a statutory underwriter, must
acknowledge that it acquired the Old Notes for its
own account as a result of market-making activities
or other trading activities and must agree that it
will deliver a prospectus meeting the requirements
of the Securities Act in connection with any resale
of such New Notes. The
10
13
Letter of Transmittal states that by so
acknowledging 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. Based on the position taken by the
SEC Staff in the interpretive letters referred to
above, the Company believes that Participating
Broker-Dealers who acquired Old Notes for their own
accounts, as a result of market-making or other
trading activities, may fulfill their prospectus
delivery requirements with respect to the New Notes
received upon exchange of such Old Notes with a
prospectus meeting the requirements of the
Securities Act, which may be the prospectus
prepared for an exchange offer so long as it
contains a description of the plan of distribution
with respect to the resale of such New Notes.
Accordingly, this Prospectus, as it may be amended
or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with
resales of New Notes received in exchange for Old
Notes if such Old Notes were acquired by such
Participating Broker-Dealer for its own account as
a result of market-making or other trading
activities. Subject to certain conditions, the
Company has agreed that this Prospectus, as it may
be amended or supplemented, may be used by a
Participating Broker-Dealer in connection with
resales of such New Notes. See "Plan of
Distribution". However, a Participating
Broker-Dealer who intends to use this Prospectus in
connection with the resale of New Notes received in
exchange for Old Notes pursuant to the Exchange
Offer must notify the Company, or cause the Company
to be notified, on or prior to the Expiration Date,
that it is a Participating Broker-Dealer. Such
notice may be given in the space provided for that
purpose in the Letter of Transmittal or may be
delivered to the Exchange Agent at one of the
addresses set forth herein under "The Exchange
Offer -- Exchange Agent; Assistance". Any
Participating Broker-Dealer who is an "affiliate"
of the Company may not rely on such interpretive
letters and must comply with the registration and
prospectus delivery requirements of the Securities
Act in connection with any resale transaction. See
"The Exchange Offer -- Resales of the New Notes".
Representations and
Covenants.................. A Participating Broker-Dealer who intends to use
this Prospectus in connection with the resale of
New Notes received in exchange for Old Notes
pursuant to the Exchange Offer must notify the
Company, or cause the Company to be notified, on or
prior to the Expiration Date, that it is a
Participating Broker-Dealer. Such notice may be
given in the space provided for that purpose in the
Letter of Transmittal or may be delivered to the
Exchange Agent at one of the addresses set forth
herein under "The Exchange Offer -- The Exchange
Agent; Assistance". In addition, by tendering Old
Notes pursuant to the Exchange Offer, Eligible
Holders and Beneficial Owners will be deemed to
have made certain representations and covenants to
the Company. See "The Exchange Offer -- Procedures
for Tendering Old Notes".
11
14
DESCRIPTION OF THE NEW NOTES
The form and term of the New Notes will be identical in all material
respects to the form and terms of the Old Notes except that (i) the New Notes
will have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, (ii) holders of New Notes will not be
entitled to any Additional Interest thereon pursuant to the Registration Rights
Agreement in respect of Old Notes constituting Registrable Securities held by
such holders if (A) a registration statement concerning the Exchange Offer is
not filed with the SEC on or prior to November 6, 1997, (B) the registration
statement filed by the Company with respect to the Exchange Offer has not been
declared effective on or prior to January 5, 1998, or (C) the Exchange Offer is
not consummated on or prior to February 4, 1998 or a Shelf Registration
Statement, if required, is not declared effective on or prior to February 4,
1998 (or if a Shelf Registration Statement is required based upon a request by
the Initial Purchasers, 30 days after request therefor) (each such event
referred to in clauses (A) through (C) above, a "Registration Default"), and
(iii) holders of New Notes will not be, and upon consummation of the Exchange
Offer, Eligible Holders of Old Notes will no longer be, entitled to certain
rights under the Registration Rights Agreement intended for Eligible Holders;
provided, however, that (X) an Eligible Holder of Old Notes who is not legally
permitted to participate in the Exchange Offer based upon advice of counsel to
that effect or who does not receive fully tradeable New Notes pursuant to the
Exchange Offer, subject to reasonable verification by the Company, and (Y) the
Initial Purchasers acquiring a majority of the initial aggregate principal
amount of Old Notes with respect to Registrable Securities acquired directly
from the Company, shall have the right to require the Company to file a Shelf
Registration Statement solely for the benefit of such Eligible Holder of Old
Notes and will be entitled to Additional Interest following the occurrence of a
Registration Default in connection with the filing of such Shelf Registration
Statement. The Exchange Offer shall be deemed consummated upon the occurrence of
the delivery by the Company to the Registrar of New Notes in the same aggregate
principal amount as the aggregate principal amount of Old Notes that were
tendered (and not withdrawn) by Eligible Holders pursuant to the Exchange Offer.
See "The Exchange Offer -- Termination of Certain Rights", "-- Procedures for
Tendering Old Notes" and "Description of the New Notes".
Maturity Date.............. October 15, 2007.
Interest Payment Dates..... April 15 and October 15 of each year, commencing
April 15, 1998.
Optional Redemption........ The New Notes are redeemable at the option of the
Company, in whole or in part, at any time on or
after October 15, 2002, at the redemption prices
set forth herein, together with accrued and unpaid
interest, if any, to the redemption date. In
addition, on or prior to October 15, 2000, the
Company may redeem up to an aggregate of 35% of the
principal amount of the Notes originally issued, at
a price of 109 7/8% of the principal amount
thereof, together with accrued and unpaid interest,
if any, to the redemption date, with the net
proceeds of one or more Public Equity Offerings,
provided that not less than $146.3 million in
principal amount of the Notes is outstanding
immediately after giving effect to such redemption.
See "Description of the New Notes -- Optional
Redemption".
Change of Control.......... Upon the occurrence of a Change in Control, each
holder of Notes, subject to certain limitations
described herein, will have the right to require
the Company to purchase all or a portion of such
holder's Notes at a purchase price in cash equal to
101% of the principal amount thereof, together with
accrued and unpaid interest, if any, to the date of
purchase. See "Description of the New
Notes -- Purchase of Notes Upon a Change in
Control".
Offers to Purchase......... The Company will, under certain circumstances, be
obligated to make offers to purchase Notes in the
event of an Asset Sale. See "Description of the New
Notes -- Certain Covenants -- Limitation on Sale of
Assets".
Ranking.................... The New Notes will be general unsecured obligations
of the Company and will be subordinated in right of
payment to all existing and future Senior
Indebtedness of the Company. In addition, the
Company is a holding company and, accordingly, the
New Notes will also be effectively subordi-
12
15
nated to all existing and future non-intercompany
liabilities of the Company's subsidiaries. As of
September 30, 1997, the Company has approximately
$190 million of Senior Indebtedness, including $160
million under the Securitization Facility (as
defined), which is a subsidiary liability, and
approximately $488 million of other
non-intercompany subsidiary liabilities (including
$367 million of deferred revenues and $26 million
of deferred income taxes) to which the New Notes
are subordinated. As of September 30, 1997, other
than indebtedness under the 13% Notes, capital
lease obligations and outstanding letters of
credit, substantially all of the Company's
liabilities, including the Securitization Facility
(which is also Senior Indebtedness), were
non-intercompany subsidiary liabilities. The New
Notes will rank pari passu in right of payment with
the Old Notes. The subordination of the New Notes
and the funds available to the Company may limit
the ability of the Company to repurchase the New
Notes. See "Risk Factors -- Subordination of the
New Notes and Holding Company Structure".
Certain Covenants.......... The Indenture (as defined herein) will contain
certain covenants that, among other things, will
limit the ability of the Company and its
subsidiaries to (i) incur additional indebtedness,
(ii) pay dividends and make other restricted
payments, (iii) issue preferred stock of its
subsidiaries, (iv) permit payment restrictions on
its subsidiaries, (v) engage in transactions with
affiliates, (vi) create liens, or (vii) engage in
mergers, consolidations or asset sales. See
"Description of the New Notes--Certain Covenants".
Absence of a Public Market
for the Notes........... The New Notes will be new securities for which
there is currently no established trading market.
Although the Initial Purchasers have informed the
Company that they currently intend to make a market
in the New Notes, the Initial Purchasers are not
obligated to do so, and any such market-making may
be discontinued at any time without notice, in
their sole discretion. Accordingly, there can be no
assurances as to the development or the liquidity
of any market for the New Notes. The Company
intends to apply to have the New Notes designated
for trading in the PORTAL system. The Company does
not intend to apply for listing of the New Notes on
any securities exchange or for quotation through
the Nasdaq National Market or any other quotation
system. See "Risk Factors -- Absence of Public
Market for the New Notes".
For more detailed information regarding the terms of the New Notes and for
definitions of capitalized terms not otherwise defined, see "Description of the
New Notes".
13
16
RISK FACTORS
See "Risk Factors" beginning on page 17 of this Prospectus for a discussion
of certain factors that should be considered by Eligible Holders in evaluating
the Exchange Offer.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus under "Prospectus Summary",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business", in addition to certain statements contained
elsewhere in this Prospectus, are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
factors include, among others, the following: general economic and business
conditions; competition; success of operating initiatives, advertising and
promotional efforts; existence of adverse publicity or litigation; acceptance of
new product offerings; changes in business strategy or plans; quality of
management; availability, terms, and development of capital; business abilities
and judgment of personnel; changes in, or the failure to comply with, government
regulations; regional weather conditions; those items set forth under the
heading "Risk Factors" beginning on page 17 of this Prospectus; and other
factors referenced in this Prospectus.
------------------
The Company was a wholly-owned subsidiary of Entertainment until
Entertainment spun-off the Company (the "Spin-off") to its stockholders on
January 9, 1996. The Company's executive offices are located at 8700 West Bryn
Mawr Avenue, Chicago, Illinois, 60631, telephone number (773) 380-3000. As used
in this Prospectus, unless the context otherwise requires, the "Company" or
"Bally" refers to Bally Total Fitness Holding Corporation and its subsidiaries
and their predecessors.
In connection with the Stock Offering, the SEC Staff advised the Company it
requires all registrants operating fitness centers with membership plans that
include initial membership fees to follow a "deferral method" of accounting with
respect to the recognition of revenue from initial membership fees. The
accompanying consolidated financial statements for periods other than the nine
months ended September 30, 1997 have been restated from those originally
reported because this "deferral method" differed from the revenue recognition
method historically used by the Company. See "Consolidated Financial
Statements".
14
17
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
The following table presents summary consolidated financial data of the
Company. The historical financial data were derived from, and should be read in
conjunction with, financial information appearing elsewhere in this Prospectus.
See "Selected Consolidated Financial Data".
NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------- ------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(AS RESTATED) (a)
STATEMENT OF OPERATIONS DATA:
Net revenues:
Membership revenues --
Initial membership fees on
paid-in-full memberships
originated................... $ 47.6 $ 65.5 $ 85.6 $ 95.7 $ 103.0 $ 141.8 $ 153.1
Initial membership fees on
financed memberships
originated................... 266.6 231.5 290.4 310.0 322.7 316.1 335.4
Dues collected................. 144.6 129.3 182.9 177.8 173.5 164.9 141.6
Change in deferred revenues.... (4.4) 15.5 29.8 16.8 27.0 (20.7) (25.1)
-------- -------- -------- -------- -------- -------- --------
454.4 441.8 588.7 600.3 626.2 602.1 605.0
Finance charges earned........... 29.5 27.7 36.4 36.9 34.9 44.4 56.8
Fees and other................... 11.5 9.5 14.1 16.2 20.9 20.2 26.8
-------- -------- -------- -------- -------- -------- --------
495.4 479.0 639.2 653.4 682.0 666.7 688.6
Operating costs and expenses:
Fitness center operations........ 288.8 281.5 366.5 396.6 407.1 416.0 398.1
Member processing and collection
centers........................ 29.0 31.7 42.2 50.3 52.1 57.4 56.7
Advertising...................... 34.6 36.8 47.4 50.0 47.5 53.3 54.2
General and administrative....... 21.0 15.1 23.6 21.6 21.9 25.6 27.9
Provision for doubtful
receivables.................... 72.6 64.3 80.4 72.1 103.9 72.5 116.2
Depreciation and amortization.... 40.7 41.1 55.9 57.4 58.9 60.4 57.8
Change in deferred membership
origination costs.............. (1.6) 1.9 4.1 0.4 6.7 (0.4) (3.0)
-------- -------- -------- -------- -------- -------- --------
485.1 472.4 620.1 648.4 698.1 684.8 707.9
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)............ 10.3 6.6 19.1 5.0 (16.1) (18.1) (19.3)
Interest income.................... 0.9 0.7 0.9 0.2
Interest expense................... (34.1) (36.1) (47.6) (43.8) (38.6) (39.1) (31.9)
-------- -------- -------- -------- -------- -------- --------
Loss before income taxes,
extraordinary item and cumulative
effect on prior years of change
in accounting for income taxes... (22.9) (28.8) (27.6) (38.6) (54.7) (57.2) (51.2)
Income tax benefit (provision)..... (0.3) (0.3) 2.7 7.2 15.2 25.8 17.6
-------- -------- -------- -------- -------- -------- --------
Loss before extraordinary item and
cumulative effect on prior years
of change in accounting for
income taxes (b)(c).............. $ (23.2) $ (29.1) $ (24.9) $ (31.4) $ (39.5) $ (31.4) $ (33.6)
======== ======== ======== ======== ======== ======== ========
Loss per common share (pro forma
for 1995 and 1994) (d)........... $ (1.68) $ (2.39) $ (2.04) $ (3.25) $ (4.61)
OTHER FINANCIAL DATA:
EBITDA (e)......................... $ 51.0 $ 47.7 $ 75.0 $ 62.4 $ 42.8 $ 42.3 $ 38.5
Capital expenditures............... 18.7 13.3 20.6 22.5 21.4 34.9 22.5
EBITDA margin (e).................. 10.3% 10.0% 11.7% 9.6% 6.3% 6.3% 5.6%
TWELVE MONTHS
ENDED SEPTEMBER 30, 1997
-------------------------
PRO FORMA FINANCIAL DATA: (f)
EBITDA (e).......................................... $78.3
Interest expense.................................... 41.0
Ratio of EBITDA to interest expense................. 1.9x
SEPTEMBER 30, 1997
--------------------------------
ACTUAL AS ADJUSTED (f)
------------ ---------------
BALANCE SHEET DATA:
Cash and equivalents................................ $ 63.4 $ 65.4
Installment contracts receivable, net............... 326.8 326.8
Total assets........................................ 965.0 969.4
Total debt.......................................... 379.7 404.7
Stockholders' equity................................ 91.5 70.9
(footnotes on page following)
15
18
- ---------------
(a) The summary consolidated financial data presented herein for periods other
than the nine months ended September 30, 1997 have been restated to reflect
a change in the Company's method of recognizing membership revenue. See
"Consolidated Financial Statements".
(b) In 1996, the Company recognized a net extraordinary gain on extinguishment
of debt consisting of (i) a gain (net of taxes) of $9.9 million ($.81 per
share) resulting from indebtedness owed Entertainment which was forgiven as
part of the December 1996 merger of Entertainment with and into Hilton
Hotels Corporation ("Hilton"), and (ii) a charge (net of taxes) of $4.2
million ($.35 per share) resulting from the refinancing of the Company's
prior securitization facility by the Securitization Facility. In 1993, the
Company recognized an extraordinary loss on extinguishment of debt of $6.0
million (net of taxes) resulting from a refinancing of certain indebtedness.
(c) In 1993, the Company changed its method of accounting for income taxes as
required by Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". As permitted by SFAS No. 109, the Company
elected to use the cumulative effect approach rather than to restate the
consolidated financial statements of any prior years to apply the provisions
of SFAS No. 109, which resulted in a charge of $69.0 million in 1993.
(d) The loss for the years ended December 31, 1995 and 1994 reflects a federal
income tax benefit arising from the Company's prior tax sharing agreement
with Entertainment of $7.1 million and $15.2 million, respectively. Pro
forma loss per common share (which is unaudited) was calculated giving
effect to (i) adjustments made to reflect the income tax provision/benefit
as if the Company had filed its own separate consolidated income tax return
for each year and (ii) the distribution of 11,845,161 shares of the
Company's common stock to Entertainment stockholders as if such distribution
had taken place as of the beginning of each year.
(e) EBITDA is defined as operating income (loss) before depreciation and
amortization and EBITDA margin represents EBITDA divided by net revenues.
The Company has presented EBITDA and EBITDA margin supplementally because
management believes this information is useful given the significance of the
Company's depreciation and amortization and because of its highly leveraged
financial position. These data should not be considered as an alternative to
any measure of performance or liquidity as promulgated under generally
accepted accounting principles (such as net income/loss or cash provided
by/used in operating, investing and financing activities), nor should they
be considered as an indicator of the Company's overall financial
performance. Also, the EBITDA definition used herein may not be comparable
to similarly titled measures reported by other companies.
(f) Adjusted to give effect to (i) the Stock Offering, (ii) the Refinancing and
(iii) the Exchange Offer, as if each had occurred on October 1, 1996 for Pro
Forma Financial Data and on September 30, 1997 for Balance Sheet Data, using
the interest rate of 9 7/8% on the Notes along with the assumptions used in
the capitalization table (see "Capitalization").
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RISK FACTORS
Prior to making an investment decision, prospective investors should
consider carefully all of the information set forth in this Prospectus and,
particularly, should evaluate the following risk factors.
RISKS ASSOCIATED WITH HIGHLY-LEVERAGED FINANCIAL POSITION
In December 1996, the Company issued $160.0 million of asset-backed
securities (the "Securitization Facility") by selling undivided interests in the
H&T Master Trust (the "Trust"). The Trust consists primarily of a portfolio of
installment contracts receivable from membership plans and the proceeds thereof.
The Company plans to refinance the Securitization Facility in the second or
third quarter of 1999; however, there can be no assurance that the Company will
be able to sell such a replacement series or that the terms of such replacement
series will be as favorable as the Securitization Facility.
At September 30, 1997, the Company had total indebtedness (including
outstanding letters of credit) of approximately $390 million ($415 million after
giving effect to the Refinancing). The Company's long-term debt presently
includes the Securitization Facility, $225 million principal amount of the Old
Notes, $22.6 million principal amount of the 13% Notes and the Bank Credit
Facility. The Company's recent losses, total indebtedness and provisions of
existing debt instruments limit the Company's ability to raise capital or borrow
money. The provisions in the Company's existing debt instruments and the Bank
Credit Facility limit the Company's ability to borrow additional funds and to
grant security interests and require the Company to maintain certain financial
ratios, including those relating to EBITDA and interest expense. As a result of
the limitations, the Company may be more vulnerable to economic downturns, may
not be able to exploit certain business opportunities when they arise and may
have less flexibility to respond to changing economic conditions, each of which
could have a material adverse effect on the Company's financial condition and
results of operations.
SUBORDINATION OF THE NEW NOTES AND HOLDING COMPANY STRUCTURE
The New Notes will be subordinated in right of payment to all existing and
future Senior Indebtedness of the Company, including any indebtedness under the
Bank Credit Facility. As of September 30, 1997, the amount of Senior
Indebtedness of the Company was approximately $190 million, including $160
million under the Securitization Facility, which is a subsidiary liability. By
reason of such subordination, in the event of liquidation or insolvency of the
Company, creditors of the Company who are holders of Senior Indebtedness may
recover more, ratably, than holders of the New Notes, and funds which would be
otherwise payable to holders of the New Notes will be paid to the holders of
Senior Indebtedness to the extent necessary to pay the Senior Indebtedness in
full, and the Company may be unable to meet its obligations fully with respect
to the New Notes. In addition, under certain circumstances, no payments may be
made with respect to the principal of or interest on the New Notes upon the
occurrence of a default under the terms of any Senior Indebtedness including,
but not limited to, a default under the Bank Credit Facility. The New Notes will
rank pari passu in right of payment with the Old Notes.
The operations of the Company are conducted through subsidiaries. Except to
the extent that the Company may itself be a trade creditor with recognized
claims against its subsidiaries, claims of creditors of such subsidiaries,
including trade creditors, will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of the Company,
including holders of the New Notes, even though such subsidiary obligations do
not constitute Senior Indebtedness. As of September 30, 1997, subsidiary
liabilities (which also include Senior Indebtedness) were approximately $660
million, including $367 million of deferred revenues and $26 million of deferred
income taxes.
In certain circumstances, the Company may be obligated to repurchase or to
make an offer to repurchase the New Notes. The subordination of the New Notes to
all existing and future Senior Indebtedness of the Company and the funds
available to the Company may limit the ability of the Company to repurchase the
New Notes.
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DECLINE IN MEMBERSHIP FEES ORIGINATED; NET LOSSES
The Company's initial membership fees originated, a principal component of
its total revenues, have decreased from $425.7 million in 1994 to $376.0 million
in 1996, and there can be no assurance that the Company will be able to halt or
reverse this decline. Although the Company's operating costs and expenses were
more than $75 million lower in 1996 than in 1994, there can be no assurance that
the Company will be able to continue reducing its operating costs and expenses.
The Company reported losses before extraordinary item of $23.2 million, $24.9
million, $31.4 million and $39.5 million for the nine months ended September 30,
1997 and the years ended December 31, 1996, 1995 and 1994, respectively. On a
pro forma basis, adjusting the income tax provision/benefit as if the Company
had filed its own separate consolidated tax returns, the loss for 1995 and 1994
would have been $38.5 million and $54.6 million, respectively.
RESTRICTIONS IMPOSED BY INDEBTEDNESS
The Bank Credit Facility and the Indenture contain covenants that, among
other things and subject to certain exceptions, restrict the ability of the
Company to incur additional indebtedness, pay dividends, prepay Subordinated
Indebtedness, dispose of certain assets, create liens and make certain
investments or acquisitions. The ability of the Company to comply with such
provisions may be affected by events beyond the Company's control. The breach of
any of these covenants could result in a default under the Bank Credit Facility.
In the event of any such default, depending on the actions taken by the lenders
under the Bank Credit Facility, such lenders could elect to declare all amounts
borrowed under the Bank Credit Facility, together with accrued interest, to be
due and payable. A default under the Bank Credit Facility or the instruments
governing the Company's other indebtedness could constitute a cross-default
under the Indenture and any instruments governing the Company's other
indebtedness, and a default under the Indenture could constitute a cross-default
under the Bank Credit Facility and any instruments governing the Company's other
indebtedness.
RISKS ASSOCIATED WITH NEW INITIATIVES
The Company intends to embark on a number of new initiatives to capitalize
on its strong brand identity, extensive distribution infrastructure
(approximately 320 facilities), significant member base (approximately four
million members) and frequency of visitation (in excess of 100 million visits in
1996). These initiatives include selling and marketing nutritional products and
work-out and related apparel to its members and marketing financial services
provided by third parties to its members such as a co-branded credit card,
credit life insurance, dining clubs and ATMs in its clubs as well as making
comprehensive outpatient rehabilitation services available to members and
non-members alike. The Company has not previously generated significant revenues
from any of these new initiatives and there can be no assurance that such
initiatives will be successful. In addition, the Company has limited experience
in marketing new products to its members. The sale and marketing of nutritional
products and work-out and related apparel and the provision of rehabilitation
services involve significant risks of competition. See "-- Competition". The
provision of rehabilitation services also involves risks of government
regulation. See "-- Government Regulation".
RISKS ASSOCIATED WITH PRICING STRATEGY
Competitive conditions in certain markets in which the Company operates may
limit the Company's ability to reduce discount pricing on paid-in-full
memberships and to increase dues significantly without a material loss in
membership.
COMPETITION
The Company is the largest operator, or among the largest operators, of
fitness centers in every major market in which it has fitness centers. Within
each market, the Company competes with other fitness centers, physical fitness
and recreational facilities established by local governments and hospitals and
by businesses for their employees, the YMCA and similar organizations and, to a
certain extent, with racquet and tennis and other athletic clubs, country clubs,
weight reducing salons and the home-use fitness equipment industry. The Company
also competes with other entertainment and retail businesses for the
discretionary income of its target market. The
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Company believes competition has increased in certain markets. There can be no
assurance that the Company will be able to compete effectively in the future in
the markets in which it operates.
When the Company embarks on its new initiatives, particularly the sale of
nutritional products and apparel, the Company will be competing against large
established companies with more experience selling such products on a retail
basis and, in some instances, with substantially greater financial resources
than the Company. There can be no assurance that the Company will be able to
compete effectively against such established companies.
SEASONAL MEMBERSHIP FEE ORIGINATIONS
Historically, the Company has experienced greater membership fee
originations in the first quarter and lower membership fee originations in the
fourth quarter. Certain of the new initiatives the Company plans to undertake
may have the effect of further increasing the seasonality of the Company's
business.
GOVERNMENT REGULATION
The operations and business practices of the Company are subject to
regulation at federal, state and, in some cases, local levels. General rules and
regulations of the Federal Trade Commission (the "FTC"), and of state and local
consumer protection agencies, and state statutes apply to the Company's
advertising, sales and other trade practices, including the sale, financing and
collection of memberships. Although management is not aware of any proposed
changes in any statutes, rules or regulations, any changes could have a material
adverse effect on the Company's financial condition and results of operations.
In addition, the provision of rehabilitation services and payments for such
services are subject to government regulation. See "Business -- Government
Regulation".
FRAUDULENT CONVEYANCE
The Company believes that the indebtedness represented by the New Notes is
being incurred for proper purposes and in good faith, and that, based on present
forecasts, asset valuations and other financial information, the Company is
solvent, will have sufficient capital for carrying on its business and will be
able to pay its debts as they mature. Notwithstanding this belief, however,
under federal or state fraudulent transfer laws, if a court of competent
jurisdiction in a suit by an unpaid creditor or a representative of creditors
(such as a trustee in bankruptcy or a debtor-in-possession) were to find that
the Company did not receive fair consideration (or reasonably equivalent value)
for incurring the New Notes and, at the time of the incurrence of such
indebtedness, the Company was insolvent, was rendered insolvent by reason of
such incurrence, was engaged in a business or transaction for which its
remaining assets constituted unreasonably small capital, intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
matured, or that the Company intended to hinder, delay or defraud its creditors,
then such court could, among other things, (i) void all or a portion of the
Company's obligations to the holders of the New Notes, the effect of which would
be that the holders of the New Notes may not be repaid in full, (ii) recover all
or a portion of the payments made to holders of the New Notes, and/or (iii)
subordinate the Company's obligations to the holders of the New Notes to other
existing and future indebtedness of the Company to a greater extent than would
otherwise be the case, the effect of which would be to entitle such other
creditors to be paid in full before any payment could be made on the New Notes.
The measure of insolvency for purposes of the foregoing will vary depending upon
the law of the relevant jurisdiction. Generally, however, a company would be
considered insolvent for purposes of the foregoing if the sum of the company's
debts is greater than all of the company's property at a fair valuation, or if
the present fair saleable value of the company's assets is less than the amount
that will be required to pay its existing debts as they become due and payable.
There can be no assurances as to what standards a court would apply to determine
whether the Company was solvent at the relevant time, or whether, whatever
standard was applied, the New Notes would not be voided on another of the
grounds set forth above.
ABSENCE OF PUBLIC MARKET FOR THE NEW NOTES
The New Notes will be new securities for which there is currently no
established trading market. Although the Initial Purchasers have informed the
Company that they currently intend to make a market in the New Notes, the
Initial Purchasers are not obligated to do so, and any such market-making may be
discontinued at any time
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without notice, in their sole discretion. Accordingly there can be no assurance
as to the development or liquidity of any market for the New Notes. The Company
intends to apply to have the New Notes designated for trading in the PORTAL
system. The Company does not intend to apply for listing of the New Notes on any
securities exchange or for quotation through the Nasdaq National Market or any
other quotation system.
CERTAIN MARKET CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
To the extent that Old Notes are tendered and accepted for exchange
pursuant to the Exchange Offer, the trading market for Old Notes that remain
outstanding may be significantly more limited, which might adversely affect the
liquidity of the Old Notes not exchanged. The extent of the market therefor and
the availability of price quotations would depend upon a number of factors,
including the number of holders of Old Notes remaining at such time and the
interest in maintaining a market in such Old Notes on the part of securities
firms. An issue of securities with a smaller outstanding market value available
for trading (the "float") may command a lower price than would a comparable
issue of securities with a greater float. Therefore, the market price for Old
Notes that are not exchanged in the Exchange Offer may be affected adversely to
the extent that the amount of Old Notes exchanged pursuant to the Exchange Offer
reduces the float. The reduced float also may make the trading price of the Old
Notes that are not exchanged more volatile.
CERTAIN CONSEQUENCES OF FAILURE TO VALIDLY TENDER
Issuance of the New Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made following the prior satisfaction, or waiver, of the
conditions set forth in "The Exchange Offer -- Conditions of the Exchange Offer"
and only after timely receipt by the Exchange Agent of such Old Notes, a
properly completed and duly executed Letter of Transmittal (if applicable) and
all other required documents. Therefore, holders of Old Notes desiring to tender
such Old Notes in exchange for New Notes should allow sufficient time to ensure
timely delivery of all required documentation. Beneficial holders of Old Notes
should also take into account the fact that the delivery of documents to The
Depository Trust Company ("DTC") in accordance with DTC's procedures does not
constitute delivery to the Exchange Agent. Neither the Exchange Agent, the
Company nor any other person is under any duty to give notification of defects
or irregularities with respect to the tenders of Old Notes for exchange. Old
Notes that may be tendered in the Exchange Offer but which are not validly
tendered will, following consummation of the Exchange Offer, remain outstanding
and will continue to be subject to the same transfer restrictions currently
applicable to the Old Notes.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes were sold by the Company to the Initial Purchasers on October
7, 1997, pursuant to the Purchase Agreement. The Initial Purchasers subsequently
resold the Old Notes in reliance on Rule 144A, Regulation S under the Securities
Act and certain other exemptions under the Securities Act. The Company and the
Initial Purchasers also entered into the Registration Rights Agreement, pursuant
to which the Company agreed, with respect to the Old Notes, to use its best
efforts (i) to file, on or prior to November 6, 1997, a registration statement
concerning the Exchange Offer with the SEC under the Securities Act, (ii) to
cause the registration statement filed by the Company with respect to the
Exchange Offer to be declared effective by the SEC on or prior to January 5,
1998, (iii) to keep the registration statement filed by the Company with respect
to the Exchange Offer effective until the closing of the Exchange Offer, and
(iv) to cause the Exchange Offer to be consummated on or prior to February 4,
1998. The Exchange Offer is intended to satisfy the Company's exchange offer
obligations under the Registration Rights Agreement.
The Exchange Offer is not being made to, nor will the Company accept
tenders for exchange from, Eligible Holders of Old Notes in any jurisdiction in
which the Exchange Offer or the acceptance thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange $1,000
in principal amount of the New Notes for each $1,000 in principal amount of the
outstanding Old Notes. The Company will accept for exchange any and all Old
Notes that are validly tendered (and not withdrawn) prior to 5:00 p.m., New York
City time, on the Expiration Date. Tenders of the Old Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date. The
Exchange Offer is not conditioned upon any minimum principal amount of Old Notes
being tendered for exchange. However, the Exchange Offer is subject to certain
customary conditions which may be waived by the Company, and to the terms and
provisions of the Registration Rights Agreement. See "-- Conditions of the
Exchange Offer".
Old Notes may be tendered only in multiples of $1,000. Subject to the
foregoing, Eligible Holders may tender less than the aggregate principal amount
represented by the Old Notes held by them, provided that they appropriately
indicate this fact on the Letter Of Transmittal accompanying the tendered Old
Notes (or so indicate pursuant to the procedures for book-entry transfer).
As of the date of this Prospectus, $225 million aggregate principal amount
of the Old Notes were outstanding, the maximum amount authorized by the
Indenture for the Notes. Solely for reasons of administration (and for no other
purpose), the Company has fixed the close of business on October 29, 1997, as
the record date (the "Record Date") for purposes of determining the persons to
whom this Prospectus and the Letter of Transmittal will be mailed initially.
Only an Eligible Holder of the Old Notes (or such Eligible Holder's legal
representative or attorney-in-fact) may participate in the Exchange Offer. There
will be no fixed record date for determining Eligible Holders of the Old Notes
entitled to participate in the Exchange Offer. The Company believes that, as of
the date of this Prospectus, no such Eligible Holder is an affiliate (as defined
in Rule 405 under the Securities Act) of the Company.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Eligible
Holders of Old Notes and for the purposes of receiving the New Notes from the
Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Eligible Holder thereof as promptly as
practicable after the Expiration Date.
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN
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FROM TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE
OFFER. IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION.
HOLDERS OF OLD NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO
THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE PRINCIPAL AMOUNT OF OLD NOTES TO
TENDER, AFTER READING CAREFULLY THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL
AND CONSULTING WITH THEIR ADVISORS, IF ANY, BASED ON THEIR OWN FINANCIAL
POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Expiration Date shall be January 15, 1998 at 5:00 p.m., New York City
time, unless the Company, 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.
The Company expressly reserves the right, in its sole and absolute
discretion, (i) to delay accepting any Old Notes, (ii) to extend the Exchange
Offer, (iii) to terminate the Exchange Offer, and (iv) to waive any condition or
otherwise amend the terms of the Exchange Offer in any manner. If the Exchange
Offer is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the Eligible Holders.
Any such delay in acceptance, extension, termination, amendment or waiver
will be followed promptly by oral or written notice thereof to the Exchange
Agent and by making a public announcement thereof, and such notice and
announcement in the case of an extension will be made no later than 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date. Without limiting the manner in which the Company may choose to
make any public announcement and subject to applicable law, the Company shall
have no obligation to publish, advertise or otherwise communicate any such
public announcement other than by issuing a release to the Dow Jones News
Service.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any
extension of the Exchange Offer, the Company will not be required to accept for
exchange, or to exchange, any Old Notes for New Notes, and, as described below,
may terminate the Exchange Offer (whether or not any Old Notes have theretofore
been accepted for exchange) or may waive any conditions to or amend the Exchange
Offer, if any of the following conditions have occurred or exists or have not
been satisfied:
(i) the Exchange Offer, or the making of any exchange by an Eligible
Holder, violates any applicable law or any applicable interpretation of the
SEC Staff;
(ii) the due tendering of Registrable Securities in accordance with
the Exchange Offer; and
(iii) each Eligible Holder of Registrable Securities exchanged in the
Exchange Offer shall have made certain customary representations, including
representations that such Eligible Holder is not an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act, that all
New Notes to be received by it shall be acquired in the ordinary course of
its business and that at the time of the consummation of the Exchange
Offer, such Eligible Holder has no arrangement or understanding with any
person to participate in the "distribution" (within the meaning of the
Securities Act) of the New Notes, and any such representation as may be
reasonably necessary under applicable SEC rules, regulations or
interpretations to allow Eligible Holders to use of the registration
statement filed by the Company with respect to the Exchange Offer.
If the Company determines in its sole and absolute discretion that any of
the foregoing events or conditions has occurred or exists or has not been
satisfied, the Company may, subject to applicable law, terminate the Exchange
Offer (whether or not any Old Notes have theretofore been accepted for exchange)
or may waive any such condition or otherwise amend the terms of the Exchange
Offer in any respect. If such waiver or amendment constitutes a material change
to the Exchange Offer, the Company will promptly disclose such waiver or
amendment by means of a prospectus supplement that will be distributed to the
registered holders of the Old
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Notes, and the Company will extend the Exchange Offer to the extent required by
Rule 14e-1 under the Exchange Act.
The Company expects that the foregoing conditions will be satisfied. The
foregoing conditions are for the sole benefit of the Company and may be waived
by the Company in whole or in part at any time and from time to time in its sole
discretion. The failure by the Company at any time to exercise any of the
foregoing rights shall not be deemed a waiver of such rights and each such right
shall be deemed an ongoing right which may be asserted at any time and from time
to time. Any determination by the Company concerning the events described above
will be final and binding upon all parties.
TERMINATION OF CERTAIN RIGHTS
The Registration Rights Agreement provides that, in the event of a
Registration Default, the interest rate borne by the Old Notes (except in the
case of the Exchange Offer not being consummated by February 4, 1998 or if a
Shelf Registration Statement is not declared effective on or prior to February
4, 1998, or if a Shelf Registration Statement is not filed within 30 days of
request by the request of the Initial Purchasers, in which case only the Old
Notes that have not been exchanged in the Exchange Offer) shall be increased by
one-quarter of one percent (0.25%) per annum upon the occurrence of any
Registration Default, which rate (as increased as aforesaid) will increase by an
additional one-quarter of one percent (0.25%) each 90-day period that such
additional interest continues to accrue under any such circumstance, with an
aggregate maximum increase in the interest rate equal to one percent (1%) per
annum (such interest in excess of 9 7/8% paid by the Company pursuant to a
Registration Default referred to herein as "Additional Interest"). Following the
cure of all Registration Defaults, the accrual of Additional Interest will cease
and the interest rate will revert to 9 7/8%. Holders of New Notes will not be
and, upon consummation of the Exchange Offer, Eligible Holders of Old Notes will
no longer be, entitled to (i) the right to receive Additional Interest upon the
occurrence of a Registration Default, or (ii) certain other rights under the
Registration Rights Agreement intended for the holders of unregistered
securities; provided, however, that (A) an Eligible Holder of Old Notes who is
not legally permitted to participate in the Exchange Offer based upon advice of
counsel to that effect or who does not receive fully tradeable New Notes
pursuant to the Exchange Offer, subject to reasonable verification by the
Company, and (B) the Initial Purchasers acquiring a majority of the initial
aggregate principal amount of the Old Notes with respect to Registrable
Securities acquired directly from the Company, shall have the right to require
the Company to file a Shelf Registration Statement solely for the benefit of
such Eligible Holders of Old Notes and will be entitled to receive Additional
Interest following the occurrence of a Registration Default in connection with
the filing of such Shelf Registration Statement. Notwithstanding anything to the
contrary in the foregoing, Old Notes not tendered in the Exchange Offer will
remain outstanding and continue to accrue interest in accordance with their
terms.
ACCRUED INTEREST ON THE OLD NOTES
Interest on the New Notes will accrue from the last Interest Payment Date
on which interest was paid on the Old Notes surrendered in exchange therefor or,
if no interest has been paid on the Old Notes, from the date of original issue
of the Old Notes. Eligible Holders of Old Notes accepted for exchange will be
deemed to have waived the right to receive any other payments or accrued
interest on the Old Notes.
PROCEDURES FOR TENDERING OLD NOTES
The tender of an Eligible Holder's Old Notes as set forth below and the
acceptance thereof by the Company will constitute a binding agreement between
the tendering Eligible Holder and the Company upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal. Except as set forth below, an Eligible Holder who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit such Old
Notes, together with a properly completed and duly executed Letter of
Transmittal, including all other documents required by such Letter of
Transmittal, to the Exchange Agent at the address set forth on the back cover
page of this Prospectus prior to 5:00 p.m., New York City time on the Expiration
Date. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE ELIGIBLE HOLDER. IF SUCH
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DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT THE ELIGIBLE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system and which is a "registered holder" (as defined) may
make book-entry delivery of the Old Notes by causing DTC to transfer such Old
Notes into the Exchange Agent's account at DTC in accordance with DTC's
procedures for such transfer. Registered holders that tender Old Notes through
DTC's Book-Entry Transfer Facility system need not submit a physical Letter of
Transmittal if such registered holders comply with the transmittal procedures
for DTC's Book-Entry Transfer Facility system. Registered holders of Old Notes
who are not participants in DTC's Book-Entry Facility system and who wish to
tender Old Notes for exchange pursuant to the Exchange Offer must properly
complete and duly execute the Letter of Transmittal (or a facsimile thereof),
together with any required signature guarantees and any other required
documents. All such documents must be delivered to and received by the Exchange
Agent at its address set forth under " -- The Exchange Agent; Assistance" on or
prior to the Expiration Date, or the guaranteed delivery procedure set forth
below must be complied with.
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
are tendered (i) by a registered holder of the Old Notes who has not completed
the box entitled "Special Delivery Instructions" in the Letter of Transmittal,
or (ii) for the account of an Eligible Institution. In the event that a
signature on a Letter of Transmittal or a notice of withdrawal, as the case may
be, is required to be guaranteed, such signature must be guaranteed by a
participant in a recognized Medallion Signature Program (a "Medallion Signature
Guarantor"). If the Letter of Transmittal is signed by a person other than the
registered holder of the Old Notes, the Old Notes surrendered for exchange must
be endorsed by the registered holder, with the signature thereon guaranteed by a
Medallion Signature Guarantor. The term "registered holder" as used herein with
respect to the Old Notes means any person in whose name the Old Notes are
registered on the books of the Registrar. The term "Eligible Institution" as
used herein means a firm which is a member of a registered national securities
exchange or of the NASD, a commercial bank or trust company having an office or
correspondent in the United States or any other "eligible guarantor institution"
as such term is defined in Rule 17Ad-15 under the Securities Exchange Act of
1934, as amended (the "Exchange Act").
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
Old Notes not properly tendered and to reject any Old Notes the Company's
acceptance of which might, in the judgment of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer
(including the Letter of Transmittal and the instructions thereto) by the
Company shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes for exchange must be
cured within such period of time as the Company shall determine. Tenders of the
Old Notes will not be deemed to have been made until such irregularities have
been cured or waived.
If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a corporation or
other person acting in a fiduciary or representative capacity, such person
should so indicate when signing, and, unless waived by the Company, provide
proper evidence satisfactory to the Company, in its sole discretion, of such
person's authority so to act.
Any beneficial owner of the Old Notes (a "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 Old Notes in the Exchange
Offer should contact such registered holder promptly and instruct such
registered holder to tender on such Beneficial Owner's behalf. If such
Beneficial Owner wishes to tender directly, such Beneficial Owner must,
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prior to completing and executing the Letter of Transmittal and tendering Old
Notes, make appropriate arrangements to register ownership of the Old Notes in
such Beneficial Owner's name. Beneficial Owners should be aware that the
transfer of registered ownership may take considerable time.
By tendering through either DTC's Book-Entry Transfer Facility system or by
executing a Letter of Transmittal, each registered holder represents to the
Company that, among other things (i) the New Notes to be acquired in connection
with the Exchange Offer by the Eligible Holder and each Beneficial Owner of the
Old Notes are being acquired by the Eligible Holder and each Beneficial Owner in
the ordinary course of business of the Eligible Holder and each Beneficial
Owner, (ii) the Eligible Holder and each Beneficial Owner are not participating,
do not intend to participate, and have no arrangement or understanding with any
person to participate, in the distribution of the New Notes, (iii) the Eligible
Holder and each Beneficial Owner acknowledge and agree that any person who is an
affiliate of the Company or who is participating in the Exchange Offer for the
purpose of distributing the New Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the New Notes acquired by such person and cannot
rely on the position of the SEC Staff set forth in no-action letters that are
discussed herein under "Resales of New Notes", (iv) that if the Eligible Holder
is a broker-dealer that acquired Old Notes as a result of market-making or other
trading activities, it will deliver a prospectus in connection with any resale
of New Notes acquired in the Exchange Offer, provided, however, by so
acknowledging and by delivering a Prospectus, the Eligible Holder will not be
deemed to admit that it is an "underwriter" within the meaning of Section 2(ii)
of the Securities Act, (v) the Eligible Holder and each Beneficial Owner
understand that a secondary resale transaction described in clause (iii) above
should be covered by an effective registration statement containing the selling
security holder information required by Item 507 of Regulation S-K adopted by
the SEC pursuant to the Securities Act, (vi) neither the Eligible Holder nor any
Beneficial Owner is an "affiliate", as defined under Rule 405 of the Securities
Act, of the Company except as otherwise disclosed to the Company in writing, and
(vii) the Eligible Holder and each Beneficial Owner has full power and authority
to tender, exchange, assign and transfer its Old Notes pursuant to the Exchange
Offer and the Company will acquire good and unencumbered title thereto, free and
clear of all liens, restrictions, charges and encumbrances and not subject to
any adverse claim. Each registered holder and Beneficial Owner will, upon
request, execute and deliver any additional documents deemed by the Company to
be necessary or desirable to complete the assignment and transfer of the Old
Notes tendered pursuant to the Exchange Offer.
GUARANTEED DELIVERY PROCEDURES
Eligible Holders who wish to tender their Old Notes other than through
DTC's Book Entry Transfer Facility system on a timely basis and (i) whose Old
Notes are not immediately available, or (ii) who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents required by the Letter of
Transmittal to the Exchange Agent on or prior to the Expiration Date, may tender
their Old Notes according to the guaranteed delivery procedures set forth in the
Letter of Transmittal. Pursuant to such procedures: (A) such tender must be made
by or through an Eligible Institution and a Notice of Guaranteed Delivery (as
defined in the Letter of Transmittal) must be signed by such Eligible Holder,
(B) on or prior to the Expiration Date, the Exchange Agent must have received
from the Eligible Institution a properly completed and duly executed Letter of
Transmittal (or facsimile thereof) and a Notice of Guaranteed Delivery (by
telegram, facsimile transmission, mail or hand delivery) setting forth the name
and address of the Eligible Holder, the certificate number or numbers of the
tendered Old Notes, and the principal amount of tendered Old Notes, stating that
the tender is being made thereby and guaranteeing that, within three New York
Stock Exchange trading days after the Expiration Date, any documents required by
the Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, and (C) such properly completed and executed documents required
by the Letter of Transmittal and the tendered Old Notes in proper form for
transfer (or confirmation of a book-entry transfer of such Old Notes into the
Exchange Agent's account at DTC) must be received by the Exchange Agent within
three New York Stock Exchange trading days after the Expiration Date. Any
Eligible Holder who wishes to tender Old Notes pursuant to the guaranteed
delivery procedures described above must ensure that the Exchange Agent receives
the Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old
Notes prior to 5:00 p.m., New York City time, on the Expiration Date.
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ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions of the Exchange Offer,
the Company will accept any and all Old Notes that are properly tendered (and
not withdrawn) in the Exchange Offer prior to 5:00 p.m., New York City time, on
the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be
delivered promptly after acceptance of the Old Notes. For purposes of the
Exchange Offer, the Company shall be deemed to have accepted validly tendered
Old Notes, when, as, and if the Company has given oral or written notice thereof
to the Exchange Agent.
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents (or of confirmation of a
book-entry transfer of such Old Notes into the Exchange Agent's account at DTC);
provided, however, that the Company reserves the absolute right to waive any
defects or irregularities in the tender or conditions of the Exchange Offer. If
any tendered Old Notes are not accepted for any reason, such unaccepted Old
Notes will be returned without expense to the tendering Eligible Holder thereof
as promptly as practicable after the expiration or termination of the Exchange
Offer.
WITHDRAWAL RIGHTS
Tenders of the Old Notes may be withdrawn by delivery of a telegram, telex,
facsimile transmission or letter to the Exchange Agent, at its address set forth
on the back cover page of this Prospectus, at any time prior to 5:00 p.m., New
York City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Old Notes to be withdrawn
(the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number or numbers and principal amount of such Old Notes, as
applicable), (iii) be signed by the Eligible 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 a
bond power in the name of the person withdrawing the tender, in satisfactory
form as determined by the Company in its sole discretion, duly executed by the
registered holder, with the signature thereon guaranteed by a Medallion
Signature Guarantor together with the other documents required upon transfer by
the Indenture, and (iv) specify the name in which such Old Notes are to be
re-registered, if different from the Depositor, pursuant to such documents of
transfer. Withdrawal of Old Notes tendered pursuant to DTC's Book-Entry Transfer
Facility system must comply with the procedures for withdrawal established by
DTC. All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company, in its sole
discretion. The 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 withdrawn will be returned to the
Eligible Holder thereof without cost to such Eligible Holder as soon as
practicable after withdrawal. Properly withdrawn Old Notes may be retendered by
following one of the procedures described under "--Procedures for Tendering Old
Notes" at any time on or prior to the Expiration Date.
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THE EXCHANGE AGENT; ASSISTANCE
First Trust National Association, a national banking corporation, is the
Exchange Agent. All tendered Old Notes, executed Letters of Transmittal and
other related documents should be directed to the Exchange Agent. Questions and
requests for assistance and requests for additional copies of the Prospectus,
the Letter of Transmittal and other related documents should be addressed to the
Exchange Agent as follows:
By Hand, Registered or Certified Mail or Overnight Courier:
First Trust National Association
First Trust Center
180 East Fifth Street
St. Paul, MN 55101
Attention: Therese Linscheid,
Specialized Finance Department
By Facsimile:
(612) 244-1537
Attention: Therese Linscheid,
Specialized Finance Department
Confirm by Telephone: (612) 244-1234
FEES AND EXPENSES
All fees and expenses incident to the Company's consummation of the
Exchange Offer and compliance with the Registration Rights Agreement will be
borne by the Company, including without limitation, and if applicable: (i) all
Commission, stock exchange or NASD registration and filing fees, (ii) all fees
and expenses incurred in connection with compliance with state securities or
blue sky laws and compliance with the rules of the NASD (including reasonable
fees and disbursements of counsel for any underwriters or Holders in connection
with blue sky qualification of any of the New Notes or Registrable Securities
and any filings with the NASD), (iii) all expenses of any persons in preparing
or assisting in preparing, word processing, printing and distributing any
registration statement, any prospectus, any amendments or supplements thereto,
any underwriting agreements, securities sale agreements and other documents
relating to the performance of and compliance with this Agreement, (iv) all fees
and expenses incurred in connection with the listing, if any, of any of the
Registrable Securities on any securities exchange or exchanges, (v) all rating
agency fees, (vi) the fees and disbursements of counsel for the Company and of
the independent public accountants of the Company, including the expenses of any
special audits or "cold comfort" letters required by or incident to such
performance and compliance, (vii) the fees and expenses of the Trustee, and any
escrow agent or custodian, (viii) the reasonable fees and disbursements of
special counsel representing the holders of Registrable Securities, and (ix) any
fees and disbursements of the underwriters required to be paid by issuers or
sellers of securities, if any, and the reasonable fees and expenses of any
special experts retained by the Company in connection with any registration
statement, if any, but excluding underwriting discounts and commissions and
transfer taxes, if any, relating to the sale or disposition of Registrable
Securities by an Eligible Holder.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
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ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss will be recognized by the Company for accounting
purposes. The expenses of the Exchange Offer will be amortized over the term of
the New Notes.
RESALES OF THE NEW NOTES
Upon consummation of the Exchange Offer, holders of Old Notes who did not
tender their Old Notes and who were not legally prohibited from participating in
the Exchange Offer based upon advice of counsel to that effect and who would
have received fully tradeable New Notes pursuant to the Exchange Offer will not
have any registration rights under the Registration Rights Agreement with
respect to such nontendered Old Notes (other than with respect to a request for
a Shelf Registration Statement by the Initial Purchasers acquiring a majority of
the initial aggregate principal amount of the Old Notes with respect to
Registrable Securities acquired directly from the Company). Such Old Notes will
continue to be subject to the restrictions on transfer contained in the legend
thereon. In general, the Old Notes may not be offered or sold unless registered
under the Securities Act and applicable state securities laws, except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not intend to register the
Old Notes under the Securities Act.
The Company is making the Exchange Offer in reliance on the position of the
SEC Staff as set forth in certain interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letter and there can be no assurance that the SEC Staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the SEC
Staff, and subject to the following sentences, the Company believes that New
Notes issued pursuant to the Exchange Offer to an Eligible Holder in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by an
Eligible Holder (other than (i) a broker-dealer who purchased Old Notes directly
from the Company for resale pursuant to Rule 144A or any other available
exemption under the Securities Act, or (ii) a person that is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act), without
further compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Eligible Holder is acquiring the New
Notes in the ordinary course of business and is not participating, and has no
arrangement or understanding with any person to participate, in the
"distribution" (within the meaning of the Securities Act) of the New Notes.
Eligible Holders wishing to accept the Exchange Offer must represent to the
Company, among other things, that such conditions have been met. Any Eligible
Holder of Old Notes who is an "affiliate" of the Company or who intends to
participate in the Exchange Offer for the purpose of participating in the
distribution of the New Notes, or any broker-dealer who purchased Old Notes from
the Company to resell pursuant to Rule 144A or any other available exemption
under the Securities Act, (a) will not be able to rely on the interpretations of
the SEC Staff set forth in the above-mentioned interpretive letters, (b) will
not be permitted or entitled to tender such Old Notes in the Exchange Offer, and
(c) must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any sale or other transfer of such Old
Notes unless such sale is made pursuant to an exemption from such requirement.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer may be deemed to be a statutory underwriter, must acknowledge
that it acquired the Old Notes for its own account as a result of market-making
activities or other trading activities and must agree that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such New Notes. The Letter of Transmittal states that by so
acknowledging 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.
Based on the position taken by the SEC Staff in the interpretive letters
referred to above, the Company believes that Participating Broker-Dealers who
acquired Old Notes for their own accounts, as a result of market-making or other
trading activities, may fulfill their prospectus delivery requirements with
respect to the New Notes received upon exchange of such Old Notes with a
prospectus meeting the requirements of the Securities Act, which may be the
prospectus prepared for an exchange offer so long as it contains a description
of the plan of distribution with respect to the resale of such New Notes.
Accordingly, this Prospectus, as it may be amended or supplemented from time to
time, may be
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used by a Participating Broker-Dealer in connection with resales of New Notes
received in exchange for Old Notes if such Old Notes were acquired by such
Participating Broker-Dealer for its own account as a result of market-making or
other trading activities. Subject to certain conditions, the Company has agreed
that this Prospectus, as it may be amended or supplemented from time to time,
may be used by a Participating Broker-Dealer in connection with resales of such
New Notes. See "Plan of Distribution". However, a Participating Broker-Dealer
who intends to use this Prospectus in connection with the resale of New Notes
received in exchange for Old Notes pursuant to the Exchange Offer must notify
the Company, or cause the Company to be notified, on or prior to the Expiration
Date, that it is a Participating Broker-Dealer. Such notice may be given in the
space provided for that purpose in the Letter of Transmittal or may be delivered
to the Exchange Agent at one of the addresses set forth herein under "-- The
Exchange Agent; Assistance". Any Participating Broker-Dealer who is an
"affiliate" of the Company may not rely on such interpretive letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by notifying the
Company that it intends to use this Prospectus in connection with the resale of
New Notes exchanged for Old Notes, that, upon receipt of notice from the Company
of the occurrence of any event or the discovery of any fact which makes any
statement contained in this Prospectus untrue in any material respect or which
causes this Prospectus to omit to state a material fact necessary in order to
make the statements contained herein, in light of the circumstances under which
they were made, not misleading or of the occurrence of certain other events
specified in the Registration Rights Agreement, such Participating Broker-Dealer
will suspend the sale of New Notes pursuant to this Prospectus until the Company
has amended or supplemented this Prospectus to correct such misstatement or
omission and has furnished copies of the amended or supplemented Prospectus to
such Participating Broker-Dealer or the Company has given notice that the sale
of the New Notes may be resumed, as the case may be.
MISCELLANEOUS
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
Upon consummation of the Exchange Offer, holders of the Old Notes that were
not prohibited from participating in the Exchange Offer and did not tender their
Old Notes will not have any registration rights under the Registration Rights
Agreement with respect to such nontendered Old Notes (other than with respect to
a request for a Shelf Registration Statement by the Initial Purchasers acquiring
a majority of the initial aggregate principal amount of the Old Notes with
respect to Registrable Securities acquired directly from the Company). Such Old
Notes will continue to be subject to the restrictions on transfer contained in
the legend thereon.
THE REFINANCING
In October 1997, the Company completed the Refinancing which reduces
interest expense, extends debt maturities and improves financial flexibility.
The components of the Refinancing were (i) the Offering of $225 million
aggregate principal amount of the Old Notes, (ii) the consummation of the Tender
Offer with respect to the 13% Notes, and (iii) the application of the net
proceeds from the Offering to retire the 13% Notes. Pursuant to the Tender
Offer, in October 1997 the Company purchased $177.4 million aggregate principal
amount of the 13% Notes and the Indenture pursuant to which the 13% Notes were
issued was substantially amended. The Company has announced that in January
1998, it will redeem the remaining $22.6 million aggregate principal amount of
the 13% Notes not tendered in the Tender Offer at a price of 106.5% of the
principal amount, together with accrued and unpaid interest.
In addition to the Refinancing, in November 1997 the Company entered into
the three-year, $70 million Bank Credit Facility to replace its prior revolving
credit agreement. The $70 million available under the Bank Credit Facility is
reduced by any outstanding letters of credit, which cannot exceed $30 million.
At September 30, 1997, outstanding letters of credit totalled $9.8 million. The
Bank Credit Facility is secured by substantially all real and personal property
(excluding installment contracts receivable) of the Company.
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CAPITALIZATION
The following table sets forth the historical consolidated capitalization
of the Company at September 30, 1997 and as adjusted to give effect to (i) the
Refinancing, and (ii) the Exchange Offer.
AS OF SEPTEMBER 30, 1997
--------------------------------
AS ADJUSTED FOR THE
REFINANCING(a) AND
ACTUAL THE EXCHANGE OFFER(b)
------ ----------------------
(IN MILLIONS)
Cash and equivalents............................................. $ 63.4 $ 65.4
====== ======
Long-term debt, including current portion:
Securitization Facility..................................... $160.0 $160.0
Capital lease obligations and other......................... 19.7 19.7
13% Notes................................................... 200.0 --
New Notes................................................... -- 225.0
------ ------
Total debt............................................. 379.7 404.7
Stockholders' equity............................................. 91.5 70.9
------ ------
Total capitalization................................... $471.2 $475.6
====== ======
- ---------------
(a) The components of the Refinancing were (i) the Offering of $225 million
aggregate principal amount of the Old Notes, (ii) the consummation of the
Tender Offer with respect to the 13% Notes, and (iii) the application of the
net proceeds from the Offering to retire the 13% Notes. Pursuant to the
Tender Offer, in October 1997 the Company purchased $177.4 million aggregate
principal amount of the 13% Notes. The Company has announced that in January
1998, it will redeem the remaining $22.6 million aggregate principal amount
of the 13% Notes not tendered in the Tender Offer at a price of 106.5% of
the principal amount, together with accrued and unpaid interest. The
retirement of the 13% Notes will result in an extraordinary loss totalling
approximately $20.6 million. The estimated fees and expenses of the Offering
and the Exchange Offer total $6.8 million.
(b) Assumes all of the outstanding Old Notes are exchanged for New Notes
pursuant to the Exchange Offer.
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SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company presented below for
and as of the end of each of the three years ended December 31, 1996 were
derived from the audited consolidated financial statements of the Company. The
data presented below for and as of the end of each of the years ended December
31, 1993 and 1992 and nine months ended September 30, 1997 and 1996 are
unaudited. In the opinion of management, such interim data include all
adjustments (which were of a normal recurring nature) necessary for a fair
presentation of the information set forth therein. The Company's operations are
subject to seasonal factors, and therefore, the results of operations for the
nine months ended September 30, 1997 and 1996 are not necessarily indicative of
the results of operations for the full year. The data presented should be read
in conjunction with financial information appearing elsewhere in this
Prospectus. See "Consolidated Financial Statements" and "Management's Discussion
and Analysis of Results of Operations and Financial Condition".
NINE MONTHS
ENDED SEPTEMBER
30, YEARS ENDED DECEMBER 31,
---------------- --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ -------- --------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
(AS RESTATED)(a)
STATEMENT OF OPERATIONS DATA:
Net revenues...................................... $495.4 $479.0 $639.2 $653.4 $682.0 $ 666.7 $ 688.6
Depreciation and amortization..................... 40.7 41.1 55.9 57.4 58.9 60.4 57.8
Operating income (loss)........................... 10.3 6.6 19.1 5.0 (16.1) (18.1) (19.3)
Loss before extraordinary item and cumulative
effect on prior years of change in accounting
for income taxes (b)(c)......................... (23.2) (29.1) (24.9) (31.4) (39.5) (31.4) (33.6)
Loss per common share (pro forma for 1995 and
1994) (d)....................................... (1.68) (2.39) (2.04) (3.25) (4.61)
OTHER FINANCIAL DATA:
EBITDA (e)........................................ $ 51.0 $ 47.7 $ 75.0 $ 62.4 $ 42.8 $ 42.3 $ 38.5
Cash provided by (used in):
Operating activities............................ (25.0) (14.5) (5.3) (9.9) 32.8 49.9 64.5
Investing activities............................ (13.8) (12.8) (9.8) (42.1) (21.4) (36.1) (25.1)
Financing activities............................ 85.6 17.9 10.4 60.4 (9.6) (13.6) (41.8)
Ratio of earnings to fixed charges (f)............ -- -- -- -- -- -- --
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and equivalents (g).......................... $ 63.4 $ 11.9 $ 16.5 $ 21.3 $ 12.8 $ 11.0 $ 10.7
Installment contracts receivable, net............. 326.8 299.1 300.2 303.4 284.1 322.7 327.8
Total assets...................................... 965.0 902.7 893.3 936.5 951.0 1,016.7 1,012.4
Total debt........................................ 379.7 384.8 384.8 369.5 300.4 312.1 276.2
Stockholders' equity (c)(g)....................... 91.5 9.9 24.2 31.7 34.8 50.6 146.8
- ---------------
(a) The selected consolidated financial data presented herein for periods other
than the nine months ended September 30, 1997 have been restated to reflect
a change in the Company's method of recognizing membership revenue. See
"Consolidated Financial Statements".
(b) In 1996, the Company recognized a net extraordinary gain on extinguishment
of debt consisting of (i) a gain (net of taxes) of $9.9 million ($.81 per
share) resulting from indebtedness owed Entertainment which was forgiven as
part of the December 1996 merger of Entertainment with and into Hilton and
(ii) a charge (net of taxes) of $4.2 million ($.35 per share) resulting from
the refinancing of the Company's prior securitization facility by the
Securitization Facility. In 1993, the Company recognized an extraordinary
loss on extinguishment of debt of $6.0 million (net of taxes) resulting from
a refinancing of certain indebtedness.
(c) In 1993, the Company changed its method of accounting for income taxes as
required by SFAS No. 109, "Accounting for Income Taxes". As permitted by
SFAS No. 109, the Company elected to use the cumulative effect approach
rather than to restate the consolidated financial statements of any prior
years to apply the provisions of SFAS No. 109, which resulted in a charge of
$69.0 million in 1993.
(d) The loss for the years ended December 31, 1995 and 1994 reflects a federal
income tax benefit arising from the Company's prior tax sharing agreement
with Entertainment of $7.1 million and $15.2 million, respectively. Pro
forma loss per common share (which is unaudited) was calculated giving
effect to (i) adjustments made to reflect the income tax provision/benefit
as if the Company had filed its own separate consolidated income tax return
for each year and (ii) the distribution of 11,845,161 shares of the
Company's common stock to Entertainment stockholders as if such distribution
had taken place as of the beginning of each year.
(e) EBITDA is defined as operating income (loss) before depreciation and
amortization. The Company has presented EBITDA supplementally because
management believes this information is useful given the significance of the
Company's depreciation and amortization and because of its highly leveraged
financial position. These data should not be considered as an alternative to
any measure of performance or liquidity as promulgated under generally
accepted accounting principles (such as net income/loss or cash provided by
/used in operating, investing and financing activities), nor should they be
considered as an indicator of the Company's overall financial performance.
Also, the EBITDA definition used herein may not be comparable to similarly
titled measures reported by other companies.
(f) The ratio of earnings to fixed charges is calculated by dividing (i) loss
before income taxes, extraordinary item and cumulative effect on prior years
of change in accounting for income taxes plus fixed charges (adjusted for
capitalized interest) by (ii) fixed charges. Fixed charges consist of
interest incurred (expensed or capitalized) and the portion of rent expense
which is deemed representative of interest. Earnings were insufficient to
cover fixed charges by $22.6 million, $27.7 million, $26.2 million, $37.1
million, $53.1 million, $55.9 million and $49.7 million for the nine months
ended September 30, 1997 and 1996 and for the years ended December 31, 1996,
1995, 1994, 1993 and 1992, respectively.
(g) In August 1997, the Company completed the Stock Offering, which provided net
proceeds of $88.4 million to the Company after deducting the underwriting
discount and related expenses.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The primary strategic initiative of management involves improving the
results of its core business and, as capital is available, replicating the
profitable new fitness center model through expansion. In 1993, the Company
began building more efficient fitness centers by eliminating pools and other wet
areas and racquet sports (all of which are costly to build and maintain and
which have significantly lower utilization rates), and replacing much of that
space with expanded workout areas which receive a higher degree of member use.
At approximately the same time, the Company emphasized member payment plans
using EFT for financed initial membership fees by adjusting sales commissions
and member incentives. The Company's experience has indicated better collection
results for financed memberships sold under EFT plans compared to those sold
with standard coupon book payment plans. EFT-financed memberships represented
approximately 56% of the total financed initial membership fee contracts in the
receivables portfolio at September 30, 1997. Over the past several years,
membership types and pricing options were standardized, making the selling
process less complicated for both the customer and the sales personnel. In
August 1994, the Company implemented a program to increase monthly dues for
contracts sold after that date and in late 1995 began to curtail the practice of
discounting dues for multiple year renewal offers. The Company believes all of
these actions, certain of which reduced new membership unit sales and revenues,
will ultimately improve cash flows and operating income.
In addition, management made certain changes designed to integrate
operations and reduce operating costs including personnel costs, advertising
expenses and other operating expenses. As part of its continuing cost reduction
program, the Company began a long-term consolidation project in 1991 and
computer conversion in 1994 for its regional service centers ("RSCs"). The
consolidation of five RSCs into two remaining RSCs was completed in the third
quarter of 1995, and the elimination of cost redundancies continued throughout
1996. The primary phase of the computer conversion was completed in the fourth
quarter of 1995. With the addition of new hardware and software, the Company has
streamlined its processing procedures and developed efficiencies that enable the
RSCs to service members better while reducing costs.
The rate of the Company's provision for doubtful receivables can vary from
period to period. The Company estimates the ultimate realization of initial
membership fees originated on financed memberships based upon a number of
factors such as method of payment (EFT vs. coupon books) and amount of
downpayment, among others. The Company continually analyzes the provision
because initial membership fees can be paid to the Company in installments.
Updated collection experience trends are reviewed each reporting period and, if
necessary, the allowance is adjusted accordingly. Changes in the allowance as a
percentage of gross receivables may result from various factors including
significant near-term fluctuations in amounts of initial membership fees
originated for financed memberships (historically, approximately one-half of
financed memberships that default do so within 120 days of origination) or the
timing or acceleration of write-offs. The Company believes the qualitative
profile of its receivables portfolio at September 30, 1997 is generally improved
from that in recent years due to more accounts paying by EFT and higher average
downpayments.
Management also believes significant opportunities exist to increase
revenues beyond those generated by the sale of memberships without significant
capital expenditures. To capitalize on the Company's strong brand identity,
extensive distribution infrastructure (approximately 320 facilities),
significant member base (approximately four million members) and frequency of
visitation (in excess of 100 million visits in 1996), management has begun to
pursue the following growth opportunities: (i) the sale of nutritional products
to its members through its fitness centers and telemarketing; (ii) the provision
of comprehensive outpatient rehabilitation services to both members and
non-members; and (iii) the sale of other goods and services, including apparel
and other items in retail shops located within its fitness centers and certain
financial services to its members.
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RESULTS OF OPERATIONS
Accounting change
In connection with the Stock Offering, the SEC Staff advised the Company it
requires all registrants operating fitness centers with membership plans that
include initial membership fees to follow a "deferral method" of accounting with
respect to the recognition of revenue from initial membership fees. The
accompanying consolidated financial statements for periods other than the nine
months ended September 30, 1997 have been restated from those originally
reported because this "deferral method" differed from the revenue recognition
method historically used by the Company. See "Consolidated Financial
Statements".
Comparison of the nine months ended September 30, 1997 and 1996
Net revenues for the first nine months of 1997 were $495.4 million compared
to $479.0 million in 1996, an increase of $16.4 million (3%) . The average
number of fitness centers selling memberships decreased from 323 in the first
nine months of 1996 to 317 in the first nine months of 1997, reflecting the
closure of 17 older, typically smaller and less profitable facilities and the
sale of a fitness center to a franchisee offset, in part, by the opening of 8
new, larger facilities, all occurring between January 1996 and September 1997.
Initial membership fees originated increased $17.2 million (6%) in the 1997
period, consisting of a $35.1 million (15%) increase in financed memberships
originated offset, in part, by a $17.9 million (27%) decrease in paid-in-full
memberships originated. These results generally reflect management's current
strategy of selling more financed membership plans (which historically have
generated better long-term returns for the Company) and fewer discounted
paid-in-full membership plans (for which dues are frequently waived for up to
three years), which resulted in a 21% increase in the average selling price of
contracts sold and a 13% decline in the number of contracts sold. These
fluctuations in the average price and number of contracts sold also reflect
management's recent emphasis on the sale of premium membership plans (which
provide additional in-club services and/or access to other fitness centers
operated by the Company) and de-emphasis on the sale of lower-priced membership
plans (which typically offer limited amenities or are sold as add-ons to
existing memberships). In addition, deferred revenue accounting delayed
recognition of revenues for the 1997 period by $4.4 million while it added $15.5
million to revenues for the 1996 period, and this unfavorable effect of the
change in deferred revenues in the current period versus the same period last
year is expected to continue into early 1998. Dues collected increased $15.3
million (12%) over 1996, reflecting the Company's continuing strategy of
increasing renewal dues. Finance charges earned increased $1.8 million (7%) in
the 1997 period due primarily to the increase in the size of the receivables
portfolio. Fees and other revenues increased $2.0 million (21%) over the 1996
period, primarily reflecting the sale of nutritional and other retail products
which the Company began selling in 1997 in certain of its fitness centers and an
increased emphasis on personal training services.
Operating income for the first nine months of 1997 was $10.3 million
compared to $6.6 million in 1996. The increase of $3.7 million is due to the
aforementioned increase in revenues offset, in part, by a $12.6 million (3%)
increase in operating costs and expenses, which includes $6.5 million of charges
($2.1 million of which is amortization of unearned compensation) relating to
restricted stock awards issued in conjunction with the Spin-off for which the
remaining restrictions lapsed in June 1997 and vesting occurred in August 1997.
Excluding the charges related to restricted stock awards and the provision for
doubtful receivables, operating costs and expenses decreased $2.2 million (1%)
from 1996. Member processing and collection center expenses decreased $2.7
million (9%), and reflects decreases in telephone expenses (as a result of
renegotiated rates and fewer member service calls), printing and equipment
rental costs. In addition, advertising expenses decreased $2.1 million (6%) due
to reduced television spending and the elimination of certain agency fees in
1997. Fitness center operating expenses increased $7.2 million (3%) due, in
part, to increased spending to improve club operations and appearance,
additional commissions (a substantial portion of which are deferred through the
change in deferred membership origination costs) from the growth in initial
membership fees originated, and costs associated with the new initiatives
described above.
The provision for doubtful receivables for the first nine months of 1997
was $72.6 million compared to $64.3 million in 1996, an increase of $8.3 million
(13%) primarily due to the increase in sales of financed membership plans.
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Interest expense was $34.1 million for the first nine months of 1997
compared to $36.0 million in 1996, a decrease of $1.9 million (5%) primarily due
to lower average interest rates and an increase in the amount of capitalized
interest.
The income tax provision for the first nine months of 1997 and 1996 has
been determined using the estimated annual effective tax rate for each year and
reflects state income taxes only, as no federal benefit has been provided due to
the uncertainty of tax loss realization.
Comparison of the years ended December 31, 1996 and December 31, 1995
Net revenues for 1996 were $640.2 million compared to $653.6 million in
1995. The decrease in revenues results, in part, because the average number of
fitness centers selling memberships decreased from 332 in 1995 to 322 in 1996,
reflecting the closure of 25 older, typically smaller and less profitable
facilities and the sale of a fitness center to Entertainment offset, in part, by
the opening of 13 new, larger facilities over the two-year period. Initial
membership fees originated decreased $29.7 million (7%) primarily due to a 12%
decline in the number of contracts sold offset, in part, by a 6% increase in the
average selling price as a result of the sale of more premium memberships. Dues
collected increased $5.1 million (3%) over 1995 despite the 3% reduction in the
average number of facilities operated, reflecting the Company's continuing
strategy of increasing renewal dues. Finance charges earned decreased $.5
million (1%) in 1996 compared to 1995. Fees and other revenues decreased $1.3
million (8%) primarily due to the reduction of personal trainer revenue in 1996
as a result of temporarily outsourcing the service and non-recurring income in
1995 pertaining to insurance recoveries.
Operating income for 1996 was $20.0 million compared to $5.2 million in
1995. The increase of $14.8 million was due to a $28.3 million (4%) reduction in
operating costs and expenses offset, in part, by the aforementioned decrease in
revenues. The reduction in operating costs and expenses was achieved despite an
$8.3 million increase in the provision for doubtful receivables and a $5.1
million charge related to restricted stock awards issued in conjunction with the
Spin-off for which restrictions lapsed due to an increase in the market price of
the Company's common stock. Excluding the provision for doubtful receivables and
charge related to restricted stock awards, operating costs and expenses
decreased $41.6 million (7%) in 1996 compared to 1995 primarily due to
reductions in fitness center operating expenses and member processing and
collection center expenses. Fitness center operating expenses for 1996 decreased
$30.1 million (8%) from 1995 primarily due to a reduction in payroll and related
costs and other variable costs as a result of the continuing cost reduction
program and the 3% reduction in the average number of fitness centers operated
in 1996 compared to 1995. In addition, insurance expenses declined due to
favorable experience in controlling general liability risks, and commissions
decreased as a result of the decline in initial membership fees originated.
Member processing and collection center expenses decreased $8.0 million (16%)
primarily due to the aforementioned RSC consolidation and computer projects.
The provision for doubtful receivables for 1996 was $80.4 million compared
to $72.1 million in 1995, an increase of $8.3 million (12%). Management believes
the additional provision for doubtful receivables in 1996 adequately reserves
for collection experience that may ultimately be realized from sales programs in
general, and specifically from sales promotions allowing very low downpayments
offered from time to time between July 1995 and October 1996 that have shown
indications of underperforming historical collection experience.
Interest expense, net of capitalized interest, was $47.6 million in 1996
compared to $43.8 million in 1995, an increase of $3.8 million (9%) principally
reflecting a higher average level of debt offset, in part, by lower average
interest rates.
As a result of the Spin-off, the Company is no longer included in the
consolidated federal income tax return of Entertainment and is required to file
its own separate consolidated federal income tax return. Accordingly, the income
tax benefit for 1996 reflects a benefit equal to the federal provision allocated
to the extraordinary item (no additional benefit has been provided due to the
uncertainty of tax loss realization), net of a state income tax provision.
Pursuant to a tax sharing agreement with Entertainment, the effective rate of
the income tax benefit for 1995 was lower than the U.S. statutory tax rate (35%)
due principally to operating losses without a current year tax benefit and
non-deductible amortization of costs in excess of acquired assets.
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Comparison of the years ended December 31, 1995 and December 31, 1994
Net revenues for 1995 were $653.6 million compared to $682.0 million in
1994. Dues collected increased by $4.2 million (2%) reflecting the Company's
strategy of increasing renewal dues. Initial membership fees originated
decreased $20.0 million (5%) in 1995 primarily due to a 6% decline in the number
of contracts sold offset, in part, by a 4% increase in the average selling
price, generally reflecting the Company's strategy of realigning its sales mix
to include more financed contracts and somewhat fewer cash contracts, although
some promotions were offered with an emphasis on cash contracts. Management
believes that initial membership fees originated were also negatively impacted
by the general retail climate and increased competition. The average number of
fitness centers selling memberships decreased from 336 in 1994 to 332 in 1995,
reflecting the closure of 26 older, typically smaller facilities and the sale of
a fitness center to Entertainment offset, in part, by the opening of 13 new,
larger facilities over the two-year period.
Operating income for 1995 was $5.2 million compared to an operating loss of
$16.1 million in 1994. The improvement of $21.3 million was due to a $49.8
million (7%) reduction in operating costs and expenses offset, in part, by the
aforementioned decrease in revenues. Excluding the provision for doubtful
receivables, operating costs and expenses decreased $18.0 million (3%) in 1995
compared to 1994 primarily due to a reduction in fitness center operating
expenses. Fitness center operating expenses for 1995 decreased $10.6 million
(3%) from 1994 primarily due to a reduction in salaries and other variable costs
as a result of the continuing cost reduction program and, to a lesser extent,
reduced commissions as a result of the decline in initial membership fees
originated. In addition, member processing and collection center expenses
decreased $1.8 million (4%) primarily due to the aforementioned RSC
consolidation project.
The provision for doubtful receivables for 1995 was $72.1 million compared
to $103.9 million in 1994, a decrease of $31.8 million (31%). The reduction was
primarily due to additional reserves recorded in 1994 in conjunction with
management's reevaluation of collection risks associated with financed sales and
due to the improving collection experience of installment contracts receivable,
primarily the reduction in first payment defaults and an increase in EFT
contracts within the receivables portfolio.
Interest expense, net of capitalized interest, was $43.8 million in 1995
compared to $38.6 million in 1994, an increase of $5.2 million (13%) principally
reflecting a higher average level of debt offset, in part, by lower average
interest rates.
Pursuant to a tax sharing agreement with Entertainment, the effective rates
of the income tax benefit for 1995 and 1994 were lower than the U.S. statutory
tax rate (35%) due principally to operating losses without a current year tax
benefit and non-deductible amortization of costs in excess of acquired assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company intends to expand and upgrade its facilities in order to
increase its membership base and more effectively capitalize on its streamlined
marketing and administrative functions. In August 1997, the Company completed a
public offering of 8,000,000 shares of its common stock, which provided net
proceeds of $88.4 million. The Company has used or intends to use the proceeds
of the Stock Offering as follows: (i) approximately $25 million to $30 million
over the next three years for capital expenditures to open 20 to 30 new
facilities, (ii) approximately $10 million over the next two years to
extensively refurbish and make major upgrades to approximately 25% of its clubs,
which include converting low-usage pools and racquet areas into expanded
exercise areas and to a lesser extent retail and outpatient rehabilitation
service areas, adding and upgrading exercise equipment, and refreshing interior
and exterior finishes to improve club ambience, among others, (iii) $7.5 million
to repay a loan from an affiliate of an underwriter of the Stock Offering, (iv)
as much as $3 million to support the introduction of new initiatives and (v) the
balance for general corporate and working capital purposes. Pending such uses,
the Company has temporarily invested available funds from the Stock Offering in
short-term securities and eliminated indebtedness under its prior revolving
credit agreement. In addition, using cash generated by operations and through
leasing arrangements, management plans to make capital expenditures of
approximately $10 million to $12 million over the next twelve months to maintain
and make minor upgrades to the Company's existing facilities, which include
exercise equipment upgrades, HVAC
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and other operating equipment upgrades and replacements, and locker room and
workout area refurbishments, among others.
Prior to the Stock Offering, the Company was dependent on availability
under its prior revolving credit agreement and its operations to provide for
cash needs. The Company has managed liquidity requirements in recent years by
utilizing membership plan discounting techniques designed to increase its cash
sales and downpayments and to accelerate collections and dues payments to
increase available cash reserves and, to a lesser extent, sales of non-strategic
assets and sale/leaseback arrangements. Management believes use of these
discounting techniques has had a negative impact on both current and long term
results, and that the proceeds provided by the Stock Offering have reduced the
need to continue the discounting techniques.
In October 1997, the Company completed the Refinancing which reduces
interest expense, extends debt maturities and improves financial flexibility.
The components of the Refinancing were (i) the Offering of $225 million
aggregate principal amount of the Old Notes, (ii) the consummation of the Tender
Offer with respect to the 13% Notes, and (iii) the application of the net
proceeds from the Offering to retire the 13% Notes. Pursuant to the Tender
Offer, in October 1997 the Company purchased $177.4 million aggregate principal
amount of the 13% Notes and the Indenture pursuant to which the 13% Notes were
issued was substantially amended. The Company has announced that in January
1998, it will redeem the remaining $22.6 million aggregate principal amount of
the 13% Notes not tendered in the Tender Offer at a price of 106.5% of the
principal amount, together with accrued and unpaid interest.
In addition to the Refinancing, in November 1997 the Company entered into
the three-year, $70 million Bank Credit Facility to replace its prior revolving
credit agreement. The $70 million available under the Bank Credit Facility is
reduced by any outstanding letters of credit, which cannot exceed $30 million.
At September 30, 1997, outstanding letters of credit totalled $9.8 million. The
Bank Credit Facility is secured by substantially all real and personal property
(excluding installment contracts receivable) of the Company.
The Company has no scheduled principal payments under the Notes until
October 2007 and the principal amount of the certificates under the
Securitization Facility remains fixed at $160 million through July 1999.
Accordingly, exclusive of the remaining 13% Notes which will be redeemed in
January 1998 using the remaining proceeds from the Offering, debt service
requirements (primarily interest) of the Company for the next twelve months are
approximately $45 million. Management believes that the Company will be able to
satisfy its debt service and capital expenditure requirements over the next
twelve months out of existing cash balances and cash flow from operations.
Management also believes that as a result of the Stock Offering, the Refinancing
and the Bank Credit Facility, the Company's liquidity and financial flexibility
have significantly improved.
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BUSINESS
The Company is the largest (and only nationwide) commercial operator of
fitness centers in the United States in terms of revenues, the number of
members, and the number and square footage of facilities. As of September 30,
1997, the Company operated approximately 320 fitness centers concentrated in
major metropolitan areas in 27 states and Canada and had approximately four
million members. During 1996, Bally's members made more than 100 million visits
to its fitness centers.
The Company offers its members value by providing access to
state-of-the-art fitness facilities with affordable membership programs. Bally's
fitness centers feature an outstanding selection of cardiovascular, conditioning
and strength equipment and offer extensive aerobic training programs. The
Company's new club prototype achieves efficiency by focusing on those fitness
services that receive a high degree of member use. Most of the Company's current
fitness centers include pools, racquet courts or other athletic facilities that
receive a lower degree of member use. The Company has clustered its fitness
centers in major metropolitan areas in order to achieve marketing and operating
efficiencies. These markets include, among others, New York, Los Angeles,
Chicago, Houston, Dallas, Detroit, Baltimore, Washington, D.C., Philadelphia,
Miami, Cleveland, Atlanta, Milwaukee, Seattle, Minneapolis, Orlando, Denver,
Phoenix, St. Louis, Boston and Kansas City. In 1996, the Company completed the
process of renaming its fitness centers so they all use the servicemark "Bally
Total Fitness", thereby enhancing brand identity, concentrating advertising and
eliminating the prior practice of using more than 25 different regional
servicemarks and trade names.
The Company's primary target market for new members is the 18 to 34-year
old, middle income segment of the population. Bally markets itself to this
consumer segment through the use of a variety of membership options and payment
plans. The membership options offered by the Company range from single-club
memberships to premium memberships which provide additional amenities and the
use of all of Bally's fitness centers nationwide. Similarly, the Company offers
a broad range of payment alternatives. Typically, members pay an initiation fee
which can either be financed (generally for 36 months and subject to downpayment
requirements) or paid-in-full at the time of joining. Members are also required
to pay monthly membership dues in order to use the Company's fitness facilities.
Management believes the various memberships and payment plans, in addition to
Bally's strong brand identity and the convenience of its multiple locations,
provide the Company distinct competitive advantages.
OPERATING STRATEGIES
In October 1996, Lee S. Hillman was named President and Chief Executive
Officer of the Company. This completed the transition of senior management of
the Company from predominantly marketing oriented managers, including the
original founders of the Company, to managers with more financial and
operational orientation. Until December 1996, a number of the Company's top
executives, including Mr. Hillman, also performed significant functions for
Entertainment, the owner of the Company until January 1996. Current management
intends to pursue a number of operating strategies, including the following,
which the Company believes will improve the results of its core business:
- Reduce Discount Pricing on Paid-In-Full Membership Plans -- Since late
1990, the Company has managed its pricing structure to generate immediate
cash for liquidity by significantly discounting its membership plans and
by emphasizing paid-in-full instead of financed membership plans.
Additional working capital provided by the Stock Offering will allow the
Company to sell more financed membership plans, which historically have
generated better long-term returns for the Company including streams of
recurring dues revenues, rather than selling discounted paid-in-full
memberships for which dues are frequently waived for up to three years.
- Upgrade and Expand Fitness Centers -- The Company intends to expand and
upgrade its facilities in order to increase its membership base and more
effectively capitalize on its streamlined marketing and administrative
functions. Management plans to make capital expenditures of approximately
$10 million to $12 million over the next twelve months to maintain and
make minor upgrades to the Company's existing facilities, which include
exercise equipment upgrades, HVAC and other operating equipment upgrades
and replacements, and locker room and workout area refurbishments, among
others. In addition, the Company intends to invest approximately $10
million of the net proceeds from the Stock Offering over the next two
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years to extensively refurbish and make major upgrades to approximately
25% of its clubs, which include converting low-usage pools and racquet
areas into expanded exercise areas and to a lesser extent retail and
outpatient rehabilitation service areas, adding and upgrading exercise
equipment, and refreshing interior and exterior finishes to improve club
ambience, among others. The Company also intends to spend approximately
$25 million to $30 million of the net proceeds from the Stock Offering
over the next three years to open 20 to 30 new facilities based on its
new prototype. These facilities are designed to cost less to construct
and maintain than the Company's older facilities. The facilities are
expected to range in size from 10,000 to 45,000 square feet and have the
capacity to accommodate significantly more members than older clubs of
the same size because the new facilities will contain only the most
widely used amenities.
- Increase Dues Revenues -- The Company believes that its dues are
substantially less than those charged by its competitors and that it can
significantly increase dues for its members who are beyond their initial
financing period without any material loss in membership.
- Improve Collections on Financed Contracts -- The Company plans to
continue its focus on increasing the downpayment on financed membership
plans and securing payment by EFT, which the Company's experience has
shown results in higher quality receivables. Further, the Company intends
to institute more focused collection efforts based on information
provided by "credit scoring", which management believes will also improve
the yield from the receivables portfolio.
- Continue Cost Reduction Policies -- The Company's operating costs and
expenses for 1996 were more than $75 million lower than in 1994.
Management believes that other opportunities exist to cut additional
costs in the areas of administration, advertising and self-insured losses
incurred.
GROWTH OPPORTUNITIES
The Company currently generates substantially all of its revenues from the
sale of membership plans and the receipt of dues. Management believes that it
can increase and diversify its revenues by leveraging its strong brand identity,
extensive distribution infrastructure (approximately 320 facilities),
significant member base (approximately four million members) and frequency of
visitation (in excess of 100 million visits in 1996) by offering a number of
ancillary products and services. In order to pursue these growth opportunities,
the Company plans to:
- Sell Nutritional Products -- The Company has successfully concluded test
marketing certain nutritional products, predominantly vitamins and weight
control supplements, and is launching the sale of these products to
members through its fitness centers and telemarketing.
- Provide Outpatient Rehabilitation Services -- The Company plans to
contract with providers of health care programs and services whereby
certain of the Company's existing facilities will also be used for
comprehensive outpatient rehabilitation services. The Company believes it
has opportunities with a number of third party providers and managers of
health care programs and services to provide similar outpatient
rehabilitation services in additional fitness centers, and expects to
offer these services within three years to members and nonmembers alike
in up to 100 of its facilities primarily using equipment already on-hand.
Among others, the Company has recently contracted with Continucare
Corporation to provide such services in certain, initially four, of the
Company's fitness centers. The Company plans to spend approximately $1
million of the net proceeds from the Stock Offering to upgrade an initial
group of its facilities to provide rehabilitation services.
- Offer Other Goods and Services -- The Company plans to sell work-out and
related apparel and market certain financial services and direct
marketing programs provided by third parties to its members such as a
co-branded credit card, credit life insurance, dining clubs and ATMs in
its clubs through in-club sales efforts and direct marketing programs.
The Company has entered into agreements with various entities to test
market the provision by third parties of financial services to its members
including the sale of credit life insurance, pursuant to which a participant's
unpaid credit card debts are paid-off if the participant dies. The programs are
typically designed such that the Company shares in either the revenue generated
by or net profit resulting from members purchasing the offered services. Test
marketing and, ultimately, the provision of services of this type by third
parties to the Company's members do not require significant capital expenditures
by the Company. Consequently, the Company expects to explore the sale of other
similar or complementary services and expects to make those products that are
most successful available to all of its members.
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MEMBERSHIP PLANS
The Company currently offers prospective members a number of membership
plans that differ primarily by the inclusion of additional in-club services
(such as racquet sports and child care) and access to other fitness centers
operated by the Company, either locally or nationally. From time to time, the
Company also offers special membership plans which limit access to fitness
centers to certain days and non-peak hours. The initial membership fees for
access to the Company's fitness center facilities range from approximately $399
to $1,179 depending on the membership plan selected, the diversity of facilities
and services available at the club of enrollment, the local competitive
environment, as well as the effects of seasonal promotional strategies.
In addition to the one-time initial membership fee, members pay monthly
membership dues in order to maintain their membership privileges. Monthly dues
for memberships generally range from $4.00 to $5.50 during the typical financing
period for a membership plan and vary based on the type of plan purchased by the
member. Some seasonal promotional programs offered by the Company in the past
have required no dues payments for up to 36 months if the member pays the
initiation fee in full at the time of joining. Renewal dues (those paid after
the typical 36 month initial period ends) generally range from as little as
$2.00 to as much as $25.00 per month, with increases as contractually permitted.
At September 30, 1997, approximately 90% of the Company's members were being
charged dues ranging from $2.00 to $15.00 per month, with the overall average
$7.71 per month. The Company has experienced an annual growth rate of dues
revenues of 7% from 1992 to 1996. The Company expects the annual increases in
dues revenues will continue in the future due to the contractual terms of
current membership plans and the Company's belief that it can significantly
increase dues for its members who are beyond their initial financing period
without any material loss in membership. The Company also offers renewal dues
that vary depending on the member's historical usage of the fitness center
facilities. The Company's recent experience has shown that members faced with a
membership renewal decision for the first time renewed at a rate of
approximately 58% and members faced with a membership renewal decision for
subsequent periods renewed at a rate of approximately 84%.
Members selecting finance membership plans can choose from several payment
mechanisms and downpayment options. The Company expects to continue its focus on
increasing the downpayment it receives on financed membership contracts and on
securing payment by EFT. The Company believes that both these strategies result
in better quality receivables. Further, the Company intends to modify its
collection efforts, based on the information provided by "credit scoring", which
management believes will also improve the yield from the receivables portfolio.
See "-- Account Servicing".
FINANCING OF INITIAL MEMBERSHIP FEE
Financed portions of initial membership fees may be prepaid without penalty
at any time during the financing term. Generally, financing terms of 36 months
are offered. Shorter terms are offered on a promotional basis or as required by
applicable state law. Contracts are financed at a fixed annual percentage rate
(generally between 16% and 18%, except as otherwise limited by applicable state
retail installment laws). Management expects that approximately 80% to 85% of
all new membership contracts originated during 1997 will be financed.
The Company offers two payment methods for financed portions of initial
membership fees: coupon books and EFT. EFT plans are the most popular mechanism
for payment of the financed portion of initial membership fees. Under an EFT
plan, on the same date each month a predetermined amount is either (i)
automatically transferred from a member's bank checking or savings account to
the Company, or (ii) automatically charged to a member's designated credit card.
Currently, more than 60% of all financed memberships sold are paid by EFT. The
other mechanism for payment financing is the use of a coupon book. This
mechanism requires the member to mail a check monthly, accompanied by a payment
coupon, to the RSC responsible for administering the membership account. Members
have the option of changing their payment method.
On average, the Company received a downpayment of approximately $75 on
contracts that were financed during 1996. This downpayment adequately defrays
both the initial account set-up cost as well as any collection costs should the
account become immediately delinquent. As a result, the Company is able to
attract new members who might otherwise be rejected while covering the
incremental cost of new membership processing and collection through the
downpayment. The Company does not perform individual credit checks on
prospective
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members. This is due, in part, to the high cost associated with performing
credit checks on the large volume of prospective members, but also due to the
Company's ability, from past performance, to measure the average value of
contracts between coupon book and EFT payers and satisfactorily manage credit
risk. Historical analysis performed by the Company indicates that the collection
experience of EFT accounts is approximately 50% better than that of coupon book
accounts. As of September 30, 1997, approximately 56% of membership contract
receivables consisted of EFT-financed memberships compared to 29% at December
31, 1992, when emphasis on payments by EFT was introduced by management.
FITNESS CENTERS
Most of the Company's fitness centers are located near regional, urban and
suburban shopping areas and in downtown areas of major cities and are generally
operated under long-term leases. Fitness centers vary in size, available
facilities and types of services provided. Fitness centers contain a wide
variety of state-of-the-art progressive resistance, cardiovascular and
conditioning exercise equipment as well as free weights. A member's use of a
fitness center may include planned exercise programs and instruction stressing
cardiovascular conditioning, strength development and improved appearance. The
Company also has a comprehensive training program for its service personnel on
the use of exercise equipment.
Generally, the Company's fitness centers constructed prior to 1980 are
smaller in size and have fewer amenities than the fitness centers constructed in
the 1980's which average 35,000 square feet and generally include a colorful
workout area, sauna and steam facilities, a lap pool, free-weight rooms, aerobic
exercise rooms, an indoor jogging track and, in some cases, racquetball courts.
The Company's prototype fitness center focuses on those fitness services that
the Company's members most frequently use rather than on a broader range of
fitness services that generally receive a lower degree of member use such as
pools, racquet courts or other athletic facilities. These "dry" clubs, which
tend to be approximately 20,000 to 30,000 square feet, have recently averaged
approximately $800,000 to construct, exclusive of real estate and exercise
equipment costs and net of any landlord contribution. The Company invests
approximately $500,000 for exercise equipment for a typical new fitness center.
The Company intends to expand and upgrade its facilities in order to
increase its membership base and more effectively capitalize on its streamlined
marketing and administrative functions. Management plans to make capital
expenditures of approximately $10 million to $12 million over the next twelve
months to maintain and make minor upgrades to the Company's existing facilities,
which include exercise equipment upgrades, HVAC and other operating equipment
upgrades and replacements, and locker room and workout area refurbishments,
among others. In addition, the Company expects to invest approximately $10
million of the proceeds from the Stock Offering over the next two years to more
extensively refurbish and make major upgrades to approximately 25% of its clubs,
which include converting low-usage pools and racquet areas into expanded
exercise areas and to a lesser extent retail and outpatient rehabilitation
service areas, adding and upgrading exercise equipment, and refreshing interior
and exterior finishes to improve club ambience, among others. For the last
several years, the Company has spent $6 million to $15 million annually, as
funds were available, to open new or replacement facilities. The Company also
intends to spend approximately $25 million to $30 million of the proceeds from
the Stock Offering over the next three years to open 20 to 30 new facilities
based on its new prototype. These facilities are designed to cost less to
construct and maintain than the Company's older facilities. The facilities are
expected to range in size from 10,000 to 45,000 square feet and have the
capacity to accommodate significantly more members than older clubs of the same
size because they will contain only the most widely used amenities. At December
31, 1996, the Company had 35 of the new prototype facilities in operation, of
which 30 had been in operation for at least one year. The average 1996 net
revenues in excess of operating costs excluding depreciation and amortization
for these 30 facilities was approximately $900,000 compared to the average 1996
results for all of the Company's other fitness facilities of approximately
$650,000.
The Company recently entered into an agreement pursuant to which three
fitness centers in Syracuse, New York, including one facility previously owned
by the Company, are operated by a third party under the service mark "Bally
Total Fitness". The Company plans to seek additional franchise relationships for
facilities located in smaller markets.
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SALES AND MARKETING
The Company devotes substantial resources to the marketing and promotion of
its fitness centers and their services because the Company believes strong
marketing support is critical to attracting new members both at existing and new
fitness centers. In 1996, the Company completed the process of renaming its
fitness centers so they all use the servicemark "Bally Total Fitness", thereby
enhancing brand identity, concentrating advertising and eliminating the prior
practice of using more than 25 different regional servicemarks and trade names.
The Company's strategy is to cluster numerous fitness centers in major
media markets in order to increase the efficiency of its marketing and
advertising programs. At September 30, 1997, the Company operated approximately
260 clubs in 26 of the top 30 U.S. media markets.
The Company expects to spend approximately $45 million for advertising and
promotion during 1997 compared to approximately $47 million in 1996, $50 million
in 1995 and $48 million in 1994. The Company primarily advertises on television,
and, to a lesser extent, newspapers, telephone directories, radio and other
promotional activities.
The Company's sales and marketing programs emphasize the benefits of
health, physical fitness and exercise by appealing to the public's desire to
look and feel better. The Company's advertisements are augmented by individual
sales presentations made by its sales personnel in the fitness centers.
Management believes the various memberships and payment plans, in addition to
Bally's strong brand identity and the convenience of its multiple locations,
provide the Company distinct competitive advantages.
The Company's marketing efforts also include corporate membership sales and
insurance-eligible programs which are designed to reduce workers' compensation
costs and improve productivity. In addition to its advertising, personal sales
presentations and targeted marketing efforts, the Company is increasingly
utilizing in-club marketing programs. Open houses and contests for members and
their guests foster member loyalty and introduce fitness centers to prospective
members. Referral incentive programs involve current members in the process of
new member enrollments.
Direct mail reminders encourage renewal of existing memberships. The
Company has a group of approximately 100 individuals located at the Towson,
Maryland RSC dedicated primarily to inbound telemarketing renewal programs to
existing members, although telemarketing is not currently used to attract
prospective new members.
ACCOUNT SERVICING
The Company administers and collects amounts owing under its membership
contracts according to uniform procedures implemented by its two RSCs. The RSCs
enable the Company to conduct centralized data processing of all membership
accounts. At September 30, 1997, the RSCs employed approximately 750 people in
the account processing and collection areas, including approximately 140
employees dedicated to customer service, approximately 330 employees dedicated
to account processing and administration and approximately 280 employees
dedicated to account collections. The two RSCs collectively receive, deposit and
post more than $550 million of membership transactions annually, including the
processing of downpayments and cash sales, and collections of financed
receivables and dues. In addition, the RSCs process, on average, 3,000 new
membership accounts per day. The RSCs are also responsible for responding to
member inquiries and maintaining membership data.
All collections for past-due accounts are handled internally by the RSCs.
The Company systematically collects accounts that are past due by utilizing a
series of computer-generated correspondence and telephone contacts.
Computer-generated correspondence is sent to a delinquent member at 7 and 20
days after an account becomes past due. Collectors with varying levels of
experience are responsible for handling delinquent accounts, depending on the
period of delinquency. At 30 and 60 days past due, the accounts are assigned to
power dialer assisted collectors initially as a reminder and later as a demand
for payment. Accounts that have not been collected for a 90-day period are
transferred to a group of the most experienced collectors (unless the first
scheduled payment has not been received on such accounts, in which case they are
generally written-off and any downpayment received is not refunded). All
remaining delinquent accounts are written-off after 180 days without
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payment. Written-off accounts are reported to credit reporting bureaus and sold
to a third-party collection group. The Company intends to modify its collection
efforts based on the information provided by "credit scoring", which management
believes will improve the yield from the receivables portfolio. For example, the
Company would not make costly collection calls to a member with a strong credit
history until late in the collection cycle. Likewise, the Company would
aggressively pursue collection tactics on a member with poor credit scoring
early in the delinquency period and reduce collection efforts if results were
not quickly realized. By tailoring its collection approach to reflect a
delinquent member's likeliness to pay, the Company believes it can collect more
of its receivables at a lower cost. The Company uses a national bureau which
charges the Company a nominal fee per credit score. Beginning in March 1997, the
Company has credit scored a majority of its financed members.
COMPETITION
The Company is the largest (and only nationwide) commercial operator of
fitness centers in the United States in terms of revenues, the number of members
and the number and square footage of facilities. The Company is the largest
operator, or among the largest operators, of fitness centers in every major
market in which it has fitness centers. The Company believes its fitness centers
generally offer a high level of amenities to its primary target market for new
members, the 18 to 34-year old, middle income segment of the population. Within
each market, the Company competes with other fitness centers, physical fitness
and recreational facilities established by local governments and hospitals and
by businesses for their employees, the YMCA and similar organizations and, to a
certain extent, with racquet and tennis and other athletic clubs, country clubs,
weight reducing salons and the home-use fitness equipment industry. However, the
Company believes that its operating experience, its ability to allocate
advertising and administration costs over all of its fitness centers, its
nationwide operations and its account processing and collection infrastructure
provide the Company distinct competitive advantages. There can be no assurance
that the Company will be able to compete effectively in the future in the
markets in which it operates.
The Company believes that competition has increased in certain markets. The
Company believes that this increase reflects the public's enthusiasm for fitness
and the decrease in the cost of entering the market due to financing available
from landlords and equipment manufacturers. The Company believes that its
membership plans are affordable and have the flexibility to be responsive to
economic conditions. However, the Company also competes with other entertainment
and retail businesses for the discretionary income of its target market.
When the Company embarks on its new initiatives, particularly the sale of
nutritional products and apparel, the Company will be competing against large,
established companies with more experience selling such products on a retail
basis and, in some instances, with substantially greater financial resources
than the Company. There can be no assurance that the Company will be able to
compete effectively against such established companies.
PROPERTIES
The Company operates approximately 320 fitness centers in 27 states and
Canada. The Company owns approximately 30 fitness centers and leases either the
land or the building or both for the remainder of its fitness centers. Aggregate
rent expense (including office and administrative space) was $65.5 million,
$86.7 million, $85.9 million and $83.3 million for the nine months ended
September 30, 1997 and the years ended December 31, 1996, 1995 and 1994,
respectively. Most leases require the Company to pay real estate taxes,
insurance, maintenance and, in the case of shopping center and office building
locations, common area maintenance fees. A limited number of leases also provide
for percentage rental based on receipts. Various leases also provide for rent
adjustments based on changes in the Consumer Price Index, most with limits
provided to protect the Company. Two fitness centers each accounted for between
1% to 2% of the Company's net revenues during 1996. The Company believes its
properties are adequate for its current membership.
Leases for fitness centers entered into in the last five years generally
provide for an original term of no less than 15 years and, in some cases, for 20
years. Most leases for fitness centers contain at least one five-year option to
renew and often two or more such options.
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The Company's executive offices are located in Chicago, Illinois where it
is co-tenant at a monthly base rental cost to the Company of $43,700. The lease
expires in January 2003. The Company also leases space in Huntington Beach,
California and Towson, Maryland for RSC operations.
TRADEMARKS AND TRADE NAMES
In 1996, the Company completed the process of renaming its fitness centers
so they all use the servicemark "Bally Total Fitness", thereby enhancing brand
identity, concentrating advertising and eliminating the prior practice of using
more than 25 different regional servicemarks or trade names. The name "Bally
Total Fitness" is a servicemark of Hilton as successor to Entertainment. In
January 1996, the Company and Entertainment entered into a 10-year trademark
license agreement to allow the Company to use certain marks, including the
"Bally Total Fitness" servicemark, in connection with its fitness center
business. The Company paid no royalty or license fee for the first year of the
license and now pays a fee of $1 million per year. Following the initial
ten-year term, the Company has the option to renew the license for an additional
five-year period at a rate equal to the greater of the fair market value or $1
million per year.
SEASONAL MEMBERSHIP FEE ORIGINATIONS
Historically, the Company has experienced greater membership fee
originations in the first quarter and lower membership fee originations in the
fourth quarter. Certain of the new initiatives the Company plans to undertake
may have the effect of further increasing the seasonality of the Company's
business.
EMPLOYEES
At September 30, 1997, the Company had approximately 13,700 employees,
including approximately 7,100 part-time employees. Approximately 12,650
employees are involved in club operations, including sales personnel,
instructors, supervisory or custodial personnel, approximately 750 are involved
in the operation of the RSCs and approximately 300 are administrative support
personnel, including accounting, legal, human resources, real estate and other
national services.
The Company is not a party to any collective bargaining agreement with its
employees. Although the Company experiences high turnover of non-management
personnel, the Company historically has not experienced difficulty in obtaining
adequate replacement personnel, except with respect to sales personnel, which
the Company believes have become somewhat more difficult to replace due, in
part, to increased competition for skilled retail sales personnel.
GOVERNMENT REGULATION
The operations and business practices of the Company are subject to
regulation at federal, state and, in some cases, local levels. General rules and
regulations of the FTC, and of state and local consumer protection agencies,
apply to the Company's advertising, sales and other trade practices.
Statutes and regulations affecting the fitness industry have been enacted
or proposed in all of the states in which the Company conducts business.
Typically, these statutes and regulations prescribe certain forms and regulate
the terms and provisions of membership contracts, giving the member the right to
cancel the contract, in most cases, within three business days after signing,
requiring an escrow for funds received from pre-opening sales or the posting of
a bond or proof of financial responsibility and, in some cases, establishing
maximum prices and terms for membership contracts and limitations on the term of
contracts. In addition, the Company is subject to numerous other types of
federal and state regulations governing the sale, financing and collection of
memberships including, among others, the Truth-in-Lending Act and Regulation Z
adopted thereunder, as well as state laws governing the collection of debts.
These laws and regulations are subject to varying interpretations by a large
number of state and federal enforcement agencies and the courts. The Company
maintains internal review procedures in order to comply with these requirements
and it believes that its activities are in substantial compliance with all
applicable statutes, rules and decisions.
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Under so-called state "cooling-off" statutes, members of fitness centers
have the right to cancel their memberships for a period of three to ten days
after the date the contract was entered into (depending on the applicable state
law) and are entitled to refunds of any payment made. In addition, the Company's
membership contracts provide that a member may cancel his or her membership at
any time for qualified medical reasons or if the member relocates a certain
distance away from the health club, and a membership may be canceled in the
event of a member's death. The specific procedures for cancellation in these
circumstances vary according to differing state laws. In each instance, the
canceling member is entitled to a refund of prepaid amounts only. Furthermore,
where permitted by law, a cancellation fee is due to the Company upon
cancellation and the Company may offset such amount against any refunds owed.
The Company is a party to several state and federal consent orders. From
time to time, the Company makes minor adjustments in its operating procedures to
comply with such consent orders. The consent orders essentially require
continued compliance with applicable laws and require that the Company refrain
from activities that are not in compliance with applicable laws.
The provision of rehabilitation services is affected by federal, state and
local laws and regulations concerning the development and operation of physical
rehabilitation health programs, licensing, certification and reimbursement and
other matters, which may vary by jurisdiction and which are subject to periodic
revision. The opening of a rehabilitation facility may require approval from
state and/or local governments and re-licensure from time to time, both of which
may be subject to a number of conditions. In addition, a substantial number of
recipients of rehabilitation services have fees paid by governmental programs as
well as private third-party payors. Governmental reimbursement programs
(including Medicare and Medicaid) generally require facilities and services to
meet certain standards promulgated by the federal and/or state government.
Additionally, reimbursement levels by governmental and private third-party
payors are subject to change which could limit or reduce reimbursement levels
and could have a material adverse effect on the demand for rehabilitation
services. Further, in a number of states and in certain circumstances pursuant
to federal law, the referral of patients to rehabilitation services is subject
to limitations imposed by law, the violation of which may, in certain
circumstances, constitute a felony. Recently, federal and state governments have
focused significant attention on health care reform and cost control. These
proposals include cut-backs to Medicare and Medicaid programs. It is uncertain
at this time what legislation and health care reform may ultimately be enacted
or whether other changes in the administration or interpretation of government
health care programs will occur. There can be no assurance that future health
care legislation or other changes in the administration or interpretation of
government health care programs will not have a material adverse effect on the
provision of rehabilitation services by the Company.
LEGAL PROCEEDINGS
A class action entitled Jackson v. Health & Tennis Corporation of America
was filed in the state district court in Bexar County, Texas on May 8, 1995. The
complaint alleges that the defendant, a subsidiary of the Company, charged
excessive amounts on its financed memberships in violation of the Texas Credit
Code and the Texas Deceptive Trade Practices -- Consumer Protection Act. A
purported class action entitled Vasquez et al. v. Bally Total Fitness
Corporation, d/b/a Bally's, was filed in state district court in Bexar County,
Texas on September 18, 1997. The complaint alleges that the defendant, a
subsidiary of the Company, charged excessive amounts on its finance memberships
in violation of the Texas Credit Code, the Federal Truth-in-Lending Act and
Federal Reserve Board regulations. The relief sought in both cases is damages
equal to the alleged overpayments and statutory remedies. The Company is
currently unable to estimate the amount sought in these actions because the
potential size of each class and the amount of damages for each member of the
putative classes are currently unknown. The Company is vigorously defending
these actions. The outcome of this litigation is not currently determinable and,
consequently, the Company cannot predict whether it will have a material adverse
effect on the Company's financial condition or results of operations in any
future period.
The Company is involved in various other claims and lawsuits incidental to
its business, including claims arising from accidents at its fitness centers. In
the opinion of management, the Company is adequately insured against such claims
and lawsuits, and any ultimate liability arising out of such claims and lawsuits
will not have a material adverse effect on the financial condition or results of
operations of the Company.
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MANAGEMENT
The following table sets forth certain information concerning the Company's
directors and executive officers.
NAME AGE POSITIONS WITH COMPANY
---------------------------- --- ---------------------------------------------
Arthur M. Goldberg 55 Chairman of the Board
Lee S. Hillman 42 President, Chief Executive Officer and
Director
John W. Dwyer 45 Executive Vice President, Chief Financial
Officer and Treasurer
William G. Fanelli 35 Senior Vice President, Operations
Cary A. Gaan 51 Senior Vice President, Secretary and
General Counsel
Harold Morgan 41 Senior Vice President, Human Resources
John H. Wildman 38 Senior Vice President, Sales and Marketing
Geoffrey M. Scheitlin 39 Vice President and Controller
Aubrey C. Lewis 62 Director
J. Kenneth Looloian 75 Director
James F. Mc Anally, M.D. 48 Director
Liza M. Walsh 39 Director
Arthur M. Goldberg has been a director of the Company since 1990, has
served as Chairman of the Board of Directors of the Company since September
1995, and was the Company's Chief Executive Officer from September 1995 until
October 1996. Mr. Goldberg also serves as Executive Vice President, President --
Gaming Division and a director of Hilton, and he was Chairman of the Board of
Directors and Chief Executive Officer of Entertainment between October 1990 and
December 1996, and President of Entertainment between January 1993 and December
1996. Mr. Goldberg has been Chairman of the Board of Directors of Bally's Grand,
Inc. since August 1992 and has been its Chief Executive Officer since September
1992. In addition, Mr. Goldberg has been Chairman of the Board of Directors,
President and Chief Executive Officer of Di Giorgio Corporation and a director
of White Rose Foods, Inc. (food distributors) since February 1990. Mr. Goldberg
is also a director of First Union Corporation (a financial services company) and
Continucare Corporation (a manager of outpatient rehabilitation programs) and
Managing Partner of Arveron Investments L.P. (an investment partnership).
Lee S. Hillman has been director of the Company since September 1992 and
was elected President and Chief Executive Officer of the Company in October
1996. Additionally, Mr. Hillman was Treasurer of the Company from April 1991 to
October 1996, Executive Vice President of the Company from September 1995 to
October 1996, Senior Vice President of the Company from April 1991 to September
1995 and Chief Financial Officer of the Company from April 1991 to May 1994. Mr.
Hillman was Vice President, Chief Financial Officer and Treasurer of
Entertainment between November 1991 and December 1996 and Executive Vice
President of Entertainment between August 1992 and December 1996. Mr. Hillman
also served as Vice President-Administration of Bally's Grand, Inc. from August
1993 through February 1997. From October 1989 to April 1991, Mr. Hillman was a
partner with the accounting firm of Ernst & Young LLP.
John W. Dwyer was elected Vice President and Chief Financial Officer of the
Company in May 1994, a Senior Vice President of the Company in September 1995,
Treasurer of the Company in October 1996 and Executive Vice President of the
Company in November 1997. Mr. Dwyer was Corporate Controller of Entertainment
between June 1992 and December 1996 and a Vice President of Entertainment
between December 1992 and December 1996. From October 1986 to June 1992, Mr.
Dwyer was a partner with the accounting firm of Ernst & Young LLP.
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William G. Fanelli was elected Senior Vice President, Operations of the
Company in November 1997 and was Vice President, Strategic Operations of the
Company from November 1996 to November 1997. Mr. Fanelli was Director, Business
Development of Entertainment from October 1993 to November 1996 and, for
approximately nine years prior to October 1993, was employed by the accounting
firm of Ernst & Young LLP.
Cary A. Gaan was elected Senior Vice President and General Counsel of the
Company in January 1991 and Secretary of the Company in April 1996. Mr. Gaan
served as a Vice President of the Company from 1987 to 1991.
Harold Morgan has been employed by the Company since August 1991 and he was
elected a Vice President of the Company in January 1992 and Senior Vice
President, Human Resources of the Company in September 1995. Mr. Morgan was Vice
President, Human Resources of Entertainment between December 1992 and December
1996. From 1985 until August 1991, Mr. Morgan was Director of Employee and Labor
Relations of the Hyatt Corporation.
John H. Wildman was elected Senior Vice President, Sales and Marketing of
the Company in November 1996 and Vice President, Sales and Marketing of the
Company in September 1995. For approximately four years prior thereto, Mr.
Wildman was a Senior Area Director of the Company.
Geoffrey M. Scheitlin was elected Vice President and Controller of the
Company in November 1997 and was Assistant Treasurer of the Company from July
1988 to November 1997.
Aubrey C. Lewis was elected a director of the Company in December 1995. Mr.
Lewis has been a Vice President of Woolworth Corporation (a global retailer)
since 1967. Mr. Lewis also serves on the Boards of Directors of the United
States Naval Academy Foundation, the University of Notre Dame, the Port
Authority of New York and New Jersey, the New Jersey State Chamber of Commerce
and the Y.M.C.A. of Chinatown in New York City.
J. Kenneth Looloian was elected a director of the Company in December 1995.
Mr. Looloian is an Executive Vice President of Di Giorgio Corporation, a former
partner in Arveron Investments L.P. and a former Executive Vice President of
International Controls Corporation. Mr. Looloian is also a director of Bally's
Grand, Inc.
James F. Mc Anally, M.D. was elected a director of the Company in December
1995. Dr. Mc Anally is a private practitioner who specializes in hypertension
and kidney disease. He has been in private practice since 1980. Dr. Mc Anally
has been the Medical Director of Nephrology Services at Elizabeth General
Medical Center in Elizabeth, New Jersey since 1984. Dr. Mc Anally has also been
Chief of Nephrology at St. Elizabeth's Hospital in Elizabeth, New Jersey since
1981.
Liza M. Walsh was elected a director of the Company in December 1995. Ms.
Walsh has been an attorney at the law firm of Connell, Foley & Geiser since
1986, was named a partner of the firm in 1992 and concentrates in commercial
litigation. Ms. Walsh has also served as an Arbitrator for the United States
District Court for the District of New Jersey since 1990.
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DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
BANK CREDIT FACILITY
In November 1997, the Company entered into the three-year, $70 million Bank
Credit Facility to replace its prior revolving credit agreement. The $70 million
available under the Bank Credit Facility is reduced by any outstanding letters
of credit, which cannot exceed $30 million. At September 30, 1997, outstanding
letters of credit totalled $9.8 million. Initially, the Bank Credit Facility
provides for a rate of interest on borrowings at the Company's option, based
upon either the agent bank's prime rate plus 2% or a Eurodollar rate plus 3%. A
fee of 2.25% on outstanding letters of credit is payable quarterly. A commitment
fee of one-half of 1% is payable quarterly on the unused portion of the Bank
Credit Facility. The Bank Credit Facility is secured by substantially all real
and personal property (excluding installment contracts receivable) of the
Company.
SECURITIZATION FACILITY
In December 1996, the Company completed a private placement of asset-backed
securities pursuant to which $145.5 million of 8.43% Accounts Receivable Trust
Certificates and $14.5 million of Floating Rate Accounts Receivable Trust
Certificates (the "Floating Certificates") were issued as undivided interests in
the Trust. The Floating Certificates bear interest (8.22% at August 31, 1997) at
2.57% above the London Interbank Offer Rate ("LIBOR"), with the interest rate on
the Floating Certificates capped at 9.43% pursuant to an interest rate cap
agreement. The Trust was created for the issuance of asset-backed securities and
was formed pursuant to a pooling and servicing agreement. The Trust includes a
portfolio of substantially all of the Company's installment contracts receivable
from membership sales and the proceeds thereof. The amount by which installment
contracts receivable in the Trust exceed the $160 million principal amount of
certificates issued by the Trust is generally retained by the Company. The
Company services the installment contracts receivable held by the Trust and
earns a servicing fee which approximates the servicing costs incurred by the
Company. Through July 1999, the principal amount of the certificates remains
fixed and collections of installment contracts receivable flow through to the
Company in exchange for the securitization of additional installment contracts
receivable, except that collections are first used to fund interest
requirements. The amortization period commences in August 1999, after which
collections of installment contracts receivable will be used first to fund
interest requirements and then to repay principal on the certificates. The
amortization period ends upon the earlier to occur of the certificates being
repaid in full or August 2002.
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DESCRIPTION OF THE NEW NOTES
The New Notes offered hereby will be issued under the Indenture dated as of
October 7, 1997 between the Company and First Trust National Association, as
Trustee, a copy of which will be made available to Eligible Holders upon request
to the Company.
Upon the effectiveness of the Registration Statement (as hereinafter
defined) of which this Prospectus is a part, the Indenture will be subject to
and governed by the Trust Indenture Act. The following summaries of the material
provisions of the Indenture do not purport to be complete, and where reference
is made to particular provisions of the Indenture, such provisions, including
the definitions of certain terms, are qualified in their entirety by reference
to all of the provisions of the Indenture and those terms made a part of the
Indenture by the Trust Indenture Act. For definitions of certain capitalized
terms used in the following summary, see "-- Certain Definitions".
GENERAL
The New Notes will mature on October 15, 2007, will be limited to
$225,000,000 aggregate principal amount and will be unsecured senior
subordinated obligations of the Company. Each New Note will bear interest at
9 7/8% per annum from the date of exchange or from the most recent interest
payment date to which interest has been paid on the Old Note which was
exchanged, payable semiannually on April 15 and October 15 in each year,
commencing April 15, 1998, to the Person in whose name the New Note (or any
predecessor Note) is registered at the close of business on the April 1 or
October 1 immediately preceding such interest payment date. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the New Notes will be
payable, and the New Notes will be exchangeable and transferable, at the office
or agency of the Company in The City of New York maintained for such purposes
(which initially will be the corporate trust office of the Trustee); provided,
however, that payment of interest may be made at the option of the Company by
check mailed to the Person entitled thereto as shown on the security register.
The New Notes will be issued only in fully registered form without coupons, in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer, exchange or redemption of New
Notes, except in certain circumstances for any tax or other governmental charge
that may be imposed in connection therewith.
Settlement for the New Notes will be made in same day funds. All payments
of principal and interest will be made by the Company in same day funds. The New
Notes will trade in the Same Day Funds Settlement System of The Depository Trust
Company (the "Depositary" or "DTC") until maturity, and secondary market trading
activity for the New Notes will therefore settle in same day funds.
When issued, the New Notes will be new securities for which there is no
established trading market. There can be no assurance as to the development or
liquidity of any market for the New Notes. See "Risk Factors -- Absence of
Public Market for the New Notes".
The New Notes will not be entitled to the benefits of any sinking fund.
CERTAIN DIFFERENCES BETWEEN NEW NOTES AND OLD NOTES
Old Notes which remain outstanding after the consummation of the Exchange
Offer will have substantially similar terms to those of the New Notes. However,
following the consummation of the Exchange Offer, Old Notes which are not
validly tendered and accepted by the Company in the Exchange Offer will continue
to be subject to the same transfer restrictions currently applicable to the Old
Notes. In addition, the Company is required, at its cost, to file with the SEC,
and use its best efforts to cause to be declared effective as promptly as
practicable but in no event later than February 4, 1998 (or, in the case of a
request by the Initial Purchasers, within 30 days of such request), a Shelf
Registration Statement with respect to the Old Notes solely for the benefit of
Eligible Holders in the event that (i) any changes in law, rules or regulations
of the SEC or applicable interpretations thereof by the SEC Staff do not permit
the Company to effect the Exchange Offer, (ii) the Registration Statement is not
declared effective by January 5, 1998 or the Exchange Offer is not consummated
by February 4, 1998, (iii) upon the request of the Initial Purchasers acquiring
a majority of the initial aggregate
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principal amount of the Old Notes with respect to any Registrable Securities
acquired directly from the Company and, with respect to other Registrable
Securities held by them, if such Initial Purchasers are not permitted, in the
reasonable opinion of counsel, to participate in the Exchange Offer or otherwise
receive fully tradeable New Notes, or (iv) if a holder of Old Notes is not
legally permitted to participate in the Exchange Offer based upon advice of
counsel to that effect or does not receive fully tradeable New Notes pursuant to
the Exchange Offer, subject to reasonable verification by the Company. Subject
to certain exceptions, the Company will use its best efforts to keep the Shelf
Registration Statement continuously effective for two years (or one year in the
case of a request by the Initial Purchasers), or such shorter period terminating
when all such Old Notes have been sold pursuant to the Shelf Registration
Statement or cease to be outstanding or otherwise to be Registrable Securities.
In the event that a Shelf Registration Statement, if required, is not declared
effective on or prior to February 4, 1998 (or, if required to be filed pursuant
to a request of the Initial Purchasers, 30 days after such request), the
interest rate borne by the Old Notes not exchanged in the Exchange Offer shall
be increased by one-quarter of one percent (0.25%) per annum, which rate (as
increased aforesaid) will increase by an additional one-quarter of one percent
(0.25%) each 90-day period that such additional interest continues to accrue
under such circumstance, with an aggregate maximum increase in the interest rate
equal to one percent (1%) per annum. Following the cure of such Registration
Default, the accrual of additional interest will cease and the interest rate on
such Old Notes will revert to 9 7/8%.
OPTIONAL REDEMPTION
The New Notes will be subject to redemption at any time on or after October
15, 2002, at the option of the Company, in whole or in part, on not less than 30
nor more than 60 days' prior notice in amounts of $1,000 or any integral
multiple thereof at the following redemption prices (expressed as percentages of
the principal amount), if redeemed during the 12-month period beginning on
October 15 of the years indicated below:
REDEMPTION
YEAR PRICE
--------------------------------------------------------- ----------
2002..................................................... 104.938%
2003..................................................... 103.292%
2004..................................................... 101.646%
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the redemption date (subject to the
rights of holders of record on the relevant record dates to receive interest due
on an interest payment date).
In addition, at any time on or prior to October 15, 2000, the Company may,
at its option, use the net proceeds of one or more Public Equity Offerings to
redeem up to an aggregate of 35% of the aggregate principal amount of Notes
originally issued at a redemption price equal to 109 7/8% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the redemption date; provided that at least $146.3 million aggregate principal
amount of Notes remains outstanding immediately after giving effect to such
redemption. In order to effect the foregoing redemption, the Company must mail a
notice of redemption no later than 60 days after the related closing of the
Public Equity Offering and must consummate such redemption within 90 days of the
closing of the Public Equity Offering.
If less than all of the Notes are to be redeemed, the Trustee shall select
the Notes or portions thereof to be redeemed pro rata, by lot or by any other
method the Trustee shall deem fair and reasonable.
PURCHASE OF NOTES UPON A CHANGE OF CONTROL
If a Change of Control shall occur at any time, then each holder of Notes
shall have the right to require the Company to repurchase all or a portion of
such holder's Notes, in integral multiples of $1,000, at a purchase price (the
"Change of Control Purchase Price") in cash in an amount equal to 101% of the
principal amount of such Notes, together with accrued and unpaid interest (if
any) to the date of purchase (the "Change of Control Purchase Date"), pursuant
to the offer described below (a "Change of Control Offer") and in accordance
with the other procedures set forth in the Indenture.
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Within 30 days of any Change of Control, the Company shall notify the
Trustee thereof and give written notice of such Change of Control to each holder
of Notes, by first-class mail, postage prepaid, at his, her or its address
appearing in the security register, stating, among other things, that a Change
of Control has occurred and the date of such event, the circumstances and
relevant facts regarding such Change of Control (including, if applicable,
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change of Control); the purchase
price and the purchase date which shall be fixed by the Company on a business
day no earlier than 30 days nor later than 60 days from the date such notice is
first mailed to the holders of the Notes, or such later date as is necessary to
comply with requirements under the Exchange Act; that any Note not tendered will
continue to accrue interest; that, unless the Company defaults in the payment of
the Change of Control Purchase Price, any Notes accepted for payment pursuant to
the Change of Control Offer shall cease to accrue interest after the Change of
Control Purchase Date; and certain other procedures that a holder of Notes must
follow to accept a Change of Control Offer or to withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be tendered by holders of the
Notes seeking to accept the Change of Control Offer. See "-- Ranking". The
failure of the Company to make or consummate the Change of Control Offer or pay
the Change of Control Purchase Price when due will give the Trustee and the
holders of the Notes the rights described under "-- Events of Default".
The term "all or substantially all" as used in the definition of "Change of
Control" has not been interpreted under New York law (which is the governing law
of the Indenture) to represent a specific quantitative test. As a consequence,
in the event the holders of the Notes elected to exercise their rights under the
Indenture with respect to a Change of Control involving (or asserted to involve)
the transfer or lease of all or substantially all of the Company's assets (as
described in clause (iii) of such definition) and the Company elected to contest
such election, there could be no assurance as to how a court interpreting New
York law would interpret such term.
The existence of a holder's right to require the Company to repurchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction which constitutes a Change of Control.
In addition to the obligations of the Company under the Indenture with
respect to the Notes in the event of a "Change of Control", the Bank Credit
Facility also contains an event of default upon a "Change of Control" clause as
defined therein which obligates the Company to repay amounts outstanding under
the Bank Credit Facility upon an acceleration of the indebtedness issued
thereunder. See "Description of Certain Other Indebtedness".
The Company 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 a Change of Control Offer.
RANKING
The payment of the principal of, premium (if any) and interest on the New
Notes or other obligations under the Indenture will be subordinated, as set
forth in the Indenture, in right of payment to the prior payment in full in cash
or Cash Equivalents or, as acceptable to the holders of Senior Indebtedness, in
any other manner, of all Senior Indebtedness. The New Notes will be senior
subordinated indebtedness of the Company, ranking pari passu in right of payment
with all other existing and future senior subordinated indebtedness of the
Company and senior to all existing and future Subordinated Indebtedness of the
Company. The New Notes will rank pari passu in right of payment with the Old
Notes.
Upon the occurrence of any default in the payment of any Designated Senior
Indebtedness beyond any applicable grace period, no payment (other than payments
previously made pursuant to the provisions described under "-- Defeasance or
Covenant Defeasance of Indenture" or "-- Satisfaction and Discharge") or
distribution of any assets of the Company or any Subsidiary of any kind or
character (excluding certain permitted equity interests or subordinated
securities) may be made on account of the principal of, premium (if any) or
interest on, the Notes or other obligations under the Indenture unless and until
such default shall have been cured or waived or shall have ceased to exist or
such Designated Senior Indebtedness shall have been discharged or paid in full
in
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cash or Cash Equivalents or, as acceptable to the holders of Senior
Indebtedness, in any other manner, after which the Company shall resume making
any and all required payments in respect of the Notes, including any missed
payments.
Upon the occurrence and during the continuance of any non-payment default
with respect to any Designated Senior Indebtedness pursuant to which the
maturity thereof may then be accelerated immediately (a "Non-payment Default")
and after the receipt by the Trustee and the Company from a representative of
holders of any Designated Senior Indebtedness (collectively, a "Senior
Representative") of written notice of such Non-payment Default, no payment
(other than payments previously made pursuant to the provisions described under
"-- Defeasance or Covenant Defeasance of Indenture" or "-- Satisfaction and
Discharge") or distribution of any assets of the Company of any kind or
character (excluding certain permitted equity interests or subordinated
securities) may be made by the Company or any Subsidiary on account of the
principal of, premium (if any) or interests on the Notes or other obligations
under the Indenture or on account of the purchase, redemption, defeasance or
other acquisition of or in respect of, the Notes or other obligations under the
Indenture for the period specified below (the "Payment Blockage Period").
A Payment Blockage Period shall commence upon the receipt of notice of the
Non-payment Default by the Trustee and the Company from a Senior Representative
and shall end on the earliest of (i) the 179th day after such commencement, (ii)
the date on which such Non-payment Default (and all Non-payment Defaults as to
which notice is also given after such Payment Blockage Period is initiated) is
cured, waived or ceases to exist or on which such Designated Senior Indebtedness
is discharged or paid in full in cash or cash equivalents or, as acceptable to
the holders of Senior Indebtedness, in any other manner, or (iii) the date on
which such Payment Blockage Period shall have been terminated by written notice
to the Company or the Trustee from the Senior Representative initiating such
Payment Blockage Period, after which, in the case of each of clauses (i), (ii)
and (iii), the Company will promptly resume making any and all required payments
in respect of the Notes, including any missed payments. In no event will a
Payment Blockage Period extend beyond 179 days from the date of the receipt by
the Company and the Trustee of the notice initiating such Payment Blockage
Period (such 179-day period referred to as the "Initial Period"). Any number of
notices of Non-payment Defaults may be given during the Initial Period; provided
that during any period of 365 consecutive days only one Payment Blockage Period,
during which payment of principal of, premium, if any, or interest on, the Notes
may not be made, may commence and the duration of such period may not exceed 179
days. No Non-payment Default with respect to any Designated Senior Indebtedness
that existed or was continuing on the date of the commencement of any Payment
Blockage Period, will be, or can be, made the basis for the commencement of a
second Payment Blockage Period, whether or not within a period of 365
consecutive days, unless such default has been cured or waived for a period of
not less than 90 consecutive days.
If the Company fails to make any payment on the Notes when due or within
any applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of Default
under the Indenture and would enable the holders of the Notes to accelerate the
maturity thereof. See "-- Events of Default".
The Indenture will provide that in the event of any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or other winding up of the Company, whether voluntary or involuntary, or whether
or not involving insolvency or bankruptcy, or any assignment for the benefit of
creditors or any other marshaling of assets or liabilities of the Company, all
Senior Indebtedness must be paid in full before any payment or distribution
(excluding distributions of certain permitted equity interest or subordinated
securities) is made on account of the principal of, premium (if any) or interest
on the Notes or other obligations under the Indenture or on account of the
purchase, redemption, defeasance or other acquisition of, or in respect of, the
Notes (other than payments previously made pursuant to the provisions described
under "-- Defeasance or Covenant Defeasance of Indenture").
By reason of such subordination, in the event of liquidation or insolvency
of the Company, creditors of the Company who are holders of Senior Indebtedness
may recover more, ratably, than the holders of the Notes, and funds which would
be otherwise payable to the holders of the Notes will be paid to the holders of
the Senior
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Indebtedness to the extent necessary to pay the Senior Indebtedness in full, and
the Company may be unable to meet its obligations fully with respect to the
Notes.
"Senior Indebtedness" under the Indenture means the principal of, premium
(if any) and interest (including interest accruing after the filing of a
petition initiating any proceeding under any state, federal or foreign
bankruptcy law whether or not allowable as a claim in such proceeding) and all
other monetary obligations on any Indebtedness of the Company (other than as
otherwise provided in this definition), whether outstanding on the date of the
Indenture or thereafter created, incurred or assumed, and whether at any time
owing, actually or contingently, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Notes. Without limiting the generality
of the foregoing, Senior Indebtedness shall include principal, premium (if any)
and interest (including interest accruing after the filing of a petition
initiating any proceedings under any state, federal or foreign bankruptcy laws
whether or not allowable as a claim in such proceeding) and all other monetary
obligations of every kind and nature of the Company from time to time owed under
the Bank Credit Facility or under the Securitization Facility; provided,
however, that any Indebtedness under any refinancing, refunding or replacement
of the Bank Credit Facility or the Securitization Facility shall not constitute
Senior Indebtedness to the extent the Indebtedness thereunder is by its express
terms subordinate to any other Indebtedness of the Company. Notwithstanding the
foregoing, "Senior Indebtedness" shall not include (i) Indebtedness evidenced by
the Notes, (ii) Indebtedness that is by its terms subordinate or junior in right
of payment to any Indebtedness of the Company, (iii) Indebtedness which, when
incurred and without respect to any election under Section 1111(b) of title 11
United States Code, is without recourse to the Company, (iv) Indebtedness which
is represented by Redeemable Capital Stock, (v) any liability for foreign,
federal, state, local or other tax owed or owing by the Company to the extent
such liability constitutes Indebtedness, (vi) Indebtedness of the Company to a
Subsidiary or any other Affiliate of the Company or any of such Affiliate's
subsidiaries, and (vii) that portion of any Indebtedness which at the time of
issuance is issued in violation of the Indenture.
As of September 30, 1997, the Company has approximately $190 million of
Senior Indebtedness, including $160 million under the Securitization Facility
(which is a Subsidiary liability), and approximately $488 million of other
non-intercompany Subsidiary liabilities (including $367 million of deferred
revenues and $26 million of deferred income taxes) to which the Notes are
subordinated. As of September 30, 1997, other than Indebtedness under the 13%
Notes, capital lease obligations and outstanding letters of credit,
substantially all of the Company's liabilities, including the Securitization
Facility (which is also Senior Indebtedness), were non-intercompany Subsidiary
liabilities.
The Indenture will limit, but not prohibit, the incurrence by the Company
and its Subsidiaries of additional Indebtedness, and the Indenture will prohibit
the incurrence by the Company of Indebtedness that is subordinated in right of
payment to any Senior Indebtedness of the Company and senior in right of payment
to the Notes.
The Notes will be effectively subordinated to all Indebtedness and other
liabilities and commitments (including trade payables and lease obligations) of
the Company's Subsidiaries. Any right of the Company to receive assets of any
such Subsidiary upon the liquidation or reorganization of any such Subsidiary
(and the consequent right of the holders of the Notes to participate in those
assets) will be effectively subordinated to the claims of that Subsidiary's
creditors, except to the extent that the Company is itself recognized as a
creditor of such Subsidiary, in which case the claims of the Company would still
be subordinate to any security in the assets of such Subsidiary and any
Indebtedness of such Subsidiary senior to that held by the Company.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness. The Company will not create, issue, incur,
assume, guarantee or otherwise in any manner become directly or indirectly
liable for the payment of or otherwise suffer to exist (collectively, "incur"),
any Indebtedness (including any Acquired Indebtedness), other than Permitted
Indebtedness, unless such Indebtedness is incurred by the Company and the
Company's Consolidated Fixed Charge Coverage Ratio for the four full fiscal
quarters for which financial results are available immediately preceding the
date of
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incurrence of such Indebtedness (the "Incurrence Date"), taken as one period
(and after giving pro forma effect to: (i) the incurrence of such Indebtedness
and (if applicable) the application of the net proceeds therefrom, including to
refinance other Indebtedness, as if such Indebtedness was incurred, and the
application of such proceeds occurred, at the beginning of such four-quarter
period; (ii) the incurrence, repayment or retirement of any other Indebtedness
by the Company since the first day of such four-quarter period as if such
Indebtedness was incurred, repaid or retired at the beginning of such
four-quarter period (except that, in making such computation, the amount of
Indebtedness under any revolving credit facility shall be computed based upon
the average daily balance of such Indebtedness during such four-quarter period);
(iii) in the case of Acquired Indebtedness, the related acquisition; and (iv)
any acquisition or disposition by the Company and its Subsidiaries of any
company or any business or any assets out of the ordinary course of business, or
any related repayment of Indebtedness, in each case since the first day of such
four-quarter period, assuming such acquisition or disposition and any such
related payments had been consummated on the first day of such four-quarter
period), would be at least 1.8:1 from the date of the Indenture to and including
December 31, 1998, and 2.0:1 thereafter. The Company will not permit any of its
Subsidiaries to incur any Indebtedness (other than Permitted Subsidiary
Indebtedness).
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to
holders of, any shares of the Company'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 such Qualified
Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, the Company's Capital Stock or any Capital Stock of
any Affiliate of the Company (other than Capital Stock of any Wholly Owned
Subsidiary of the Company);
(iii) prior to any scheduled principal payment, sinking fund payment
or maturity of any Subordinated Indebtedness, make any principal payment
on, or repurchase, redeem, defease, retire or otherwise acquire for value,
such Subordinated Indebtedness (other than any such Indebtedness owed to
the Company or a Wholly Owned Subsidiary);
(iv) declare or pay any dividend or distribution on any Capital Stock
of any Subsidiary to any Person (other than to the Company or any of its
Wholly Owned Subsidiaries) or purchase, redeem or otherwise acquire or
retire for value any Capital Stock of any Subsidiary held by any person
(other than the Company or any of its Wholly Owned Subsidiaries);
(v) incur, create, or assume, any guarantee of Indebtedness of any
Affiliate of the Company (other than a Wholly Owned Subsidiary of the
Company); or
(vi) make any Investment in any Person
(other than, in the case of clauses (ii) through (vi) above, Permitted
Investments) (any of the foregoing actions described in clauses (i) through
(vi), other than any such action that is a Permitted Payment (as defined below),
collectively, a "Restricted Payment") (the amount of any such Restricted
Payment, if other than cash, being determined by the board of directors of the
Company, whose determination shall be conclusive and evidenced by a board
resolution); unless (1) immediately before and immediately after giving effect
to such proposed Restricted Payment on a pro forma basis, no Default or Event of
Default shall have occurred and be continuing and such Restricted Payment shall
not be an event which is, or after notice or lapse of time or both, would be, an
"event of default" under the terms of any Indebtedness of the Company or its
Subsidiaries; (2) immediately before and immediately after giving effect to such
Restricted Payment on a pro forma basis, the Company could incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness or Permitted
Subsidiary Indebtedness) under the provisions described under "-- Limitation on
Indebtedness"; and (3) after giving effect to the proposed
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Restricted Payment, the aggregate amount of all such Restricted Payments
declared or made after the date of the Indenture plus the Permitted Payments
made under clause (b)(vi), do not exceed $5.0 million plus the sum of:
(A) 50% of the aggregate Consolidated Net Income of the Company
accrued on a cumulative basis during the period beginning on January 1,
1998 and ending on the last day of the Company's last fiscal quarter ending
prior to the date of the Restricted Payment (or, if such aggregate
cumulative Consolidated Net Income shall be a loss, minus 100% of such
loss); plus
(B) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company either (x) as capital contributions in the form of
common equity to the Company or (y) from the issuance or sale (other than
to any of its Subsidiaries) of Qualified Capital Stock of the Company or
any options, warrants or rights to purchase such Qualified Capital Stock of
the Company (except, in each case, to the extent such proceeds are used to
purchase, redeem or otherwise retire Capital Stock or Subordinated
Indebtedness as set forth in clause (ii) or (iii) of paragraph (b) below),
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 the date of the
Indenture by the Company (other than from any of its Subsidiaries) upon the
exercise of any options, warrants or rights to purchase Qualified Capital
Stock of the Company; plus
(D) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the conversion or exchange, if any, of debt
securities or Redeemable Capital Stock of the Company or its Subsidiaries
into or for Qualified Capital Stock of the Company plus, to the extent such
debt securities or Redeemable Capital Stock were issued after the date of
the Indenture, 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 the date of the Indenture, an
amount equal to the lesser of the return of capital with respect to such
Investment and the initial amount of such Investment, in either case, less
the cost of the disposition of such Investment.
(b) Notwithstanding the foregoing, and in the case of clauses (ii) through
(vii) below, so long as there is no Default or Event of Default continuing, the
foregoing provisions shall not prohibit the following actions (each of clauses
(i) through (vii) being referred to as a "Permitted Payment"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof if at the date of declaration thereof such other
dividend (A) would be permitted by the provisions of paragraph (a) of this
Section and (B) shall be deemed to have been paid on such date of
declaration for purposes of the calculation required by paragraph (a) of
this Section;
(ii) the repurchase, redemption, or other acquisition or retirement
for value of any shares of any class of Capital Stock of the Company in
exchange for (including any such exchange pursuant to the exercise of a
conversion right or privilege in connection with which cash is paid in lieu
of the issuance of fractional shares or scrip), or out of the Net Cash
Proceeds of a substantially concurrent issue and sale for cash (other than
to a Subsidiary) of, other shares of Qualified Capital Stock of the
Company; provided that the Net Cash Proceeds from the issuance of such
shares of Qualified Capital Stock are, to the extent so used, excluded from
clause (3) (B) of paragraph (a) of this Section;
(iii) 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 the Company, provided that the Net Cash Proceeds from the
issuance of such shares of Qualified Capital Stock are, to the extent so
used, excluded from clause (3)(B) of paragraph (a) of this Section;
(iv) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Subordinated
Indebtedness (other than Redeemable Capital Stock) (a "refinancing")
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through the substantially concurrent issuance of new Subordinated
Indebtedness of the Company, provided that any such new Subordinated
Indebtedness (1) shall be in a principal amount that does not exceed the
principal amount so refinanced (or, if such Subordinated Indebtedness
provides for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration thereof, then such lesser amount
as of the date of determination), plus the lesser of (I) the stated amount
of any premium or other payment required to be paid in connection with such
a refinancing pursuant to the terms of the Indebtedness being refinanced,
or (II) the amount of premium or other payment actually paid at such time
to refinance the Indebtedness, plus, in either case, the amount of expenses
of the Company incurred in connection with such refinancing; (2) has an
Average Life to Stated Maturity greater than the remaining Average Life to
Stated Maturity of the Notes; (3) 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 (4) is expressly subordinated
in right of payment to the Notes at least to the same extent as the
Subordinated Indebtedness to be refinanced;
(v) 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
the Company, provided that any such new Redeemable Capital Stock (1) shall
have an aggregate liquidation preference that does not exceed the aggregate
liquidation preference of the amount so refinanced; (2) has an Average Life
to Stated Maturity greater than the remaining Average Life to Stated
Maturity of the Notes; and (3) has a Stated Maturity later than the Stated
Maturity for the final scheduled principal payment of the Notes;
(vi) the repurchase of shares of, or options or warrants to purchase
shares of, common stock of the Company or any of its Subsidiaries from
employees, former employees, directors or former directors of the Company
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 the Company under which such
individuals purchase or sell or are granted the option to purchase or sell,
shares of such common stock; and
(vii) the repurchase, redemption, defeasance, retirement or
acquisition for value of the 13% Notes on or prior to their scheduled
maturity.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly, enter into any
transaction or series of related transactions (including, without limitation,
the sale, purchase, exchange or lease of assets, property or services) with or
for the benefit of any Affiliate of the Company (other than the Company or a
Subsidiary) unless such transaction or series of related transactions is entered
into in good faith and (a) such transaction or series of related transactions is
on terms that are no less favorable to the Company or such Subsidiary, as the
case may be, than those that would be available in a comparable transaction in
arm's-length dealings with an unrelated third party, (b) with respect to any
transaction or series of related transactions involving aggregate value in
excess of $1.0 million, the Company delivers an officers' certificate to the
Trustee certifying that such transaction or series of related transactions
complies with clause (a) above, and (c) with respect to any transaction or
series of related transactions involving aggregate value in excess of $10.0
million, either (A) such transaction or series of related transactions has been
approved by a majority of the Disinterested Directors of the Company, or in the
event there is only one Disinterested Director, by such Disinterested Director,
or (B) the Company delivers to the Trustee a written opinion of an investment
banking firm of national standing or other recognized independent expert with
experience appraising the terms and conditions of the type of transaction or
series of related transactions for which an opinion is required stating that the
transactions or series of related transactions are fair to the Company or such
Subsidiary from a financial point of view; provided, however, that clauses (a)
through (c) above shall not apply to (i) any transaction with an employee or
director of the Company or any of its Subsidiaries entered into in the ordinary
course of business (including compensation and employee benefit arrangements
with any officer, director or employee of the Company or any Subsidiary,
including under any stock option or stock incentive plans), (ii) Restricted
Payments made in accordance with "-- Limitation on Restricted Payments" or
Permitted Payments, (iii) any transactions related to the Securitization
Facility, (iv) management agreements or similar agreements between (A) the
Company or any Subsidiary and (B) Affiliates in which the Company or any
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Subsidiary has made an Investment, and (v) contributions by the Company or any
Subsidiary to a real estate investment trust pursuant to clause (ix) of the
definition of Permitted Investments.
Limitation on Liens. The Company will not, and will not permit any
Subsidiary to, directly or indirectly, create or incur any Lien of any kind
securing any Pari Passu Indebtedness or Subordinated Indebtedness (including any
assumption, guarantee or other liability with respect thereto by any Subsidiary)
upon any property or assets (including any intercompany notes) of the Company or
any Subsidiary owned on the date of the Indenture or acquired after the date of
the Indenture, or any income or profits therefrom, unless the Notes are directly
secured equally and ratably with (or, in the case of Subordinated Indebtedness,
prior or senior thereto, with the same relative priority as the Notes shall have
with respect to such Subordinated Indebtedness) the obligations or liability
secured by such Lien except for Liens (A) securing any Indebtedness which became
Indebtedness pursuant to a transaction permitted under "-- Consolidation,
Merger, Sale of Assets" or securing Acquired Indebtedness which, in each case,
were created prior to (and not created in connection with, or in contemplation
of) the incurrence of such Pari Passu Indebtedness or Subordinated Indebtedness
(including any assumption, guarantee or other liability with respect thereto by
any Subsidiary) and which Indebtedness is permitted under the provisions of
"-- Limitation on Indebtedness", (B) securing any Indebtedness incurred in
connection with any refinancing, renewal, substitutions or replacements of any
such Indebtedness described in clause (A), so long as the aggregate principal
amount of Indebtedness represented thereby is not increased by such refinancing
by an amount greater than the lesser of (i) the stated amount of any premium or
other payment required to be paid in connection with such a refinancing pursuant
to the terms of the Indebtedness being refinanced, or (ii) the amount of premium
or other payment actually paid at such time to refinance the Indebtedness, plus,
in either case, the amount of expenses of the Company incurred in connection
with such refinancing, provided, however, that in the case of clauses (A) and
(B), any such Lien only extends to the assets that were subject to such Lien
securing such Indebtedness prior to the related acquisition by the Company or
its Subsidiaries, or (C) securing Indebtedness incurred to effect a defeasance
of the Notes pursuant to the defeasance provisions of the Indenture.
Limitation on Sale of Assets. (a) The Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly, consummate an Asset
Sale unless (i) at least 75% of the consideration from such Asset Sale is
received in cash or Cash Equivalents, and (ii) the Company or such Subsidiary
receives consideration at the time of such Asset Sale at least equal to the Fair
Market Value of the shares or assets subject to such Asset Sale (as determined
by the board of directors of the Company and evidenced in a board resolution).
(b) If all or a portion of the Net Cash Proceeds of any Asset Sale are not
required to be applied to repay permanently any Senior Indebtedness then
outstanding as required by the terms thereof, or the Company determines not to
apply such Net Cash Proceeds to the permanent prepayment of such Senior
Indebtedness, or if no such Senior Indebtedness is then outstanding, then the
Company or a Subsidiary may, within 360 days of the Asset Sale, invest the Net
Cash Proceeds in properties and other assets that (as determined by the board of
directors of the Company) replace the properties and assets that were the
subject of the Asset Sale or in properties and assets that will be used in the
businesses of the Company or its Subsidiaries existing on the date of the
Indenture or in businesses reasonably related or complementary thereto. The
amount of such Net Cash Proceeds not applied to repay Senior Indebtedness or
used or invested within 360 days of the Asset Sale as set forth in this
paragraph constitutes "Excess Proceeds".
(c) When the aggregate amount of Excess Proceeds exceeds $15.0 million, the
Company will apply the Excess Proceeds to the repayment of the Notes and any
other Pari Passu Indebtedness outstanding with provisions requiring the Company
to make an offer to purchase or to purchase or redeem such Indebtedness with the
proceeds from any Asset Sale as follows: (A) the Company will make an offer to
purchase (an "Offer") from all holders of the Notes in accordance with the
procedures set forth in the Indenture in the maximum principal amount (expressed
as a multiple of $1,000) of Notes that may be purchased out of an amount (the
"Note Amount") equal to the product of such Excess Proceeds multiplied by a
fraction, the numerator of which is the outstanding principal amount of the
Notes, and the denominator of which is the sum of the outstanding principal
amount of the Notes and such Pari Passu Indebtedness (subject to proration in
the event such amount is less than the aggregate Offered Price (as defined
herein) of all Notes tendered), and (B) to the extent required by such Pari
Passu Indebtedness to permanently reduce the principal amount of such Pari Passu
Indebtedness, the Company
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will make an offer to purchase or otherwise repurchase or redeem Pari Passu
Indebtedness (a "Pari Passu Offer") in an amount (the "Pari Passu Debt Amount")
equal to the excess of the Excess Proceeds over the Note Amount; provided that
in no event will the Company be required to make a Pari Passu Offer in a Pari
Passu Debt Amount exceeding the principal amount of such Pari Passu Indebtedness
plus the amount of any premium required to be paid to repurchase such Pari Passu
Indebtedness. The offer price for the Notes will be payable in cash in an amount
equal to 100% of the principal amount of the Notes plus accrued and unpaid
interest, if any, to the date (the "Offer Date") such Offer is consummated (the
"Offered Price"), in accordance with the procedures set forth in the Indenture.
To the extent that the aggregate Offered Price of the Notes tendered pursuant to
the Offer is less than the Note Amount relating thereto or the aggregate amount
of Pari Passu Indebtedness that is purchased in a Pari Passu Offer is less than
the Pari Passu Debt Amount, the Company will use any remaining Excess Proceeds
for general corporate purposes. If the aggregate principal amount of Notes and
Pari Passu Indebtedness surrendered by holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro
rata basis. Upon the completion of the purchase of all the Notes tendered
pursuant to an Offer and the completion of a Pari Passu Offer, the amount of
Excess Proceeds, if any, shall be reset at zero.
(d) The Indenture will provide that, if the Company becomes obligated to
make an Offer pursuant to clause (c) above, the Notes and the Pari Passu
Indebtedness shall be purchased by the Company, at the option of the holders
thereof, in whole or in part in integral multiples of $1,000, on a date that is
not earlier than 30 days and not later than 60 days from the date the notice of
such Offer is given to holders, or such later date as may be necessary for the
Company to comply with the requirements under the Exchange Act.
(e) The Indenture will provide that the Company will comply with the
applicable tender offer rules, including Rule 14e-l under the Exchange Act, and
any other applicable securities laws or regulations in connection with an Offer.
Limitation on Senior Subordinated Indebtedness. The Company will not,
directly or indirectly, create, incur, issue, assume, guarantee or otherwise in
any manner become directly or indirectly liable for or with respect to or
otherwise permit to exist any Indebtedness that is subordinate in right of
payment to any Indebtedness of the Company unless such Indebtedness is also pari
passu with the Notes or subordinate in right of payment to the Notes at least to
the same extent as the Notes are subordinate in right of payment to Senior
Indebtedness.
Limitation on Preferred Stock of Subsidiaries. The Company will not permit
(a) any Subsidiary of the Company to issue any Preferred Stock, except for (i)
Preferred Stock issued to the Company or a Wholly Owned Subsidiary, and (ii)
Preferred Stock issued by a Person prior to the time (A) such Person becomes a
Subsidiary, (B) such Person merges with or into a Subsidiary, or (C) a
Subsidiary merges with or into such Person; provided that the Preferred Stock
referred to in clause (ii) above was not issued or incurred by such Person in
anticipation of the type of transaction contemplated by subclause (A), (B) or
(C); or (b) any Person (other than the Company or a Wholly Owned Subsidiary) to
acquire Preferred Stock of any Subsidiary from the Company or any Subsidiary,
except, in the case of clause (a) or (b), upon the acquisition of all the
outstanding Preferred Stock of such Subsidiary in accordance with the terms of
the Indenture.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any of its Subsidiaries
to, directly or indirectly, create or suffer to exist any consensual encumbrance
or restriction on the ability of any Subsidiary to (i) pay dividends or make any
other distribution on its Capital Stock, (ii) pay any Indebtedness owed to the
Company or any other Subsidiary, (iii) make any Investment in the Company or any
other Subsidiary, or (iv) transfer any of its properties or assets to the
Company or any other Subsidiary, except for: (a) any encumbrance or restriction
pursuant to any agreement in effect on the date of the Indenture; (b) any
encumbrance or restriction, with respect to a Subsidiary that is not a
Subsidiary of the Company on the date of the Indenture, in existence at the time
such Person becomes a Subsidiary of the Company and not incurred in connection
with, or in contemplation of, such Person becoming a Subsidiary; (c) customary
non-assignment or subletting provisions of any lease, license or other contract;
(d) any restriction 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 such restriction restricts the
transfer of property subject to such security agreement, mortgage or lease; (e)
any restriction contained in an agreement pursuant to which Permitted Subsidiary
Indebtedness is incurred; and (f) any encumbrance or restriction existing
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under any agreement that amends, substitutes, restructures, supplements,
extends, renews, refinances, replaces or otherwise modifies the agreements
containing the encumbrances or restrictions in the foregoing clauses (a), (b),
(c), (d) or (e), or in this clause (f); provided in each case that the terms and
conditions of any such encumbrances or restrictions are no more restrictive in
any material respect than those under or pursuant to the agreement evidencing
the Indebtedness so amended, substituted, restructured, supplemented, extended,
renewed, refinanced, replaced or modified.
Limitations on Unrestricted Subsidiaries. The Company will not make, and
will not permit its Subsidiaries to make, an Investment in Unrestricted
Subsidiaries unless, at the time thereof, (a) the aggregate amount of such
Investments would not exceed the amount of Restricted Payments then permitted to
be made pursuant to the provisions described under "-- Limitation on Restricted
Payments", or (b) such Investment is a Permitted Investment. Except for
Permitted Investments, any Investment in Unrestricted Subsidiaries permitted to
be made pursuant to this covenant (i) must be permitted to be made pursuant to
the provision described under "-- Limitation on Restricted Payments" and will be
treated as a Restricted Payment in calculating the amount of Restricted Payments
made by the Company, and (ii) may be made in cash or property.
Provision of Financial Statements. After the earlier to occur of the
consummation of the Exchange Offer and the 120th calendar day following the date
of original issue of the Notes, whether or not the Company is subject to Section
13(a) or 15(d) of the Exchange Act, the Company will, to the extent permitted
under the Exchange Act, file with the SEC the annual reports, quarterly reports
and other documents which the Company would have been required to file with the
SEC pursuant to Section 13(a) or 15(d) of the Exchange Act if the Company were
so subject, such documents to be filed with the SEC on or prior to the date (a
"Required Filing Date") by which the Company would have been required so to file
such documents if the Company were so subject. The Company will also in any
event (x) within 15 days of each Required Filing Date occurring after the
issuance of the Notes (i) transmit by mail to all holders, as their names and
addresses appear in the security register, without cost to such holders and (ii)
file with the Trustee, copies of the annual reports, quarterly reports and other
documents which the Company would have been required to file with the SEC
pursuant to Section 13(a) or 15(d) of the Exchange Act if the Company were
subject to either of such Sections, and (y) if filing such documents by the
Company with the SEC is not permitted under the Exchange Act, promptly upon
written request and payment of the reasonable cost of duplication and delivery,
supply copies of such documents to any prospective holder at the Company's cost.
The Indenture also provides that, so long as any of the Notes remain
outstanding, the Company will make available to any prospective purchaser of
Notes or beneficial owner of Notes in connection with any sale thereof the
information required by Rule 144A(d)(4) under the Securities Act, until such
time as the Company has either exchanged the Notes for securities identical in
all material respects which have been registered under the Securities Act or
until such time as the holders thereof have disposed of such Notes pursuant to
an effective registration statement under the Securities Act.
CONSOLIDATION, MERGER, SALE OF ASSETS
The Company will not, in a single transaction or through a series of
related transactions, consolidate with or merge with or into any other Person or
sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its properties and assets to any Person or group of
affiliated Persons, or permit any of its Subsidiaries to enter into any such
transaction or series of related transactions if such 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 the Company and its Subsidiaries on a Consolidated
basis to any other Person or group of affiliated Persons, unless at the time and
after giving effect thereto (i) either (a) the Company will be the continuing
corporation, or (b) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by sale, assignment, conveyance, transfer, lease or disposition all or
substantially all of the properties and assets of the Company and its
Subsidiaries on a Consolidated basis (the "Surviving Entity") will be a
corporation duly organized and validly existing under the laws of the United
States of America, any state thereof or the District of Columbia and such Person
expressly assumes, by a supplemental indenture, in a form satisfactory to the
Trustee, all the obligations of the Company under the Notes and the Indenture,
as the case may be, and the Notes and the Indenture will remain in full force
and effect as so supplemented, (ii) immediately before and immediately after
giving effect to such
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transaction on a pro forma basis (and treating any Indebtedness not previously
an obligation of the Company or any of its Subsidiaries which becomes the
obligation of the Company or any of its Subsidiaries as a result of such
transaction as having been incurred at the time of such transaction), no Default
or Event of Default will have occurred and be continuing, (iii) immediately
before and immediately after giving effect to such transaction on a pro forma
basis (on the assumption that the transaction occurred on the first day of the
four-quarter period for which financial results are available ending immediately
prior to the consummation of such transaction with the appropriate adjustments
with respect to the transaction being included in such pro forma calculation),
the Company (or the Surviving Entity if the Company is not the continuing
obligor under the Indenture) could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness or Permitted Subsidiary Indebtedness) under the
provisions of "-- Certain Covenants -- Limitation on Indebtedness", and (iv) at
the time of the transaction the Company or the Surviving Entity will have
delivered, or caused to be delivered, to the Trustee, in form and substance
reasonably satisfactory to the Trustee, an officers' certificate and an opinion
of counsel, each to the effect that such consolidation, merger, transfer, sale,
assignment, conveyance, transfer, lease or other transaction and the
supplemental indenture in respect thereof comply with the Indenture and that all
conditions precedent therein provided for relating to such transaction have been
complied with; provided, however, that the foregoing prohibition shall not
prohibit any merger between or among Subsidiaries or between a Subsidiary and
the Company, provided the Company is the continuing corporation.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which the Company is not the continuing corporation, the successor Person formed
or remaining shall succeed to, and be substituted for, and may exercise every
right and power of, the Company, and the Company would be discharged from all
obligations and covenants under the Indenture and the Notes, as the case may be.
EVENTS OF DEFAULT
An Event of Default will occur under the Indenture if:
(i) there shall be a default in the payment of any interest on any
Note when it becomes due and payable, and such default shall continue for a
period of 30 days;
(ii) there shall be a default in the payment of the principal of (or
premium, if any, on) any Note at its Maturity (upon acceleration, optional
or mandatory redemption, required repurchase or otherwise);
(iii) there shall be a default in the performance, or breach, of any
covenant or agreement of the Company under the Indenture (other than a
default in the performance, or breach, of a covenant or agreement which is
specifically dealt with in clause (i), (ii) or (iv)) and such default or
breach shall continue for a period of 30 days after written notice has been
given, by certified mail, (x) to the Company by the Trustee, or (y) to the
Company and the Trustee by the holders of at least 25% in aggregate
principal amount of the outstanding Notes;
(iv) (a) there shall be a default in the performance or breach of the
provisions described in "Consolidation, Merger, Sale of Assets", (b) the
Company shall have failed to make or consummate an Offer required in
accordance with the provisions of "-- Certain Covenants -- Limitation on
Sale of Assets", or (c) the Company shall have failed to make or consummate
a Change of Control Offer required in accordance with the provisions of
"-- Purchase of Notes Upon a Change of Control";
(v) one or more defaults shall have occurred under any of the
agreements, indentures or instruments under which the Company or any
Subsidiary then has outstanding Indebtedness in excess of $10.0 million,
individually or in the aggregate, and either (a) such default results from
the failure to pay such Indebtedness at its stated final maturity, or (b)
such default or defaults have resulted in the acceleration of the maturity
of such Indebtedness;
(vi) one or more judgments, orders or decrees for the payment of money
in excess of $10.0 million, either individually or in the aggregate, shall
be rendered against the Company or any Subsidiary or any of their
respective properties and shall not be discharged and either (a) any
creditor shall have commenced an enforcement proceeding upon such judgment,
order or decree, or (b) there shall have been a period of
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60 consecutive days during which a stay of enforcement of such judgment,
order or decree, by reason of an appeal or otherwise, shall not be in
effect, provided that the amount of such money judgment, order or decree
shall be calculated net of any insurance coverage that the Company has
determined in good faith is available in whole or in part with respect to
such money judgment, order or decree;
(vii) there shall have been the entry by a court of competent
jurisdiction of (a) a decree or order for relief in respect of the Company
or any Significant Subsidiary in an involuntary case or proceeding under
any applicable Bankruptcy Law, or (b) a decree or order adjudging the
Company or any Significant Subsidiary bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment or composition of or in respect of
the Company or any Significant Subsidiary under any applicable federal or
state law, or appointing a custodian, receiver, liquidator, assignee,
trustee, sequestrator (or other similar official) of the Company or any
Significant Subsidiary or of any substantial part of their respective
properties, or ordering the winding up or liquidation of their respective
affairs, and any such decree or order for relief shall continue to be in
effect, or any such other decree or order shall be unstayed and in effect,
for a period of 60 consecutive days; or
(viii) (a) the Company or any Significant Subsidiary commences a
voluntary case or proceeding under any applicable Bankruptcy Law or any
other case or proceeding to be adjudicated bankrupt or insolvent, (b) the
Company or any Significant Subsidiary consents to the entry of a decree or
order for relief in respect of the Company or such Significant Subsidiary
in an involuntary case or proceeding under any applicable Bankruptcy Law or
to the commencement of any bankruptcy or insolvency case or proceeding
against it, (c) the Company or any Significant Subsidiary files a petition
or answer or consent seeking reorganization or relief under any applicable
federal or state law, (d) the Company or any Significant Subsidiary (I)
consents to the filing of such petition or the appointment of, or taking
possession by, a custodian, receiver, liquidator, assignee, trustee,
sequestrator or similar official of the Company or such Significant
Subsidiary or of any substantial part of their respective properties, (II)
makes an assignment for the benefit of creditors, or (III) admits in
writing its inability to pay its debts generally as they become due, or (e)
the Company or any Significant Subsidiary takes any corporate action in
furtherance of any such actions in this paragraph (viii).
If an Event of Default (other than as specified in clauses (vii) and (viii)
of the prior paragraph with respect to the Company) shall occur and be
continuing with respect to the Indenture, the Trustee or the holders of not less
than 25% in aggregate principal amount of the Notes then outstanding may, and
the Trustee at the request of such holders shall, declare all unpaid principal
of, premium, if any, and accrued interest on all Notes to be due and payable, by
a notice in writing to the Company (and to the Trustee if given by the holders
of the Notes) and upon any such declaration, such principal, premium, if any,
and interest shall become due and payable immediately. If an Event of Default
specified in clause (vii) or (viii) of the prior paragraph occurs with respect
to the Company and is continuing, then all the Notes shall ipso facto become and
be due and payable immediately in an amount equal to the principal amount of the
Notes, together with accrued and unpaid interest, if any, to the date the Notes
become due and payable, without any declaration or other act on the part of the
Trustee or any holder. Thereupon, the Trustee may, at its discretion, proceed to
protect and enforce the rights of the holders of Notes by appropriate judicial
proceedings.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of Notes outstanding, by written notice
to the Company and the Trustee, may rescind and annul such declaration and its
consequences if (a) the Company has paid or deposited with the Trustee a sum
sufficient to pay (i) all sums paid or advanced by the Trustee under the
Indenture and the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel, (ii) all overdue interest on all Notes
then outstanding, (iii) the principal of and premium, if any, on any Notes then
outstanding which have become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the Notes, and (iv) to
the extent that payment of such interest is lawful, interest upon overdue
interest at the rate borne by the Notes; and (b) all Events of Default, other
than the nonpayment of principal of the Notes which have become due solely by
such declaration of acceleration, have been cured or waived as provided in the
Indenture. No such rescission shall affect any subsequent default or impair any
right consequent thereon.
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The holders of not less than a majority in aggregate principal amount of
the Notes outstanding may on behalf of the holders of all outstanding Notes
waive any past default under the Indenture and its consequences, except a
default in the payment of the principal of, premium, if any, or interest on any
Note or in respect of a covenant or provision which under the Indenture cannot
be modified or amended without the consent of the holder of each Note affected
by such modification or amendment.
The Company is also required to notify the Trustee within ten business days
of the occurrence of any Default. The Company is required to deliver to the
Trustee, on or before a date not more than 120 days after the end of each fiscal
year, a written statement as to compliance with the Indenture, including whether
or not any Default has occurred. The Trustee is under no obligation to exercise
any of the rights or powers vested in it by the Indenture at the request or
direction of any of the holders of the Notes unless such holders offer to the
Trustee security or indemnity satisfactory to the Trustee against the costs,
expenses and liabilities which might be incurred thereby.
The Trust Indenture Act contains limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of any
such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions, provided that if it acquires any conflicting interest it
must eliminate such conflict upon the occurrence of an Event of Default or else
resign.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company and any other obligor upon the Notes discharged with
respect to the outstanding Notes ("defeasance"). Such defeasance means that the
Company and any other obligor under the Indenture shall be deemed to have paid
and discharged the entire Indebtedness represented by the outstanding Notes,
except for (i) the rights of holders of such outstanding Notes to receive
payments in respect of the principal of, premium, if any, and interest on such
Notes when such payments are due, (ii) the Company'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, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and (iv) the defeasance provisions
of the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("covenant defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or an Event of Default with respect to the Notes. In the event covenant
defeasance occurs, certain events (not including non-payment, 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 defeasance or covenant defeasance, (i) the
Company must irrevocably deposit or cause to be deposited with the Trustee, in
trust, for the benefit of the holders of the Notes, cash in United States
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 and discharge the principal of,
premium, if any, and interest on the outstanding Notes on the Stated Maturity
(or on any date after October 15, 2002 (such date being referred to as the
"Defeasance Redemption Date"), if at or prior to electing either defeasance or
covenant defeasance, the Company has delivered to the Trustee an irrevocable
notice to redeem all of the outstanding Notes on the Defeasance Redemption
Date); (ii) in the case of defeasance, the Company shall have delivered to the
Trustee an opinion of independent counsel in the United States stating that (A)
the Company has received from, or there has been published by, the Internal
Revenue Service a ruling or, (B) since the date of the Indenture, 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 independent counsel in the United States
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 such
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 defeasance
had not occurred; (iii) in the case of covenant defeasance, the Company shall
have delivered to the Trustee an opinion of independent counsel in the United
States to the effect that the holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such
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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; (iv) no Default or Event of Default
(other than a Default or an Event of Default resulting from the borrowing of
funds to be applied to such deposit) shall have occurred and be continuing on
the date of such deposit or insofar as clauses (vii) or (viii) under the first
paragraph under "-- Events of Default" are concerned, at any time during the
period ending on the 91st day after the date of deposit (it being understood
that this condition shall not be deemed satisfied until the expiration of such
period); (v) such defeasance or covenant defeasance shall not cause the Trustee
for the Notes to have a conflicting interest as defined in the Indenture and for
purposes of the Trust Indenture Act with respect to any securities of the
Company; (vi) such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a Default under, (A) the Indenture or (B)
any other agreement or instrument to which the Company or any Significant
Subsidiary is a party or by which the Company or any Significant Subsidiary is
bound, if such breach, violation, or default thereof would have a material
adverse effect on the Company and its Subsidiaries taken as a whole; (vii) such
defeasance or covenant defeasance shall not result in the trust arising from
such deposit constituting an investment company within the meaning of the
Investment Company Act of 1940, as amended, unless such trust shall be
registered under such Act or exempt from registration thereunder; (viii) the
Company will have delivered to the Trustee an opinion of independent counsel in
the United States to the effect that after the 91st day following the deposit,
the trust funds will not be subject to avoidance under Section 547 of the United
States Bankruptcy Code (or any successor provision thereto) and related judicial
decisions; (ix) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the intent
of preferring the holders of the Notes over the other creditors of the Company
with the intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; (x) no event or condition shall exist that would prevent the
Company from making payments of the principal of, premium, if any, and interest
on the Notes on the date of such deposit or at any time ending on the 91st day
after the date of such deposit; and (xi) the Company will have delivered to the
Trustee an officers' certificate and an opinion of independent counsel, each
stating that all conditions precedent provided for relating to either the
defeasance or the covenant defeasance, as the case may be, have been complied
with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes as expressly provided for in the Indenture) as to all outstanding Notes
under the Indenture when (a) either (i) all such Notes theretofore authenticated
and delivered (except lost, stolen or destroyed Notes which have been replaced
or paid or Notes whose payment has been deposited in trust or segregated and
held in trust by the Company and thereafter repaid to the Company or discharged
from such trust as provided for in the Indenture) have been delivered to the
Trustee for cancellation, or (ii) all Notes not theretofore delivered to the
Trustee for cancellation (x) have become due and payable, (y) will become due
and payable at their Stated Maturity within one year, or (z) are to be called
for redemption within one year under arrangements satisfactory to the applicable
Trustee for the giving of notice of redemption by the Trustee in the name, and
at the expense, of the Company; and the Company has irrevocably deposited or
caused to be deposited with the Trustee as trust funds in trust an amount in
United States dollars sufficient to pay and discharge the entire indebtedness on
the Notes not theretofore delivered to the Trustee for cancellation, including
principal of, premium, if any, and accrued interest on, such Notes at such
Maturity, Stated Maturity or redemption date; (b) the Company has paid or caused
to be paid all other sums payable under the Indenture by the Company; and (c)
the Company has delivered to the Trustee an officers' certificate and an opinion
of independent counsel each stating that (i) all conditions precedent under the
Indenture relating to the satisfaction and discharge of such Indenture have been
complied with, and (ii) such satisfaction and discharge will not result in a
breach or violation of, or constitute a default under, the Indenture or any
other material agreement or instrument to which the Company or any Subsidiary is
a party or by which the Company or any Subsidiary is bound.
MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the holders of at least a majority of
aggregate principal amount of the Notes then outstanding; provided, however,
that no such modification or amendment may, without the consent of the holder of
each
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outstanding Note affected thereby: (i) change the Stated Maturity of the
principal of, or any installment of interest on, or change to an earlier date
any redemption date of, or waive a default in the payment of the principal or
interest on, any such Note or reduce the principal amount thereof or the rate of
interest thereon or any premium payable upon the redemption thereof, or change
the coin or currency in which the principal of any such Note or any premium or
the interest thereon is payable, or impair the right to institute suit for the
enforcement of any such payment after the Stated Maturity thereof (or, in the
case of redemption, on or after the redemption date); (ii) amend, change or
modify the obligation of the Company to make and consummate an Offer with
respect to any Asset Sale or Asset Sales in accordance with "-- Certain
Covenants -- Limitation on Sale of Assets" or the obligation of the Company to
make and consummate a Change of Control Offer in the event of a Change of
Control in accordance with "-- Purchase of Notes Upon a Change of Control",
including, in each case, amending, changing or modifying any definitions
relating thereto; (iii) reduce the percentage in principal amount of such
outstanding Notes, the consent of whose holders is required for any such
supplemental indenture, or the consent of whose holders is required for any
waiver or compliance with certain provisions of the Indenture; (iv) modify any
of the provisions relating to supplemental indentures requiring the consent of
holders or relating to the waiver of past defaults or relating to the waiver of
certain covenants, except to increase the percentage of such outstanding Notes
required for any such actions or to provide that certain other provisions of the
Indenture cannot be modified or waived without the consent of the holder of each
such Note affected thereby; (v) except as otherwise permitted under
"-- Consolidation, Merger, Sale of Assets", consent to the assignment or
transfer by the Company of any of its rights and obligations under the
Indenture; or (vi) amend or modify any of the provisions referred to under
"-- Ranking" in any manner adverse to the holders of the Notes.
Notwithstanding the foregoing, without the consent of any holders of the
Notes, the Company and the Trustee may modify or amend the Indenture: (a) to
evidence the succession of another Person to the Company or any other obligor
upon the Notes, and the assumption by any such successor of the covenants of the
Company or such obligor in the Indenture and in the Notes in accordance with
"-- Consolidation, Merger, Sale of Assets"; (b) to add to the covenants of the
Company or any other obligor upon the Notes for the benefit of the holders of
the Notes, or to surrender any right or power conferred upon the Company or any
other obligor upon the Notes, as applicable, in the Indenture or in the Notes;
(c) to cure any ambiguity, or to correct or supplement any provision in the
Indenture or in any supplementary indenture or the Notes which may be defective
or inconsistent with any other provision in the Indenture or the Notes or make
any other provisions with respect to matters or questions arising under the
Indenture or the Notes; provided that, in each case, such provisions shall not
adversely affect the interest of the holders of the Notes; (d) to comply with
the requirements of the SEC in order to effect or maintain the qualification of
the Indenture under the Trust Indenture Act; (e) to evidence and provide the
acceptance of the appointment of a successor trustee under the Indenture; or (f)
to mortgage, pledge, hypothecate or grant a security interest in favor of the
Trustee for the benefit of the holders of the Notes as additional security for
the payment and performance of the Company's obligations under the Indenture, in
any property, or assets, including any of which are required to be mortgaged,
pledged or hypothecated, or in which a security interest is required to be
granted to the Trustee pursuant to the Indenture or otherwise.
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.
GOVERNING LAW
The Indenture is, and the New Notes will be, governed by, and construed in
accordance with, the laws of the State of New York, without giving effect to the
conflicts of law principles thereof.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, 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 is permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the SEC for permission to continue as
Trustee with such conflict or resign as Trustee.
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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
occurs (which has not been cured), 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 such holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Subsidiary or merges with or into the Company or any
Subsidiary, or (ii) assumed in connection with the acquisition of assets from
such Person, in each case, other than Indebtedness incurred in connection with,
or in contemplation of, such Person becoming a Subsidiary or such acquisition,
as the case may be. Acquired Indebtedness shall be deemed to be incurred on the
date of the related acquisition of assets from any Person or the date the
acquired Person becomes a Subsidiary, as the case may be.
"Adjusted Consolidated Interest Expense" of any Person means, without
duplication, for any period, as applied to any Person, the sum of (a) the
interest expense of such Person and its Consolidated Subsidiaries (exclusive of
deferred financing fees and any premiums or penalties paid in connection with
redeeming or retiring any Indebtedness prior to its stated maturity) for such
period, on a Consolidated basis, including without limitation, (i) amortization
of debt discount, (ii) the net cost under interest rate contracts (including
amortization of discounts), (iii) the interest portion of any deferred payment
obligation, and (iv) accrued interest, plus (b) (i) the interest component of
the Capital Lease Obligations paid, accrued and/or scheduled to be paid, or
accrued by such Person during such period, and (ii) 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: (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person; (ii) any other Person that
owns, directly or indirectly, 10% or more of such specified Person's Capital
Stock or beneficial equity interest in such Person (if such Person is a real
estate investment trust), or any officer or director of any such specified
Person or other Person or, 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 (iii) any other Person 10% or more of the Voting Stock of
which is beneficially owned or held directly or indirectly by such specified
Person. 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, whether through ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of: (i) any Capital
Stock of any Subsidiary; (ii) all or substantially all of the properties and
assets of any division or line of business of the Company or its Subsidiaries;
or (iii) any other properties or assets of the Company or any Subsidiary, other
than in the ordinary course of business. For the purposes of this definition,
the term "Asset Sale" shall not include any transfer of properties and assets
(A) that is governed by the provisions described under "-- Consolidation,
Merger, Sale of Assets", (B) that is by any Subsidiary to the Company or any
Wholly Owned Subsidiary in accordance with the terms of the Indenture, (C) that
is of obsolete equipment or other obsolete assets in the ordinary course of
business, (D) that constitutes the making of a Permitted Investment (other than
pursuant to clause (v) of the definition of "Permitted Investment"), (E) the
Fair Market Value of which in the aggregate does not exceed $1.0 million in any
transaction or series of related transactions, (F) sales of accounts receivable
and other transactions among the Company and its Subsidiaries pursuant to the
Securitization Facility, or (G) Investments by the Company which comply with the
terms of clause (ix) of the definition of "Permitted Investments".
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from the date of
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determination to the date or dates of each successive scheduled principal
payment of such Indebtedness multiplied by (b) the amount of each such principal
payment; by (ii) the sum of all such principal payments.
"Bank Credit Facility" means the third amended and restated Credit
Agreement dated as of June 26, 1995 among the Company, the Banks and The Chase
Manhattan Bank, as agent, as such agreement, in whole or in part, may be
amended, renewed, extended, substituted, refinanced, restructured, replaced,
supplemented or otherwise modified from time to time (including, without
limitation, any successive renewals, extensions, substitutions, refinancings,
restructurings, replacements, supplementations or other modifications of the
foregoing).
"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 Bank Credit Facility.
"Capital Lease Obligation" of any Person means any obligation of such
Person and its Subsidiaries on a Consolidated basis under any capital lease of
real or personal property which, in accordance with GAAP, has been recorded as a
capitalized lease obligation.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of such Person's
capital stock or other equity interests whether now outstanding or issued after
the date of the Indenture.
"Cash Equivalents" means: (i) Temporary Cash Investments; (ii) securities
received by the Company or any Subsidiary from the transferee in an Asset Sale
that are promptly converted by the Company or such Subsidiary into cash; (iii)
the assumption of Indebtedness or other obligations or liabilities of the
Company or any Subsidiary in connection with an Asset Sale; and (iv) in
connection with an Asset Sale to a Person where the assets sold, issued,
conveyed, transferred, leased or otherwise disposed of are included in a
business which will be a party to the Franchise Program, the net present value
of payments by such Person pursuant to the Franchise Program as calculated and
certified by the chief financial officer of the Company.
"Change of Control" means the occurrence of any of the following events:
(i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act) is or becomes the "beneficial owner" (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), directly or indirectly, of more than a majority of the total
outstanding Voting Stock of the Company; (ii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the board of directors of the Company (together with any new directors whose
election to such board or whose nomination for election by the stockholders of
the Company was approved by a vote of 66 2/3% of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved), cease for any
reason to constitute a majority of such board of directors then in office; (iii)
the Company 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 the Company in any such
event pursuant to a transaction in which the outstanding Voting Stock of the
Company is changed into or exchanged for cash, securities or other property,
other than any such transaction where the outstanding Voting Stock of the
Company is not changed or exchanged at all (except to the extent necessary to
reflect a change in the jurisdiction of incorporation of the Company) or where
(A) the outstanding Voting Stock of the Company is changed into or exchanged for
(x) Voting Stock of the surviving corporation which is not Redeemable Capital
Stock or (y) cash, securities and other property (other than Capital Stock of
the surviving corporation) in an amount which could be paid by the Company as a
Restricted Payment as described under "-- Certain Covenants -- Limitation on
Restricted Payments" (and such amount shall be treated as a Restricted Payment
subject to the provisions in the Indenture described under "-- Certain
Covenants -- Limitation on Restricted Payments") and (B) 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
(iv) the Company is liquidated or dissolved or adopts a plan of liquidation or
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dissolution other than in a transaction which complies with the provisions
described under "-- Consolidation, Merger, Sale of Assets".
"Company" means Bally Total Fitness Holding Corporation, a corporation
incorporated under the laws of Delaware, until a successor Person shall have
become such pursuant to the applicable provisions of the Indenture, and
thereafter "Company" shall mean such successor Person.
"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 such period and cash dividends paid on any Preferred Stock of such Person
during such period; provided that (i) in making such computation, the Adjusted
Consolidated Interest Expense attributable to interest on any Indebtedness shall
be computed on a pro forma basis and (A) where such Indebtedness was outstanding
during the period and bore a floating interest rate, interest shall 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 such Indebtedness was not outstanding
during the period for which the computation is being made but which bears, at
the option of the Company, a fixed or floating rate of interest, shall be
computed by applying at the option of the Company, either the fixed or floating
rates, and (ii) in making such computation, the Adjusted Consolidated Interest
Expense of such Person attributable to interest on any Indebtedness under a
revolving credit facility computed on a pro forma basis shall be computed based
upon the average daily balance of such 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 such Person and
its Consolidated Subsidiaries for such 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 such Person and its Subsidiaries for such
period on a Consolidated basis as determined in accordance with GAAP, adjusted,
to the extent included in calculating such net income (or loss), by excluding,
without duplication, (i) all extraordinary gains or losses (exclusive of all
fees and expenses relating thereto), (ii) the portion of net income (or loss) of
such 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 such Person or one of its
Subsidiaries, (iii) net income (or loss) of any Person combined with such Person
or any of its Subsidiaries on a "pooling of interests" basis attributable to any
period prior to the date of combination, (iv) any gain or loss, net of taxes,
realized upon the termination of any employee pension benefit plan, (v) net
gains (or losses) (except for all fees and expenses relating thereto) in respect
of dispositions of assets other than in the ordinary course of business, (vi)
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, (vii)
any gain arising from the acquisition of any securities, or the extinguishment,
under GAAP, of any Indebtedness of such Person, (viii) transaction costs charged
in connection with the Refinancing, or (ix) amortization of intangible assets of
such 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 such Person
and its Subsidiaries on a Consolidated basis for such period, as determined in
accordance with GAAP (excluding any non-cash charge which requires an accrual or
reserve for cash charges for any future period).
"Consolidated Tangible Assets" means consolidated total assets of the
Company and its Subsidiaries as reported in the Company's Consolidated balance
sheet from time to time as required by "-- Certain Covenants -- Provision of
Financial Statements" less (A) (i) any asset which is treated as an intangible
asset in conformity with GAAP (including, without limitation, leasehold rights,
franchise rights, non-compete agreements, goodwill, unamortized debt discounts,
patents, patent applications, trademarks, trade names, copyrights and licenses),
and (ii) any deferred charges determined in conformity with GAAP (including,
without limitation, deferred finance charges and deferred membership origination
costs), plus (B) any treasury stock.
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"Consolidation" means, with respect to any Person, the consolidation of the
accounts of such Person and each of its Subsidiaries if and to the extent the
accounts of such Person and each of its Subsidiaries would normally be
consolidated with those of such Person, all in accordance with GAAP. The term
"Consolidated" shall have a similar meaning.
"Credit Card Program Guarantee" means the Company's obligation to remit
funds in excess of the sum of (a) $25.0 million plus (b) a reserve (of up to 25%
of the amount owed to the Company by a member which becomes an obligation due to
the credit card issuer by such member) with respect to the Company's credit card
program pursuant to the Company's Credit Card Program Agreement dated December
21, 1995, as such agreement, in whole or in part, may be amended, renewed,
extended, substituted, refinanced, restructured, replaced, supplemented, or
otherwise modified from time to time (including, without limitation, any
successive renewals, extensions, substitutions, refinancings, restructurings,
replacements, supplementations or other modifications of the foregoing).
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" under the Indenture means (i) all Senior
Indebtedness under, or in respect of, the Bank Credit Facility and the
Securitization Facility, and (ii) any other Senior Indebtedness which at the
time of determination, has an aggregate principal amount outstanding of at least
$15 million and is specifically designated in the instrument evidencing such
Senior Indebtedness or the agreement under which such Senior Indebtedness arises
as "Designated Senior Indebtedness" by the Company.
"Disinterested Director" means, with respect to any transaction or series
of related transactions, a member of the board of directors of the Company who
does not have any material direct or indirect financial interest in or with
respect to such transaction or series of related transactions.
"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 Income in each case, for such
period, of the Company and its Subsidiaries on a Consolidated basis, all
determined in accordance with GAAP consistently applied.
"Exchange Act" means the United States Securities Exchange Act of 1934, as
amended, or any successor statute.
"Fair Market Value" means, with respect to any asset or property, 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 shall be determined by the board
of directors of the Company acting in good faith and shall be evidenced by a
resolution of the board of directors.
"Franchise Program" means the program under which the Company and/or its
Subsidiaries grant franchises to third parties which require franchisees, among
other things, to pay fees to the Company and/or its Subsidiaries, and which,
among other things, grants to the franchisee the right to receive training from
the Company or its Subsidiaries or sell memberships to use facilities of the
franchisee and the Company or its Subsidiaries. The Franchise Program may
include the conversion of facilities owned by the Company 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 (including, without limitation, any successive
renewal, extension, substitution, restructuring, replacement, supplementation or
other modification of the foregoing).
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, which
are in effect on the date of the Indenture.
"Guaranteed Debt" of any Person means, without duplication, all
Indebtedness of any other Person referred to in the definition of Indebtedness
below guaranteed directly or indirectly in any manner by such Person, or in
effect guaranteed directly or indirectly by such Person through an agreement (i)
to pay or purchase such Indebtedness or to advance or supply funds for the
payment or purchase of such Indebtedness, (ii) to purchase, sell or lease (as
lessee or lessor) property, or to purchase or sell services, primarily for the
purpose of enabling the
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debtor to make payment of such Indebtedness or to assure the holder of such
Indebtedness against loss, (iii) 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 such property be received or such services be rendered),
(iv) 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 (v) otherwise to assure a creditor against loss; provided that the term
"guarantee" shall not include endorsements for collection or deposit, in either
case in the ordinary course of business or guarantees of operating leases.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities arising in the ordinary course of business, but including,
without limitation, all obligations, contingent or otherwise, of such Person in
connection with any letters of credit issued under letter of credit facilities,
acceptance facilities or other similar facilities and 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, now or hereafter outstanding, (ii) all obligations of such
Person evidenced by bonds, notes, debentures or other similar instruments, (iii)
all indebtedness created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such 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, (iv) all
obligations under Interest Rate Agreements of such Person, (v) all Capital Lease
Obligations of such Person, (vi) all Indebtedness referred to in clauses (i)
through (v) above of other Persons and all dividends of other Persons, the
payment of which 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, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or become
liable for the payment of such Indebtedness, (vii) all Guaranteed Debt of such
Person, (viii) 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, (ix) the Credit Card Program Guarantee, (x)
indebtedness incurred by a real estate investment trust in which the Company or
any Subsidiary has invested pursuant to clause (ix) of the definition of
"Permitted Investments" and as to which, in the event that the Company controls
such trust, any of the Company or any Subsidiary is directly or indirectly
liable (by virtue of the Company or any such Subsidiary being the primary
obligor on, guarantor of, or otherwise liable in respect to, such indebtedness),
and (xi) any amendment, supplement, modification, deferral, renewal, extension,
refunding or refinancing of any liability which constitutes Indebtedness of the
types referred to in clauses (i) through (ix) above. For purposes hereof, the
"maximum fixed repurchase price" of any Redeemable Capital Stock which does not
have a fixed repurchase price shall be calculated in accordance with the terms
of such Redeemable Capital Stock as if such Redeemable Capital Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by, the
Fair Market Value of such Redeemable Capital Stock, such Fair Market Value to be
determined in good faith by the board of directors of the issuer of such
Redeemable Capital Stock.
"Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest rate
protection agreements (including, without limitation, interest rate swaps, caps,
floors, collars and similar agreements) and/or other types of interest rate
hedging agreements from time to time.
"Investment" means, with respect to any Person, directly or indirectly, any
advance, loan (including guarantees) or other extension of credit or capital
contribution (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others) or any
purchase, acquisition or ownership (other than ownership obtained without
making, or becoming liable, directly or indirectly, contingent or otherwise, for
the making of, any advance, loan (or the forgiveness thereof), payment,
extension of credit or capital contribution in connection therewith), by such
Person of any Capital Stock, bonds, notes, debentures or other securities issued
or owned by any other Person and all other items that would be classified as
investments on a balance sheet prepared in accordance with GAAP.
"Issue Date" means the date on which the Notes are originally issued under
the Indenture.
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"Lien" means any mortgage or deed of trust, charge, pledge, lien (statutory
or otherwise), privilege, security interest, assignment, deposit, arrangement,
easement, hypothecation, claim, preference, priority or other encumbrance upon
or with respect to any property of any kind (including any conditional sale,
capital lease or other title retention agreement, any leases in the nature
thereof, and any agreement to give any security interest), real or personal,
movable or immovable, now owned or hereafter acquired.
"Maturity" means, when used with respect to the Notes, the date on which
the principal of the Notes becomes due and payable as therein provided or as
provided in the Indenture, whether at Stated Maturity, the Offer Date, the
Change of Control Purchase Date or the redemption date and whether by
declaration of acceleration, Offer in respect of Excess Proceeds, Chance of
Control Offer in respect of a Change of Control, call for redemption or
otherwise.
"Net Cash Proceeds" means (a) with respect to any Asset Sale by any Person,
the proceeds thereof (without duplication in respect of all Asset Sales) in the
form of cash or Temporary Cash Investments including payments in respect of
deferred payment obligations when received in the form of, or stock or other
assets when disposed of for, cash or Temporary Cash Investments (except to the
extent that such obligations are financed or sold with recourse to the Company
or any Subsidiary) net of (i) brokerage commissions and other reasonable fees
and expenses (including fees and expenses of counsel and investment bankers)
related to such Asset Sale, (ii) provisions for all taxes payable as a result of
such Asset Sale, (iii) payments made to retire Indebtedness where payment of
such Indebtedness is secured by the assets or properties the subject of such
Asset Sale, (iv) amounts required to be paid to any Person (other than the
Company or any Subsidiary) owning a beneficial interest in the assets subject to
the Asset Sale and (v) appropriate amounts to be provided by the Company or any
Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against
any liabilities associated with such Asset Sale and retained by the Company or
any Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as reflected in an officers'
certificate delivered to the Trustee, and (b) 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 -- Limitation on
Restricted Payments", the proceeds of such issuance or sale in the form of cash
or Temporary Cash Investments including payments in respect of deferred payment
obligations when received in the form of, or stock or other assets when disposed
of for, cash or Temporary Cash Investments (except to the extent that such
obligations are financed or sold with recourse to the Company or any
Subsidiary), net of attorneys' fees, accountants' fees and brokerage,
consultation, underwriting and other fees and expenses actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Pari Passu Indebtedness" means any Indebtedness of the Company that is
pari passu in right of payment to the Notes.
"Permitted Indebtedness" means:
(i) Indebtedness under the Bank Credit Facility in an aggregate
principal amount at any one time outstanding not to exceed $70.0 million,
minus any permanent reductions of the amount outstanding under the Bank
Credit Facility, which reduction is a result of the Limitation on Sale of
Assets covenant of the Indenture;
(ii) Indebtedness under the Securitization Facility in an aggregate
amount not to exceed the greater of $160.0 million or 80% of the net book
value of the consolidated accounts receivable of the Company and its
Subsidiaries, calculated in accordance with GAAP;
(iii) Indebtedness of the Company (a) represented by the Notes, or (b)
that is incurred, in any amount, and in whole or in part, to (1) redeem all
of the Notes outstanding as described herein, or (2) effect a complete
defeasance or a covenant defeasance thereof as described herein; provided,
in either case, that any Indebtedness incurred under this subclause (b) is
actually applied in accordance with the applicable redemption or defeasance
provision of the Indenture;
(iv) Indebtedness of the Company outstanding on the date of the
Indenture and listed on a schedule thereto;
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(v) Indebtedness of the Company owing to a Subsidiary; provided that
any Indebtedness of the Company owing to a Subsidiary is made pursuant to
an intercompany note and is expressly subordinated in right of payment to
the payment and performance of the Company's obligations under the Notes,
and, upon an Event of Default, such Indebtedness shall not be due and
payable until such Event of Default is cured, waived or rescinded;
provided, further, that any disposition, pledge or transfer of any such
Indebtedness to a Person (other than a disposition, pledge or transfer to a
Subsidiary) shall be deemed to be an incurrence of such Indebtedness by the
Company not permitted by this clause (v);
(vi) obligations of the Company entered into in the ordinary course of
business pursuant to Interest Rate Agreements designed to protect the
Company against fluctuations in interest rates in respect of Indebtedness
of the Company as long as such obligations do not exceed the aggregate
principal amount of such Indebtedness then outstanding;
(vii) Indebtedness of the Company represented by Capital Lease
Obligations or Purchase Money Obligations or other Indebtedness incurred or
assumed in connection with the acquisition, improvement or development of
real or personal, movable or immovable, 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 the Company and any refinancings of such Indebtedness made in
accordance with subclauses (a), (b) and (c) of clause (xi) below, in an
aggregate principal amount pursuant to this clause (vii) not to exceed
$25.0 million outstanding at any time; provided that the principal amount
of any Indebtedness permitted under this clause (vii) did not in each case
at the time of incurrence exceed the cost of the acquired or constructed
asset or improvement so financed;
(viii) Indebtedness of the Company in respect of performance bonds,
surety bonds and replevin bonds provided by the Company in the ordinary
course of business;
(ix) other Indebtedness of the Company that does not exceed $50.0
million in the aggregate at any one time outstanding;
(x) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or other financial instrument drawn
against insufficient funds in the ordinary course of business, provided
that such Indebtedness is extinguished within four business days of its
incurrence; and
(xi) any renewals, extensions, substitutions, refundings, refinancings
or replacements (collectively, a "refinancing") of any Indebtedness
described in clauses (iv) and (v) of this definition of "Permitted
Indebtedness", including any successive refinancings (a) so long as the
borrower under such refinancing is the Company or, if not the Company, the
same as the borrower of the Indebtedness being refinanced, (b) the
aggregate principal amount of Indebtedness represented thereby as of the
date of the Indenture is not increased by such refinancing by an amount
greater than the lesser of (I) the stated amount of any premium or other
payment required to be paid in connection with such a refinancing pursuant
to the terms of the Indebtedness being refinanced or (II) the amount of
premium or other payment actually paid at such time to refinance the
Indebtedness, plus, in either case, the amount of expenses of the Company
incurred in connection with such refinancing, and (c) (A) in the case of
any refinancing of Indebtedness that is Subordinated Indebtedness, such new
Indebtedness is made subordinated to the Notes at least to the same extent
as the Indebtedness being refinanced and (B) in the case of Pari Passu
Indebtedness or Subordinated Indebtedness, as the case may be, such
refinancing does not reduce the Average Life to Stated Maturity or the
Stated Maturity of such Indebtedness.
"Permitted Investment" means: (i) Investments in any Subsidiary or any
Person which, as a result of such 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, the Company or any Subsidiary; (ii)
Indebtedness of the Company described under clause (v) of the definition of
"Permitted Indebtedness"; (iii) Investments in any of the Notes; (iv) Temporary
Cash Investments; (v) Investments acquired by the Company or any Subsidiary in
connection with an Asset Sale permitted under "-- Certain
Covenants -- Limitation on Sale of Assets" to the extent such Investments are
non-cash proceeds as permitted under such covenant; (vi) Investments in
existence on the date of the Indenture; (vii) Investments in the aggregate
amount of $5.0 million to purchase Capital Stock of
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any Subsidiary; (viii) any advance, loan (including guarantees) or other
extension of credit to any Person who purchases or acquires assets of the
Company or any Subsidiaries which are to be included in a business which will be
or is a party to the Franchise Program, limited to the purchase or acquisition
price of such assets; (ix) a one-time contribution of real property
independently valued at not more than $10.0 million to a real estate investment
trust which is an Affiliate of the Company and additional contributions (and/or
the non-cash component of sales in a situation where less than 75% of the
consideration was received in cash or Cash Equivalents) to such trust of real
property independently valued, which in the aggregate at the time of each
additional contribution, together with all previous additional contributions, do
not have a value in excess of 3% of the Company's Consolidated Tangible Assets
as of the end of the next immediately preceding fiscal year; and (x) any other
Investments in joint ventures, partnerships, real estate investment trusts or
other Persons reasonably related or complementary to the business of the Company
on the date of the Indenture in an aggregate amount not greater than $25.0
million at any one time outstanding. In connection with any assets or property
contributed or transferred to any Person as an Investment, such property and
assets shall be equal to the Fair Market Value (as determined by the board of
directors of the Company) at the time of Investment.
"Permitted Subsidiary Indebtedness" means:
(i) Indebtedness of a Subsidiary owing to the Company or another
Subsidiary; provided that such Indebtedness is made pursuant to an
intercompany note, and, upon an Event of Default, all amounts owing
pursuant to such Indebtedness are immediately due and payable; and
provided, further, that (a) any disposition, pledge or transfer of any such
Indebtedness to a Person (other than the Company or a Subsidiary) shall be
an incurrence of such Indebtedness by the obligor not within the definition
of "Permitted Subsidiary Indebtedness" pursuant to this clause (i), and (b)
any transaction pursuant to which any Subsidiary ceases to be a Subsidiary
shall be deemed to be the incurrence of Indebtedness by such Subsidiary
that is not within the definition of "Permitted Subsidiary Indebtedness"
pursuant to this clause (i);
(ii) Indebtedness of a Subsidiary represented by Indebtedness which
would be permitted by clause (iv), (vi), (vii), (viii), (ix), (x) or (xi)
of the definition of "Permitted Indebtedness" if incurred by the Company;
(iii) Acquired Indebtedness of a Subsidiary that would be permitted to
be incurred by the Company if such Acquired Indebtedness were being
incurred by the Company;
(iv) Indebtedness of a Subsidiary under the Securitization Facility;
(v) guarantees of Senior Indebtedness of the Company; and
(vi) guarantees of Indebtedness of Affiliates provided that the
Investment in such 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
thereof.
"Preferred Stock" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) 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 SEC (other than a registration statement
on Form S-8 or any successor form or otherwise relating to equity securities
issuable under any employee benefit plan of the Company).
"Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to the business of the Company and its Subsidiaries and any
additions and accessions thereto, which are purchased at any time after the
Notes are issued; provided that (i) 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
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Agreement") shall be entered into within 120 days after the purchase or
substantial completion of the construction of such assets and shall at all times
be confined solely to the assets so purchased or acquired, any additions and
accessions thereto and any proceeds therefrom, (ii) at no time shall the
aggregate principal amount of the outstanding Indebtedness secured thereby, be
increased, except in connection with the purchase of additions and accession
thereto and except in respect of fees and other obligations in respect of such
Indebtedness, and (iii) (A) the aggregate outstanding principal amount of
Indebtedness secured thereby (determined on a per asset basis in the case of any
additions and accessions) shall not at the time such Purchase Money Security
Agreement is entered into exceed 100% of the purchase price to the Company and
its Subsidiaries of the assets subject thereto, or (B) the Indebtedness secured
thereby shall be with recourse solely to the assets so purchased or acquired,
any additions and accessions thereto and any proceeds therefrom.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such 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, 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 or is redeemable at the option of the holder thereof at
any time prior to any such Stated Maturity, or is convertible into or
exchangeable for debt securities at any time prior to any such Stated Maturity
at the option of the holder thereof.
"Refinancing" means (i) the offering and sale of the Notes pursuant to the
Indenture, (ii) the modification of the Bank Credit Facility, and (iii) the
consummation of the tender offer by the Company for its 13% Notes outstanding
prior to the Issue Date.
"SEC" means the United States Securities and Exchange Commission, as from
time to time constituted, created under the Exchange Act, or if at any time
after the execution of the Indenture such SEC is not existing and performing the
duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.
"Securities Act" means the United States Securities Act of 1933, as
amended, or any successor statute.
"Securitization Facility" means the asset-backed securities issued by the
H&T Master Trust on December 13, 1996 in the aggregate principal amount of
$160.0 million, as such facility in whole or in part, may be amended, renewed,
extended, substituted, refinanced, restructured, replaced (including, without
limitation, with bank financing secured by receivables), supplemented or
otherwise modified from time to time (including, without limitation, any
successive renewals, extensions, substitutions, refinancing, restructurings,
replacements, supplementations or other modifications of the foregoing).
"Significant Subsidiary" means any Subsidiary that would be a "Significant
Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X
promulgated by the SEC.
"Stated Maturity" means, when used with respect to any Indebtedness or any
installment of interest thereon, the dates specified in such Indebtedness as the
fixed date on which the principal of such Indebtedness or such installment of
interest, as the case may be, is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company which is by
its terms expressly subordinated in right of payment to the Notes.
"Subsidiary" means any Person, a majority of the equity ownership or the
Voting Stock of which is at the time owned, directly or indirectly, by the
Company or by one or more other Subsidiaries, or by the Company and one or more
other Subsidiaries; provided that (i) any Unrestricted Subsidiary shall not be
deemed a Subsidiary under the Indenture, and (ii) any real estate investment
trust in which the Company or any Subsidiary has invested pursuant to clause
(ix) of the definition of "Permitted Investment" shall not be deemed a
Subsidiary under the Indenture.
"Temporary Cash Investments" means (i) any evidence of Indebtedness,
maturing not more than one year after the date of acquisition, issued by the
United States of America, or an instrumentality or agency thereof, and
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guaranteed fully as to principal, premium, if any, and interest by the United
States of America, (ii) any certificate of deposit (or, with respect to non-U.S.
banking institutions, similar instruments) maturing not more than one year after
the date of acquisition, issued by, or time deposit of, 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, in each case, that has combined capital and surplus and
undivided profits of not less than $500 million (or the foreign currency
equivalent thereof), whose debt has a rating, at the time as of which any
investment therein is made, of "P-1" (or higher) according to Moody's Investors
Service, Inc. ("Moody's") or any successor rating agency or "A-1" (or higher)
according to Standard & Poor's Rating Group, a division of McGraw Hill, Inc.
("S&P") or any successor rating agency, (iii) commercial paper, maturing not
more than one year after the date of acquisition, issued by a corporation (other
than an Affiliate or Subsidiary of the Company) organized and existing under the
laws of the United States of America with a rating, at the time as of which any
investment therein is made, of "P-1" (or higher) according to Moody's or "A-1"
(or higher) according to S&P, (iv) 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, in each case having capital and surplus in excess of $500
million (or the foreign currency equivalent thereof); provided that the
short-term debt of such commercial bank has a rating, at the time of Investment,
of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P,
and (v) 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.
"13% Notes" means the 13% Senior Subordinated Notes due 2003 of the
Company.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
exists on the Issue Date and is so designated as an Unrestricted Subsidiary on a
schedule attached to the Indenture, (ii) any subsidiary of the Company that at
the time of determination shall be an Unrestricted Subsidiary (as designated by
the board of directors of the Company, as provided below), and (iii) any
subsidiary of an Unrestricted Subsidiary. The board of directors of the Company
may designate any subsidiary of the Company (including any newly acquired or
newly formed subsidiary) to be an Unrestricted Subsidiary if all of the
following conditions apply: (a) neither the Company nor any of its Subsidiaries
provides credit support for Indebtedness of such Unrestricted Subsidiary
(including any undertaking, agreement or instrument evidencing such
Indebtedness), (b) such Unrestricted Subsidiary is not liable, directly or
indirectly, with respect to any Indebtedness other than Unrestricted Subsidiary
Indebtedness or the Bank Credit Facility, (c) any Investment by the Company in
such Unrestricted Subsidiary made as a result of designating such subsidiary an
Unrestricted Subsidiary shall not violate the provisions described under
"-- Certain Covenants -- Limitation on Unrestricted Subsidiaries" and such
Unrestricted Subsidiary is not party to any agreement, contract, arrangement or
understanding at such time with the Company or any other subsidiary of the
Company unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such other subsidiary than
those that might be obtained at the time from Persons who are not Affiliates of
the Company or, in the event such condition is not satisfied, the value of such
agreement, contract, arrangement or understanding to such Unrestricted
Subsidiary shall be deemed an Investment, and (d) such Unrestricted Subsidiary
does not own any Capital Stock in any subsidiary of the Company which is not
simultaneously being designated an Unrestricted Subsidiary. Any such designation
by the board of directors of the Company shall be evidenced to the Trustee by
filing with the Trustee a board resolution giving effect to such designation and
an officers' certificate certifying that such designation complies with the
foregoing conditions and any Investment by the Company in such Unrestricted
Subsidiary shall be deemed a Restricted Payment on the date of designation in an
amount equal to the greater of (1) the net book value of such Investment or (2)
the Fair Market Value of such Investment as determined in good faith by the
Company's board of directors. The board of directors of the Company may
designate any Unrestricted Subsidiary as a Subsidiary; provided (i) that if such
Unrestricted Subsidiary has any Indebtedness, that immediately after giving
effect to such designation, the Company could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness or Permitted Subsidiary
Indebtedness) pursuant to the restrictions under "-- Certain
Covenants -- Limitation on Indebtedness", and (ii) that all Indebtedness of such
Subsidiary shall be deemed to be incurred on the date such Unrestricted
Subsidiary becomes a Subsidiary.
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"Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary means
Indebtedness of any Unrestricted Subsidiary (i) as to which neither the Company
nor any Subsidiary is directly or indirectly liable (by virtue of the Company or
any such Subsidiary being the primary obligor on, guarantor of, or otherwise
liable in any respect to, such Indebtedness), and (ii) which, upon the
occurrence of a default with respect thereto, does not result in, or permit any
holder of any Indebtedness of the Company or any Subsidiary to declare, a
default on such Indebtedness of the Company or any Subsidiary or cause the
payment thereof to be accelerated or payable prior to its Stated Maturity.
"Voting Stock" means Capital Stock of the class or classes pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of a corporation (irrespective of whether or not at the time Capital
Stock of any other class or classes shall have or might have voting power by
reason of the happening of any contingency).
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of which
(other than qualifying shares, if any) is owned by the Company or another Wholly
Owned Subsidiary.
BOOK-ENTRY DELIVERY AND FORM
The Old Notes, which were offered and sold to qualified institutional
buyers (as defined under Rule 144A) ("QIBs") and were deposited with the Trustee
as custodian for DTC and registered in the name of Cede & Co. are registered in
book-entry form and are represented by two global notes, in definitive, fully
registered form without interest coupons (the "U.S. Global Notes").
The Old Notes (i) originally purchased by or transferred to "accredited
investors" (as defined in Rule 501(a)(1), (2), (3) and (7) under the Securities
Act) ("Institutional Accredited Investors") who are not QIBs, or (ii) held by
QIBs who elected to take physical delivery of their certificates instead of
holding their interest through the U.S. Global Notes (and which are then unable
to trade through DTC) (collectively referred to herein as the "Non-Global
Purchasers"), were issued in registered form without interest coupons
("Certificated Notes"). Upon the transfer of such Certificated Notes held by a
Non-Global Purchaser to a QIB, such Certificated Notes will, unless the
transferee requests otherwise or the U.S. Global Notes have previously been
exchanged in whole for Certificated Notes, be exchanged for an interest in the
U.S. Global Note.
The Old Notes offered and sold to persons outside the United States who
received such Old Notes pursuant to sales in accordance with Regulation S under
the Securities Act were each initially represented by a global note certificate
in fully registered form without interest coupons (the "Offshore Global Note
and, together with the U.S. Global Notes, the "Old Global Notes"). The Offshore
Global Note was deposited with the Trustee as custodian for DTC and registered
in the name of Cede & Co.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC holds securities for its participants and
facilitates the clearance and settlement of securities transactions between
participants through electronic computerized book-entry changes in accounts of
its participants, thereby eliminating the need for physical movement of
securities 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").
Except as set forth below, it is expected that the New Notes will be issued
in global form (the "New Global Notes" and, together with the Old Global Notes,
the "Global Notes"). The Company expects that pursuant to procedures established
by DTC (a) upon the issuance of the New Global Notes, DTC or its custodian will
credit on its internal system portions of the New Global Notes which shall be
comprised of the corresponding respective principal amount of the Old Global
Note to the respective accounts of persons who have accounts with such
depositary, and (b) ownership of the New Notes will be shown on, and the
transfer of ownership thereof will be effected only through, records maintained
by DTC or its nominee (with respect to interests of Participants (as
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defined)) and the records of participants (with respect to interests of persons
other than participants). Such accounts initially will be designated by the
Exchange Agent and ownership of beneficial interest in the New Global Notes will
be limited to persons who have accounts with DTC ("Participants") or persons who
hold interests through Participants. QIBs may hold their interests in the New
Global Notes directly through DTC if they are Participants in such system, or
indirectly through organizations which are Participants in such system.
So long as DTC or its nominee is the registered owner or holder of a New
Global Note, DTC or such nominee, as the case may be, will be considered the
sole record owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owners of an interest
in the Global Notes will be able to transfer that interest except in accordance
with DTC's applicable procedures in addition to those provided for under the
Indenture.
Payments of the principal of, premium (if any) and interest on the New
Global Notes will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. None of the Company, 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.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium (if any) or interest in respect of the Global Notes will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial ownership interests in the principal amount of such Global
Note, as shown on the records of DTC or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in such Global
Note held through such participants will be governed by standing instructions
and customary practices, 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.
Transfer between participants in DTC will be effected in the ordinary way
in accordance with DTC rules. If a holder requires physical delivery of
Certificated Notes for any reason, including selling the Notes to persons in
states which require delivery of the Notes or pledging the Notes, such holder
must transfer its interest in the U.S. Global Note, in accordance with the
normal procedures of DTC and the procedures set forth in the Indenture.
Transfers between participants in Euroclear and Cedel will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
DTC has advised the Company that neither DTC nor Cede & Co. will consent or
vote with respect to the Global Notes. Under its usual procedures, DTC mails an
Omnibus Proxy to the Company as soon as possible after the record date. The
Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those direct
participants to whose accounts the Global Notes are credited on the record date
(identified in a listing attached to the Omnibus Proxy).
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company 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.
Interests in the New Global Notes will be exchangeable or transferable, as
the case may be, for Certificated Notes if (i) DTC notifies the Company that it
is unwilling or unable to continue as depositary for such New Global Notes, or
DTC ceases to be a "Clearing Agency" registered under the Exchange Act, and a
successor depositary is not appointed by the Company within 90 days, or (ii) an
Event of Default has occurred and is continuing with respect to such New Notes.
Upon the occurrence of any of the events described in the preceding sentence,
the Company will cause the appropriate Certificated Notes to be delivered.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer may be deemed to be a statutory underwriter, must acknowledge
that it acquired the Old Notes for its own account as a result of market-making
activities or other trading activities and must agree that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such New Notes. This Prospectus, as it may be amended or supplemented
from time to time, may be used by Participating Broker-Dealers in connection
with resales of New Notes received in exchange for Old Notes if such Old Notes
were acquired by such Participating Broker-Dealers for their own accounts as a
result of market-making or other trading activities. Subject to certain
conditions, the Company has agreed that this Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of such New Notes. However, a Participating
Broker-Dealer who intends to use this Prospectus in connection with the resale
of New Notes received in exchange for Old Notes pursuant to the Exchange Offer
must notify the Company, or cause the Company to be notified, on or prior to the
Expiration Date, that it is a Participating Broker-Dealer. Such notice may be
given in the space provided for that purpose in the Letter of Transmittal or may
be delivered to the Exchange Agent at one of the addresses set forth herein
under "The Exchange Offer -- The Exchange Agent; Assistance". See "The Exchange
Offer -- Resales of the New Notes".
The Company will not receive any cash proceeds from the Exchange Offer. New
Notes received by broker-dealers for their own accounts in connection with 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 New 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 at 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 New Notes.
Any broker-dealer that resells New Notes that were received by it for its
own account in connection with the Exchange Offer or any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of New Notes 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.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange Act
and in accordance therewith, files reports, proxy statements and other
information with the SEC. Reports, registration statements, proxy statements and
other information filed by the Company with the SEC can be inspected and copied
at the public reference facility maintained by the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and the SEC's Regional
Offices, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can also be obtained from the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549. The SEC maintains a web site at
http://www.sec.gov that contains reports, registration statements, proxy
statements and other information regarding registrants, such as the Company,
that file electronically with the SEC.
The Company has filed a Registration Statement on Form S-4 (the
"Registration Statement") with the SEC under the Securities Act, in respect of
the New Notes offered for exchange hereby. For purposes hereof, the term
"Registration Statement" means the initial Registration Statement and any and
all amendments thereto. This Prospectus omits certain information contained in
the Registration Statement as permitted by the rules and regulations of the SEC.
For further information with respect to the Company and the New Notes offered
for exchange hereby, reference is made to the Registration Statement, including
the exhibits thereto. Statements herein concerning the contents of any contract
or other document are not necessarily complete, and in each instance reference
is made to such contract or other document filed with the SEC as an exhibit to
the Registration Statement, or otherwise, each such statement being qualified
by, and subject to, such reference in all respects.
76
79
LEGAL MATTERS
The validity, authorization and issuance of the New Notes offered hereby
will be passed upon for the Company by Benesch, Friedlander, Coplan & Aronoff
LLP of Cleveland, Ohio. George N. Aronoff, a partner in Benesch, Friedlander,
Coplan & Aronoff LLP, owns 22,359 shares of the Company's common stock.
EXPERTS
The consolidated financial statements and schedule of the Company at
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996, appearing and incorporated by reference in this Prospectus
and the Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing herein and
incorporated by reference, and are included herein and incorporated by reference
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the SEC pursuant to the
Exchange Act are incorporated herein by reference:
(1) the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1996 (file no. 0-27478) (the "Annual Report");
(2) the Company's Quarterly Report on Form 10-Q/A for the quarter ended
March 31, 1997 (file no. 0-27478);
(3) the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 (file no. 0-27478);
(4) the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 (file no. 0-27478);
(5) the Company's Current Report on Form 8-K filed with the SEC on
August 4, 1997 (file no. 0-27478);
(6) the Company's Proxy Statement for its 1997 Annual Meeting of
Stockholders filed with the SEC on October 17, 1997 (file no.
0-27478); and
(7) the description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A/A filed with the SEC on
January 3, 1996 (file no. 0-27478).
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the Expiration Date shall be deemed incorporated by reference in this Prospectus
and a part hereof from the respective date of filing each such document. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company undertakes to provide, without charge, to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, upon the written or oral request of any such person, a copy of any
and all of the documents referred to above that have been incorporated in this
Prospectus by reference, other than exhibits to such documents. Requests for
such copies should be directed to the Secretary, Bally Total Fitness Holding
Corporation, 8700 West Bryn Mawr Avenue, Chicago, Illinois 60631, telephone
(773) 380-3000.
77
80
[THIS PAGE INTENTIONALLY LEFT BLANK]
81
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
---------------
Report of independent auditors............................................... F-2
Consolidated balance sheet at December 31, 1996 and 1995..................... F-3
Consolidated statement of operations for the years ended December 31, 1996,
1995 and 1994.............................................................. F-4
Consolidated statement of stockholders' equity for the years ended December
31, 1996, 1995 and 1994.................................................... F-5
Consolidated statement of cash flows for the years ended December 31, 1996,
1995 and 1994.............................................................. F-6
Notes to consolidated financial statements for the years ended December 31,
1996, 1995 and 1994........................................................ F-8
Supplementary data:
Quarterly consolidated financial information (unaudited)................... F-22
Condensed consolidated balance sheet at September 30, 1997 (unaudited)....... F-23
Consolidated statement of operations for the nine months ended September 30,
1997 and 1996 (unaudited).................................................. F-24
Consolidated statement of stockholders' equity for the nine months ended
September 30, 1997 (unaudited)............................................. F-25
Consolidated statement of cash flows for the nine months ended September 30,
1997 and 1996 (unaudited).................................................. F-26
Notes to condensed consolidated financial statements for the nine months
ended September 30, 1997 and 1996 (unaudited).............................. F-28
F-1
82
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Bally Total Fitness Holding Corporation
We have audited the accompanying consolidated balance sheet of Bally Total
Fitness Holding Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Bally Total Fitness Holding Corporation at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
The consolidated financial statements referred to above have been restated
as discussed in the "Summary of significant accounting policies -- Restatement
and Membership revenue recognition" notes to the consolidated financial
statements.
ERNST & YOUNG LLP
Chicago, Illinois
February 25, 1997, except for the
"Summary of significant accounting
policies -- Restatement, Membership
revenue recognition and Impact of
recently issued accounting
standards" and "Income Taxes" notes,
as to which the date is July 14,
1997
F-2
83
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
(As restated)
DECEMBER 31,
---------------------
1996 1995
-------- --------
ASSETS
Current assets:
Cash and equivalents............................................... $ 16,534 $ 21,263
Installment contracts receivable, net.............................. 153,235 155,504
Deferred income taxes.............................................. 6,953
Other current assets............................................... 24,075 20,216
-------- --------
Total current assets............................................ 193,844 203,936
Long-term installment contracts receivable, net...................... 146,972 147,856
Property and equipment, at cost:
Land............................................................... 22,550 22,550
Buildings.......................................................... 108,361 106,945
Leasehold improvements............................................. 400,340 393,418
Equipment and furnishings.......................................... 99,073 119,253
-------- --------
630,324 642,166
Accumulated depreciation and amortization.......................... 304,865 293,698
-------- --------
Net property and equipment...................................... 325,459 348,468
Intangible assets, less accumulated amortization of $49,619 and
$45,117............................................................ 105,725 110,227
Deferred income taxes................................................ 13,656
Deferred membership origination costs................................ 82,140 86,253
Other assets......................................................... 25,506 39,771
-------- --------
$893,302 $936,511
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 41,565 $ 43,740
Income taxes payable............................................... 2,258 2,241
Deferred income taxes.............................................. 15,145
Accrued liabilities................................................ 55,063 64,977
Current maturities of long-term debt............................... 8,401 1,481
Deferred revenues.................................................. 265,465 285,153
-------- --------
Total current liabilities....................................... 387,897 397,592
Long-term debt, less current maturities.............................. 376,397 368,032
Tax obligation to Bally Entertainment Corporation.................... 15,200
Deferred income taxes................................................ 8,442
Other liabilities.................................................... 6,824 7,596
Deferred revenues.................................................... 98,032 107,960
Stockholders' equity:
Preferred stock, $.10 par value; 10,000,000 shares authorized; none
issued --
Series A Junior Participating; 300,000 shares authorized; none
issued.........................................................
Common stock, $.01 par value; 60,200,000 shares authorized;
12,495,161 and 11,845,161 shares issued and outstanding......... 125 118
Contributed capital................................................ 303,811 290,062
Accumulated deficit................................................ (277,733) (258,491)
Unearned compensation (restricted stock)........................... (2,051)
-------- --------
Total stockholders' equity...................................... 24,152 31,689
-------- --------
$893,302 $936,511
======== ========
See accompanying notes.
F-3
84
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share data)
(As restated)
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
Net revenues:
Membership revenues --
Initial membership fees on paid-in-full memberships
originated.......................................... $ 85,624 $ 95,695 $ 102,961
Initial membership fees on financed memberships
originated.......................................... 290,378 309,974 322,752
Dues collected........................................ 182,909 177,783 173,549
Change in deferred revenues........................... 29,791 16,813 26,975
---------- ---------- ----------
588,702 600,265 626,237
Finance charges earned................................... 36,405 36,889 34,877
Fees and other........................................... 14,092 16,220 20,929
---------- ---------- ----------
639,199 653,374 682,043
Operating costs and expenses:
Fitness center operations................................ 366,466 396,564 407,119
Member processing and collection centers................. 42,257 50,255 52,080
Advertising.............................................. 47,428 50,037 47,578
General and administrative............................... 23,586 21,603 21,925
Provision for doubtful receivables....................... 80,350 72,145 103,930
Depreciation and amortization............................ 55,940 57,359 58,856
Change in deferred membership origination costs.......... 4,113 428 6,692
---------- ---------- ----------
620,140 648,391 698,180
---------- ---------- ----------
Operating income (loss).................................... 19,059 4,983 (16,137)
Interest income............................................ 988 179
Interest expense........................................... (47,644) (43,750) (38,556)
---------- ---------- ----------
Loss before income taxes and extraordinary item............ (27,597) (38,588) (54,693)
Income tax benefit......................................... 2,700 7,188 15,213
---------- ---------- ----------
Loss before extraordinary item............................. (24,897) (31,400) (39,480)
Extraordinary gain on extinguishment of debt............... 5,655
---------- ---------- ----------
Net loss................................................... $ (19,242) $ (31,400) $ (39,480)
========== ========== ==========
Pro forma net loss reflecting income taxes
on a separate return basis............................... $ (38,469) $ (54,640)
========== ==========
Per common share (pro forma for 1995 and 1994):
Loss before extraordinary item........................... $ (2.04) $ (3.25) $ (4.61)
Extraordinary gain on extinguishment of debt............. .46
---------- ---------- ----------
Net loss................................................. $ (1.58) $ (3.25) $ (4.61)
========== ========== ==========
Average common shares outstanding (pro forma for
1995 and 1994)........................................... 12,174,601 11,845,161 11,845,161
========== ========== ==========
See accompanying notes.
F-4
85
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(As restated)
COMMON STOCK RETAINED UNEARNED
------------------- EARNINGS COMPENSATION TOTAL
NUMBER PAR CONTRIBUTED (ACCUMULATED (RESTRICTED STOCKHOLDERS'
OF SHARES VALUE CAPITAL DEFICIT) STOCK) EQUITY
---------- ----- ----------- ----------- ------------ -------------
Balance at December 31, 1993, as
originally reported............ 19,000,000 $190 $ 238,007 $ 23,118 $ $ 261,315
Cumulative effect of change in
accounting for membership
revenue........................ (210,729) (210,729)
---------- ---- --------- --------- -------- ---------
Balance at December 31, 1993, as
restated....................... 19,000,000 190 238,007 (187,611) 50,586
Net loss......................... (39,480) (39,480)
Settlement of pre-acquisition
contingency.................... (7,669) (7,669)
Forgiveness of income tax
obligation by Bally
Entertainment Corporation...... 31,400 31,400
---------- ---- --------- --------- -------- ---------
Balance at December 31, 1994..... 19,000,000 190 261,738 (227,091) 34,837
Net loss......................... (31,400) (31,400)
Effects of spin-off from Bally
Entertainment Corporation:
Forgiveness of income tax
obligation by Bally
Entertainment
Corporation................ 44,507 44,507
Increase in income tax
valuation allowance due to
adjustments to the income
tax basis of certain
assets..................... (20,147) (20,147)
Excess of sales price over
historical basis of assets
sold to Bally Entertainment
Corporation................ 3,892 3,892
Reduction in number of shares
issued and outstanding..... (7,154,839) (72) 72 --
---------- ---- --------- --------- -------- ---------
Balance at December 31, 1995..... 11,845,161 118 290,062 (258,491) 31,689
Net loss......................... (19,242) (19,242)
Common stock issued under
long-term incentive plan....... 650,000 7 4,389 (4,396) --
Capital contributions by Bally
Entertainment Corporation...... 9,360 9,360
Amortization of unearned
compensation................... 2,345 2,345
---------- ---- --------- --------- -------- ---------
Balance at December 31, 1996..... 12,495,161 $125 $ 303,811 $(277,733) $ (2,051) $ 24,152
========== ==== ========= ========= ======== =========
See accompanying notes.
F-5
86
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(As restated)
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
OPERATING:
Loss before extraordinary item........................... $ (24,897) $ (31,400) $ (39,480)
Adjustments to reconcile to cash provided (used)--
Depreciation and amortization, including amortization
included in interest expense........................ 59,124 60,701 60,760
Provision for doubtful receivables.................... 80,350 72,145 103,930
Change in operating assets and liabilities............ (119,764) (112,922) (94,150)
Other, net............................................ (114) 1,622 1,774
--------- --------- ---------
Cash provided by (used in) operating
activities..................................... (5,301) (9,854) 32,834
INVESTING:
Purchases and construction of property and equipment..... (20,612) (22,469) (21,357)
Reserve fund deposit refunded (paid) pursuant to
securitization facility............................... 10,000 (20,000)
Other, net............................................... 833 353 (19)
--------- --------- ---------
Cash used in investing activities................ (9,779) (42,116) (21,376)
FINANCING:
Debt transactions --
Proceeds from securitization facility................. 160,000 150,000
Proceeds from other long-term borrowings.............. 2,318
Repayment of securitization facility.................. (153,613)
Net repayments under revolving credit agreement....... (77,000) (3,910)
Repayments of other long-term debt.................... (2,299) (5,917) (5,149)
Debt issuance costs................................... (2,815) (6,654) (575)
--------- --------- ---------
Cash provided by (used in) debt transactions..... 3,591 60,429 (9,634)
Equity transaction --
Capital contribution by Bally Entertainment
Corporation......................................... 6,760
--------- --------- ---------
Cash provided by (used in) financing
activities..................................... 10,351 60,429 (9,634)
--------- --------- ---------
Increase (decrease) in cash and equivalents................ (4,729) 8,459 1,824
Cash and equivalents, beginning of year.................... 21,263 12,804 10,980
--------- --------- ---------
Cash and equivalents, end of year.......................... $ 16,534 $ 21,263 $ 12,804
========= ========= =========
See accompanying notes.
F-6
87
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
(In thousands)
(As restated)
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
--------- --------- --------
SUPPLEMENTAL CASH FLOWS INFORMATION:
Changes in operating assets and liabilities, net of
effects from acquisitions or sales, were as follows --
Increase in installment contracts receivable......... $ (75,491) $ (91,422) $(65,890)
(Increase) decrease in other current and other
assets............................................. (4,063) 1,589 (3,081)
Decrease in deferred membership origination costs.... 4,113 428 6,692
Decrease in accounts payable......................... (475) (498) (85)
Increase (decrease) in income taxes payable.......... (2,866) (503) (6,257)
Increase (decrease) in accrued and other
liabilities........................................ (11,191) (5,703) 1,446
Decrease in deferred revenues........................ (29,791) (16,813) (26,975)
---------- ---------- ----------
$(119,764) $(112,922) $(94,150)
========== ========== ==========
Cash payments for interest and income taxes were as
follows--
Interest paid........................................ $ 44,604 $ 42,221 $ 36,499
Interest capitalized................................. (236) (278) (253)
Income taxes paid (refunded), net.................... 166 (6,685) (8,956)
Investing and financing activities exclude the following
non-cash activities--
Forgiveness of income tax obligations by Bally
Entertainment Corporation/Hilton Hotels
Corporation........................................ $ 15,200 $ 44,507 $ 31,400
Acquisition of property and equipment through capital
leases............................................. 5,266 2,445
Common stock issued under long-term incentive plan... 4,396
Capital contribution by Bally Entertainment
Corporation........................................ 2,600
Increase in income tax valuation allowance due to
adjustments to the income tax basis of certain
assets upon spin-off from Bally Entertainment
Corporation........................................ 20,147
Excess of sales price over historical basis of assets
sold to Bally Entertainment Corporation............ 3,892
Reduction of intangible assets resulting from
settlement of pre-acquisition contingency.......... 10,331
See accompanying notes.
F-7
88
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements include the accounts of
Bally Total Fitness Holding Corporation (the "Company") and the subsidiaries
which it controls. The Company, through its subsidiaries, is a nationwide
commercial operator of fitness centers with approximately 320 facilities
concentrated in 27 states and Canada. The Company operates in one industry
segment, and all significant revenues arise from the commercial operation of
fitness centers, primarily in major metropolitan markets in the United States.
Unless otherwise specified in the text, references to the Company include the
Company and its subsidiaries.
The Company was a wholly owned subsidiary of Bally Entertainment
Corporation ("Entertainment") until the consummation of Entertainment's spin-off
of the Company. On November 6, 1995, the Board of Directors of Entertainment
declared a distribution in the form of a dividend (the "Spin-off") to holders of
record of its common stock as of the close of business on November 15, 1995 (the
"Record Date") on the basis of one share of common stock, par value $.01 per
share (the "Common Stock") of the Company, along with an associated stock
purchase right (a "Right") issued pursuant to a stockholder rights plan (the
"Stockholders Rights Plan"), for every four shares of Entertainment common stock
held on the Record Date. On January 9, 1996 (the "Distribution Date"),
11,845,161 shares of Common Stock were distributed. For financial accounting
purposes, the Company has reflected the effect of the Spin-off as of December
31, 1995.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which require the
Company's management to make estimates and assumptions that affect the amounts
reported therein. Actual results could vary from such estimates.
Restatement
The Staff of the Securities and Exchange Commission (the "SEC Staff") has
advised the Company, in connection with an offering of Common Stock, it requires
all registrants operating fitness centers with membership plans that include
initial membership fees to follow a "deferral method" of accounting with respect
to the recognition of such initial membership fees. The Company's fitness
centers primarily offer a dues membership, which permits members, upon paying
initial membership fees, which may be financed, to maintain their membership on
a month-to-month basis as long as monthly dues payments are made. Since 1985,
the Company has recognized the initial membership fee portion of the membership
as revenue at the time the membership was sold (when contractually enforceable)
and deferred the dues portion of such membership (when the dues were waived or
prepaid) under a method that approximated the "selling and service" method. In
connection with an offering of Common Stock, the SEC Staff informed the Company
it no longer agreed with this methodology and the Company should change its
method of recognizing initial membership fees to a "deferral method", which
recognizes the initial membership fee over the weighted average expected life of
the memberships sold. Following a series of extensive discussions with the SEC
Staff, the Company has agreed to restate its consolidated financial statements
for all years presented to this new method. See "-- Membership revenue
recognition". Accordingly, the accompanying consolidated financial statements
have been restated from those originally reported to reflect the resolution of
these discussions between the Company and the SEC Staff regarding revenue
recognition methods. The deferral of historical revenues resulting from the
change in the method of recognizing membership revenue had no impact on the
Company's liquidity or cash flows; and
F-8
89
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
summarized financial information illustrating the effect of the restatement on
the Company's consolidated financial statements is as follows:
1996 1995 1994
--------------------- --------------------- ---------------------
AS AS AS
ORIGINALLY AS ORIGINALLY AS ORIGINALLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- --------
Financial position --
Deferred membership
origination costs..... $ -- $ 82,140 $ -- $ 86,253
Current deferred
revenues.............. 55,927 265,465 61,881 285,153
Long-term deferred
revenues.............. 26,440 98,032 29,686 107,960
Stockholders' equity..... 216,507 24,152 240,347 31,689
Results of operations --
Net revenues............. $ 625,640 $640,187 $ 661,740 $653,553 $ 661,505 $682,043
Operating income
(loss)................ 3,744 20,047 7,591 5,162 (37,248) (16,137)
Loss before extraordinary
item.................. (41,200) (24,897) (25,160) (31,400) (50,791) (39,480)
Net loss................. (35,545) (19,242) (25,160) (31,400) (50,791) (39,480)
Net loss per common share
(pro forma for 1995
and 1994)............. (2.92) (1.58) (3.08) (3.25) (6.44) (4.61)
In addition, certain reclassifications (primarily interest income) have
been made to the financial statements to conform with the current 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 is provided on the
straight-line method over the estimated economic lives of the related assets and
amortization of leasehold improvements is provided on the straight-line method
over the lesser of the estimated economic lives of the improvements or the lease
periods. Depreciation and amortization of property and equipment was $48,444,
$51,999 and $53,476 for 1996, 1995 and 1994, respectively.
Deferred finance costs
Deferred finance costs are amortized over the terms of the related debt
using the bonds outstanding method. Included in "Other assets" at December 31,
1996 and 1995 were deferred finance costs of $8,252 and $10,971, respectively,
net of accumulated amortization of $4,430 and $4,034, respectively.
Intangible assets
Intangible assets consist principally of cost in excess of net assets of
acquired businesses (goodwill), which is being amortized on the straight-line
method over periods ranging up to forty years from dates of acquisition, and
amounts assigned to acquired operating lease rights, which are being amortized
on the straight-line method over the remaining lease periods.
F-9
90
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
The Company evaluates annually whether the remaining estimated useful life
of goodwill may warrant revision or the remaining balance of goodwill may not be
recoverable, generally considering expectations of future profitability and cash
flows (undiscounted and without interest charges) on a consolidated basis. If
the sum of the Company's expected future cash flows was less than the carrying
value of the Company's long-lived assets and identifiable intangibles, an
impairment loss would be recognized equal to the amount by which the carrying
value of the Company's long-lived assets and identifiable intangibles exceeded
their fair value. Based on present operations and strategic plans, the Company
believes that no impairment of goodwill exists at December 31, 1996. However, if
future operations do not perform as expected, or if the Company's strategic
plans for its business were to change, a reduction in the carrying value of
these assets may be required.
Membership revenue recognition
The Company's fitness centers primarily offer a dues membership, which
permits members, upon paying initial membership fees, which may be financed, to
maintain their membership on a month-to-month basis as long as monthly dues
payments are made. Initial membership fees may be paid-in-full when members join
or may be financed via installment contracts over periods ranging up to 36
months. Revenues from initial membership fees are deferred and recognized
straight-line over the weighted average expected life of the memberships, which
for paid-in-full memberships and financed memberships sold after December 31,
1993 has been calculated to be 36 months and 22 months, respectively (previously
34 months and 20 months, respectively). Costs directly related to the
origination of memberships (substantially all of which are sales commissions
paid, which are included in "Fitness center operations") are also deferred and
are amortized using the same methodology as for initial membership fees
described above. Dues revenue is recorded as monthly services are provided.
Accordingly, when dues are prepaid, the prepaid portion is deferred and
recognized over the applicable term. Installment contracts bear interest at, or
are adjusted for financial accounting purposes at the time the contracts are
sold to, rates for comparable consumer financing contracts. Unearned finance
charges are amortized over the term of the contracts on the
sum-of-the-months-digits method, which approximates the interest method.
Components of deferred revenues as of December 31, 1996 and 1995 are as
follows:
1996 1995
------------------------------- -------------------------------
CURRENT LONG-TERM TOTAL CURRENT LONG-TERM TOTAL
-------- --------- -------- -------- --------- --------
Paid-in-full initial
membership fees
deferred................. $ 75,614 $55,278 $130,892 $ 81,563 $ 58,400 $139,963
Financed initial membership
fees deferred............ 148,251 31,981 180,232 162,918 35,967 198,885
Prepaid dues............... 41,600 10,773 52,373 40,672 13,593 54,265
-------- -------- -------- -------- -------- --------
$265,465 $98,032 $363,497 $285,153 $ 107,960 $393,113
======== ======== ======== ======== ======== ========
F-10
91
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
Components of the change in deferred revenues for the years ended December
31, 1996, 1995 and 1994 are as follows:
1996 1995 1994
--------- --------- ---------
Paid-in-full initial memberships fees --
Originating........................................ $ (85,624) $ (95,695) $(102,961)
Recognized......................................... 94,870 116,608 138,654
--------- --------- ---------
Decrease in deferral............................ 9,246 20,913 35,693
Financed initial membership fees --
Originating........................................ (290,378) (309,974) (322,752)
Less provision for doubtful receivables............ 80,350 72,145 103,930
--------- --------- ---------
Originating, net................................... (210,028) (237,829) (218,822)
Recognized......................................... 228,681 220,885 215,270
--------- --------- ---------
Decrease (increase) in deferral................. 18,653 (16,944) (3,552)
Decrease (increase) in prepaid dues.................. 1,892 12,844 (5,166)
--------- --------- ---------
Change in deferred revenues.......................... $ 29,791 $ 16,813 $ 26,975
========= ========= =========
Components of the change in deferred membership origination costs for the
years ended December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994
--------- --------- ---------
Incurred (substantially all of which are sales
commissions paid, which are included in "Fitness
center operations")................................ $ (77,257) $ (82,720) $ (85,704)
Amortized............................................ 81,370 83,148 92,396
--------- --------- ---------
Change in deferred membership origination costs...... $ 4,113 $ 428 $ 6,692
========= ========= =========
Income taxes
For tax periods after January 9, 1996, the Company is required to file its
own separate consolidated federal income tax return. For tax periods prior to
and including January 9, 1996, taxable income or loss of the Company was
included in the consolidated federal income tax return of Entertainment.
Pursuant to a tax sharing agreement with Entertainment, income taxes were
allocated to the Company based on amounts the Company would pay or receive if it
filed a separate consolidated federal income tax return, except that the Company
received from Entertainment an amount equal to the tax benefit of the Company's
net operating losses and tax credits, if any, that could be utilized in
Entertainment's consolidated federal income tax return, whether or not such
losses or credits could be utilized by the Company on a separate return basis.
As a result of the Spin-off, the Company and Entertainment entered into the Tax
Allocation and Indemnity Agreement that defines the parties' rights and
obligations with respect to deficiencies and refunds of federal income taxes for
tax periods through January 9, 1996. In connection therewith, Entertainment
assumed substantially all responsibility for any federal income tax adjustments
related to the Company for tax periods through January 9, 1996. The Tax
Allocation and Indemnity Agreement was amended in 1996 to include a portion of
the Company's losses in Entertainment's consolidated federal income tax return.
As a result, capital contributions totalling $9,360 were received by the Company
($6,760 in cash and $2,600 as an offset to certain indebtedness) representing a
portion of the benefit that Entertainment receives from the utilization of the
Company's loss carrybacks.
F-11
92
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
Loss per common share
Loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the year, which
totalled 12,174,601 shares for 1996. Certain restricted stock was issued subject
to forfeiture unless certain conditions are met. These contingent shares are
considered common stock equivalents and are excluded from the loss per share
computation until the conditions are met because their effect would be
anti-dilutive.
Impact of recently issued accounting standards
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", which
provides new accounting and reporting standards for sales, securitizations, and
servicing of receivables and other financial assets, secured borrowing and
collateral transactions, and extinguishments of liabilities occurring after
December 31, 1996. SFAS No. 125 addresses whether a transfer of financial assets
constitutes a sale and, if so, the determination of any resulting gain or loss.
SFAS No. 125 is based on a "financial-components approach" that focuses on
control. Under this approach, following a transfer of financial assets
(including portions of financial assets), an entity recognizes the assets it
controls and liabilities it has incurred, and derecognizes financial assets for
which control has been surrendered and financial liabilities that have been
extinguished. The Company has determined that SFAS No. 125 does not have any
impact on the accounting for its securitization facility.
EXTRAORDINARY ITEM
The extraordinary gain on extinguishment of debt for 1996 consists of (i) a
gain of $9,880 ($.81 per share), net of income taxes of $5,320, resulting from a
$15,200 tax obligation to Entertainment which was forgiven as part of the
December 1996 merger (the "Merger") of Entertainment with and into Hilton Hotels
Corporation ("Hilton") and (ii) a charge of $4,225 ($.35 per share), net of
income taxes of $2,270, resulting from the refinancing of the Company's
securitization facility.
INSTALLMENT CONTRACTS RECEIVABLE
1996 1995
-------- --------
Current:
Installment contracts receivable............................. $226,173 $244,522
Less --
Unearned finance charges.................................. 24,467 27,128
Allowance for doubtful receivables and cancellations...... 48,471 61,890
-------- --------
$153,235 $155,504
======== ========
Long-term:
Installment contracts receivable............................. $195,978 $211,549
Less --
Unearned finance charges.................................. 11,382 13,055
Allowance for doubtful receivables and cancellations...... 37,624 50,638
-------- --------
$146,972 $147,856
======== ========
The carrying amount of installment contracts receivable at December 31,
1996 and 1995 approximates fair value based on discounted cash flow analyses,
using interest rates in effect at the end of each year comparable to similar
consumer financing contracts.
F-12
93
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
ACCRUED LIABILITIES
1996 1995
-------- --------
Payroll and benefit-related liabilities........................ $ 16,384 $ 18,263
Interest....................................................... 11,938 12,041
Taxes other than income taxes.................................. 3,853 7,389
Other.......................................................... 22,888 27,284
-------- --------
$ 55,063 $ 64,977
======== ========
LONG-TERM DEBT
1996 1995
-------- --------
Nonsubordinated:
Securitization facility...................................... $160,000 $150,000
Revolving credit agreement................................... -- --
Capital lease obligations.................................... 6,686 2,176
Other secured and unsecured obligations...................... 18,112 17,337
Subordinated:
13% Senior Subordinated Notes due 2003....................... 200,000 200,000
-------- --------
Total long-term debt........................................... 384,798 369,513
Current maturities of long-term debt........................... (8,401) (1,481)
-------- --------
Long-term debt, less current maturities........................ $376,397 $368,032
======== ========
In December 1996, the Company refinanced its $150,000 securitization
facility by completing a private placement of asset-backed securities (the
"Securitization") pursuant to which $145,500 of 8.43% Accounts Receivable Trust
Certificates and $14,500 of Floating Rate Accounts Receivable Trust Certificates
(the "Floating Certificates") were issued as undivided interests in the H&T
Master Trust (the "Trust"). The Floating Certificates bear interest (8.175% at
December 31, 1996) at 2.57% above the London Interbank Offer Rate ("LIBOR"),
with the interest rate on the Floating Certificates capped at 9.43% pursuant to
an interest rate cap agreement. The Trust was created for the issuance of
asset-backed securities and was formed pursuant to a pooling and servicing
agreement. The Trust includes a portfolio of substantially all of the Company's
installment contracts receivable from membership sales and the proceeds thereof.
The amount by which installment contracts receivable in the Trust exceed the
$160,000 principal amount of certificates issued by the Trust is generally
retained by the Company. The Company services the installment contracts
receivable held by the Trust and earns a servicing fee which approximates the
servicing costs incurred by the Company. Through July 1999, the principal amount
of the certificates remains fixed and collections of installment contracts
receivable flow through to the Company in exchange for the securitization of
additional installment contracts receivable, except that collections are first
used to fund interest requirements. The amortization period commences in August
1999, after which collections of installment contracts receivable will be used
first to fund interest requirements and then to repay principal on the
certificates. The amortization period ends upon the earlier to occur of the
certificates being repaid in full or August 2002.
The Company's revolving credit agreement was amended in February 1997 to
provide for a $20,000 line of credit, which is reduced by the amount of any
outstanding letters of credit in excess of $10,000 (which excess may not exceed
$10,000). The maximum amount available under this revolving credit agreement,
including letters of credit, is $30,000. The rate of interest on borrowings is
at the Company's option, based upon either the agent bank's prime rate plus 2%
or a Eurodollar rate plus 3%. A fee of 2.25% on outstanding letters of credit is
payable quarterly. A commitment fee of 1/2 of 1% is payable quarterly on the
unused portion of the credit facility. At December 31, 1996, the entire line of
credit was unused and outstanding letters of credit totalled $12,687. The
F-13
94
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
revolving credit agreement is secured by substantially all real and personal
property (excluding installment contracts receivable) of the Company.
The Company leases certain fitness equipment under capital leases expiring
in periods ranging from three to five years. Included in "Property and
equipment" at December 31, 1996 and 1995 were assets recorded under capital
leases of $11,981 and $6,018, respectively, net of accumulated amortization of
$3,318 and $1,611, respectively.
The 13% Senior Subordinated Notes due 2003 (the "13% Notes") are not
subject to any sinking fund requirement, but may be redeemed beginning in
January 1998, in whole or in part, with premiums ranging from 6.5% in 1998 to
zero in 2000 and thereafter. The payment of the 13% Notes is subordinated to the
prior payment in full of all senior indebtedness of the Company, as defined
(approximately $198,000 at December 31, 1996).
The Company is restricted from paying cash dividends by the terms of its
13% Notes and its revolving credit agreement. The covenants also limit the
amounts available for capital expenditures, restrict additional borrowings, and
require maintenance of certain financial ratios.
Maturities of long-term debt and future minimum payments under capital
leases together with the present value of future minimum rentals as of December
31, 1996 are as follows:
LONG-TERM CAPITAL
DEBT LEASES TOTAL
--------- ------- --------
1997................................................ $ 6,725 $ 2,398 $ 9,123
1998................................................ 6,711 2,420 9,131
1999................................................ 66,187 1,956 68,143
2000................................................ 95,414 1,341 96,755
2001................................................ 743 267 1,010
Thereafter.......................................... 202,332 202,332
-------- ------ --------
378,112 8,382 386,494
Less amount representing interest................... 1,696 1,696
-------- ------ --------
$ 378,112 $ 6,686 $384,798
======== ====== ========
The fair value of the Company's long-term debt at December 31, 1996 and
1995 approximates its carrying amount, except for the 13% Notes which had a fair
market value (based on quoted market prices) of $190,875 and $161,500 at
December 31, 1996 and 1995, respectively. The fair values are not necessarily
indicative of the amounts the Company could acquire the debt for in a purchase
or redemption.
INCOME TAXES
The income tax provision (benefit) applicable to loss before income taxes
and extraordinary item consists of the following:
1996 1995 1994
------- ------- --------
Federal (all current)................................ $(3,050) $(7,069) $(15,160)
State and other (all current)........................ 350 (119) (53)
------- -------- --------
$(2,700) $(7,188) $(15,213)
======= ======== ========
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
F-14
95
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
deferred tax assets and liabilities as of December 31, 1996 and 1995, along with
their classification, are as follows:
1996 1995
----------------------- -----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
--------- ----------- --------- -----------
Installment contract revenues............... $ 27,466 $ $ 73,503 $
Amounts not yet deducted for tax purposes:
Bad debts.............................. 33,509 48,630
Other.................................. 14,275 13,253
Amounts not yet deducted for book purposes:
Deferred membership origination
costs................................ 32,412 38,064
Depreciation and capitalized costs.......... 2,308 5,791
Tax loss carryforwards...................... 118,313 49,817
Other, net.................................. 1,460 2,012
-------- ------- -------- -------
193,563 $36,180 185,203 $45,867
======= =======
Valuation allowance......................... (158,872) (140,825)
-------- --------
$ 34,691 $ 44,378
======== ========
Current..................................... $ 7,420 $22,565 $ 33,964 $27,011
Long-term................................... 27,271 13,615 10,414 18,856
-------- ------- -------- -------
$ 34,691 $36,180 $ 44,378 $45,867
======== ======= ======== =======
Upon consummation of the Spin-off, a portion of Entertainment's federal tax
loss and Alternative Minimum Tax ("AMT") credit carryforwards were allocated to
the Company pursuant to U.S. Treasury Regulations. The amount of carryforwards
allocated to the Company may ultimately be different as a result of Internal
Revenue Service (the "IRS") adjustments. At December 31, 1996, estimated federal
AMT credit and tax loss carryforwards of $2,987 and $243,508, respectively, have
been recorded by the Company. The AMT credits can be carried forward
indefinitely, while the tax loss carryforwards expire through 2011. In addition,
the Company has substantial state tax loss carryforwards which begin to expire
in 1997 and fully expire through 2011. Based upon the Company's past performance
and the expiration dates of its carryforwards, the ultimate realization of all
of the Company's deferred tax assets can not be assured. Accordingly, a
valuation allowance has been recorded to reduce deferred tax assets to a level
which, more likely than not, will be realized.
A reconciliation of the income tax benefit with amounts determined by
applying the U.S. statutory tax rate to loss before income taxes and
extraordinary item is as follows:
1996 1995 1994
-------- -------- --------
Benefit at U.S. statutory tax rate (35%)............... $ (9,659) $(13,506) $(19,143)
Add (deduct):
Operating losses without a current year tax
benefit........................................... 5,509 4,904 3,309
State income taxes, net of related federal income tax
effect and valuation allowance.................... 770 96 (695)
Amortization of cost in excess of acquired assets.... 1,411 1,391 1,393
Prior years' taxes................................... (5) (336) (327)
Other, net........................................... (726) 263 250
-------- -------- --------
Income tax benefit..................................... $ (2,700) $ (7,188) $(15,213)
======== ======== ========
In May 1994, the Company, Entertainment and the IRS reached a settlement
with respect to certain income tax matters. As the Company adequately provided
deferred and current taxes in connection therewith, the settlement did not have
an adverse effect on the Company's consolidated financial position or results of
F-15
96
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
operations. For financial accounting purposes, this settlement resulted in a
reversal of previously recorded pre-acquisition contingencies totaling $10,331,
which was reflected as a reduction of intangible assets. Since Entertainment had
agreed to indemnify the Company for a substantial portion of such contingencies,
the settlement resulted in a $7,669 reduction of contributed capital.
STOCKHOLDERS' EQUITY
The Series A Junior Participating Preferred Stock, $.10 par value (the
"Series A Junior Stock"), if issued, will have a minimum preferential quarterly
dividend payment equal to the greater of (i) $1.00 per share and (ii) an amount
equal to 100 times the aggregate dividends declared per share of Common Stock
during the related quarter. In the event of liquidation, the holders of the
shares of Series A Junior Stock will be entitled to a preferential liquidation
payment equal to the greater of (a) $100 per share and (b) an amount equal to
100 times the liquidation payment made per share of Common Stock. Each share of
Series A Junior Stock will have 100 votes, voting together with the shares of
Common Stock. Finally, in the event of any merger, consolidation or other
transaction in which shares of Common Stock are exchanged, each share of Series
A Junior Stock will be entitled to receive 100 times the amount received per
share of Common Stock. These rights are protected by customary antidilution
provisions.
The Board of Directors of the Company adopted the Stockholder Rights Plan
and issued and distributed a Right for each share of Common Stock distributed to
Entertainment stockholders pursuant to the Spin-off. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Junior Stock at a price of $40.00 per one one-hundredth of a share of
Series A Junior Stock, subject to adjustment (the "Purchase Price").
The Rights are not exercisable or transferable apart from the Common Stock
until the occurrence of one of the following: (i) ten days (or such later date
as may be determined by action of the Board of Directors of the Company prior to
such time as any person or group of affiliated persons becomes an Acquiring
Person) after the date of public announcement that a person (other than an
Exempt Person, as defined below) or group of affiliated or associated persons
has acquired, or obtained the right to acquire, beneficial ownership of 10% or
more of the Common Stock (an "Acquiring Person"), or (ii) ten days after the
date of the commencement of a tender offer or exchange offer by a person (other
than an Exempt Person) or group of affiliated or associated persons, the
consummation of which would result in beneficial ownership by such person or
group of 20% or more of the outstanding shares of Common Stock. "Exempt Persons"
include the Company, any subsidiary of the Company, employee benefit plans of
the Company, directors of the Company on January 5, 1996 who are also officers
of the Company, Entertainment and any person holding the warrant to purchase
shares of Common Stock initially issued to Entertainment.
In the event that, at any time after a person or group of affiliated or
associated persons has become an Acquiring Person, (i) the Company consolidates
with or merges with or into any person and is not the surviving corporation,
(ii) any person merges with or into the Company and the Company is the surviving
corporation, but the shares of Common Stock are changed or exchanged, or (iii)
50% or more of the Company's assets or earning power are sold, each holder of a
Right will thereafter have the right to receive, upon the exercise thereof at
the then current exercise price of the Right, that number of shares of Common
Stock (or under certain circumstances, an economically equivalent security or
securities) of such other person which at the time of such transaction would
have a market value of two times the exercise price of the Right. The Rights,
which do not have voting privileges, are subject to adjustment to prevent
dilution and expire on January 5, 2006. The Company may redeem or exchange all,
but not less than all, of the Rights at a price of $.01 per Right, payable in
cash or Common Stock, at any time prior to such time as a person or group of
affiliated or associated persons becomes an Acquiring Person.
F-16
97
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights that are or were owned beneficially by the
Acquiring Person (which, from and after the later of the Rights distribution
date and the date of the earliest of any such events, will be void), will
thereafter have the right to receive, upon exercise thereof at the then current
exercise price of the Right, that number of shares of Common Stock (or, under
certain circumstances, an economically equivalent security or securities of the
Company) having a market value of two times the exercise price of the Right.
At December 31, 1996, 4,492,805 shares of Common Stock were reserved for
future issuance (2,942,805 shares in connection with outstanding warrants and
1,550,000 shares in connection with certain stock plans).
SAVINGS PLANS
The Company sponsors several defined contribution plans that provide
retirement benefits for certain full-time employees. Eligible employees may
elect to participate by contributing a percentage of their pre-tax earnings to
the plans. Employee contributions to the plans, up to certain limits, are
matched in various percentages by the Company. The expense related to the plans
totaled $974, $557 and $807 in 1996, 1995 and 1994, respectively.
STOCK PLANS
In January 1996, the Board of Directors of the Company adopted the 1996
Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). The
Directors' Plan provides for the grant of non-qualified stock options to
non-employee directors of the Company. Initially, 100,000 shares of Common Stock
were reserved for issuance under the Directors' Plan and at December 31, 1996,
80,000 shares of Common Stock were available for future grant under the
Directors' Plan. Stock options may not be granted under the Directors' Plan
after January 3, 2006.
Pursuant to the Directors' Plan, non-employee directors of the Company are
granted an option to purchase 5,000 shares of Common Stock upon the commencement
of service on the Board of Directors, with another option to purchase 5,000
shares of Common Stock granted on the second anniversary thereof. Options under
the Directors' Plan are generally granted with an exercise price equal to the
fair market value of the Common Stock at the date of grant. Option grants under
the Directors' Plan become exercisable in three equal annual installments
commencing one year from the date of grant and have a 10-year term.
Also in January 1996, the Board of Directors of the Company adopted the
1996 Long-Term Incentive Plan (the "Incentive Plan"). The Incentive Plan
provides for the grant of non-qualified stock options, incentive stock options
and compensatory restricted stock awards (collectively "Awards") to officers and
key employees of the Company. Initially, 2,100,000 shares of Common Stock were
reserved for issuance under the Incentive Plan and at December 31, 1996, 125,340
shares of Common Stock were available for future grant under the Incentive Plan.
Awards may not be granted under the Incentive Plan after January 3, 2006.
Pursuant to the Incentive Plan, non-qualified stock options are generally
granted with an exercise price equal to the fair market value of the Common
Stock at the date of grant. Incentive stock options must be granted at not less
than the fair market value of the Common Stock at the date of grant. Option
grants become exercisable at the discretion of the Compensation Committee of the
Board of Directors (the "Compensation Committee"). Option grants in 1996 under
the Incentive Plan have a 10-year term and are exercisable in four equal annual
installments commencing one year from the date of grant except, if at any time
on or before the third anniversary of the date of grant the fair market value of
the Common Stock reaches a targeted stock price, vesting of such options is
accelerated so that they become exercisable in three equal annual installments
commencing one year from the date of grant.
F-17
98
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
A summary of 1996 stock option activity under the Directors' Plan and
Incentive Plan is as follows:
NUMBER WEIGHTED-
OF SHARES AVERAGE RANGE OF
REPRESENTED EXERCISE EXERCISE
BY OPTIONS PRICE PRICES
----------- --------- --------------
Granted.................................... 1,594,580 $ 4.23 $4.125 - 5.125
Forfeited.................................. (249,920) 4.125 4.125
---------
Outstanding at December 31, 1996, none of
which were exercisable................... 1,344,660 4.25 4.125 - 5.125
=========
The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its stock options because, as discussed below,
the alternative fair value accounting provided for under SFAS No. 123,
"Accounting for Stock-Based Compensation" requires use of option valuation
models that were not developed for use in valuing stock options. Under APB No.
25, because the exercise price of the Company's stock options equals the market
price of the Common Stock on the date of grant, no compensation expense is
recognized.
SFAS No. 123 requires pro forma net loss and loss per share information be
provided as if the Company had accounted for stock options under the fair value
method prescribed by SFAS No. 123, which for 1996 is $20,032 and $1.65,
respectively. In addition, the weighted-average fair value of stock options
granted in 1996 was $1.93 per share. The fair value for stock options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1996: risk-free interest rate of
6.22%; no dividend yield; volatility factor of the expected market price of the
Common Stock of 0.413; and a weighted-average expected life of the options of
five years. Pro forma results under SFAS No. 123 in 1996 are not likely to be
representative of future pro forma results because, for example, options vest
over several years and additional awards may be made in future years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
Pursuant to the Incentive Plan, restricted stock awards are rights granted
to an employee to receive shares of stock without payment but subject to
forfeiture and other restrictions as set forth in the Incentive Plan. Generally,
the restricted stock awarded, and the right to vote such stock or to receive
dividends thereon, may not be sold, exchanged or otherwise disposed of during
the restricted period. Except as otherwise determined by the Compensation
Committee, the restrictions and risks of forfeiture will lapse in three equal
annual installments commencing one year after the date of grant.
In 1996, the Compensation Committee awarded 650,000 shares of restricted
Common Stock to certain executive officers of the Company. Restrictions on these
shares generally lapse based upon the market price of the Common Stock reaching
certain targeted stock prices unless less than half of such shares awarded vest
within two years after the date of grant, at which time a number of shares will
vest so that the total number of vested shares equals 50% of the original
grants. In addition, a recipient of these restricted stock awards will receive a
cash payment from the Company upon the lapse of restrictions in an amount
sufficient to insure that the recipient will receive the Common Stock net of all
taxes imposed upon the recipient because of the receipt of such Common Stock and
cash payment. Restrictions applicable to 433,355 of these shares generally
lapsed upon reaching certain targeted stock prices in 1996 and, accordingly, the
fair value of these shares ($2,345) was amortized to
F-18
99
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
expense in connection therewith. The weighted-average fair value of restricted
Common Stock awarded in 1996 was $4.87 per share as determined under SFAS No.
123.
Prior to the Spin-off, certain officers and key employees of the Company
participated in the 1989 Incentive Plan of Entertainment (the "1989 Plan"),
pursuant to which Entertainment granted these individuals options (generally
becoming exercisable in three equal annual installments commencing one year
after the date of grant) to purchase Entertainment common stock at a price equal
to the fair market value of the stock at the date of grant. Pursuant to the 1989
Plan, following the Spin-off, these officers and key employees no longer
affiliated with Entertainment could no longer participate in this plan. As a
result, their unexercisable options were cancelled on January 9, 1996, and their
vested options terminated 90 days thereafter to the extent not exercised prior
thereto.
COMMITMENTS AND CONTINGENCIES
Operating leases
The Company leases various fitness center facilities, office facilities,
and equipment under operating leases expiring in periods ranging from one to
twenty-five years excluding optional renewal periods. Certain of the leases
contain contingent rental provisions generally related to cost of living
criteria or revenues of the respective fitness centers. Rent expense under
operating leases was $86,717, $85,857 and $83,288 for 1996, 1995 and 1994,
respectively.
Minimum future rent payments under long-term noncancellable operating
leases in effect as of December 31, 1996, exclusive of taxes, insurance, other
expenses payable directly by the Company and contingent rent, are $82,441,
$82,638, $81,295, $75,248 and $70,036 for 1997 through 2001, respectively, and
$447,357 thereafter.
Included in the amounts above are leases with real estate partnerships in
which certain of the Company's current or former executive officers have
ownership interests. Rent expense under these leases was $2,002, $1,991 and
$1,953 for 1996, 1995 and 1994, respectively. In addition, these leases require
minimum rent payments of $1,954 for 1997.
Litigation
A class action entitled Jackson v. Health & Tennis Corporation of America
was filed in the state district court in Bexar County, Texas on May 8, 1995. The
complaint alleges that the defendant, a subsidiary of the Company, charged
excessive amounts on its financed memberships in violation of the Texas Credit
Code and the Texas Deceptive Trade Practices -- Consumer Protection Act. The
relief sought is damages equal to the alleged overpayments and statutory
remedies. The Company is currently unable to estimate the amount sought in this
action because the potential size of the class and the amount of damages for
each member of the putative class are currently unknown. The Company is
vigorously defending this action. The outcome of this litigation is not
currently determinable and, consequently, the Company cannot predict whether it
will have a material adverse effect on the Company's financial condition or
results of operations in any future period.
The Company is involved in various other claims and lawsuits incidental to
its business, including claims arising from accidents at its fitness centers. In
the opinion of management, the Company is adequately insured against such claims
and lawsuits, and any ultimate liability arising out of such claims and lawsuits
will not have a material adverse effect on the financial condition or results of
operations of the Company.
TRANSACTIONS WITH ENTERTAINMENT
In connection with the Spin-off, the Company issued Entertainment a warrant
(the "Warrant") entitling Entertainment to acquire 2,942,805 shares of Common
Stock at an exercise price of $5.26 per share (equal to 110% of the average
daily closing price of the Common Stock for the twenty consecutive trading days
beginning
F-19
100
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
on the first trading day after the Distribution Date). At the time of the
Merger, Entertainment sold the Warrant to two directors and executive officers
of the Company. The Warrants are exercisable until December 31, 2005.
In January 1996, the Company and Entertainment entered into a Trademark
License Agreement pursuant to which Entertainment (Hilton after the Merger)
licenses the use of the name "Bally" and certain trademarks, trade names and
servicemarks to the Company in connection with its fitness center business. The
license is for a period of ten years, subject to termination in certain
circumstances. The Company paid no royalty or license fee for the first year and
pays a fee of $1,000 per year thereafter. Following the initial ten-year term,
the Company has an option to renew the license for an additional five-year
period at a rate equal to the greater of the then market rate or $1,000 per
year.
In connection with the Spin-off, Entertainment purchased a fitness center
from the Company for $6,200. The Company and Entertainment entered into a
management agreement pursuant to which the Company provides certain
administrative services to Entertainment in connection with the operation of
this fitness center, including membership contract processing, membership card
issuance, collections, processing cash receipts and renewal solicitation.
Entertainment pays the Company a management fee equal to 4% of membership
revenues and 2% of total revenues of this fitness center for these services,
which was $279 for 1996. In addition, Entertainment purchased from the Company
all of the shares of capital stock and warrants to purchase shares of capital
stock of Holmes Place PLC owned by the Company, as well as a note receivable
from Holmes Place PLC held by the Company, for $1,800. For financial accounting
purposes, because of Entertainment's ownership interest at the time, the excess
of the sales price over the historical net book value of the fitness center and
Holmes Place PLC assets of $5,988 was accounted for as an increase to
stockholders' equity, net of income taxes of $2,096.
In January 1996, the Company and Entertainment entered into a Transitional
Services Agreement pursuant to which Entertainment provided the Company certain
services for a period of one year following the Spin-off. The services provided
to the Company by Entertainment included services relating to insurance, tax
matters, accounting and other financial services and the administration of
employee benefit programs. The Company provided payroll services to
Entertainment during this period. The net amount charged to the Company by
Entertainment in 1996 pursuant to the Transitional Services Agreement was
$2,344, based on the costs incurred for such services. Prior to the Spin-off,
the Company and Entertainment reimbursed each other for the proportionate share
of costs (salaries, benefits, rent, etc.) related to employees performing
functions on behalf of both companies, based on estimates of time spent on
behalf of each company. The net amount charged to (by) Entertainment in 1995 and
1994 was $(3,045) and $1,510, respectively. The costs charged to (by)
Entertainment varied in amount from year to year primarily due to changes in the
time devoted to each company by personnel based on events at both companies.
Management believes that the method used to allocate these costs was reasonable.
In addition, certain of the Company's insurance coverage was obtained by
Entertainment pursuant to corporate-wide programs and Entertainment charged the
Company its proportionate share of the respective insurance premiums, which
totalled $4,625, $5,668 and $7,176 for 1996, 1995 and 1994, respectively.
Pursuant to the Transitional Services Agreement, the Company indemnified
Entertainment against (i) debts and liabilities of the Company and (ii)
liabilities relating to litigation currently pending or claims, controversies or
other causes of action relating to the Company's business arising through the
Distribution Date. The Transitional Services Agreement also provided for the
payment by the Company of $15,200 due Entertainment under the prior tax sharing
agreement (plus interest at 10% per annum from the Distribution Date). At the
time of the Merger, the $15,200 of indebtedness was forgiven by Hilton, which
the Company reflected as an extraordinary gain. The Company also paid interest,
calculated primarily at a prime rate, on advances from Entertainment. Interest
paid to Entertainment was $1,551, $430 and $720 for 1996, 1995 and 1994,
respectively.
F-20
101
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
PRO FORMA INFORMATION (UNAUDITED)
The net loss for the years ended December 31, 1995 and 1994 reflects a
federal income tax benefit arising from the Company's prior tax sharing
agreement with Entertainment of $7,069 and $15,160, respectively. Pro forma net
loss and related per share amounts have been presented on the consolidated
statement of operations giving effect to (i) adjustments made to reflect the
income tax provision/benefit as if the Company had filed its own separate
consolidated income tax return for each year and (ii) the distribution of
11,845,161 shares of Common Stock to Entertainment stockholders as if such
distribution had taken place as of the beginning of each year.
F-21
102
BALLY TOTAL FITNESS HOLDING CORPORATION
SUPPLEMENTARY DATA
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
(All dollar amounts in millions, except share data)
QUARTERS ENDED
----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------------- --------------- --------------- ----------------
1996 1995 1996 1995 1996 1995 1996 1995
------ ------ ------ ------ ------ ------ ------- ------
(AS RESTATED)
Net revenues............................ $163.7 $165.1 $158.7 $160.2 $156.6 $163.1 $ 160.2 $165.0
Operating income (loss)................. (.2) 1.0 4.0 (.9) 2.8 (1.4) 12.5 6.3
Income (loss) before extraordinary item
(pro forma for 1995).................. (12.0) (9.0) (7.9) (11.6) (9.2) (12.9) 4.2 (5.0)
Extraordinary gain on extinguishment of
debt.................................. 5.7
Net income (loss) (pro forma for
1995)................................. (12.0) (9.0) (7.9) (11.6) (9.2) (12.9) 9.9 (5.0)
Per common share (pro forma for 1995):
Income (loss) before extraordinary
item................................ $ (.98) $ (.76) $ (.65) $ (.98) $ (.76) $(1.09) $ .35 $ (.42)
Extraordinary gain on extinguishment
of debt............................. .46
Net income (loss)..................... (.98) (.76) (.65) (.98) (.76) (1.09) .81 (.42)
- ---------------
1. The quarterly consolidated financial information presented herein has been
restated to reflect a change in the Company's method of recognizing
membership revenue. See "Summary of significant accounting policies--
Restatement" in notes to the consolidated financial statements.
2. The Company's operations are subject to seasonal factors.
3. The Company was a wholly owned subsidiary of Entertainment until January 9,
1996, the date 11,845,161 shares of Common Stock were distributed by
Entertainment in the Spin-off. For financial accounting purposes, the Company
has reflected the effect of the Spin-off as of December 31, 1995.
4. Pro forma net loss and related per share amounts for each of the 1995
quarters were calculated giving effect to (i) adjustments made to reflect the
income tax provision/benefit as if the Company had filed its own separate
consolidated income tax return for each quarter and (ii) the distribution of
11,845,161 shares of Common Stock to Entertainment stockholders as if such
distribution had taken place as of the beginning of each quarter.
5. The extraordinary gain on extinguishment of debt for the quarter ended
December 31, 1996 consists of (i) a gain (net of taxes) of $9.9 million ($.81
per share) resulting from indebtedness owed Entertainment which was forgiven
as part of the December 1996 merger of Entertainment with and into Hilton
Hotels Corporation and (ii) a charge (net of taxes) of $4.2 million ($.35 per
share) resulting from the December 1996 refinancing of the Company's
securitization facility.
F-22
103
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In thousands)
SEPTEMBER 30,
1997
--------------
ASSETS
Current assets:
Cash and equivalents.......................................................... $ 63,380
Installment contracts receivable, less unearned finance charges of $28,030 and
allowance for doubtful receivables and cancellations of $50,916............ 166,043
Other current assets.......................................................... 35,336
--------
Total current assets....................................................... 264,759
Installment contracts receivable, less unearned finance charges of $13,040 and
allowance for doubtful receivables and cancellations of $40,092............... 160,725
Property and equipment, less accumulated depreciation and amortization of
$310,078...................................................................... 303,336
Intangible assets, less accumulated amortization of $52,997..................... 102,347
Deferred income taxes........................................................... 24,561
Deferred membership origination costs........................................... 83,781
Other assets.................................................................... 25,518
--------
$965,027
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 40,378
Income taxes payable.......................................................... 2,418
Deferred income taxes......................................................... 26,050
Accrued liabilities........................................................... 51,468
Current maturities of long-term debt.......................................... 7,908
Deferred revenues............................................................. 269,909
--------
Total current liabilities.................................................. 398,131
Long-term debt, less current maturities......................................... 371,765
Other liabilities............................................................... 6,343
Deferred revenues............................................................... 97,267
Stockholders' equity............................................................ 91,521
--------
$965,027
========
See accompanying notes.
F-23
104
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------
1997 1996
-------- -----------
(AS RESTATED)
Net revenues:
Membership revenues --
Initial membership fees on paid-in-full memberships
originated..................................................... $ 47,564 $ 65,500
Initial membership fees on financed memberships originated...... 266,593 231,489
Dues collected.................................................. 144,577 129,282
Change in deferred revenues..................................... (4,372) 15,516
-------- --------
454,362 441,787
Finance charges earned............................................. 29,516 27,698
Fees and other..................................................... 11,492 9,530
-------- --------
495,370 479,015
Operating costs and expenses:
Fitness center operations.......................................... 288,750 281,540
Member processing and collection centers........................... 28,983 31,728
Advertising........................................................ 34,671 36,789
General and administrative......................................... 20,980 15,110
Provision for doubtful receivables................................. 72,617 64,334
Depreciation and amortization...................................... 40,703 41,119
Change in deferred membership origination costs.................... (1,641) 1,845
-------- --------
485,063 472,465
-------- --------
Operating income..................................................... 10,307 6,550
Interest income...................................................... 839 726
Interest expense..................................................... (34,081) (36,042)
-------- --------
Loss before income taxes............................................. (22,935) (28,766)
Income tax provision................................................. (300) (365)
-------- --------
Net loss............................................................. $(23,235) $ (29,131)
======== ========
Net loss per common share............................................ $ (1.68) $ (2.39)
======== ========
See accompanying notes.
F-24
105
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share data)
COMMON STOCK UNEARNED
------------------- COMPENSATION TOTAL
NUMBER PAR CONTRIBUTED ACCUMULATED (RESTRICTED STOCKHOLDERS'
OF SHARES VALUE CAPITAL DEFICIT STOCK) EQUITY
---------- ----- ----------- ----------- ------------ -------------
Balance at December 31, 1996..... 12,495,161 $125 $ 303,811 $(277,733) $ (2,051) $24,152
Net loss......................... (23,235) (23,235)
Issuance of common stock through
public offering................ 8,000,000 80 88,310 88,390
Issuance of common stock upon
exercise of stock options...... 51,886 1 162 163
Amortization of unearned
compensation................... 2,051 2,051
---------- ---- -------- -------- ------- --------
Balance at September 30, 1997.... 20,547,047 $206 $ 392,283 $(300,968) $ -- $91,521
========== ==== ======== ======== ======= ========
See accompanying notes.
F-25
106
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1997 1996
--------- -----------
(AS RESTATED)
OPERATING:
Net loss............................................................ $ (23,235) $ (29,131)
Adjustments to reconcile to cash used --
Depreciation and amortization, including amortization included in
interest expense................................................ 42,517 43,546
Provision for doubtful receivables............................... 72,617 64,334
Change in operating assets and liabilities....................... (116,789) (93,202)
Other, net....................................................... (75)
-------- --------
Cash used in operating activities........................... (24,965) (14,453)
INVESTING:
Purchases and construction of property and equipment................ (18,720) (13,346)
Proceeds from sale of property and equipment........................ 4,939
Other, net.......................................................... 564
-------- --------
Cash used in investing activities........................... (13,781) (12,782)
FINANCING:
Debt transactions --
Net borrowings under revolving credit agreement.................. 11,500
Proceeds from other long-term borrowings......................... 7,500 1,500
Repayments of other long-term debt............................... (10,203) (1,577)
Debt issuance costs.............................................. (258) (302)
-------- --------
Cash provided by (used in) debt transactions................ (2,961) 11,121
Equity transactions --
Proceeds from issuance of common stock through public offering... 88,390
Proceeds from issuance of common stock upon exercise of stock
options......................................................... 163
Capital contribution by Bally Entertainment Corporation.......... 6,760
-------- --------
Cash provided by financing activities....................... 85,592 17,881
-------- --------
Increase (decrease) in cash and equivalents........................... 46,846 (9,354)
Cash and equivalents, beginning of period............................. 16,534 21,263
-------- --------
Cash and equivalents, end of period................................... $ 63,380 $ 11,909
======== ========
See accompanying notes.
F-26
107
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) -- (CONTINUED)
(In thousands)
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1997 1996
--------- -----------
(AS RESTATED)
SUPPLEMENTAL CASH FLOWS INFORMATION:
Changes in operating assets and liabilities, net of effects from the
sale of a fitness center, were as follows --
Increase in installment contracts receivable..................... $ (99,817) $ (60,113)
Increase in other current and other assets....................... (13,307) (4,645)
(Increase) decrease in deferred membership origination costs..... (1,641) 1,845
Decrease in accounts payable..................................... (1,187) (8,189)
Increase (decrease) in income taxes payable...................... 160 (1,527)
Decrease in accrued and other liabilities........................ (5,369) (5,057)
Increase (decrease) in deferred revenues......................... 4,372 (15,516)
-------- --------
$(116,789) $ (93,202)
======== ========
Cash payments for interest and income taxes were as follows --
Interest paid.................................................... $ 39,445 $ 39,271
Interest capitalized............................................. (691) (173)
Income taxes paid, net........................................... 140 1,892
Investing and financing activities exclude the following non-cash
transactions --
Acquisition of property and equipment through capital
leases/borrowings............................................... $ 3,585 $ 3,873
Repayment of long-term debt using proceeds from sale of property
and equipment................................................... 6,007
See accompanying notes.
F-27
108
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(All dollar amounts in thousands, except share data)
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Bally Total Fitness Holding Corporation (the "Company") and the
subsidiaries which it controls. The Company, through its subsidiaries, is a
nationwide commercial operator of fitness centers with approximately 320
facilities concentrated in 27 states and Canada. The Company operates in one
industry segment, and all significant revenues arise from the commercial
operation of fitness centers, primarily in major metropolitan markets in the
United States. Unless otherwise specified in the text, references to the Company
include the Company and its subsidiaries. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements of the Company for the years ended December 31, 1996, 1995 and 1994
included elsewhere herein.
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 September 30, 1997, its consolidated statements of operations and
cash flows for the nine months ended September 30, 1997 and 1996, and its
consolidated statement of stockholders' equity for the nine months ended
September 30, 1997. 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.
RESTATEMENT
As more fully described in the "Summary of significant accounting
policies -- Restatement and Membership revenue recognition" notes to the
consolidated financial statements of the Company for the years ended December
31, 1996, 1995 and 1994 included elsewhere herein, following a series of
extensive discussions with the Staff of the Securities and Exchange Commission,
the Company restated its condensed consolidated financial statements for periods
prior to the issuance of its June 30, 1997 financial statements to reflect a
change in the method of recognizing membership revenue. Summarized financial
information illustrating the effect of the restatement on the Company's
consolidated statement of operations for the nine months ended September 30,
1996 is as follows:
AS
ORIGINALLY AS
REPORTED RESTATED
---------- --------
Revenues....................................................... $ 488,443 $479,741
Operating income............................................... 20,082 7,276
Net loss....................................................... (16,225) (29,131)
Net loss per common share...................................... (1.33) (2.39)
In addition, certain reclassifications (primarily interest income) have
been made to prior period financial statements to conform with the 1997
presentation.
SEASONAL FACTORS
The Company's operations are subject to seasonal factors and, therefore,
the results of operations for the nine months ended September 30, 1997 and 1996
are not necessarily indicative of the results of operations for the full year.
F-28
109
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(All dollar amounts in thousands, except share data)
STOCK OFFERING
In August 1997, the Company completed a public offering of 8,000,000 shares
of its common stock, which provided net proceeds of $88,390 (the "Stock
Offering"). The Company has used or intends to use the proceeds of the Stock
Offering to develop new facilities and more extensively refurbish and upgrade
existing facilities, to repay certain indebtedness, to support the introduction
of new initiatives and for general corporate and working capital purposes.
LOSS PER COMMON SHARE
Loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during each period, which
totaled 13,868,305 shares and 12,170,161 shares for the nine months ended
September 30, 1997 and 1996, respectively. Certain restricted stock was issued
subject to forfeiture unless certain conditions were met. These contingent
shares were considered common stock equivalents and were excluded from the loss
per share computation until the conditions were met because their effect was
anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", which
establishes new standards for computing and presenting earnings per share. SFAS
No. 128 requires a dual presentation of basic earnings per share (computed by
dividing income (loss) available to common stockholders by the weighted-average
number of common shares outstanding for the period) and diluted earnings per
share (computed similarly to fully diluted earnings per share pursuant to APB
Opinion No. 15) on the face of the Company's statement of operations. The
Company will adopt SFAS No. 128 in the fourth quarter of 1997; earlier
application is not permitted. As computed under SFAS No. 128, basic and diluted
loss per share for the nine months ended September 30, 1997 each would have been
$1.68 per share.
SUBSEQUENT EVENT
In October 1997, the Company completed a refinancing (the "Refinancing").
The components of the Refinancing were (i) the issuance by the Company of
$225,000 aggregate principal amount of 9 7/8% Senior Subordinated Notes due 2007
(the "9 7/8% Notes"), (ii) the consummation of a tender offer and consent
solicitation by the Company (the "Tender Offer") with respect to its $200,000
aggregate principal amount of 13% Senior Subordinated Notes due 2003 (the "13%
Notes"), and (iii) the application of the net proceeds from the issuance of the
9 7/8% Notes to retire the 13% Notes. Pursuant to the Tender Offer, in October
1997 the Company purchased $177,400 aggregate principal amount of the 13% Notes
and the Indenture pursuant to which the 13% Notes were issued was substantially
amended. The Company has announced that in January 1998, it will redeem the
remaining $22,600 aggregate principal amount of the 13% Notes not tendered in
the Tender Offer at a price of 106.5% of the principal amount, together with
accrued and unpaid interest. The retirement of the 13% Notes will result in an
extraordinary loss totalling approximately $20,600.
F-29
110
======================================================
ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, THE LETTER OF
TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE
AGENT AS FOLLOWS:
BY HAND, REGISTERED OR CERTIFIED MAIL OR OVERNIGHT
COURIER:
FIRST TRUST NATIONAL ASSOCIATION
FIRST TRUST CENTER
180 EAST FIFTH STREET
ST. PAUL, MN 55101
ATTENTION: THERESE LINSCHEID,
SPECIALIZED FINANCE DEPARTMENT
BY FACSIMILE:
(612) 244-1537
ATTENTION: THERESE LINSCHEID,
SPECIALIZED FINANCE DEPARTMENT
(ORIGINALS OF ALL DOCUMENTS SENT BY FACSIMILE SHOULD BE SENT PROMPTLY BY
HAND, REGISTERED OR CERTIFIED MAIL OR OVERNIGHT COURIER).
CONFIRM BY TELEPHONE: (612) 244-1234
------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary......................... 5
Risk Factors............................... 17
The Exchange Offer......................... 21
The Refinancing............................ 29
Capitalization............................. 30
Selected Consolidated Financial Data....... 31
Management's Discussion and Analysis of
Results of Operations and Financial
Condition................................ 32
Business................................... 37
Management................................. 45
Description of Certain Other
Indebtedness............................. 47
Description of the New Notes............... 48
Plan of Distribution....................... 76
Available Information...................... 76
Legal Matters.............................. 77
Experts.................................... 77
Incorporation of Certain Information by
Reference................................ 77
Index to Consolidated Financial
Statements............................... F-1
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS AND THE ACCOMPANYING LETTER OF
TRANSMITTAL DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY THE NEW NOTES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, NOR ANY
EXCHANGE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
======================================================
======================================================
$225,000,000
LOGO
BALLY TOTAL FITNESS
HOLDING CORPORATION
9 7/8% SENIOR SUBORDINATED NOTES DUE 2007
---------------------------------
PROSPECTUS
---------------------------------
OFFER TO EXCHANGE $1,000 IN PRINCIPAL AMOUNT OF ITS 9 7/8% SERIES B SENIOR
SUBORDINATED NOTES DUE 2007 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR EACH $1,000 IN PRINCIPAL AMOUNT OF ITS OUTSTANDING 9 7/8% SERIES A SENIOR
SUBORDINATED NOTES DUE 2007.
DECEMBER 11, 1997
======================================================
111
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") permits the
indemnification of the directors and officers of the Company. The Company
By-laws provide that it will indemnify the officers, directors, employees and
agents of the Company to the extent permitted by the DGCL.
The Company Certificate provides for the indemnification of directors and
officers of the Company, and persons who serve or served at the request of the
Company 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, the Company shall
indemnify any such person seeking indemnification in connection with a
proceeding initiated by such person only if such proceeding was authorized by
the Board. In the event a claim for indemnification by any person has not been
paid in full by the Company after written request has been received by the
Company, the claimant may at any time thereafter bring suit against the Company
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 the Company Certificate is
a contract right and shall include the right to be paid by the Company the
expenses incurred in defending any such proceeding in advance of its final
disposition. The Company maintains insurance, at its expense, to protect itself
and any director, officer, employee or agent of the Company against any such
expense, liability or loss, whether or not the Company would have the power to
indemnify such person against such expense, liability or loss under state law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
**1.1 Purchase Agreement dated September 29, 1997 among Bally Total Fitness Holding
Corporation and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Chase Securities Inc., Societe Generale Securities Corporation
and Ladenburg Thalmann & Co. Inc.
**4.1 Indenture dated as of October 7, 1997 between Bally Total Fitness Holding
Corporation and First Trust National Association, as Trustee, including the
form of Old Note and form of New Note.
**4.2 Registration Rights Agreement dated as of October 7, 1997 among Bally Total
Fitness Holding Corporation and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Chase Securities Inc., Societe Generale
Securities Corporation and Ladenburg Thalmann & Co. Inc.
*4.3 Indenture dated as of January 15, 1993 between Bally Total Fitness Holding
Corporation and Amalgamated Bank of Chicago, as Trustee (filed as an exhibit
to Entertainment's Annual Report on Form 10-K, file no. 1-7244, for the
fiscal year ended December 31, 1993).
**4.4 Supplemental Indenture dated September 24, 1997 between Bally Total Fitness
Holding Corporation and Amalgamated Bank of Chicago, as Trustee.
**4.5 Senior Subordinated Note Specimen Certificate.
**5.1 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP.
10.1 Credit Agreement dated as of November 18, 1997 among Bally Total Fitness
Holding Corporation, the several banks and financial institutions which are
parties thereto and The Chase Manhattan Bank, as Agent.
10.2 Guarantee and Collateral Agreement dated as of November 18, 1997 made by
Bally Total Fitness Holding Corporation and certain of its subsidiaries in
favor of The Chase Manhattan Bank, as Collateral Agent.
**12.1 Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Ernst & Young LLP.
II-1
112
**23.2 Consent of Benesch, Friedlander, Coplan & Aronoff LLP (contained in its
Opinion filed as Exhibit 5.1 hereto).
**24.1 Powers of Attorney for the Company.
**25.1 Statement of Eligibility of Trustee on Form T-1.
- ---------------
* Incorporated by reference.
** Filed previously.
(b) Financial Statement Schedule
Report of independent auditors on financial statement schedule
Schedule II -- Valuation and qualifying accounts for each of the three
years in the period ended December 31, 1996
All other schedules specified under Regulation S-X for the Company are
omitted because they are either not applicable or required under the
instructions, or because the information required is already set forth in
the consolidated financial statements or related notes thereto.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities 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 registrant will, unless in the opinion of its 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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the registration
statement 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.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus 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.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, 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.
II-2
113
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-4 AND 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 DECEMBER 11, 1997.
BALLY TOTAL FITNESS HOLDING
CORPORATION
By: /s/ JOHN W. DWYER
----------------------------------
John W. Dwyer
Executive Vice President,
Chief Financial Officer
and Treasurer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- ----------------------------------- ---------------------------------- ---------------------
* Chairman of the Board of December 11, 1997
- ----------------------------------- Directors
Arthur M. Goldberg
* Chief Executive Officer, President, December 11, 1997
- ----------------------------------- and Director
Lee S. Hillman
* Executive Vice President, Chief December 11, 1997
- ----------------------------------- Financial Officer and Treasurer
John W. Dwyer
/s/ GEOFFREY M. SCHEITLIN Vice President and Controller December 11, 1997
- -----------------------------------
Geoffrey M. Scheitlin
* Director December 11, 1997
- -----------------------------------
Aubrey C. Lewis
* Director December 11, 1997
- -----------------------------------
J. Kenneth Looloian
* Director December 11, 1997
- -----------------------------------
James F. Mc Anally, M.D.
* Director December 11, 1997
- -----------------------------------
Liza M. Walsh
*By: /s/ JOHN W. DWYER
------------------------------
John W. Dwyer
Attorney-in-fact
II-3
114
INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE
----
Report of independent auditors on financial statement schedule.......................... S-2
Schedule II -- Valuation and qualifying accounts for each of the three years in the
period ended December 31, 1996........................................................ S-3
All other schedules specified under Regulation S-X for Bally Total Fitness
Holding Corporation are omitted because they are either not applicable or
required under the instructions, or because the information required is already
set forth in the consolidated financial statements or related notes thereto.
S-1
115
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
We have audited the consolidated financial statements of Bally Total
Fitness Holding Corporation as of December 31, 1996 and 1995, and for each of
the three years in the period ended December 31, 1996, and have issued our
report thereon dated February 25, 1997, except for the "Summary of significant
accounting policies -- Restatement, Membership revenue recognition and Impact of
recently issued accounting standards" and "Income Taxes" notes, as to which the
date is July 14, 1997 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule listed in Item 16(b) of
this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois
February 25, 1997, except for the
"Summary of significant accounting
policies -- Restatement, Membership
revenue recognition and Impact of
recently issued accounting
standards" and "Income Taxes" notes,
as to which the date is July 14,
1997
S-2
116
BALLY TOTAL FITNESS HOLDING CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(All dollar amounts in thousands)
ADDITIONS
----------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF YEAR EXPENSES(a) ACCOUNTS(b) DEDUCTIONS(c) YEAR
- ------------------------------------ ---------- ------------- ----------- ------------- ----------
1996:
Allowance for doubtful receivables
and cancellations.............. $ 112,528 $ 80,350 $ 111,736 $ 218,519 $ 86,095
======== ======== ======== ======== ========
1995:
Allowance for doubtful receivables
and cancellations.............. $ 120,329 $ 72,145 $ 114,729 $ 194,675 $ 112,528
======== ======== ======== ======== ========
1994:
Allowance for doubtful receivables
and cancellations.............. $ 82,317 $ 103,930 $ 113,320 $ 179,238 $ 120,329
======== ======== ======== ======== ========
- ---------------
(a) Amounts are included as a component of the deferred revenue computation as
set forth in the "Summary of significant accounting policies--Membership
revenue recognition" note to the consolidated financial statements.
(b) Additions charged to accounts other than costs and expenses primarily
consist of charges to revenues.
(c) Deductions include write-offs of uncollectible amounts, net of recoveries.
S-3
117
EXHIBIT INDEX
PAGE
NUMBER IN
SEQUENTIAL
NUMBERING
EXHIBIT SYSTEM
- ------- ---------
**1.1 Purchase Agreement dated September 29, 1997 among Bally Total Fitness
Holding Corporation and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Chase Securities Inc., Societe Generale
Securities Corporation and Ladenberg Thalmann & Co. Inc.
**4.1 Indenture dated as of October 7, 1997 between Bally Total Fitness
Holding Corporation and First Trust National Association, as Trustee,
including the form of Old Note and form of New Note.
**4.2 Registration Rights Agreement dated as of October 7, 1997 among Bally
Total Fitness Holding Corporation and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities Inc.,
Societe Generale Securities Corporation and Ladenburg, Thalmann & Co.
Inc.
*4.3 Indenture dated as of January 15, 1993 between Bally Total Fitness
Holding Corporation and Amalgamated Bank of Chicago, as Trustee (filed
as an exhibit to Entertainment's Annual Report on Form 10-K, file no.
1-7244, for the fiscal year ended December 31, 1993).
**4.4 Supplemental Indenture dated September 24, 1997 between Bally Total
Fitness Holding Corporation and Amalgamated Bank of Chicago, as Trustee.
**4.5 Senior Subordinated Note Specimen Certificate.
**5.1 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP.
10.1 Credit Agreement dated as of November 18, 1997 among the Bally Total
Fitness Holding Corporation, the several banks and financial
institutions which are parties thereto and The Chase Manhattan Bank, as
Agent.
10.2 Guarantee and Collateral Agreement dated as of November 18, 1997 made by
Bally Total Fitness Holding Corporation and certain of its subsidiaries
in favor of The Chase Manhattan Bank, as Collateral Agent.
**12.1 Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Ernst & Young LLP.
**23.2 Consent of Benesch, Friedlander, Coplan & Aronoff LLP (contained in its
Opinion filed as Exhibit 5.1 hereto).
**24.1 Powers of Attorney for the Company.
**25.1 Statement of Eligibility of Trustee on Form T-1.
- ---------------
* Incorporated by reference.
** Filed previously.