<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 1997
REGISTRATION NO. 333-24175
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
BALLY TOTAL FITNESS HOLDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
Delaware 7991 36-3228107
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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)
------------------
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)
------------------
Copies to:
<TABLE>
<S> <C>
IRV BERLINER HOWARD L. SHECTER
Benesch, Friedlander, Coplan & Aronoff LLP Morgan, Lewis & Bockius LLP
2300 BP America Building 101 Park Avenue
200 Public Square New York, New York 10178
Cleveland, Ohio 44114 (212) 309-6000
(216) 363-4500
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, 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, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------
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.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 16, 1997
PROSPECTUS
- ----------
6,000,000 SHARES
[Bally Logo]
BALLY TOTAL FITNESS HOLDING CORPORATION
COMMON STOCK
------------------
All of the 6,000,000 shares of common stock, $.01 par value per share (the
"Common Stock"), offered hereby (the "Offering") are being issued and sold by
Bally Total Fitness Holding Corporation, a Delaware corporation (the "Company"
or "Bally"). The Common Stock is quoted on the Nasdaq National Market under the
symbol "BFIT". On July 15, 1997, the last sale price of the Common Stock as
reported on the Nasdaq National Market was $10 1/16 per share. See "Price Range
of Common Stock and Dividend Policy".
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................ $ $ $
- -----------------------------------------------------------------------------------------------
Total (3)............................ $ $ $
===============================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act of 1933,
as amended. See "Underwriting".
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the several Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an additional 900,000
shares of Common Stock, to cover over-allotments, if any. If all such shares
are purchased, the total Price to Public, Underwriting Discount and Proceeds
to Company will be $ , $ and $ , respectively.
See "Underwriting".
------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to the
approval of certain legal matters by counsel for the Underwriters and to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
the delivery of the shares of Common Stock will be made in New York, New York,
on or about , 1997.
------------------
MERRILL LYNCH & CO.
LADENBURG THALMANN & CO. INC.
JEFFERIES & COMPANY, INC.
------------------
The date of this Prospectus is , 1997.
<PAGE> 3
[GRAPHIC DESCRIPTION: A PICTURE OF THE
FRONT OF ONE OF THE COMPANY'S FACILITIES AND
THREE PICTURES OF PEOPLE USING VARIOUS
COMPANY FACILITIES.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING".
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING".
2
<PAGE> 4
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 8.
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 June 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
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 membership plans and
by emphasizing paid-in-full instead of financed membership plans.
Additional working capital will allow the Company to sell more financed
membership plans, which historically
3
<PAGE> 5
have generated better long-term returns for the Company including streams
of recurring dues revenues, rather than selling discounted paid-in-full
memberships for which dues are frequently waived for up to three years.
- Upgrade and Expand Fitness Centers -- The Company intends to expand and
upgrade its facilities in order to increase its membership base and more
effectively capitalize on its streamlined marketing and administrative
functions. Management plans to make capital expenditures of approximately
$10 million to $12 million over the next twelve months to maintain and
make minor upgrades to the Company's existing facilities, which include
exercise equipment upgrades, heating, ventilation and air conditioning
("HVAC") and other operating equipment upgrades and replacements, and
locker room and workout area refurbishments, among others. In addition,
the Company expects to invest approximately $5 million to $10 million of
the proceeds from this Offering over the next two years to extensively
refurbish and make major upgrades to approximately 25% of its clubs,
which include converting low-usage pools and racquet areas into expanded
exercise areas and to a lesser extent retail and outpatient
rehabilitation service areas, adding and upgrading exercise equipment,
and refreshing interior and exterior finishes to improve club ambience,
among others. The Company also intends to spend approximately $15 million
to $25 million of the proceeds from this Offering over the next three
years to open 15 to 25 new facilities based on its new prototype. These
facilities are designed to cost less to construct and maintain than the
Company's older facilities. The facilities are expected to range in size
from 10,000 to 45,000 square feet and have the capacity to accommodate
significantly more members than older clubs of the same size because the
new facilities will contain only the most widely used amenities.
- Increase Dues Revenues -- The Company believes that its dues are
substantially less than those charged by its competitors and that it can
significantly increase dues for its members who are beyond their initial
financing period without any material loss in membership.
- Improve Collections on Financed Contracts -- The Company plans to
continue its focus on increasing the downpayment on financed membership
plans and securing payment by 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
4
<PAGE> 6
already on-hand. Among others, the Company has recently contracted with
Continucare Corporation to provide such services in certain, initially
four, of the Company's fitness centers. The Company plans to spend
approximately $1 million of the proceeds from this 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.
ACCOUNTING CHANGE
In connection with this Prospectus, the Staff of the Securities and
Exchange Commission (the "SEC Staff") advised the Company it now requires all
registrants operating fitness centers with membership plans that include initial
membership fees to follow a "deferral method" of accounting with respect to the
recognition of revenue from initial membership fees. The accompanying
consolidated financial statements have been restated from those originally
reported because this "deferral method" differed from the revenue recognition
method historically used by the Company. See "Consolidated Financial
Statements".
5
<PAGE> 7
THE OFFERING
Common Stock offered.......... 6,000,000 shares (1)
Common Stock to be outstanding
after the Offering.......... 18,512,488 shares (1)(2)
Use of proceeds............... For capital expenditures to develop new
facilities and more extensively refurbish and
upgrade existing facilities, to repay a loan of
$7.5 million, to support the introduction of
new initiatives and for general corporate and
working capital purposes. See "Use of
Proceeds".
Nasdaq National Market
symbol...................... BFIT
- ---------------
(1) Assumes that the Underwriters' over-allotment option to purchase up to
900,000 shares of Common Stock is not exercised.
(2) Does not give effect to any future exercise of outstanding warrants to
purchase 3,192,805 shares of Common Stock, outstanding stock options to
purchase 1,264,606 shares of Common Stock and options to purchase an
additional 268,067 shares of Common Stock which the Company is able to grant
under the Company's existing stock option plans.
------------------------
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.
6
<PAGE> 8
SUMMARY FINANCIAL DATA
The following table presents summary consolidated financial data of the
Company. The financial data were derived from, and should be read in conjunction
with, financial information appearing elsewhere in this Prospectus. See
"Selected Consolidated Financial Data".
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
--------------- ----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<CAPTION>
(AS RESTATED) (a)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................... $168.5 $163.9 $640.2 $653.6 $682.0 $ 666.7 $ 688.6
Operating income (loss).................... 6.3 -- 20.0 5.2 (16.1) (18.1) (19.3)
Loss before extraordinary item and
cumulative effect on prior years of
change in accounting for income taxes
(b)(c)................................... (5.7) (12.0) (24.9) (31.4) (39.5) (31.4) (33.6)
Loss per common share (pro forma for 1995
and 1994) (d)............................ (.46) (.98) (2.04) (3.25) (4.61)
BALANCE SHEET DATA (AT END OF PERIOD):
Installment contracts receivable, net...... $317.0 $307.6 $300.2 $303.4 $284.1 $ 322.7 $ 327.8
Total assets............................... 904.9 931.7 893.3 936.5 951.0 1,016.7 1,012.4
Long-term debt, less current maturities.... 387.7 363.8 376.4 368.0 289.7 305.7 269.8
Stockholders' equity (c)................... 18.5 19.9 24.2 31.7 34.8 50.6 146.8
OTHER FINANCIAL DATA:
EBITDA (e)................................. $ 19.4 $ 13.7 $ 75.9 $ 62.6 $ 42.8 $ 42.3 $ 38.5
Cash provided by (used in):
Operating activities..................... (10.9) (15.1) (5.3) (9.9) 32.8 49.9 64.5
Investing activities..................... (6.9) (6.4) (9.8) (42.1) (21.4) (36.1) (25.1)
Financing activities..................... 11.2 10.0 10.4 60.4 (9.6) (13.6) (41.8)
</TABLE>
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(a) The summary consolidated financial data presented herein have been restated
to reflect a change in the Company's method of recognizing membership
revenue and, with respect to data at March 31, 1997 and for the three months
then ended, a change in accounting for its securitization facility. See
"Consolidated Financial Statements".
(b) In 1995, the Company recognized a net extraordinary gain on extinguishment
of debt consisting of (i) a gain (net of taxes) of $9.9 million ($.81 per
share) resulting from indebtedness owed Entertainment which was forgiven as
part of the December 1996 merger of Entertainment with and into Hilton
Hotels Corporation ("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 a new securitization facility. In 1993, the
Company recognized an extraordinary loss on extinguishment of debt of $6.0
million (net of taxes) resulting from a refinancing of certain indebtedness.
(c) In 1993, the Company changed its method of accounting for income taxes as
required by Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." As permitted by SFAS No. 109, the Company
elected to use the cumulative effect approach rather than to restate the
consolidated financial statements of any prior years to apply the provisions
of SFAS No. 109, which resulted in a charge of $69.0 million in 1993.
(d) The net loss for the years ended December 31, 1995 and 1994 reflects a
federal income tax benefit arising from the Company's prior tax sharing
agreement with Entertainment of $7.1 million and $15.2 million,
respectively. Pro forma loss per common share (which is unaudited) was
calculated giving effect to (i) adjustments made to reflect the income tax
provision/benefit as if the Company had filed its own separate consolidated
income tax return for each year and (ii) the distribution of 11,845,161
shares of Common Stock to Entertainment stockholders as if such distribution
had taken place as of the beginning of each year.
(e) EBITDA is defined as operating income (loss) before depreciation and
amortization. The Company has presented EBITDA supplementally because
management believes this information is useful given the significance of the
Company's depreciation and amortization and because of its highly leveraged
financial position. These data should not be considered as an alternative to
any measure of performance or liquidity as promulgated under generally
accepted accounting principles (such as net income/loss or cash provided
by/used in operating, investing and financing activities), nor should they
be considered as an indicator of the Company's overall financial
performance. Also, the EBITDA definition used herein may not be comparable
to similarly titled measures reported by other companies.
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<PAGE> 9
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THE PROSPECTUS SUMMARY AND UNDER THE HEADINGS "RISK
FACTORS", "BUSINESS", "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION", AND ELSEWHERE IN THIS PROSPECTUS CONSTITUTE
"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"; AND OTHER
FACTORS REFERENCED IN THIS PROSPECTUS.
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.
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 $5.7 million, $24.9
million, $31.4 million and $39.5 million for the three months ended March 31,
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.
RISKS ASSOCIATED WITH HIGHLY-LEVERAGED FINANCIAL POSITION
In December 1996, the Company issued $160.0 million of asset-backed
securities (the "Securitization") 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 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.
The Company's long-term debt includes the Securitization, $200 million
principal amount of 13% Senior Subordinated Notes due 2003 (the "13% Notes") and
a $20 million revolving credit facility which expires in June 1998, of which
$12.0 million was outstanding at March 31, 1997. At March 31, 1997, the Company
had total indebtedness of approximately $396 million. 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 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 cash flow 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.
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<PAGE> 10
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. 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 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.
DILUTION
Assuming an offering price of $10 1/16 per share, purchasers of shares of
Common Stock offered hereby will experience an immediate dilution of $11.71 per
share. See "Dilution".
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
9
<PAGE> 11
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".
POTENTIAL IMPACT OF CERTAIN ANTITAKEOVER PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
(the "Company Certificate") and the Company's Amended and Restated By-Laws may
inhibit changes in control of the Company not approved by the Board of Directors
of the Company (the "Board"). These provisions include a stockholders rights
plan, a classified Board, advance notice provisions for nominations for election
of candidates to the Board and a "fair-price provision". The stockholder rights
plan, under which one right entitling the holder to purchase one one-hundredth
of a share of the Company's Series A Junior Participating Preferred Stock at a
price of $40 per share (subject to adjustment) is attached to each outstanding
share of Common Stock, renders an acquisition of control of the Company in a
transaction not approved by the Board more difficult. The Company's 1996
Long-Term Incentive Plan provides for acceleration of stock options and
restricted stock awards upon a change in control of the Company which has the
effect of making an acquisition of control of the Company more expensive. These
agreements may also inhibit a change in control of the Company and may have a
negative effect on the market price of the Common Stock. The 13% Notes also
include change in control provisions which provide, among other things, that
upon a change in control of the Company, the holders of the 13% Notes may
require the Company to repurchase the 13% Notes at 101% of the principal amount,
together with accrued and unpaid interest to the repurchase date. A change in
control of the Company constitutes a default under the Company's revolving
credit agreement. In addition, certain Company officers have severance
compensation agreements with the Company that provide for substantial cash
payments and acceleration of other benefits in the event of specified corporate
changes related to the Company, including a change in control of the Company.
DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS
The Company does not anticipate paying dividends for the foreseeable
future. Currently, the Company is restricted from paying dividends by the terms
of the 13% Notes and its revolving credit agreement. Specifically, the Indenture
governing the 13% Notes contains a covenant that the Company currently cannot,
directly or indirectly, declare or pay any dividend on, or make any distribution
to holders of, any shares of Common Stock (other than dividends or distributions
payable in shares of Common Stock or in options, warrants or other rights to
purchase Common Stock, but excluding certain specified dividends or
distributions). Similarly, the terms of the Company's revolving credit agreement
provide that the Company is restricted from paying dividends without the consent
of the lenders during the term of the agreement and until all obligations
thereunder have been satisfied.
FUTURE SALE AND PRICE OF COMMON STOCK
After the Offering, 18,512,488 shares of Common Stock will be outstanding
(assuming the Underwriters' over-allotment option is not exercised). At that
time, the Company will also have (i) outstanding options to purchase 1,264,606
shares of Common Stock with a weighted-average exercise price of $4.25 per
share, and (ii) the ability to grant options to purchase an additional 268,067
shares of Common Stock under the Company's stock option plans. In addition, the
Company will have outstanding warrants to purchase 2,942,805 shares of Common
Stock at an exercise price of $5.26 per share. The warrants are held by the
Chairman of the Board and the President of the Company and are exercisable until
December 31, 2005. Further, the Company has issued warrants to purchase 250,000
shares of Common Stock to an affiliate of one of the Underwriters in connection
with a loan to the Company. See "Underwriting". The effect, if any, on the
market price of the Common Stock prevailing from time to time as a result of the
additional shares of Common Stock that would be outstanding upon the exercise of
stock options and warrants is unpredictable, and no assurance can be given that
the effect will not be adverse.
10
<PAGE> 12
USE OF PROCEEDS
At an offering price of $10 1/16 per share (based on the closing price of a
share of Common Stock on the Nasdaq National Market on July 15, 1997), the net
proceeds to be received by the Company from the sale of shares of Common Stock
(after deducting the underwriting discount and estimated expenses payable by the
Company) are estimated to be approximately $55.6 million ($64.0 million if the
underwriters' over-allotment option is exercised in full). The Company intends
to use approximately $15 million to $25 million of the proceeds from this
Offering over the next three years for capital expenditures to open 15 to 25 new
facilities based on its new prototype, approximately $5 million to $10 million
for capital expenditures over the next two years to extensively refurbish and
make major upgrades to approximately 25% of its clubs, $7.5 million to repay a
loan from Ladenburg Thalmann Capital Corporation ("LTCC") due upon the earlier
of the closing of this Offering or October 8, 1997 (the "Loan"), as much as $3
million to support the introduction of new initiatives and the balance, if any,
for general corporate and working capital purposes. Pending such uses, the
Company may temporarily invest available funds from this Offering in short-term
securities and/or reduce indebtedness under its revolving credit agreement. The
Loan accrues interest at 13% per annum. See "Underwriting". The rate of interest
on the revolving credit agreement is at the Company's option, based upon either
the bank agent's prime rate plus 2% or a Eurodollar rate plus 3%. At June 30,
1997, the interest rate on the revolving credit agreement selected by the
Company was 10.5%. The revolving credit agreement expires in June 1998.
DILUTION
The net tangible book value of the Company at March 31, 1997 was a deficit
of approximately $86.1 million, or $6.89 per share. The deficit in net tangible
book value per share represents the amount by which the Company's total
liabilities (including deferred revenues) exceed the Company's net tangible
assets at March 31, 1997, divided by 12,496,975 shares of Common Stock
outstanding at March 31, 1997. After giving effect to the sale by the Company of
6,000,000 shares of Common Stock offered hereby (assuming the Underwriters'
over-allotment option is not exercised) at an assumed offering price of $10 1/16
per share and after deducting the estimated underwriting discount and estimated
offering expenses, the Company's net tangible book value at March 31, 1997 would
be a deficit of approximately $30.6 million, or $1.65 per share. This represents
an immediate increase in the net tangible book value of $5.24 per share to
existing stockholders and an immediate dilution of $11.71 per share to new
investors purchasing shares in the Offering. The following table illustrates
this dilution:
<TABLE>
<S> <C> <C>
Assumed offering price per share............................ $10.06
Deficit in net tangible book value per share before the
Offering.................................................. $ 6.89
Increase in net tangible book value per share attributable
to new investors.......................................... 5.24
------
Deficit in net tangible book value per share after the
Offering.................................................. 1.65
------
Dilution per share to new investors......................... $11.71
======
</TABLE>
11
<PAGE> 13
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is quoted on the Nasdaq National Market under the symbol
"BFIT". The following table sets forth for the periods indicated the high and
low quarterly sales prices for a share of Common Stock as reported on the Nasdaq
National Market since trading began on January 4, 1996, the date the Company's
initial Registration Statement on Form S-1 was declared effective. The Company
was a wholly-owned subsidiary of Entertainment until January 9, 1996, the date
on which 11,845,161 shares of Common Stock were distributed by Entertainment in
the Spin-off.
<TABLE>
<CAPTION>
HIGH LOW
---------- ----------
<S> <C> <C>
1996:
First Quarter (from January 4, 1996).................. $ 7 $3 3/4
Second Quarter........................................ 5 3/4 3 15/16
Third Quarter......................................... 5 1/8 4
Fourth Quarter........................................ 9 1/16 4 1/2
1997:
First Quarter......................................... $ 8 13/16 $6
Second Quarter........................................ 10 7/16 5 5/8
Third Quarter (through July 15, 1997)................. 10 3/8 8 1/2
</TABLE>
The last reported sale price of a share of Common Stock on the Nasdaq
National Market on July 15, 1997 is set forth on the cover page of this
Prospectus. As of June 30, 1997, there were 10,858 holders of record of the
Common Stock.
The Company does not anticipate paying dividends for the foreseeable
future. Currently, the Company is restricted from paying dividends by the terms
of the 13% Notes and its revolving credit agreement. See "Risk
Factors -- Dividend Policy".
12
<PAGE> 14
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at March 31, 1997 as restated (see "Consolidated Financial Statements")
and as adjusted to give effect to the sale by the Company of 6,000,000 shares of
Common Stock offered hereby (assuming the Underwriters' over-allotment option is
not exercised) at an assumed offering price of $10 1/16 per share and after
deducting the estimated underwriting discount and estimated offering expenses,
as if such transaction had occurred as of March 31, 1997.
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------
AS AS
RESTATED ADJUSTED
-------- --------
(IN MILLIONS)
<S> <C> <C>
Cash and equivalents............................................ $ 9.9 $ 65.5
======== ========
Current maturities of long-term debt (1)........................ $ 8.4 $ 8.4
======== ========
Long-term debt, less current maturities (1)..................... $ 387.7 $ 387.7
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;
12,496,975 and 18,496,975 shares issued.................... .1 .2
Contributed capital........................................... 303.8 359.3
Accumulated deficit........................................... (283.4) (283.4)
Unearned compensation (restricted stock)...................... (2.0) (2.0)
-------- --------
Total stockholders' equity.................................... 18.5 74.1
-------- --------
Total capitalization..................................... $ 406.2 $ 461.8
======== ========
</TABLE>
- ---------------
(1) See "Consolidated Financial Statements" and "Management's Discussion and
Analysis of Results of Operations and Financial Condition" for additional
information with respect to the Company's consolidated indebtedness.
13
<PAGE> 15
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 three months ended March 31, 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 three months ended
March 31, 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".
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
--------------- ----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ -------- --------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
(AS RESTATED)(A)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................... $168.5 $163.9 $640.2 $653.6 $682.0 $ 666.7 $ 688.6
Depreciation and amortization.............. 13.1 13.7 55.9 57.4 58.9 60.4 57.8
Operating income (loss).................... 6.3 -- 20.0 5.2 (16.1) (18.1) (19.3)
Loss before extraordinary item and
cumulative effect on prior years of
change in accounting for income taxes
(b)(c)................................... (5.7) (12.0) (24.9) (31.4) (39.5) (31.4) (33.6)
Loss per common share (pro forma for 1995
and 1994) (d)............................ (.46) (.98) (2.04) (3.25) (4.61)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and equivalents....................... $ 9.9 $ 9.7 $ 16.5 $ 21.3 $ 12.8 $ 11.0 $ 10.7
Installment contracts receivable, net...... 317.0 307.6 300.2 303.4 284.1 322.7 327.8
Total assets............................... 904.9 931.7 893.3 936.5 951.0 1,016.7 1,012.4
Long-term debt, less current maturities.... 387.7 363.8 376.4 368.0 289.7 305.7 269.8
Stockholders' equity (c)................... 18.5 19.9 24.2 31.7 34.8 50.6 146.8
OTHER FINANCIAL DATA:
EBITDA (e)................................. $ 19.4 $ 13.7 $ 75.9 $ 62.6 $ 42.8 $ 42.3 $ 38.5
Cash provided by (used in):
Operating activities..................... (10.9) (15.1) (5.3) (9.9) 32.8 49.9 64.5
Investing activities..................... (6.9) (6.4) (9.8) (42.1) (21.4) (36.1) (25.1)
Financing activities..................... 11.2 10.0 10.4 60.4 (9.6) (13.6) (41.8)
</TABLE>
- ---------------
(a) The selected consolidated financial data presented herein have been restated
to reflect a change in the Company's method of recognizing membership
revenue and, with respect to data at March 31, 1997 and for the three months
then ended, a change in accounting for its securitization facility. See
"Consolidated Financial Statements".
(b) In 1995, the Company recognized a net extraordinary gain on extinguishment
of debt consisting of (i) a gain (net of taxes) of $9.9 million ($.81 per
share) resulting from indebtedness owed Entertainment which was forgiven as
part of the December 1996 merger of Entertainment with and into Hilton and
(ii) a charge (net of taxes) of $4.2 million ($.35 per share) resulting from
the refinancing of the Company's prior securitization facility by a new
securitization facility. In 1993, the Company recognized an extraordinary
loss on extinguishment of debt of $6.0 million (net of taxes) resulting from
a refinancing of certain indebtedness.
(c) In 1993, the Company changed its method of accounting for income taxes as
required by 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 net loss for the years ended December 31, 1995 and 1994 reflects a
federal income tax benefit arising from the Company's prior tax sharing
agreement with Entertainment of $7.1 million and $15.2 million,
respectively. Pro forma loss per common share (which is unaudited) was
calculated giving effect to (i) adjustments made to reflect the income tax
provision/benefit as if the Company had filed its own separate consolidated
income tax return for each year and (ii) the distribution of 11,845,161
shares of Common Stock to Entertainment stockholders as if such distribution
had taken place as of the beginning of each year.
(e) EBITDA is defined as operating income (loss) before depreciation and
amortization. The Company has presented EBITDA supplementally because
management believes this information is useful given the significance of the
Company's depreciation and amortization and because of its highly leveraged
financial position. These data should not be considered as an alternative to
any measure of performance or liquidity as promulgated under generally
accepted accounting principles (such as net income/loss or cash provided
by/used in operating, investing and financing activities), nor should they
be considered as an indicator of the Company's overall financial
performance. Also, the EBITDA definition used herein may not be comparable
to similarly titled measures reported by other companies.
14
<PAGE> 16
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 June 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.
Management also believes significant opportunities exist to increase
revenues beyond those generated by the sale of memberships without significant
capital expenditures. To capitalize on the Company's strong brand identity,
extensive distribution infrastructure (approximately 320 facilities),
significant member base (approximately four million members) and frequency of
visitation (in excess of 100 million visits in 1996), management has begun to
pursue the following growth opportunities: (i) the sale of nutritional products
to its members through its fitness centers and telemarketing; (ii) the provision
of comprehensive outpatient rehabilitation services to both members and
non-members; and (iii) the sale of other goods and services, including apparel
and other items in retail shops located within its fitness centers and certain
financial services to its members.
RESULTS OF OPERATIONS
Accounting change
In connection with this Prospectus, the SEC Staff advised the Company it
now requires all registrants operating fitness centers with membership plans
that include initial membership fees to follow a "deferral method" of accounting
with respect to the recognition of revenue from initial membership fees. The
accompanying consolidated financial statements have been restated from those
originally reported because this "deferral method" differed from the revenue
recognition method historically used by the Company. See "Consolidated Financial
Statements".
Comparison of the three months ended March 31, 1997 and 1996
Net revenues for the first quarter of 1997 were $168.5 million compared to
$163.9 million in 1996, an increase of $4.6 million (3%). The average number of
fitness centers selling memberships decreased from 324 in the first quarter of
1996 to 319 in the first quarter of 1997, reflecting the closure of 12 older,
typically
15
<PAGE> 17
smaller and less profitable facilities offset, in part, by the opening of 6 new,
larger facilities between January 1996 and March 1997. Initial membership fees
originated increased $4.7 million (4%) in the 1997 quarter, consisting of an
$8.4 million (10%) increase in financed memberships originated offset, in part,
by a $3.7 million (17%) decrease in paid-in-full memberships originated. These
results generally reflect management's current strategy of selling more financed
membership plans and fewer discounted paid-in-full membership plans, which
resulted in an 18% increase in the average selling price of contracts sold and a
14% decline in the number of contracts sold. Dues collected increased $4.4
million (10%) over 1996, reflecting the Company's continuing strategy of
increasing renewal dues. Finance charges earned increased $.2 million (2%) in
the 1997 quarter and fees and other revenues increased $.3 million (9%) from
1996.
Operating income for the first quarter of 1997 was $6.3 million compared to
approximately break-even in 1996. The improvement of $6.3 million is due to the
aforementioned increase in revenues and a $1.6 million (1%) decrease in
operating costs and expenses, which is net of a $1.0 million increase in the
provision for doubtful receivables. Excluding the provision for doubtful
receivables, operating costs and expenses decreased $2.6 million (2%) from 1996
primarily due to a $2.2 million (19%) decrease in member processing and
collection center expenses, which includes the realization in 1997 of the full
effect of cost reductions achieved in connection with the completion of the
primary phase of a computer conversion in late 1995. In addition, telephone
expenses decreased as a result of renegotiated rates and fewer member service
calls. Operating costs and expenses are expected to include a non-recurring
charge during the second quarter or later in 1997, principally amortization,
relating to the restricted stock awards issued in conjunction with the Spin-off
for which restrictions lapsed and vesting has yet to occur. The charge, which is
based in part on the price of the Common Stock at the time of future vesting, is
not yet determinable.
The provision for doubtful receivables for the first quarter of 1997 was
$25.5 million compared to $24.5 million in 1996, an increase of $1.0 million
(4%) primarily due to the increase in initial membership fees originated on
financed memberships. 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 50% 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 March 31, 1997 is generally improved
from that in recent years due to more accounts paying by EFT and higher average
downpayments.
Interest expense, net of capitalized interest, was $11.9 million for the
first quarter of 1997 compared to $11.8 million in 1996, an increase of $.1
million (1%).
The income tax provision for the first quarter 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
16
<PAGE> 18
renewal dues. Finance charges earned decreased $.5 million (1%) in 1996 compared
to 1995. Fees and other revenues decreased $1.3 million (8%) primarily due to
the reduction of personal trainer revenue in 1996 as a result of temporarily
outsourcing the service and non-recurring income in 1995 pertaining to insurance
recoveries.
Operating income for 1996 was $20.0 million compared to $5.2 million in
1995. The increase of $14.8 million was due to a $28.3 million (4%) reduction in
operating costs and expenses offset, in part, by the aforementioned decrease in
revenues. The reduction in operating costs and expenses was achieved despite an
$8.3 million increase in the provision for doubtful receivables and a $5.1
million charge related to restricted stock awards issued in conjunction with the
Spin-off for which restrictions lapsed due to the increase in the market price
of the Common Stock. Excluding the provision for doubtful receivables and charge
related to restricted stock awards, operating costs and expenses decreased $41.6
million (7%) in 1996 compared to 1995 primarily due to reductions in fitness
center operating expenses and member processing and collection center expenses.
Fitness center operating expenses for 1996 decreased $30.1 million (8%) from
1995 primarily due to a reduction in payroll and related costs and other
variable costs as a result of the continuing cost reduction program and the 3%
reduction in the average number of fitness centers operated in 1996 compared to
1995. In addition, insurance expenses declined due to favorable experience in
controlling general liability risks, and commissions decreased as a result of
the decline in initial membership fees originated. Member processing and
collection center expenses decreased $8.0 million (16%) primarily due to the
aforementioned RSC consolidation and computer projects.
The provision for doubtful receivables for 1996 was $80.4 million compared
to $72.1 million in 1995, an increase of $8.3 million (12%). Management believes
the additional provision for doubtful receivables in 1996 adequately reserves
for collection experience that may ultimately be realized from sales programs in
general, and specifically from sales promotions allowing very low downpayments
offered from time to time between July 1995 and October 1996 that have shown
indications of underperforming historical collection experience.
Interest expense, net of capitalized interest, was $47.6 million in 1996
compared to $43.8 million in 1995, an increase of $3.8 million (9%) principally
reflecting a higher average level of debt offset, in part, by lower average
interest rates.
As a result of the Spin-off, the Company is no longer included in the
consolidated federal income tax return of Entertainment and is required to file
its own separate consolidated federal income tax return. Accordingly, the income
tax benefit for 1996 reflects a benefit equal to the federal provision allocated
to the extraordinary item (no additional benefit has been provided due to the
uncertainty of tax loss realization), net of a state income tax provision.
Pursuant to a tax sharing agreement with Entertainment, the effective rate of
the income tax benefit for 1995 was lower than the U.S. statutory tax rate (35%)
due principally to operating losses without a current year tax benefit and
non-deductible amortization of costs in excess of acquired assets.
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
17
<PAGE> 19
reduction in fitness center operating expenses. Fitness center operating
expenses for 1995 decreased $10.6 million (3%) from 1994 primarily due to a
reduction in salaries and other variable costs as a result of the continuing
cost reduction program and, to a lesser extent, reduced commissions as a result
of the decline in initial membership fees originated. In addition, member
processing and collection center expenses decreased $1.8 million (4%) primarily
due to the aforementioned RSC consolidation project.
The provision for doubtful receivables for 1995 was $72.1 million compared
to $103.9 million in 1994, a decrease of $31.8 million (31%). The reduction was
primarily due to additional reserves recorded in 1994 in conjunction with
management's reevaluation of collection risks associated with financed sales and
due to the improving collection experience of installment contracts receivable,
primarily the reduction in first payment defaults and an increase in EFT
contracts within the receivables portfolio.
Interest expense, net of capitalized interest, was $43.8 million in 1995
compared to $38.6 million in 1994, an increase of $5.2 million (13%) principally
reflecting a higher average level of debt offset, in part, by lower average
interest rates.
Pursuant to a tax sharing agreement with Entertainment, the effective rates
of the income tax benefit for 1995 and 1994 were lower than the U.S. statutory
tax rate (35%) due principally to operating losses without a current year tax
benefit and non-deductible amortization of costs in excess of acquired assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company has no scheduled principal payments under the 13% Notes until
January 2003. Through July 1999, the principal amount of the certificates under
the Securitization remains fixed at $160 million. In addition, the Company's
revolving credit agreement, which provides for borrowings of up to $20 million,
expires in June 1998. Additionally, the Company will use $7.5 million of the
proceeds from this Offering to repay the Loan. See "Use of Proceeds".
Accordingly, debt service requirements of the Company for the next twelve months
are principally for interest and are expected to be approximately $51 million.
The Company's recent losses and the terms of its revolving credit agreement
have limited the Company's ability to borrow significant amounts of additional
funds. Consequently, the Company has been dependent on availability under its
revolving credit agreement ($4.4 million at March 31, 1997) and its operations
to provide for cash needs. The Company has managed liquidity requirements in
recent years by utilizing membership plan discounting techniques designed to
increase its cash sales and 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, if needed in the future, such discounting and acceleration
techniques may be increasingly costly and less effective.
The Company intends to expand and upgrade its facilities in order to
increase its membership base and more effectively capitalize on its streamlined
marketing and administrative functions. Using cash generated by operations and
through leasing arrangements, management plans to make capital expenditures of
approximately $10 million to $12 million over the next twelve months to maintain
and make minor upgrades to the Company's existing facilities, which include
exercise equipment upgrades, HVAC and other operating equipment upgrades and
replacements, and locker room and workout area refurbishments, among others. In
addition, the Company expects to invest approximately $5 million to $10 million
of the proceeds from this 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. 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 $15 million to $25 million of the proceeds from this Offering over
the next three years for capital expenditures to open 15 to 25 new facilities
based on its new prototype.
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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 June 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 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 expects to invest approximately $5
million to $10 million of the
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proceeds from this Offering over the next two years to extensively
refurbish and make major upgrades to approximately 25% of its clubs,
which include converting low-usage pools and racquet areas into expanded
exercise areas and to a lesser extent retail and outpatient
rehabilitation service areas, adding and upgrading exercise equipment,
and refreshing interior and exterior finishes to improve club ambience,
among others. The Company also intends to spend approximately $15 million
to $25 million of the proceeds from this Offering over the next three
years to open 15 to 25 new facilities based on its new prototype. These
facilities are designed to cost less to construct and maintain than the
Company's older facilities. The facilities are expected to range in size
from 10,000 to 45,000 square feet and have the capacity to accommodate
significantly more members than older clubs of the same size because the
new facilities will contain only the most widely used amenities.
- Increase Dues Revenues -- The Company believes that its dues are
substantially less than those charged by its competitors and that it can
significantly increase dues for its members who are beyond their initial
financing period without any material loss in membership.
- Improve Collections on Financed Contracts -- The Company plans to
continue its focus on increasing the downpayment on financed membership
plans and securing payment by EFT, which the Company's experience has
shown results in higher quality receivables. Further, the Company intends
to institute more focused collection efforts based on information
provided by "credit scoring", which management believes will also improve
the yield from the receivables portfolio.
- 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 proceeds from this 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.
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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.
MEMBERSHIP PLANS
The Company currently offers prospective members a number of membership
plans that differ primarily by the inclusion of additional in-club services
(such as racquet sports and child care) and access to other fitness centers
operated by the Company, either locally or nationally. From time to time, the
Company also offers special membership plans which limit access to fitness
centers to certain days and non-peak hours. The initial membership fees for
access to the Company's fitness center facilities range from approximately $349
to $1,179 depending on the membership plan selected, the diversity of facilities
and services available at the club of enrollment, the local competitive
environment, as well as the effects of seasonal promotional strategies.
In addition to the one-time initial membership fee, members pay monthly
membership dues in order to maintain their membership privileges. Monthly dues
for memberships generally range from $4.00 to $5.50 during the typical financing
period for a membership plan and vary based on the type of plan purchased by the
member. Some seasonal promotional programs offered by the Company in the past
have required no dues payments for up to 36 months if the member pays the
initiation fee in full at the time of joining. Renewal dues (those paid after
the typical 36 month initial period ends) range from as little as $2.00 to as
much as $25.00 per month, with increases as contractually permitted. At March
31, 1997, approximately 90% of the Company's members were being charged dues
ranging from $2.00 to $15.00 per month, with the overall average approximately
$7.75 per month. The Company has experienced an annual growth rate of dues
revenues of 7% from 1992 to 1996. The Company expects the annual increases in
dues revenues will continue in the future due to the contractual terms of
current membership plans and the Company's belief that it can significantly
increase dues for its members who are beyond their initial financing period
without any material loss in membership. The Company also offers renewal dues
that vary depending on the member's historical usage of the fitness center
facilities. The Company's recent experience has shown that members faced with a
membership renewal decision for the first time renewed at a rate of
approximately 58% and members faced with a membership renewal decision for
subsequent periods renewed at a rate of approximately 84%.
Members selecting finance membership plans can choose from several payment
mechanisms and downpayment options. The Company expects to continue its focus on
increasing the downpayment it receives on financed membership contracts and on
securing payment by 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.
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On average, the Company received a downpayment of approximately $75 on
contracts that were financed during 1996. This downpayment adequately defrays
both the initial account set-up cost as well as any collection costs should the
account become immediately delinquent. As a result, the Company is able to
attract new members who might otherwise be rejected while covering the
incremental cost of new membership processing and collection through the
downpayment. The Company does not perform individual credit checks on
prospective members. This is due, in part, to the high cost associated with
performing credit checks on the large volume of prospective members, but also
due to the Company's ability, from past performance, to measure the average
value of contracts between coupon book and EFT payers and satisfactorily manage
credit risk. Historical analysis performed by the Company indicates that the
collection experience of EFT accounts is approximately 50% better than that of
coupon book accounts. As of June 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 $5
million to $10 million of the proceeds from this 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 $15 million to $25
million of the proceeds from this Offering over the next three years to open 15
to 25 new facilities based on its new prototype. These facilities are designed
to cost less to construct and maintain than the Company's older facilities. The
facilities are expected to range in size from 10,000 to 45,000 square feet and
have the capacity to accommodate significantly more members than older clubs of
the same size because 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 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.
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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, will be 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.
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 June 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 June 30, 1997, the RSCs employed approximately 770 people in the
account processing and collection areas, including approximately 155 employees
dedicated to customer service, approximately 340 employees dedicated to account
processing and administration and approximately 275 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
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accounts, depending on the period of delinquency. At 30 and 60 days past due,
the accounts are assigned to power dialer assisted collectors initially as a
reminder and later as a demand for payment. Accounts that have not been
collected for a 90-day period are transferred to a group of the most experienced
collectors (unless the first scheduled payment has not been received on such
accounts, in which case they are generally written-off and any downpayment
received is not refunded). All remaining delinquent accounts are written-off
after 180 days without payment. Written-off accounts are reported to credit
reporting bureaus and sold to a third-party collection group. The Company
intends to modify its collection efforts based on the information provided by
"credit scoring", which management believes will improve the yield from the
receivables portfolio. For example, the Company would not make costly collection
calls to a member with a strong credit history until late in the collection
cycle. Likewise, the Company would aggressively pursue collection tactics on a
member with poor credit scoring early in the delinquency period and reduce
collection efforts if results were not quickly realized. By tailoring its
collection approach to reflect a delinquent member's likeliness to pay, the
Company believes it can collect more of its receivables at a lower cost. The
Company uses a national bureau which charges the Company a nominal fee per
credit score. Beginning in March 1997, the Company has credit scored a majority
of its financed members.
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 $86.7 million,
$85.9 million and $83.3 million for 1996, 1995 and 1994, respectively. Most
leases require the Company to pay real estate taxes, insurance, maintenance and,
in the case of shopping center and office building locations, common area
maintenance fees. A limited number of leases also provide for percentage rental
based on receipts. Various leases also provide for rent adjustments based on
changes in the Consumer Price Index, most with limits provided to protect the
Company. Two fitness centers each accounted for between 1% to 2% of the
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Company's net revenues during 1996. The Company believes its properties are
adequate for its current membership.
Leases for fitness centers entered into in the last five years generally
provide for an original term of no less than 15 years and, in some cases, for 20
years. Most leases for fitness centers contain at least one five-year option to
renew and often two or more such options.
The Company's executive offices are located in Chicago, Illinois where it
is co-tenant at a monthly base rental cost to the Company of $43,700. The lease
expires in January 2003. The Company also leases space in Huntington Beach,
California and Towson, Maryland for RSC operations.
TRADEMARKS AND TRADE NAMES
In 1996, the Company completed the process of renaming its fitness centers
so they all use the servicemark "Bally Total Fitness", thereby enhancing brand
identity, concentrating advertising and eliminating the prior practice of using
more than 25 different regional servicemarks or trade names. The name "Bally
Total Fitness" is a servicemark of Hilton as successor to Entertainment. In
January 1996, the Company and Entertainment entered into a 10-year trademark
license agreement to allow the Company to use certain marks, including the
"Bally Total Fitness" servicemark, in connection with its fitness center
business. The Company paid no royalty or license fee for the first year of the
license and now pays a fee of $1.0 million per year. Following the initial
ten-year term, the Company has the option to renew the license for an additional
five-year period at a rate equal to the greater of the fair market value or $1.0
million per year.
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 June 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 770 are involved in the operation of the
RSCs and approximately 280 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
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Company maintains internal review procedures in order to comply with these
requirements and it believes that its activities are in substantial compliance
with all applicable statutes, rules and decisions.
Under so-called state "cooling-off" statutes, members of fitness centers
have the right to cancel their memberships for a period of three to ten days
after the date the contract was entered into (depending on the applicable state
law) and are entitled to refunds of any payment made. In addition, the Company's
membership contracts provide that a member may cancel his or her membership at
any time for qualified medical reasons or if the member relocates a certain
distance away from the health club, and a membership may be canceled in the
event of a member's death. The specific procedures for cancellation in these
circumstances vary according to differing state laws. In each instance, the
canceling member is entitled to a refund of prepaid amounts only. Furthermore,
where permitted by law, a cancellation fee is due to the Company upon
cancellation and the Company may offset such amount against any refunds owed.
The Company is a party to several state and federal consent orders. From
time to time, the Company makes minor adjustments in its operating procedures to
comply with such consent orders. The consent orders essentially require
continued compliance with applicable laws and require that the Company refrain
from activities that are not in compliance with applicable laws.
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. 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.
26
<PAGE> 28
MANAGEMENT
The following table sets forth certain information concerning the Company's
directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH COMPANY
---------------------------- --- ---------------------------------------------
<S> <C> <C>
Arthur M. Goldberg 55 Chairman of the Board
Lee S. Hillman 41 President, Chief Executive
Officer and Director
John W. Dwyer 44 Sr. Vice President, Chief Financial
Officer and Treasurer
Cary A. Gaan 51 Sr. Vice President, Secretary and General
Counsel
Harold Morgan 40 Sr. Vice President, Human Resources
David M. Tolmie 42 Sr. Vice President,
New Business Development
John H. Wildman 37 Sr. Vice President, Sales and Marketing
Julie Adams 52 Vice President and Controller
Aubrey C. Lewis 62 Director
J. Kenneth Looloian 74 Director
James F. Mc Anally, M.D. 48 Director
Liza M. Walsh 39 Director
</TABLE>
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
and Treasurer of the Company in October 1996. 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.
27
<PAGE> 29
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.
David M. Tolmie was elected Vice President of Planning and Development of
the Company in January 1995, Senior Vice President, Operations of the Company in
September 1995 and Senior Vice President, New Business Development of the
Company in October 1996. Mr. Tolmie rejoined the Company after having served as
President of Foundation Properties, Inc. (a real estate development, property
management and sales company) from 1990 to 1994. Between 1985 and 1990, Mr.
Tolmie worked for a subsidiary of the Company.
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.
Julie Adams was elected Vice President and Controller of the Company in
January 1994 and was Controller of the Company from December 1992 to January
1994. Ms. Adams was Director of Financial Reporting of the Company from August
1985 to December 1992.
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
and has been a member of the firm since 1992. Ms. Walsh has also served as an
Arbitrator for the United States District Court for the District of New Jersey
since 1990.
28
<PAGE> 30
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Ladenburg Thalmann & Co.
Inc. ("Ladenburg Thalmann") and Jefferies & Company, Inc. are acting as
representatives (the "Representatives"), has severally agreed to purchase from
the Company, the respective numbers of shares of Common Stock set forth opposite
its name below at the public offering price less the underwriting discount set
forth on the cover page of this Prospectus. In the Purchase Agreement, the
several Underwriters have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock offered hereby if any of
such shares are purchased. In the event of default by an Underwriter, the
Purchase Agreement provides that, in certain circumstances, the purchase
commitments of the nondefaulting Underwriter may be increased or the Purchase
Agreement may be terminated.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
------------------------------------------------------------------ -------------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..........................................
Ladenburg Thalmann & Co. Inc......................................
Jefferies & Company, Inc..........................................
---------
Total................................................. 6,000,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the offering
price set forth on the cover page of this Prospectus, and to certain dealers at
such price less a concession not in excess of $ per share. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. After the Offering contemplated hereby, the
offering price and other selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
900,000 additional shares of Common Stock at the public offering price set forth
on the cover page hereof, less the underwriting discount. The Underwriters may
exercise such option only to cover over-allotments, if any, made in connection
with the sale of Common Stock offered hereby. To the extent that the
Underwriters exercise this option, each Underwriter will have a firm commitment,
subject to certain conditions, to purchase approximately the same percentage
thereof which the number of shares of Common Stock to be purchased by it shown
in the above table is of the 6,000,000 shares of Common Stock initially offered
hereby. If purchased, the Underwriters will offer such additional shares on the
same terms as those on which the 6,000,000 shares are being offered.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission (the "Commission") may limit the ability of
the Underwriters and certain selling group members (if any) to bid for and
purchase the Common Stock. As an exception to these rules, the Representatives
are permitted to engage in certain transactions that stabilize the price of the
Common Stock.
29
<PAGE> 31
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering (i.e., if they sell a greater number of shares of
Common Stock than is set forth on the cover page of this Prospectus), the
Representatives may reduce that short position by purchasing shares of Common
Stock in the open market. The Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
In connection with this Offering, the Underwriters or their respective
affiliates and selling group members (if any) who are qualified market makers on
Nasdaq may engage in "passive market making" in the Common Stock on the Nasdaq
National Market in accordance with Rule 103 of Regulation M under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Rule 103 permits, upon
the satisfaction of certain conditions, underwriters and selling group members
participating in a distribution that are also Nasdaq market makers in the
security being distributed (or a related security) to engage in limited market
making transactions during the period when Regulation M under the Exchange Act
would otherwise prohibit such activity. Rule 103 prohibits underwriters and
selling group members engaged in passive market making generally from entering a
bid or effecting a purchase at a price that exceeds the highest bid for those
securities displayed on the Nasdaq Nation Market by a market maker that is not
participating in the distribution. Under Rule 103, each underwriter or selling
group member engaged in passive market making is subject to a daily net purchase
limitation equal to 30% of such entity's average daily trading volume during the
two full consecutive calendar months immediately preceding the date of the
filing of the registration statement under the Securities Act pertaining to the
security to be distributed (or such related security).
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act.
The Company and each of the executive officers and directors of the Company
have agreed not to, directly or indirectly, offer, pledge, sell, contract to
sell or otherwise transfer or dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock
without the prior written consent of Merrill Lynch for a period of 120 days from
the date of this Prospectus, except that the Company may, without such consent,
issue shares of Common Stock upon the exercise or conversion of any outstanding
options or warrants, or grant options to purchase shares of Common Stock
pursuant to the Company's stock option plans.
Pursuant to the Loan, LTCC, an affiliate of Ladenburg Thalmann, loaned the
Company $7.5 million due upon the earlier of the closing of this Offering or
October 8, 1997. The Loan bears interest at 13% and is an unsecured obligation
of the Company. LTCC received a commitment fee of $75,000 and warrants to
purchase 250,000 shares of Common Stock in connection therewith. The warrants,
which are not transferable by LTCC prior to July 11, 1998, have an exercise
price equal to the lesser of $10 per share or 120% of the per share price of the
Common Stock offered hereby, are exercisable for five years and have certain
registration rights.
LEGAL MATTERS
The validity, authorization and issuance of the shares of Common Stock
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 23,859 shares of Common Stock.
30
<PAGE> 32
Certain legal matters will be passed on for the Underwriters by Morgan, Lewis &
Bockius LLP of New York, New York.
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 in this Prospectus and the Registration Statement
(as hereinafter defined) have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein and
in the Registration Statement, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
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 Commission. Reports, registration statements, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facility maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and the Commission'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 Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549. The Commission 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 Commission.
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") with the Commission under the Securities Act of 1933,
as amended, in respect of the Common Stock offered 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 Commission. For further information with respect to the
Company and the Common Stock offered 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 Commission as an exhibit to the Registration Statement,
or otherwise, each such statement being qualified by, and subject to, such
reference in all respects.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission 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); and
(3) the description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A/A filed with the
Commission 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 termination of the Offering 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
31
<PAGE> 33
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.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED.
32
<PAGE> 34
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------------
<S> <C>
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 March 31, 1997 (unaudited)........... F-23
Consolidated statement of operations for the three months ended March 31,
1997 and 1996 (unaudited).................................................. F-24
Consolidated statement of stockholders' equity for the three months ended
March 31, 1997 (unaudited)................................................. F-25
Consolidated statement of cash flows for the three months ended March 31,
1997 and 1996 (unaudited).................................................. F-26
Notes to condensed consolidated financial statements for the three months
ended March 31, 1997 and 1996 (unaudited).................................. F-28
</TABLE>
F-1
<PAGE> 35
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
<PAGE> 36
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
(As restated)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents............................................... $ 16,534 $ 21,263
Installment contracts receivable, net.............................. 153,235 155,504
Deferred income taxes.............................................. 6,953
Other current assets............................................... 24,075 20,216
-------- --------
Total current assets............................................ 193,844 203,936
Long-term installment contracts receivable, net...................... 146,972 147,856
Property and equipment, at cost:
Land............................................................... 22,550 22,550
Buildings.......................................................... 108,361 106,945
Leasehold improvements............................................. 400,340 393,418
Equipment and furnishings.......................................... 99,073 119,253
-------- --------
630,324 642,166
Accumulated depreciation and amortization.......................... 304,865 293,698
-------- --------
Net property and equipment...................................... 325,459 348,468
Intangible assets, less accumulated amortization of $49,619 and
$45,117............................................................ 105,725 110,227
Deferred income taxes................................................ 13,656
Deferred membership origination costs................................ 82,140 86,253
Other assets......................................................... 25,506 39,771
-------- --------
$893,302 $936,511
======== ========
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
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 37
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share data)
(As restated)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues:
Membership revenues --
Initial membership fees on paid-in-full memberships
originated.......................................... $ 85,624 $ 95,695 $ 102,961
Initial membership fees on financed memberships
originated.......................................... 290,378 309,974 322,752
Dues collected........................................ 182,909 177,783 173,549
Change in deferred revenues........................... 29,791 16,813 26,975
---------- ---------- ----------
588,702 600,265 626,237
Finance charges earned................................... 36,405 36,889 34,877
Fees and other........................................... 15,080 16,399 20,929
---------- ---------- ----------
640,187 653,553 682,043
Operating costs and expenses:
Fitness center operations................................ 366,466 396,564 407,119
Member processing and collection centers................. 42,257 50,255 52,080
Advertising.............................................. 47,428 50,037 47,578
General and administrative............................... 23,586 21,603 21,925
Provision for doubtful receivables....................... 80,350 72,145 103,930
Depreciation and amortization............................ 55,940 57,359 58,856
Change in deferred membership origination costs.......... 4,113 428 6,692
---------- ---------- ----------
620,140 648,391 698,180
---------- ---------- ----------
Operating income (loss).................................... 20,047 5,162 (16,137)
Interest expense........................................... 47,644 43,750 38,556
---------- ---------- ----------
Loss before income taxes and extraordinary item............ (27,597) (38,588) (54,693)
Income tax benefit......................................... (2,700) (7,188) (15,213)
---------- ---------- ----------
Loss before extraordinary item............................. (24,897) (31,400) (39,480)
Extraordinary gain on extinguishment of debt............... 5,655
---------- ---------- ----------
Net loss................................................... $ (19,242) $ (31,400) $ (39,480)
========== ========== ==========
Pro forma net loss reflecting income taxes
on a separate return basis............................... $ (38,469) $ (54,640)
========== ==========
Per common share (pro forma for 1995 and 1994):
Loss before extraordinary item........................... $ (2.04) $ (3.25) $ (4.61)
Extraordinary gain on extinguishment of debt............. .46
---------- ---------- ----------
Net loss................................................. $ (1.58) $ (3.25) $ (4.61)
========== ========== ==========
Average common shares outstanding (pro forma for
1995 and 1994)........................................... 12,174,601 11,845,161 11,845,161
========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 38
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(As restated)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED UNEARNED
------------------- EARNINGS COMPENSATION TOTAL
NUMBER PAR CONTRIBUTED (ACCUMULATED (RESTRICTED STOCKHOLDERS'
OF SHARES VALUE CAPITAL DEFICIT) STOCK) EQUITY
---------- ----- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993, as
originally reported............ 19,000,000 $190 $ 238,007 $ 23,118 $ $ 261,315
Cumulative effect of change in
accounting for membership
revenue........................ (210,729) (210,729)
---------- ---- --------- --------- -------- ---------
Balance at December 31, 1993, as
restated....................... 19,000,000 190 238,007 (187,611) 50,586
Net loss......................... (39,480) (39,480)
Settlement of pre-acquisition
contingency.................... (7,669) (7,669)
Forgiveness of income tax
obligation by Bally
Entertainment Corporation...... 31,400 31,400
---------- ---- --------- --------- -------- ---------
Balance at December 31, 1994..... 19,000,000 190 261,738 (227,091) 34,837
Net loss......................... (31,400) (31,400)
Effects of spin-off from Bally
Entertainment Corporation:
Forgiveness of income tax
obligation by Bally
Entertainment
Corporation................ 44,507 44,507
Increase in income tax
valuation allowance due to
adjustments to the income
tax basis of certain
assets..................... (20,147) (20,147)
Excess of sales price over
historical basis of assets
sold to Bally Entertainment
Corporation................ 3,892 3,892
Reduction in number of shares
issued and outstanding..... (7,154,839) (72) 72 --
---------- ---- --------- --------- -------- ---------
Balance at December 31, 1995..... 11,845,161 118 290,062 (258,491) 31,689
Net loss......................... (19,242) (19,242)
Common stock issued under long-
term incentive plan............ 650,000 7 4,389 (4,396) --
Capital contributions by Bally
Entertainment Corporation...... 9,360 9,360
Amortization of unearned
compensation................... 2,345 2,345
---------- ---- --------- --------- -------- ---------
Balance at December 31, 1996..... 12,495,161 $125 $ 303,811 $(277,733) $ (2,051) $ 24,152
========== ==== ========= ========= ======== =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 39
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(As restated)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
OPERATING:
Loss before extraordinary item.......................... $ (24,897) $ (31,400) $ (39,480)
Adjustments to reconcile to cash provided (used)--
Depreciation and amortization, including amortization
included in interest expense....................... 59,124 60,701 60,760
Provision for doubtful receivables................... 80,350 72,145 103,930
Change in operating assets and liabilities........... (119,764) (112,922) (94,150)
Other, net........................................... (114) 1,622 1,774
--------- --------- ---------
Cash provided by (used in) operating
activities.................................... (5,301) (9,854) 32,834
INVESTING:
Purchases and construction of property and equipment.... (20,612) (22,469) (21,357)
Reserve fund deposit refunded (paid) pursuant to
securitization facility.............................. 10,000 (20,000)
Other, net.............................................. 833 353 (19)
--------- --------- ---------
Cash used in investing activities............... (9,779) (42,116) (21,376)
FINANCING:
Debt transactions --
Proceeds from securitization facility................ 160,000 150,000
Proceeds from other long-term borrowings............. 2,318
Repayment of securitization facility................. (153,613)
Net repayments under revolving credit agreement...... (77,000) (3,910)
Repayments of other long-term debt................... (2,299) (5,917) (5,149)
Debt issuance costs.................................. (2,815) (6,654) (575)
--------- --------- ---------
Cash provided by (used in) debt transactions.... 3,591 60,429 (9,634)
Equity transaction --
Capital contribution by Bally Entertainment
Corporation........................................ 6,760
--------- --------- ---------
Cash provided by (used in) financing
activities.................................... 10,351 60,429 (9,634)
--------- --------- ---------
Increase (decrease) in cash and equivalents............... (4,729) 8,459 1,824
Cash and equivalents, beginning of year................... 21,263 12,804 10,980
--------- --------- ---------
Cash and equivalents, end of year......................... $ 16,534 $ 21,263 $ 12,804
========= ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 40
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
(In thousands)
(As restated)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOWS INFORMATION:
Changes in operating assets and liabilities, net of
effects from acquisitions or sales, were as follows --
Increase in installment contracts receivable........ $ (75,491) $ (91,422) $(65,890)
(Increase) decrease in other current and other
assets............................................ (4,063) 1,589 (3,081)
Decrease in deferred membership origination costs... 4,113 428 6,692
Decrease in accounts payable........................ (475) (498) (85)
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
</TABLE>
See accompanying notes.
F-7
<PAGE> 41
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 this Prospectus, it will now require all
registrants operating fitness centers with membership plans that include initial
membership fees to follow a "deferral method" of accounting with respect to the
recognition of such initial membership fees. The Company's fitness centers
primarily offer a dues membership, which permits members, upon paying initial
membership fees, which may be financed, to maintain their membership on a
month-to-month basis as long as monthly dues payments are made. Since 1985, the
Company has recognized the initial membership fee portion of the membership as
revenue at the time the membership was sold (when contractually enforceable) and
deferred the dues portion of such membership (when the dues were waived or
prepaid) under a method that approximated the "selling and service" method. In
connection with this Prospectus, 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
<PAGE> 42
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:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- ---------------------
AS AS AS
ORIGINALLY AS ORIGINALLY AS ORIGINALLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Financial position --
Deferred membership
origination costs..... $ -- $ 82,140 $ -- $ 86,253
Current deferred
revenues.............. 55,927 265,465 61,881 285,153
Long-term deferred
revenues.............. 26,440 98,032 29,686 107,960
Stockholders' equity..... 216,507 24,152 240,347 31,689
Results of operations --
Net revenues............. $ 625,640 $640,187 $ 661,740 $653,553 $ 661,505 $682,043
Operating income
(loss)................ 3,744 20,047 7,591 5,162 (37,248) (16,137)
Loss before extraordinary
item.................. (41,200) (24,897) (25,160) (31,400) (50,791) (39,480)
Net loss................. (35,545) (19,242) (25,160) (31,400) (50,791) (39,480)
Net loss per common share
(pro forma for 1995
and 1994)............. (2.92) (1.58) (3.08) (3.25) (6.44) (4.61)
</TABLE>
Cash equivalents
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents. The carrying amount
of cash equivalents approximates fair value due to the short maturity of those
instruments.
Property and equipment
Depreciation of buildings, equipment and furnishings is provided on the
straight-line method over the estimated economic lives of the related assets and
amortization of leasehold improvements is provided on the straight-line method
over the lesser of the estimated economic lives of the improvements or the lease
periods. Depreciation and amortization of property and equipment was $48,444,
$51,999 and $53,476 for 1996, 1995 and 1994, respectively.
Deferred finance costs
Deferred finance costs are amortized over the terms of the related debt
using the bonds outstanding method. Included in "Other assets" at December 31,
1996 and 1995 were deferred finance costs of $8,252 and $10,971, respectively,
net of accumulated amortization of $4,430 and $4,034, respectively.
Intangible assets
Intangible assets consist principally of cost in excess of net assets of
acquired businesses (goodwill), which is being amortized on the straight-line
method over periods ranging up to forty years from dates of acquisition, and
amounts assigned to acquired operating lease rights, which are being amortized
on the straight-line method over the remaining lease periods.
F-9
<PAGE> 43
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
The Company evaluates annually whether the remaining estimated useful life
of goodwill may warrant revision or the remaining balance of goodwill may not be
recoverable, generally considering expectations of future profitability and cash
flows (undiscounted and without interest charges) on a consolidated basis. If
the sum of the Company's expected future cash flows was less than the carrying
value of the Company's long-lived assets and identifiable intangibles, an
impairment loss would be recognized equal to the amount by which the carrying
value of the Company's long-lived assets and identifiable intangibles exceeded
their fair value. Based on present operations and strategic plans, the Company
believes that no impairment of goodwill exists at December 31, 1996. However, if
future operations do not perform as expected, or if the Company's strategic
plans for its business were to change, a reduction in the carrying value of
these assets may be required.
Membership revenue recognition
The Company's fitness centers primarily offer a dues membership, which
permits members, upon paying initial membership fees, which may be financed, to
maintain their membership on a month-to-month basis as long as monthly dues
payments are made. Initial membership fees may be paid-in-full when members join
or may be financed via installment contracts over periods ranging up to 36
months. Revenues from initial membership fees are deferred and recognized
straight-line over the weighted average expected life of the memberships, which
for paid-in-full memberships and financed memberships sold after December 31,
1993 has been calculated to be 36 months and 22 months, respectively (previously
34 months and 20 months, respectively). Costs directly related to the
origination of memberships (substantially all of which are sales commissions
paid, which are included in "Fitness center operations") are also deferred and
are amortized using the same methodology as for initial membership fees
described above. Dues revenue is recorded as monthly services are provided.
Accordingly, when dues are prepaid, the prepaid portion is deferred and
recognized over the applicable term. Installment contracts bear interest at, or
are adjusted for financial accounting purposes at the time the contracts are
sold to, rates for comparable consumer financing contracts. Unearned finance
charges are amortized over the term of the contracts on the
sum-of-the-months-digits method, which approximates the interest method.
Components of deferred revenues as of December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------- -------------------------------
CURRENT LONG-TERM TOTAL CURRENT LONG-TERM TOTAL
-------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Paid-in-full initial
membership fees
deferred................. $ 75,614 $55,278 $130,892 $ 81,563 $ 58,400 $139,963
Financed initial membership
fees deferred............ 148,251 31,981 180,232 162,918 35,967 198,885
Prepaid dues............... 41,600 10,773 52,373 40,672 13,593 54,265
-------- -------- -------- -------- -------- --------
$265,465 $98,032 $363,497 $285,153 $ 107,960 $393,113
======== ======== ======== ======== ======== ========
</TABLE>
F-10
<PAGE> 44
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
Components of the change in deferred revenues for the years ended December
31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Paid-in-full initial memberships fees --
Originating....................................... $ (85,624) $ (95,695) $(102,961)
Recognized........................................ 94,870 116,608 138,654
--------- --------- ---------
Decrease in deferral........................... 9,246 20,913 35,693
Financed initial membership fees --
Originating....................................... (290,378) (309,974) (322,752)
Less provision for doubtful receivables........... 80,350 72,145 103,930
--------- --------- ---------
Originating, net.................................. (210,028) (237,829) (218,822)
Recognized........................................ 228,681 220,885 215,270
--------- --------- ---------
Decrease (increase) in deferral................ 18,653 (16,944) (3,552)
Decrease (increase) in prepaid dues................. 1,892 12,844 (5,166)
--------- --------- ---------
Change in deferred revenues......................... $ 29,791 $ 16,813 $ 26,975
========= ========= =========
</TABLE>
Components of the change in deferred membership origination costs for the
years ended December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Incurred (substantially all of which are sales
commissions paid, which are included in "Fitness
center operations")............................... $ (77,257) $ (82,720) $ (85,704)
Amortized........................................... 81,370 83,148 92,396
--------- --------- ---------
Change in deferred membership origination costs..... $ 4,113 $ 428 $ 6,692
========= ========= =========
</TABLE>
Income taxes
For tax periods after January 9, 1996, the Company is required to file its
own separate consolidated federal income tax return. For tax periods prior to
and including January 9, 1996, taxable income or loss of the Company was
included in the consolidated federal income tax return of Entertainment.
Pursuant to a tax sharing agreement with Entertainment, income taxes were
allocated to the Company based on amounts the Company would pay or receive if it
filed a separate consolidated federal income tax return, except that the Company
received from Entertainment an amount equal to the tax benefit of the Company's
net operating losses and tax credits, if any, that could be utilized in
Entertainment's consolidated federal income tax return, whether or not such
losses or credits could be utilized by the Company on a separate return basis.
As a result of the Spin-off, the Company and Entertainment entered into the Tax
Allocation and 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
<PAGE> 45
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
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Current:
Installment contracts receivable............................. $226,173 $244,522
Less --
Unearned finance charges.................................. 24,467 27,128
Allowance for doubtful receivables and cancellations...... 48,471 61,890
-------- --------
$153,235 $155,504
======== ========
Long-term:
Installment contracts receivable............................. $195,978 $211,549
Less --
Unearned finance charges.................................. 11,382 13,055
Allowance for doubtful receivables and cancellations...... 37,624 50,638
-------- --------
$146,972 $147,856
======== ========
</TABLE>
The carrying amount of installment contracts receivable at December 31,
1996 and 1995 approximates fair value based on discounted cash flow analyses,
using interest rates in effect at the end of each year comparable to similar
consumer financing contracts.
F-12
<PAGE> 46
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
ACCRUED LIABILITIES
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Payroll and benefit-related liabilities........................ $ 16,384 $ 18,263
Interest....................................................... 11,938 12,041
Taxes other than income taxes.................................. 3,853 7,389
Other.......................................................... 22,888 27,284
-------- --------
$ 55,063 $ 64,977
======== ========
</TABLE>
LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Nonsubordinated:
Securitization facility...................................... $160,000 $150,000
Revolving credit agreement................................... -- --
Capital lease obligations.................................... 6,686 2,176
Other secured and unsecured obligations...................... 18,112 17,337
Subordinated:
13% Senior Subordinated Notes due 2003....................... 200,000 200,000
-------- --------
Total long-term debt........................................... 384,798 369,513
Current maturities of long-term debt........................... (8,401) (1,481)
-------- --------
Long-term debt, less current maturities........................ $376,397 $368,032
======== ========
</TABLE>
In December 1996, the Company refinanced its $150,000 securitization
facility by completing a private placement of asset-backed securities (the
"Securitization") pursuant to which $145,500 of 8.43% Accounts Receivable Trust
Certificates and $14,500 of Floating Rate Accounts Receivable Trust Certificates
(the "Floating Certificates") 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
F-13
<PAGE> 47
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
credit totalled $12,687. The revolving credit agreement is secured by
substantially all real and personal property (excluding installment contracts
receivable) of the Company.
The Company leases certain fitness equipment under capital leases expiring
in periods ranging from three to five years. Included in "Property and
equipment" at December 31, 1996 and 1995 were assets recorded under capital
leases of $11,981 and $6,018, respectively, net of accumulated amortization of
$3,318 and $1,611, respectively.
The 13% Senior Subordinated Notes due 2003 (the "13% Notes") are not
subject to any sinking fund requirement, but may be redeemed beginning in
January 1998, in whole or in part, with premiums ranging from 6.5% in 1998 to
zero in 2000 and thereafter. The payment of the 13% Notes is subordinated to the
prior payment in full of all senior indebtedness of the Company, as defined
(approximately $198,000 at December 31, 1996).
The Company is restricted from paying cash dividends by the terms of its
13% Notes and its revolving credit agreement. The covenants also limit the
amounts available for capital expenditures, restrict additional borrowings, and
require maintenance of certain financial ratios.
Maturities of long-term debt and future minimum payments under capital
leases together with the present value of future minimum rentals as of December
31, 1996 are as follows:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL
DEBT LEASES TOTAL
--------- ------- --------
<S> <C> <C> <C>
1997................................................ $ 6,725 $ 2,398 $ 9,123
1998................................................ 6,711 2,420 9,131
1999................................................ 66,187 1,956 68,143
2000................................................ 95,414 1,341 96,755
2001................................................ 743 267 1,010
Thereafter.......................................... 202,332 202,332
-------- ------ --------
378,112 8,382 386,494
Less amount representing interest................... 1,696 1,696
-------- ------ --------
$ 378,112 $ 6,686 $384,798
======== ====== ========
</TABLE>
The fair value of the Company's long-term debt at December 31, 1996 and
1995 approximates its carrying amount, except for the 13% Notes which had a fair
market value (based on quoted market prices) of $190,875 and $161,500 at
December 31, 1996 and 1995, respectively. The fair values are not necessarily
indicative of the amounts the Company could acquire the debt for in a purchase
or redemption.
INCOME TAXES
The income tax provision (benefit) applicable to loss before income taxes
and extraordinary item consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Federal (all current)............................... $(3,050) $(7,069) $(15,160)
State and other (all current)....................... 350 (119) (53)
------- -------- --------
$(2,700) $(7,188) $(15,213)
======= ======== ========
</TABLE>
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
F-14
<PAGE> 48
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
Company's deferred tax assets and liabilities as of December 31, 1996 and 1995,
along with their classification, are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Installment contract revenues.............. $ 27,466 $ $ 73,503 $
Amounts not yet deducted for tax purposes:
Bad debts............................. 33,509 48,630
Other................................. 14,275 13,253
Amounts not yet deducted for book purposes:
Deferred membership origination
costs............................... 32,412 38,064
Depreciation and capitalized costs......... 2,308 5,791
Tax loss carryforwards..................... 118,313 49,817
Other, net................................. 1,460 2,012
-------- ------- -------- -------
193,563 $36,180 185,203 $45,867
======= =======
Valuation allowance........................ (158,872) (140,825)
-------- --------
$ 34,691 $ 44,378
======== ========
Current.................................... $ 7,420 $22,565 $ 33,964 $27,011
Long-term.................................. 27,271 13,615 10,414 18,856
-------- ------- -------- -------
$ 34,691 $36,180 $ 44,378 $45,867
======== ======= ======== =======
</TABLE>
Upon consummation of the Spin-off, a portion of Entertainment's federal tax
loss and Alternative Minimum Tax ("AMT") credit carryforwards were allocated to
the Company pursuant to U.S. Treasury Regulations. The amount of carryforwards
allocated to the Company may ultimately be different as a result of Internal
Revenue Service (the "IRS") adjustments. At December 31, 1996, estimated federal
AMT credit and tax loss carryforwards of $2,987 and $243,508, respectively, have
been recorded by the Company. The AMT credits can be carried forward
indefinitely, while the tax loss carryforwards expire through 2011. In addition,
the Company has substantial state tax loss carryforwards which begin to expire
in 1997 and fully expire through 2011. Based upon the Company's past performance
and the expiration dates of its carryforwards, the ultimate realization of all
of the Company's deferred tax assets can not be assured. Accordingly, a
valuation allowance has been recorded to reduce deferred tax assets to a level
which, more likely than not, will be realized.
A reconciliation of the income tax benefit with amounts determined by
applying the U.S. statutory tax rate to loss before income taxes and
extraordinary item is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Benefit at U.S. statutory tax rate (35%).............. $ (9,659) $(13,506) $(19,143)
Add (deduct):
Operating losses without a current year tax
benefit.......................................... 5,509 4,904 3,309
State income taxes, net of related federal income
tax effect and valuation allowance............... 770 96 (695)
Amortization of cost in excess of acquired assets... 1,411 1,391 1,393
Prior years' taxes.................................. (5) (336) (327)
Other, net.......................................... (726) 263 250
-------- -------- --------
Income tax benefit.................................... $ (2,700) $ (7,188) $(15,213)
======== ======== ========
</TABLE>
In May 1994, the Company, Entertainment and the IRS reached a settlement
with respect to certain income tax matters. As the Company adequately provided
deferred and current taxes in connection therewith,
F-15
<PAGE> 49
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
the settlement did not have an adverse effect on the Company's consolidated
financial position or results of operations. For financial accounting purposes,
this settlement resulted in a reversal of previously recorded pre-acquisition
contingencies totaling $10,331, which was reflected as a reduction of intangible
assets. Since Entertainment had agreed to indemnify the Company for a
substantial portion of such contingencies, the settlement resulted in a $7,669
reduction of contributed capital.
STOCKHOLDERS' EQUITY
The Series A Junior Participating Preferred Stock, $.10 par value (the
"Series A Junior Stock"), if issued, will have a minimum preferential quarterly
dividend payment equal to the greater of (i) $1.00 per share and (ii) an amount
equal to 100 times the aggregate dividends declared per share of Common Stock
during the related quarter. In the event of liquidation, the holders of the
shares of Series A Junior Stock will be entitled to a preferential liquidation
payment equal to the greater of (a) $100 per share and (b) an amount equal to
100 times the liquidation payment made per share of Common Stock. Each share of
Series A Junior Stock will have 100 votes, voting together with the shares of
Common Stock. Finally, in the event of any merger, consolidation or other
transaction in which shares of Common Stock are exchanged, each share of Series
A Junior Stock will be entitled to receive 100 times the amount received per
share of Common Stock. These rights are protected by customary antidilution
provisions.
The Board of Directors of the Company adopted the Stockholder Rights Plan
and issued and distributed a Right for each share of Common Stock distributed to
Entertainment stockholders pursuant to the Spin-off. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Junior Stock at a price of $40.00 per one one-hundredth of a share of
Series A Junior Stock, subject to adjustment (the "Purchase Price").
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
<PAGE> 50
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
<PAGE> 51
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:
<TABLE>
<CAPTION>
NUMBER WEIGHTED-
OF SHARES AVERAGE RANGE OF
REPRESENTED EXERCISE EXERCISE
BY OPTIONS PRICE PRICES
----------- --------- --------------
<S> <C> <C> <C>
Granted................................... 1,594,580 $ 4.23 $4.125 - 5.125
Forfeited................................. (249,920) 4.125 4.125
---------
Outstanding at December 31, 1996, none of
which were exercisable.................. 1,344,660 4.25 4.125 - 5.125
=========
</TABLE>
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
F-18
<PAGE> 52
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
upon reaching certain targeted stock prices in 1996 and, accordingly, the fair
value of these shares ($2,345) was amortized to expense in connection therewith.
The weighted-average fair value of restricted Common Stock awarded in 1996 was
$4.87 per share as determined under SFAS No. 123.
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.
F-19
<PAGE> 53
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
TRANSACTIONS WITH ENTERTAINMENT
In connection with the Spin-off, the Company issued Entertainment a warrant
(the "Warrant") entitling Entertainment to acquire 2,942,805 shares of Common
Stock at an exercise price of $5.26 per share (equal to 110% of the average
daily closing price of the Common Stock for the twenty consecutive trading days
beginning on the first trading day after the Distribution Date). At the time of
the Merger, Entertainment sold the Warrant to two directors and executive
officers of the Company. The Warrants are exercisable until December 31, 2005.
In January 1996, the Company and Entertainment entered into a Trademark
License Agreement pursuant to which Entertainment (Hilton after the Merger)
licenses the use of the name "Bally" and certain trademarks, trade names and
servicemarks to the Company in connection with its fitness center business. The
license is for a period of ten years, subject to termination in certain
circumstances. The Company paid no royalty or license fee for the first year and
pays a fee of $1,000 per year thereafter. Following the initial ten-year term,
the Company has an option to renew the license for an additional five-year
period at a rate equal to the greater of the then market rate or $1,000 per
year.
In connection with the Spin-off, Entertainment purchased a fitness center
from the Company for $6,200. The Company and Entertainment entered into a
management agreement pursuant to which the Company provides certain
administrative services to Entertainment in connection with the operation of
this fitness center, including membership contract processing, membership card
issuance, collections, processing cash receipts and renewal solicitation.
Entertainment pays the Company a management fee equal to 4% of membership
revenues and 2% of total revenues of this fitness center for these services,
which was $279 for 1996. In addition, Entertainment purchased from the Company
all of the shares of capital stock and warrants to purchase shares of capital
stock of Holmes Place PLC owned by the Company, as well as a note receivable
from Holmes Place PLC held by the Company, for $1,800. For financial accounting
purposes, because of Entertainment's ownership interest at the time, the excess
of the sales price over the historical net book value of the fitness center and
Holmes Place PLC assets of $5,988 was accounted for as an increase to
stockholders' equity, net of income taxes of $2,096.
In January 1996, the Company and Entertainment entered into a Transitional
Services Agreement pursuant to which Entertainment provided the Company certain
services for a period of one year following the Spin-off. The services provided
to the Company by Entertainment included services relating to insurance, tax
matters, accounting and other financial services and the administration of
employee benefit programs. The Company provided payroll services to
Entertainment during this period. The net amount charged to the Company by
Entertainment in 1996 pursuant to the Transitional Services Agreement was
$2,344, based on the costs incurred for such services. Prior to the Spin-off,
the Company and Entertainment reimbursed each other for the proportionate share
of costs (salaries, benefits, rent, etc.) related to employees performing
functions on behalf of both companies, based on estimates of time spent on
behalf of each company. The net amount charged to (by) Entertainment in 1995 and
1994 was $(3,045) and $1,510, respectively. The costs charged to (by)
Entertainment varied in amount from year to year primarily due to changes in the
time devoted to each company by personnel based on events at both companies.
Management believes that the method used to allocate these costs was reasonable.
In addition, certain of the Company's insurance coverage was obtained by
Entertainment pursuant to corporate-wide programs and Entertainment charged the
Company its proportionate share of the respective insurance premiums, which
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
F-20
<PAGE> 54
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
Date. The Transitional Services Agreement also provided for the payment by the
Company of $15,200 due Entertainment under the prior tax sharing agreement (plus
interest at 10% per annum from the Distribution Date). At the time of the
Merger, the $15,200 of indebtedness was forgiven by Hilton, which the Company
reflected as an extraordinary gain. The Company also paid interest, calculated
primarily at a prime rate, on advances from Entertainment. Interest paid to
Entertainment was $1,551, $430 and $720 for 1996, 1995 and 1994, respectively.
PRO FORMA INFORMATION (UNAUDITED)
The net loss for the years ended December 31, 1995 and 1994 reflects a
federal income tax benefit arising from the Company's prior tax sharing
agreement with Entertainment of $7,069 and $15,160, respectively. Pro forma net
loss and related per share amounts have been presented on the consolidated
statement of operations giving effect to (i) adjustments made to reflect the
income tax provision/benefit as if the Company had filed its own separate
consolidated income tax return for each year and (ii) the distribution of
11,845,161 shares of Common Stock to Entertainment stockholders as if such
distribution had taken place as of the beginning of each year.
F-21
<PAGE> 55
BALLY TOTAL FITNESS HOLDING CORPORATION
SUPPLEMENTARY DATA
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
(All dollar amounts in millions, except share data)
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------------- --------------- --------------- ----------------
1996 1995 1996 1995 1996 1995 1996 1995
------ ------ ------ ------ ------ ------ ------- ------
(AS RESTATED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............................ $163.9 $165.1 $159.0 $160.2 $157.0 $163.2 $ 160.4 $165.1
Operating income (loss)................. -- 1.0 4.2 (.9) 3.0 (1.4) 12.8 6.4
Income (loss) before extraordinary item
(pro forma for 1995).................. (12.0) (9.0) (7.9) (11.6) (9.2) (12.9) 4.2 (5.0)
Extraordinary gain on extinguishment of
debt.................................. 5.7
Net income (loss) (pro forma for
1995)................................. (12.0) (9.0) (7.9) (11.6) (9.2) (12.9) 9.9 (5.0)
Per common share (pro forma for 1995):
Income (loss) before extraordinary
item................................ $ (.98) $ (.76) $ (.65) $ (.98) $ (.76) $(1.09) $ .35 $ (.42)
Extraordinary gain on extinguishment
of debt............................. .46
Net income (loss)..................... (.98) (.76) (.65) (.98) (.76) (1.09) .81 (.42)
</TABLE>
- ---------------
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
<PAGE> 56
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In thousands)
(As restated)
<TABLE>
<CAPTION>
MARCH 31,
1997
--------------
<S> <C>
ASSETS
Current assets:
Cash and equivalents.......................................................... $ 9,924
Installment contracts receivable, less unearned finance charges of $26,887 and
allowance for doubtful receivables and cancellations of $51,587............ 161,962
Other current assets.......................................................... 28,314
---------
Total current assets....................................................... 200,200
Installment contracts receivable, less unearned finance charges of $12,508 and
allowance for doubtful receivables and cancellations of $40,042............... 155,049
Property and equipment, less accumulated depreciation and amortization of
$312,628...................................................................... 320,666
Intangible assets, less accumulated amortization of $50,745..................... 104,599
Deferred income taxes........................................................... 17,003
Deferred membership origination costs........................................... 82,442
Other assets.................................................................... 24,988
---------
$904,947
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 44,077
Income taxes payable.......................................................... 2,322
Deferred income taxes......................................................... 18,492
Accrued liabilities........................................................... 49,631
Current maturities of long-term debt.......................................... 8,387
Deferred revenues............................................................. 267,456
---------
Total current liabilities.................................................. 390,365
Long-term debt, less current maturities......................................... 387,740
Other liabilities............................................................... 6,657
Deferred revenues............................................................... 101,706
Stockholders' equity............................................................ 18,479
---------
$904,947
=========
</TABLE>
See accompanying notes.
F-23
<PAGE> 57
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
(As restated)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Net revenues:
Membership revenues --
Initial membership fees on paid-in-full memberships
originated..................................................... $ 17,475 $ 21,157
Initial membership fees on financed memberships originated...... 95,568 87,178
Dues collected.................................................. 47,788 43,416
Change in deferred revenues..................................... (5,665) (748)
-------- --------
155,166 151,003
Finance charges earned............................................. 9,769 9,595
Fees and other..................................................... 3,598 3,294
-------- --------
168,533 163,892
Operating costs and expenses:
Fitness center operations.......................................... 95,924 95,214
Member processing and collection centers........................... 9,403 11,589
Advertising........................................................ 12,686 12,611
General and administrative......................................... 5,921 5,789
Provision for doubtful receivables................................. 25,537 24,478
Depreciation and amortization...................................... 13,065 13,676
Change in deferred membership origination costs.................... (302) 492
-------- --------
162,234 163,849
-------- --------
Operating income..................................................... 6,299 43
Interest expense..................................................... 11,879 11,849
-------- --------
Loss before income taxes............................................. (5,580) (11,806)
Income tax provision................................................. 100 150
-------- --------
Net loss............................................................. $ (5,680) $(11,956)
======== ========
Net loss per common share............................................ $ (.46) $ (.98)
======== ========
</TABLE>
See accompanying notes.
F-24
<PAGE> 58
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share data)
(As restated)
<TABLE>
<CAPTION>
COMMON STOCK UNEARNED
------------------- COMPENSATION TOTAL
NUMBER PAR CONTRIBUTED ACCUMULATED (RESTRICTED STOCKHOLDERS'
OF SHARES VALUE CAPITAL DEFICIT STOCK) EQUITY
---------- ----- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996..... 12,495,161 $125 $ 303,811 $(277,733) $ (2,051) $24,152
Net loss......................... (5,680) (5,680)
Issuance of common stock upon
exercise of stock options...... 1,814 7 7
---------- ---- -------- -------- ------- --------
Balance at March 31, 1997........ 12,496,975 $125 $ 303,818 $(283,413) $ (2,051) $18,479
========== ==== ======== ======== ======= ========
</TABLE>
See accompanying notes.
F-25
<PAGE> 59
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
(As restated)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING:
Net loss............................................................... $ (5,680) $(11,956)
Adjustments to reconcile to cash used --
Depreciation and amortization, including amortization included in
interest expense................................................... 13,624 14,552
Provision for doubtful receivables.................................. 25,537 24,478
Change in operating assets and liabilities.......................... (44,360) (42,212)
-------- --------
Cash used in operating activities.............................. (10,879) (15,138)
INVESTING:
Purchases and construction of property and equipment................... (6,842) (7,172)
Other, net............................................................. (55) 747
-------- --------
Cash used in investing activities.............................. (6,897) (6,425)
FINANCING:
Debt transactions --
Net borrowings under revolving credit agreement..................... 12,000 9,000
Proceeds from other long-term borrowings............................ 1,500
Repayments of other long-term debt.................................. (834) (310)
Debt issuance costs................................................. (7) (144)
-------- --------
Cash provided by debt transactions............................. 11,159 10,046
Equity transaction --
Proceeds from issuance of common stock upon exercise of stock
options............................................................ 7
-------- --------
Cash provided by financing activities.......................... 11,166 10,046
-------- --------
Decrease in cash and equivalents......................................... (6,610) (11,517)
Cash and equivalents, beginning of period................................ 16,534 21,263
-------- --------
Cash and equivalents, end of period...................................... $ 9,924 $ 9,746
======== ========
</TABLE>
See accompanying notes.
F-26
<PAGE> 60
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) -- (CONTINUED)
(In thousands)
(As restated)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
SUPPLEMENTAL CASH FLOWS INFORMATION:
Changes in operating assets and liabilities were as follows --
Increase in installment contracts receivable......................... $(42,341) $(28,678)
Increase in other current and other assets........................... (4,414) (747)
(Increase) decrease in deferred membership origination costs......... (302) 492
Increase (decrease) in accounts payable.............................. 2,512 (8,344)
Increase (decrease) in income taxes payable.......................... 64 (930)
Decrease in accrued and other liabilities............................ (5,544) (4,753)
Increase in deferred revenues........................................ 5,665 748
-------- --------
$(44,360) $(42,212)
======== ========
Cash payments for interest and income taxes were as follows --
Interest paid........................................................ $ 17,823 $ 17,352
Interest capitalized................................................. (288) (55)
Income taxes paid, net............................................... 36 1,080
Investing and financing activities exclude the following non-cash
transactions --
Acquisition of property and equipment through capital leases......... $ 163 $ 1,999
</TABLE>
See accompanying notes.
F-27
<PAGE> 61
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 March 31, 1997, its consolidated statements of operations and
cash flows for the three months ended March 31, 1997 and 1996, and its
consolidated statement of stockholders' equity for the three months ended March
31, 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 "SEC Staff"), the Company has agreed to restate its condensed consolidated
financial statements for all periods presented to reflect a change in the method
of recognizing membership revenue. Summarized financial information illustrating
the effect of the restatement on the Company's condensed consolidated financial
statements is as follows:
<TABLE>
<CAPTION>
MARCH 31, 1997 MARCH 31, 1996
----------------------- --------------------------
AS AS
ORIGINALLY AS ORIGINALLY AS
REPORTED RESTATED REPORTED RESTATED
---------- -------- ------------- --------
<S> <C> <C> <C> <C>
Financial position --
Deferred membership origination
costs............................ $ -- $ 82,442
Current deferred revenues........... 54,005 267,456
Long-term deferred revenues......... 25,529 101,706
Stockholders' equity................ 219,036 18,479
Results of operations --
Net revenues........................ $ 177,321 $168,033 $ 171,081 $163,892
Operating income.................... 14,001 5,799 9,592 43
Net income (loss)................... 2,522 (5,680) (2,457) (11,956)
Net income (loss) per common
share............................ .19 (.46) (.20) (.98)
</TABLE>
In addition, the Company changed its first quarter 1997 application of
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
F-28
<PAGE> 62
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(All dollar amounts in thousands, except share data)
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, based upon a series of consultations with its
independent auditors, initially believed that under the Company's securitization
facility, installment contracts receivable originating and being sold to a
special purpose entity after December 31, 1996 qualified for "sale treatment"
under SFAS No. 125. However, based upon Emerging Issues Task Force Issue 96-20
guidance, the Company and its independent auditors now believe that sales of
installment contracts receivable after December 31, 1996 do not qualify for
"sale treatment" under SFAS No. 125. As a result of this additional restatement
of the Company's first quarter 1997 condensed consolidated financial statements,
assets relating to installment contracts receivable and long-term debt each
increased by approximately $30,000 at March 31, 1997, and finance charges earned
and interest expense each increased by approximately $500 for the three months
ended March 31, 1997.
SEASONAL FACTORS
The Company's operations are subject to seasonal factors and, therefore,
the results of operations for the three months ended March 31, 1997 and 1996 are
not necessarily indicative of the results of operations for the full year.
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 12,279,131 shares and 12,170,161 shares for the three months ended March
31, 1997 and 1996, respectively. 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.
In February 1997, the Financial Accounting Standards Board issued 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 three months ended March 31,
1997 each would have been $(.46) per share.
LONG-TERM DEBT
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. At March 31, 1997, outstanding letters
of credit totaled approximately $13,600 and borrowings on the credit line
totaled $12,000.
F-29
<PAGE> 63
[GRAPHIC DESCRIPTION: TWO PHOTOS OF PEOPLE
USING THE COMPANY'S FACILITIES AND A COLOR
CODED MAP OF THE UNITED STATES INDICATING
THE NUMBER OF THE COMPANY'S FACILITIES IN
EACH STATE AND THE LOCATION OF ITS REGIONAL
SERVICE CENTERS. THE LEGEND TO THE MAP SAYS
"STATES WITH FITNESS CENTERS INCLUDING
NUMBER OF CENTERS PER STATE"
AND "REGIONAL SERVICE CENTERS."]
<PAGE> 64
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK 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 NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Special Note Regarding Forward-Looking
Statements.......................... 8
Risk Factors.......................... 8
Use of Proceeds....................... 11
Dilution.............................. 11
Price Range of Common Stock and
Dividend Policy..................... 12
Capitalization........................ 13
Selected Consolidated Financial
Data................................ 14
Management's Discussion and Analysis
of Results of Operations and
Financial Condition................. 15
Business.............................. 19
Management............................ 27
Underwriting.......................... 29
Legal Matters......................... 30
Experts............................... 31
Available Information................. 31
Incorporation of Certain Information
by Reference........................ 31
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
======================================================
======================================================
6,000,000 SHARES
[LOGO]
BALLY TOTAL FITNESS
HOLDING CORPORATION
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
LADENBURG THALMANN & CO. INC.
JEFFERIES & COMPANY, INC.
, 1997
======================================================
<PAGE> 65
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses in connection with the issuance of
the Common Stock being registered. All of the amounts shown are estimates,
except the registration fee:
<TABLE>
<S> <C>
SEC registration fee.................................................. $ 17,642
Accounting fees and expenses.......................................... 325,000
Legal fees and expenses............................................... 200,000
Blue Sky fees and expenses............................................ 5,000
Printing expenses..................................................... 325,000
Miscellaneous expenses................................................ 27,358
--------
Total....................................................... $900,000
========
</TABLE>
ITEM 15. 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.
II-1
<PAGE> 66
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement among the Company and the Underwriters.
**4.1 Specimen stock certificate (filed as an exhibit to the Company's Registration
Statement on Form 8-A/A dated January 3, 1996, File No. 0-27478).
***5.1 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP.
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.
99.1 Physical Rehabilitation Services Development Agreement between Continucare
Outpatient Rehabilitation Management, Inc. and BFIT Rehabilitation Services,
Inc.
</TABLE>
- ---------------
<TABLE>
<S> <C>
* Filed previously.
** Incorporated by reference.
*** To be filed by amendment.
(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.
</TABLE>
ITEM 17. 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.
II-2
<PAGE> 67
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.
II-3
<PAGE> 68
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-3 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 JULY 16, 1997.
BALLY TOTAL FITNESS HOLDING
CORPORATION
By: /s/ JOHN W. DWYER
----------------------------------
John W. Dwyer
Senior 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ---------------------------------------------------------
<S> <C> <C>
* Chairman of the Board of July 16, 1997
- ----------------------------------- Directors
Arthur M. Goldberg
* Chief Executive Officer, President, July 16, 1997
- ----------------------------------- and Director
Lee S. Hillman
* Senior Vice President, Chief July 16, 1997
- ----------------------------------- Financial Officer and Treasurer
John W. Dwyer
* Vice President and Controller July 16, 1997
- -----------------------------------
Julie Adams
* Director July 16, 1997
- -----------------------------------
Aubrey C. Lewis
* Director July 16, 1997
- -----------------------------------
J. Kenneth Looloian
* Director July 16, 1997
- -----------------------------------
James F. Mc Anally, M.D.
* Director July 16, 1997
- -----------------------------------
Liza M. Walsh
</TABLE>
*By: /s/ JOHN W. DWYER
-----------------------------------------
John W. Dwyer
Attorney-in-fact
II-4
<PAGE> 69
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
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
<PAGE> 70
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
In connection with our audits of 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, we have also
audited the consolidated schedule included in this Registration Statement on
Form S-3 as listed in Item 16(b).
In our opinion, the consolidated schedule referred to above presents
fairly, in all material respects, the information required to be stated herein.
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
<PAGE> 71
BALLY TOTAL FITNESS HOLDING CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(All dollar amounts in thousands)
<TABLE>
<CAPTION>
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
- ---------------------------------- ---------- ------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ========
</TABLE>
- ---------------
(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
<PAGE> 72
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER IN
SEQUENTIAL
NUMBERING
EXHIBIT SYSTEM
- -------- ---------
<S> <C> <C>
1.1 Form of Underwriting Agreement among the Company and the Underwriters.
**4.1 Specimen stock certificate (filed as an exhibit to the Company's
Registration Statement on Form 8-A/A dated January 3, 1996, File No.
0-27478).
***5.1 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP.
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.
99.1 Physical Rehabilitation Services Development Agreement between
Continucare Outpatient Rehabilitation Management, Inc. and BFIT
Rehabilitation Services, Inc.
</TABLE>
- ---------------
* Filed previously.
** Incorporated by reference.
*** To be filed by amendment.
<PAGE> 1
BALLY TOTAL FITNESS HOLDING CORPORATION
(a Delaware corporation)
6,000,000 Shares of Common Stock
PURCHASE AGREEMENT
Dated: [________]-, 1997
<PAGE> 2
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
PURCHASE AGREEMENT................................................................................................1
SECTION 1. Representations and Warranties by the Company..........................................3
(i) Compliance with Registration Requirements.....................................3
(ii) Incorporated Documents........................................................4
(iii) Independent Accountants.......................................................4
(iv) Financial Statements..........................................................4
(v) No Material Adverse Change in Business........................................4
(vi) Good Standing of the Company..................................................5
(vii) Good Standing of Subsidiaries.................................................5
(viii) Capitalization................................................................5
(ix) Authorization of Agreement....................................................6
(x) Authorization and Description of Securities...................................6
(xi) Absence of Defaults and Conflicts.............................................6
(xii) Absence of Labor Dispute......................................................7
(xiii) Absence of Proceedings........................................................7
(xiv) Accuracy of Exhibits..........................................................7
(xv) Possession of Intellectual Property...........................................7
(xvi) Absence of Further Requirements...............................................8
(xvii) Possession of Licenses and Permits............................................8
(xviii) Title to Property.............................................................8
(xix) Compliance with Cuba Act......................................................8
(xx) Investment Company Act........................................................9
(xxi) Environmental Laws............................................................9
(xxii) Tax Matters...................................................................9
(xxiii) Accounting Controls and Methodology..........................................10
(xxiv) No Registration Rights.......................................................10
(xxv) Solvency.....................................................................10
(xxvi) Compliance with Laws.........................................................10
SECTION 2. Sale and Delivery to Underwriters; Closing............................................10
(a) Initial Securities....................................................................11
(b) Option Securities.....................................................................11
(c) Payment...............................................................................11
(d) Denominations; Registration...........................................................12
SECTION 3. Covenants of the Company..............................................................12
(a) Compliance with Securities Regulations and Commission Requests........................12
(b) Filing of Amendments..................................................................12
(c) Delivery of Registration Statements...................................................13
(d) Delivery of Prospectuses..............................................................13
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
(e) Continued Compliance with Securities Laws.............................................13
(f) Blue Sky Qualifications...............................................................14
(g) Rule 158..............................................................................14
(h) Use of Proceeds.......................................................................14
(i) Listing...............................................................................14
(j) Restriction on Sale of Securities.....................................................14
(k) Reporting Requirements................................................................15
SECTION 4. Payment of Expenses...................................................................15
(a) Expenses..............................................................................15
(b) Termination of Agreement..............................................................15
(c) Allocation of Expenses................................................................15
SECTION 5. Conditions of Underwriters' Obligations...............................................16
(a) Effectiveness of Registration Statement...............................................16
(b) Opinion of Counsel for Company........................................................16
(c) Opinion of Counsel for Underwriters...................................................16
(d) Officers' Certificate.................................................................16
(e) Accountant's Comfort Letter...........................................................17
(f) Bring-down Comfort Letter.............................................................17
(g) Approval of Listing...................................................................17
(h) No Objection..........................................................................17
(i) Lock-up Agreements....................................................................17
(j) Conditions to Purchase of Option Securities...........................................17
(i) Officers' Certificate........................................................18
(ii) Opinion of Counsel for Company...............................................18
(iii) Opinion of Counsel for Underwriters..........................................18
(iv) Bring-down Comfort Letter....................................................18
(k) Additional Documents..................................................................18
(l) Termination of Agreement..............................................................18
SECTION 6. Indemnification.......................................................................19
(a) Indemnification of Underwriters.......................................................19
(b) Indemnification of Company, Directors and Officers....................................20
(c) Actions against Parties; Notification.................................................20
(d) Settlement without Consent if Failure to Reimburse....................................20
SECTION 7. Contribution................................................................................21
SECTION 8. Representations, Warranties and Agreements to Survive Delivery..............................22
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
SECTION 9. Termination of Agreement....................................................................22
(a) Termination; General..................................................................22
(b) Liabilities...........................................................................23
SECTION 10. Default by One or More of the Underwriters.................................................23
SECTION 11. Default by the Company.....................................................................24
SECTION 12. Notices....................................................................................24
SECTION 13. Parties....................................................................................24
SECTION 14. GOVERNING LAW AND TIME.....................................................................24
SECTION 15. Effect of Headings.........................................................................24
SCHEDULES
Schedule A - List of Underwriters.............................................................Sch A-1
Schedule B - Pricing Information..............................................................Sch B-1
Schedule C - List of Subsidiaries ............................................................Sch C-1
Schedule D - List of Persons and Entities Subject to Lock-up..................................Sch D-1
EXHIBITS
Exhibit A - Form of Opinion of Company's Counsel.............................................. A-1
Exhibit B - Form of Lock-up Letter............................................................. B-1
</TABLE>
iii
<PAGE> 5
BALLY TOTAL FITNESS HOLDING CORPORATION
(a Delaware corporation)
6,000,000 Shares of Common Stock
(Par Value $.01 Per Share)
PURCHASE AGREEMENT
[_____] -, 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
LADENBURG THALMANN & CO. INC.
JEFFERIES & COMPANY, INC.
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Bally Total Fitness Holding Corporation, a Delaware corporation (the
"Company"), confirms its agreement with Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Ladenburg Thalmann & Co.
Inc. ("Ladenburg"), Jefferies & Company, Inc. ("Jefferies") and each of the
other Underwriters named in Schedule A hereto (collectively, the "Underwriters",
which term shall also include any underwriter substituted as hereinafter
provided in Section 10 hereof), for whom Merrill Lynch, Ladenburg and Jefferies
are acting as representatives (in such capacity, the "Representatives"), with
respect to (i) the sale by the Company, and the purchase by the Underwriters,
acting severally and not jointly, of the respective numbers of shares of Common
Stock, par value $.01 per share, of the Company ("Common Stock") set forth in
Schedules A and B hereto and (ii) the grant by the Company to the Underwriters,
acting severally and not jointly, of the option described in Section 2(b) hereof
to purchase all or any part of 900,000 additional shares of Common Stock to
cover over-allotments, if any. The aforesaid 6,000,000 shares of Common Stock
(the "Initial Securities") to be purchased by the Underwriters and all or any
part of the 900,000 shares of Common Stock subject to the option described in
Section 2(b) hereof (the "Option Securities") are hereinafter called,
collectively, the "Securities".
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<PAGE> 6
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deem advisable after
this Agreement has been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (No. 333-24175) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in such prospectus or in such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto, schedules thereto, if any, and the
documents incorporated by reference therein pursuant to Item 12 of Form S-3
under the 1933 Act, at the time it became effective and including the Rule 430A
Information and the Rule 434 Information, as applicable, is herein called the
"Registration Statement." Any registration statement filed pursuant to Rule
462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b)
Registration Statement," and after such filing the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. The final prospectus,
including the documents incorporated by reference therein pursuant to Item 12 of
Form S-3 under the 1933 Act, in the form first furnished to the Underwriters for
use in connection with the offering of the Securities is herein called the
"Prospectus." If Rule 434 is relied on, the term "Prospectus" shall refer to the
preliminary prospectus dated [______] -, 1997 together with the Term Sheet and
all references in this Agreement to the date of the Prospectus shall mean the
date of the Term Sheet. For purposes of this Agreement, all references to the
Registration Statement, any preliminary prospectus, the Prospectus or any Term
Sheet or any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").
All references in this Agreement to financial statements and schedules
and other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary prospectus or the Prospectus (or other
references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is incorporated
by reference in the Registration Statement, any preliminary prospectus or the
Prospectus, as the case may be; and all references in this Agreement to
amendments or supplements to the Registration Statement, any
2
<PAGE> 7
preliminary prospectus or the Prospectus shall be deemed to mean and include the
filing of any document under the Securities Exchange Act of 1934 (the "1934
Act") which is incorporated by reference in the Registration Statement, such
preliminary prospectus or the Prospectus, as the case may be.
SECTION 1. Representations and Warranties by the Company.
The Company represents and warrants to each Underwriter as of the date
hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of
each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees
with each Underwriter, as follows:
(i) Compliance with Registration Requirements. The Company
meets the requirements for use of Form S-3 under the 1933 Act. Each of
the Registration Statement and any Rule 462(b) Registration Statement
has become effective under the 1933 Act and no stop order suspending
the effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and
any request on the part of the Commission for additional information
has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Securities
are purchased, at the Date of Delivery), the Registration Statement,
the Rule 462(b) Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations and
did not and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. Neither the
Prospectus nor any amendments or supplements thereto, at the time the
Prospectus or any such amendment or supplement was issued and at the
Closing Time (and, if any Option Securities are purchased, at the Date
of Delivery), included or will include an untrue statement of a
material fact or omitted or will omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434
is used, the Company will comply with the requirements of Rule 434. The
representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through Merrill
Lynch expressly for use in the Registration Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectus
delivered to the
3
<PAGE> 8
Underwriters for use in connection with this offering was identical to
the electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) Incorporated Documents. The documents incorporated or
deemed to be incorporated by reference in the Registration Statement
and the Prospectus, when they became effective or at the time they were
or hereafter are filed with the Commission, complied and will comply in
all material respects with the requirements of the 1933 Act and the
1933 Act Regulations or the 1934 Act and the rules and regulations of
the Commission thereunder (the "1934 Act Regulations"), as applicable,
and, when read together with the other information in the Prospectus,
at the time the Registration Statement became effective, at the time
the Prospectus was issued and at the Closing Time (and, if any Option
Securities are purchased, at the Date of Delivery), did not and will
not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading.
(iii) Independent Accountants. The accountants who certified
the financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required
by the 1933 Act and the 1933 Act Regulations.
(iv) Financial Statements. The financial statements included
in the Registration Statement and the Prospectus, together with the
related schedules and notes, present fairly the financial position of
the Company and its consolidated subsidiaries at the dates indicated
and the statement of operations, stockholders' equity and cash flows of
the Company and its consolidated subsidiaries for the periods
specified; said financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved, except as otherwise
described in such financial statements. The supporting schedules, if
any, included in the Registration Statement present fairly in
accordance with GAAP the information required to be stated therein. The
selected financial data and the summary financial information included
in the Prospectus present fairly the information shown therein and have
been compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement.
(v) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein, (A)
there has been no material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business
(a "Material Adverse Effect"), (B) there have been no transactions
entered into by the Company or any of its subsidiaries, other than
those in the ordinary course of business, which are material with
respect to the Company and its
4
<PAGE> 9
subsidiaries considered as one enterprise, and (C) there has been no
dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(vi) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing
under the laws of the State of Delaware and has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and to enter into and perform
its obligations under this Agreement; and the Company is duly qualified
as a foreign corporation to transact business and is in good standing
in each other jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect.
(vii) Good Standing of Subsidiaries. Each subsidiary of the
Company (each a "Subsidiary" and, collectively, the "Subsidiaries") has
been duly incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, has
corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Prospectus and each
Significant Subsidiary (as defined herein) is duly qualified as a
foreign corporation to transact business and is in good standing in
each jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure to so qualify or to be in good
standing would not result in a Material Adverse Effect; except as
otherwise disclosed in the Registration Statement, all of the issued
and outstanding capital of each Subsidiary has been duly authorized and
validly issued, is fully paid and non-assessable, and, except as set
forth on Schedule C attached hereto, is directly or through
Subsidiaries wholly owned by the Company, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim or
equity; none of the outstanding shares of capital stock of any
Subsidiary was issued in violation of preemptive or similar rights of
any security holder of such Subsidiary. Attached hereto as Schedule C
is a true and complete list of the Subsidiaries of the Company. As used
herein, "Significant Subsidiary" means any subsidiary designated by the
Company as a Significant Subsidiary in Schedule C attached hereto. The
assets of the Significant Subsidiaries (i) constitute at least 95% of
the total assets of the Company and its Subsidiaries considered as one
enterprise and (ii) produced at least 95% of the operating income of
the Company and its Subsidiaries considered as one enterprise in each
of the last three fiscal years, in each case determined in accordance
with generally accepted accounting principles.
(viii) Capitalization. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities or
options referred to in the Prospectus). The shares of issued and
outstanding capital stock of the Company, have been duly
5
<PAGE> 10
authorized and validly issued and are fully paid and non-assessable;
none of the outstanding shares of capital stock was issued in violation
of the preemptive or other similar rights of any securityholder of the
Company.
(ix) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by the Company.
(x) Authorization and Description of Securities. The
Securities have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered
by the Company pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued and fully paid
and non-assessable; the Common Stock conforms to all statements
relating thereto contained in the Prospectus and such statements
conform to the rights set forth in the instruments defining the same;
no holder of the Securities will be subject to personal liability by
reason of being such a holder; and the issuance of the Securities is
not subject to the preemptive or other similar rights of any
securityholder of the Company.
(xi) Absence of Defaults and Conflicts. Neither the Company
nor any of its Subsidiaries is in violation of its charter or by-laws
or in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or other
agreement or instrument to which the Company or any of its Subsidiaries
is a party or by which it or any of them may be bound, or to which any
of the property or assets of the Company or any Subsidiary is subject
(collectively, "Agreements and Instruments") except for such defaults
that would not result in a Material Adverse Effect; and the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein and in the Registration Statement
(including the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in the Prospectus
under the caption "Use of Proceeds") and compliance by the Company with
its obligations hereunder have been duly authorized by all necessary
corporate action and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined
below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
Subsidiary pursuant to, the Agreements and Instruments (except for such
conflicts, breaches or defaults or liens, charges or encumbrances that
would not result in a Material Adverse Effect), nor will such action
result in any violation of the provisions of the charter or by-laws of
the Company or any Subsidiary or any applicable law, statute, rule,
regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having
jurisdiction over the Company or any Subsidiary or any of their assets,
properties or operations. As used herein, a "Repayment Event" means any
event or condition which gives the holder of any note, debenture or
other evidence of indebtedness (or any person acting on such holder's
behalf) the right to require
6
<PAGE> 11
the repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company or any Subsidiary.
(xii) Absence of Labor Dispute. No labor dispute with the
employees of the Company or any Subsidiary exists or, to the knowledge
of the Company, has been threatened, and the Company is not aware of
any existing or threatened labor disturbance by the employees of any of
its or any Subsidiary's principal suppliers, manufacturers or
contractors, which, in either case, may reasonably be expected to
result in a Material Adverse Effect.
(xiii) Absence of Proceedings. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened, against or affecting the
Company or any Subsidiary, which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or which
might reasonably be expected to result in a Material Adverse Effect, or
which might reasonably be expected to materially and adversely affect
the properties or assets thereof or the consummation of the
transactions contemplated in this Agreement or the performance by the
Company of its obligations hereunder; the aggregate of all pending
legal or governmental proceedings to which the Company or any
Subsidiary is a party or of which any of their respective property or
assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material
Adverse Effect.
(xiv) Accuracy of Exhibits. There are no contracts or
documents which are required to be described in the Registration
Statement, the Prospectus or the documents incorporated by reference
therein or to be filed as exhibits thereto which have not been so
described and filed as required.
(xv) Possession of Intellectual Property. The Company and its
Subsidiaries license, own or possess, or can acquire on reasonable
terms, adequate patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property") necessary
to carry on the business now operated by them, and neither the Company
nor any of its Subsidiaries has received any notice or is otherwise
aware of any infringement of or conflict with asserted rights of others
with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or
inadequate to protect the interest of the Company or any of its
Subsidiaries therein, and which infringement or conflict (if the
subject of any unfavorable decision, ruling or finding) or invalidity
or inadequacy, singly or in the aggregate, would result in a Material
Adverse Effect.
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<PAGE> 12
(xvi) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in connection with the offering, issuance or
sale of the Securities hereunder or the consummation of the
transactions contemplated by this Agreement, except such as have been
already obtained or as may be required under the 1933 Act or the 1933
Act Regulations or state securities laws.
(xvii) Possession of Licenses and Permits. The Company and its
Subsidiaries possess such permits, licenses, approvals, consents and
other authorizations (collectively, "Governmental Licenses") issued by
the appropriate federal, state, local or foreign regulatory agencies or
bodies necessary to conduct the business now operated by them; the
Company and its Subsidiaries are in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure
so to comply would not, singly or in the aggregate, have a Material
Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full
force and effect would not have a Material Adverse Effect; and neither
the Company nor any of its Subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect.
(xviii) Title to Property. The Company and its Subsidiaries
have good and marketable title to all real property owned by the
Company and its Subsidiaries and good title to all other properties
owned by them, in each case, free and clear of all mortgages, pledges,
liens, security interests, claims, restrictions or encumbrances of any
kind except such as (a) are described in the Prospectus or (b) do not,
singly or in the aggregate, materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company or any of its Subsidiaries; and all of
the leases and subleases material to the business of the Company and
its Subsidiaries, considered as one enterprise, and under which the
Company or any of its Subsidiaries holds properties described in the
Prospectus, are in full force and effect, and neither the Company nor
any subsidiary has any notice of any claim of any sort that has been
asserted by anyone adverse to the rights of the Company or any
Subsidiary under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company or such Subsidiary
to the continued possession of the leased or subleased premises under
any such lease or sublease, which, in either case, may be expected to
result in a Material Adverse Effect.
(xix) Compliance with Cuba Act. The Company has complied with,
and is and will be in compliance with, the provisions of that certain
Florida act relating to disclosure of doing business with Cuba,
codified as Section 517.075 of the Florida statutes, and the rules and
regulations thereunder (collectively, the "Cuba Act") or is exempt
therefrom.
8
<PAGE> 13
(xx) Investment Company Act. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the
Prospectus will not be, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in
the Investment Company Act of 1940, as amended.
(xxi) Environmental Laws. Except as described in the
Registration Statement and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company
nor any of its Subsidiaries is in violation of any federal, state,
local or foreign statute, law, rule, regulation, ordinance, code,
policy or rule of common law or any judicial or administrative
interpretation thereof, including any judicial or administrative order,
consent, decree or judgment, relating to pollution or protection of
human health, the environment (including, without limitation, ambient
air, surface water, groundwater, land surface or subsurface strata) or
wildlife, including, without limitation, laws and regulations relating
to the release or threatened release of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum
or petroleum products (collectively, "Hazardous Materials") or to the
manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and its Subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements,
(C) there are no pending or threatened administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens,
notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company or any of its
Subsidiaries and (D) there are no events or circumstances that might
reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any of
its subsidiaries relating to Hazardous Materials or any Environmental
Laws.
(xxii) Tax Matters. All United States federal income tax
returns of the Company and its consolidated Subsidiaries required by
law to be filed have been filed and all taxes shown by the said returns
or otherwise assessed which are due and payable have been paid, except
assessments against which appeals have been or will be promptly taken.
All United States federal income tax returns of Bally Entertainment
Corporation ("Entertainment") and its consolidated subsidiaries,
including the Company, for tax periods prior to January 9, 1996,
required by law to be filed have been filed and all taxes shown by the
said returns or otherwise assessed which are due and payable have been
paid, except assessments against which appeals have been or will be
promptly taken. The United States federal income tax returns of
Entertainment and its consolidated subsidiaries, including the Company
and its subsidiaries, through the fiscal year ended 1982 have been
settled and no assessment in connection therewith has been made against
the Company or Entertainment in connection with the business of the
Company. The Company and its Significant Subsidiaries have filed all
other tax returns which are required to have been filed by them
pursuant to applicable
9
<PAGE> 14
state, local or other law except insofar as the failure to file such
returns individually and in the aggregate would not have a Material
Adverse Effect, and have paid all taxes due pursuant to said returns or
pursuant to any assessment received by the Company or its Subsidiaries,
except for such taxes, if any, as are being contested in good faith and
as to which adequate reserves have been provided. The charges, accruals
and reserves on the consolidated books of the Company in respect of any
income and corporation tax liability for any years not finally
determined are adequate to meet any assessment or re-assessments for
additional income tax for any years not finally determined, except to
the extent of any inadequacy which would not have a Material Adverse
Effect.
(xxiii) Accounting Controls and Methodology. The Company and
its Subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurances that (A) transactions are
executed in accordance with management's general or specific
authorization, (B) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to
maintain accountability for assets, (C) access to assets is permitted
only in accordance with management's general or specific authorization,
(D) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences and (E) the tax accounting method used
by the Company and its Subsidiaries to report income from membership
contracts is the proper method of accounting for United States federal
income tax purposes and is in accordance with agreements reached with
the Internal Revenue Service.
(xxiv) No Registration Rights. There are no holders of
securities of the Company who by reason of the filing of the
Registration Statement under the 1933 Act have the right to request the
Company to register under the 1933 Act securities held by them.
(xxv) Solvency. The Company is, and immediately after the
Closing Time will be, Solvent. As used herein, the term "Solvent"
means, with respect to the Company on a particular date, that on such
date (A) the fair market value of the assets of the Company is greater
than the total amount of liabilities (including contingent liabilities)
of the Company, (B) the present fair salable value of the assets of the
Company is greater than the amount that will be required to pay the
probable liabilities of the Company on its debts as they become
absolute and matured, (C) the Company is able to realize upon its
assets and pay its debts and other liabilities, including contingent
obligations, as they mature, and (D) the Company does not have
unreasonably small capital.
(xxvi) Compliance with Laws. The Company and its Subsidiaries
have conducted and are conducting their business in compliance with all
applicable federal, state and local laws, rules, regulations,
decisions, directives and orders, except where the failure to do so
would not have a Material Adverse Effect.
10
<PAGE> 15
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, severally and not
jointly, and each Underwriter, severally and not jointly, agrees to purchase
from the Company, at the purchase price per share set forth in Schedule B, the
number of Initial Securities set forth in Schedule A opposite the name of such
Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the Underwriters, severally
and not jointly, to purchase up to an additional 900,000 shares of Common Stock,
at the purchase price per share set forth in Schedule B, less an amount per
share equal to any dividends or distributions declared by the Company and
payable on the Initial Securities but not payable on the Option Securities. The
option hereby granted will expire at 5:30 p.m. New York City time 30 days after
the date hereof and may be exercised in whole or in part from time to time only
for the purpose of covering over-allotments which may be made in connection with
the offering and distribution of the Initial Securities upon notice by the
Representatives to the Company setting forth the number of Option Securities as
to which the several Underwriters are then exercising the option and the time
and date of payment and delivery for such Option Securities. Any such time and
date of delivery (a "Date of Delivery") shall be determined by the
Representatives, but shall not be later than seven full business days after the
exercise of said option, nor in any event prior to the Closing Time, as
hereinafter defined. If the option is exercised as to all or any portion of the
Option Securities, each of the Underwriters, acting severally and not jointly,
will purchase that proportion of the total number of Option Securities then
being purchased which the number of Initial Securities set forth in Schedule A
opposite the name of such Underwriter bears to the total number of Initial
Securities, subject in each case to such adjustments as the Representatives in
their discretion shall make to eliminate any sales or purchases of fractional
shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Morgan,
Lewis & Bockius LLP, 101 Park Avenue, New York, New York 101778-0060, or at such
other place as shall be agreed upon by the Representatives and the Company at
9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30
P.M. (Eastern time) on any given day) business day after the date hereof (unless
postponed in accordance with the provisions of Section 10), or such other time
not later than ten business days after such date as shall be agreed upon by the
Representatives and the Company (such time and date of payment and delivery
being herein called the "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed
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<PAGE> 16
upon by the Representatives and the Company, on each Date of Delivery as
specified in the notice from the Representatives to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company against delivery to
the Representatives for the respective accounts of the Underwriters of
certificates for the Securities to be purchased by them. It is understood that
each Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Initial Securities or the Option Securities, if any, to be
purchased by any Underwriter whose funds have not been received by the Closing
Time or the relevant Date of Delivery, as the case may be, but such payment
shall not relieve such Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial
Securities and the Option Securities, if any, shall be in such denominations and
registered in such names as the Representatives may request in writing at least
one full business day before the Closing Time or the relevant Date of Delivery,
as the case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
SECTION 3. Covenants of the Company. The Company covenants with each
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission
Requests. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A or Rule 434, as applicable, and will notify
the Representatives immediately, and, if requested by you, confirm the
notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement to the
Prospectus or any amended Prospectus shall have been filed, (ii) of the
receipt of any comments from the Commission, (iii) of any request by
the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional
information, and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of
any order preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the Securities
for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes. The Company
will promptly effect the filings necessary pursuant to Rule 424(b) and
will take such steps as it deems necessary to ascertain promptly
whether the form of prospectus transmitted for filing under Rule 424(b)
was received for filing by the Commission and, in the event that it was
not, it will promptly file such prospectus. The Company will make every
reasonable effort to prevent the issuance of any stop order and, if any
stop order is issued, to obtain the lifting thereof at the earliest
possible moment.
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<PAGE> 17
(b) Filing of Amendments. The Company will give the
Representatives notice of its intention to file or prepare any
amendment to the Registration Statement (including any filing under
Rule 462(b)), any Term Sheet or any amendment, supplement or revision
to either the prospectus included in the Registration Statement at the
time it became effective or to the Prospectus, whether pursuant to the
1933 Act, the 1934 Act or otherwise, will furnish the Representatives
with copies of any such documents a reasonable amount of time prior to
such proposed filing or use, as the case may be, and will not file or
use any such document to which the Representatives or counsel for the
Underwriters shall object.
(c) Delivery of Registration Statements. The Company has
furnished or will deliver to the Representatives and counsel for the
Underwriters, without charge, signed copies of the Registration
Statement as originally filed and of each amendment thereto (including
exhibits filed therewith or incorporated by reference therein and
documents incorporated or deemed to be incorporated by reference
therein) and signed copies of all consents and certificates of experts,
and will also deliver to the Representatives, without charge, a
conformed copy of the Registration Statement as originally filed and of
each amendment thereto (without exhibits) for each of the Underwriters.
The copies of the Registration Statement and each amendment thereto
furnished to the Underwriters will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to
each Underwriter, without charge, as many copies of each preliminary
prospectus as such Underwriter reasonably requested, and the Company
hereby consents to the use of such copies for purposes permitted by the
1933 Act. The Company will furnish to each Underwriter, without charge,
during the period when the Prospectus is required to be delivered under
the 1933 Act or the 1934 Act, such number of copies of the Prospectus
(as amended or supplemented) as such Underwriter may reasonably
request. The Prospectus and any amendments or supplements thereto
furnished to the Underwriters will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company
will comply with the 1933 Act and the 1933 Act Regulations and the 1934
Act and the 1934 Act Regulations so as to permit the completion of the
distribution of the Securities as contemplated in this Agreement and in
the Prospectus. If at any time when a prospectus is required by the
1933 Act to be delivered in connection with sales of the Securities,
any event shall occur or condition shall exist as a result of which it
is necessary, in the opinion of counsel for the Underwriters or for the
Company, to amend the Registration Statement or amend or supplement the
Prospectus in order that the Prospectus will not include any untrue
statements of a material fact or omit to state a material fact
necessary in order to make the statements therein not misleading in the
light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of such counsel,
at any such time to
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<PAGE> 18
amend the Registration Statement or amend or supplement the Prospectus
in order to comply with the requirements of the 1933 Act or the 1933
Act Regulations, the Company will promptly prepare and file with the
Commission, subject to Section 3(b), such amendment or supplement as
may be necessary to correct such statement or omission or to make the
Registration Statement or the Prospectus comply with such requirements,
and the Company will furnish to the Underwriters such number of copies
of such amendment or supplement as the Underwriters may reasonably
request.
(f) Blue Sky Qualifications. The Company, in cooperation with
the Underwriters, will endeavor to qualify the Securities for offering
and sale under the applicable securities laws of such states and other
jurisdictions as the Representatives may designate and to maintain such
qualifications in effect for so long as may be required to complete the
distribution of the Securities contemplated by this Agreement;
provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign
corporation or as a dealer in securities in any jurisdiction in which
it is not so qualified or to subject itself to taxation in respect of
doing business in any jurisdiction in which it is not otherwise so
subject. In each jurisdiction in which the Securities have been so
qualified, the Company will file such statements and reports as may be
required by the laws of such jurisdiction to continue such
qualification in effect for so long as may be required to complete the
distribution of the Securities contemplated by this Agreement.
(g) Rule 158. The Company will timely file such reports
pursuant to the 1934 Act as are necessary in order to make generally
available to its securityholders as soon as practicable an earnings
statement for the purposes of, and to provide the benefits contemplated
by, the last paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified
in the Prospectus under "Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect
and maintain the quotation of the Securities on the Nasdaq National
Market and will file with the Nasdaq National Market all documents and
notices required by the Nasdaq National Market of companies that have
securities that are traded in the over-the-counter market and
quotations for which are reported by the Nasdaq National Market.
(j) Restriction on Sale of Securities. During a period of 120
days from the date of the Prospectus, the Company will not, without the
prior written consent of Merrill Lynch, (i) directly or indirectly,
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any
share of Common Stock or any securities convertible into or exercisable
or exchangeable for Common Stock or file any registration statement
under the 1933 Act with respect to any of the foregoing or (ii) enter
into any swap or any other agreement or any transaction that transfers,
in whole or in part, directly or
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<PAGE> 19
indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not
apply to (A) the Securities to be sold hereunder, (B) any shares of
Common Stock issued by the Company upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof
and referred to in the Prospectus, (C) any shares of Common Stock
issued or options to purchase Common Stock granted pursuant to existing
employee benefit plans of the Company referred to in the Prospectus or
(D) any shares of Common Stock issued pursuant or options to purchase
Common Stock granted to any non-employee director stock plan or
dividend reinvestment plan.
(k) Reporting Requirements. The Company, during the period
when the Prospectus is required to be delivered under the 1933 Act or
the 1934 Act, will file all documents required to be filed with the
Commission pursuant to the 1934 Act within the time periods required by
the 1934 Act and the 1934 Act Regulations.
SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay or
cause to be paid all expenses incident to the performance of its obligations
under this Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriters of this Agreement, any Agreement among
Underwriters and such other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Securities, (iii) the
preparation, issuance and delivery of the certificates for the Securities to the
Underwriters, including any stock or other transfer taxes and any stamp or other
duties payable upon the sale, issuance or delivery of the Securities to the
Underwriters, (iv) the fees and disbursements of the Company's counsel,
accountants and other advisors, (v) the qualification of the Securities under
securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriters in connection therewith and in connection with the preparation
of the blue sky survey and any supplement thereto, (vi) the printing and
delivery to the Underwriters of copies of each preliminary prospectus, any Term
Sheets and of the Prospectus and any amendments or supplements thereto, (vii)
the preparation, printing and delivery to the Underwriters of copies of the blue
sky survey and any supplement thereto, (viii) the fees and expenses of any
transfer agent or registrar for the Securities and (ix) the filing fees incident
to, and the reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the National Association of Securities Dealers,
Inc. (the "NASD") of the terms of the sale of the Securities and (x) the fees
and expenses incurred in connection with the inclusion of the Securities in the
Nasdaq National Market
(b) Termination of Agreement. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5, Section 9(a)(i)
or Section 11 hereof, the Company shall reimburse the Underwriters for all of
their out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters.
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<PAGE> 20
(c) Allocation of Expenses. The provisions of this Section shall not
affect any agreement that the Company may make for the sharing of such costs and
expenses.
SECTION 5. Conditions of Underwriters' Obligations. The obligations of
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company or any subsidiary of the Company
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the
effectiveness of the Registration Statement shall have been issued
under the 1933 Act or proceedings therefor initiated or threatened by
the Commission, and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of counsel to the Underwriters. A prospectus containing
the Rule 430A Information shall have been filed with the Commission in
accordance with Rule 424(b) (or a post-effective amendment providing
such information shall have been filed and declared effective in
accordance with the requirements of Rule 430A) or, if the Company has
elected to rely upon Rule 434, a Term Sheet shall have been filed with
the Commission in accordance with Rule 424(b).
(b) Opinion of Counsel for Company. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Benesch, Friedlander, Coplan & Aronoff LLP, counsel
for the Company, in form and substance satisfactory to counsel for the
Underwriters, together with signed or reproduced copies of such letter
for each of the other Underwriters to the effect set forth in Exhibit A
hereto and to such further effect as counsel to the Underwriters may
reasonably request. For purposes of such opinion, such counsel may rely
upon the opinion of the General Counsel of the Company to the extent
set forth in Exhibit A.
(c) Opinion of Counsel for Underwriters. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Morgan, Lewis & Bockius LLP, counsel for the
Underwriters, together with signed or reproduced copies of such letter
for each of the other Underwriters with respect to the matters set
forth in clauses (i), (ii), (v), (vi) (solely as to preemptive or other
similar rights arising by operation of law or under the charter or
by-laws of the Company), (viii) through (x), inclusive, (xii), and the
penultimate paragraph of Exhibit A hereto. In giving such opinion such
counsel may rely, as to all matters governed by the laws of
jurisdictions other than the law of the State of New York, the federal
law of the United States and the General Corporation Law of the State
of Delaware, upon the opinions of counsel satisfactory to the
Representatives. Such counsel may also state that, insofar as such
opinion involves factual matters, they have relied, to the extent they
deem proper, upon certificates of officers of the Company and its
subsidiaries and certificates of public officials.
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<PAGE> 21
(d) Officers' Certificate. At Closing Time, there shall not
have been, since the date hereof or since the respective dates as of
which information is given in the Prospectus, any change which would
result in a Material Adverse Effect, and the Representatives shall have
received a certificate of the President or a Vice President of the
Company and of the chief financial or chief accounting officer of the
Company, dated as of Closing Time, to the effect that (i) there has
been no such change which would result in a Material Adverse Effect,
(ii) the representations and warranties in Section 1 hereof are true
and correct with the same force and effect as though expressly made at
and as of Closing Time, (iii) the Company has complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to Closing Time, and (iv) no stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
pending or are contemplated by the Commission.
(e) Accountant's Comfort Letter. At the time of the execution
of this Agreement, the Representatives shall have received from Ernst &
Young LLP a letter dated such date, in form and substance satisfactory
to the Representatives, together with signed or reproduced copies of
such letter for each of the other Underwriters containing statements
and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the
Registration Statement and the Prospectus.
(f) Bring-down Comfort Letter. At Closing Time, the
Representatives shall have received from Ernst & Young LLP a letter,
dated as of Closing Time, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (e) of
this Section, except that the specified date referred to shall be a
date not more than three business days prior to Closing Time.
(g) Approval of Listing. At Closing Time, the Securities shall
have been approved for inclusion in the Nasdaq National Market, subject
only to official notice of issuance.
(h) No Objection. The NASD has confirmed that it has not
raised any objection with respect to the fairness and reasonableness of
the underwriting terms and arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the
Representatives shall have received an agreement substantially in the
form of Exhibit B hereto signed by the persons listed on Schedule D
hereto.
(j) Conditions to Purchase of Option Securities. In the event
that the Underwriters exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the Option Securities, the
representations and warranties of the Company contained herein and the
statements in any certificates furnished by the Company and any
subsidiary of the Company hereunder shall be true and correct as of
each Date of Delivery and, at the relevant Date of Delivery, the
Representatives shall have received:
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<PAGE> 22
(i) Officers' Certificate. A certificate, dated such
Date of Delivery, of the President or a Vice President of the
Company and of the chief financial or chief accounting officer
of the Company confirming that the certificate delivered at
the Closing Time pursuant to Section 5(d) hereof remains true
and correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable
opinion of Benesch, Friedlander, Coplan & Aronoff LLP, counsel
for the Company, in form and substance satisfactory to counsel
for the Underwriters, dated such Date of Delivery, relating to
the Option Securities to be purchased on such Date of Delivery
and otherwise to the same effect as the opinion required by
Section 5(b) hereof.
(iii) Opinion of Counsel for Underwriters. The
favorable opinion of Morgan, Lewis & Bockius LLP, counsel for
the Underwriters, dated such Date of Delivery, relating to the
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by
Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from Ernst &
Young LLP, in form and substance satisfactory to the
Representatives and dated such Date of Delivery, substantially
in the same form and substance as the letter furnished to the
Representatives pursuant to Section 5(e) hereof, except the
"specified date" in the letter furnished pursuant to this
paragraph shall be a date not more than five days prior to
such Date of Delivery.
(k) Additional Documents. At Closing Time and at each Date of
Delivery counsel for the Underwriters shall have been furnished with
such documents and opinions as they may reasonably require for the
purpose of enabling them to pass upon the issuance and sale of the
Securities as herein contemplated, or in order to evidence the accuracy
of any of the representations or warranties, or the fulfillment of any
of the conditions, herein contained; and all proceedings taken by the
Company in connection with the issuance and sale of the Securities as
herein contemplated shall be reasonably satisfactory in form and
substance to the Representatives and counsel for the Underwriters.
(l) Termination of Agreement. If any condition specified in
this Section shall not have been fulfilled when and as required to be
fulfilled, this Agreement, or, in the case of any condition to the
purchase of Option Securities on a Date of Delivery which is after the
Closing Time, the obligations of the several Underwriters to purchase
the relevant Option Securities, may be terminated by the
Representatives by notice to the Company at any time at or prior to
Closing Time or such Date of Delivery, as the case may be, and such
termination shall be without liability of any party to any other party
except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
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SECTION 6. Indemnification.
(a) Indemnification of Underwriters. The Company agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act to the extent and in the manner set forth in clauses
(i), (ii) and (iii), as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission; provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including, subject to Section 6(c) hereof, the reasonable fees and
disbursements of counsel chosen by Merrill Lynch), reasonably incurred
in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under (i) or
(ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of (i) any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) or (ii) with respect to the
sale of Securities by an Underwriter to any person, a failure by such
Underwriter to give a copy of the Prospectus to such person within the time
required by the 1933 Act (unless such failure was the result of the Company's
failure to furnish to such Underwriters sufficient copies of the Prospectus on a
timely basis) if, but only if, the untrue
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<PAGE> 24
statement or alleged untrue statement or omission or alleged omission of a
material fact was corrected in the Prospectus.
(b) Indemnification of Company, Directors and Officers. Each
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a)
of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through Merrill Lynch expressly for use in the Registration Statement (or any
amendment thereto) or such preliminary prospectus or the Prospectus (or any
amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for reasonable
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fees and expenses of counsel, such indemnifying party agrees that it shall be
liable for any settlement of the nature contemplated by Section 6(a)(ii)
effected without its written consent if (i) such settlement is entered into more
than 45 days after receipt by such indemnifying party of the aforesaid request,
(ii) such indemnifying party shall have received notice of the terms of such
settlement at least 30 days prior to such settlement being entered into and
(iii) such indemnifying party shall not have reimbursed such indemnified party
in accordance with such request prior to the date of such settlement.
SECTION 7. Contribution. If the indemnification provided for in Section
6 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other hand from the offering of the Securities
pursuant to this Agreement or (ii) if the allocation provided by clause (i) is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and of the Underwriters on the
other hand in connection with the statements or omissions which resulted in such
losses, liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the Securities
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Securities
pursuant to this Agreement (before deducting expenses) received by the Company
and the total underwriting discount received by the Underwriters, in each case
as set forth on the cover of the Prospectus, or, if Rule 434 is used, the
corresponding location on the Term Sheet bear to the aggregate initial public
offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand and the Underwriters
on the other hand shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
21
<PAGE> 26
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries submitted pursuant hereto, shall remain operative and in full force
and effect, regardless of any investigation made by or on behalf of any
Underwriter or controlling person, or by or on behalf of the Company and shall
survive delivery of the Securities to the Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which is
such as to make it, in the judgment of the Representatives, impracticable to
market the Securities or to enforce contracts for the sale of the Securities, or
(iii) if trading in any securities of the Company has been suspended or
materially limited by the Commission or the Nasdaq National
22
<PAGE> 27
Market, or if trading generally on the American Stock Exchange or the New York
Stock Exchange or in the Nasdaq National Market has been suspended or materially
limited, or minimum or maximum prices for trading have been fixed, or maximum
ranges for prices have been required, by any of said exchanges or by such system
or by order of the Commission, the NASD or any other governmental authority, or
(iv) if a banking moratorium has been declared by Federal, Illinois or New York
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. Default by One or More of the Underwriters. If one or more
of the Underwriters shall fail at Closing Time or a Date of Delivery to purchase
the Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if, however, the Representatives shall not have
completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after the Closing
Time, the obligation of the Underwriters to purchase and of the Company
to sell the Option Securities to be purchased and sold on such Date of
Delivery shall terminate without liability on the part of any
non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either (i) the Representatives or (ii) the Company shall
have the right to postpone Closing Time or the relevant Date of Delivery, as the
case may be, for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or
23
<PAGE> 28
Prospectus or in any other documents or arrangements. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 10.
SECTION 11. Default by the Company. If the Company shall fail at
Closing Time or at the Date of Delivery to sell the number of Securities that it
is obligated to sell hereunder, then this Agreement shall terminate without any
liability on the part of any non-defaulting party; provided, however, that the
provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect.
No action taken pursuant to this Section shall relieve the Company from
liability, if any, in respect of such default.
SECTION 12. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at Sears Tower, Suite
5500, Chicago, Illinois 60606, attention of Todd Kaplan; notices to the Company
shall be directed to it at 8700 West Bryn Mawr Avenue, Chicago, Illinois 60631,
attention of Lee S.
Hillman.
SECTION 13. Parties. This Agreement shall each inure to the benefit of
and be binding upon the Underwriters , the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters, the Company and their respective successors and the controlling
persons and officers and directors referred to in Sections 6 and 7 and their
heirs and legal representatives, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Underwriters, the Company and their respective
successors, and said controlling persons and officers and directors and their
heirs and legal representatives, and for the benefit of no other person, firm or
corporation. No purchaser of Securities from any Underwriter shall be deemed to
be a successor by reason merely of such purchase.
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 15. Effect of Headings. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
24
<PAGE> 29
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
among the Underwriters and the Company in accordance with its terms.
Very truly yours,
BALLY TOTAL FITNESS HOLDING CORPORATION
By
---------------------------------
Name:
Title:
CONFIRMED AND ACCEPTED, as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
LADENBURG THALMANN & CO. INC.
JEFFERIES & COMPANY, INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
- ------------------------------------
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
PURCHASE AGREEMENT SIGNATURE PAGE
25
<PAGE> 30
SCHEDULE A
<TABLE>
<CAPTION>
Name of Underwriter Number of
Initial
Securities
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................................................
Ladenburg Thalmann & Co. Inc...............................................................
Jefferies & Company, Inc...................................................................
Total...................................................................................... 6,000,000
=========
</TABLE>
Sch A - 1
<PAGE> 31
SCHEDULE B
BALLY TOTAL FITNESS HOLDING CORPORATION
6,000,000 Shares of Common Stock
(Par Value $.01 Per Share)
1. The public offering price per share for the Securities shall be $-.
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $-, being an amount equal to the public offering
price set forth above less $- per share; provided that the purchase price per
share for any Option Securities purchased upon the exercise of the
over-allotment option described in Section 2(b) shall be reduced by an amount
per share equal to any dividends or distributions declared by the Company and
payable on the Initial Securities but not payable on the Option Securities.
Sch B - 1
<PAGE> 32
SCHEDULE C
List of Subsidiaries
[To be provided by the Company]
*/ Indicates a Significant Subsidiary.
Sch C - 1
<PAGE> 33
SCHEDULE D
List of persons and entities
subject to lock-up
Arthur M. Goldberg
Lee S. Hillman
John W. Dwyer
Cary A. Gaan
Harold Morgan
David M. Tolmie
John H. Wildman
Julie Adams
Aubrey C. Lewis
J. Kenneth Looloian
James F. McAnally, M.D.
Liza M. Walsh
Sch D - 1
<PAGE> 34
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.
(iii) To our knowledge, the Company is duly qualified as a foreign
corporation to transact business and is in good standing in each jurisdiction in
which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure so to
qualify or to be in good standing would not result in a Material Adverse Effect.
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus in the column entitled "Actual" under
the caption "Capitalization" (except for subsequent issuances, if any, pursuant
to the Purchase Agreement or pursuant to reservations, agreements or employee
benefit plans referred to in the Prospectus or pursuant to the exercise of
warrants or options referred to in the Prospectus); the shares of issued and
outstanding capital stock of the Company have been duly authorized and validly
issued and are fully paid and non-assessable; and, to our knowledge, none of the
outstanding shares of capital stock of the Company was issued in violation of
the preemptive or other similar rights of any security holder of the Company.
(v) The Securities to be purchased by the Underwriters from the Company
have been duly authorized for issuance and sale to the Underwriters pursuant to
the Purchase Agreement and, when issued and delivered by the Company pursuant to
the Purchase Agreement against payment of the consideration set forth in the
Purchase Agreement, will be validly issued and fully paid and non-assessable.
(vi) The issuance and sale of the Securities by the Company is not
subject to the preemptive or other similar rights of any securityholder of the
Company created by operation of law or under the Company's certificate of
incorporation or bylaws or any agreement known to us to which the Company is a
party or to which it is bound.
(vii) Each Significant Subsidiary has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has corporate
A-1
<PAGE> 35
power and authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and is duly qualified as a foreign
corporation to transact business and is in good standing in each jurisdiction in
which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure so to
qualify or to be in good standing would not result in a Material Adverse Effect;
except as otherwise disclosed in the Registration Statement, all of the issued
and outstanding capital stock of each Significant Subsidiary has been duly
authorized and validly issued, is fully paid and non-assessable and, except as
set forth on Schedule C of the Purchase Agreement, to our knowledge, is owned by
the Company, directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity except for
security interests created pursuant to the Company's Third Amended and Restated
Credit Agreement, dated as of June 26, 1995, with Chemical Bank, as Agent which
secure indebtedness thereunder and which are reflected in the Company's audited
financial statements included in the Prospectus; to our knowledge, none of the
outstanding shares of capital stock of any Significant Subsidiary was issued in
violation of the preemptive or similar rights of any securityholder of such
Subsidiary. Except as set forth on Schedule C of the Purchase Agreement, there
are no outstanding rights, warrants or options to acquire, or instruments
convertible into or exchangeable for, or agreements or understandings with
respect to the sale or issuance of, any shares of capital stock of or other
equity interest in any Significant Subsidiary of the Company.
(viii) The Purchase Agreement has been duly authorized, executed and
delivered by the Company.
(ix) Based on telephonic confirmation from the Commission on
___________, 1997, the Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); and, to our
knowledge, no stop order suspending the effectiveness of the Registration
Statement or any Rule 462(b) Registration Statement has been issued under the
1933 Act and no proceedings for that purpose have been instituted or are pending
or threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectus, excluding the documents incorporated by reference
therein, and each amendment or supplement to the Registration Statement and
Prospectus, excluding the documents incorporated by reference therein, as of
their respective effective or issue dates (other than the financial statements
and notes thereto and the schedules and other financial and statistical data
included therein or omitted therefrom, as to which we express no opinion)
complied as to form in all material respects with the requirements of the 1933
Act and the 1933 Act Regulations.
(xi) The documents incorporated by reference in the Prospectus (other
than the financial statements and notes thereto and the schedules and other
financial and statistical data included therein or omitted therefrom, as to
which we express no opinion), when they became effective or
A-2
<PAGE> 36
were filed with the Commission, as the case may be, complied as to form in all
material respects with the requirements of the 1933 Act or the 1934 Act as
applicable and the rules and regulations of the Commission thereunder.
(xii) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory requirements,
with any applicable requirements of the Certificate of Incorporation and by-laws
of the Company and the applicable statutory requirements of the Delaware General
Corporation Law.
(xiii) To our knowledge and other than as described in the Prospectus,
there is not pending or threatened any action, suit, proceeding, inquiry or
investigation, to which the Company or any subsidiary is a party, or to which
the property of the Company or any subsidiary is subject, before or brought by
any court or governmental agency or body, domestic or foreign, which might
reasonably be expected to result in a Material Adverse Effect, or which might
reasonably be expected to materially and adversely affect the properties or
assets thereof or the consummation of the transactions contemplated in the
Purchase Agreement or the performance by the Company of its obligations
thereunder.
(xiv) The information in the Prospectus under "Business--Properties",
"Business-- Trademarks and Trade Names", "Business--Government Regulation" and
"Business-Legal Proceedings", and in the Registration Statement under Item 15,
to the extent that it constitutes matters of law, summaries of legal matters,
the Company's Certificate of Incorporation and by-laws or legal proceedings, or
legal conclusions, has been reviewed by us and is correct in all material
respects.
(xv) To the best of our knowledge, there are no statutes or regulations
that are required to be described in the Prospectus that are not described as
required.
(xvi) All descriptions in the Registration Statement of contracts and
other documents to which the Company or its subsidiaries are a party are
accurate in all material respects; to the best of our knowledge, there are no
franchises, contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits thereto,
and the descriptions thereof or references thereto are correct in all material
respects.
(xvii) To our knowledge, neither the Company nor any subsidiary is in
violation of its charter or by-laws and, to our knowledge, no default by the
Company or any subsidiary exists in the due performance or observance of any
material obligation, agreement, covenant or condition contained in any material
contract, indenture, mortgage, loan agreement, note, lease or other material
agreement or instrument that is described or referred to in the Registration
Statement or the Prospectus or filed or incorporated by reference as an exhibit
to the Registration Statement.
A-3
<PAGE> 37
(xviii) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and the
1933 Act Regulations, which have been obtained, or as may be required under the
securities or blue sky laws of the various states, as to which we need express
no opinion) is necessary or required in connection with the due authorization,
execution and delivery of the Purchase Agreement or for the offering, issuance,
sale or delivery of the Securities.
(xix) The execution, delivery and performance of the Purchase Agreement
and the consummation of the transactions contemplated in the Purchase Agreement
and in the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectus under the caption "Use Of Proceeds") and compliance
by the Company with its obligations under the Purchase Agreement do not and will
not, whether with or without the giving of notice or lapse of time or both,
conflict with or constitute a breach of, or default or Repayment Event (as
defined in Section 1(a)(xi) of the Purchase Agreement) under or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any subsidiary pursuant to any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or any other
agreement or instrument, known to us, to which the Company or any subsidiary is
a party or by which it or any of them may be bound, or to which any of the
property or assets of the Company or any subsidiary is subject (except for such
conflicts, breaches or defaults or liens, charges or encumbrances that would not
have a Material Adverse Effect), nor will such action result in any violation of
the provisions of the charter or by-laws of the Company or any Significant
Subsidiary, or (assuming compliance with all applicable blue sky laws) any
applicable law, statute, rule, regulation, judgment, order, writ or decree,
known to us, of any government, government instrumentality or court, domestic or
foreign, having jurisdiction over the Company or any Significant Subsidiary or
any of their respective properties, assets or operations.
(xx) [The Rights under the Company's Shareholder Rights Plan to which
holders of the Securities will be entitled have been duly authorized and validly
issued.]
(xxi) There are no holders of securities of the Company who, by reason
of the filing of the Registration Statement under the 1933 Act, have the right
to request the Company to register under the 1933 Act securities held by them.
In addition, although we have not undertaken to determine
independently, and do not assume any responsibility for, the accuracy or
completeness of the statements in the Registration Statement or the Prospectus,
we have participated in conferences with officers of the Company and
representatives of the independent public accountants of the Company and
representatives of the Underwriters at which the contents of the Registration
Statement and the Prospectus were discussed and we have reviewed certain other
documents. On the basis of the foregoing, nothing has come to our attention that
would lead us to believe that the Registration Statement or any amendment
thereto, including the Rule 430A Information and Rule 434 Information (if
applicable), (except for financial statements and notes thereto and schedules
and other financial and statistical data included or
A-4
<PAGE> 38
incorporated by reference therein or omitted therefrom, as to which we express
no opinion), at the time such Registration Statement or any such amendment
became effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus or any amendment or
supplement thereto (except for financial statements and notes thereto and
schedules and other financial and statistical data included or incorporated by
reference therein or omitted therefrom, as to which we express no opinion), at
the time the Prospectus was issued, at the time any such amended or supplemented
prospectus was issued or at the Closing Time, as the case may be, included an
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In rendering the opinion in Paragraph (vii) above and the opinion
solely with respect to any subsidiary of the Company in Paragraph (xvii) above,
such counsel may rely on the opinion of Cary Gaan, General Counsel of the
Company, a copy of which shall be attached and which shall specifically provide
that the Underwriters may rely on such opinion.
In rendering such opinion, such counsel may rely, as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it is
otherwise subject to, any treatise, written policy or other document relating to
legal opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991).
A-5
<PAGE> 39
Exhibit B
[______] -, 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
LADENBURG THALMANN & CO. INC.
as Representatives of the several
Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by Bally Total Fitness Holding Corporation
Dear Sirs:
The undersigned, a stockholder [and an officer and/or director]* of
Bally Total Fitness Holding Corporation, a Delaware corporation (the "Company"),
understands that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and Ladenburg Thalmann & Co. Inc. propose to
enter into a Purchase Agreement (the "Purchase Agreement") with the Company
providing for the public offering of shares (the "Securities") of the Company's
common stock, par value $.01 per share (the "Common Stock"). In recognition of
the benefit that such an offering will confer upon the undersigned as a
stockholder [and an officer and/or director]2 of the Company, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the undersigned agrees with each underwriter to be named in the
Purchase Agreement that, during a period of 120 days from the date of the
Purchase Agreement, the undersigned will not, without the prior written consent
of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant for the sale of, or otherwise
dispose of or transfer any shares of the Company's Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or hereafter acquired by the undersigned or with respect to
which the undersigned has or hereafter acquires the power of disposition, or
file any registration statement under the Securities Act of 1933, as amended,
with respect to any of the
- --------
* Delete or revise bracketed language as appropriate.
B-1
<PAGE> 40
foregoing or (ii) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock, whether any such swap or
transaction is to be settled by delivery of Common Stock or other securities, in
cash or otherwise.
Very truly yours,
Signature:
---------------------
Print Name:
---------------------
B-2
<PAGE> 41
Annex A
[FORM OF ACCOUNTANTS' COMFORT LETTER PURSUANT TO SECTION 5(e)]
We are independent public accountants with respect to the Company within the
meaning of the 1933 Act and the applicable published 1933 Act Regulations
(i) in our opinion, the audited financial statements and the
related financial statement schedules included or incorporated by
reference in the Registration Statement and the Prospectus comply as to
form in all material respects with the applicable accounting
requirements of the 1933 Act and the published rules and regulations
thereunder;
(ii) on the basis of procedures (but not an examination in
accordance with generally accepted auditing standards) consisting of a
reading of the unaudited interim consolidated financial statements of
the Company for the three month periods ended March 31, 1997 and March
31, 1996, included or incorporated by reference in the Registration
Statement and the Prospectus (collectively, the "10-Q Financials"), a
reading of the minutes of all meetings of the stockholders and
directors of the Company and the ____________ and ____________
Committees of the Company's Board of Directors since January 1, 1997,
inquiries of certain officials of the Company responsible for financial
and accounting matters, a review of interim financial information in
accordance with standards established by the American Institute of
Certified Public Accountants in Statement on Auditing Standards No. 71,
Interim Financial Information ("SAS 71"), with respect to the
three-month periods ended March 31, 1997 and March 31, 1996 and such
other inquiries and procedures as may be specified in such letter,
nothing came to our attention that caused us to believe that:
(A) the 10-Q Financials incorporated by reference in
the Registration Statement and the Prospectus do not comply as
to form in all material respects with the applicable
accounting requirements of the 1934 Act and the 1934 Act
Regulations applicable to unaudited financial statements
included in Form 10-Q or any material modifications should be
made to the 10-Q Financials incorporated by reference in the
Registration Statement and the Prospectus for them to be in
conformity with generally accepted accounting principles;
(B) at March 31, 1997 and at a specified date not
more than five calendar days prior to the date of this
Agreement, there was any change in the consolidated capital
stock of the Company or any decrease in the consolidated
stockholder's equity of the Company or any increase in the
long-term debt of the Company, in each case as compared with
amounts shown in the latest balance sheet included in the
Registration Statement, except in each case for changes,
decreases or increases that the Registration Statement
discloses have occurred or may occur; or
Annex A-1
<PAGE> 42
(C) for the period from January 1, 1997 to March 31,
1997 and for the period from March 31, 1997 to a specified
date not more than five calendar days prior to the date of
this Agreement, there was any decrease in consolidated
revenues, consolidated Cash EBITDA (as defined in the
Company's Form 10-K filed with the Commission on March 28,
1997), consolidated provision for doubtful receivables as a
percentage of consolidated revenues, consolidated provision
for doubtful receivables as percentage of net financed sales,
or consolidated net income of the Company, in each case as
compared with the comparable period in the preceding year,
except in each case for any decreases that the Registration
Statement discloses have occurred or may occur;
(iii) based upon the procedures set forth in clause (ii) above
and a reading of the Selected Consolidated Financial Data included in
the Registration Statement and a reading of the financial statements
from which such data were derived, nothing came to our attention that
caused us to believe that the Selected Consolidated Financial Data
included in the Registration Statement do not comply as to form in all
material respects with the disclosure requirements of Item 301 of
Regulation S-K of the 1933 Act, that the amounts included in the
Selected Consolidated Financial Data are not in agreement with the
corresponding amounts in the audited consolidated financial statements
for the respective periods or that the financial statements not
included in the Registration Statement from which certain of such data
were derived are not in conformity with generally accepted accounting
principles;
(iv) we have compared the information in the Registration
Statement under selected captions with the disclosure requirements of
Regulation S-K of the 1933 Act and, on the basis of limited procedures
specified herein, nothing came to our attention that caused us to
believe that this information does not comply as to form in all
material respects with the disclosure requirements of Items 302, 402
and 503(d), respectively, of Regulation S-K;
(v) based upon the procedures set forth in clause (ii) above,
a reading of the unaudited financial statements of the Company for the
three months ended March 31, 1997 and March 31, 1996 that have not been
included in the Registration Statement and a review of such financial
statements in accordance with SAS No. 71, nothing came to our attention
that caused us to believe that the unaudited amounts for net revenues,
depreciation and amortization, operating income (loss), loss before
extraordinary item and cumulative effect on prior years of change in
accounting for income taxes, loss per common share, cash and
equivalents, installment contracts receivable (net), total assets,
long-term debt, less current maturities, stockholders' equity, EBITDA,
cash provided by (used in): operating activities, cash provided by
(used in): investing activities and cash provided by (used in):
financing activities for the three months ended March 31, 1997 and
March 31, 1996, do not agree with the amounts set forth in the
unaudited consolidated financial statements for those periods or that
such unaudited amounts were not determined on a basis substantially
consistent with that of the corresponding amounts in the audited
consolidated financial statements; and
Annex A-2
<PAGE> 43
(vi) in addition to the procedures referred to in clause (ii)
above, we have performed other procedures, not constituting an audit,
with respect to certain amounts, percentages, numerical data and
financial information appearing in the Registration Statement, which
are specified herein, and have compared certain of such items with, and
have found such items to be in agreement with, the accounting and
financial records of the Company;
Annex A-3
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
to the use of our reports 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, in Amendment No. 2 to the Registration
Statement (Form S-3 No. 333-24175) and related Prospectus of Bally Total
Fitness Holding Corporation for the registration of up to 6,900,000 shares of
its common stock.
ERNST & YOUNG LLP
Chicago, Illinois
July 14, 1997
<PAGE> 1
PHYSICAL REHABILITATION SERVICES DEVELOPMENT AGREEMENT
BETWEEN
CONTINUCARE OUTPATIENT REHABILITATION MANAGEMENT, INC.
AND
BFIT REHABILITATION SERVICES, INC.
THIS PHYSICAL REHABILITATION SERVICES DEVELOPMENT AGREEMENT
("Agreement"), entered as of the 10th day of February, 1997, by and between BFIT
REHABILITATION SERVICES, INC., a Delaware corporation (herein referred to as
"Bally"), and CONTINUCARE OUTPATIENT REHABILITATION MANAGEMENT, INC., a Florida
corporation (herein referred to as "Continucare"). Bally and Continucare may be
jointly referred to as the "Parties" and each individually as a "Party".
Capitalized terms used herein shall have the meanings ascribed to them in
Article 9 of this Agreement.
RECITALS
WHEREAS, Bally desires to establish Medicare-Certified rehabilitation
agencies furnishing medically necessary physical and medical rehabilitation
services (the "Program Services") at certain health and fitness centers
("Clubs") owned or operated by Affiliates of Bally;
WHEREAS, Continucare is engaged in the business of, and has expertise
with respect to, identifying, designing, planning, developing, administering and
operating outpatient medical and physical rehabilitation healthcare service
centers;
WHEREAS, Bally desires to retain an expert in the industry to (i)
identify regions and locations in which to provide Program Service and (ii)
design facilities and systems for providing Program Services at agreed upon
Clubs; and
WHEREAS, Continucare and Bally are bona fide separate organizations and
are not related to one another through common ownership or control.
NOW, THEREFORE, in consideration of the mutual promises contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Bally hereby agrees to engage
Continucare to perform the duties and services described herein, on such terms
and conditions set forth herein, and Continucare hereby accepts such engagement
on the terms and conditions set forth herein.
ARTICLE ONE
CONDITIONS AND TERMS OF AGREEMENT
1.1 APPOINTMENT. Upon the terms and conditions of this Agreement, Bally
hereby designates and appoints Continucare to (i) identify Areas where Program
Services might be provided, (ii) prepare Regional Proposals outlining the
strategy for developing and administering Program Services within each Area,
(iii) prepare Business Proposals for developing and
<PAGE> 2
administering Program Services at each Club described in each Regional Plan
approved by Bally hereunder, and (iv) upon approval by Bally of each Business
Plan, provide the Organizational Services for the Program Facility at the Club
identified on such Business Plan. Continucare hereby accepts such appointment,
and in accepting such appointment, Continucare acknowledges that Bally and its
Affiliates are wholly dependent upon the expertise of Continucare in identifying
Regions and Clubs suitable for the provision of Program Services, in designing
the Program Facilities and Program Services and in selecting the third party
providers of design and construction services.
1.2 AUTHORITY. Bally and its Affiliates shall at all times retain and
exercise full control over the assets and operations of each Club and the
related Program Facilities. Continucare shall perform only those functions set
forth in this Agreement, or otherwise delegated to Continucare by Bally in
writing, and the Parties understand that control and direction over all
functions of the Clubs other than the provision of Program Proposal Services,
Design and Development Services, Administrative Planning Services and other
services specified in any other written agreement between the Parties or their
Affiliates shall be by Bally or its Affiliates. Notwithstanding any term of this
Agreement, Continucare shall not have any authority to enter into any contract,
commitment or arrangement on behalf of Bally or its Affiliates absent the
express written direction of Bally with respect to each such contract,
commitment or arrangement.
1.3 EXCLUSIVITY. With respect to each Region described on Schedule 2.2
attached hereto, as the same shall be amended from time to time in accordance
with the terms hereof, the appointment described in clauses (iii) and (iv) of
Section 1.1 shall be exclusive for such Region until the earliest of (a) the
termination of this Agreement pursuant to Section 6.2.1 or Section 6.2.2.2, (b)
the occurrence of any Regional Termination Event with respect to such Region or
(c) any Master Termination Event permitting Bally to exercise rights of
termination under Section 6.2.3.1.
1.4 RELATIONSHIP. The Parties expressly acknowledge that in performing
their respective obligations under this Agreement, they are each acting as
independent contractors, and that the personnel required for the performance of
this Agreement who are employed by or under contract with (i) Continucare shall
not be considered employees of Bally or its Affiliates and (ii) Bally shall not
be considered employees of Continucare or its Affiliates. Continucare and Bally
are not and shall not be considered joint venturers or partners, and nothing
herein shall be construed to authorize either Party to act as agent for the
other, except as expressly provided herein. Each party agrees to disclose in its
respective dealings that they are separate entities.
ARTICLE TWO
REGIONAL PROPOSAL; CREATION OF REGION; BUSINESS PROPOSAL
2.1 REGIONAL PROPOSAL. With respect to any one or more states or other
geographic area agreed to by Bally ("Area"), Continucare from time to time may
or, upon Bally's request shall, provide Bally a proposal ("Regional Proposal")
which shall set forth a plan for designing,
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developing, maintaining and operating Program Facilities and providing Program
Services within such Area, which Regional Proposal shall contain, without
limitation, the following information:
2.1.1 PROGRAM FACILITIES. A list of those Clubs within
such Area at which Continucareproposes Program Facilities should be established.
2.1.2 PROGRAM SERVICES. A description of the types of
Program Services proposed to be conducted at each Program Facility identified
in the Regional Proposal.
2.1.3 ANTICIPATED REGIONAL BUDGET: COSTS AND REVENUE. A
statement of the anticipated budget for the Regional Proposal which includes,
without limitation, estimations of the proposed capital expenditures and
operating expenses for designing, developing, providing community and patient
education programs, maintaining and operating Program Facilities and providing
Program Services within the Area, projections of anticipated revenues from
providing Program Services, PRO FORMA cash flow calculations and a statement of
each material economic assumption made in preparing such budget.
2.1.4 DEMOGRAPHICS. A description of all relevant demographic
information and similar data for such Area including, without limitation, all
studies, reports and analyses, whether generated internally or externally, with
respect to individuals within such Area to whom Program Services might be
provided and possible patient sources and payor sources for the Program
Facilities.
2.1.5 TIMING. The projected schedule for designing, developing
and opening each of the Program Facilities in the Area, including the date(s) by
which Business Proposals for each Club will be submitted to Bally.
2.2 BALLY APPROVAL. After Continucare submits a Regional Proposal with
respect to any Area, Bally and Continucare shall confer and discuss the
information contained in such Regional Proposal. During such conferral period,
Bally may request Continucare to modify such Regional Proposal or provide such
further information it may request to assess the Regional Proposal. After such
conferral period, Bally shall inform Continucare in writing whether it approves
or disapproves of the Regional Proposal, or any specific portions thereof
(including, without limitation, any proposal by Continucare to locate a Program
Facility at a certain Club). Upon Bally's approval of the Regional Proposal, as
modified, pursuant to this Section, (i) such approved Regional Proposal, shall
constitute the regional plan ("Regional Plan") for the Program Facilities and
the Program Services to be provided, which Regional Plan shall not be amended or
modified except in a writing expressly identified as an "Amendment to Regional
Plan", and (ii) such Area described in the Regional Plan shall be a Region
hereunder, which shall be evidenced by its listing on Schedule 2.2 hereof. Bally
may reasonably disapprove of the Regional Proposal, or any portion thereof,
whereupon Continucare may endeavor to make such modifications to the Regional
Proposal, or such portions thereof, as are necessary to resolve the objections
raised by Bally's notice and resubmit such Regional Proposal. Notwithstanding
the foregoing, Bally may, in its sole discretion, disapprove of or reject any
Regional Proposal if Bally determines for any
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reason whatsoever that it does not wish to establish a Region or provide Program
Services in such Area at such time.
2.3 BUSINESS PROPOSAL. On or before the dates set forth for each Club
in the Regional Plan, Continucare shall provide Bally a separate proposal
("Business Proposal") for each Club identified on such Regional Plan at which a
Program Facility shall be located or Program Services shall be provided. Each
such Business Plan shall set forth the proposal of Continucare for designing,
developing, maintaining and operating Program Facilities and providing Program
Services at such Club, including, without limitation, the following information:
2.3.1 PROGRAM SERVICES. A detailed description of the
Program Services to be initially conducted at such Program Facility.
2.3.2 PRELIMINARY DESIGN PLANS. A description of those areas
("Program Space") within the Club that are proposed to be developed as a Program
Facility, which description will identify, without limitation, any area (i) to
be used to provide Program Services, (ii) required for conducting administrative
tasks (including office space) and (iii) which will be a shared or common space
within the Club.
2.3.3 BUDGET: COSTS AND REVENUE. A statement of the
anticipated budget for implementing the Business Proposal which includes (i) the
Pre-Opening Budget for the proposed Program Facility, (ii) the Physical
Development Budget for the proposed Program Facility, (iii) the Operating Budget
for the proposed Program Facility, and (iv) a statement of each material
economic assumption made in preparing each budget.
2.3.4 TIMING. The projected schedule for planning, developing,
constructing and opening Program Facilities and Program Services at such Club
which includes each of the following (collectively, the "Pre-Opening
Benchmarks"): (i) the date on which Continucare shall make, and present to
Bally, a complete and final list of the members of the Design Team other than
the Project Contractor, (ii) following approval of the Design Team by Bally, the
period of time within which the Design Team shall submit its Design Plan, (iii)
following submission of the Design Plan, the period of time within which (A) a
project contractor shall be identified to Bally (if not previously identified)
and (B) construction shall begin, (iv) the date on which recruiting and hiring
all Program Staff and a Medical Director required to operate such Program
Facility on the Opening Date shall be complete, and (v) the anticipated Opening
Date (the "Planned Opening Date") of the Program Facilities.
2.3.5 COMMUNITY AND PATIENT EDUCATION. All reports, whether
generated internally or externally, with respect to such Program Facility that
include, without limitation, (i) a description of locations, as determined by
existing demographic information, in which Continucare proposes community and
patient education services to be conducted for such Program Facility, (ii) the
nature of the proposed community and patient education campaign, (iii) all
projected costs for the community and patient education campaign, and (iv) such
other information as may reasonably be requested by Bally.
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<PAGE> 5
2.3.6 PERSONNEL AND STAFF. A description of the projected
personnel needs for a Program Staff at such Program Facility including, without
limitation, clinical and administrative staff for the Program Services, and
Continucare's proposal for recruiting and hiring such Program Staff.
2.4 BALLY APPROVAL.
2.4.1 Bally shall inform Continucare in writing whether it
approves or disapproves of the Business Proposal, or any portion thereof, and,
if so, the specific portions thereof of which it disapproves and the reasons
therefor.
2.4.2 Bally may reasonably disapprove of the Business Proposal
or any portion thereof, Continucare shall (i) endeavor to make such
modifications to the Business Proposal as are necessary to resolve the
objections raised in Bally's notice pursuant to Section 2.4.1, and to resubmit
such Business Proposal for review under the terms of Section 2.4.1, and (ii) if
necessary, to make further revisions under this Section 2.4.2. Notwithstanding
the foregoing, Bally may, in its sole discretion, disapprove of or reject any
Business Proposal if Bally determines for any reason whatsoever that it does not
wish to establish or operate a Program Facility or provide Program Services at
such Club at such time.
2.4.3 Upon Bally's approval of the Business Proposal pursuant
to Sections 2.4.1 and 2.4.2, such Business Proposal, as approved, shall
constitute the business plan ("Business Plan") for the Program Facility and the
Program Services to be provided at such Program Facility, which Business Plan
shall not be amended or modified except in writing expressly identified as an
"Amendment to Business Plan." Bally shall not unreasonably withhold its approval
of any amendment or modification to the Business Plan required by a change in
any applicable Governmental Requirement, provided, however, that with respect to
any material amendment or modification required by a change in a Governmental
Requirement, Bally may, in response thereto, elect to terminate such Business
Plan.
ARTICLE THREE
DESIGN AND DEVELOPMENT SERVICES
3.1 SUPERVISION OF DESIGN AND DEVELOPMENT BY CONTINUCARE. Upon Bally's
approval of the Business Plan, Continucare shall supervise, and shall be
responsible to Bally for, the design and development of the Program Facility
identified in such Business Plan. Continucare shall perform, or cause to be
performed, each of the following ("Design and Development Services") in a manner
that conforms with the Business Plan:
3.1.1 DESIGN SERVICES. Continucare shall:
3.1.1.1 Identify, such architects, designers (the
architects and designers so selected are referred to herein as the "Project
Architects"), engineers, contractors (the contractors so selected are referred
to herein as the "Project Contractors"), and other specialists (collectively,
the "Design Team") as Continucare deems best suited to prepare all construction
drawings,
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<PAGE> 6
surveys, materials specifications, architectural plans and drawings,
elevations, construction models, engineering plans and drawings, approved plats
and all other plans, drawings, studies or reports required for the construction
of the Program Facility (the "Plans and Specifications") at the Club, including
for the purchase and installation of the FF&E (the "FF&E Specifications") in
conformity with the Business Plan and the highest professional, trade or
industry standards relevant to such Plans and Specifications and FF&E
Specifications.
3.1.1.2 Submit to Bally a proposal (the "Design
Plan"), which includes the completed preliminary design documents, a statement
of the proposed contract sum, and a proposed schedule for completion of the
Project Facility, and that conforms to the Business Plan, all applicable
Governmental Requirements and the highest professional, trade or industry
standards relevant to the Design Plan. Preliminary design documents shall
consist of preliminary design drawings, outline specifications or other
documents sufficient to establish the size, quality and character of the entire
project, its architectural, structural, mechanical and electrical systems, and
the materials and such other elements of the Project Facility as may be
appropriate. Deviations from the Business Plan shall be disclosed in the Design
Plan and are subject to Section 3.2.
3.1.1.3 Establish all operational and all
functional requirements of the Program Facility, including, without limitation,
information systems, energy, signage, lighting, sound, communications,
maintenance, personnel, data processing equipment and software, both for use by
Bally and as criteria for the Program Facility to be used by the Project
Architects and the Project Contractor in the preparation of the Plans and
Specifications and the FF&E Specifications.
3.1.1.4 Advise and consult with the Project
Architects and the Project Contractor regarding various key building systems,
including, without limitation, mechanical, electrical, plumbing and life safety.
3.1.1.5 Advise and consult with the Design Team in
the development of schematic, preliminary and working Plans and Specifications
and in the selection and specifications of FF&E, wall and floor coverings,
design and color, wall hangings, signage, art, accouterments, space planning
requirements and functional design criteria and all other aesthetic and
operational elements of design and other nonstructural elements of the Program
Facility in a manner that conforms to existing design and nonstructural elements
of the Club.
3.1.1.6 Ensure that Plans and Specifications are
consistent in all respects with the Business Plan and the highest applicable
professional, trade and industry standards.
3.1.1.7 Review, critique and make recommendations
to Project Architects and the Project Contractor in the selection, purchase,
ordering, installation and layout of the FF&E in accordance with the Plans and
Specifications.
3.1.1.8 Use its best efforts to ensure that the
Design Team will prepare the Plan and Specifications in a manner that does not
cause a reduction in, or otherwise diminish, the value of the Club or interfere
with the services provided therein.
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3.1.1.9 Ensure all Governmental Requirements
applicable to design, construction and operation of the Program Facility are
complied with by the Design Team, and make, or cause to be made, revisions in
the Plan and Specifications or other documents required by the enactment or
revision of any Governmental Requirements subsequent to the preparation of such
documents.
3.1.1.10 Notify Bally in writing if Continucare,
any member of the Design Team, or another design professional retained to
provide services on the Program Facility believes that implementation of any
instruction received from Bally would cause a violation of any Governmental
Requirement or would be inconsistent with the Business Plan or any applicable
professional, trade or industry standard.
3.1.1.11 Advise and consult with Bally regarding
any and all relevant design, construction or operational standards necessary for
optimal medical care, state licensure and federal conditions for participation
in rehabilitation programs.
3.1.2 DEVELOPMENT SERVICES. Continucare shall:
3.1.2.1 Prepare in conjunction with qualified
professionals, cost estimators or contractors, the final Construction Budget,
which shall be deemed to be the "Construction Budget" for purposes of this
Agreement upon Bally's approval thereof in writing.
3.1.2.2 Promptly and diligently identify and inform
Bally of all Development Permits needed to commence construction of the Program
Facility.
3.1.2.3 Upon Bally's approval of the Plan and
Specifications and the final Construction Budget, supervise the alteration of
the Program Space in accordance with the Plans and Specifications.
3.1.2.4 Use its best efforts to ensure that all
work shall be performed by personnel who will not, either by the conduct of
their work or by their presence on the Program Space, cause or lead to,
directly or indirectly, any strike, picketing, handbilling, labor dispute, work
slowdown or boycott (collectively, "Disruptions") affecting the Program Space,
the Club, the building in which same is located, or any part thereof, and shall
use its best efforts to cause personnel causing any Disruption to permanently
leave the Program Space within six (6) hours after Bally's oral or written
request therefor.
3.1.2.5 Use its best efforts to ensure that the
Design Team will not, nor permit their respective agents or employees to,
interfere with access to or the use and operation of the Club by its staff and
members or cause a reduction in, or otherwise diminish, the value of the Club or
interfere with the services provided therein and shall use its best efforts to
ensure each of them to observe all rules and regulations of such Club,
including, but not limited to, the rules and regulations of the Club and
restrictions on the hours of use, and rules and regulations imposed upon Bally
by its landlord or any other agreement by which the Club may be bound, and upon
Continucare's reasonable request, Bally shall provide Continucare a copy of the
lease for
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such Club or such other documents which are necessary for Continucare to
ascertain such rules and regulations.
3.1.3 Cooperate with the Facility Supervisor in performing the
Design and Development Services described in this Section 3.1.
3.1.4 Notwithstanding anything to the contrary contained in
this Section 3.1, Continucare shall perform the Design and Development Services
for each Program Facility in a manner that complies with the terms of the lease
for such Club and each Governmental Requirement affecting such Program Facility.
3.2 MODIFICATIONS.
Each of the Design and Development Services, including without
limitation the Design Plan, the final Plans and Specifications and FF&E
Specifications, shall conform with the Business Plan, and if Continucare, any of
its employees or agents, or any member of the Design Team wishes to perform any
Design and Development Service in a manner other than as provided in the
Business Plan, Continucare shall first obtain Bally's written consent as set
forth herein to modify the Business Plan to accommodate such proposed variation.
Continucare shall inform Bally in writing of the requested modification
("Modification") and the reason Continucare requests such Modification. Bally
and Continucare shall confer and discuss the Modification, and after conferring
with Continucare, Bally shall inform Continucare in writing whether it approves
or disapproves the Modification. Notwithstanding the foregoing, Bally shall not
unreasonably disapprove of any Modification requested by Continucare which is
required by a change in any applicable Governmental Requirement, provided,
however, that with respect to any material modification required by a change in
a Governmental Requirement, Bally may, in response thereto, elect to terminate
such Business Plan. Any Modification, or portion thereof, approved by Bally
shall be incorporated into the Business Plan described in Section 2.4.3.
3.3 BALLY RESPONSIBILITIES
Notwithstanding anything to the contrary contained herein,
Bally shall be responsible for each of the following:
3.3.1 Providing Continucare access to the Program Space
approved in the Business Plan in order to supervise the development of the
Program Facilities and ensuring that Continucare, its agents and employees,
members of the Design Team, and surveyors and inspectors for any Governmental
Authority, which must license or authorize such development, shall have any
necessary rights of ingress and egress to the Program Facilities;
3.3.2 Selecting the Design Team, including without limitation
the Project Architects and Project Contractors, negotiating any contracts
engaging members of the Design Team and paying all fees negotiated with the
Design Team, except as otherwise provided in the Business Plan or in any
contract with any member of the Design Team. Notwithstanding anything to the
contrary contained in this Agreement, Continucare shall not be required to
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become or be deemed (except pursuant to a written agreement) a party to any
contract with any member of the Design Team.
3.3.3 Obtaining all Development Permits necessary to effect
the construction of the Program Facility with the assistance of Continucare, and
Bally shall undertake all reasonable efforts to act in compliance with such
Development Permits.
3.4 OPENING THE PROGRAM FACILITY. The Program Facility shall be opened
to the public, and Program Services shall be provided, beginning on a date
("Opening Date") established by Continucare upon satisfaction of the following:
(i) the Project Architects have issued to Bally a certificate(s) of substantial
completion confirming that the Program Facility has been substantially completed
in accordance with the Plans and Specifications, (ii) the Project Contractor has
issued to Bally a certificate(s) of substantial completion confirming that the
FF&E has been substantially installed therein in accordance with the FF&E
Specifications and the Plans and Specifications, (iii) all Operating Permits
have been obtained, (iv) Continucare is satisfied that all operational systems
have been established to the satisfaction of Continucare and any appropriate
Governmental Authorities, (v) all other Governmental Requirements necessary to
open, occupy and operate the Program Facility have been satisfied, and (vi)
Bally's determination that the Program Facility complies with the Business Plan
and the terms of this Agreement.
ARTICLE FOUR
ADMINISTRATION, PLANNING AND OPERATION SERVICES
4.1 ADMINISTRATION. Upon Bally's approval of any Business Plan,
Continucare shall perform, or cause to be performed, each of the following
(collectively, "Administration Planning Services") in a manner that conforms
with the Business Plan:
4.1.1 Ensuring that, on or prior to the Opening Date, the
Program Services comply with all applicable Governmental Requirements,
professional conditions of participation and other guidelines and Laws
established by the various Governmental Authorities regulating providers of
Program Services.
4.1.2 Identifying all necessary or useful licenses,
certifications, permits and operating approvals ("Operating Permits") for the
existence, use or operation of the Program Facility and Program Services are
required on or prior to the Opening Date and work with Governmental Authorities,
third-party payors and others to secure any such Operating Permits.
4.1.3 Implementing the pre-opening community and patient
education campaign under the Business Plan, including, but not limited to,
direct sales, media and direct mail advertising, promotion, publicity and public
relations permitted under applicable Governmental Requirements.
4.1.4 Recruiting, providing orientation to, training,
supervising and advising as to the compensation of all Program Staff required
on behalf of Bally, including all Program Staff
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to be utilized during the period from the date of approval of the Business Plan
until the Opening Date in accordance with the approved Business Plan.
4.2 PROGRAM SERVICES CONSULTATION. Prior to the Opening Date,
Continucare shall plan and direct the development of Program Services to be
provided at the Program Facility including, without limitation, development of
the following:
4.2.1 the organizational structure of the Program;
4.2.2 programs and policies with respect to Program
administration and patient care;
4.2.3 a structure for the Program Facilities that enables
Bally to obtain the reimbursement to which it is rightfully entitled for
services rendered to beneficiaries of third party payors from Medicare and any
other third party payors; and
4.2.4 the scope and types of services to be provided in the
Program and the reimbursability of various types of Program Services under
Medicare, Medicaid and other insurance.
4.3 PRE-OPENING ACQUISITION OF CAPITAL EQUIPMENT. Prior to the Opening
Date, Continucare shall (i) review all intended acquisitions of capital
equipment for the Program and advise Bally regarding the need and terms for such
acquisitions and, if requested by Bally, negotiate the terms thereof with third
parties. Bally acknowledges that in designing acquisition services under this
Section 4.3, if Continucare is acting solely as a procuring agent for Bally,
then Continucare shall not be deemed a merchant as that term is defined in the
Uniform Commercial Code (as adopted in the State of Illinois) and makes no
warranty, express or implied with respect to equipment and supplies so ordered
or acquired by Continucare on behalf of Bally, except as otherwise provided in
this Agreement.
4.4 COMPLIANCE WITH LAWS. Continucare shall design Program Services in
a manner that complies with all Laws and other Governmental Regulations enacted
by any Governmental Authority affecting the provision of the Program Services
and any other operations at such Program Facility, including, without
limitation, any of the foregoing which require the licensing or accreditation of
physical therapists and other personnel, or which relate to physical therapy or
other medical services, or the Americans with Disabilities Act, or the
Occupational Safety and Health Act, or Medicare or similar Governmental
Regulations whether or not any such Laws or other Governmental Regulations which
may be hereafter enacted involve a change of policy on the part of the
Governmental Authority enacting the same.
4.5 PROHIBITION ON INDUCEMENTS. Notwithstanding anything to the
contrary contained in this Agreement, neither party shall offer, pay or accept
anything of value to any person to induce, encourage, or otherwise influence
such person to refer patients of any governmentally-funded program, including
Medicare and Medicaid, to any Program Facility, nor rely upon or use physicians
or other health care professionals treating patients at any Program
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Facility or target any patients of such physicians or health care professionals
in any direct marketing effort.
ARTICLE FIVE
PAYMENT
In consideration of the services provided by Continucare hereunder,
Bally shall pay Continucare:
5.1.1 Upon Bally's approval of a Business Proposal in
accordance with Section 2.4 with respect to Program Services to be provided at a
Program Facility, a fee of $10,000, which shall be paid in two installments of
$5,000 each by no later than the fifth business day of each of the next two
succeeding full calendar months after Bally's written approval of such Business
Proposal.
5.1.2 Within five business days of the Opening Date of any
Program Facility, a fee of $5,000.
5.2 REIMBURSABLE EXPENSES. Bally shall pay for the out-of-pocket,
reimbursable expenses incurred by Continucare with respect to each Program
Facility; provided, however, that Continucare shall provide Bally satisfactory
documentation with respect to the nature and cost of each such reimbursable
expense and the aggregate amount of such reimbursable expenses for a Program
Facility shall not exceed the projected amount of reimbursable expenses approved
on the Business Plan for such Program Facility.
ARTICLE SIX
TERM AND TERMINATION OF AGREEMENT
6.1 TERM. The term of this Agreement shall be for a period of three
years commencing on the Effective Date and terminating on the third anniversary
of the Effective Date (the "Initial Term"), unless terminated earlier as
permitted herein. Thereafter, the Agreement shall automatically renew for
successive three (3) year terms unless terminated earlier, in whole or in part,
by either Party as permitted herein.
6.2 TERMINATION. This Agreement may be terminated as follows:
6.2.1 MASTER OR REGIONAL TERMINATION BY MUTUAL CONSENT. The
Parties and their respective Affiliates may terminate this Agreement and/or any
Other Agreement generally or with respect to any Region or portion thereof by
mutual consent, and such termination shall be effective ninety (90) days after a
written consent is signed by the Parties.
6.2.2 TERMINATION WITHOUT CAUSE.
6.2.2.1 IDENTIFICATION OF AREAS; PREPARATION OF
REGIONAL PROPOSALS. At any time on or after the third anniversary of the
Effective Date of this Agreement, Bally may, without cause, terminate, in whole
or in part, the appointment of Continucare pursuant to clauses (i) and (ii) of
SECTION 1.1 to identify Areas where Program Services might be provided and to
prepare
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Regional Proposals, provided sixty (60) days' prior written notice of its intent
to terminate such appointment has been provided to Continucare by Bally.
6.2.2.2 PROGRAM FACILITIES TERMINATION. Subject to
the provisions of Section 6.3, at any time on or after third anniversary of the
Effective Date of this Agreement, (i) Bally and its Affiliates may terminate
this Agreement and/or any Other Agreement with respect to any or all Program
Facilities upon one hundred eighty (180) days written notice to Continucare and
(ii) Continucare and its Affiliates may terminate this Agreement and/or any
Other Agreement with respect to any or all Program Facilities upon one years
written notice to Bally.
6.2.3 TERMINATION FOR CAUSE.
6.2.3.1 MASTER TERMINATION. The Party indicated
below and its Affiliates shall have the right to terminate this Agreement and/or
the Other Agreements, in their entirety or, at the option of the terminating
Party and its Affiliates, with respect to one or more Program Facilities or one
or more Regions, upon five (5) business days' notice (or such other notice as
required by this subsection 6.2.3.1) to the other Party in the event of any of
the following (collectively, "Master Termination Events"):
6.2.3.1.1 By one Party and its Affiliates
after a material breach by the other Party of any representation, warranty or
covenant of this Agreement, other than a breach arising out of the events or
circumstances set forth in Section 6.2.3.2 or Section 6.2.3.3 provided such
breach is not cured within thirty (30) days after provision of written notice by
the other Party specifying such breach with particularity.
6.2.3.1.2 By one Party after (i) a general
assignment by the other Party or its Parent for the benefit of creditors, (ii)
an involuntary case or other proceeding shall be commenced against, or a court
having jurisdiction shall enter a decree or order for relief in respect of, the
other Party or its Parent in an involuntary case or other proceeding under any
applicable bankruptcy, insolvency or other similar Law now or hereinafter in
effect or any other federal, state or foreign Law, and the petition shall not be
dismissed within sixty (60) days after commencement of such case, (iii) the
decree or order of a court having jurisdiction for the appointment of a
receiver, liquidator, sequestrator, trustee, custodian or other officer having
similar powers over the other Party or its Parent shall be entered or an interim
receiver, trustee or other custodian of the other Party or its Parent or of a
substantial part of its property shall be appointed, or a warrant of attachment,
execution or similar process against any substantial part of the property of the
other Party or its Parent shall be issued, and such event shall not be stayed,
vacated, dismissed, bonded or discharged within sixty (60) days of entry,
appointment or issuance; or (iv) the other Party or its Parent shall have an
order for relief entered with respect to it or commence a voluntary case under
any applicable bankruptcy, insolvency or other similar law, now or hereafter in
effect or shall consent to the entry of an order for relief in an involuntary
case or to the conversion of an involuntary case to a voluntary case, under any
such law, or shall consent to the appointment of or taking of possession by a
receiver, trustee or other custodian of a substantial party of its property.
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6.2.3.1.3 By one Party after the exclusion
of the other Party from participation in the Medicare or Medicaid programs or
conviction of the other Party or any of its officers of a felony.
6.2.3.2 PROGRAM FACILITY TERMINATION. The Party
indicated below and its Affiliates shall be permitted to terminate this
Agreement and/or any Other Agreements with respect to a particular Program
Facility in the event of any of the following (collectively, "Program
Termination Events"):
6.2.3.2.1 By either Party and its
Affiliates, in the event a casualty or Force Majeure shall preclude or
materially impair provision of Program Services at such Program Facility for a
period of sixty (60) or more consecutive days or ninety (90) days within any
twelve (12) month period.
6.2.3.2.2 By Bally and its Affiliates, if
Bally and its Affiliates shall (i) substantially discontinue the operation of a
health and fitness center at the Club at which the Program Facility is located
or (ii) no longer own one hundred percent (100%) of the equity interest in the
Club at which any Program Facility is located.
6.2.3.2.3 By either Party and its
Affiliates, if Bally or its Affiliates for any reason, whether by contract, law
or regulation, or other binding agreement, instrument or order, is precluded or
materially impaired from providing the Program Facilities or Program Services at
a Club.
6.2.3.2.4 By either Party and its
Affiliates, if there is a change in licensing requirements, Bally Regulations or
private insurer or governmental reimbursement for Program Facilities or for
Program Services at a Club that has a material adverse effect on the economic
benefits of a Program to either Party; provided that prior to such notice of
termination, such Party has given written notice of its intent to terminate on
such basis, and such Party shall have sought to engage in good faith
negotiations with the other Party for a period of thirty (30) days in order to
modify the Agreement to achieve economic viability of the Program for both
Parties.
6.2.3.2.5 By one Party and its Affiliates
if the other Party has been excused from performance under Section 6.6 and such
non-performance continues for a period of sixty (60) or more consecutive days or
ninety (90) days within any twelve (12) month period.
6.2.3.2.6 By Bally and its Affiliates if
any Pre-Opening Benchmark with respect to such Program Facility shall not be met
unless such delay is cured within thirty (30) days of the original Pre-Opening
Benchmark deadline, or, if such delay is not cured within such 30-day period and
Continucare is making all reasonable efforts and is acting in good faith to
promptly cure such delay, within one hundred twenty (120) days of the original
Pre-Opening Benchmark deadline provided, however, that Continucare shall not
have any right to cure a delay that has or will have material adverse
consequence upon the Program Facility or Program Services.
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6.2.3.3 PROGRAM FACILITY OR REGION TERMINATION.
Bally and its Affiliates shall be permitted to terminate this Agreement and/or
the Other Agreements with respect to a particular Region or any or all Program
Facilities within such Region in the event of any of the following
(collectively, "Regional Termination Events"):
6.2.3.3.1 Pursuant to subsection 6.2.3.2,
Bally and its Affiliates shall have the right to terminate this Agreement with
respect to more than one-half (by number) of the Program Facilities within such
Region.
6.2.3.3.2 Bally shall not have received any
payments of Capital Returns pursuant to Section 5.1.3 for such Region (i) for
any period of more than 89 consecutive days, commencing on or after the date
which is the 210 day anniversary of the Opening Date of the First Program
Facility in such Region or (ii) at any one or more points in time, Bally shall
not have received payment in full of the aggregate Capital Expenses for such
Region for all Program Facilities as to which two or more years have passed
since their Opening Date. This Section only provides a right of termination and
does not create or purport to create any guarantee by Continucare of any
payments of Capital Returns, and Bally shall exercise its right of termination
in accordance with this Section in its sole business judgment.
6.2.3.3.3. Bally shall not have received
any Net Excess Cash Flow ursuant to Section 5.1.7 for such Region for any period
of more than 89 consecutive days commencing on or after the date which is the
390 day anniversary after the Opening Date of the first Program Facility in such
Region. This Section only provides a right of termination and does not create or
purport to create any guarantee by Continucare of any Net Excess Cash Flow, and
Bally shall exercise its right of termination in accordance with this Section in
its sole business judgment.
6.2.3.4 REGION TERMINATION. Either Party and its
Affiliates shall be permitted to terminate this Agreement and/or the Other
Agreements with respect to any or all Regions upon notice given at any time
within 180 days after a Continucare Change of Control or a Bally Change of
Control, provided such termination may not become effective until 180 days after
written notice to the other Party of such intention to terminate.
6.3 OBLIGATIONS FOLLOWING TERMINATION.
6.3.1 Termination of this Agreement, in whole or in part,
pursuant to Sections 6.2.1, 6.2.2 or 6.2.3 or the terms of this Section 6.3
shall not affect or negate any obligations of either Party to the other arising
prior to termination.
6.3.2 Continucare shall, upon the termination (by Bally,
Continucare or operation of law), in whole or in part, of this Agreement in its
entirety or with respect to any one or more Regions or Program Facilities, as
well as any Program Services or other services provided by Continucare
hereunder, vacate, upon and as provided by Bally's direction, such Program
Facility, and cooperate and assist with Bally in effecting an orderly transition
with respect to each such Region or Program Facility with respect to which
Continucare's services are being provided, and such Program Services or other
services, including without limitation
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providing Bally, for a period of one hundred eighty (180) days after such
termination, cooperation and assistance with the transfer to Bally of, or
otherwise enabling Bally to use and, where possible, obtain for use after such
180-day period, any information, records, copyrights, trademarks, patents,
licenses or other intellectual properties necessary or useful for operating each
such Region or Program Facility or providing such Program Services or other
services from and after such termination, and Bally shall reimburse Continucare
for such reasonable costs incurred hereunder.
6.3.3 The Parties' obligations under Section 8.5 shall survive
indefinitely.
6.4 REMEDIES. The remedies set forth in this Agreement shall be in
addition to all other remedies available to the Parties at law or in equity. In
addition to providing a right of termination, the occurrence of any event
described in Section 6.2.3.1.2 or Section 6.2.3.1.4 shall constitute a breach of
this Agreement by the Party which caused such event to occur.
6.5 NO WAIVER. No waiver of any covenant, condition, representation or
warranty or of the breach of any covenant, condition, representation or warranty
to be performed by either Party shall be taken to constitute a waiver of any
subsequent breach of such covenant, condition, representation or warranty by
such Party nor to justify or authorize the non-observance on any other occasion
of the same or of any other covenant, condition, representation or warranty in
this Agreement.
6.6 FORCE MAJEURE. Either Party shall be excused for failures and
delays in performance of its respective obligations under this Agreement,
including without limitation obtaining any necessary licenses or certifications,
due to any cause beyond the control and without the fault of such Party,
including without limitation, any act of God, war, riot, or insurrection, law or
regulation, strike, governmental inaction or delay, flood, hurricane, fire,
explosion or inability due to any of the aforementioned causes to obtain
necessary labor, materials or facilities ("Force Majeure"). This provision shall
not, however, release the Party from using commercially reasonable efforts to
avoid or remove such cause and the Party shall continue performance hereunder
with the utmost dispatch whenever such causes are removed. Upon claiming any
such excuse or delay for nonperformance, the Party shall give prompt written
notice thereof to the other Party.
ARTICLE SEVEN
REPRESENTATIONS AND WARRANTIES
7.1 REPRESENTATIONS AND WARRANTIES OF CONTINUCARE. Continucare hereby
represents and warrants to Bally, as of the date of this Agreement and the date
of each amendment to Schedule 1.1 and Schedule C hereto, as follows:
7.1.1 ORGANIZATION. Continucare is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Florida.
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7.1.2 CAPACITY; AUTHORITY; VALIDITY. Continucare has all
necessary corporate power and authority to enter into this Agreement, and each
agreement contemplated hereunder, and to perform, or cause to be performed, all
of its obligations under this Agreement and each agreement contemplated
hereunder. This Agreement and each agreement contemplated hereunder, and the
consummation of the transactions contemplated hereby and thereby have been duly
and validly authorized by all necessary corporate action of Continucare and this
Agreement has been duly executed and delivered by Continucare and constitutes
the valid and binding obligation of Continucare, enforceable in accordance with
its terms (except as such enforcement may be limited by Continucare's
bankruptcy, insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights generally).
7.1.3 CONFLICTS; DEFAULTS. Neither the execution and delivery
of this Agreement or any other document contemplated hereby by Continucare nor
the consummation of any transaction contemplated hereby by Continucare will (i)
conflict with, result in a breach of, constitute a default under, or accelerate
the performance required by the terms of any contract, instrument or commitment
to which Continucare is a party or by which Continucare is bound, (ii) violate
the charter or by-laws of Continucare, (iii) require any consent or approval
under or violate any judgment, order, decree, permit or license to which
Continucare is party or by which Continucare is bound, or (iv) require the
consent or approval of any Governmental Authority or other party to any
contract, instrument or commitment to which Continucare is party or by which it
is bound, except as have been obtained.
7.2 REPRESENTATIONS AND WARRANTIES OF BALLY. Bally hereby represents
and warrants to Continucare, as of the date of this Agreement and the date of
each amendment to Schedule 1 and Schedule C hereto, as follows:
7.2.1 ORGANIZATION. Bally is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
7.2.2 CAPACITY; AUTHORITY; VALIDITY. Bally has all necessary
corporate power and authority to enter into this Agreement, and each agreement
contemplated hereunder, and to perform all of its obligations under this
Agreement and each agreement contemplated hereunder. This Agreement and each
agreement contemplated hereunder, and the consummation by Bally of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action of Bally, and this Agreement has
been duly executed and delivered by Bally and constitutes the valid and binding
obligation of Bally, enforceable in accordance with its terms (except as such
enforcement may be limited by Bally's bankruptcy, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors' rights generally).
7.2.3 CONFLICTS; DEFAULTS. Neither the execution and delivery
of this Agreement by Bally nor the consummation of any transaction contemplated
hereby by Bally will (i) conflict with, result in a breach of, constitute a
default under, or accelerate the performance required by the terms of any
contract, instrument or commitment to which Bally is a party or by which Bally
is bound, (ii) violate the charter or by-laws of Bally, (iii) require any
consent or approval under or violate any judgment, order, decree, permit or
license to which Bally is a party or by which Bally is bound, or (iv) require
the consent or approval of any Governmental Authority or any party to
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any contract, instrument or commitment to which Bally is a party or by which it
is bound, except as contemplated to be obtained pursuant to this Agreement.
ARTICLE EIGHT
OTHER MATTERS
8.1. CONFIDENTIALITY; NON-DISCLOSURE.
8.1.1 CONFIDENTIALITY. Each Party agrees that it will not
before, during or after the term of this Agreement, permit the duplication, use
or disclosure of any Confidential Information of the other Party to any person
(other than its own employees, agents, Representatives or those members of the
Design Team who must have such information for the performance of such Party's
obligations hereunder), unless such duplication, use or disclosure is
specifically authorized by the other Party. The Parties acknowledge and agree
that a Party's Confidential Information shall be deemed a trade secret of such
Party. Confidential Information shall not include any information which, at the
time of disclosure, (i) is generally known by the public or generally known
within the respective Parties' industries, (ii) was in the recipient's
possession free of any obligation of confidentiality at the time of the
disclosing Party's communication thereof to the recipient, (iii) was
communicated to the recipient free of any obligation of confidentiality
subsequent to the time of the disclosing Party's communication thereof, (iv) was
communicated to the recipient by a third party free of any obligation of
confidentiality or (v) was developed by employees or contractors of the
recipient independently of, and without reference to, any of the information of
the disclosing Party.
If Confidential Information is subject to disclosure pursuant to any
order, decree, subpoena or other validly issued judicial or administrative
process or is otherwise required by law to be disclosed, the Party required to
disclose such Confidential Information may do so provided that such Party
promptly notifies the other Party of its intention to do so that the
non-disclosing Party may seek to obtain a protective order or other appropriate
relief from disclosure.
Each Party shall explicitly inform each employee, agent,
Representative, supplier, contractor, subcontractor or members of the Design
Team who will have access to any Confidential Information of the confidential
nature of such information. Each Party shall be responsible for the actions of
its employees, agents, Representatives, suppliers, contractors, including
without limitation, members of the Design Team, and subcontractors.
Without limiting the foregoing, Continucare shall not reproduce,
release or in any way make available or furnish, either directly or indirectly,
to any Person at any time, any information concerning the members of the Club or
any facility owned or operated by Bally or its Affiliates. Continucare agrees
not to use the information concerning such members in any manner except to
perform its obligations under this Agreement. Continucare shall at all times
maintain any information, including lists, relating to such members physically
separate and distinct from any information Continucare may maintain that is
unrelated to this Agreement.
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Each Party shall immediately report to the other any knowledge which
such Party has with respect to any attempt by any Person to duplicate, use or
disclose Confidential Information in violation of this Agreement.
Each Party shall use its best efforts to maintain the security of the
Confidential Information.
8.1.2 NON-DISCLOSURE. Continucare agrees that neither it nor
its Affiliates or Representatives shall issue any press releases, announcements
or other disclosures (whether broadcast, print or otherwise) relating to this
Agreement, its terms or otherwise or the services arising hereunder including,
without limitation, in any marketing to prospective customers of Continucare or
its Affiliates or to prospective recipients of Program Services, without the
prior written approval of Bally.
8.1.3 FEDERAL SECURITIES LAWS. Continucare acknowledges that
it is (i) aware that the United States securities laws prohibit any person who
has material non-public information about a company from purchasing or selling
securities of such company, or from communicating such information to any other
person under circumstances in which it is reasonably foreseeable that such
person is likely to purchase or sell such securities and (ii) familiar with the
Exchange Act and the rules and regulations promulgated thereunder, and agrees
that it will neither use, nor permit any third party to use, any Confidential
Information or other material non-public information relating to Bally or its
Affiliates in contravention of such Act or any such rules and regulations,
including without limitation, Rules 10b-5 and 14e-3.
8.2 EXCLUSIVITY OF CONTINUCARE RELATIONSHIP. Continucare shall not
engage in (i) any National Competitive Activities at any time prior to the
expiration of the Initial Term of this Agreement, (ii) any Regional Competitive
Activities with respect to any Region at any time prior to the date which is (A)
one year from the date upon which this Agreement is terminated with respect to
such Region by Bally in accordance with Section 6.2.3 or by Continucare or (B)
six months from the date upon which Bally terminates this Agreement with respect
to the entirety of such Region in accordance with Section 6.2.2, and (iii) any
Local Competitive Activities with respect to any Program Facility at any time
prior to the date which is (A) one year from the date upon which this Agreement
is terminated with respect to such Program Facility in accordance with Section
6.2.3 or by Continucare or (B) six months from the date upon which Bally
terminates this Agreement with respect to such Program Facility in accordance
with Section 6.2.2.
8.3 TRADEMARKS.
8.3.1 BALLY TRADEMARKS. For the term of this Agreement, Bally
hereby grants Continucare a limited right to use the Bally Trademarks in any
Region in which any Program Facilities operate, solely to be included in
materials approved in advance in writing by Bally which are to be used in
connection with each approved Program Facility and the related Program Services.
None of Continucare or its Affiliates or Representatives shall at any time do or
cause to be done any act, directly or indirectly, contesting or in any way
impairing either the validity or ownership by Bally, or its Affiliates, of the
Bally Trademarks. Continucare acknowledges
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Bally's exclusive right, title and interest, or that of Affiliates of Bally, as
the case may be, in and to the Bally Trademarks. Every permitted use of the
Bally Trademarks shall inure to the sole benefit of Bally.
8.3.2 CONTINUCARE TRADEMARKS. For the term of this Agreement,
Continucare hereby grants Bally a limited right to use the Continucare
Trademarks in any Region in which any Program Facilities operate, solely to be
included in the materials approved in advance in writing by Continucare which
are to be used in connection with each approved Program Facility and the related
Program Services. None of Bally or its Affiliates or Representatives shall at
any time do or cause to be done any act, directly or indirectly, contesting or
in any way impairing either the validity or ownership by Continucare, or its
Affiliates, of the Continucare Trademarks. Bally acknowledges Continucare's
exclusive right, title and interest, or that of Affiliates of Continucare, as
the case may be, in and to the Continucare Trademarks. Every permitted use of
the Continucare Trademarks shall inure to the sole benefit of Continucare.
8.4 SUBORDINATION. If any Club is leased or subleased to Bally or its
Affiliates as tenant or subtenant or if Bally's, or its Affiliates' operation of
any Club is subject to any management or other operating agreement, then those
provisions herein related to any Program Facility to be located at such Club,
shall be subject and subordinate to each and every term and condition of such
lease, sublease and/or each and every other agreement which binds Bally or its
Affiliates or pertains to the Club.
8.5 INDEMNIFICATION.
8.5.1 BY CONTINUCARE. Continucare shall be liable to and shall
defend, indemnify and hold Bally and its Affiliates, and their respective
officers, directors, employees, agents, Representatives and permitted assigns,
harmless from and against any and all Losses incurred by reason of or related to
(i) the breach by Continucare of any representation, warranty or covenant
hereunder or under any Other Agreement, or (ii) any claim by a Person to whom
Program Services are provided or any third party arising out of the design or
development of any Program Facility or Program Services.
8.5.2 BY BALLY. Bally shall be liable to and shall defend,
indemnify and hold Continucare and its Affiliates, and their respective
officers, directors, employees, agents, Representatives and permitted assigns
harmless from and against any and all Losses incurred by reason of Bally's
breach of any representation, warranty or covenant hereunder or under any Other
Agreement.
8.6 INDEMNIFICATION PROCEDURES. If any person or entity entitled to
indemnification under this Agreement (as "Indemnified Party") asserts a claim
for indemnification or receives notice of the assertion of any claim or of the
commencement of any action or proceeding by any person or entity who is not a
party to this Agreement or an Affiliate of such a party hereto against such
Indemnified Party, against which a party to this Agreement is required to
provide indemnification hereunder (an "Indemnifying Party"), the Indemnified
Party shall give written notice together with a statement of any available
information regarding such claim to the Indemnifying Party within thirty (30)
days after learning of such claim (or within such shorter
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time as may be necessary to give the Indemnifying Party a reasonable opportunity
to respond to such claim). The Indemnifying Party shall have the right, upon
written notice to the Indemnified Party (the "Defense Notice") within thirty
(30) days after receipt of the notice of such claim, which Defense Notice shall
specify the counsel it will appoint to defend such claim, to conduct at its
expense the defense against such claim in its own name, or if necessary, in the
name of the Indemnified Party. The Indemnified Party shall have the right to
approve such defense counsel, which approval shall not be unreasonably withheld.
If the Indemnifying Party fails to give the Defense Notice, it shall be deemed
to have elected not to conduct the defense of the subject claim and, in such
event, the Indemnified Party shall have the right to conduct such defense in
good faith and to compromise and settle such claim without prior consent of the
Indemnifying Party, and the Indemnifying Party will be liable for all Losses
paid or incurred in connection therewith.
If the Indemnifying Party does elect to conduct the defense of the
subject claim, the Indemnified Party shall cooperate with and make available to
the Indemnifying Party such assistance and materials as may be reasonably
requested by it, all at the expense of the Indemnifying Party, and the
Indemnified Party shall have the right at its expense to participate in the
defense assisted by counsel of its own choosing, provided that the Indemnified
Party shall not have the right to compromise or settle the claim. Without the
prior written consent of the Indemnified Party, the Indemnifying Party will not
enter into any settlement of any claim or cease to defend against such claim, if
pursuant to or as a result of such settlement or cessation, (i) injunctive or
other equitable relief would be imposed against the Indemnified Party or (ii)
such settlement or cessation would lead to liability or create any financial or
other obligation on the part of the Indemnified Party for which the Indemnified
Party is not entitled to indemnification hereunder. The Indemnifying Party shall
not be entitled to control, and the Indemnified Party shall be entitled to have
sole control over, the defense or settlement of any claim to the extent that
claim seeks an order, injunction or other equitable relief against the
Indemnified Party which, if successful, could materially interfere with the
business, operations, assets, condition (financial or otherwise) or prospects of
the Indemnified Party (and the cost of such defense shall constitute a Loss for
which the Indemnified Party is entitled to indemnification hereunder). If a firm
decision is made to settle a claim, which offer the Indemnifying Party is
permitted to settle under this Section 8.6, and the Indemnifying Party desires
to accept and agree to such offer, the Indemnifying Party will give written
notice to the Indemnified Party to that effect. If the Indemnified Party fails
to consent to such firm offer within thirty (30) calendar days after its receipt
of such notice, the Indemnified Party may continue to contest or defend such
claim and, in such event, the maximum liability of the Indemnifying Party as to
such claim will not exceed the amount of such settlement offer, plus costs and
expenses paid or incurred by the Indemnified Party through the end of such
30-day period.
Any judgment entered or settlement agreed upon in the manner provided
herein shall be binding upon the Indemnifying Party, and shall conclusively be
deemed to be an obligation with respect to which the Indemnified Party is
entitled to prompt indemnification hereunder.
Failure to give timely, accurate or complete notice under this Section
8.6 or Section 8.7 will not affect the rights or obligations of any party
hereunder except and only to the extent that, as a result of such failure, the
Party entitled to receive such notice was directly and materially damaged.
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8.7 DIRECT CLAIMS. The Parties intend that all direct claims by an
Indemnified Party not arising out of third party claims shall be subject to and
benefit from the provisions of Section 8.5. Any such claims shall be asserted by
giving the Indemnifying Party notice thereof, whereupon the Indemnifying Party
will have thirty (30) days within which to satisfy such direct claim. If the
Indemnifying Party does not so satisfy such claim, the Indemnifying Party will
be deemed to have rejected such claim, in which event the Indemnified Party will
be free to pursue all such remedies as may be available to it under Section 8.5
or otherwise.
8.8 INSURANCE. Continucare shall obtain and maintain in full force and
effect, at its sole cost and expense, the following insurance coverage
("Required Coverage") from an insurance carrier with a rating from Best of "B+"
or better with respect to each Program Facility from and after the date of
Bally's approval of the Business Plan for such Facility: (a) comprehensive
general liability insurance, including insurance against assumed or contractual
liability, with respect to each Program Facility, with a combined single limit
of not less than One Million Dollars ($1,000,000) per occurrence, Three Million
Dollars ($3,000,000) in aggregate and Four Million Dollars ($4,000,000) in
umbrella coverage with respect to bodily injury, personal injury, death,
professional liability and property damage, and shall name Bally as an
additional insured on such coverage; (b) worker's compensation insurance as
required by law; and (c) professional liability insurance coverage in such
coverage amounts and with such insurance companies as shall be acceptable to
Bally in its reasonable discretion; provided, however, that in no event shall
such professional liability insurance coverage be less than One Million Dollars
($1,000,000) per occurrence. The Required Coverage shall specify Bally and its
Affiliates as named insureds and shall be on such other terms as the Facility
Supervisor or Bally requests. If Continucare obtains a claims-made professional
liability insurance policy hereunder, Continucare shall purchase and maintain, a
Continucare's sole cost and expense, extended coverage protection (commonly
known as "tail coverage") insurance for not less than a period of twenty-one
(21) years after the earlier of either the termination or expiration of this
Agreement to assure protection against claims made after Continucare's
professional liability insurance coverage under this Agreement has expired. A
certificate of each such policy, together with a photocopy of each policy, shall
be deposited with Bally prior to the commencement of construction of the Program
Facility, together with a certification of the insurer that such coverages shall
not be amended, modified, canceled or reduced without at least thirty (30) days
written notice to Bally. Prior to the expiration or termination of any such
policy, Continucare shall deliver to Bally a certificate of the new or renewal
policy, together with a copy of the rider covering the Program Facility. In the
event Continucare shall not obtain or fail to maintain any aspect of the
Required Coverage, Bally may (without demand or notice) obtain such coverage on
such terms as it shall see fit, with the costs thereof to be immediately due to
Bally from Continucare.
8.9 PRIVATE INSURERS. If either Party desires to establish a program
for providing rehabilitation services for which it shall be reimbursed by
private insurers or other third party payors, the other Party shall undertake
all reasonable efforts to cooperate in establishing such a program.
8.10 NOTICES. Any notice, request, demand, approval or consent given or
required to be given under this Agreement shall be in writing and shall be
deemed to have been given on the
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fifth (5th) business day following the date on which the same shall have been
mailed by United States registered or certified mail, return receipt requested,
or one (1) business day following deposit with a nationally recognized overnight
courier service, with all postal charges prepaid, addressed as follows:
To Bally: BFIT Rehabilitation Services, Inc.
c/o Bally Total Fitness Corporation
8700 West Bryn Mawr Avenue
Second Floor
Chicago, Illinois 60631
Attention: Chief Financial Officer
With a copy to: Bally Total Fitness Corporation
8700 West Bryn Mawr Avenue
Second Floor
Chicago, Illinois 60631
Attention: General Counsel
To Continucare: Continucare Corporation
100 S.E. Second Street
36th Floor
Miami, Florida 33132
Attention: Susan Tarbe, Esq.
With a copy to: Gardner, Carton & Douglas
1301 K Street, N.W.
Suite 900, East Tower
Washington, DC 20005-3317
Attention: Christopher L. White, Esq.
Either Party may, at any time, change its address for the above
purposes by sending a notice to the other Party in accordance with the terms
hereof, but such notice of change of address shall only be effective upon
receipt.
8.11 GOVERNING LAW. This Agreement shall be deemed to have been made
and entered into in and shall be interpreted in accordance with the laws of the
State of Illinois.
8.12 SEVERABILITY. If any part of this Agreement should be held void or
unenforceable, such part shall be treated as severable, leaving valid the
remainder of this Agreement, notwithstanding the part or parts found void or
unenforceable.
8.13 ACCESS TO RECORDS. In accordance with 42 U.S.C. ss. 1395
x(v)(1)(i) and 42 C.F.R. Part 420, Subpart D, Section 420.300 et seq.,
Continucare shall, until the expiration of four (4) years after the furnishing
of Medicare reimbursable services pursuant to this Agreement, upon proper
written request, allow the Comptroller General of the United States, the
Secretary of Health and Human Services, and their duly authorized
representatives access to this Agreement
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and Continucare's books, documents and records necessary to certify the nature
and extent of costs of Medicare reimbursable services provided under this
Agreement.
In accordance with the above-referenced statute and regulations, if
Medicare reimbursable services provided by Continucare under this Agreement are
carried out by means of a subcontract with any organization related to
Continucare, and such related organization provides services the costs or value
of which is Ten Thousand Dollars ($10,000.00), or more over a twelve (12) month
period, then the subcontract between Continucare and the related organization
shall contain a clause comparable to the clause specified in the preceding
paragraph.
8.14 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which together shall constitute one Agreement.
8.15 ENTIRE AGREEMENT. Other than the Other Agreements, this Agreement
contains the entire agreement of the Parties with respect to the subject matter
hereof and may not be amended or modified except in writing signed by both
Parties.
8.16 ASSIGNMENT. Bally desires Continucare to manage the Program based
upon Continucare's expertise in identifying, designing, developing and operating
Program Facilities, thus Continucare shall not assign this Agreement, in whole
or in part, nor sublicense any part or all of it, except to a wholly-owned
subsidiary of Continucare, without the prior written notice consent of Bally.
This Agreement may be assigned by Bally to any entity succeeding to all or
substantially all of Bally's operations or any wholly-owned, directly or
indirectly, subsidiary of Bally Total Fitness Corporation.
8.17 BINDING EFFECT. This Agreement is binding upon the Parties hereto
and upon all successors in interest and permitted assigns, and shall inure to
the benefit of each of them.
8.18 DISCRIMINATION. Neither Party shall discriminate against any
individuals on the basis of race, religion, age, sex, disability, or national
origin.
ARTICLE NINE
DEFINITIONS
"Administrative Planning Services" has the meaning ascribed to it in
Section 4.1.
"Affiliate" has the meaning accorded such term in Regulation S-X
promulgated under the Exchange Act.
"Area" has the meaning as ascribed to it in Section 2.1.
"Bally Change of Control" means any Change of Control with respect to
Bally in which the Person that acquires control of Bally is, directly or
indirectly, engaged in providing rehabilitation services (exclusive, however, of
any Person that derives less than ten percent (10%) of its revenues or ten
percent (10%) of its net income from such rehabilitation services).
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"Bally Regulations" means all bylaws, policies, rules and regulations
of Bally and its Affiliates.
"Bally Trademarks" means all trademarks owned or licensed by Bally or
its Affiliates which are from time to time designated in writing by Bally to
Continucare.
"Business Plan" has the meaning ascribed to it in Section 2.4.3.
"Business Proposal" has the meaning ascribed to it in Section 2.3.
"Capital Expenses" means all expenses incurred in designing,
constructing or opening a Program Facility, including, without limitation, those
incurred under the Physical Development Budget, which may be capitalized under
generally accepted accounting principles.
"Capital Return" has the meaning ascribed to it in Section 5.1.3.
"Change of Control" means the occurrence of any of the following: (i)
any sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidations) in one or a series of related transactions, of all or
substantially all of the assets of a Party or its Parent to any "person" (as
defined in Section 13(d) of the Exchange Act) or "group" (as defined in Sections
13(d)(3) and 14(d)(2) of the Exchange Act); (ii) the adoption of a plan for the
liquidation or dissolution of a Party or its Parent other than a liquidation or
dissolution that results in substantially all of the assets of such Party being
held by its Parent; (iii) a Party or its Parent consolidates with, or merges
with or into, another "person" (as defined above) or "group" (as defined above)
in a transaction or series of related transactions in which the stock of such
Party is converted into or exchanged for cash, securities or other property;
(iv) the consummation of any transaction or series of related transactions
(including, without limitation, by way of merger or consolidation) the result of
which is that any "person" (as defined in Rule 13d-3 under the Exchange Act) or
"group" (as defined above) becomes the "beneficial owner" (as defined above) of
more than 30% of the voting power of the Voting Stock of a Party or its Parent,
or (v) during any consecutive two-year period, the first day on which a majority
of the members of the board of directors of a Party or its Parent who were
members of such board of directors at the beginning of such period are no longer
members of such board of directors.
"Clubs" has the meaning ascribed to it in the Recitals hereto.
"Confidential Information" shall mean any information or data disclosed
by a Party or its employees or Representatives (the "Disclosing Party") to the
other Party (the "Recipient") under or in contemplation of this Agreement, any
Other Agreement or any other agreement between or among the Parties or their
Affiliates and (a) which, if in tangible form or other media that can be
converted to readable form, is clearly marked as proprietary, confidential or
private when disclosed, (b) which, if oral or visual, is identified as
proprietary, confidential or private on disclosure and upon request is
summarized in a writing so marked and delivered within ten (10) days following
such disclosure or (c) all analyses, compilations, studies, or other documents,
records or data prepared by Recipient or any of its Representatives which
contain or otherwise reflect or are generated from information and documents
specified in clauses (a) and (b).
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"Continucare Change of Control" means any Change of Control with
respect to Continucare in which the Person that acquires control of Continucare
is, directly or indirectly, engaged in the management, operation or control of
health and fitness centers (exclusive, however, of any Person that derives less
than ten percent (10%) of its revenues or ten percent (10%) of its net income
from such health and fitness centers).
"Continucare Trademarks" means all trademarks owned or licensed by
Continucare or its Affiliates which are from time to time designated in writing
by Continucare to Bally.
"Current Month" has the meaning ascribed to it in Section 5.1.
"Defense Notice" has the meaning ascribed to it in Section 8.7.
"Design and Development Services" has the meaning ascribed to it in
Section 3.1.
"Design Plan" has the meaning ascribed to it in Section 3.1.1.2.
"Design Team" has the meaning ascribed to it in Section 3.1.1.1.
"Development Permits" means all necessary or useful licenses,
certifications, permits and operating approvals for the design, development or
construction of the Program Facility that are required on or prior to the
Opening Date.
"Disruption" has the meaning ascribed to it in Section 3.1.2.4.
"Effective Date" shall mean February 10, 1997.
"Exchange Act" means the Securities Exchange Act of 1934.
"Facility Supervisor" means the person designated as such supervisor in
writing by Bally to Continucare with respect to each Program.
"FF&E" means all furniture, furnishings, equipment, and fixtures,
including computers, housekeeping items, athletic equipment and medical
equipment, necessary or appropriate to operate the Program Facilities in
conformity with this Agreement and any Governmental Requirements.
"FF&E Budget" has the meaning ascribed to it in Section 3.1
"FF&E Specifications" has the meaning ascribed to it in
Section 3.1.1.1.
"Force Majeure" has the meaning ascribed to it in Section 6.6.
"Governmental Authority" means the United States, any state, county,
parish or other political subdivision in which a Program Facility is or shall be
located, and any court or political subdivision, agency, commission, board or
instrumentality or officer thereof, whether federal, state, local, having or
exercising a jurisdiction over the Parties.
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"Governmental Requirements" means all Laws and agreements with any
Governmental Authority that are applicable to the acquisition, development,
construction and operation of the Program Facility, including, without
limitation, the Americans with Disabilities Act of 1990, as amended.
"Indemnified Party" has the meaning ascribed to it in Section 8.6.
"Indemnifying Party" has the meaning ascribed to it in Section 8.6.
"Initial Term" has the meaning ascribed to it in Section 6.1.
"Law" means any statute, ordinance, promulgation, law, treaty, rule,
regulation, code, judicial or administrative precedent or order of any court or
any other Governmental Authority.
"Local Competitive Activities" means (i) assisting or engaging in the
identification, design, planning, development, administration, operation or
establishment of any other rehabilitation center, whether or not
Medicare-Certified, within five miles of any Program Facility or (ii) holding,
directly or indirectly, any equity interest in (exclusive of passive beneficial
ownership, in the aggregate, of up to five percent (5%) of the outstanding
equity interests in any publicly traded entity), any corporation or other entity
engaged in the activities described in clause (i).
"Losses" means any liabilities (whether contingent, fixed or unfixed,
liquidated or unliquidated, or otherwise), obligations, deficiencies, demands,
claims, suits, actions, or causes of actions, assessments, losses, costs,
expenses, interest, fines, penalties, actual or punitive damages or costs or
expenses of any and all investigations, proceedings, judgment, settlements and
compromises (including fees and expenses of attorneys, accountants and other
experts), without regard to whether such Losses would be deemed material under
this Agreement.
"Management Fees" means the fees accruing under Section 4.1 of each
Management Services Agreement.
"Management Services Agreements" means each Management Services
Agreement substantially in the form of Exhibit A attached hereto.
"Management Services Payment Agreements" means each Management Services
Payment Agreement substantially in the form of Exhibit B attached hereto.
"Master Termination Events" has the meaning ascribed to it in
Section 6.2.3.1.
"Medical Director" means a duly licensed clinician qualified to provide
overall medical direction and supervision of clinical services rendered at any
Program Facility.
"National Competitive Activities" means (i) assisting or engaging in
the identification, design, planning, development, administration, operation or
establishment of a Program Facility or any other rehabilitation facility,
whether or not Medicare-Certified, in any health and fitness center (or similar
facility) not owned or operated by Bally or its Affiliates in the United States
or
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its territories or (ii) holding, directly or indirectly, any equity interest
in (exclusive of passive beneficial ownership, in the aggregate, of up to five
percent (5%) of the outstanding equity interests in any publicly traded entity),
any corporation or other entity engaged in the activities described in clause
(i).
"Net Excess Cash Flow" means, with respect to each particular Region in
which Continucare provides Program Services an amount equal to the difference
between aggregate net revenues received in respect of Program Services within
such Region during any fiscal month MINUS the aggregate amount of costs and
expenses incurred in connection with operating Program Facilities in such Region
and providing Program Services in such Region during such fiscal month; all
calculated on a cash basis.
"Opening Date" means the first date a patient is provided Program
Services at a certain Program Facility.
"Operating Budget" means the budget for on-going costs of the Program
Facility and Program Services after the Opening Date which includes, without
limitation (A) estimations of the proposed capital costs and operating expenses
for providing Program Services and maintaining and operating such Program
Facility, costs of purchasing, leasing and supplying equipment after the Opening
Date, insurance costs, costs of licensing and compliance with all applicable
laws, costs of employee wages, salaries and benefits, costs associated with
vendor contracts and billing and collection services, (B) PRO FORMA cash flow
calculations, (C) projections of anticipated revenues from providing the Program
Services, and (D) a statement of each material economic assumption made in
preparing such budget.
"Operating Permits" has the meaning ascribed to it in Section 4.1.2.
"Other Agreement" means an agreement between or among Bally and
Continucare or any of their Affiliates concerning rehabilitation services other
than any agreement which by its terms expressly excludes itself from the
definition of "Other Agreement."
"Organizational Services" means the services to be performed by
Continucare pursuant to Articles 2, 3 and 4 hereof.
"Parent" means, in the case of Continucare, Continucare Corporation, a
Florida corporation, and in the case of Bally, Bally Total Fitness Holding
Corporation, a Delaware corporation.
"Person" shall mean and include any individual, partnership, joint
venture, firm, corporation, association, trust or other enterprise or any
Governmental Authority.
"Physical Development Budget" means the budget for cost of the design,
development and construction of the Program Facility contained in the Business
Plan, including (A) both "hard costs" and "soft costs" related to construction,
financing, pre-opening activities and development activities, including any
accountants' and attorneys' fees, (B) the construction budget for the Facility
(the "Construction Budget"), which shall include a breakdown of estimated costs
of construction, specialty finishes and professional fees, (C) the FF&E budget
(the "FF&E
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Budget"), which shall include a breakdown of the estimated costs of each item of
FF&E, and (D) a statement of each material economic assumption made in preparing
such budget.
"Planned Opening Date" has the meaning ascribed to it in Section 2.3.4.
"Plans and Specifications" has the meaning ascribed to it in Section
3.1.1.1, which includes within its scope the FF&E Specifications.
"Pre-Opening Benchmarks" has the meaning ascribed to it in
Section 2.3.4.
"Pre-Opening Budget" means the budget of expenses, other than expenses
included in the Physical Development Budget, to be incurred prior to the Opening
Date of any Program Facility. Such expenses shall include, without limitation,
all budgeted expenses incurred by Bally or by any of Bally's Affiliates in
performing the Administrative Planning Services, recruitment and training for
all employees of the Program Facility, costs of licensing or other qualification
of Program Facility employees prior to the Opening Date, the cost of pre-opening
sales, educating, advertising, promotion and publicity, the cost of obtaining
all permits and accreditations and licensure, including the fees of all counsel
and other consultants incident thereto, those out-of-pocket expenses to be
incurred by Continucare before the Opening Date for which Continucare will be
reimbursed by Bally, and all other expenses incurred prior to the Opening Date
other than expenses included in the Construction Budget.
"Program" means the provision of Program Services and related
activities contemplated by this Agreement and any Management Services Agreement
at each Club.
"Program Facilities" means the physical space, equipment and other
personal property devoted to the provision of Program Services at each Club.
"Program Policies" means the operational, managerial, personnel,
medical, financial and other policies useful or necessary to the operation of
the Program.
"Program Services" has the meaning ascribed to it in the Recitals
hereto.
"Program Space" has the meaning ascribed to it in Section 2.3.2.
"Program Staff" means those persons providing Program Services (other
than the Medical Director) in each Program.
"Program Termination Events" has the meaning ascribed to it in
Section 6.2.3.2.
"Proposal Services" means the services and activities to be provided by
Continucare that are described in Sections 2.2 and 2.4 of this Agreement.
"Project Architects" has the meaning ascribed to it in Section 3.1.1.1.
"Project Contractors" has the meaning ascribed to it in
Section 3.1.1.1.
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"Region" means a geographic area approved as a Region in a Regional
Plan under Section 2.2 and listed on Schedule 2.2.
"Regional Competitive Activities" means, with respect to any Region,
(i) assisting or engaging in the identification, design, planning, development,
administration, operation or establishment of a Program Facility or any other
rehabilitation facility, whether or not Medicare-Certified, in any health and
fitness center (or similar facility) not owned or operated by Bally or its
Affiliates in such Region or (ii) holding, directly or indirectly, any equity
interest in (exclusive of passive beneficial ownership, in the aggregate, of up
to five percent (5%) of the outstanding equity interests in any publicly traded
entity), any corporation or other entity engaged in the activities described in
clause (i).
"Regional Plan" has the meaning ascribed to it in Section 2.2.
"Regional Proposal" has the meaning ascribed to it in Section 2.1.
"Regional Termination Events" has the meaning ascribed to it in
Section 6.2.3.3.
"Representative" means the attorneys, accountants, lenders and other
advisors to the subject Party.
"Required Coverage" has the meaning ascribed to it in Section 8.9.
"Subsequent Management Fees" has the meaning ascribed to it in
Section 5.1.5.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date and year first herein above written.
CONTINUCARE OUTPATIENT REHABILITATION
MANAGEMENT, INC.
By: /s/ Charles M. Fernandez
_______________________________
Charles M. Fernandez,
President and CEO
BFIT REHABILITATION SERVICES, INC.
By: /s/ John W. Dwyer
_______________________________
Name: John W. Dwyer
_________________________
Title: Senior Vice President
________________________
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