<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1997
REGISTRATION NO. 333-39195
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BALLY TOTAL FITNESS HOLDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<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)
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LEE S. HILLMAN
Bally Total Fitness Holding Corporation
8700 West Bryn Mawr Avenue
Chicago, Illinois 60631
(773) 380-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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Copies to:
IRV BERLINER
Benesch, Friedlander, Coplan & Aronoff LLP
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114
(216) 363-4500
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective and
all other conditions to the exchange offer pursuant to the registration rights
agreement described in the enclosed Prospectus have been satisfied or waived.
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If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement of the earlier effective registration statement for the
same offering. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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BALLY TOTAL FITNESS HOLDING CORPORATION
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER IN FORM S-4 LOCATION IN PROXY STATEMENT/PROSPECTUS
- ------------------------------------------------ -------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and Facing Page of the Registration Statement;
Outside Front Cover Page of Prospectus Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front Cover Page of Prospectus;
of Prospectus Available Information; Outside Back Cover
Page of Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Outside Front Cover Page of Prospectus;
Charges and Other Information Summary; Risk Factors; Selected
Consolidated Financial Data
4. Terms of the Transaction Outside Front Cover Page of Prospectus;
Summary; The Exchange Offer; Description of
the New Notes
5. Pro Forma Financial Information Summary Historical and Pro Forma
Consolidated Financial Data
6. Material Contracts with the Company Being *
Acquired
7. Additional Information Required for *
Reoffering by Persons and Parties Deemed
to be Underwriters
8. Interests of Named Experts and Counsel Legal Matters; Experts
9. Disclosure of Commission Position on *
Indemnification for Securities Act
Liabilities
10. Information with Respect to S-3 Registrants Summary; Summary Historical and Pro Forma
Consolidated Financial Data; Management's
Discussion and Analysis of Results of
Operations and Financial Condition;
Business; Consolidated Financial State-
ments
11. Incorporation of Certain Information by Incorporation of Certain Information by
Reference Reference
12. Information with Respect to S-2 or S-3 *
Registrants
13. Incorporation of Certain Information by *
Reference
14. Information with Respect to Registrants *
Other Than S-3 or S-2 Registrants
15. Information with Respect to S-3 Companies *
16. Information with Respect to S-2 or S-3 *
Companies
17. Information with Respect to Companies Other *
Than S-3 or S-2 Companies
18. Information if Proxies, Consents or *
Authorizations are to be Solicited
19. Information if Proxies, Consents or Management; The Exchange Offer
Authorizations are not to be Solicited or
in an Exchange Offer
</TABLE>
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* Omitted because the item is inapplicable or the answer thereto is negative.
<PAGE> 3
PROSPECTUS
$225,000,000
LOGO
BALLY TOTAL FITNESS HOLDING CORPORATION
OFFER TO EXCHANGE
ALL OUTSTANDING
9 7/8% SERIES A SENIOR SUBORDINATED NOTES DUE 2007
($225,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR 9 7/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2007
The Exchange Offer (as defined) and withdrawal rights will expire at 5:00
p.m., New York City time, on January 15, 1998 (as such date may be extended, the
"Expiration Date").
Bally Total Fitness Holding Corporation, a Delaware corporation (the
"Company"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus, as it may be amended and supplemented from time to
time (the "Prospectus"), and the accompanying Letter of Transmittal (the "Letter
of Transmittal", and, together with the Prospectus, the "Exchange Offer"), to
exchange $1,000 in principal amount of its 9 7/8% Series B Senior Subordinated
Notes due 2007 (the "New Notes") for each $1,000 in principal amount of its
outstanding 9 7/8% Series A Senior Subordinated Notes due 2007 (the "Old Notes")
(the Old Notes and the New Notes are collectively referred to herein as the
"Notes") held by Eligible Holders (as defined), of which an aggregate principal
amount of $225 million is outstanding. See "The Exchange Offer". For purposes of
the Exchange Offer, "Eligible Holder" shall mean the registered owner of any
Registrable Securities (as defined) as reflected on the records of First Trust
National Association, a national banking corporation, as registrar for the Old
Notes (in such capacity, the "Registrar"), or any person whose Registrable
Securities are held of record by the Depositary (as defined), as of the Record
Date. For purposes of the Exchange Offer, "Registrable Securities" means each
Old Note until the earliest to occur of (i) the date on which such Old Note has
been exchanged for a New Note in the Exchange Offer, (ii) the date on which a
registration statement filed by the Company which covers the Old Note has been
declared effective under the Securities Act of 1933, as amended (the "Securities
Act"), and the Old Note is disposed of in accordance with such registration
statement, (iii) the date on which such Old Note is sold to the public pursuant
to Rule 144 (or any similar provision then in force, but not Rule 144A) under
the Securities Act, (iv) the date on which the Old Note ceases to be
outstanding, or (v) the date on which the Old Note can be sold by the holder
thereof without limitation as to holding period or volume.
The Company will accept for exchange any and all Old Notes that are validly
tendered prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders
of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Offer is not conditioned upon any
minimum principal amount of the Old Notes being tendered for exchange. However,
the Exchange Offer is subject to certain customary conditions, which may be
waived, in part or in whole, by the Company, and to the terms and provisions of
the Registration Rights Agreement, dated as of October 7, 1997 (the
"Registration Rights Agreement"), among the Company and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities Inc.,
Societe Generale Securities Corporation and Ladenburg Thalmann & Co. Inc.
(collectively, the "Initial Purchasers"). The Old Notes may be tendered only in
multiples of $1,000. See "The Exchange Offer".
(continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 17 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY ELIGIBLE HOLDERS IN
EVALUATING THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "SEC") OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SEC OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is December 11, 1997.
<PAGE> 4
An aggregate of $225 million principal amount of Old Notes were sold by the
Company to the Initial Purchasers on October 7, 1997 (the "Closing Date")
without registration under the Securities Act, in reliance upon exemptions
therefrom, pursuant to a Purchase Agreement dated September 29, 1997 (the
"Purchase Agreement") among the Company and the Initial Purchasers. The Initial
Purchasers subsequently resold the Old Notes in reliance on Rule 144A under the
Securities Act ("Rule 144A"), Regulation S under the Securities Act ("Regulation
S") and certain other exemptions under the Securities Act. The Company and the
Initial Purchasers also entered into the Registration Rights Agreement, pursuant
to which the Company granted certain registration rights for the benefit of the
holders of the Old Notes. The Exchange Offer is intended to satisfy certain of
the Company's obligations under the Registration Rights Agreement with respect
to the Old Notes. See "The Exchange Offer -- Purpose and Effect".
The Old Notes were, and the New Notes will be, issued under the Indenture
dated as of October 7, 1997 (the "Indenture") between the Company and First
Trust National Association, a national banking corporation, as trustee (in such
capacity, the "Trustee"). The form and terms of the New Notes will be identical
in all material respects to the form and terms of the Old Notes, except that (i)
the New Notes will have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof, (ii) holders of New
Notes will not be entitled to any Additional Interest (as defined) pursuant to
the Registration Rights Agreement in respect of Old Notes constituting
Registrable Securities held by such holders upon the occurrence of a
Registration Default (as defined), and (iii) holders of New Notes will not be,
and upon consummation of the Exchange Offer, Eligible Holders of Old Notes will
no longer be, entitled to certain rights under the Registration Rights Agreement
intended for the holders of Registrable Securities; provided, however, that (A)
an Eligible Holder of Old Notes who is not legally permitted to participate in
the Exchange Offer based upon advice of counsel to that effect or who does not
receive fully tradeable New Notes pursuant to the Exchange Offer, subject to
reasonable verification by the Company, and (B) the Initial Purchasers acquiring
a majority of the initial aggregate principal amount of Old Notes with respect
to Registrable Securities acquired directly from the Company, shall have the
right to require the Company to file a shelf registration statement pursuant to
Rule 415 under the Securities Act (a "Shelf Registration Statement") solely for
the benefit of such Eligible Holder of Old Notes and will be entitled to
Additional Interest following the occurrence of a Registration Default in
connection with the filing of such Shelf Registration Statement. The Exchange
Offer shall be deemed consummated upon the occurrence of the delivery by the
Company to the Registrar of New Notes in the same aggregate principal amount as
the aggregate principal amount of Old Notes that were tendered by Eligible
Holders pursuant to the Exchange Offer. See "The Exchange Offer -- Termination
of Certain Rights", "-- Procedures for Tendering Old Notes" and "Description of
the New Notes".
Interest on the New Notes is payable semiannually, in arrears, on April 15
and October 15 of each year (each, an "Interest Payment Date") commencing on
April 15, 1998. Interest on the New Notes will accrue from the last Interest
Payment Date on which interest was paid on the Old Notes surrendered in exchange
therefor or, if no interest has been paid on the Old Notes, from the date of
original issue of the Old Notes. Eligible Holders of Old Notes accepted for
exchange will be deemed to have waived the right to receive any other payments
or accrued interest on the Old Notes. The New Notes will mature on October 15,
2007. See "Description of the New Notes -- General".
The New Notes will be redeemable at the option of the Company, in whole or
in part, at any time on or after October 15, 2002, at the redemption prices set
forth herein, together with accrued and unpaid interest, if any, to the
redemption date. In addition, on or prior to October 15, 2000, the Company may
redeem up to 35% of the Notes originally issued, at a price of 109 7/8% of the
principal amount thereof, together with accrued and unpaid interest, if any, to
the redemption date, with the net proceeds of one or more Public Equity
Offerings (as defined), provided that not less than $146.3 million in principal
amount of the Notes is outstanding immediately after giving effect to such
redemption. Upon the occurrence of a Change of Control (as defined), each holder
of Notes, subject to the limitations described herein, will have the right to
require the Company to purchase all or a portion of such holder's Notes at a
purchase price in cash equal to 101% of the principal amount thereof, together
with accrued and unpaid interest, if any, to the date of purchase.
The Company is making the Exchange Offer in reliance on the position of the
staff of the Division of Corporation Finance of the SEC (the "SEC Staff") as set
forth in certain interpretive letters addressed to third
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parties in other transactions. However, the Company has not sought its own
interpretive letter and there can be no assurance that the SEC Staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the SEC
Staff, and subject to the following sentences, the Company believes that New
Notes issued pursuant to the Exchange Offer to an Eligible Holder in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by an
Eligible Holder (other than (i) a broker-dealer who purchased Old Notes directly
from the Company for resale pursuant to Rule 144A or any other available
exemption under the Securities Act, or (ii) a person that is an affiliate of the
Company within the meaning of Rule 405 under the Securities Act), without
further compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Eligible Holder is acquiring the New
Notes in the ordinary course of business and is not participating, and has no
arrangement or understanding with any person to participate, in the
"distribution" (within the meaning of the Securities Act) of the New Notes.
Eligible Holders wishing to accept the Exchange Offer must represent to the
Company, among other things, that such conditions have been met. Any Eligible
Holder of Old Notes who is an "affiliate" of the Company or who intends to
participate in the Exchange Offer for the purpose of participating in the
"distribution" of the New Notes, or any broker-dealer who purchased Old Notes
from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act, (a) will not be able to rely on the
interpretations of the SEC Staff set forth in the above-mentioned interpretive
letters, (b) will not be permitted or entitled to tender such Old Notes in the
Exchange Offer, and (c) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any sale or other
transfer of such Old Notes unless such sale is made pursuant to an exemption
from such requirement. See "The Exchange Offer -- Resales of the New Notes".
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer may be deemed to be a Statutory Underwriter, must acknowledge
that it acquired the Old Notes for its own account as a result of market-making
activities or other trading activities and must agree that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Based on the position taken by the SEC Staff in the interpretive letters
referred to above, the Company believes that broker-dealers who acquired Old
Notes for their own accounts, as a result of market-making or other trading
activities ("Participating Broker-Dealers"), may fulfill their prospectus
delivery requirements with respect to the New Notes received upon exchange of
such Old Notes with a prospectus meeting the requirements of the Securities Act,
which may be the prospectus prepared for an exchange offer so long as it
contains a description of the plan of distribution with respect to the resale of
such New Notes. Accordingly, this Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of New Notes received in exchange for Old Notes if such
Old Notes were acquired by such Participating Broker-Dealer for its own account
as a result of market-making or other trading activities. Subject to certain
conditions, the Company has agreed that this Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of such New Notes. See "Plan of Distribution". However,
a Participating Broker-Dealer who intends to use this Prospectus in connection
with the resale of New Notes received in exchange for Old Notes pursuant to the
Exchange Offer must notify the Company, or cause the Company to be notified, on
or prior to the Expiration Date, that it is a Participating Broker-Dealer. Such
notice may be given in the space provided for that purpose in the Letter of
Transmittal or may be delivered to the Exchange Agent at one of the addresses
set forth herein under "The Exchange Offer -- The Exchange Agent; Assistance".
Any Participating Broker-Dealer who is an "affiliate" of the Company may not
rely on such interpretive letters and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. See "The Exchange Offer -- Resales of the New Notes".
Each Participating Broker-Dealer who surrenders Old Notes pursuant to the
Exchange Offer will be deemed to have agreed that, upon receipt of notice from
the Company of the occurrence of any event or the discovery of any fact which
makes any statement contained in this Prospectus untrue in any material respect
or which causes this Prospectus to omit to state a material fact necessary in
order to make the statements contained herein, in light of the circumstances
under which they were made, not misleading or of the occurrence of certain other
events specified in the Registration Rights Agreement, such Participating
Broker-Dealer will suspend the sale of New
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Notes pursuant to this Prospectus until the Company has amended or supplemented
this Prospectus to correct such misstatement or omission and has furnished
copies of the amended or supplemented Prospectus to such Participating
Broker-Dealer or the Company has given notice that the sale of the New Notes may
be resumed, as the case may be.
There has previously been only a limited secondary market, and no public
market, for the Old Notes. The Old Notes are eligible for trading in the Private
Offering, Resales and Trading through Automatic Linkages ("PORTAL") system of
the National Association of Securities Dealers, Inc. (the "NASD"). There can be
no assurance that an active trading market for the New Notes will develop. If
such a trading market develops for the New Notes, future trading prices will
depend on many factors, including, among other things, prevailing interest
rates, the Company's results of operations and the market for similar
securities. Depending on such factors, the New Notes may trade at a discount
from their face value. See "Risk Factors -- Absence of Public Market for the New
Notes".
The Company will not receive any proceeds from the Exchange Offer, but,
pursuant to the Registration Rights Agreement, the Company will bear certain
registration expenses. No underwriter is being utilized in connection with the
Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
A PARTICIPATING BROKER-DEALER WHO INTENDS TO USE THIS PROSPECTUS IN
CONNECTION WITH THE RESALE OF NEW NOTES RECEIVED IN EXCHANGE FOR OLD NOTES
PURSUANT TO THE EXCHANGE OFFER MUST NOTIFY THE COMPANY, OR CAUSE THE COMPANY TO
BE NOTIFIED, ON OR PRIOR TO THE EXPIRATION DATE, THAT IT IS A PARTICIPATING
BROKER-DEALER. SUCH NOTICE MAY BE GIVEN IN THE SPACE PROVIDED FOR THAT PURPOSE
IN THE LETTER OF TRANSMITTAL OR MAY BE DELIVERED TO THE EXCHANGE AGENT AT ONE OF
THE ADDRESSES SET FORTH HEREIN UNDER "THE EXCHANGE OFFER -- THE EXCHANGE AGENT;
ASSISTANCE". IN ADDITION, BY TENDERING OLD NOTES PURSUANT TO THE EXCHANGE OFFER,
ELIGIBLE HOLDERS AND BENEFICIAL OWNERS (AS DEFINED) WILL BE DEEMED TO HAVE MADE
CERTAIN REPRESENTATIONS AND COVENANTS TO THE COMPANY. SEE "THE EXCHANGE OFFER
- -- PROCEDURES FOR TENDERING OLD NOTES".
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
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PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in this
Prospectus and is qualified by the more detailed information set forth elsewhere
in this Prospectus which should be read in its entirety. Unless otherwise
indicated, capitalized terms used in this Prospectus Summary have the respective
meanings ascribed to them elsewhere in this Prospectus. The information
contained in this Prospectus Summary contains forward-looking statements which
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. See "Special Note Regarding
Forward-Looking Statements" on page 14.
THE COMPANY
The Company is the largest (and only nationwide) commercial operator of
fitness centers in the United States in terms of revenues, the number of
members, and the number and square footage of facilities. As of September 30,
1997, the Company operated approximately 320 fitness centers concentrated in
major metropolitan areas in 27 states and Canada and had approximately four
million members. During 1996, Bally's members made more than 100 million visits
to its fitness centers. In August 1997, the Company completed a public offering
of 8,000,000 shares of its common stock, which provided net proceeds of $88.4
million to the Company (the "Stock Offering").
The Company offers its members value by providing access to
state-of-the-art fitness facilities with affordable membership programs. Bally's
fitness centers feature an outstanding selection of cardiovascular, conditioning
and strength equipment and offer extensive aerobic training programs. The
Company's new club prototype achieves efficiency by focusing on those fitness
services that receive a high degree of member use. Most of the Company's current
fitness centers include pools, racquet courts or other athletic facilities that
receive a lower degree of member use. The Company has clustered its fitness
centers in major metropolitan areas in order to achieve marketing and operating
efficiencies. These markets include, among others, New York, Los Angeles,
Chicago, Houston, Dallas, Detroit, Baltimore, Washington, D.C., Philadelphia,
Miami, Cleveland, Atlanta, Milwaukee, Seattle, Minneapolis, Orlando, Denver,
Phoenix, St. Louis, Boston and Kansas City. In 1996, the Company completed the
process of renaming its fitness centers so they all use the servicemark "Bally
Total Fitness", thereby enhancing brand identity, concentrating advertising and
eliminating the prior practice of using more than 25 different regional
servicemarks and trade names.
The Company's primary target market for new members is the 18 to 34-year
old, middle income segment of the population. Bally markets itself to this
consumer segment through the use of a variety of membership options and payment
plans. The membership options offered by the Company range from single-club
memberships to premium memberships which provide additional amenities and the
use of all of Bally's fitness centers nationwide. Similarly, the Company offers
a broad range of payment alternatives. Typically, members pay an initiation fee
which can either be financed (generally for 36 months and subject to downpayment
requirements) or paid-in-full at the time of joining. Members are also required
to pay monthly membership dues in order to use the Company's fitness facilities.
Management believes the various memberships and payment plans, in addition to
Bally's strong brand identity and the convenience of its multiple locations,
provide the Company distinct competitive advantages.
OPERATING STRATEGIES
In October 1996, Lee S. Hillman was named President and Chief Executive
Officer of the Company. This completed the transition of senior management of
the Company from predominantly marketing oriented managers, including the
original founders of the Company, to managers with more financial and
operational orientation. Until December 1996, a number of the Company's top
executives, including Mr. Hillman, also performed significant functions for
Bally Entertainment Corporation ("Entertainment"), the owner of the Company
until January 1996. Current management intends to pursue a number of operating
strategies, including the following, which the Company believes will improve the
results of its core business:
- Reduce Discount Pricing on Paid-In-Full Membership Plans -- Since late
1990, the Company has managed its pricing structure to generate immediate
cash for liquidity by significantly discounting its
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membership plans and by emphasizing paid-in-full instead of financed
membership plans. Additional working capital provided by the Stock
Offering will allow the Company to sell more financed membership plans,
which historically have generated better long-term returns for the
Company including streams of recurring dues revenues, rather than selling
discounted paid-in-full memberships for which dues are frequently waived
for up to three years.
- Upgrade and Expand Fitness Centers -- The Company intends to expand and
upgrade its facilities in order to increase its membership base and more
effectively capitalize on its streamlined marketing and administrative
functions. Management plans to make capital expenditures of approximately
$10 million to $12 million over the next twelve months to maintain and
make minor upgrades to the Company's existing facilities, which include
exercise equipment upgrades, heating, ventilation and air conditioning
("HVAC") and other operating equipment upgrades and replacements, and
locker room and workout area refurbishments, among others. In addition,
the Company intends to invest approximately $10 million of the net
proceeds from the Stock Offering over the next two years to extensively
refurbish and make major upgrades to approximately 25% of its clubs,
which include converting low-usage pools and racquet areas into expanded
exercise areas and to a lesser extent retail and outpatient
rehabilitation service areas, adding and upgrading exercise equipment,
and refreshing interior and exterior finishes to improve club ambience,
among others. The Company also intends to spend approximately $25 million
to $30 million of the net proceeds from the Stock Offering over the next
three years to open 20 to 30 new facilities based on its new prototype.
These facilities are designed to cost less to construct and maintain than
the Company's older facilities. The facilities are expected to range in
size from 10,000 to 45,000 square feet and have the capacity to
accommodate significantly more members than older clubs of the same size
because the new facilities will contain only the most widely used
amenities.
- Increase Dues Revenues -- The Company believes that its dues are
substantially less than those charged by its competitors and that it can
significantly increase dues for its members who are beyond their initial
financing period without any material loss in membership.
- Improve Collections on Financed Contracts -- The Company plans to
continue its focus on increasing the downpayment on financed membership
plans and securing payment by electronic funds transfer ("EFT"), which
the Company's experience has shown results in higher quality receivables.
Further, the Company intends to institute more focused collection efforts
based on information provided by "credit scoring", which management
believes will also improve the yield from the receivables portfolio.
- Continue Cost Reduction Policies -- The Company's operating costs and
expenses for 1996 were more than $75 million lower than in 1994.
Management believes that other opportunities exist to cut additional
costs in the areas of administration, advertising and self-insured losses
incurred.
GROWTH OPPORTUNITIES
The Company currently generates substantially all of its revenues from the
sale of membership plans and the receipt of dues. Management believes that it
can increase and diversify its revenues by leveraging its strong brand identity,
extensive distribution infrastructure (approximately 320 facilities),
significant member base (approximately four million members) and frequency of
visitation (in excess of 100 million visits in 1996) by offering a number of
ancillary products and services. In order to pursue these growth opportunities,
the Company plans to:
- Sell Nutritional Products -- The Company has successfully concluded test
marketing certain nutritional products, predominantly vitamins and weight
control supplements, and is launching the sale of these products to
members through its fitness centers and telemarketing.
- Provide Outpatient Rehabilitation Services -- The Company plans to
contract with providers of health care programs and services whereby
certain of the Company's existing facilities will also be used for
comprehensive outpatient rehabilitation services. The Company believes it
has opportunities with a number of third party providers and managers of
health care programs and services to provide similar outpatient
rehabilitation services in additional fitness centers, and expects to
offer these services within three years to members and non-members alike
in up to 100 of its facilities primarily using equipment
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<PAGE> 9
already on-hand. Among others, the Company has recently contracted with
Continucare Corporation to provide such services in certain, initially
four, of the Company's fitness centers. The Company plans to spend
approximately $1 million of the net proceeds from the Stock Offering to
upgrade an initial group of its facilities to provide rehabilitation
services.
- Offer Other Goods and Services -- The Company plans to sell work-out and
related apparel and market certain financial services and direct
marketing programs provided by third parties to its members such as a
co-branded credit card, credit life insurance, dining clubs and automated
teller machines ("ATMs") in its clubs through in-club sales efforts and
direct marketing programs.
THE REFINANCING
In October 1997, the Company completed a refinancing (the "Refinancing")
which reduces interest expense, extends debt maturities and improves financial
flexibility. The components of the Refinancing were (i) the issuance by the
Company of $225 million aggregate principal amount of the Old Notes (the
"Offering"), (ii) the consummation of a tender offer and consent solicitation by
the Company (the "Tender Offer") with respect to its $200 million aggregate
principal amount of 13% Senior Subordinated Notes due 2003 (the "13% Notes"),
and (iii) the application of the net proceeds from the Offering to retire the
13% Notes. Pursuant to the Tender Offer, in October 1997 the Company purchased
$177.4 million aggregate principal amount of the 13% Notes and the Indenture
pursuant to which the 13% Notes were issued was substantially amended. The
Company has announced that in January 1998, it will redeem the remaining $22.6
million aggregate principal amount of the 13% Notes not tendered in the Tender
Offer at a price of 106.5% of the principal amount, together with accrued and
unpaid interest.
In addition to the Refinancing, in November 1997 the Company entered into a
three-year, $70 million revolving bank credit facility (the "Bank Credit
Facility") to replace its prior revolving credit agreement. The $70 million
available under the Bank Credit Facility is reduced by any outstanding letters
of credit, which cannot exceed $30 million. At September 30, 1997, outstanding
letters of credit totalled $9.8 million. The Bank Credit Facility is secured by
substantially all real and personal property (excluding installment contracts
receivable) of the Company.
ISSUANCE OF THE OLD NOTES
The Old Notes were sold by the Company to the Initial Purchasers on the
Closing Date pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Old Notes in reliance on Rule 144A, Regulation S under
the Securities Act and other available exemptions under the Securities Act. The
Company and the Initial Purchasers also entered into the Registration Rights
Agreement. The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement with respect to the Old
Notes. See "The Exchange Offer".
7
<PAGE> 10
THE EXCHANGE OFFER
The Exchange Offer......... The Company hereby offers, upon the terms and
subject to the conditions set forth herein and in
the accompanying Letter of Transmittal, to exchange
$1,000 in principal amount of the New Notes for
each $1,000 in principal amount of the outstanding
Old Notes. As of the date of this Prospectus, $225
million aggregate principal amount of the Old Notes
were outstanding, the maximum amount authorized by
the Indenture for all Notes. Upon consummation of
the Exchange Offer, holders of Old Notes that were
not prohibited from participating in the Exchange
Offer and did not tender their Old Notes will not
have any registration rights under the Registration
Rights Agreement with respect to such nontendered
Old Notes (except pursuant to a request for a Shelf
Registration Statement by the Initial Purchasers
acquiring a majority of the initial aggregate
principal amount of the Old Notes with respect to
Registrable Securities acquired directly from the
Company) and, accordingly, such nontendered Old
Notes will continue to be subject to the
restrictions on transfer contained in the legend
thereon. See "The Exchange Offer -- Terms of the
Exchange Offer".
Expiration Date............ 5:00 p.m., New York City time, on January 15, 1998
as the same may be extended. See "The Exchange
Offer -- Expiration Date; Extensions; Amendments".
Conditions of the Exchange
Offer; Extensions;
Amendments.............. The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being
tendered for exchange. However, the Exchange Offer
is subject to certain customary conditions. The
Company expressly reserves the right, in its sole
and absolute discretion, (i) to delay accepting any
Old Notes by giving oral or written notice to the
Exchange Agent, (ii) to extend the Exchange Offer,
(iii) to terminate the Exchange Offer by giving
oral or written notice of such termination to the
Exchange Agent, and (iv) to waive any condition or
otherwise amend the terms of the Exchange Offer in
any manner. If the Exchange Offer is amended in a
manner determined by the Company to constitute a
material change, the Company will promptly disclose
such amendment by means of a prospectus supplement
that will be distributed to the Eligible Holders.
See "The Exchange Offer -- Expiration Date;
Extensions; Amendments" and " -- Conditions of the
Exchange Offer".
Termination of Certain
Rights..................... Eligible Holders of Old Notes have certain rights
pursuant to the Registration Rights Agreement and
the Old Notes. Holders of New Notes will not be
and, upon consummation of the Exchange Offer,
Eligible Holders of Old Notes will no longer be,
entitled to (i) the right to receive Additional
Interest upon the occurrence of Registration
Default, or (ii) certain other rights under the
Registration Rights Agreement intended for the
holders of unregistered securities; provided,
however, that (A) an Eligible Holder of Old Notes
who is not legally permitted to participate in the
Exchange Offer based upon advice of counsel to that
effect or who does not receive fully tradeable New
Notes pursuant to the Exchange Offer, subject to
reasonable verification by the Company, and (B) the
Initial Purchasers acquiring a majority of the
initial aggregate principal amount of Old Notes
with respect to Registrable Securities acquired
directly from the Company, shall have the right to
require the Company to file a Shelf Registration
Statement solely for the benefit of such Eligible
Holders of Old Notes and will be entitled to
receive Additional Interest following the
occurrence of a Registration Default in connection
with the filing of such Shelf Registra-
8
<PAGE> 11
tion Statement. Notwithstanding anything to the
contrary in the foregoing, Old Notes not tendered
in the Exchange Offer will remain outstanding and
continue to accrue interest in accordance with
their terms. See "The Exchange Offer -- Termination
of Certain Rights" and "-- Procedures for Tendering
Old Notes" and "Description of the New Notes".
Accrued Interest on the
Old Notes............... Interest on the New Notes will accrue from the last
Interest Payment Date on which interest was paid on
the Old Notes surrendered in exchange therefor or,
if no interest has been paid on the Old Notes, from
the date of original issue of the Old Notes.
Eligible Holders of Old Notes accepted for exchange
will be deemed to have waived the right to receive
any other payments or accrued interest on the Old
Notes.
Procedures for Tendering
Old Notes.................. Unless a tender of Old Notes is effected pursuant
to the procedures for book-entry transfer as
provided herein, each Eligible Holder desiring to
accept the Exchange Offer must complete and sign
the Letter of Transmittal, have the signature
thereon guaranteed if received by the Letter of
Transmittal, and mail or deliver the Letter of
Transmittal, together with the Old Notes or a
Notice of Guaranteed Delivery and any other
required documents (such as evidence of authority
to act, if the Letter of Transmittal is signed by
someone acting in a fiduciary or representative
capacity), to the Exchange Agent (as defined) at
the address set forth on the back cover page of
this Prospectus prior to 5:00 p.m., New York City
time, on the Expiration Date; provided, however,
that the signature on the Letter of Transmittal is
not required to be guaranteed if the Old Notes
surrendered for exchange are tendered (i) by a
registered holder of the Old Notes who has not
completed the box entitled "Special Delivery
Instructions" in the Letter of Transmittal, or (ii)
for the account of an Eligible Institution (as
defined). Any Beneficial Owner (as defined) of the
Old Notes whose Old Notes are registered in the
name of a nominee, such as a broker, dealer,
commercial bank or trust company, and who wishes to
tender Old Notes in the Exchange Offer, should
instruct such entity or person to promptly tender
on such Beneficial Owner's behalf. Any Old Notes
not accepted for exchange for any reason will be
returned, without expense to the tendering Eligible
Holder thereof, as promptly as practicable after
the Expiration Date. See "The Exchange
Offer -- Procedures for Tendering Old Notes".
Guaranteed Delivery
Procedures................. Eligible Holders of Old Notes who wish to tender
their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver
their Old Notes, the Letter of Transmittal or any
other documents required by the Letter of
Transmittal to the Exchange Agent on or prior to
the Expiration Date, may tender their Old Notes
according to the guaranteed delivery procedures set
forth in the Letter of Transmittal. See "The
Exchange Offer -- Guaranteed Delivery Procedures".
Acceptance of Old Notes and
Delivery of New Notes... Upon satisfaction or waiver of all conditions of
the Exchange Offer, the Company will accept any and
all Old Notes that are properly tendered (and not
withdrawn) in the Exchange Offer prior to 5:00
p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer
will be delivered promptly after acceptance of the
Old Notes. See "The Exchange Offer -- Acceptance of
Old Notes for Exchange; Delivery of New Notes".
9
<PAGE> 12
Withdrawal Rights.......... Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date. See "The Exchange Offer --
Withdrawal Rights".
The Exchange Agent......... First Trust National Association, a national
banking corporation, is the exchange agent (in such
capacity, the "Exchange Agent"). The address and
telephone number of the Exchange Agent are set
forth in "The Exchange Offer -- The Exchange Agent;
Assistance".
Fees and Expenses.......... All expenses incident to the Company's consummation
of the Exchange Offer and compliance with the
Registration Rights Agreement will be borne by the
Company. The Company will also pay certain transfer
taxes, if applicable, to the Exchange Offer. See
"The Exchange Offer -- Fees and Expenses".
Resales of the New Notes... The Company is making the Exchange Offer in
reliance on the position of the SEC Staff as set
forth in certain interpretive letters addressed to
third parties in other transactions. However, the
Company has not sought its own interpretive letter
and there can be no assurance that the SEC Staff
would make a similar determination with respect to
the Exchange Offer as it has in such interpretive
letters to third parties. Based on these
interpretations by the SEC Staff, and subject to
the following sentences, the Company believes that
New Notes issued pursuant to the Exchange Offer to
an Eligible Holder in exchange for Old Notes may be
offered for resale, resold and otherwise
transferred by an Eligible Holder (other than (i) a
broker-dealer who purchased Old Notes directly from
the Company for resale pursuant to Rule 144A or any
other available exemption under the Securities Act,
or (ii) a person that is an "affiliate" of the
Company within the meaning of Rule 405 under the
Securities Act), without further compliance with
the registration and prospectus delivery provisions
of the Securities Act, provided that such Eligible
Holder is acquiring the New Notes in the ordinary
course of business and is not participating, and
has no arrangement or understanding with any person
to participate, in the "distribution" (within the
meaning of the Securities Act) of the New Notes.
Eligible Holders wishing to accept the Exchange
Offer must represent to the Company, among other
things, that such conditions have been met. Any
Eligible Holder of Old Notes who is an "affiliate"
of the Company or who intends to participate in the
Exchange Offer for the purpose of participating in
the distribution of the New Notes, or any
broker-dealer who purchased Old Notes from the
Company to resell pursuant to Rule 144A or any
other available exemption under the Securities Act,
(a) will not be able to rely on the interpretations
of the SEC Staff set forth in the above-mentioned
interpretive letters, (b) will not be permitted or
entitled to tender such Old Notes in the Exchange
Offer, and (c) must comply with the registration
and prospectus delivery requirements of the
Securities Act in connection with any sale or other
transfer of such Old Notes unless such sale is made
pursuant to an exemption from such requirement. See
"The Exchange Offer -- Resales of the New Notes".
Each broker-dealer that receives New Notes for
its own account pursuant to the Exchange Offer may
be deemed to be a statutory underwriter, must
acknowledge that it acquired the Old Notes for its
own account as a result of market-making activities
or other trading activities and must agree that it
will deliver a prospectus meeting the requirements
of the Securities Act in connection with any resale
of such New Notes. The
10
<PAGE> 13
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. Based on the position taken by the
SEC Staff in the interpretive letters referred to
above, the Company believes that Participating
Broker-Dealers who acquired Old Notes for their own
accounts, as a result of market-making or other
trading activities, may fulfill their prospectus
delivery requirements with respect to the New Notes
received upon exchange of such Old Notes with a
prospectus meeting the requirements of the
Securities Act, which may be the prospectus
prepared for an exchange offer so long as it
contains a description of the plan of distribution
with respect to the resale of such New Notes.
Accordingly, this Prospectus, as it may be amended
or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with
resales of New Notes received in exchange for Old
Notes if such Old Notes were acquired by such
Participating Broker-Dealer for its own account as
a result of market-making or other trading
activities. Subject to certain conditions, the
Company has agreed that this Prospectus, as it may
be amended or supplemented, may be used by a
Participating Broker-Dealer in connection with
resales of such New Notes. See "Plan of
Distribution". However, a Participating
Broker-Dealer who intends to use this Prospectus in
connection with the resale of New Notes received in
exchange for Old Notes pursuant to the Exchange
Offer must notify the Company, or cause the Company
to be notified, on or prior to the Expiration Date,
that it is a Participating Broker-Dealer. Such
notice may be given in the space provided for that
purpose in the Letter of Transmittal or may be
delivered to the Exchange Agent at one of the
addresses set forth herein under "The Exchange
Offer -- Exchange Agent; Assistance". Any
Participating Broker-Dealer who is an "affiliate"
of the Company may not rely on such interpretive
letters and must comply with the registration and
prospectus delivery requirements of the Securities
Act in connection with any resale transaction. See
"The Exchange Offer -- Resales of the New Notes".
Representations and
Covenants.................. A Participating Broker-Dealer who intends to use
this Prospectus in connection with the resale of
New Notes received in exchange for Old Notes
pursuant to the Exchange Offer must notify the
Company, or cause the Company to be notified, on or
prior to the Expiration Date, that it is a
Participating Broker-Dealer. Such notice may be
given in the space provided for that purpose in the
Letter of Transmittal or may be delivered to the
Exchange Agent at one of the addresses set forth
herein under "The Exchange Offer -- The Exchange
Agent; Assistance". In addition, by tendering Old
Notes pursuant to the Exchange Offer, Eligible
Holders and Beneficial Owners will be deemed to
have made certain representations and covenants to
the Company. See "The Exchange Offer -- Procedures
for Tendering Old Notes".
11
<PAGE> 14
DESCRIPTION OF THE NEW NOTES
The form and term of the New Notes will be identical in all material
respects to the form and terms of the Old Notes except that (i) the New Notes
will have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, (ii) holders of New Notes will not be
entitled to any Additional Interest thereon pursuant to the Registration Rights
Agreement in respect of Old Notes constituting Registrable Securities held by
such holders if (A) a registration statement concerning the Exchange Offer is
not filed with the SEC on or prior to November 6, 1997, (B) the registration
statement filed by the Company with respect to the Exchange Offer has not been
declared effective on or prior to January 5, 1998, or (C) the Exchange Offer is
not consummated on or prior to February 4, 1998 or a Shelf Registration
Statement, if required, is not declared effective on or prior to February 4,
1998 (or if a Shelf Registration Statement is required based upon a request by
the Initial Purchasers, 30 days after request therefor) (each such event
referred to in clauses (A) through (C) above, a "Registration Default"), and
(iii) holders of New Notes will not be, and upon consummation of the Exchange
Offer, Eligible Holders of Old Notes will no longer be, entitled to certain
rights under the Registration Rights Agreement intended for Eligible Holders;
provided, however, that (X) an Eligible Holder of Old Notes who is not legally
permitted to participate in the Exchange Offer based upon advice of counsel to
that effect or who does not receive fully tradeable New Notes pursuant to the
Exchange Offer, subject to reasonable verification by the Company, and (Y) the
Initial Purchasers acquiring a majority of the initial aggregate principal
amount of Old Notes with respect to Registrable Securities acquired directly
from the Company, shall have the right to require the Company to file a Shelf
Registration Statement solely for the benefit of such Eligible Holder of Old
Notes and will be entitled to Additional Interest following the occurrence of a
Registration Default in connection with the filing of such Shelf Registration
Statement. The Exchange Offer shall be deemed consummated upon the occurrence of
the delivery by the Company to the Registrar of New Notes in the same aggregate
principal amount as the aggregate principal amount of Old Notes that were
tendered (and not withdrawn) by Eligible Holders pursuant to the Exchange Offer.
See "The Exchange Offer -- Termination of Certain Rights", "-- Procedures for
Tendering Old Notes" and "Description of the New Notes".
Maturity Date.............. October 15, 2007.
Interest Payment Dates..... April 15 and October 15 of each year, commencing
April 15, 1998.
Optional Redemption........ The New Notes are redeemable at the option of the
Company, in whole or in part, at any time on or
after October 15, 2002, at the redemption prices
set forth herein, together with accrued and unpaid
interest, if any, to the redemption date. In
addition, on or prior to October 15, 2000, the
Company may redeem up to an aggregate of 35% of the
principal amount of the Notes originally issued, at
a price of 109 7/8% of the principal amount
thereof, together with accrued and unpaid interest,
if any, to the redemption date, with the net
proceeds of one or more Public Equity Offerings,
provided that not less than $146.3 million in
principal amount of the Notes is outstanding
immediately after giving effect to such redemption.
See "Description of the New Notes -- Optional
Redemption".
Change of Control.......... Upon the occurrence of a Change in Control, each
holder of Notes, subject to certain limitations
described herein, will have the right to require
the Company to purchase all or a portion of such
holder's Notes at a purchase price in cash equal to
101% of the principal amount thereof, together with
accrued and unpaid interest, if any, to the date of
purchase. See "Description of the New
Notes -- Purchase of Notes Upon a Change in
Control".
Offers to Purchase......... The Company will, under certain circumstances, be
obligated to make offers to purchase Notes in the
event of an Asset Sale. See "Description of the New
Notes -- Certain Covenants -- Limitation on Sale of
Assets".
Ranking.................... The New Notes will be general unsecured obligations
of the Company and will be subordinated in right of
payment to all existing and future Senior
Indebtedness of the Company. In addition, the
Company is a holding company and, accordingly, the
New Notes will also be effectively subordi-
12
<PAGE> 15
nated to all existing and future non-intercompany
liabilities of the Company's subsidiaries. As of
September 30, 1997, the Company has approximately
$190 million of Senior Indebtedness, including $160
million under the Securitization Facility (as
defined), which is a subsidiary liability, and
approximately $488 million of other
non-intercompany subsidiary liabilities (including
$367 million of deferred revenues and $26 million
of deferred income taxes) to which the New Notes
are subordinated. As of September 30, 1997, other
than indebtedness under the 13% Notes, capital
lease obligations and outstanding letters of
credit, substantially all of the Company's
liabilities, including the Securitization Facility
(which is also Senior Indebtedness), were
non-intercompany subsidiary liabilities. The New
Notes will rank pari passu in right of payment with
the Old Notes. The subordination of the New Notes
and the funds available to the Company may limit
the ability of the Company to repurchase the New
Notes. See "Risk Factors -- Subordination of the
New Notes and Holding Company Structure".
Certain Covenants.......... The Indenture (as defined herein) will contain
certain covenants that, among other things, will
limit the ability of the Company and its
subsidiaries to (i) incur additional indebtedness,
(ii) pay dividends and make other restricted
payments, (iii) issue preferred stock of its
subsidiaries, (iv) permit payment restrictions on
its subsidiaries, (v) engage in transactions with
affiliates, (vi) create liens, or (vii) engage in
mergers, consolidations or asset sales. See
"Description of the New Notes--Certain Covenants".
Absence of a Public Market
for the Notes........... The New Notes will be new securities for which
there is currently no established trading market.
Although the Initial Purchasers have informed the
Company that they currently intend to make a market
in the New Notes, the Initial Purchasers are not
obligated to do so, and any such market-making may
be discontinued at any time without notice, in
their sole discretion. Accordingly, there can be no
assurances as to the development or the liquidity
of any market for the New Notes. The Company
intends to apply to have the New Notes designated
for trading in the PORTAL system. The Company does
not intend to apply for listing of the New Notes on
any securities exchange or for quotation through
the Nasdaq National Market or any other quotation
system. See "Risk Factors -- Absence of Public
Market for the New Notes".
For more detailed information regarding the terms of the New Notes and for
definitions of capitalized terms not otherwise defined, see "Description of the
New Notes".
13
<PAGE> 16
RISK FACTORS
See "Risk Factors" beginning on page 17 of this Prospectus for a discussion
of certain factors that should be considered by Eligible Holders in evaluating
the Exchange Offer.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus under "Prospectus Summary",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business", in addition to certain statements contained
elsewhere in this Prospectus, are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
factors include, among others, the following: general economic and business
conditions; competition; success of operating initiatives, advertising and
promotional efforts; existence of adverse publicity or litigation; acceptance of
new product offerings; changes in business strategy or plans; quality of
management; availability, terms, and development of capital; business abilities
and judgment of personnel; changes in, or the failure to comply with, government
regulations; regional weather conditions; those items set forth under the
heading "Risk Factors" beginning on page 17 of this Prospectus; and other
factors referenced in this Prospectus.
------------------
The Company was a wholly-owned subsidiary of Entertainment until
Entertainment spun-off the Company (the "Spin-off") to its stockholders on
January 9, 1996. The Company's executive offices are located at 8700 West Bryn
Mawr Avenue, Chicago, Illinois, 60631, telephone number (773) 380-3000. As used
in this Prospectus, unless the context otherwise requires, the "Company" or
"Bally" refers to Bally Total Fitness Holding Corporation and its subsidiaries
and their predecessors.
In connection with the Stock Offering, the SEC Staff advised the Company it
requires all registrants operating fitness centers with membership plans that
include initial membership fees to follow a "deferral method" of accounting with
respect to the recognition of revenue from initial membership fees. The
accompanying consolidated financial statements for periods other than the nine
months ended September 30, 1997 have been restated from those originally
reported because this "deferral method" differed from the revenue recognition
method historically used by the Company. See "Consolidated Financial
Statements".
14
<PAGE> 17
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
The following table presents summary consolidated financial data of the
Company. The historical financial data were derived from, and should be read in
conjunction with, financial information appearing elsewhere in this Prospectus.
See "Selected Consolidated Financial Data".
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------- ------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(AS RESTATED) (a)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Membership revenues --
Initial membership fees on
paid-in-full memberships
originated................... $ 47.6 $ 65.5 $ 85.6 $ 95.7 $ 103.0 $ 141.8 $ 153.1
Initial membership fees on
financed memberships
originated................... 266.6 231.5 290.4 310.0 322.7 316.1 335.4
Dues collected................. 144.6 129.3 182.9 177.8 173.5 164.9 141.6
Change in deferred revenues.... (4.4) 15.5 29.8 16.8 27.0 (20.7) (25.1)
-------- -------- -------- -------- -------- -------- --------
454.4 441.8 588.7 600.3 626.2 602.1 605.0
Finance charges earned........... 29.5 27.7 36.4 36.9 34.9 44.4 56.8
Fees and other................... 11.5 9.5 14.1 16.2 20.9 20.2 26.8
-------- -------- -------- -------- -------- -------- --------
495.4 479.0 639.2 653.4 682.0 666.7 688.6
Operating costs and expenses:
Fitness center operations........ 288.8 281.5 366.5 396.6 407.1 416.0 398.1
Member processing and collection
centers........................ 29.0 31.7 42.2 50.3 52.1 57.4 56.7
Advertising...................... 34.6 36.8 47.4 50.0 47.5 53.3 54.2
General and administrative....... 21.0 15.1 23.6 21.6 21.9 25.6 27.9
Provision for doubtful
receivables.................... 72.6 64.3 80.4 72.1 103.9 72.5 116.2
Depreciation and amortization.... 40.7 41.1 55.9 57.4 58.9 60.4 57.8
Change in deferred membership
origination costs.............. (1.6) 1.9 4.1 0.4 6.7 (0.4) (3.0)
-------- -------- -------- -------- -------- -------- --------
485.1 472.4 620.1 648.4 698.1 684.8 707.9
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)............ 10.3 6.6 19.1 5.0 (16.1) (18.1) (19.3)
Interest income.................... 0.9 0.7 0.9 0.2
Interest expense................... (34.1) (36.1) (47.6) (43.8) (38.6) (39.1) (31.9)
-------- -------- -------- -------- -------- -------- --------
Loss before income taxes,
extraordinary item and cumulative
effect on prior years of change
in accounting for income taxes... (22.9) (28.8) (27.6) (38.6) (54.7) (57.2) (51.2)
Income tax benefit (provision)..... (0.3) (0.3) 2.7 7.2 15.2 25.8 17.6
-------- -------- -------- -------- -------- -------- --------
Loss before extraordinary item and
cumulative effect on prior years
of change in accounting for
income taxes (b)(c).............. $ (23.2) $ (29.1) $ (24.9) $ (31.4) $ (39.5) $ (31.4) $ (33.6)
======== ======== ======== ======== ======== ======== ========
Loss per common share (pro forma
for 1995 and 1994) (d)........... $ (1.68) $ (2.39) $ (2.04) $ (3.25) $ (4.61)
OTHER FINANCIAL DATA:
EBITDA (e)......................... $ 51.0 $ 47.7 $ 75.0 $ 62.4 $ 42.8 $ 42.3 $ 38.5
Capital expenditures............... 18.7 13.3 20.6 22.5 21.4 34.9 22.5
EBITDA margin (e).................. 10.3% 10.0% 11.7% 9.6% 6.3% 6.3% 5.6%
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED SEPTEMBER 30, 1997
-------------------------
<S> <C> <C>
PRO FORMA FINANCIAL DATA: (f)
EBITDA (e).......................................... $78.3
Interest expense.................................... 41.0
Ratio of EBITDA to interest expense................. 1.9x
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------
ACTUAL AS ADJUSTED (f)
------------ ---------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents................................ $ 63.4 $ 65.4
Installment contracts receivable, net............... 326.8 326.8
Total assets........................................ 965.0 969.4
Total debt.......................................... 379.7 404.7
Stockholders' equity................................ 91.5 70.9
</TABLE>
(footnotes on page following)
15
<PAGE> 18
- ---------------
(a) The summary consolidated financial data presented herein for periods other
than the nine months ended September 30, 1997 have been restated to reflect
a change in the Company's method of recognizing membership revenue. See
"Consolidated Financial Statements".
(b) In 1996, the Company recognized a net extraordinary gain on extinguishment
of debt consisting of (i) a gain (net of taxes) of $9.9 million ($.81 per
share) resulting from indebtedness owed Entertainment which was forgiven as
part of the December 1996 merger of Entertainment with and into Hilton
Hotels Corporation ("Hilton"), and (ii) a charge (net of taxes) of $4.2
million ($.35 per share) resulting from the refinancing of the Company's
prior securitization facility by the Securitization Facility. In 1993, the
Company recognized an extraordinary loss on extinguishment of debt of $6.0
million (net of taxes) resulting from a refinancing of certain indebtedness.
(c) In 1993, the Company changed its method of accounting for income taxes as
required by Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". As permitted by SFAS No. 109, the Company
elected to use the cumulative effect approach rather than to restate the
consolidated financial statements of any prior years to apply the provisions
of SFAS No. 109, which resulted in a charge of $69.0 million in 1993.
(d) The loss for the years ended December 31, 1995 and 1994 reflects a federal
income tax benefit arising from the Company's prior tax sharing agreement
with Entertainment of $7.1 million and $15.2 million, respectively. Pro
forma loss per common share (which is unaudited) was calculated giving
effect to (i) adjustments made to reflect the income tax provision/benefit
as if the Company had filed its own separate consolidated income tax return
for each year and (ii) the distribution of 11,845,161 shares of the
Company's common stock to Entertainment stockholders as if such distribution
had taken place as of the beginning of each year.
(e) EBITDA is defined as operating income (loss) before depreciation and
amortization and EBITDA margin represents EBITDA divided by net revenues.
The Company has presented EBITDA and EBITDA margin supplementally because
management believes this information is useful given the significance of the
Company's depreciation and amortization and because of its highly leveraged
financial position. These data should not be considered as an alternative to
any measure of performance or liquidity as promulgated under generally
accepted accounting principles (such as net income/loss or cash provided
by/used in operating, investing and financing activities), nor should they
be considered as an indicator of the Company's overall financial
performance. Also, the EBITDA definition used herein may not be comparable
to similarly titled measures reported by other companies.
(f) Adjusted to give effect to (i) the Stock Offering, (ii) the Refinancing and
(iii) the Exchange Offer, as if each had occurred on October 1, 1996 for Pro
Forma Financial Data and on September 30, 1997 for Balance Sheet Data, using
the interest rate of 9 7/8% on the Notes along with the assumptions used in
the capitalization table (see "Capitalization").
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RISK FACTORS
Prior to making an investment decision, prospective investors should
consider carefully all of the information set forth in this Prospectus and,
particularly, should evaluate the following risk factors.
RISKS ASSOCIATED WITH HIGHLY-LEVERAGED FINANCIAL POSITION
In December 1996, the Company issued $160.0 million of asset-backed
securities (the "Securitization Facility") by selling undivided interests in the
H&T Master Trust (the "Trust"). The Trust consists primarily of a portfolio of
installment contracts receivable from membership plans and the proceeds thereof.
The Company plans to refinance the Securitization Facility in the second or
third quarter of 1999; however, there can be no assurance that the Company will
be able to sell such a replacement series or that the terms of such replacement
series will be as favorable as the Securitization Facility.
At September 30, 1997, the Company had total indebtedness (including
outstanding letters of credit) of approximately $390 million ($415 million after
giving effect to the Refinancing). The Company's long-term debt presently
includes the Securitization Facility, $225 million principal amount of the Old
Notes, $22.6 million principal amount of the 13% Notes and the Bank Credit
Facility. The Company's recent losses, total indebtedness and provisions of
existing debt instruments limit the Company's ability to raise capital or borrow
money. The provisions in the Company's existing debt instruments and the Bank
Credit Facility limit the Company's ability to borrow additional funds and to
grant security interests and require the Company to maintain certain financial
ratios, including those relating to EBITDA and interest expense. As a result of
the limitations, the Company may be more vulnerable to economic downturns, may
not be able to exploit certain business opportunities when they arise and may
have less flexibility to respond to changing economic conditions, each of which
could have a material adverse effect on the Company's financial condition and
results of operations.
SUBORDINATION OF THE NEW NOTES AND HOLDING COMPANY STRUCTURE
The New Notes will be subordinated in right of payment to all existing and
future Senior Indebtedness of the Company, including any indebtedness under the
Bank Credit Facility. As of September 30, 1997, the amount of Senior
Indebtedness of the Company was approximately $190 million, including $160
million under the Securitization Facility, which is a subsidiary liability. By
reason of such subordination, in the event of liquidation or insolvency of the
Company, creditors of the Company who are holders of Senior Indebtedness may
recover more, ratably, than holders of the New Notes, and funds which would be
otherwise payable to holders of the New Notes will be paid to the holders of
Senior Indebtedness to the extent necessary to pay the Senior Indebtedness in
full, and the Company may be unable to meet its obligations fully with respect
to the New Notes. In addition, under certain circumstances, no payments may be
made with respect to the principal of or interest on the New Notes upon the
occurrence of a default under the terms of any Senior Indebtedness including,
but not limited to, a default under the Bank Credit Facility. The New Notes will
rank pari passu in right of payment with the Old Notes.
The operations of the Company are conducted through subsidiaries. Except to
the extent that the Company may itself be a trade creditor with recognized
claims against its subsidiaries, claims of creditors of such subsidiaries,
including trade creditors, will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of the Company,
including holders of the New Notes, even though such subsidiary obligations do
not constitute Senior Indebtedness. As of September 30, 1997, subsidiary
liabilities (which also include Senior Indebtedness) were approximately $660
million, including $367 million of deferred revenues and $26 million of deferred
income taxes.
In certain circumstances, the Company may be obligated to repurchase or to
make an offer to repurchase the New Notes. The subordination of the New Notes to
all existing and future Senior Indebtedness of the Company and the funds
available to the Company may limit the ability of the Company to repurchase the
New Notes.
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DECLINE IN MEMBERSHIP FEES ORIGINATED; NET LOSSES
The Company's initial membership fees originated, a principal component of
its total revenues, have decreased from $425.7 million in 1994 to $376.0 million
in 1996, and there can be no assurance that the Company will be able to halt or
reverse this decline. Although the Company's operating costs and expenses were
more than $75 million lower in 1996 than in 1994, there can be no assurance that
the Company will be able to continue reducing its operating costs and expenses.
The Company reported losses before extraordinary item of $23.2 million, $24.9
million, $31.4 million and $39.5 million for the nine months ended September 30,
1997 and the years ended December 31, 1996, 1995 and 1994, respectively. On a
pro forma basis, adjusting the income tax provision/benefit as if the Company
had filed its own separate consolidated tax returns, the loss for 1995 and 1994
would have been $38.5 million and $54.6 million, respectively.
RESTRICTIONS IMPOSED BY INDEBTEDNESS
The Bank Credit Facility and the Indenture contain covenants that, among
other things and subject to certain exceptions, restrict the ability of the
Company to incur additional indebtedness, pay dividends, prepay Subordinated
Indebtedness, dispose of certain assets, create liens and make certain
investments or acquisitions. The ability of the Company to comply with such
provisions may be affected by events beyond the Company's control. The breach of
any of these covenants could result in a default under the Bank Credit Facility.
In the event of any such default, depending on the actions taken by the lenders
under the Bank Credit Facility, such lenders could elect to declare all amounts
borrowed under the Bank Credit Facility, together with accrued interest, to be
due and payable. A default under the Bank Credit Facility or the instruments
governing the Company's other indebtedness could constitute a cross-default
under the Indenture and any instruments governing the Company's other
indebtedness, and a default under the Indenture could constitute a cross-default
under the Bank Credit Facility and any instruments governing the Company's other
indebtedness.
RISKS ASSOCIATED WITH NEW INITIATIVES
The Company intends to embark on a number of new initiatives to capitalize
on its strong brand identity, extensive distribution infrastructure
(approximately 320 facilities), significant member base (approximately four
million members) and frequency of visitation (in excess of 100 million visits in
1996). These initiatives include selling and marketing nutritional products and
work-out and related apparel to its members and marketing financial services
provided by third parties to its members such as a co-branded credit card,
credit life insurance, dining clubs and ATMs in its clubs as well as making
comprehensive outpatient rehabilitation services available to members and
non-members alike. The Company has not previously generated significant revenues
from any of these new initiatives and there can be no assurance that such
initiatives will be successful. In addition, the Company has limited experience
in marketing new products to its members. The sale and marketing of nutritional
products and work-out and related apparel and the provision of rehabilitation
services involve significant risks of competition. See "-- Competition". The
provision of rehabilitation services also involves risks of government
regulation. See "-- Government Regulation".
RISKS ASSOCIATED WITH PRICING STRATEGY
Competitive conditions in certain markets in which the Company operates may
limit the Company's ability to reduce discount pricing on paid-in-full
memberships and to increase dues significantly without a material loss in
membership.
COMPETITION
The Company is the largest operator, or among the largest operators, of
fitness centers in every major market in which it has fitness centers. Within
each market, the Company competes with other fitness centers, physical fitness
and recreational facilities established by local governments and hospitals and
by businesses for their employees, the YMCA and similar organizations and, to a
certain extent, with racquet and tennis and other athletic clubs, country clubs,
weight reducing salons and the home-use fitness equipment industry. The Company
also competes with other entertainment and retail businesses for the
discretionary income of its target market. The
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Company believes competition has increased in certain markets. There can be no
assurance that the Company will be able to compete effectively in the future in
the markets in which it operates.
When the Company embarks on its new initiatives, particularly the sale of
nutritional products and apparel, the Company will be competing against large
established companies with more experience selling such products on a retail
basis and, in some instances, with substantially greater financial resources
than the Company. There can be no assurance that the Company will be able to
compete effectively against such established companies.
SEASONAL MEMBERSHIP FEE ORIGINATIONS
Historically, the Company has experienced greater membership fee
originations in the first quarter and lower membership fee originations in the
fourth quarter. Certain of the new initiatives the Company plans to undertake
may have the effect of further increasing the seasonality of the Company's
business.
GOVERNMENT REGULATION
The operations and business practices of the Company are subject to
regulation at federal, state and, in some cases, local levels. General rules and
regulations of the Federal Trade Commission (the "FTC"), and of state and local
consumer protection agencies, and state statutes apply to the Company's
advertising, sales and other trade practices, including the sale, financing and
collection of memberships. Although management is not aware of any proposed
changes in any statutes, rules or regulations, any changes could have a material
adverse effect on the Company's financial condition and results of operations.
In addition, the provision of rehabilitation services and payments for such
services are subject to government regulation. See "Business -- Government
Regulation".
FRAUDULENT CONVEYANCE
The Company believes that the indebtedness represented by the New Notes is
being incurred for proper purposes and in good faith, and that, based on present
forecasts, asset valuations and other financial information, the Company is
solvent, will have sufficient capital for carrying on its business and will be
able to pay its debts as they mature. Notwithstanding this belief, however,
under federal or state fraudulent transfer laws, if a court of competent
jurisdiction in a suit by an unpaid creditor or a representative of creditors
(such as a trustee in bankruptcy or a debtor-in-possession) were to find that
the Company did not receive fair consideration (or reasonably equivalent value)
for incurring the New Notes and, at the time of the incurrence of such
indebtedness, the Company was insolvent, was rendered insolvent by reason of
such incurrence, was engaged in a business or transaction for which its
remaining assets constituted unreasonably small capital, intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
matured, or that the Company intended to hinder, delay or defraud its creditors,
then such court could, among other things, (i) void all or a portion of the
Company's obligations to the holders of the New Notes, the effect of which would
be that the holders of the New Notes may not be repaid in full, (ii) recover all
or a portion of the payments made to holders of the New Notes, and/or (iii)
subordinate the Company's obligations to the holders of the New Notes to other
existing and future indebtedness of the Company to a greater extent than would
otherwise be the case, the effect of which would be to entitle such other
creditors to be paid in full before any payment could be made on the New Notes.
The measure of insolvency for purposes of the foregoing will vary depending upon
the law of the relevant jurisdiction. Generally, however, a company would be
considered insolvent for purposes of the foregoing if the sum of the company's
debts is greater than all of the company's property at a fair valuation, or if
the present fair saleable value of the company's assets is less than the amount
that will be required to pay its existing debts as they become due and payable.
There can be no assurances as to what standards a court would apply to determine
whether the Company was solvent at the relevant time, or whether, whatever
standard was applied, the New Notes would not be voided on another of the
grounds set forth above.
ABSENCE OF PUBLIC MARKET FOR THE NEW NOTES
The New Notes will be new securities for which there is currently no
established trading market. Although the Initial Purchasers have informed the
Company that they currently intend to make a market in the New Notes, the
Initial Purchasers are not obligated to do so, and any such market-making may be
discontinued at any time
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without notice, in their sole discretion. Accordingly there can be no assurance
as to the development or liquidity of any market for the New Notes. The Company
intends to apply to have the New Notes designated for trading in the PORTAL
system. The Company does not intend to apply for listing of the New Notes on any
securities exchange or for quotation through the Nasdaq National Market or any
other quotation system.
CERTAIN MARKET CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
To the extent that Old Notes are tendered and accepted for exchange
pursuant to the Exchange Offer, the trading market for Old Notes that remain
outstanding may be significantly more limited, which might adversely affect the
liquidity of the Old Notes not exchanged. The extent of the market therefor and
the availability of price quotations would depend upon a number of factors,
including the number of holders of Old Notes remaining at such time and the
interest in maintaining a market in such Old Notes on the part of securities
firms. An issue of securities with a smaller outstanding market value available
for trading (the "float") may command a lower price than would a comparable
issue of securities with a greater float. Therefore, the market price for Old
Notes that are not exchanged in the Exchange Offer may be affected adversely to
the extent that the amount of Old Notes exchanged pursuant to the Exchange Offer
reduces the float. The reduced float also may make the trading price of the Old
Notes that are not exchanged more volatile.
CERTAIN CONSEQUENCES OF FAILURE TO VALIDLY TENDER
Issuance of the New Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made following the prior satisfaction, or waiver, of the
conditions set forth in "The Exchange Offer -- Conditions of the Exchange Offer"
and only after timely receipt by the Exchange Agent of such Old Notes, a
properly completed and duly executed Letter of Transmittal (if applicable) and
all other required documents. Therefore, holders of Old Notes desiring to tender
such Old Notes in exchange for New Notes should allow sufficient time to ensure
timely delivery of all required documentation. Beneficial holders of Old Notes
should also take into account the fact that the delivery of documents to The
Depository Trust Company ("DTC") in accordance with DTC's procedures does not
constitute delivery to the Exchange Agent. Neither the Exchange Agent, the
Company nor any other person is under any duty to give notification of defects
or irregularities with respect to the tenders of Old Notes for exchange. Old
Notes that may be tendered in the Exchange Offer but which are not validly
tendered will, following consummation of the Exchange Offer, remain outstanding
and will continue to be subject to the same transfer restrictions currently
applicable to the Old Notes.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes were sold by the Company to the Initial Purchasers on October
7, 1997, pursuant to the Purchase Agreement. The Initial Purchasers subsequently
resold the Old Notes in reliance on Rule 144A, Regulation S under the Securities
Act and certain other exemptions under the Securities Act. The Company and the
Initial Purchasers also entered into the Registration Rights Agreement, pursuant
to which the Company agreed, with respect to the Old Notes, to use its best
efforts (i) to file, on or prior to November 6, 1997, a registration statement
concerning the Exchange Offer with the SEC under the Securities Act, (ii) to
cause the registration statement filed by the Company with respect to the
Exchange Offer to be declared effective by the SEC on or prior to January 5,
1998, (iii) to keep the registration statement filed by the Company with respect
to the Exchange Offer effective until the closing of the Exchange Offer, and
(iv) to cause the Exchange Offer to be consummated on or prior to February 4,
1998. The Exchange Offer is intended to satisfy the Company's exchange offer
obligations under the Registration Rights Agreement.
The Exchange Offer is not being made to, nor will the Company accept
tenders for exchange from, Eligible Holders of Old Notes in any jurisdiction in
which the Exchange Offer or the acceptance thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange $1,000
in principal amount of the New Notes for each $1,000 in principal amount of the
outstanding Old Notes. The Company will accept for exchange any and all Old
Notes that are validly tendered (and not withdrawn) prior to 5:00 p.m., New York
City time, on the Expiration Date. Tenders of the Old Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date. The
Exchange Offer is not conditioned upon any minimum principal amount of Old Notes
being tendered for exchange. However, the Exchange Offer is subject to certain
customary conditions which may be waived by the Company, and to the terms and
provisions of the Registration Rights Agreement. See "-- Conditions of the
Exchange Offer".
Old Notes may be tendered only in multiples of $1,000. Subject to the
foregoing, Eligible Holders may tender less than the aggregate principal amount
represented by the Old Notes held by them, provided that they appropriately
indicate this fact on the Letter Of Transmittal accompanying the tendered Old
Notes (or so indicate pursuant to the procedures for book-entry transfer).
As of the date of this Prospectus, $225 million aggregate principal amount
of the Old Notes were outstanding, the maximum amount authorized by the
Indenture for the Notes. Solely for reasons of administration (and for no other
purpose), the Company has fixed the close of business on October 29, 1997, as
the record date (the "Record Date") for purposes of determining the persons to
whom this Prospectus and the Letter of Transmittal will be mailed initially.
Only an Eligible Holder of the Old Notes (or such Eligible Holder's legal
representative or attorney-in-fact) may participate in the Exchange Offer. There
will be no fixed record date for determining Eligible Holders of the Old Notes
entitled to participate in the Exchange Offer. The Company believes that, as of
the date of this Prospectus, no such Eligible Holder is an affiliate (as defined
in Rule 405 under the Securities Act) of the Company.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Eligible
Holders of Old Notes and for the purposes of receiving the New Notes from the
Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Eligible Holder thereof as promptly as
practicable after the Expiration Date.
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN
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FROM TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE
OFFER. IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION.
HOLDERS OF OLD NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO
THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE PRINCIPAL AMOUNT OF OLD NOTES TO
TENDER, AFTER READING CAREFULLY THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL
AND CONSULTING WITH THEIR ADVISORS, IF ANY, BASED ON THEIR OWN FINANCIAL
POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Expiration Date shall be January 15, 1998 at 5:00 p.m., New York City
time, unless the Company, in its sole discretion, extends the Exchange Offer, in
which case the Expiration Date shall be the latest date and time to which the
Exchange Offer is extended.
The Company expressly reserves the right, in its sole and absolute
discretion, (i) to delay accepting any Old Notes, (ii) to extend the Exchange
Offer, (iii) to terminate the Exchange Offer, and (iv) to waive any condition or
otherwise amend the terms of the Exchange Offer in any manner. If the Exchange
Offer is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the Eligible Holders.
Any such delay in acceptance, extension, termination, amendment or waiver
will be followed promptly by oral or written notice thereof to the Exchange
Agent and by making a public announcement thereof, and such notice and
announcement in the case of an extension will be made no later than 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date. Without limiting the manner in which the Company may choose to
make any public announcement and subject to applicable law, the Company shall
have no obligation to publish, advertise or otherwise communicate any such
public announcement other than by issuing a release to the Dow Jones News
Service.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any
extension of the Exchange Offer, the Company will not be required to accept for
exchange, or to exchange, any Old Notes for New Notes, and, as described below,
may terminate the Exchange Offer (whether or not any Old Notes have theretofore
been accepted for exchange) or may waive any conditions to or amend the Exchange
Offer, if any of the following conditions have occurred or exists or have not
been satisfied:
(i) the Exchange Offer, or the making of any exchange by an Eligible
Holder, violates any applicable law or any applicable interpretation of the
SEC Staff;
(ii) the due tendering of Registrable Securities in accordance with
the Exchange Offer; and
(iii) each Eligible Holder of Registrable Securities exchanged in the
Exchange Offer shall have made certain customary representations, including
representations that such Eligible Holder is not an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act, that all
New Notes to be received by it shall be acquired in the ordinary course of
its business and that at the time of the consummation of the Exchange
Offer, such Eligible Holder has no arrangement or understanding with any
person to participate in the "distribution" (within the meaning of the
Securities Act) of the New Notes, and any such representation as may be
reasonably necessary under applicable SEC rules, regulations or
interpretations to allow Eligible Holders to use of the registration
statement filed by the Company with respect to the Exchange Offer.
If the Company determines in its sole and absolute discretion that any of
the foregoing events or conditions has occurred or exists or has not been
satisfied, the Company may, subject to applicable law, terminate the Exchange
Offer (whether or not any Old Notes have theretofore been accepted for exchange)
or may waive any such condition or otherwise amend the terms of the Exchange
Offer in any respect. If such waiver or amendment constitutes a material change
to the Exchange Offer, the Company will promptly disclose such waiver or
amendment by means of a prospectus supplement that will be distributed to the
registered holders of the Old
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Notes, and the Company will extend the Exchange Offer to the extent required by
Rule 14e-1 under the Exchange Act.
The Company expects that the foregoing conditions will be satisfied. The
foregoing conditions are for the sole benefit of the Company and may be waived
by the Company in whole or in part at any time and from time to time in its sole
discretion. The failure by the Company at any time to exercise any of the
foregoing rights shall not be deemed a waiver of such rights and each such right
shall be deemed an ongoing right which may be asserted at any time and from time
to time. Any determination by the Company concerning the events described above
will be final and binding upon all parties.
TERMINATION OF CERTAIN RIGHTS
The Registration Rights Agreement provides that, in the event of a
Registration Default, the interest rate borne by the Old Notes (except in the
case of the Exchange Offer not being consummated by February 4, 1998 or if a
Shelf Registration Statement is not declared effective on or prior to February
4, 1998, or if a Shelf Registration Statement is not filed within 30 days of
request by the request of the Initial Purchasers, in which case only the Old
Notes that have not been exchanged in the Exchange Offer) shall be increased by
one-quarter of one percent (0.25%) per annum upon the occurrence of any
Registration Default, which rate (as increased as aforesaid) will increase by an
additional one-quarter of one percent (0.25%) each 90-day period that such
additional interest continues to accrue under any such circumstance, with an
aggregate maximum increase in the interest rate equal to one percent (1%) per
annum (such interest in excess of 9 7/8% paid by the Company pursuant to a
Registration Default referred to herein as "Additional Interest"). Following the
cure of all Registration Defaults, the accrual of Additional Interest will cease
and the interest rate will revert to 9 7/8%. Holders of New Notes will not be
and, upon consummation of the Exchange Offer, Eligible Holders of Old Notes will
no longer be, entitled to (i) the right to receive Additional Interest upon the
occurrence of a Registration Default, or (ii) certain other rights under the
Registration Rights Agreement intended for the holders of unregistered
securities; provided, however, that (A) an Eligible Holder of Old Notes who is
not legally permitted to participate in the Exchange Offer based upon advice of
counsel to that effect or who does not receive fully tradeable New Notes
pursuant to the Exchange Offer, subject to reasonable verification by the
Company, and (B) the Initial Purchasers acquiring a majority of the initial
aggregate principal amount of the Old Notes with respect to Registrable
Securities acquired directly from the Company, shall have the right to require
the Company to file a Shelf Registration Statement solely for the benefit of
such Eligible Holders of Old Notes and will be entitled to receive Additional
Interest following the occurrence of a Registration Default in connection with
the filing of such Shelf Registration Statement. Notwithstanding anything to the
contrary in the foregoing, Old Notes not tendered in the Exchange Offer will
remain outstanding and continue to accrue interest in accordance with their
terms.
ACCRUED INTEREST ON THE OLD NOTES
Interest on the New Notes will accrue from the last Interest Payment Date
on which interest was paid on the Old Notes surrendered in exchange therefor or,
if no interest has been paid on the Old Notes, from the date of original issue
of the Old Notes. Eligible Holders of Old Notes accepted for exchange will be
deemed to have waived the right to receive any other payments or accrued
interest on the Old Notes.
PROCEDURES FOR TENDERING OLD NOTES
The tender of an Eligible Holder's Old Notes as set forth below and the
acceptance thereof by the Company will constitute a binding agreement between
the tendering Eligible Holder and the Company upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal. Except as set forth below, an Eligible Holder who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit such Old
Notes, together with a properly completed and duly executed Letter of
Transmittal, including all other documents required by such Letter of
Transmittal, to the Exchange Agent at the address set forth on the back cover
page of this Prospectus prior to 5:00 p.m., New York City time on the Expiration
Date. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE ELIGIBLE HOLDER. IF SUCH
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DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT THE ELIGIBLE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system and which is a "registered holder" (as defined) may
make book-entry delivery of the Old Notes by causing DTC to transfer such Old
Notes into the Exchange Agent's account at DTC in accordance with DTC's
procedures for such transfer. Registered holders that tender Old Notes through
DTC's Book-Entry Transfer Facility system need not submit a physical Letter of
Transmittal if such registered holders comply with the transmittal procedures
for DTC's Book-Entry Transfer Facility system. Registered holders of Old Notes
who are not participants in DTC's Book-Entry Facility system and who wish to
tender Old Notes for exchange pursuant to the Exchange Offer must properly
complete and duly execute the Letter of Transmittal (or a facsimile thereof),
together with any required signature guarantees and any other required
documents. All such documents must be delivered to and received by the Exchange
Agent at its address set forth under " -- The Exchange Agent; Assistance" on or
prior to the Expiration Date, or the guaranteed delivery procedure set forth
below must be complied with.
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
are tendered (i) by a registered holder of the Old Notes who has not completed
the box entitled "Special Delivery Instructions" in the Letter of Transmittal,
or (ii) for the account of an Eligible Institution. In the event that a
signature on a Letter of Transmittal or a notice of withdrawal, as the case may
be, is required to be guaranteed, such signature must be guaranteed by a
participant in a recognized Medallion Signature Program (a "Medallion Signature
Guarantor"). If the Letter of Transmittal is signed by a person other than the
registered holder of the Old Notes, the Old Notes surrendered for exchange must
be endorsed by the registered holder, with the signature thereon guaranteed by a
Medallion Signature Guarantor. The term "registered holder" as used herein with
respect to the Old Notes means any person in whose name the Old Notes are
registered on the books of the Registrar. The term "Eligible Institution" as
used herein means a firm which is a member of a registered national securities
exchange or of the NASD, a commercial bank or trust company having an office or
correspondent in the United States or any other "eligible guarantor institution"
as such term is defined in Rule 17Ad-15 under the Securities Exchange Act of
1934, as amended (the "Exchange Act").
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
Old Notes not properly tendered and to reject any Old Notes the Company's
acceptance of which might, in the judgment of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer
(including the Letter of Transmittal and the instructions thereto) by the
Company shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes for exchange must be
cured within such period of time as the Company shall determine. Tenders of the
Old Notes will not be deemed to have been made until such irregularities have
been cured or waived.
If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a corporation or
other person acting in a fiduciary or representative capacity, such person
should so indicate when signing, and, unless waived by the Company, provide
proper evidence satisfactory to the Company, in its sole discretion, of such
person's authority so to act.
Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old
Notes are registered in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender Old Notes in the Exchange
Offer should contact such registered holder promptly and instruct such
registered holder to tender on such Beneficial Owner's behalf. If such
Beneficial Owner wishes to tender directly, such Beneficial Owner must,
24
<PAGE> 27
prior to completing and executing the Letter of Transmittal and tendering Old
Notes, make appropriate arrangements to register ownership of the Old Notes in
such Beneficial Owner's name. Beneficial Owners should be aware that the
transfer of registered ownership may take considerable time.
By tendering through either DTC's Book-Entry Transfer Facility system or by
executing a Letter of Transmittal, each registered holder represents to the
Company that, among other things (i) the New Notes to be acquired in connection
with the Exchange Offer by the Eligible Holder and each Beneficial Owner of the
Old Notes are being acquired by the Eligible Holder and each Beneficial Owner in
the ordinary course of business of the Eligible Holder and each Beneficial
Owner, (ii) the Eligible Holder and each Beneficial Owner are not participating,
do not intend to participate, and have no arrangement or understanding with any
person to participate, in the distribution of the New Notes, (iii) the Eligible
Holder and each Beneficial Owner acknowledge and agree that any person who is an
affiliate of the Company or who is participating in the Exchange Offer for the
purpose of distributing the New Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the New Notes acquired by such person and cannot
rely on the position of the SEC Staff set forth in no-action letters that are
discussed herein under "Resales of New Notes", (iv) that if the Eligible Holder
is a broker-dealer that acquired Old Notes as a result of market-making or other
trading activities, it will deliver a prospectus in connection with any resale
of New Notes acquired in the Exchange Offer, provided, however, by so
acknowledging and by delivering a Prospectus, the Eligible Holder will not be
deemed to admit that it is an "underwriter" within the meaning of Section 2(ii)
of the Securities Act, (v) the Eligible Holder and each Beneficial Owner
understand that a secondary resale transaction described in clause (iii) above
should be covered by an effective registration statement containing the selling
security holder information required by Item 507 of Regulation S-K adopted by
the SEC pursuant to the Securities Act, (vi) neither the Eligible Holder nor any
Beneficial Owner is an "affiliate", as defined under Rule 405 of the Securities
Act, of the Company except as otherwise disclosed to the Company in writing, and
(vii) the Eligible Holder and each Beneficial Owner has full power and authority
to tender, exchange, assign and transfer its Old Notes pursuant to the Exchange
Offer and the Company will acquire good and unencumbered title thereto, free and
clear of all liens, restrictions, charges and encumbrances and not subject to
any adverse claim. Each registered holder and Beneficial Owner will, upon
request, execute and deliver any additional documents deemed by the Company to
be necessary or desirable to complete the assignment and transfer of the Old
Notes tendered pursuant to the Exchange Offer.
GUARANTEED DELIVERY PROCEDURES
Eligible Holders who wish to tender their Old Notes other than through
DTC's Book Entry Transfer Facility system on a timely basis and (i) whose Old
Notes are not immediately available, or (ii) who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents required by the Letter of
Transmittal to the Exchange Agent on or prior to the Expiration Date, may tender
their Old Notes according to the guaranteed delivery procedures set forth in the
Letter of Transmittal. Pursuant to such procedures: (A) such tender must be made
by or through an Eligible Institution and a Notice of Guaranteed Delivery (as
defined in the Letter of Transmittal) must be signed by such Eligible Holder,
(B) on or prior to the Expiration Date, the Exchange Agent must have received
from the Eligible Institution a properly completed and duly executed Letter of
Transmittal (or facsimile thereof) and a Notice of Guaranteed Delivery (by
telegram, facsimile transmission, mail or hand delivery) setting forth the name
and address of the Eligible Holder, the certificate number or numbers of the
tendered Old Notes, and the principal amount of tendered Old Notes, stating that
the tender is being made thereby and guaranteeing that, within three New York
Stock Exchange trading days after the Expiration Date, any documents required by
the Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, and (C) such properly completed and executed documents required
by the Letter of Transmittal and the tendered Old Notes in proper form for
transfer (or confirmation of a book-entry transfer of such Old Notes into the
Exchange Agent's account at DTC) must be received by the Exchange Agent within
three New York Stock Exchange trading days after the Expiration Date. Any
Eligible Holder who wishes to tender Old Notes pursuant to the guaranteed
delivery procedures described above must ensure that the Exchange Agent receives
the Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old
Notes prior to 5:00 p.m., New York City time, on the Expiration Date.
25
<PAGE> 28
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions of the Exchange Offer,
the Company will accept any and all Old Notes that are properly tendered (and
not withdrawn) in the Exchange Offer prior to 5:00 p.m., New York City time, on
the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be
delivered promptly after acceptance of the Old Notes. For purposes of the
Exchange Offer, the Company shall be deemed to have accepted validly tendered
Old Notes, when, as, and if the Company has given oral or written notice thereof
to the Exchange Agent.
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents (or of confirmation of a
book-entry transfer of such Old Notes into the Exchange Agent's account at DTC);
provided, however, that the Company reserves the absolute right to waive any
defects or irregularities in the tender or conditions of the Exchange Offer. If
any tendered Old Notes are not accepted for any reason, such unaccepted Old
Notes will be returned without expense to the tendering Eligible Holder thereof
as promptly as practicable after the expiration or termination of the Exchange
Offer.
WITHDRAWAL RIGHTS
Tenders of the Old Notes may be withdrawn by delivery of a telegram, telex,
facsimile transmission or letter to the Exchange Agent, at its address set forth
on the back cover page of this Prospectus, at any time prior to 5:00 p.m., New
York City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Old Notes to be withdrawn
(the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number or numbers and principal amount of such Old Notes, as
applicable), (iii) be signed by the Eligible Holder in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by a
bond power in the name of the person withdrawing the tender, in satisfactory
form as determined by the Company in its sole discretion, duly executed by the
registered holder, with the signature thereon guaranteed by a Medallion
Signature Guarantor together with the other documents required upon transfer by
the Indenture, and (iv) specify the name in which such Old Notes are to be
re-registered, if different from the Depositor, pursuant to such documents of
transfer. Withdrawal of Old Notes tendered pursuant to DTC's Book-Entry Transfer
Facility system must comply with the procedures for withdrawal established by
DTC. All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company, in its sole
discretion. The Old Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer. Any Old Notes which
have been tendered for exchange but which are withdrawn will be returned to the
Eligible Holder thereof without cost to such Eligible Holder as soon as
practicable after withdrawal. Properly withdrawn Old Notes may be retendered by
following one of the procedures described under "--Procedures for Tendering Old
Notes" at any time on or prior to the Expiration Date.
26
<PAGE> 29
THE EXCHANGE AGENT; ASSISTANCE
First Trust National Association, a national banking corporation, is the
Exchange Agent. All tendered Old Notes, executed Letters of Transmittal and
other related documents should be directed to the Exchange Agent. Questions and
requests for assistance and requests for additional copies of the Prospectus,
the Letter of Transmittal and other related documents should be addressed to the
Exchange Agent as follows:
By Hand, Registered or Certified Mail or Overnight Courier:
First Trust National Association
First Trust Center
180 East Fifth Street
St. Paul, MN 55101
Attention: Therese Linscheid,
Specialized Finance Department
By Facsimile:
(612) 244-1537
Attention: Therese Linscheid,
Specialized Finance Department
Confirm by Telephone: (612) 244-1234
FEES AND EXPENSES
All fees and expenses incident to the Company's consummation of the
Exchange Offer and compliance with the Registration Rights Agreement will be
borne by the Company, including without limitation, and if applicable: (i) all
Commission, stock exchange or NASD registration and filing fees, (ii) all fees
and expenses incurred in connection with compliance with state securities or
blue sky laws and compliance with the rules of the NASD (including reasonable
fees and disbursements of counsel for any underwriters or Holders in connection
with blue sky qualification of any of the New Notes or Registrable Securities
and any filings with the NASD), (iii) all expenses of any persons in preparing
or assisting in preparing, word processing, printing and distributing any
registration statement, any prospectus, any amendments or supplements thereto,
any underwriting agreements, securities sale agreements and other documents
relating to the performance of and compliance with this Agreement, (iv) all fees
and expenses incurred in connection with the listing, if any, of any of the
Registrable Securities on any securities exchange or exchanges, (v) all rating
agency fees, (vi) the fees and disbursements of counsel for the Company and of
the independent public accountants of the Company, including the expenses of any
special audits or "cold comfort" letters required by or incident to such
performance and compliance, (vii) the fees and expenses of the Trustee, and any
escrow agent or custodian, (viii) the reasonable fees and disbursements of
special counsel representing the holders of Registrable Securities, and (ix) any
fees and disbursements of the underwriters required to be paid by issuers or
sellers of securities, if any, and the reasonable fees and expenses of any
special experts retained by the Company in connection with any registration
statement, if any, but excluding underwriting discounts and commissions and
transfer taxes, if any, relating to the sale or disposition of Registrable
Securities by an Eligible Holder.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
27
<PAGE> 30
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss will be recognized by the Company for accounting
purposes. The expenses of the Exchange Offer will be amortized over the term of
the New Notes.
RESALES OF THE NEW NOTES
Upon consummation of the Exchange Offer, holders of Old Notes who did not
tender their Old Notes and who were not legally prohibited from participating in
the Exchange Offer based upon advice of counsel to that effect and who would
have received fully tradeable New Notes pursuant to the Exchange Offer will not
have any registration rights under the Registration Rights Agreement with
respect to such nontendered Old Notes (other than with respect to a request for
a Shelf Registration Statement by the Initial Purchasers acquiring a majority of
the initial aggregate principal amount of the Old Notes with respect to
Registrable Securities acquired directly from the Company). Such Old Notes will
continue to be subject to the restrictions on transfer contained in the legend
thereon. In general, the Old Notes may not be offered or sold unless registered
under the Securities Act and applicable state securities laws, except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not intend to register the
Old Notes under the Securities Act.
The Company is making the Exchange Offer in reliance on the position of the
SEC Staff as set forth in certain interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letter and there can be no assurance that the SEC Staff would make
a similar determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the SEC
Staff, and subject to the following sentences, the Company believes that New
Notes issued pursuant to the Exchange Offer to an Eligible Holder in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by an
Eligible Holder (other than (i) a broker-dealer who purchased Old Notes directly
from the Company for resale pursuant to Rule 144A or any other available
exemption under the Securities Act, or (ii) a person that is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act), without
further compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Eligible Holder is acquiring the New
Notes in the ordinary course of business and is not participating, and has no
arrangement or understanding with any person to participate, in the
"distribution" (within the meaning of the Securities Act) of the New Notes.
Eligible Holders wishing to accept the Exchange Offer must represent to the
Company, among other things, that such conditions have been met. Any Eligible
Holder of Old Notes who is an "affiliate" of the Company or who intends to
participate in the Exchange Offer for the purpose of participating in the
distribution of the New Notes, or any broker-dealer who purchased Old Notes from
the Company to resell pursuant to Rule 144A or any other available exemption
under the Securities Act, (a) will not be able to rely on the interpretations of
the SEC Staff set forth in the above-mentioned interpretive letters, (b) will
not be permitted or entitled to tender such Old Notes in the Exchange Offer, and
(c) must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any sale or other transfer of such Old
Notes unless such sale is made pursuant to an exemption from such requirement.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer may be deemed to be a statutory underwriter, must acknowledge
that it acquired the Old Notes for its own account as a result of market-making
activities or other trading activities and must agree that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Based on the position taken by the SEC Staff in the interpretive letters
referred to above, the Company believes that Participating Broker-Dealers who
acquired Old Notes for their own accounts, as a result of market-making or other
trading activities, may fulfill their prospectus delivery requirements with
respect to the New Notes received upon exchange of such Old Notes with a
prospectus meeting the requirements of the Securities Act, which may be the
prospectus prepared for an exchange offer so long as it contains a description
of the plan of distribution with respect to the resale of such New Notes.
Accordingly, this Prospectus, as it may be amended or supplemented from time to
time, may be
28
<PAGE> 31
used by a Participating Broker-Dealer in connection with resales of New Notes
received in exchange for Old Notes if such Old Notes were acquired by such
Participating Broker-Dealer for its own account as a result of market-making or
other trading activities. Subject to certain conditions, the Company has agreed
that this Prospectus, as it may be amended or supplemented from time to time,
may be used by a Participating Broker-Dealer in connection with resales of such
New Notes. See "Plan of Distribution". However, a Participating Broker-Dealer
who intends to use this Prospectus in connection with the resale of New Notes
received in exchange for Old Notes pursuant to the Exchange Offer must notify
the Company, or cause the Company to be notified, on or prior to the Expiration
Date, that it is a Participating Broker-Dealer. Such notice may be given in the
space provided for that purpose in the Letter of Transmittal or may be delivered
to the Exchange Agent at one of the addresses set forth herein under "-- The
Exchange Agent; Assistance". Any Participating Broker-Dealer who is an
"affiliate" of the Company may not rely on such interpretive letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by notifying the
Company that it intends to use this Prospectus in connection with the resale of
New Notes exchanged for Old Notes, that, upon receipt of notice from the Company
of the occurrence of any event or the discovery of any fact which makes any
statement contained in this Prospectus untrue in any material respect or which
causes this Prospectus to omit to state a material fact necessary in order to
make the statements contained herein, in light of the circumstances under which
they were made, not misleading or of the occurrence of certain other events
specified in the Registration Rights Agreement, such Participating Broker-Dealer
will suspend the sale of New Notes pursuant to this Prospectus until the Company
has amended or supplemented this Prospectus to correct such misstatement or
omission and has furnished copies of the amended or supplemented Prospectus to
such Participating Broker-Dealer or the Company has given notice that the sale
of the New Notes may be resumed, as the case may be.
MISCELLANEOUS
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
Upon consummation of the Exchange Offer, holders of the Old Notes that were
not prohibited from participating in the Exchange Offer and did not tender their
Old Notes will not have any registration rights under the Registration Rights
Agreement with respect to such nontendered Old Notes (other than with respect to
a request for a Shelf Registration Statement by the Initial Purchasers acquiring
a majority of the initial aggregate principal amount of the Old Notes with
respect to Registrable Securities acquired directly from the Company). Such Old
Notes will continue to be subject to the restrictions on transfer contained in
the legend thereon.
THE REFINANCING
In October 1997, the Company completed the Refinancing which reduces
interest expense, extends debt maturities and improves financial flexibility.
The components of the Refinancing were (i) the Offering of $225 million
aggregate principal amount of the Old Notes, (ii) the consummation of the Tender
Offer with respect to the 13% Notes, and (iii) the application of the net
proceeds from the Offering to retire the 13% Notes. Pursuant to the Tender
Offer, in October 1997 the Company purchased $177.4 million aggregate principal
amount of the 13% Notes and the Indenture pursuant to which the 13% Notes were
issued was substantially amended. The Company has announced that in January
1998, it will redeem the remaining $22.6 million aggregate principal amount of
the 13% Notes not tendered in the Tender Offer at a price of 106.5% of the
principal amount, together with accrued and unpaid interest.
In addition to the Refinancing, in November 1997 the Company entered into
the three-year, $70 million Bank Credit Facility to replace its prior revolving
credit agreement. The $70 million available under the Bank Credit Facility is
reduced by any outstanding letters of credit, which cannot exceed $30 million.
At September 30, 1997, outstanding letters of credit totalled $9.8 million. The
Bank Credit Facility is secured by substantially all real and personal property
(excluding installment contracts receivable) of the Company.
29
<PAGE> 32
CAPITALIZATION
The following table sets forth the historical consolidated capitalization
of the Company at September 30, 1997 and as adjusted to give effect to (i) the
Refinancing, and (ii) the Exchange Offer.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
--------------------------------
AS ADJUSTED FOR THE
REFINANCING(a) AND
ACTUAL THE EXCHANGE OFFER(b)
------ ----------------------
(IN MILLIONS)
<S> <C> <C>
Cash and equivalents............................................. $ 63.4 $ 65.4
====== ======
Long-term debt, including current portion:
Securitization Facility..................................... $160.0 $160.0
Capital lease obligations and other......................... 19.7 19.7
13% Notes................................................... 200.0 --
New Notes................................................... -- 225.0
------ ------
Total debt............................................. 379.7 404.7
Stockholders' equity............................................. 91.5 70.9
------ ------
Total capitalization................................... $471.2 $475.6
====== ======
</TABLE>
- ---------------
(a) The components of the Refinancing were (i) the Offering of $225 million
aggregate principal amount of the Old Notes, (ii) the consummation of the
Tender Offer with respect to the 13% Notes, and (iii) the application of the
net proceeds from the Offering to retire the 13% Notes. Pursuant to the
Tender Offer, in October 1997 the Company purchased $177.4 million aggregate
principal amount of the 13% Notes. The Company has announced that in January
1998, it will redeem the remaining $22.6 million aggregate principal amount
of the 13% Notes not tendered in the Tender Offer at a price of 106.5% of
the principal amount, together with accrued and unpaid interest. The
retirement of the 13% Notes will result in an extraordinary loss totalling
approximately $20.6 million. The estimated fees and expenses of the Offering
and the Exchange Offer total $6.8 million.
(b) Assumes all of the outstanding Old Notes are exchanged for New Notes
pursuant to the Exchange Offer.
30
<PAGE> 33
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company presented below for
and as of the end of each of the three years ended December 31, 1996 were
derived from the audited consolidated financial statements of the Company. The
data presented below for and as of the end of each of the years ended December
31, 1993 and 1992 and nine months ended September 30, 1997 and 1996 are
unaudited. In the opinion of management, such interim data include all
adjustments (which were of a normal recurring nature) necessary for a fair
presentation of the information set forth therein. The Company's operations are
subject to seasonal factors, and therefore, the results of operations for the
nine months ended September 30, 1997 and 1996 are not necessarily indicative of
the results of operations for the full year. The data presented should be read
in conjunction with financial information appearing elsewhere in this
Prospectus. See "Consolidated Financial Statements" and "Management's Discussion
and Analysis of Results of Operations and Financial Condition".
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
30, YEARS ENDED DECEMBER 31,
---------------- --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ -------- --------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
(AS RESTATED)(a)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues...................................... $495.4 $479.0 $639.2 $653.4 $682.0 $ 666.7 $ 688.6
Depreciation and amortization..................... 40.7 41.1 55.9 57.4 58.9 60.4 57.8
Operating income (loss)........................... 10.3 6.6 19.1 5.0 (16.1) (18.1) (19.3)
Loss before extraordinary item and cumulative
effect on prior years of change in accounting
for income taxes (b)(c)......................... (23.2) (29.1) (24.9) (31.4) (39.5) (31.4) (33.6)
Loss per common share (pro forma for 1995 and
1994) (d)....................................... (1.68) (2.39) (2.04) (3.25) (4.61)
OTHER FINANCIAL DATA:
EBITDA (e)........................................ $ 51.0 $ 47.7 $ 75.0 $ 62.4 $ 42.8 $ 42.3 $ 38.5
Cash provided by (used in):
Operating activities............................ (25.0) (14.5) (5.3) (9.9) 32.8 49.9 64.5
Investing activities............................ (13.8) (12.8) (9.8) (42.1) (21.4) (36.1) (25.1)
Financing activities............................ 85.6 17.9 10.4 60.4 (9.6) (13.6) (41.8)
Ratio of earnings to fixed charges (f)............ -- -- -- -- -- -- --
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and equivalents (g).......................... $ 63.4 $ 11.9 $ 16.5 $ 21.3 $ 12.8 $ 11.0 $ 10.7
Installment contracts receivable, net............. 326.8 299.1 300.2 303.4 284.1 322.7 327.8
Total assets...................................... 965.0 902.7 893.3 936.5 951.0 1,016.7 1,012.4
Total debt........................................ 379.7 384.8 384.8 369.5 300.4 312.1 276.2
Stockholders' equity (c)(g)....................... 91.5 9.9 24.2 31.7 34.8 50.6 146.8
</TABLE>
- ---------------
(a) The selected consolidated financial data presented herein for periods other
than the nine months ended September 30, 1997 have been restated to reflect
a change in the Company's method of recognizing membership revenue. See
"Consolidated Financial Statements".
(b) In 1996, the Company recognized a net extraordinary gain on extinguishment
of debt consisting of (i) a gain (net of taxes) of $9.9 million ($.81 per
share) resulting from indebtedness owed Entertainment which was forgiven as
part of the December 1996 merger of Entertainment with and into Hilton and
(ii) a charge (net of taxes) of $4.2 million ($.35 per share) resulting from
the refinancing of the Company's prior securitization facility by the
Securitization Facility. In 1993, the Company recognized an extraordinary
loss on extinguishment of debt of $6.0 million (net of taxes) resulting from
a refinancing of certain indebtedness.
(c) In 1993, the Company changed its method of accounting for income taxes as
required by SFAS No. 109, "Accounting for Income Taxes". As permitted by
SFAS No. 109, the Company elected to use the cumulative effect approach
rather than to restate the consolidated financial statements of any prior
years to apply the provisions of SFAS No. 109, which resulted in a charge of
$69.0 million in 1993.
(d) The loss for the years ended December 31, 1995 and 1994 reflects a federal
income tax benefit arising from the Company's prior tax sharing agreement
with Entertainment of $7.1 million and $15.2 million, respectively. Pro
forma loss per common share (which is unaudited) was calculated giving
effect to (i) adjustments made to reflect the income tax provision/benefit
as if the Company had filed its own separate consolidated income tax return
for each year and (ii) the distribution of 11,845,161 shares of the
Company's common stock to Entertainment stockholders as if such distribution
had taken place as of the beginning of each year.
(e) EBITDA is defined as operating income (loss) before depreciation and
amortization. The Company has presented EBITDA supplementally because
management believes this information is useful given the significance of the
Company's depreciation and amortization and because of its highly leveraged
financial position. These data should not be considered as an alternative to
any measure of performance or liquidity as promulgated under generally
accepted accounting principles (such as net income/loss or cash provided by
/used in operating, investing and financing activities), nor should they be
considered as an indicator of the Company's overall financial performance.
Also, the EBITDA definition used herein may not be comparable to similarly
titled measures reported by other companies.
(f) The ratio of earnings to fixed charges is calculated by dividing (i) loss
before income taxes, extraordinary item and cumulative effect on prior years
of change in accounting for income taxes plus fixed charges (adjusted for
capitalized interest) by (ii) fixed charges. Fixed charges consist of
interest incurred (expensed or capitalized) and the portion of rent expense
which is deemed representative of interest. Earnings were insufficient to
cover fixed charges by $22.6 million, $27.7 million, $26.2 million, $37.1
million, $53.1 million, $55.9 million and $49.7 million for the nine months
ended September 30, 1997 and 1996 and for the years ended December 31, 1996,
1995, 1994, 1993 and 1992, respectively.
(g) In August 1997, the Company completed the Stock Offering, which provided net
proceeds of $88.4 million to the Company after deducting the underwriting
discount and related expenses.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The primary strategic initiative of management involves improving the
results of its core business and, as capital is available, replicating the
profitable new fitness center model through expansion. In 1993, the Company
began building more efficient fitness centers by eliminating pools and other wet
areas and racquet sports (all of which are costly to build and maintain and
which have significantly lower utilization rates), and replacing much of that
space with expanded workout areas which receive a higher degree of member use.
At approximately the same time, the Company emphasized member payment plans
using EFT for financed initial membership fees by adjusting sales commissions
and member incentives. The Company's experience has indicated better collection
results for financed memberships sold under EFT plans compared to those sold
with standard coupon book payment plans. EFT-financed memberships represented
approximately 56% of the total financed initial membership fee contracts in the
receivables portfolio at September 30, 1997. Over the past several years,
membership types and pricing options were standardized, making the selling
process less complicated for both the customer and the sales personnel. In
August 1994, the Company implemented a program to increase monthly dues for
contracts sold after that date and in late 1995 began to curtail the practice of
discounting dues for multiple year renewal offers. The Company believes all of
these actions, certain of which reduced new membership unit sales and revenues,
will ultimately improve cash flows and operating income.
In addition, management made certain changes designed to integrate
operations and reduce operating costs including personnel costs, advertising
expenses and other operating expenses. As part of its continuing cost reduction
program, the Company began a long-term consolidation project in 1991 and
computer conversion in 1994 for its regional service centers ("RSCs"). The
consolidation of five RSCs into two remaining RSCs was completed in the third
quarter of 1995, and the elimination of cost redundancies continued throughout
1996. The primary phase of the computer conversion was completed in the fourth
quarter of 1995. With the addition of new hardware and software, the Company has
streamlined its processing procedures and developed efficiencies that enable the
RSCs to service members better while reducing costs.
The rate of the Company's provision for doubtful receivables can vary from
period to period. The Company estimates the ultimate realization of initial
membership fees originated on financed memberships based upon a number of
factors such as method of payment (EFT vs. coupon books) and amount of
downpayment, among others. The Company continually analyzes the provision
because initial membership fees can be paid to the Company in installments.
Updated collection experience trends are reviewed each reporting period and, if
necessary, the allowance is adjusted accordingly. Changes in the allowance as a
percentage of gross receivables may result from various factors including
significant near-term fluctuations in amounts of initial membership fees
originated for financed memberships (historically, approximately one-half of
financed memberships that default do so within 120 days of origination) or the
timing or acceleration of write-offs. The Company believes the qualitative
profile of its receivables portfolio at September 30, 1997 is generally improved
from that in recent years due to more accounts paying by EFT and higher average
downpayments.
Management also believes significant opportunities exist to increase
revenues beyond those generated by the sale of memberships without significant
capital expenditures. To capitalize on the Company's strong brand identity,
extensive distribution infrastructure (approximately 320 facilities),
significant member base (approximately four million members) and frequency of
visitation (in excess of 100 million visits in 1996), management has begun to
pursue the following growth opportunities: (i) the sale of nutritional products
to its members through its fitness centers and telemarketing; (ii) the provision
of comprehensive outpatient rehabilitation services to both members and
non-members; and (iii) the sale of other goods and services, including apparel
and other items in retail shops located within its fitness centers and certain
financial services to its members.
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RESULTS OF OPERATIONS
Accounting change
In connection with the Stock Offering, the SEC Staff advised the Company it
requires all registrants operating fitness centers with membership plans that
include initial membership fees to follow a "deferral method" of accounting with
respect to the recognition of revenue from initial membership fees. The
accompanying consolidated financial statements for periods other than the nine
months ended September 30, 1997 have been restated from those originally
reported because this "deferral method" differed from the revenue recognition
method historically used by the Company. See "Consolidated Financial
Statements".
Comparison of the nine months ended September 30, 1997 and 1996
Net revenues for the first nine months of 1997 were $495.4 million compared
to $479.0 million in 1996, an increase of $16.4 million (3%) . The average
number of fitness centers selling memberships decreased from 323 in the first
nine months of 1996 to 317 in the first nine months of 1997, reflecting the
closure of 17 older, typically smaller and less profitable facilities and the
sale of a fitness center to a franchisee offset, in part, by the opening of 8
new, larger facilities, all occurring between January 1996 and September 1997.
Initial membership fees originated increased $17.2 million (6%) in the 1997
period, consisting of a $35.1 million (15%) increase in financed memberships
originated offset, in part, by a $17.9 million (27%) decrease in paid-in-full
memberships originated. These results generally reflect management's current
strategy of selling more financed membership plans (which historically have
generated better long-term returns for the Company) and fewer discounted
paid-in-full membership plans (for which dues are frequently waived for up to
three years), which resulted in a 21% increase in the average selling price of
contracts sold and a 13% decline in the number of contracts sold. These
fluctuations in the average price and number of contracts sold also reflect
management's recent emphasis on the sale of premium membership plans (which
provide additional in-club services and/or access to other fitness centers
operated by the Company) and de-emphasis on the sale of lower-priced membership
plans (which typically offer limited amenities or are sold as add-ons to
existing memberships). In addition, deferred revenue accounting delayed
recognition of revenues for the 1997 period by $4.4 million while it added $15.5
million to revenues for the 1996 period, and this unfavorable effect of the
change in deferred revenues in the current period versus the same period last
year is expected to continue into early 1998. Dues collected increased $15.3
million (12%) over 1996, reflecting the Company's continuing strategy of
increasing renewal dues. Finance charges earned increased $1.8 million (7%) in
the 1997 period due primarily to the increase in the size of the receivables
portfolio. Fees and other revenues increased $2.0 million (21%) over the 1996
period, primarily reflecting the sale of nutritional and other retail products
which the Company began selling in 1997 in certain of its fitness centers and an
increased emphasis on personal training services.
Operating income for the first nine months of 1997 was $10.3 million
compared to $6.6 million in 1996. The increase of $3.7 million is due to the
aforementioned increase in revenues offset, in part, by a $12.6 million (3%)
increase in operating costs and expenses, which includes $6.5 million of charges
($2.1 million of which is amortization of unearned compensation) relating to
restricted stock awards issued in conjunction with the Spin-off for which the
remaining restrictions lapsed in June 1997 and vesting occurred in August 1997.
Excluding the charges related to restricted stock awards and the provision for
doubtful receivables, operating costs and expenses decreased $2.2 million (1%)
from 1996. Member processing and collection center expenses decreased $2.7
million (9%), and reflects decreases in telephone expenses (as a result of
renegotiated rates and fewer member service calls), printing and equipment
rental costs. In addition, advertising expenses decreased $2.1 million (6%) due
to reduced television spending and the elimination of certain agency fees in
1997. Fitness center operating expenses increased $7.2 million (3%) due, in
part, to increased spending to improve club operations and appearance,
additional commissions (a substantial portion of which are deferred through the
change in deferred membership origination costs) from the growth in initial
membership fees originated, and costs associated with the new initiatives
described above.
The provision for doubtful receivables for the first nine months of 1997
was $72.6 million compared to $64.3 million in 1996, an increase of $8.3 million
(13%) primarily due to the increase in sales of financed membership plans.
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Interest expense was $34.1 million for the first nine months of 1997
compared to $36.0 million in 1996, a decrease of $1.9 million (5%) primarily due
to lower average interest rates and an increase in the amount of capitalized
interest.
The income tax provision for the first nine months of 1997 and 1996 has
been determined using the estimated annual effective tax rate for each year and
reflects state income taxes only, as no federal benefit has been provided due to
the uncertainty of tax loss realization.
Comparison of the years ended December 31, 1996 and December 31, 1995
Net revenues for 1996 were $640.2 million compared to $653.6 million in
1995. The decrease in revenues results, in part, because the average number of
fitness centers selling memberships decreased from 332 in 1995 to 322 in 1996,
reflecting the closure of 25 older, typically smaller and less profitable
facilities and the sale of a fitness center to Entertainment offset, in part, by
the opening of 13 new, larger facilities over the two-year period. Initial
membership fees originated decreased $29.7 million (7%) primarily due to a 12%
decline in the number of contracts sold offset, in part, by a 6% increase in the
average selling price as a result of the sale of more premium memberships. Dues
collected increased $5.1 million (3%) over 1995 despite the 3% reduction in the
average number of facilities operated, reflecting the Company's continuing
strategy of increasing renewal dues. Finance charges earned decreased $.5
million (1%) in 1996 compared to 1995. Fees and other revenues decreased $1.3
million (8%) primarily due to the reduction of personal trainer revenue in 1996
as a result of temporarily outsourcing the service and non-recurring income in
1995 pertaining to insurance recoveries.
Operating income for 1996 was $20.0 million compared to $5.2 million in
1995. The increase of $14.8 million was due to a $28.3 million (4%) reduction in
operating costs and expenses offset, in part, by the aforementioned decrease in
revenues. The reduction in operating costs and expenses was achieved despite an
$8.3 million increase in the provision for doubtful receivables and a $5.1
million charge related to restricted stock awards issued in conjunction with the
Spin-off for which restrictions lapsed due to an increase in the market price of
the Company's common stock. Excluding the provision for doubtful receivables and
charge related to restricted stock awards, operating costs and expenses
decreased $41.6 million (7%) in 1996 compared to 1995 primarily due to
reductions in fitness center operating expenses and member processing and
collection center expenses. Fitness center operating expenses for 1996 decreased
$30.1 million (8%) from 1995 primarily due to a reduction in payroll and related
costs and other variable costs as a result of the continuing cost reduction
program and the 3% reduction in the average number of fitness centers operated
in 1996 compared to 1995. In addition, insurance expenses declined due to
favorable experience in controlling general liability risks, and commissions
decreased as a result of the decline in initial membership fees originated.
Member processing and collection center expenses decreased $8.0 million (16%)
primarily due to the aforementioned RSC consolidation and computer projects.
The provision for doubtful receivables for 1996 was $80.4 million compared
to $72.1 million in 1995, an increase of $8.3 million (12%). Management believes
the additional provision for doubtful receivables in 1996 adequately reserves
for collection experience that may ultimately be realized from sales programs in
general, and specifically from sales promotions allowing very low downpayments
offered from time to time between July 1995 and October 1996 that have shown
indications of underperforming historical collection experience.
Interest expense, net of capitalized interest, was $47.6 million in 1996
compared to $43.8 million in 1995, an increase of $3.8 million (9%) principally
reflecting a higher average level of debt offset, in part, by lower average
interest rates.
As a result of the Spin-off, the Company is no longer included in the
consolidated federal income tax return of Entertainment and is required to file
its own separate consolidated federal income tax return. Accordingly, the income
tax benefit for 1996 reflects a benefit equal to the federal provision allocated
to the extraordinary item (no additional benefit has been provided due to the
uncertainty of tax loss realization), net of a state income tax provision.
Pursuant to a tax sharing agreement with Entertainment, the effective rate of
the income tax benefit for 1995 was lower than the U.S. statutory tax rate (35%)
due principally to operating losses without a current year tax benefit and
non-deductible amortization of costs in excess of acquired assets.
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Comparison of the years ended December 31, 1995 and December 31, 1994
Net revenues for 1995 were $653.6 million compared to $682.0 million in
1994. Dues collected increased by $4.2 million (2%) reflecting the Company's
strategy of increasing renewal dues. Initial membership fees originated
decreased $20.0 million (5%) in 1995 primarily due to a 6% decline in the number
of contracts sold offset, in part, by a 4% increase in the average selling
price, generally reflecting the Company's strategy of realigning its sales mix
to include more financed contracts and somewhat fewer cash contracts, although
some promotions were offered with an emphasis on cash contracts. Management
believes that initial membership fees originated were also negatively impacted
by the general retail climate and increased competition. The average number of
fitness centers selling memberships decreased from 336 in 1994 to 332 in 1995,
reflecting the closure of 26 older, typically smaller facilities and the sale of
a fitness center to Entertainment offset, in part, by the opening of 13 new,
larger facilities over the two-year period.
Operating income for 1995 was $5.2 million compared to an operating loss of
$16.1 million in 1994. The improvement of $21.3 million was due to a $49.8
million (7%) reduction in operating costs and expenses offset, in part, by the
aforementioned decrease in revenues. Excluding the provision for doubtful
receivables, operating costs and expenses decreased $18.0 million (3%) in 1995
compared to 1994 primarily due to a reduction in fitness center operating
expenses. Fitness center operating expenses for 1995 decreased $10.6 million
(3%) from 1994 primarily due to a reduction in salaries and other variable costs
as a result of the continuing cost reduction program and, to a lesser extent,
reduced commissions as a result of the decline in initial membership fees
originated. In addition, member processing and collection center expenses
decreased $1.8 million (4%) primarily due to the aforementioned RSC
consolidation project.
The provision for doubtful receivables for 1995 was $72.1 million compared
to $103.9 million in 1994, a decrease of $31.8 million (31%). The reduction was
primarily due to additional reserves recorded in 1994 in conjunction with
management's reevaluation of collection risks associated with financed sales and
due to the improving collection experience of installment contracts receivable,
primarily the reduction in first payment defaults and an increase in EFT
contracts within the receivables portfolio.
Interest expense, net of capitalized interest, was $43.8 million in 1995
compared to $38.6 million in 1994, an increase of $5.2 million (13%) principally
reflecting a higher average level of debt offset, in part, by lower average
interest rates.
Pursuant to a tax sharing agreement with Entertainment, the effective rates
of the income tax benefit for 1995 and 1994 were lower than the U.S. statutory
tax rate (35%) due principally to operating losses without a current year tax
benefit and non-deductible amortization of costs in excess of acquired assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company intends to expand and upgrade its facilities in order to
increase its membership base and more effectively capitalize on its streamlined
marketing and administrative functions. In August 1997, the Company completed a
public offering of 8,000,000 shares of its common stock, which provided net
proceeds of $88.4 million. The Company has used or intends to use the proceeds
of the Stock Offering as follows: (i) approximately $25 million to $30 million
over the next three years for capital expenditures to open 20 to 30 new
facilities, (ii) approximately $10 million over the next two years to
extensively refurbish and make major upgrades to approximately 25% of its clubs,
which include converting low-usage pools and racquet areas into expanded
exercise areas and to a lesser extent retail and outpatient rehabilitation
service areas, adding and upgrading exercise equipment, and refreshing interior
and exterior finishes to improve club ambience, among others, (iii) $7.5 million
to repay a loan from an affiliate of an underwriter of the Stock Offering, (iv)
as much as $3 million to support the introduction of new initiatives and (v) the
balance for general corporate and working capital purposes. Pending such uses,
the Company has temporarily invested available funds from the Stock Offering in
short-term securities and eliminated indebtedness under its prior revolving
credit agreement. In addition, using cash generated by operations and through
leasing arrangements, management plans to make capital expenditures of
approximately $10 million to $12 million over the next twelve months to maintain
and make minor upgrades to the Company's existing facilities, which include
exercise equipment upgrades, HVAC
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and other operating equipment upgrades and replacements, and locker room and
workout area refurbishments, among others.
Prior to the Stock Offering, the Company was dependent on availability
under its prior revolving credit agreement and its operations to provide for
cash needs. The Company has managed liquidity requirements in recent years by
utilizing membership plan discounting techniques designed to increase its cash
sales and downpayments and to accelerate collections and dues payments to
increase available cash reserves and, to a lesser extent, sales of non-strategic
assets and sale/leaseback arrangements. Management believes use of these
discounting techniques has had a negative impact on both current and long term
results, and that the proceeds provided by the Stock Offering have reduced the
need to continue the discounting techniques.
In October 1997, the Company completed the Refinancing which reduces
interest expense, extends debt maturities and improves financial flexibility.
The components of the Refinancing were (i) the Offering of $225 million
aggregate principal amount of the Old Notes, (ii) the consummation of the Tender
Offer with respect to the 13% Notes, and (iii) the application of the net
proceeds from the Offering to retire the 13% Notes. Pursuant to the Tender
Offer, in October 1997 the Company purchased $177.4 million aggregate principal
amount of the 13% Notes and the Indenture pursuant to which the 13% Notes were
issued was substantially amended. The Company has announced that in January
1998, it will redeem the remaining $22.6 million aggregate principal amount of
the 13% Notes not tendered in the Tender Offer at a price of 106.5% of the
principal amount, together with accrued and unpaid interest.
In addition to the Refinancing, in November 1997 the Company entered into
the three-year, $70 million Bank Credit Facility to replace its prior revolving
credit agreement. The $70 million available under the Bank Credit Facility is
reduced by any outstanding letters of credit, which cannot exceed $30 million.
At September 30, 1997, outstanding letters of credit totalled $9.8 million. The
Bank Credit Facility is secured by substantially all real and personal property
(excluding installment contracts receivable) of the Company.
The Company has no scheduled principal payments under the Notes until
October 2007 and the principal amount of the certificates under the
Securitization Facility remains fixed at $160 million through July 1999.
Accordingly, exclusive of the remaining 13% Notes which will be redeemed in
January 1998 using the remaining proceeds from the Offering, debt service
requirements (primarily interest) of the Company for the next twelve months are
approximately $45 million. Management believes that the Company will be able to
satisfy its debt service and capital expenditure requirements over the next
twelve months out of existing cash balances and cash flow from operations.
Management also believes that as a result of the Stock Offering, the Refinancing
and the Bank Credit Facility, the Company's liquidity and financial flexibility
have significantly improved.
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BUSINESS
The Company is the largest (and only nationwide) commercial operator of
fitness centers in the United States in terms of revenues, the number of
members, and the number and square footage of facilities. As of September 30,
1997, the Company operated approximately 320 fitness centers concentrated in
major metropolitan areas in 27 states and Canada and had approximately four
million members. During 1996, Bally's members made more than 100 million visits
to its fitness centers.
The Company offers its members value by providing access to
state-of-the-art fitness facilities with affordable membership programs. Bally's
fitness centers feature an outstanding selection of cardiovascular, conditioning
and strength equipment and offer extensive aerobic training programs. The
Company's new club prototype achieves efficiency by focusing on those fitness
services that receive a high degree of member use. Most of the Company's current
fitness centers include pools, racquet courts or other athletic facilities that
receive a lower degree of member use. The Company has clustered its fitness
centers in major metropolitan areas in order to achieve marketing and operating
efficiencies. These markets include, among others, New York, Los Angeles,
Chicago, Houston, Dallas, Detroit, Baltimore, Washington, D.C., Philadelphia,
Miami, Cleveland, Atlanta, Milwaukee, Seattle, Minneapolis, Orlando, Denver,
Phoenix, St. Louis, Boston and Kansas City. In 1996, the Company completed the
process of renaming its fitness centers so they all use the servicemark "Bally
Total Fitness", thereby enhancing brand identity, concentrating advertising and
eliminating the prior practice of using more than 25 different regional
servicemarks and trade names.
The Company's primary target market for new members is the 18 to 34-year
old, middle income segment of the population. Bally markets itself to this
consumer segment through the use of a variety of membership options and payment
plans. The membership options offered by the Company range from single-club
memberships to premium memberships which provide additional amenities and the
use of all of Bally's fitness centers nationwide. Similarly, the Company offers
a broad range of payment alternatives. Typically, members pay an initiation fee
which can either be financed (generally for 36 months and subject to downpayment
requirements) or paid-in-full at the time of joining. Members are also required
to pay monthly membership dues in order to use the Company's fitness facilities.
Management believes the various memberships and payment plans, in addition to
Bally's strong brand identity and the convenience of its multiple locations,
provide the Company distinct competitive advantages.
OPERATING STRATEGIES
In October 1996, Lee S. Hillman was named President and Chief Executive
Officer of the Company. This completed the transition of senior management of
the Company from predominantly marketing oriented managers, including the
original founders of the Company, to managers with more financial and
operational orientation. Until December 1996, a number of the Company's top
executives, including Mr. Hillman, also performed significant functions for
Entertainment, the owner of the Company until January 1996. Current management
intends to pursue a number of operating strategies, including the following,
which the Company believes will improve the results of its core business:
- Reduce Discount Pricing on Paid-In-Full Membership Plans -- Since late
1990, the Company has managed its pricing structure to generate immediate
cash for liquidity by significantly discounting its membership plans and
by emphasizing paid-in-full instead of financed membership plans.
Additional working capital provided by the Stock Offering will allow the
Company to sell more financed membership plans, which historically have
generated better long-term returns for the Company including streams of
recurring dues revenues, rather than selling discounted paid-in-full
memberships for which dues are frequently waived for up to three years.
- Upgrade and Expand Fitness Centers -- The Company intends to expand and
upgrade its facilities in order to increase its membership base and more
effectively capitalize on its streamlined marketing and administrative
functions. Management plans to make capital expenditures of approximately
$10 million to $12 million over the next twelve months to maintain and
make minor upgrades to the Company's existing facilities, which include
exercise equipment upgrades, HVAC and other operating equipment upgrades
and replacements, and locker room and workout area refurbishments, among
others. In addition, the Company intends to invest approximately $10
million of the net proceeds from the Stock Offering over the next two
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years to extensively refurbish and make major upgrades to approximately
25% of its clubs, which include converting low-usage pools and racquet
areas into expanded exercise areas and to a lesser extent retail and
outpatient rehabilitation service areas, adding and upgrading exercise
equipment, and refreshing interior and exterior finishes to improve club
ambience, among others. The Company also intends to spend approximately
$25 million to $30 million of the net proceeds from the Stock Offering
over the next three years to open 20 to 30 new facilities based on its
new prototype. These facilities are designed to cost less to construct
and maintain than the Company's older facilities. The facilities are
expected to range in size from 10,000 to 45,000 square feet and have the
capacity to accommodate significantly more members than older clubs of
the same size because the new facilities will contain only the most
widely used amenities.
- Increase Dues Revenues -- The Company believes that its dues are
substantially less than those charged by its competitors and that it can
significantly increase dues for its members who are beyond their initial
financing period without any material loss in membership.
- Improve Collections on Financed Contracts -- The Company plans to
continue its focus on increasing the downpayment on financed membership
plans and securing payment by EFT, which the Company's experience has
shown results in higher quality receivables. Further, the Company intends
to institute more focused collection efforts based on information
provided by "credit scoring", which management believes will also improve
the yield from the receivables portfolio.
- Continue Cost Reduction Policies -- The Company's operating costs and
expenses for 1996 were more than $75 million lower than in 1994.
Management believes that other opportunities exist to cut additional
costs in the areas of administration, advertising and self-insured losses
incurred.
GROWTH OPPORTUNITIES
The Company currently generates substantially all of its revenues from the
sale of membership plans and the receipt of dues. Management believes that it
can increase and diversify its revenues by leveraging its strong brand identity,
extensive distribution infrastructure (approximately 320 facilities),
significant member base (approximately four million members) and frequency of
visitation (in excess of 100 million visits in 1996) by offering a number of
ancillary products and services. In order to pursue these growth opportunities,
the Company plans to:
- Sell Nutritional Products -- The Company has successfully concluded test
marketing certain nutritional products, predominantly vitamins and weight
control supplements, and is launching the sale of these products to
members through its fitness centers and telemarketing.
- Provide Outpatient Rehabilitation Services -- The Company plans to
contract with providers of health care programs and services whereby
certain of the Company's existing facilities will also be used for
comprehensive outpatient rehabilitation services. The Company believes it
has opportunities with a number of third party providers and managers of
health care programs and services to provide similar outpatient
rehabilitation services in additional fitness centers, and expects to
offer these services within three years to members and nonmembers alike
in up to 100 of its facilities primarily using equipment already on-hand.
Among others, the Company has recently contracted with Continucare
Corporation to provide such services in certain, initially four, of the
Company's fitness centers. The Company plans to spend approximately $1
million of the net proceeds from the Stock Offering to upgrade an initial
group of its facilities to provide rehabilitation services.
- Offer Other Goods and Services -- The Company plans to sell work-out and
related apparel and market certain financial services and direct
marketing programs provided by third parties to its members such as a
co-branded credit card, credit life insurance, dining clubs and ATMs in
its clubs through in-club sales efforts and direct marketing programs.
The Company has entered into agreements with various entities to test
market the provision by third parties of financial services to its members
including the sale of credit life insurance, pursuant to which a participant's
unpaid credit card debts are paid-off if the participant dies. The programs are
typically designed such that the Company shares in either the revenue generated
by or net profit resulting from members purchasing the offered services. Test
marketing and, ultimately, the provision of services of this type by third
parties to the Company's members do not require significant capital expenditures
by the Company. Consequently, the Company expects to explore the sale of other
similar or complementary services and expects to make those products that are
most successful available to all of its members.
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MEMBERSHIP PLANS
The Company currently offers prospective members a number of membership
plans that differ primarily by the inclusion of additional in-club services
(such as racquet sports and child care) and access to other fitness centers
operated by the Company, either locally or nationally. From time to time, the
Company also offers special membership plans which limit access to fitness
centers to certain days and non-peak hours. The initial membership fees for
access to the Company's fitness center facilities range from approximately $399
to $1,179 depending on the membership plan selected, the diversity of facilities
and services available at the club of enrollment, the local competitive
environment, as well as the effects of seasonal promotional strategies.
In addition to the one-time initial membership fee, members pay monthly
membership dues in order to maintain their membership privileges. Monthly dues
for memberships generally range from $4.00 to $5.50 during the typical financing
period for a membership plan and vary based on the type of plan purchased by the
member. Some seasonal promotional programs offered by the Company in the past
have required no dues payments for up to 36 months if the member pays the
initiation fee in full at the time of joining. Renewal dues (those paid after
the typical 36 month initial period ends) generally range from as little as
$2.00 to as much as $25.00 per month, with increases as contractually permitted.
At September 30, 1997, approximately 90% of the Company's members were being
charged dues ranging from $2.00 to $15.00 per month, with the overall average
$7.71 per month. The Company has experienced an annual growth rate of dues
revenues of 7% from 1992 to 1996. The Company expects the annual increases in
dues revenues will continue in the future due to the contractual terms of
current membership plans and the Company's belief that it can significantly
increase dues for its members who are beyond their initial financing period
without any material loss in membership. The Company also offers renewal dues
that vary depending on the member's historical usage of the fitness center
facilities. The Company's recent experience has shown that members faced with a
membership renewal decision for the first time renewed at a rate of
approximately 58% and members faced with a membership renewal decision for
subsequent periods renewed at a rate of approximately 84%.
Members selecting finance membership plans can choose from several payment
mechanisms and downpayment options. The Company expects to continue its focus on
increasing the downpayment it receives on financed membership contracts and on
securing payment by EFT. The Company believes that both these strategies result
in better quality receivables. Further, the Company intends to modify its
collection efforts, based on the information provided by "credit scoring", which
management believes will also improve the yield from the receivables portfolio.
See "-- Account Servicing".
FINANCING OF INITIAL MEMBERSHIP FEE
Financed portions of initial membership fees may be prepaid without penalty
at any time during the financing term. Generally, financing terms of 36 months
are offered. Shorter terms are offered on a promotional basis or as required by
applicable state law. Contracts are financed at a fixed annual percentage rate
(generally between 16% and 18%, except as otherwise limited by applicable state
retail installment laws). Management expects that approximately 80% to 85% of
all new membership contracts originated during 1997 will be financed.
The Company offers two payment methods for financed portions of initial
membership fees: coupon books and EFT. EFT plans are the most popular mechanism
for payment of the financed portion of initial membership fees. Under an EFT
plan, on the same date each month a predetermined amount is either (i)
automatically transferred from a member's bank checking or savings account to
the Company, or (ii) automatically charged to a member's designated credit card.
Currently, more than 60% of all financed memberships sold are paid by EFT. The
other mechanism for payment financing is the use of a coupon book. This
mechanism requires the member to mail a check monthly, accompanied by a payment
coupon, to the RSC responsible for administering the membership account. Members
have the option of changing their payment method.
On average, the Company received a downpayment of approximately $75 on
contracts that were financed during 1996. This downpayment adequately defrays
both the initial account set-up cost as well as any collection costs should the
account become immediately delinquent. As a result, the Company is able to
attract new members who might otherwise be rejected while covering the
incremental cost of new membership processing and collection through the
downpayment. The Company does not perform individual credit checks on
prospective
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<PAGE> 42
members. This is due, in part, to the high cost associated with performing
credit checks on the large volume of prospective members, but also due to the
Company's ability, from past performance, to measure the average value of
contracts between coupon book and EFT payers and satisfactorily manage credit
risk. Historical analysis performed by the Company indicates that the collection
experience of EFT accounts is approximately 50% better than that of coupon book
accounts. As of September 30, 1997, approximately 56% of membership contract
receivables consisted of EFT-financed memberships compared to 29% at December
31, 1992, when emphasis on payments by EFT was introduced by management.
FITNESS CENTERS
Most of the Company's fitness centers are located near regional, urban and
suburban shopping areas and in downtown areas of major cities and are generally
operated under long-term leases. Fitness centers vary in size, available
facilities and types of services provided. Fitness centers contain a wide
variety of state-of-the-art progressive resistance, cardiovascular and
conditioning exercise equipment as well as free weights. A member's use of a
fitness center may include planned exercise programs and instruction stressing
cardiovascular conditioning, strength development and improved appearance. The
Company also has a comprehensive training program for its service personnel on
the use of exercise equipment.
Generally, the Company's fitness centers constructed prior to 1980 are
smaller in size and have fewer amenities than the fitness centers constructed in
the 1980's which average 35,000 square feet and generally include a colorful
workout area, sauna and steam facilities, a lap pool, free-weight rooms, aerobic
exercise rooms, an indoor jogging track and, in some cases, racquetball courts.
The Company's prototype fitness center focuses on those fitness services that
the Company's members most frequently use rather than on a broader range of
fitness services that generally receive a lower degree of member use such as
pools, racquet courts or other athletic facilities. These "dry" clubs, which
tend to be approximately 20,000 to 30,000 square feet, have recently averaged
approximately $800,000 to construct, exclusive of real estate and exercise
equipment costs and net of any landlord contribution. The Company invests
approximately $500,000 for exercise equipment for a typical new fitness center.
The Company intends to expand and upgrade its facilities in order to
increase its membership base and more effectively capitalize on its streamlined
marketing and administrative functions. Management plans to make capital
expenditures of approximately $10 million to $12 million over the next twelve
months to maintain and make minor upgrades to the Company's existing facilities,
which include exercise equipment upgrades, HVAC and other operating equipment
upgrades and replacements, and locker room and workout area refurbishments,
among others. In addition, the Company expects to invest approximately $10
million of the proceeds from the Stock Offering over the next two years to more
extensively refurbish and make major upgrades to approximately 25% of its clubs,
which include converting low-usage pools and racquet areas into expanded
exercise areas and to a lesser extent retail and outpatient rehabilitation
service areas, adding and upgrading exercise equipment, and refreshing interior
and exterior finishes to improve club ambience, among others. For the last
several years, the Company has spent $6 million to $15 million annually, as
funds were available, to open new or replacement facilities. The Company also
intends to spend approximately $25 million to $30 million of the proceeds from
the Stock Offering over the next three years to open 20 to 30 new facilities
based on its new prototype. These facilities are designed to cost less to
construct and maintain than the Company's older facilities. The facilities are
expected to range in size from 10,000 to 45,000 square feet and have the
capacity to accommodate significantly more members than older clubs of the same
size because they will contain only the most widely used amenities. At December
31, 1996, the Company had 35 of the new prototype facilities in operation, of
which 30 had been in operation for at least one year. The average 1996 net
revenues in excess of operating costs excluding depreciation and amortization
for these 30 facilities was approximately $900,000 compared to the average 1996
results for all of the Company's other fitness facilities of approximately
$650,000.
The Company recently entered into an agreement pursuant to which three
fitness centers in Syracuse, New York, including one facility previously owned
by the Company, are operated by a third party under the service mark "Bally
Total Fitness". The Company plans to seek additional franchise relationships for
facilities located in smaller markets.
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<PAGE> 43
SALES AND MARKETING
The Company devotes substantial resources to the marketing and promotion of
its fitness centers and their services because the Company believes strong
marketing support is critical to attracting new members both at existing and new
fitness centers. In 1996, the Company completed the process of renaming its
fitness centers so they all use the servicemark "Bally Total Fitness", thereby
enhancing brand identity, concentrating advertising and eliminating the prior
practice of using more than 25 different regional servicemarks and trade names.
The Company's strategy is to cluster numerous fitness centers in major
media markets in order to increase the efficiency of its marketing and
advertising programs. At September 30, 1997, the Company operated approximately
260 clubs in 26 of the top 30 U.S. media markets.
The Company expects to spend approximately $45 million for advertising and
promotion during 1997 compared to approximately $47 million in 1996, $50 million
in 1995 and $48 million in 1994. The Company primarily advertises on television,
and, to a lesser extent, newspapers, telephone directories, radio and other
promotional activities.
The Company's sales and marketing programs emphasize the benefits of
health, physical fitness and exercise by appealing to the public's desire to
look and feel better. The Company's advertisements are augmented by individual
sales presentations made by its sales personnel in the fitness centers.
Management believes the various memberships and payment plans, in addition to
Bally's strong brand identity and the convenience of its multiple locations,
provide the Company distinct competitive advantages.
The Company's marketing efforts also include corporate membership sales and
insurance-eligible programs which are designed to reduce workers' compensation
costs and improve productivity. In addition to its advertising, personal sales
presentations and targeted marketing efforts, the Company is increasingly
utilizing in-club marketing programs. Open houses and contests for members and
their guests foster member loyalty and introduce fitness centers to prospective
members. Referral incentive programs involve current members in the process of
new member enrollments.
Direct mail reminders encourage renewal of existing memberships. The
Company has a group of approximately 100 individuals located at the Towson,
Maryland RSC dedicated primarily to inbound telemarketing renewal programs to
existing members, although telemarketing is not currently used to attract
prospective new members.
ACCOUNT SERVICING
The Company administers and collects amounts owing under its membership
contracts according to uniform procedures implemented by its two RSCs. The RSCs
enable the Company to conduct centralized data processing of all membership
accounts. At September 30, 1997, the RSCs employed approximately 750 people in
the account processing and collection areas, including approximately 140
employees dedicated to customer service, approximately 330 employees dedicated
to account processing and administration and approximately 280 employees
dedicated to account collections. The two RSCs collectively receive, deposit and
post more than $550 million of membership transactions annually, including the
processing of downpayments and cash sales, and collections of financed
receivables and dues. In addition, the RSCs process, on average, 3,000 new
membership accounts per day. The RSCs are also responsible for responding to
member inquiries and maintaining membership data.
All collections for past-due accounts are handled internally by the RSCs.
The Company systematically collects accounts that are past due by utilizing a
series of computer-generated correspondence and telephone contacts.
Computer-generated correspondence is sent to a delinquent member at 7 and 20
days after an account becomes past due. Collectors with varying levels of
experience are responsible for handling delinquent accounts, depending on the
period of delinquency. At 30 and 60 days past due, the accounts are assigned to
power dialer assisted collectors initially as a reminder and later as a demand
for payment. Accounts that have not been collected for a 90-day period are
transferred to a group of the most experienced collectors (unless the first
scheduled payment has not been received on such accounts, in which case they are
generally written-off and any downpayment received is not refunded). All
remaining delinquent accounts are written-off after 180 days without
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payment. Written-off accounts are reported to credit reporting bureaus and sold
to a third-party collection group. The Company intends to modify its collection
efforts based on the information provided by "credit scoring", which management
believes will improve the yield from the receivables portfolio. For example, the
Company would not make costly collection calls to a member with a strong credit
history until late in the collection cycle. Likewise, the Company would
aggressively pursue collection tactics on a member with poor credit scoring
early in the delinquency period and reduce collection efforts if results were
not quickly realized. By tailoring its collection approach to reflect a
delinquent member's likeliness to pay, the Company believes it can collect more
of its receivables at a lower cost. The Company uses a national bureau which
charges the Company a nominal fee per credit score. Beginning in March 1997, the
Company has credit scored a majority of its financed members.
COMPETITION
The Company is the largest (and only nationwide) commercial operator of
fitness centers in the United States in terms of revenues, the number of members
and the number and square footage of facilities. The Company is the largest
operator, or among the largest operators, of fitness centers in every major
market in which it has fitness centers. The Company believes its fitness centers
generally offer a high level of amenities to its primary target market for new
members, the 18 to 34-year old, middle income segment of the population. Within
each market, the Company competes with other fitness centers, physical fitness
and recreational facilities established by local governments and hospitals and
by businesses for their employees, the YMCA and similar organizations and, to a
certain extent, with racquet and tennis and other athletic clubs, country clubs,
weight reducing salons and the home-use fitness equipment industry. However, the
Company believes that its operating experience, its ability to allocate
advertising and administration costs over all of its fitness centers, its
nationwide operations and its account processing and collection infrastructure
provide the Company distinct competitive advantages. There can be no assurance
that the Company will be able to compete effectively in the future in the
markets in which it operates.
The Company believes that competition has increased in certain markets. The
Company believes that this increase reflects the public's enthusiasm for fitness
and the decrease in the cost of entering the market due to financing available
from landlords and equipment manufacturers. The Company believes that its
membership plans are affordable and have the flexibility to be responsive to
economic conditions. However, the Company also competes with other entertainment
and retail businesses for the discretionary income of its target market.
When the Company embarks on its new initiatives, particularly the sale of
nutritional products and apparel, the Company will be competing against large,
established companies with more experience selling such products on a retail
basis and, in some instances, with substantially greater financial resources
than the Company. There can be no assurance that the Company will be able to
compete effectively against such established companies.
PROPERTIES
The Company operates approximately 320 fitness centers in 27 states and
Canada. The Company owns approximately 30 fitness centers and leases either the
land or the building or both for the remainder of its fitness centers. Aggregate
rent expense (including office and administrative space) was $65.5 million,
$86.7 million, $85.9 million and $83.3 million for the nine months ended
September 30, 1997 and the years ended December 31, 1996, 1995 and 1994,
respectively. Most leases require the Company to pay real estate taxes,
insurance, maintenance and, in the case of shopping center and office building
locations, common area maintenance fees. A limited number of leases also provide
for percentage rental based on receipts. Various leases also provide for rent
adjustments based on changes in the Consumer Price Index, most with limits
provided to protect the Company. Two fitness centers each accounted for between
1% to 2% of the Company's net revenues during 1996. The Company believes its
properties are adequate for its current membership.
Leases for fitness centers entered into in the last five years generally
provide for an original term of no less than 15 years and, in some cases, for 20
years. Most leases for fitness centers contain at least one five-year option to
renew and often two or more such options.
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The Company's executive offices are located in Chicago, Illinois where it
is co-tenant at a monthly base rental cost to the Company of $43,700. The lease
expires in January 2003. The Company also leases space in Huntington Beach,
California and Towson, Maryland for RSC operations.
TRADEMARKS AND TRADE NAMES
In 1996, the Company completed the process of renaming its fitness centers
so they all use the servicemark "Bally Total Fitness", thereby enhancing brand
identity, concentrating advertising and eliminating the prior practice of using
more than 25 different regional servicemarks or trade names. The name "Bally
Total Fitness" is a servicemark of Hilton as successor to Entertainment. In
January 1996, the Company and Entertainment entered into a 10-year trademark
license agreement to allow the Company to use certain marks, including the
"Bally Total Fitness" servicemark, in connection with its fitness center
business. The Company paid no royalty or license fee for the first year of the
license and now pays a fee of $1 million per year. Following the initial
ten-year term, the Company has the option to renew the license for an additional
five-year period at a rate equal to the greater of the fair market value or $1
million per year.
SEASONAL MEMBERSHIP FEE ORIGINATIONS
Historically, the Company has experienced greater membership fee
originations in the first quarter and lower membership fee originations in the
fourth quarter. Certain of the new initiatives the Company plans to undertake
may have the effect of further increasing the seasonality of the Company's
business.
EMPLOYEES
At September 30, 1997, the Company had approximately 13,700 employees,
including approximately 7,100 part-time employees. Approximately 12,650
employees are involved in club operations, including sales personnel,
instructors, supervisory or custodial personnel, approximately 750 are involved
in the operation of the RSCs and approximately 300 are administrative support
personnel, including accounting, legal, human resources, real estate and other
national services.
The Company is not a party to any collective bargaining agreement with its
employees. Although the Company experiences high turnover of non-management
personnel, the Company historically has not experienced difficulty in obtaining
adequate replacement personnel, except with respect to sales personnel, which
the Company believes have become somewhat more difficult to replace due, in
part, to increased competition for skilled retail sales personnel.
GOVERNMENT REGULATION
The operations and business practices of the Company are subject to
regulation at federal, state and, in some cases, local levels. General rules and
regulations of the FTC, and of state and local consumer protection agencies,
apply to the Company's advertising, sales and other trade practices.
Statutes and regulations affecting the fitness industry have been enacted
or proposed in all of the states in which the Company conducts business.
Typically, these statutes and regulations prescribe certain forms and regulate
the terms and provisions of membership contracts, giving the member the right to
cancel the contract, in most cases, within three business days after signing,
requiring an escrow for funds received from pre-opening sales or the posting of
a bond or proof of financial responsibility and, in some cases, establishing
maximum prices and terms for membership contracts and limitations on the term of
contracts. In addition, the Company is subject to numerous other types of
federal and state regulations governing the sale, financing and collection of
memberships including, among others, the Truth-in-Lending Act and Regulation Z
adopted thereunder, as well as state laws governing the collection of debts.
These laws and regulations are subject to varying interpretations by a large
number of state and federal enforcement agencies and the courts. The Company
maintains internal review procedures in order to comply with these requirements
and it believes that its activities are in substantial compliance with all
applicable statutes, rules and decisions.
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Under so-called state "cooling-off" statutes, members of fitness centers
have the right to cancel their memberships for a period of three to ten days
after the date the contract was entered into (depending on the applicable state
law) and are entitled to refunds of any payment made. In addition, the Company's
membership contracts provide that a member may cancel his or her membership at
any time for qualified medical reasons or if the member relocates a certain
distance away from the health club, and a membership may be canceled in the
event of a member's death. The specific procedures for cancellation in these
circumstances vary according to differing state laws. In each instance, the
canceling member is entitled to a refund of prepaid amounts only. Furthermore,
where permitted by law, a cancellation fee is due to the Company upon
cancellation and the Company may offset such amount against any refunds owed.
The Company is a party to several state and federal consent orders. From
time to time, the Company makes minor adjustments in its operating procedures to
comply with such consent orders. The consent orders essentially require
continued compliance with applicable laws and require that the Company refrain
from activities that are not in compliance with applicable laws.
The provision of rehabilitation services is affected by federal, state and
local laws and regulations concerning the development and operation of physical
rehabilitation health programs, licensing, certification and reimbursement and
other matters, which may vary by jurisdiction and which are subject to periodic
revision. The opening of a rehabilitation facility may require approval from
state and/or local governments and re-licensure from time to time, both of which
may be subject to a number of conditions. In addition, a substantial number of
recipients of rehabilitation services have fees paid by governmental programs as
well as private third-party payors. Governmental reimbursement programs
(including Medicare and Medicaid) generally require facilities and services to
meet certain standards promulgated by the federal and/or state government.
Additionally, reimbursement levels by governmental and private third-party
payors are subject to change which could limit or reduce reimbursement levels
and could have a material adverse effect on the demand for rehabilitation
services. Further, in a number of states and in certain circumstances pursuant
to federal law, the referral of patients to rehabilitation services is subject
to limitations imposed by law, the violation of which may, in certain
circumstances, constitute a felony. Recently, federal and state governments have
focused significant attention on health care reform and cost control. These
proposals include cut-backs to Medicare and Medicaid programs. It is uncertain
at this time what legislation and health care reform may ultimately be enacted
or whether other changes in the administration or interpretation of government
health care programs will occur. There can be no assurance that future health
care legislation or other changes in the administration or interpretation of
government health care programs will not have a material adverse effect on the
provision of rehabilitation services by the Company.
LEGAL PROCEEDINGS
A class action entitled Jackson v. Health & Tennis Corporation of America
was filed in the state district court in Bexar County, Texas on May 8, 1995. The
complaint alleges that the defendant, a subsidiary of the Company, charged
excessive amounts on its financed memberships in violation of the Texas Credit
Code and the Texas Deceptive Trade Practices -- Consumer Protection Act. A
purported class action entitled Vasquez et al. v. Bally Total Fitness
Corporation, d/b/a Bally's, was filed in state district court in Bexar County,
Texas on September 18, 1997. The complaint alleges that the defendant, a
subsidiary of the Company, charged excessive amounts on its finance memberships
in violation of the Texas Credit Code, the Federal Truth-in-Lending Act and
Federal Reserve Board regulations. The relief sought in both cases is damages
equal to the alleged overpayments and statutory remedies. The Company is
currently unable to estimate the amount sought in these actions because the
potential size of each class and the amount of damages for each member of the
putative classes are currently unknown. The Company is vigorously defending
these actions. The outcome of this litigation is not currently determinable and,
consequently, the Company cannot predict whether it will have a material adverse
effect on the Company's financial condition or results of operations in any
future period.
The Company is involved in various other claims and lawsuits incidental to
its business, including claims arising from accidents at its fitness centers. In
the opinion of management, the Company is adequately insured against such claims
and lawsuits, and any ultimate liability arising out of such claims and lawsuits
will not have a material adverse effect on the financial condition or results of
operations of the Company.
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MANAGEMENT
The following table sets forth certain information concerning the Company's
directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH COMPANY
---------------------------- --- ---------------------------------------------
<S> <C> <C>
Arthur M. Goldberg 55 Chairman of the Board
Lee S. Hillman 42 President, Chief Executive Officer and
Director
John W. Dwyer 45 Executive Vice President, Chief Financial
Officer and Treasurer
William G. Fanelli 35 Senior Vice President, Operations
Cary A. Gaan 51 Senior Vice President, Secretary and
General Counsel
Harold Morgan 41 Senior Vice President, Human Resources
John H. Wildman 38 Senior Vice President, Sales and Marketing
Geoffrey M. Scheitlin 39 Vice President and Controller
Aubrey C. Lewis 62 Director
J. Kenneth Looloian 75 Director
James F. Mc Anally, M.D. 48 Director
Liza M. Walsh 39 Director
</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,
Treasurer of the Company in October 1996 and Executive Vice President of the
Company in November 1997. Mr. Dwyer was Corporate Controller of Entertainment
between June 1992 and December 1996 and a Vice President of Entertainment
between December 1992 and December 1996. From October 1986 to June 1992, Mr.
Dwyer was a partner with the accounting firm of Ernst & Young LLP.
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<PAGE> 48
William G. Fanelli was elected Senior Vice President, Operations of the
Company in November 1997 and was Vice President, Strategic Operations of the
Company from November 1996 to November 1997. Mr. Fanelli was Director, Business
Development of Entertainment from October 1993 to November 1996 and, for
approximately nine years prior to October 1993, was employed by the accounting
firm of Ernst & Young LLP.
Cary A. Gaan was elected Senior Vice President and General Counsel of the
Company in January 1991 and Secretary of the Company in April 1996. Mr. Gaan
served as a Vice President of the Company from 1987 to 1991.
Harold Morgan has been employed by the Company since August 1991 and he was
elected a Vice President of the Company in January 1992 and Senior Vice
President, Human Resources of the Company in September 1995. Mr. Morgan was Vice
President, Human Resources of Entertainment between December 1992 and December
1996. From 1985 until August 1991, Mr. Morgan was Director of Employee and Labor
Relations of the Hyatt Corporation.
John H. Wildman was elected Senior Vice President, Sales and Marketing of
the Company in November 1996 and Vice President, Sales and Marketing of the
Company in September 1995. For approximately four years prior thereto, Mr.
Wildman was a Senior Area Director of the Company.
Geoffrey M. Scheitlin was elected Vice President and Controller of the
Company in November 1997 and was Assistant Treasurer of the Company from July
1988 to November 1997.
Aubrey C. Lewis was elected a director of the Company in December 1995. Mr.
Lewis has been a Vice President of Woolworth Corporation (a global retailer)
since 1967. Mr. Lewis also serves on the Boards of Directors of the United
States Naval Academy Foundation, the University of Notre Dame, the Port
Authority of New York and New Jersey, the New Jersey State Chamber of Commerce
and the Y.M.C.A. of Chinatown in New York City.
J. Kenneth Looloian was elected a director of the Company in December 1995.
Mr. Looloian is an Executive Vice President of Di Giorgio Corporation, a former
partner in Arveron Investments L.P. and a former Executive Vice President of
International Controls Corporation. Mr. Looloian is also a director of Bally's
Grand, Inc.
James F. Mc Anally, M.D. was elected a director of the Company in December
1995. Dr. Mc Anally is a private practitioner who specializes in hypertension
and kidney disease. He has been in private practice since 1980. Dr. Mc Anally
has been the Medical Director of Nephrology Services at Elizabeth General
Medical Center in Elizabeth, New Jersey since 1984. Dr. Mc Anally has also been
Chief of Nephrology at St. Elizabeth's Hospital in Elizabeth, New Jersey since
1981.
Liza M. Walsh was elected a director of the Company in December 1995. Ms.
Walsh has been an attorney at the law firm of Connell, Foley & Geiser since
1986, was named a partner of the firm in 1992 and concentrates in commercial
litigation. Ms. Walsh has also served as an Arbitrator for the United States
District Court for the District of New Jersey since 1990.
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DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
BANK CREDIT FACILITY
In November 1997, the Company entered into the three-year, $70 million Bank
Credit Facility to replace its prior revolving credit agreement. The $70 million
available under the Bank Credit Facility is reduced by any outstanding letters
of credit, which cannot exceed $30 million. At September 30, 1997, outstanding
letters of credit totalled $9.8 million. Initially, the Bank Credit Facility
provides for a rate of interest on borrowings at the Company's option, based
upon either the agent bank's prime rate plus 2% or a Eurodollar rate plus 3%. A
fee of 2.25% on outstanding letters of credit is payable quarterly. A commitment
fee of one-half of 1% is payable quarterly on the unused portion of the Bank
Credit Facility. The Bank Credit Facility is secured by substantially all real
and personal property (excluding installment contracts receivable) of the
Company.
SECURITIZATION FACILITY
In December 1996, the Company completed a private placement of asset-backed
securities pursuant to which $145.5 million of 8.43% Accounts Receivable Trust
Certificates and $14.5 million of Floating Rate Accounts Receivable Trust
Certificates (the "Floating Certificates") were issued as undivided interests in
the Trust. The Floating Certificates bear interest (8.22% at August 31, 1997) at
2.57% above the London Interbank Offer Rate ("LIBOR"), with the interest rate on
the Floating Certificates capped at 9.43% pursuant to an interest rate cap
agreement. The Trust was created for the issuance of asset-backed securities and
was formed pursuant to a pooling and servicing agreement. The Trust includes a
portfolio of substantially all of the Company's installment contracts receivable
from membership sales and the proceeds thereof. The amount by which installment
contracts receivable in the Trust exceed the $160 million principal amount of
certificates issued by the Trust is generally retained by the Company. The
Company services the installment contracts receivable held by the Trust and
earns a servicing fee which approximates the servicing costs incurred by the
Company. Through July 1999, the principal amount of the certificates remains
fixed and collections of installment contracts receivable flow through to the
Company in exchange for the securitization of additional installment contracts
receivable, except that collections are first used to fund interest
requirements. The amortization period commences in August 1999, after which
collections of installment contracts receivable will be used first to fund
interest requirements and then to repay principal on the certificates. The
amortization period ends upon the earlier to occur of the certificates being
repaid in full or August 2002.
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<PAGE> 50
DESCRIPTION OF THE NEW NOTES
The New Notes offered hereby will be issued under the Indenture dated as of
October 7, 1997 between the Company and First Trust National Association, as
Trustee, a copy of which will be made available to Eligible Holders upon request
to the Company.
Upon the effectiveness of the Registration Statement (as hereinafter
defined) of which this Prospectus is a part, the Indenture will be subject to
and governed by the Trust Indenture Act. The following summaries of the material
provisions of the Indenture do not purport to be complete, and where reference
is made to particular provisions of the Indenture, such provisions, including
the definitions of certain terms, are qualified in their entirety by reference
to all of the provisions of the Indenture and those terms made a part of the
Indenture by the Trust Indenture Act. For definitions of certain capitalized
terms used in the following summary, see "-- Certain Definitions".
GENERAL
The New Notes will mature on October 15, 2007, will be limited to
$225,000,000 aggregate principal amount and will be unsecured senior
subordinated obligations of the Company. Each New Note will bear interest at
9 7/8% per annum from the date of exchange or from the most recent interest
payment date to which interest has been paid on the Old Note which was
exchanged, payable semiannually on April 15 and October 15 in each year,
commencing April 15, 1998, to the Person in whose name the New Note (or any
predecessor Note) is registered at the close of business on the April 1 or
October 1 immediately preceding such interest payment date. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the New Notes will be
payable, and the New Notes will be exchangeable and transferable, at the office
or agency of the Company in The City of New York maintained for such purposes
(which initially will be the corporate trust office of the Trustee); provided,
however, that payment of interest may be made at the option of the Company by
check mailed to the Person entitled thereto as shown on the security register.
The New Notes will be issued only in fully registered form without coupons, in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer, exchange or redemption of New
Notes, except in certain circumstances for any tax or other governmental charge
that may be imposed in connection therewith.
Settlement for the New Notes will be made in same day funds. All payments
of principal and interest will be made by the Company in same day funds. The New
Notes will trade in the Same Day Funds Settlement System of The Depository Trust
Company (the "Depositary" or "DTC") until maturity, and secondary market trading
activity for the New Notes will therefore settle in same day funds.
When issued, the New Notes will be new securities for which there is no
established trading market. There can be no assurance as to the development or
liquidity of any market for the New Notes. See "Risk Factors -- Absence of
Public Market for the New Notes".
The New Notes will not be entitled to the benefits of any sinking fund.
CERTAIN DIFFERENCES BETWEEN NEW NOTES AND OLD NOTES
Old Notes which remain outstanding after the consummation of the Exchange
Offer will have substantially similar terms to those of the New Notes. However,
following the consummation of the Exchange Offer, Old Notes which are not
validly tendered and accepted by the Company in the Exchange Offer will continue
to be subject to the same transfer restrictions currently applicable to the Old
Notes. In addition, the Company is required, at its cost, to file with the SEC,
and use its best efforts to cause to be declared effective as promptly as
practicable but in no event later than February 4, 1998 (or, in the case of a
request by the Initial Purchasers, within 30 days of such request), a Shelf
Registration Statement with respect to the Old Notes solely for the benefit of
Eligible Holders in the event that (i) any changes in law, rules or regulations
of the SEC or applicable interpretations thereof by the SEC Staff do not permit
the Company to effect the Exchange Offer, (ii) the Registration Statement is not
declared effective by January 5, 1998 or the Exchange Offer is not consummated
by February 4, 1998, (iii) upon the request of the Initial Purchasers acquiring
a majority of the initial aggregate
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<PAGE> 51
principal amount of the Old Notes with respect to any Registrable Securities
acquired directly from the Company and, with respect to other Registrable
Securities held by them, if such Initial Purchasers are not permitted, in the
reasonable opinion of counsel, to participate in the Exchange Offer or otherwise
receive fully tradeable New Notes, or (iv) if a holder of Old Notes is not
legally permitted to participate in the Exchange Offer based upon advice of
counsel to that effect or does not receive fully tradeable New Notes pursuant to
the Exchange Offer, subject to reasonable verification by the Company. Subject
to certain exceptions, the Company will use its best efforts to keep the Shelf
Registration Statement continuously effective for two years (or one year in the
case of a request by the Initial Purchasers), or such shorter period terminating
when all such Old Notes have been sold pursuant to the Shelf Registration
Statement or cease to be outstanding or otherwise to be Registrable Securities.
In the event that a Shelf Registration Statement, if required, is not declared
effective on or prior to February 4, 1998 (or, if required to be filed pursuant
to a request of the Initial Purchasers, 30 days after such request), the
interest rate borne by the Old Notes not exchanged in the Exchange Offer shall
be increased by one-quarter of one percent (0.25%) per annum, which rate (as
increased aforesaid) will increase by an additional one-quarter of one percent
(0.25%) each 90-day period that such additional interest continues to accrue
under such circumstance, with an aggregate maximum increase in the interest rate
equal to one percent (1%) per annum. Following the cure of such Registration
Default, the accrual of additional interest will cease and the interest rate on
such Old Notes will revert to 9 7/8%.
OPTIONAL REDEMPTION
The New Notes will be subject to redemption at any time on or after October
15, 2002, at the option of the Company, in whole or in part, on not less than 30
nor more than 60 days' prior notice in amounts of $1,000 or any integral
multiple thereof at the following redemption prices (expressed as percentages of
the principal amount), if redeemed during the 12-month period beginning on
October 15 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
--------------------------------------------------------- ----------
<S> <C>
2002..................................................... 104.938%
2003..................................................... 103.292%
2004..................................................... 101.646%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the redemption date (subject to the
rights of holders of record on the relevant record dates to receive interest due
on an interest payment date).
In addition, at any time on or prior to October 15, 2000, the Company may,
at its option, use the net proceeds of one or more Public Equity Offerings to
redeem up to an aggregate of 35% of the aggregate principal amount of Notes
originally issued at a redemption price equal to 109 7/8% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the redemption date; provided that at least $146.3 million aggregate principal
amount of Notes remains outstanding immediately after giving effect to such
redemption. In order to effect the foregoing redemption, the Company must mail a
notice of redemption no later than 60 days after the related closing of the
Public Equity Offering and must consummate such redemption within 90 days of the
closing of the Public Equity Offering.
If less than all of the Notes are to be redeemed, the Trustee shall select
the Notes or portions thereof to be redeemed pro rata, by lot or by any other
method the Trustee shall deem fair and reasonable.
PURCHASE OF NOTES UPON A CHANGE OF CONTROL
If a Change of Control shall occur at any time, then each holder of Notes
shall have the right to require the Company to repurchase all or a portion of
such holder's Notes, in integral multiples of $1,000, at a purchase price (the
"Change of Control Purchase Price") in cash in an amount equal to 101% of the
principal amount of such Notes, together with accrued and unpaid interest (if
any) to the date of purchase (the "Change of Control Purchase Date"), pursuant
to the offer described below (a "Change of Control Offer") and in accordance
with the other procedures set forth in the Indenture.
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<PAGE> 52
Within 30 days of any Change of Control, the Company shall notify the
Trustee thereof and give written notice of such Change of Control to each holder
of Notes, by first-class mail, postage prepaid, at his, her or its address
appearing in the security register, stating, among other things, that a Change
of Control has occurred and the date of such event, the circumstances and
relevant facts regarding such Change of Control (including, if applicable,
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change of Control); the purchase
price and the purchase date which shall be fixed by the Company on a business
day no earlier than 30 days nor later than 60 days from the date such notice is
first mailed to the holders of the Notes, or such later date as is necessary to
comply with requirements under the Exchange Act; that any Note not tendered will
continue to accrue interest; that, unless the Company defaults in the payment of
the Change of Control Purchase Price, any Notes accepted for payment pursuant to
the Change of Control Offer shall cease to accrue interest after the Change of
Control Purchase Date; and certain other procedures that a holder of Notes must
follow to accept a Change of Control Offer or to withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be tendered by holders of the
Notes seeking to accept the Change of Control Offer. See "-- Ranking". The
failure of the Company to make or consummate the Change of Control Offer or pay
the Change of Control Purchase Price when due will give the Trustee and the
holders of the Notes the rights described under "-- Events of Default".
The term "all or substantially all" as used in the definition of "Change of
Control" has not been interpreted under New York law (which is the governing law
of the Indenture) to represent a specific quantitative test. As a consequence,
in the event the holders of the Notes elected to exercise their rights under the
Indenture with respect to a Change of Control involving (or asserted to involve)
the transfer or lease of all or substantially all of the Company's assets (as
described in clause (iii) of such definition) and the Company elected to contest
such election, there could be no assurance as to how a court interpreting New
York law would interpret such term.
The existence of a holder's right to require the Company to repurchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction which constitutes a Change of Control.
In addition to the obligations of the Company under the Indenture with
respect to the Notes in the event of a "Change of Control", the Bank Credit
Facility also contains an event of default upon a "Change of Control" clause as
defined therein which obligates the Company to repay amounts outstanding under
the Bank Credit Facility upon an acceleration of the indebtedness issued
thereunder. See "Description of Certain Other Indebtedness".
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with a Change of Control Offer.
RANKING
The payment of the principal of, premium (if any) and interest on the New
Notes or other obligations under the Indenture will be subordinated, as set
forth in the Indenture, in right of payment to the prior payment in full in cash
or Cash Equivalents or, as acceptable to the holders of Senior Indebtedness, in
any other manner, of all Senior Indebtedness. The New Notes will be senior
subordinated indebtedness of the Company, ranking pari passu in right of payment
with all other existing and future senior subordinated indebtedness of the
Company and senior to all existing and future Subordinated Indebtedness of the
Company. The New Notes will rank pari passu in right of payment with the Old
Notes.
Upon the occurrence of any default in the payment of any Designated Senior
Indebtedness beyond any applicable grace period, no payment (other than payments
previously made pursuant to the provisions described under "-- Defeasance or
Covenant Defeasance of Indenture" or "-- Satisfaction and Discharge") or
distribution of any assets of the Company or any Subsidiary of any kind or
character (excluding certain permitted equity interests or subordinated
securities) may be made on account of the principal of, premium (if any) or
interest on, the Notes or other obligations under the Indenture unless and until
such default shall have been cured or waived or shall have ceased to exist or
such Designated Senior Indebtedness shall have been discharged or paid in full
in
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<PAGE> 53
cash or Cash Equivalents or, as acceptable to the holders of Senior
Indebtedness, in any other manner, after which the Company shall resume making
any and all required payments in respect of the Notes, including any missed
payments.
Upon the occurrence and during the continuance of any non-payment default
with respect to any Designated Senior Indebtedness pursuant to which the
maturity thereof may then be accelerated immediately (a "Non-payment Default")
and after the receipt by the Trustee and the Company from a representative of
holders of any Designated Senior Indebtedness (collectively, a "Senior
Representative") of written notice of such Non-payment Default, no payment
(other than payments previously made pursuant to the provisions described under
"-- Defeasance or Covenant Defeasance of Indenture" or "-- Satisfaction and
Discharge") or distribution of any assets of the Company of any kind or
character (excluding certain permitted equity interests or subordinated
securities) may be made by the Company or any Subsidiary on account of the
principal of, premium (if any) or interests on the Notes or other obligations
under the Indenture or on account of the purchase, redemption, defeasance or
other acquisition of or in respect of, the Notes or other obligations under the
Indenture for the period specified below (the "Payment Blockage Period").
A Payment Blockage Period shall commence upon the receipt of notice of the
Non-payment Default by the Trustee and the Company from a Senior Representative
and shall end on the earliest of (i) the 179th day after such commencement, (ii)
the date on which such Non-payment Default (and all Non-payment Defaults as to
which notice is also given after such Payment Blockage Period is initiated) is
cured, waived or ceases to exist or on which such Designated Senior Indebtedness
is discharged or paid in full in cash or cash equivalents or, as acceptable to
the holders of Senior Indebtedness, in any other manner, or (iii) the date on
which such Payment Blockage Period shall have been terminated by written notice
to the Company or the Trustee from the Senior Representative initiating such
Payment Blockage Period, after which, in the case of each of clauses (i), (ii)
and (iii), the Company will promptly resume making any and all required payments
in respect of the Notes, including any missed payments. In no event will a
Payment Blockage Period extend beyond 179 days from the date of the receipt by
the Company and the Trustee of the notice initiating such Payment Blockage
Period (such 179-day period referred to as the "Initial Period"). Any number of
notices of Non-payment Defaults may be given during the Initial Period; provided
that during any period of 365 consecutive days only one Payment Blockage Period,
during which payment of principal of, premium, if any, or interest on, the Notes
may not be made, may commence and the duration of such period may not exceed 179
days. No Non-payment Default with respect to any Designated Senior Indebtedness
that existed or was continuing on the date of the commencement of any Payment
Blockage Period, will be, or can be, made the basis for the commencement of a
second Payment Blockage Period, whether or not within a period of 365
consecutive days, unless such default has been cured or waived for a period of
not less than 90 consecutive days.
If the Company fails to make any payment on the Notes when due or within
any applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of Default
under the Indenture and would enable the holders of the Notes to accelerate the
maturity thereof. See "-- Events of Default".
The Indenture will provide that in the event of any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or other winding up of the Company, whether voluntary or involuntary, or whether
or not involving insolvency or bankruptcy, or any assignment for the benefit of
creditors or any other marshaling of assets or liabilities of the Company, all
Senior Indebtedness must be paid in full before any payment or distribution
(excluding distributions of certain permitted equity interest or subordinated
securities) is made on account of the principal of, premium (if any) or interest
on the Notes or other obligations under the Indenture or on account of the
purchase, redemption, defeasance or other acquisition of, or in respect of, the
Notes (other than payments previously made pursuant to the provisions described
under "-- Defeasance or Covenant Defeasance of Indenture").
By reason of such subordination, in the event of liquidation or insolvency
of the Company, creditors of the Company who are holders of Senior Indebtedness
may recover more, ratably, than the holders of the Notes, and funds which would
be otherwise payable to the holders of the Notes will be paid to the holders of
the Senior
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<PAGE> 54
Indebtedness to the extent necessary to pay the Senior Indebtedness in full, and
the Company may be unable to meet its obligations fully with respect to the
Notes.
"Senior Indebtedness" under the Indenture means the principal of, premium
(if any) and interest (including interest accruing after the filing of a
petition initiating any proceeding under any state, federal or foreign
bankruptcy law whether or not allowable as a claim in such proceeding) and all
other monetary obligations on any Indebtedness of the Company (other than as
otherwise provided in this definition), whether outstanding on the date of the
Indenture or thereafter created, incurred or assumed, and whether at any time
owing, actually or contingently, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Notes. Without limiting the generality
of the foregoing, Senior Indebtedness shall include principal, premium (if any)
and interest (including interest accruing after the filing of a petition
initiating any proceedings under any state, federal or foreign bankruptcy laws
whether or not allowable as a claim in such proceeding) and all other monetary
obligations of every kind and nature of the Company from time to time owed under
the Bank Credit Facility or under the Securitization Facility; provided,
however, that any Indebtedness under any refinancing, refunding or replacement
of the Bank Credit Facility or the Securitization Facility shall not constitute
Senior Indebtedness to the extent the Indebtedness thereunder is by its express
terms subordinate to any other Indebtedness of the Company. Notwithstanding the
foregoing, "Senior Indebtedness" shall not include (i) Indebtedness evidenced by
the Notes, (ii) Indebtedness that is by its terms subordinate or junior in right
of payment to any Indebtedness of the Company, (iii) Indebtedness which, when
incurred and without respect to any election under Section 1111(b) of title 11
United States Code, is without recourse to the Company, (iv) Indebtedness which
is represented by Redeemable Capital Stock, (v) any liability for foreign,
federal, state, local or other tax owed or owing by the Company to the extent
such liability constitutes Indebtedness, (vi) Indebtedness of the Company to a
Subsidiary or any other Affiliate of the Company or any of such Affiliate's
subsidiaries, and (vii) that portion of any Indebtedness which at the time of
issuance is issued in violation of the Indenture.
As of September 30, 1997, the Company has approximately $190 million of
Senior Indebtedness, including $160 million under the Securitization Facility
(which is a Subsidiary liability), and approximately $488 million of other
non-intercompany Subsidiary liabilities (including $367 million of deferred
revenues and $26 million of deferred income taxes) to which the Notes are
subordinated. As of September 30, 1997, other than Indebtedness under the 13%
Notes, capital lease obligations and outstanding letters of credit,
substantially all of the Company's liabilities, including the Securitization
Facility (which is also Senior Indebtedness), were non-intercompany Subsidiary
liabilities.
The Indenture will limit, but not prohibit, the incurrence by the Company
and its Subsidiaries of additional Indebtedness, and the Indenture will prohibit
the incurrence by the Company of Indebtedness that is subordinated in right of
payment to any Senior Indebtedness of the Company and senior in right of payment
to the Notes.
The Notes will be effectively subordinated to all Indebtedness and other
liabilities and commitments (including trade payables and lease obligations) of
the Company's Subsidiaries. Any right of the Company to receive assets of any
such Subsidiary upon the liquidation or reorganization of any such Subsidiary
(and the consequent right of the holders of the Notes to participate in those
assets) will be effectively subordinated to the claims of that Subsidiary's
creditors, except to the extent that the Company is itself recognized as a
creditor of such Subsidiary, in which case the claims of the Company would still
be subordinate to any security in the assets of such Subsidiary and any
Indebtedness of such Subsidiary senior to that held by the Company.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness. The Company will not create, issue, incur,
assume, guarantee or otherwise in any manner become directly or indirectly
liable for the payment of or otherwise suffer to exist (collectively, "incur"),
any Indebtedness (including any Acquired Indebtedness), other than Permitted
Indebtedness, unless such Indebtedness is incurred by the Company and the
Company's Consolidated Fixed Charge Coverage Ratio for the four full fiscal
quarters for which financial results are available immediately preceding the
date of
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incurrence of such Indebtedness (the "Incurrence Date"), taken as one period
(and after giving pro forma effect to: (i) the incurrence of such Indebtedness
and (if applicable) the application of the net proceeds therefrom, including to
refinance other Indebtedness, as if such Indebtedness was incurred, and the
application of such proceeds occurred, at the beginning of such four-quarter
period; (ii) the incurrence, repayment or retirement of any other Indebtedness
by the Company since the first day of such four-quarter period as if such
Indebtedness was incurred, repaid or retired at the beginning of such
four-quarter period (except that, in making such computation, the amount of
Indebtedness under any revolving credit facility shall be computed based upon
the average daily balance of such Indebtedness during such four-quarter period);
(iii) in the case of Acquired Indebtedness, the related acquisition; and (iv)
any acquisition or disposition by the Company and its Subsidiaries of any
company or any business or any assets out of the ordinary course of business, or
any related repayment of Indebtedness, in each case since the first day of such
four-quarter period, assuming such acquisition or disposition and any such
related payments had been consummated on the first day of such four-quarter
period), would be at least 1.8:1 from the date of the Indenture to and including
December 31, 1998, and 2.0:1 thereafter. The Company will not permit any of its
Subsidiaries to incur any Indebtedness (other than Permitted Subsidiary
Indebtedness).
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to
holders of, any shares of the Company's Capital Stock (other than dividends
or distributions payable solely in shares of its Qualified Capital Stock or
in options, warrants or other rights to acquire shares of such Qualified
Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, the Company's Capital Stock or any Capital Stock of
any Affiliate of the Company (other than Capital Stock of any Wholly Owned
Subsidiary of the Company);
(iii) prior to any scheduled principal payment, sinking fund payment
or maturity of any Subordinated Indebtedness, make any principal payment
on, or repurchase, redeem, defease, retire or otherwise acquire for value,
such Subordinated Indebtedness (other than any such Indebtedness owed to
the Company or a Wholly Owned Subsidiary);
(iv) declare or pay any dividend or distribution on any Capital Stock
of any Subsidiary to any Person (other than to the Company or any of its
Wholly Owned Subsidiaries) or purchase, redeem or otherwise acquire or
retire for value any Capital Stock of any Subsidiary held by any person
(other than the Company or any of its Wholly Owned Subsidiaries);
(v) incur, create, or assume, any guarantee of Indebtedness of any
Affiliate of the Company (other than a Wholly Owned Subsidiary of the
Company); or
(vi) make any Investment in any Person
(other than, in the case of clauses (ii) through (vi) above, Permitted
Investments) (any of the foregoing actions described in clauses (i) through
(vi), other than any such action that is a Permitted Payment (as defined below),
collectively, a "Restricted Payment") (the amount of any such Restricted
Payment, if other than cash, being determined by the board of directors of the
Company, whose determination shall be conclusive and evidenced by a board
resolution); unless (1) immediately before and immediately after giving effect
to such proposed Restricted Payment on a pro forma basis, no Default or Event of
Default shall have occurred and be continuing and such Restricted Payment shall
not be an event which is, or after notice or lapse of time or both, would be, an
"event of default" under the terms of any Indebtedness of the Company or its
Subsidiaries; (2) immediately before and immediately after giving effect to such
Restricted Payment on a pro forma basis, the Company could incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness or Permitted
Subsidiary Indebtedness) under the provisions described under "-- Limitation on
Indebtedness"; and (3) after giving effect to the proposed
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Restricted Payment, the aggregate amount of all such Restricted Payments
declared or made after the date of the Indenture plus the Permitted Payments
made under clause (b)(vi), do not exceed $5.0 million plus the sum of:
(A) 50% of the aggregate Consolidated Net Income of the Company
accrued on a cumulative basis during the period beginning on January 1,
1998 and ending on the last day of the Company's last fiscal quarter ending
prior to the date of the Restricted Payment (or, if such aggregate
cumulative Consolidated Net Income shall be a loss, minus 100% of such
loss); plus
(B) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company either (x) as capital contributions in the form of
common equity to the Company or (y) from the issuance or sale (other than
to any of its Subsidiaries) of Qualified Capital Stock of the Company or
any options, warrants or rights to purchase such Qualified Capital Stock of
the Company (except, in each case, to the extent such proceeds are used to
purchase, redeem or otherwise retire Capital Stock or Subordinated
Indebtedness as set forth in clause (ii) or (iii) of paragraph (b) below),
in each case, other than Net Cash Proceeds received from the issuance or
sale of Qualified Capital Stock or options, warrants or rights to purchase
Qualified Capital Stock in, or otherwise received in connection with, the
Refinancing; plus
(C) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company (other than from any of its Subsidiaries) upon the
exercise of any options, warrants or rights to purchase Qualified Capital
Stock of the Company; plus
(D) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the conversion or exchange, if any, of debt
securities or Redeemable Capital Stock of the Company or its Subsidiaries
into or for Qualified Capital Stock of the Company plus, to the extent such
debt securities or Redeemable Capital Stock were issued after the date of
the Indenture, the aggregate of Net Cash Proceeds from their original
issuance; plus
(E) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment made after the date of the Indenture, an
amount equal to the lesser of the return of capital with respect to such
Investment and the initial amount of such Investment, in either case, less
the cost of the disposition of such Investment.
(b) Notwithstanding the foregoing, and in the case of clauses (ii) through
(vii) below, so long as there is no Default or Event of Default continuing, the
foregoing provisions shall not prohibit the following actions (each of clauses
(i) through (vii) being referred to as a "Permitted Payment"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof if at the date of declaration thereof such other
dividend (A) would be permitted by the provisions of paragraph (a) of this
Section and (B) shall be deemed to have been paid on such date of
declaration for purposes of the calculation required by paragraph (a) of
this Section;
(ii) the repurchase, redemption, or other acquisition or retirement
for value of any shares of any class of Capital Stock of the Company in
exchange for (including any such exchange pursuant to the exercise of a
conversion right or privilege in connection with which cash is paid in lieu
of the issuance of fractional shares or scrip), or out of the Net Cash
Proceeds of a substantially concurrent issue and sale for cash (other than
to a Subsidiary) of, other shares of Qualified Capital Stock of the
Company; provided that the Net Cash Proceeds from the issuance of such
shares of Qualified Capital Stock are, to the extent so used, excluded from
clause (3) (B) of paragraph (a) of this Section;
(iii) the repurchase, redemption, defeasance, retirement or
acquisition for value or payment of principal of any Subordinated
Indebtedness or Redeemable Capital Stock in exchange for, or in an amount
not in excess of the Net Cash Proceeds of, a substantially concurrent
issuance and sale for cash (other than to any Subsidiary) of any Qualified
Capital Stock of the Company, provided that the Net Cash Proceeds from the
issuance of such shares of Qualified Capital Stock are, to the extent so
used, excluded from clause (3)(B) of paragraph (a) of this Section;
(iv) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Subordinated
Indebtedness (other than Redeemable Capital Stock) (a "refinancing")
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<PAGE> 57
through the substantially concurrent issuance of new Subordinated
Indebtedness of the Company, provided that any such new Subordinated
Indebtedness (1) shall be in a principal amount that does not exceed the
principal amount so refinanced (or, if such Subordinated Indebtedness
provides for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration thereof, then such lesser amount
as of the date of determination), plus the lesser of (I) the stated amount
of any premium or other payment required to be paid in connection with such
a refinancing pursuant to the terms of the Indebtedness being refinanced,
or (II) the amount of premium or other payment actually paid at such time
to refinance the Indebtedness, plus, in either case, the amount of expenses
of the Company incurred in connection with such refinancing; (2) has an
Average Life to Stated Maturity greater than the remaining Average Life to
Stated Maturity of the Notes; (3) has a Stated Maturity for its final
scheduled principal payment later than the Stated Maturity for the final
scheduled principal payment of the Notes; and (4) is expressly subordinated
in right of payment to the Notes at least to the same extent as the
Subordinated Indebtedness to be refinanced;
(v) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of any Redeemable Capital Stock through
the substantially concurrent issuance of new Redeemable Capital Stock of
the Company, provided that any such new Redeemable Capital Stock (1) shall
have an aggregate liquidation preference that does not exceed the aggregate
liquidation preference of the amount so refinanced; (2) has an Average Life
to Stated Maturity greater than the remaining Average Life to Stated
Maturity of the Notes; and (3) has a Stated Maturity later than the Stated
Maturity for the final scheduled principal payment of the Notes;
(vi) the repurchase of shares of, or options or warrants to purchase
shares of, common stock of the Company or any of its Subsidiaries from
employees, former employees, directors or former directors of the Company
or any of its Subsidiaries (or permitted transferees of such employees,
former employees, directors or former directors), pursuant to the terms of
the agreements (including employment agreements) or plans (or amendments
thereto) approved by the board of directors of the Company under which such
individuals purchase or sell or are granted the option to purchase or sell,
shares of such common stock; and
(vii) the repurchase, redemption, defeasance, retirement or
acquisition for value of the 13% Notes on or prior to their scheduled
maturity.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly, enter into any
transaction or series of related transactions (including, without limitation,
the sale, purchase, exchange or lease of assets, property or services) with or
for the benefit of any Affiliate of the Company (other than the Company or a
Subsidiary) unless such transaction or series of related transactions is entered
into in good faith and (a) such transaction or series of related transactions is
on terms that are no less favorable to the Company or such Subsidiary, as the
case may be, than those that would be available in a comparable transaction in
arm's-length dealings with an unrelated third party, (b) with respect to any
transaction or series of related transactions involving aggregate value in
excess of $1.0 million, the Company delivers an officers' certificate to the
Trustee certifying that such transaction or series of related transactions
complies with clause (a) above, and (c) with respect to any transaction or
series of related transactions involving aggregate value in excess of $10.0
million, either (A) such transaction or series of related transactions has been
approved by a majority of the Disinterested Directors of the Company, or in the
event there is only one Disinterested Director, by such Disinterested Director,
or (B) the Company delivers to the Trustee a written opinion of an investment
banking firm of national standing or other recognized independent expert with
experience appraising the terms and conditions of the type of transaction or
series of related transactions for which an opinion is required stating that the
transactions or series of related transactions are fair to the Company or such
Subsidiary from a financial point of view; provided, however, that clauses (a)
through (c) above shall not apply to (i) any transaction with an employee or
director of the Company or any of its Subsidiaries entered into in the ordinary
course of business (including compensation and employee benefit arrangements
with any officer, director or employee of the Company or any Subsidiary,
including under any stock option or stock incentive plans), (ii) Restricted
Payments made in accordance with "-- Limitation on Restricted Payments" or
Permitted Payments, (iii) any transactions related to the Securitization
Facility, (iv) management agreements or similar agreements between (A) the
Company or any Subsidiary and (B) Affiliates in which the Company or any
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Subsidiary has made an Investment, and (v) contributions by the Company or any
Subsidiary to a real estate investment trust pursuant to clause (ix) of the
definition of Permitted Investments.
Limitation on Liens. The Company will not, and will not permit any
Subsidiary to, directly or indirectly, create or incur any Lien of any kind
securing any Pari Passu Indebtedness or Subordinated Indebtedness (including any
assumption, guarantee or other liability with respect thereto by any Subsidiary)
upon any property or assets (including any intercompany notes) of the Company or
any Subsidiary owned on the date of the Indenture or acquired after the date of
the Indenture, or any income or profits therefrom, unless the Notes are directly
secured equally and ratably with (or, in the case of Subordinated Indebtedness,
prior or senior thereto, with the same relative priority as the Notes shall have
with respect to such Subordinated Indebtedness) the obligations or liability
secured by such Lien except for Liens (A) securing any Indebtedness which became
Indebtedness pursuant to a transaction permitted under "-- Consolidation,
Merger, Sale of Assets" or securing Acquired Indebtedness which, in each case,
were created prior to (and not created in connection with, or in contemplation
of) the incurrence of such Pari Passu Indebtedness or Subordinated Indebtedness
(including any assumption, guarantee or other liability with respect thereto by
any Subsidiary) and which Indebtedness is permitted under the provisions of
"-- Limitation on Indebtedness", (B) securing any Indebtedness incurred in
connection with any refinancing, renewal, substitutions or replacements of any
such Indebtedness described in clause (A), so long as the aggregate principal
amount of Indebtedness represented thereby is not increased by such refinancing
by an amount greater than the lesser of (i) the stated amount of any premium or
other payment required to be paid in connection with such a refinancing pursuant
to the terms of the Indebtedness being refinanced, or (ii) the amount of premium
or other payment actually paid at such time to refinance the Indebtedness, plus,
in either case, the amount of expenses of the Company incurred in connection
with such refinancing, provided, however, that in the case of clauses (A) and
(B), any such Lien only extends to the assets that were subject to such Lien
securing such Indebtedness prior to the related acquisition by the Company or
its Subsidiaries, or (C) securing Indebtedness incurred to effect a defeasance
of the Notes pursuant to the defeasance provisions of the Indenture.
Limitation on Sale of Assets. (a) The Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly, consummate an Asset
Sale unless (i) at least 75% of the consideration from such Asset Sale is
received in cash or Cash Equivalents, and (ii) the Company or such Subsidiary
receives consideration at the time of such Asset Sale at least equal to the Fair
Market Value of the shares or assets subject to such Asset Sale (as determined
by the board of directors of the Company and evidenced in a board resolution).
(b) If all or a portion of the Net Cash Proceeds of any Asset Sale are not
required to be applied to repay permanently any Senior Indebtedness then
outstanding as required by the terms thereof, or the Company determines not to
apply such Net Cash Proceeds to the permanent prepayment of such Senior
Indebtedness, or if no such Senior Indebtedness is then outstanding, then the
Company or a Subsidiary may, within 360 days of the Asset Sale, invest the Net
Cash Proceeds in properties and other assets that (as determined by the board of
directors of the Company) replace the properties and assets that were the
subject of the Asset Sale or in properties and assets that will be used in the
businesses of the Company or its Subsidiaries existing on the date of the
Indenture or in businesses reasonably related or complementary thereto. The
amount of such Net Cash Proceeds not applied to repay Senior Indebtedness or
used or invested within 360 days of the Asset Sale as set forth in this
paragraph constitutes "Excess Proceeds".
(c) When the aggregate amount of Excess Proceeds exceeds $15.0 million, the
Company will apply the Excess Proceeds to the repayment of the Notes and any
other Pari Passu Indebtedness outstanding with provisions requiring the Company
to make an offer to purchase or to purchase or redeem such Indebtedness with the
proceeds from any Asset Sale as follows: (A) the Company will make an offer to
purchase (an "Offer") from all holders of the Notes in accordance with the
procedures set forth in the Indenture in the maximum principal amount (expressed
as a multiple of $1,000) of Notes that may be purchased out of an amount (the
"Note Amount") equal to the product of such Excess Proceeds multiplied by a
fraction, the numerator of which is the outstanding principal amount of the
Notes, and the denominator of which is the sum of the outstanding principal
amount of the Notes and such Pari Passu Indebtedness (subject to proration in
the event such amount is less than the aggregate Offered Price (as defined
herein) of all Notes tendered), and (B) to the extent required by such Pari
Passu Indebtedness to permanently reduce the principal amount of such Pari Passu
Indebtedness, the Company
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will make an offer to purchase or otherwise repurchase or redeem Pari Passu
Indebtedness (a "Pari Passu Offer") in an amount (the "Pari Passu Debt Amount")
equal to the excess of the Excess Proceeds over the Note Amount; provided that
in no event will the Company be required to make a Pari Passu Offer in a Pari
Passu Debt Amount exceeding the principal amount of such Pari Passu Indebtedness
plus the amount of any premium required to be paid to repurchase such Pari Passu
Indebtedness. The offer price for the Notes will be payable in cash in an amount
equal to 100% of the principal amount of the Notes plus accrued and unpaid
interest, if any, to the date (the "Offer Date") such Offer is consummated (the
"Offered Price"), in accordance with the procedures set forth in the Indenture.
To the extent that the aggregate Offered Price of the Notes tendered pursuant to
the Offer is less than the Note Amount relating thereto or the aggregate amount
of Pari Passu Indebtedness that is purchased in a Pari Passu Offer is less than
the Pari Passu Debt Amount, the Company will use any remaining Excess Proceeds
for general corporate purposes. If the aggregate principal amount of Notes and
Pari Passu Indebtedness surrendered by holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro
rata basis. Upon the completion of the purchase of all the Notes tendered
pursuant to an Offer and the completion of a Pari Passu Offer, the amount of
Excess Proceeds, if any, shall be reset at zero.
(d) The Indenture will provide that, if the Company becomes obligated to
make an Offer pursuant to clause (c) above, the Notes and the Pari Passu
Indebtedness shall be purchased by the Company, at the option of the holders
thereof, in whole or in part in integral multiples of $1,000, on a date that is
not earlier than 30 days and not later than 60 days from the date the notice of
such Offer is given to holders, or such later date as may be necessary for the
Company to comply with the requirements under the Exchange Act.
(e) The Indenture will provide that the Company will comply with the
applicable tender offer rules, including Rule 14e-l under the Exchange Act, and
any other applicable securities laws or regulations in connection with an Offer.
Limitation on Senior Subordinated Indebtedness. The Company will not,
directly or indirectly, create, incur, issue, assume, guarantee or otherwise in
any manner become directly or indirectly liable for or with respect to or
otherwise permit to exist any Indebtedness that is subordinate in right of
payment to any Indebtedness of the Company unless such Indebtedness is also pari
passu with the Notes or subordinate in right of payment to the Notes at least to
the same extent as the Notes are subordinate in right of payment to Senior
Indebtedness.
Limitation on Preferred Stock of Subsidiaries. The Company will not permit
(a) any Subsidiary of the Company to issue any Preferred Stock, except for (i)
Preferred Stock issued to the Company or a Wholly Owned Subsidiary, and (ii)
Preferred Stock issued by a Person prior to the time (A) such Person becomes a
Subsidiary, (B) such Person merges with or into a Subsidiary, or (C) a
Subsidiary merges with or into such Person; provided that the Preferred Stock
referred to in clause (ii) above was not issued or incurred by such Person in
anticipation of the type of transaction contemplated by subclause (A), (B) or
(C); or (b) any Person (other than the Company or a Wholly Owned Subsidiary) to
acquire Preferred Stock of any Subsidiary from the Company or any Subsidiary,
except, in the case of clause (a) or (b), upon the acquisition of all the
outstanding Preferred Stock of such Subsidiary in accordance with the terms of
the Indenture.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any of its Subsidiaries
to, directly or indirectly, create or suffer to exist any consensual encumbrance
or restriction on the ability of any Subsidiary to (i) pay dividends or make any
other distribution on its Capital Stock, (ii) pay any Indebtedness owed to the
Company or any other Subsidiary, (iii) make any Investment in the Company or any
other Subsidiary, or (iv) transfer any of its properties or assets to the
Company or any other Subsidiary, except for: (a) any encumbrance or restriction
pursuant to any agreement in effect on the date of the Indenture; (b) any
encumbrance or restriction, with respect to a Subsidiary that is not a
Subsidiary of the Company on the date of the Indenture, in existence at the time
such Person becomes a Subsidiary of the Company and not incurred in connection
with, or in contemplation of, such Person becoming a Subsidiary; (c) customary
non-assignment or subletting provisions of any lease, license or other contract;
(d) any restriction entered into in the ordinary course of business contained in
any lease of any Subsidiary or any security agreement or mortgage securing
Indebtedness of any Subsidiary to the extent such restriction restricts the
transfer of property subject to such security agreement, mortgage or lease; (e)
any restriction contained in an agreement pursuant to which Permitted Subsidiary
Indebtedness is incurred; and (f) any encumbrance or restriction existing
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under any agreement that amends, substitutes, restructures, supplements,
extends, renews, refinances, replaces or otherwise modifies the agreements
containing the encumbrances or restrictions in the foregoing clauses (a), (b),
(c), (d) or (e), or in this clause (f); provided in each case that the terms and
conditions of any such encumbrances or restrictions are no more restrictive in
any material respect than those under or pursuant to the agreement evidencing
the Indebtedness so amended, substituted, restructured, supplemented, extended,
renewed, refinanced, replaced or modified.
Limitations on Unrestricted Subsidiaries. The Company will not make, and
will not permit its Subsidiaries to make, an Investment in Unrestricted
Subsidiaries unless, at the time thereof, (a) the aggregate amount of such
Investments would not exceed the amount of Restricted Payments then permitted to
be made pursuant to the provisions described under "-- Limitation on Restricted
Payments", or (b) such Investment is a Permitted Investment. Except for
Permitted Investments, any Investment in Unrestricted Subsidiaries permitted to
be made pursuant to this covenant (i) must be permitted to be made pursuant to
the provision described under "-- Limitation on Restricted Payments" and will be
treated as a Restricted Payment in calculating the amount of Restricted Payments
made by the Company, and (ii) may be made in cash or property.
Provision of Financial Statements. After the earlier to occur of the
consummation of the Exchange Offer and the 120th calendar day following the date
of original issue of the Notes, whether or not the Company is subject to Section
13(a) or 15(d) of the Exchange Act, the Company will, to the extent permitted
under the Exchange Act, file with the SEC the annual reports, quarterly reports
and other documents which the Company would have been required to file with the
SEC pursuant to Section 13(a) or 15(d) of the Exchange Act if the Company were
so subject, such documents to be filed with the SEC on or prior to the date (a
"Required Filing Date") by which the Company would have been required so to file
such documents if the Company were so subject. The Company will also in any
event (x) within 15 days of each Required Filing Date occurring after the
issuance of the Notes (i) transmit by mail to all holders, as their names and
addresses appear in the security register, without cost to such holders and (ii)
file with the Trustee, copies of the annual reports, quarterly reports and other
documents which the Company would have been required to file with the SEC
pursuant to Section 13(a) or 15(d) of the Exchange Act if the Company were
subject to either of such Sections, and (y) if filing such documents by the
Company with the SEC is not permitted under the Exchange Act, promptly upon
written request and payment of the reasonable cost of duplication and delivery,
supply copies of such documents to any prospective holder at the Company's cost.
The Indenture also provides that, so long as any of the Notes remain
outstanding, the Company will make available to any prospective purchaser of
Notes or beneficial owner of Notes in connection with any sale thereof the
information required by Rule 144A(d)(4) under the Securities Act, until such
time as the Company has either exchanged the Notes for securities identical in
all material respects which have been registered under the Securities Act or
until such time as the holders thereof have disposed of such Notes pursuant to
an effective registration statement under the Securities Act.
CONSOLIDATION, MERGER, SALE OF ASSETS
The Company will not, in a single transaction or through a series of
related transactions, consolidate with or merge with or into any other Person or
sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its properties and assets to any Person or group of
affiliated Persons, or permit any of its Subsidiaries to enter into any such
transaction or series of related transactions if such transaction or series of
related transactions, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or disposition of all or substantially all of the
properties and assets of the Company and its Subsidiaries on a Consolidated
basis to any other Person or group of affiliated Persons, unless at the time and
after giving effect thereto (i) either (a) the Company will be the continuing
corporation, or (b) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by sale, assignment, conveyance, transfer, lease or disposition all or
substantially all of the properties and assets of the Company and its
Subsidiaries on a Consolidated basis (the "Surviving Entity") will be a
corporation duly organized and validly existing under the laws of the United
States of America, any state thereof or the District of Columbia and such Person
expressly assumes, by a supplemental indenture, in a form satisfactory to the
Trustee, all the obligations of the Company under the Notes and the Indenture,
as the case may be, and the Notes and the Indenture will remain in full force
and effect as so supplemented, (ii) immediately before and immediately after
giving effect to such
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transaction on a pro forma basis (and treating any Indebtedness not previously
an obligation of the Company or any of its Subsidiaries which becomes the
obligation of the Company or any of its Subsidiaries as a result of such
transaction as having been incurred at the time of such transaction), no Default
or Event of Default will have occurred and be continuing, (iii) immediately
before and immediately after giving effect to such transaction on a pro forma
basis (on the assumption that the transaction occurred on the first day of the
four-quarter period for which financial results are available ending immediately
prior to the consummation of such transaction with the appropriate adjustments
with respect to the transaction being included in such pro forma calculation),
the Company (or the Surviving Entity if the Company is not the continuing
obligor under the Indenture) could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness or Permitted Subsidiary Indebtedness) under the
provisions of "-- Certain Covenants -- Limitation on Indebtedness", and (iv) at
the time of the transaction the Company or the Surviving Entity will have
delivered, or caused to be delivered, to the Trustee, in form and substance
reasonably satisfactory to the Trustee, an officers' certificate and an opinion
of counsel, each to the effect that such consolidation, merger, transfer, sale,
assignment, conveyance, transfer, lease or other transaction and the
supplemental indenture in respect thereof comply with the Indenture and that all
conditions precedent therein provided for relating to such transaction have been
complied with; provided, however, that the foregoing prohibition shall not
prohibit any merger between or among Subsidiaries or between a Subsidiary and
the Company, provided the Company is the continuing corporation.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which the Company is not the continuing corporation, the successor Person formed
or remaining shall succeed to, and be substituted for, and may exercise every
right and power of, the Company, and the Company would be discharged from all
obligations and covenants under the Indenture and the Notes, as the case may be.
EVENTS OF DEFAULT
An Event of Default will occur under the Indenture if:
(i) there shall be a default in the payment of any interest on any
Note when it becomes due and payable, and such default shall continue for a
period of 30 days;
(ii) there shall be a default in the payment of the principal of (or
premium, if any, on) any Note at its Maturity (upon acceleration, optional
or mandatory redemption, required repurchase or otherwise);
(iii) there shall be a default in the performance, or breach, of any
covenant or agreement of the Company under the Indenture (other than a
default in the performance, or breach, of a covenant or agreement which is
specifically dealt with in clause (i), (ii) or (iv)) and such default or
breach shall continue for a period of 30 days after written notice has been
given, by certified mail, (x) to the Company by the Trustee, or (y) to the
Company and the Trustee by the holders of at least 25% in aggregate
principal amount of the outstanding Notes;
(iv) (a) there shall be a default in the performance or breach of the
provisions described in "Consolidation, Merger, Sale of Assets", (b) the
Company shall have failed to make or consummate an Offer required in
accordance with the provisions of "-- Certain Covenants -- Limitation on
Sale of Assets", or (c) the Company shall have failed to make or consummate
a Change of Control Offer required in accordance with the provisions of
"-- Purchase of Notes Upon a Change of Control";
(v) one or more defaults shall have occurred under any of the
agreements, indentures or instruments under which the Company or any
Subsidiary then has outstanding Indebtedness in excess of $10.0 million,
individually or in the aggregate, and either (a) such default results from
the failure to pay such Indebtedness at its stated final maturity, or (b)
such default or defaults have resulted in the acceleration of the maturity
of such Indebtedness;
(vi) one or more judgments, orders or decrees for the payment of money
in excess of $10.0 million, either individually or in the aggregate, shall
be rendered against the Company or any Subsidiary or any of their
respective properties and shall not be discharged and either (a) any
creditor shall have commenced an enforcement proceeding upon such judgment,
order or decree, or (b) there shall have been a period of
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60 consecutive days during which a stay of enforcement of such judgment,
order or decree, by reason of an appeal or otherwise, shall not be in
effect, provided that the amount of such money judgment, order or decree
shall be calculated net of any insurance coverage that the Company has
determined in good faith is available in whole or in part with respect to
such money judgment, order or decree;
(vii) there shall have been the entry by a court of competent
jurisdiction of (a) a decree or order for relief in respect of the Company
or any Significant Subsidiary in an involuntary case or proceeding under
any applicable Bankruptcy Law, or (b) a decree or order adjudging the
Company or any Significant Subsidiary bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment or composition of or in respect of
the Company or any Significant Subsidiary under any applicable federal or
state law, or appointing a custodian, receiver, liquidator, assignee,
trustee, sequestrator (or other similar official) of the Company or any
Significant Subsidiary or of any substantial part of their respective
properties, or ordering the winding up or liquidation of their respective
affairs, and any such decree or order for relief shall continue to be in
effect, or any such other decree or order shall be unstayed and in effect,
for a period of 60 consecutive days; or
(viii) (a) the Company or any Significant Subsidiary commences a
voluntary case or proceeding under any applicable Bankruptcy Law or any
other case or proceeding to be adjudicated bankrupt or insolvent, (b) the
Company or any Significant Subsidiary consents to the entry of a decree or
order for relief in respect of the Company or such Significant Subsidiary
in an involuntary case or proceeding under any applicable Bankruptcy Law or
to the commencement of any bankruptcy or insolvency case or proceeding
against it, (c) the Company or any Significant Subsidiary files a petition
or answer or consent seeking reorganization or relief under any applicable
federal or state law, (d) the Company or any Significant Subsidiary (I)
consents to the filing of such petition or the appointment of, or taking
possession by, a custodian, receiver, liquidator, assignee, trustee,
sequestrator or similar official of the Company or such Significant
Subsidiary or of any substantial part of their respective properties, (II)
makes an assignment for the benefit of creditors, or (III) admits in
writing its inability to pay its debts generally as they become due, or (e)
the Company or any Significant Subsidiary takes any corporate action in
furtherance of any such actions in this paragraph (viii).
If an Event of Default (other than as specified in clauses (vii) and (viii)
of the prior paragraph with respect to the Company) shall occur and be
continuing with respect to the Indenture, the Trustee or the holders of not less
than 25% in aggregate principal amount of the Notes then outstanding may, and
the Trustee at the request of such holders shall, declare all unpaid principal
of, premium, if any, and accrued interest on all Notes to be due and payable, by
a notice in writing to the Company (and to the Trustee if given by the holders
of the Notes) and upon any such declaration, such principal, premium, if any,
and interest shall become due and payable immediately. If an Event of Default
specified in clause (vii) or (viii) of the prior paragraph occurs with respect
to the Company and is continuing, then all the Notes shall ipso facto become and
be due and payable immediately in an amount equal to the principal amount of the
Notes, together with accrued and unpaid interest, if any, to the date the Notes
become due and payable, without any declaration or other act on the part of the
Trustee or any holder. Thereupon, the Trustee may, at its discretion, proceed to
protect and enforce the rights of the holders of Notes by appropriate judicial
proceedings.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of Notes outstanding, by written notice
to the Company and the Trustee, may rescind and annul such declaration and its
consequences if (a) the Company has paid or deposited with the Trustee a sum
sufficient to pay (i) all sums paid or advanced by the Trustee under the
Indenture and the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel, (ii) all overdue interest on all Notes
then outstanding, (iii) the principal of and premium, if any, on any Notes then
outstanding which have become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the Notes, and (iv) to
the extent that payment of such interest is lawful, interest upon overdue
interest at the rate borne by the Notes; and (b) all Events of Default, other
than the nonpayment of principal of the Notes which have become due solely by
such declaration of acceleration, have been cured or waived as provided in the
Indenture. No such rescission shall affect any subsequent default or impair any
right consequent thereon.
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The holders of not less than a majority in aggregate principal amount of
the Notes outstanding may on behalf of the holders of all outstanding Notes
waive any past default under the Indenture and its consequences, except a
default in the payment of the principal of, premium, if any, or interest on any
Note or in respect of a covenant or provision which under the Indenture cannot
be modified or amended without the consent of the holder of each Note affected
by such modification or amendment.
The Company is also required to notify the Trustee within ten business days
of the occurrence of any Default. The Company is required to deliver to the
Trustee, on or before a date not more than 120 days after the end of each fiscal
year, a written statement as to compliance with the Indenture, including whether
or not any Default has occurred. The Trustee is under no obligation to exercise
any of the rights or powers vested in it by the Indenture at the request or
direction of any of the holders of the Notes unless such holders offer to the
Trustee security or indemnity satisfactory to the Trustee against the costs,
expenses and liabilities which might be incurred thereby.
The Trust Indenture Act contains limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of any
such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions, provided that if it acquires any conflicting interest it
must eliminate such conflict upon the occurrence of an Event of Default or else
resign.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company and any other obligor upon the Notes discharged with
respect to the outstanding Notes ("defeasance"). Such defeasance means that the
Company and any other obligor under the Indenture shall be deemed to have paid
and discharged the entire Indebtedness represented by the outstanding Notes,
except for (i) the rights of holders of such outstanding Notes to receive
payments in respect of the principal of, premium, if any, and interest on such
Notes when such payments are due, (ii) the Company's obligations with respect to
the Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes, and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and (iv) the defeasance provisions
of the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("covenant defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or an Event of Default with respect to the Notes. In the event covenant
defeasance occurs, certain events (not including non-payment, bankruptcy and
insolvency events) described under "-- Events of Default" will no longer
constitute an Event of Default with respect to the Notes.
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit or cause to be deposited with the Trustee, in
trust, for the benefit of the holders of the Notes, cash in United States
dollars, U.S. Government Obligations (as defined in the Indenture), or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants or a nationally
recognized investment banking firm, to pay and discharge the principal of,
premium, if any, and interest on the outstanding Notes on the Stated Maturity
(or on any date after October 15, 2002 (such date being referred to as the
"Defeasance Redemption Date"), if at or prior to electing either defeasance or
covenant defeasance, the Company has delivered to the Trustee an irrevocable
notice to redeem all of the outstanding Notes on the Defeasance Redemption
Date); (ii) in the case of defeasance, the Company shall have delivered to the
Trustee an opinion of independent counsel in the United States stating that (A)
the Company has received from, or there has been published by, the Internal
Revenue Service a ruling or, (B) since the date of the Indenture, there has been
a change in the applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of independent counsel in the United States
shall confirm that, the holders of the outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such defeasance
had not occurred; (iii) in the case of covenant defeasance, the Company shall
have delivered to the Trustee an opinion of independent counsel in the United
States to the effect that the holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such
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covenant defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such covenant defeasance had not occurred; (iv) no Default or Event of Default
(other than a Default or an Event of Default resulting from the borrowing of
funds to be applied to such deposit) shall have occurred and be continuing on
the date of such deposit or insofar as clauses (vii) or (viii) under the first
paragraph under "-- Events of Default" are concerned, at any time during the
period ending on the 91st day after the date of deposit (it being understood
that this condition shall not be deemed satisfied until the expiration of such
period); (v) such defeasance or covenant defeasance shall not cause the Trustee
for the Notes to have a conflicting interest as defined in the Indenture and for
purposes of the Trust Indenture Act with respect to any securities of the
Company; (vi) such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a Default under, (A) the Indenture or (B)
any other agreement or instrument to which the Company or any Significant
Subsidiary is a party or by which the Company or any Significant Subsidiary is
bound, if such breach, violation, or default thereof would have a material
adverse effect on the Company and its Subsidiaries taken as a whole; (vii) such
defeasance or covenant defeasance shall not result in the trust arising from
such deposit constituting an investment company within the meaning of the
Investment Company Act of 1940, as amended, unless such trust shall be
registered under such Act or exempt from registration thereunder; (viii) the
Company will have delivered to the Trustee an opinion of independent counsel in
the United States to the effect that after the 91st day following the deposit,
the trust funds will not be subject to avoidance under Section 547 of the United
States Bankruptcy Code (or any successor provision thereto) and related judicial
decisions; (ix) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the intent
of preferring the holders of the Notes over the other creditors of the Company
with the intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; (x) no event or condition shall exist that would prevent the
Company from making payments of the principal of, premium, if any, and interest
on the Notes on the date of such deposit or at any time ending on the 91st day
after the date of such deposit; and (xi) the Company will have delivered to the
Trustee an officers' certificate and an opinion of independent counsel, each
stating that all conditions precedent provided for relating to either the
defeasance or the covenant defeasance, as the case may be, have been complied
with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes as expressly provided for in the Indenture) as to all outstanding Notes
under the Indenture when (a) either (i) all such Notes theretofore authenticated
and delivered (except lost, stolen or destroyed Notes which have been replaced
or paid or Notes whose payment has been deposited in trust or segregated and
held in trust by the Company and thereafter repaid to the Company or discharged
from such trust as provided for in the Indenture) have been delivered to the
Trustee for cancellation, or (ii) all Notes not theretofore delivered to the
Trustee for cancellation (x) have become due and payable, (y) will become due
and payable at their Stated Maturity within one year, or (z) are to be called
for redemption within one year under arrangements satisfactory to the applicable
Trustee for the giving of notice of redemption by the Trustee in the name, and
at the expense, of the Company; and the Company has irrevocably deposited or
caused to be deposited with the Trustee as trust funds in trust an amount in
United States dollars sufficient to pay and discharge the entire indebtedness on
the Notes not theretofore delivered to the Trustee for cancellation, including
principal of, premium, if any, and accrued interest on, such Notes at such
Maturity, Stated Maturity or redemption date; (b) the Company has paid or caused
to be paid all other sums payable under the Indenture by the Company; and (c)
the Company has delivered to the Trustee an officers' certificate and an opinion
of independent counsel each stating that (i) all conditions precedent under the
Indenture relating to the satisfaction and discharge of such Indenture have been
complied with, and (ii) such satisfaction and discharge will not result in a
breach or violation of, or constitute a default under, the Indenture or any
other material agreement or instrument to which the Company or any Subsidiary is
a party or by which the Company or any Subsidiary is bound.
MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the holders of at least a majority of
aggregate principal amount of the Notes then outstanding; provided, however,
that no such modification or amendment may, without the consent of the holder of
each
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outstanding Note affected thereby: (i) change the Stated Maturity of the
principal of, or any installment of interest on, or change to an earlier date
any redemption date of, or waive a default in the payment of the principal or
interest on, any such Note or reduce the principal amount thereof or the rate of
interest thereon or any premium payable upon the redemption thereof, or change
the coin or currency in which the principal of any such Note or any premium or
the interest thereon is payable, or impair the right to institute suit for the
enforcement of any such payment after the Stated Maturity thereof (or, in the
case of redemption, on or after the redemption date); (ii) amend, change or
modify the obligation of the Company to make and consummate an Offer with
respect to any Asset Sale or Asset Sales in accordance with "-- Certain
Covenants -- Limitation on Sale of Assets" or the obligation of the Company to
make and consummate a Change of Control Offer in the event of a Change of
Control in accordance with "-- Purchase of Notes Upon a Change of Control",
including, in each case, amending, changing or modifying any definitions
relating thereto; (iii) reduce the percentage in principal amount of such
outstanding Notes, the consent of whose holders is required for any such
supplemental indenture, or the consent of whose holders is required for any
waiver or compliance with certain provisions of the Indenture; (iv) modify any
of the provisions relating to supplemental indentures requiring the consent of
holders or relating to the waiver of past defaults or relating to the waiver of
certain covenants, except to increase the percentage of such outstanding Notes
required for any such actions or to provide that certain other provisions of the
Indenture cannot be modified or waived without the consent of the holder of each
such Note affected thereby; (v) except as otherwise permitted under
"-- Consolidation, Merger, Sale of Assets", consent to the assignment or
transfer by the Company of any of its rights and obligations under the
Indenture; or (vi) amend or modify any of the provisions referred to under
"-- Ranking" in any manner adverse to the holders of the Notes.
Notwithstanding the foregoing, without the consent of any holders of the
Notes, the Company and the Trustee may modify or amend the Indenture: (a) to
evidence the succession of another Person to the Company or any other obligor
upon the Notes, and the assumption by any such successor of the covenants of the
Company or such obligor in the Indenture and in the Notes in accordance with
"-- Consolidation, Merger, Sale of Assets"; (b) to add to the covenants of the
Company or any other obligor upon the Notes for the benefit of the holders of
the Notes, or to surrender any right or power conferred upon the Company or any
other obligor upon the Notes, as applicable, in the Indenture or in the Notes;
(c) to cure any ambiguity, or to correct or supplement any provision in the
Indenture or in any supplementary indenture or the Notes which may be defective
or inconsistent with any other provision in the Indenture or the Notes or make
any other provisions with respect to matters or questions arising under the
Indenture or the Notes; provided that, in each case, such provisions shall not
adversely affect the interest of the holders of the Notes; (d) to comply with
the requirements of the SEC in order to effect or maintain the qualification of
the Indenture under the Trust Indenture Act; (e) to evidence and provide the
acceptance of the appointment of a successor trustee under the Indenture; or (f)
to mortgage, pledge, hypothecate or grant a security interest in favor of the
Trustee for the benefit of the holders of the Notes as additional security for
the payment and performance of the Company's obligations under the Indenture, in
any property, or assets, including any of which are required to be mortgaged,
pledged or hypothecated, or in which a security interest is required to be
granted to the Trustee pursuant to the Indenture or otherwise.
The holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
GOVERNING LAW
The Indenture is, and the New Notes will be, governed by, and construed in
accordance with, the laws of the State of New York, without giving effect to the
conflicts of law principles thereof.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee is permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the SEC for permission to continue as
Trustee with such conflict or resign as Trustee.
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The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
occurs (which has not been cured), the Trustee will be required, in the exercise
of its power, to use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request of
any holder of Notes unless such holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Subsidiary or merges with or into the Company or any
Subsidiary, or (ii) assumed in connection with the acquisition of assets from
such Person, in each case, other than Indebtedness incurred in connection with,
or in contemplation of, such Person becoming a Subsidiary or such acquisition,
as the case may be. Acquired Indebtedness shall be deemed to be incurred on the
date of the related acquisition of assets from any Person or the date the
acquired Person becomes a Subsidiary, as the case may be.
"Adjusted Consolidated Interest Expense" of any Person means, without
duplication, for any period, as applied to any Person, the sum of (a) the
interest expense of such Person and its Consolidated Subsidiaries (exclusive of
deferred financing fees and any premiums or penalties paid in connection with
redeeming or retiring any Indebtedness prior to its stated maturity) for such
period, on a Consolidated basis, including without limitation, (i) amortization
of debt discount, (ii) the net cost under interest rate contracts (including
amortization of discounts), (iii) the interest portion of any deferred payment
obligation, and (iv) accrued interest, plus (b) (i) the interest component of
the Capital Lease Obligations paid, accrued and/or scheduled to be paid, or
accrued by such Person during such period, and (ii) all capitalized interest of
such Person and its Consolidated Subsidiaries, in each case as determined in
accordance with GAAP consistently applied.
"Affiliate" means, with respect to any specified Person: (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person; (ii) any other Person that
owns, directly or indirectly, 10% or more of such specified Person's Capital
Stock or beneficial equity interest in such Person (if such Person is a real
estate investment trust), or any officer or director of any such specified
Person or other Person or, with respect to any natural Person, any person having
a relationship with such Person by blood, marriage or adoption not more remote
than first cousin; or (iii) any other Person 10% or more of the Voting Stock of
which is beneficially owned or held directly or indirectly by such specified
Person. For the purposes of this definition, "control" when used with respect to
any specified Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of: (i) any Capital
Stock of any Subsidiary; (ii) all or substantially all of the properties and
assets of any division or line of business of the Company or its Subsidiaries;
or (iii) any other properties or assets of the Company or any Subsidiary, other
than in the ordinary course of business. For the purposes of this definition,
the term "Asset Sale" shall not include any transfer of properties and assets
(A) that is governed by the provisions described under "-- Consolidation,
Merger, Sale of Assets", (B) that is by any Subsidiary to the Company or any
Wholly Owned Subsidiary in accordance with the terms of the Indenture, (C) that
is of obsolete equipment or other obsolete assets in the ordinary course of
business, (D) that constitutes the making of a Permitted Investment (other than
pursuant to clause (v) of the definition of "Permitted Investment"), (E) the
Fair Market Value of which in the aggregate does not exceed $1.0 million in any
transaction or series of related transactions, (F) sales of accounts receivable
and other transactions among the Company and its Subsidiaries pursuant to the
Securitization Facility, or (G) Investments by the Company which comply with the
terms of clause (ix) of the definition of "Permitted Investments".
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from the date of
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determination to the date or dates of each successive scheduled principal
payment of such Indebtedness multiplied by (b) the amount of each such principal
payment; by (ii) the sum of all such principal payments.
"Bank Credit Facility" means the third amended and restated Credit
Agreement dated as of June 26, 1995 among the Company, the Banks and The Chase
Manhattan Bank, as agent, as such agreement, in whole or in part, may be
amended, renewed, extended, substituted, refinanced, restructured, replaced,
supplemented or otherwise modified from time to time (including, without
limitation, any successive renewals, extensions, substitutions, refinancings,
restructurings, replacements, supplementations or other modifications of the
foregoing).
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding up, liquidation, reorganization or
relief of debtors or any amendment to, succession to or change in any such law.
"Banks" means the lenders under the Bank Credit Facility.
"Capital Lease Obligation" of any Person means any obligation of such
Person and its Subsidiaries on a Consolidated basis under any capital lease of
real or personal property which, in accordance with GAAP, has been recorded as a
capitalized lease obligation.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of such Person's
capital stock or other equity interests whether now outstanding or issued after
the date of the Indenture.
"Cash Equivalents" means: (i) Temporary Cash Investments; (ii) securities
received by the Company or any Subsidiary from the transferee in an Asset Sale
that are promptly converted by the Company or such Subsidiary into cash; (iii)
the assumption of Indebtedness or other obligations or liabilities of the
Company or any Subsidiary in connection with an Asset Sale; and (iv) in
connection with an Asset Sale to a Person where the assets sold, issued,
conveyed, transferred, leased or otherwise disposed of are included in a
business which will be a party to the Franchise Program, the net present value
of payments by such Person pursuant to the Franchise Program as calculated and
certified by the chief financial officer of the Company.
"Change of Control" means the occurrence of any of the following events:
(i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to
have beneficial ownership of all shares that such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than a majority of the total
outstanding Voting Stock of the Company; (ii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the board of directors of the Company (together with any new directors whose
election to such board or whose nomination for election by the stockholders of
the Company was approved by a vote of 66 2/3% of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved), cease for any
reason to constitute a majority of such board of directors then in office; (iii)
the Company consolidates with or merges with or into any Person or conveys,
transfers or leases all or substantially all of its assets to any Person, or any
corporation consolidates with or merges into or with the Company in any such
event pursuant to a transaction in which the outstanding Voting Stock of the
Company is changed into or exchanged for cash, securities or other property,
other than any such transaction where the outstanding Voting Stock of the
Company is not changed or exchanged at all (except to the extent necessary to
reflect a change in the jurisdiction of incorporation of the Company) or where
(A) the outstanding Voting Stock of the Company is changed into or exchanged for
(x) Voting Stock of the surviving corporation which is not Redeemable Capital
Stock or (y) cash, securities and other property (other than Capital Stock of
the surviving corporation) in an amount which could be paid by the Company as a
Restricted Payment as described under "-- Certain Covenants -- Limitation on
Restricted Payments" (and such amount shall be treated as a Restricted Payment
subject to the provisions in the Indenture described under "-- Certain
Covenants -- Limitation on Restricted Payments") and (B) no "person" or "group"
owns immediately after such transaction, directly or indirectly, more than a
majority of the total outstanding Voting Stock of the surviving corporation; or
(iv) the Company is liquidated or dissolved or adopts a plan of liquidation or
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dissolution other than in a transaction which complies with the provisions
described under "-- Consolidation, Merger, Sale of Assets".
"Company" means Bally Total Fitness Holding Corporation, a corporation
incorporated under the laws of Delaware, until a successor Person shall have
become such pursuant to the applicable provisions of the Indenture, and
thereafter "Company" shall mean such successor Person.
"Consolidated Fixed Charge Coverage Ratio" of any Person means, for any
period, the ratio of EBITDA to the sum of Adjusted Consolidated Interest Expense
for such period and cash dividends paid on any Preferred Stock of such Person
during such period; provided that (i) in making such computation, the Adjusted
Consolidated Interest Expense attributable to interest on any Indebtedness shall
be computed on a pro forma basis and (A) where such Indebtedness was outstanding
during the period and bore a floating interest rate, interest shall be computed
as if the rate in effect on the date of computation had been the applicable rate
for the entire period, and (B) where such Indebtedness was not outstanding
during the period for which the computation is being made but which bears, at
the option of the Company, a fixed or floating rate of interest, shall be
computed by applying at the option of the Company, either the fixed or floating
rates, and (ii) in making such computation, the Adjusted Consolidated Interest
Expense of such Person attributable to interest on any Indebtedness under a
revolving credit facility computed on a pro forma basis shall be computed based
upon the average daily balance of such Indebtedness during the applicable
period.
"Consolidated Income Tax Expense" of any Person means, for any period, the
provision for federal, state, local and foreign income taxes of such Person and
its Consolidated Subsidiaries for such period as determined in accordance with
GAAP.
"Consolidated Net Income (Loss)" of any Person means, for any period, the
Consolidated net income (or loss) of such Person and its Subsidiaries for such
period on a Consolidated basis as determined in accordance with GAAP, adjusted,
to the extent included in calculating such net income (or loss), by excluding,
without duplication, (i) all extraordinary gains or losses (exclusive of all
fees and expenses relating thereto), (ii) the portion of net income (or loss) of
such Person and its Subsidiaries on a Consolidated basis allocable to minority
interests in unconsolidated Persons to the extent that cash dividends or
distributions have not actually been received by such Person or one of its
Subsidiaries, (iii) net income (or loss) of any Person combined with such Person
or any of its Subsidiaries on a "pooling of interests" basis attributable to any
period prior to the date of combination, (iv) any gain or loss, net of taxes,
realized upon the termination of any employee pension benefit plan, (v) net
gains (or losses) (except for all fees and expenses relating thereto) in respect
of dispositions of assets other than in the ordinary course of business, (vi)
the net income of any Subsidiary to the extent that the declaration of dividends
or similar distributions by that Subsidiary of that income is not at the time
permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Subsidiary or its stockholders, (vii)
any gain arising from the acquisition of any securities, or the extinguishment,
under GAAP, of any Indebtedness of such Person, (viii) transaction costs charged
in connection with the Refinancing, or (ix) amortization of intangible assets of
such Person and its Subsidiaries on a consolidated basis under GAAP.
"Consolidated Non-Cash Charges" of any Person means, for any period, the
aggregate depreciation, amortization and other non-cash charges of such Person
and its Subsidiaries on a Consolidated basis for such period, as determined in
accordance with GAAP (excluding any non-cash charge which requires an accrual or
reserve for cash charges for any future period).
"Consolidated Tangible Assets" means consolidated total assets of the
Company and its Subsidiaries as reported in the Company's Consolidated balance
sheet from time to time as required by "-- Certain Covenants -- Provision of
Financial Statements" less (A) (i) any asset which is treated as an intangible
asset in conformity with GAAP (including, without limitation, leasehold rights,
franchise rights, non-compete agreements, goodwill, unamortized debt discounts,
patents, patent applications, trademarks, trade names, copyrights and licenses),
and (ii) any deferred charges determined in conformity with GAAP (including,
without limitation, deferred finance charges and deferred membership origination
costs), plus (B) any treasury stock.
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"Consolidation" means, with respect to any Person, the consolidation of the
accounts of such Person and each of its Subsidiaries if and to the extent the
accounts of such Person and each of its Subsidiaries would normally be
consolidated with those of such Person, all in accordance with GAAP. The term
"Consolidated" shall have a similar meaning.
"Credit Card Program Guarantee" means the Company's obligation to remit
funds in excess of the sum of (a) $25.0 million plus (b) a reserve (of up to 25%
of the amount owed to the Company by a member which becomes an obligation due to
the credit card issuer by such member) with respect to the Company's credit card
program pursuant to the Company's Credit Card Program Agreement dated December
21, 1995, as such agreement, in whole or in part, may be amended, renewed,
extended, substituted, refinanced, restructured, replaced, supplemented, or
otherwise modified from time to time (including, without limitation, any
successive renewals, extensions, substitutions, refinancings, restructurings,
replacements, supplementations or other modifications of the foregoing).
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" under the Indenture means (i) all Senior
Indebtedness under, or in respect of, the Bank Credit Facility and the
Securitization Facility, and (ii) any other Senior Indebtedness which at the
time of determination, has an aggregate principal amount outstanding of at least
$15 million and is specifically designated in the instrument evidencing such
Senior Indebtedness or the agreement under which such Senior Indebtedness arises
as "Designated Senior Indebtedness" by the Company.
"Disinterested Director" means, with respect to any transaction or series
of related transactions, a member of the board of directors of the Company who
does not have any material direct or indirect financial interest in or with
respect to such transaction or series of related transactions.
"EBITDA" means the sum of Consolidated Net Income, Adjusted Consolidated
Interest Expense, Consolidated Income Tax Expense and Consolidated Non-Cash
Charges deducted in computing Consolidated Net Income in each case, for such
period, of the Company and its Subsidiaries on a Consolidated basis, all
determined in accordance with GAAP consistently applied.
"Exchange Act" means the United States Securities Exchange Act of 1934, as
amended, or any successor statute.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy. Fair Market Value shall be determined by the board
of directors of the Company acting in good faith and shall be evidenced by a
resolution of the board of directors.
"Franchise Program" means the program under which the Company and/or its
Subsidiaries grant franchises to third parties which require franchisees, among
other things, to pay fees to the Company and/or its Subsidiaries, and which,
among other things, grants to the franchisee the right to receive training from
the Company or its Subsidiaries or sell memberships to use facilities of the
franchisee and the Company or its Subsidiaries. The Franchise Program may
include the conversion of facilities owned by the Company or its Subsidiaries to
franchise facilities and includes such a program as it may be amended, renewed,
extended, substituted, restructured, replaced, supplemented or otherwise
modified from time to time (including, without limitation, any successive
renewal, extension, substitution, restructuring, replacement, supplementation or
other modification of the foregoing).
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, which
are in effect on the date of the Indenture.
"Guaranteed Debt" of any Person means, without duplication, all
Indebtedness of any other Person referred to in the definition of Indebtedness
below guaranteed directly or indirectly in any manner by such Person, or in
effect guaranteed directly or indirectly by such Person through an agreement (i)
to pay or purchase such Indebtedness or to advance or supply funds for the
payment or purchase of such Indebtedness, (ii) to purchase, sell or lease (as
lessee or lessor) property, or to purchase or sell services, primarily for the
purpose of enabling the
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debtor to make payment of such Indebtedness or to assure the holder of such
Indebtedness against loss, (iii) to supply funds to, or in any other manner
invest in, the debtor (including any agreement to pay for property or services
without requiring that such property be received or such services be rendered),
(iv) to maintain working capital or equity capital of the debtor, or otherwise
to maintain the net worth, solvency or other financial condition of the debtor,
or (v) otherwise to assure a creditor against loss; provided that the term
"guarantee" shall not include endorsements for collection or deposit, in either
case in the ordinary course of business or guarantees of operating leases.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities arising in the ordinary course of business, but including,
without limitation, all obligations, contingent or otherwise, of such Person in
connection with any letters of credit issued under letter of credit facilities,
acceptance facilities or other similar facilities and in connection with any
agreement to purchase, redeem, exchange, convert or otherwise acquire for value
any Capital Stock of such Person, or any warrants, rights or options to acquire
such Capital Stock, now or hereafter outstanding, (ii) all obligations of such
Person evidenced by bonds, notes, debentures or other similar instruments, (iii)
all indebtedness created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person (even if
the rights and remedies of the seller or lender under such agreement in the
event of default are limited to repossession or sale of such property), but
excluding trade payables arising in the ordinary course of business, (iv) all
obligations under Interest Rate Agreements of such Person, (v) all Capital Lease
Obligations of such Person, (vi) all Indebtedness referred to in clauses (i)
through (v) above of other Persons and all dividends of other Persons, the
payment of which is secured by (or for which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by) any Lien, upon or
with respect to property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or become
liable for the payment of such Indebtedness, (vii) all Guaranteed Debt of such
Person, (viii) all Redeemable Capital Stock issued by such Person valued at the
greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued and unpaid dividends, (ix) the Credit Card Program Guarantee, (x)
indebtedness incurred by a real estate investment trust in which the Company or
any Subsidiary has invested pursuant to clause (ix) of the definition of
"Permitted Investments" and as to which, in the event that the Company controls
such trust, any of the Company or any Subsidiary is directly or indirectly
liable (by virtue of the Company or any such Subsidiary being the primary
obligor on, guarantor of, or otherwise liable in respect to, such indebtedness),
and (xi) any amendment, supplement, modification, deferral, renewal, extension,
refunding or refinancing of any liability which constitutes Indebtedness of the
types referred to in clauses (i) through (ix) above. For purposes hereof, the
"maximum fixed repurchase price" of any Redeemable Capital Stock which does not
have a fixed repurchase price shall be calculated in accordance with the terms
of such Redeemable Capital Stock as if such Redeemable Capital Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by, the
Fair Market Value of such Redeemable Capital Stock, such Fair Market Value to be
determined in good faith by the board of directors of the issuer of such
Redeemable Capital Stock.
"Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest rate
protection agreements (including, without limitation, interest rate swaps, caps,
floors, collars and similar agreements) and/or other types of interest rate
hedging agreements from time to time.
"Investment" means, with respect to any Person, directly or indirectly, any
advance, loan (including guarantees) or other extension of credit or capital
contribution (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others) or any
purchase, acquisition or ownership (other than ownership obtained without
making, or becoming liable, directly or indirectly, contingent or otherwise, for
the making of, any advance, loan (or the forgiveness thereof), payment,
extension of credit or capital contribution in connection therewith), by such
Person of any Capital Stock, bonds, notes, debentures or other securities issued
or owned by any other Person and all other items that would be classified as
investments on a balance sheet prepared in accordance with GAAP.
"Issue Date" means the date on which the Notes are originally issued under
the Indenture.
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"Lien" means any mortgage or deed of trust, charge, pledge, lien (statutory
or otherwise), privilege, security interest, assignment, deposit, arrangement,
easement, hypothecation, claim, preference, priority or other encumbrance upon
or with respect to any property of any kind (including any conditional sale,
capital lease or other title retention agreement, any leases in the nature
thereof, and any agreement to give any security interest), real or personal,
movable or immovable, now owned or hereafter acquired.
"Maturity" means, when used with respect to the Notes, the date on which
the principal of the Notes becomes due and payable as therein provided or as
provided in the Indenture, whether at Stated Maturity, the Offer Date, the
Change of Control Purchase Date or the redemption date and whether by
declaration of acceleration, Offer in respect of Excess Proceeds, Chance of
Control Offer in respect of a Change of Control, call for redemption or
otherwise.
"Net Cash Proceeds" means (a) with respect to any Asset Sale by any Person,
the proceeds thereof (without duplication in respect of all Asset Sales) in the
form of cash or Temporary Cash Investments including payments in respect of
deferred payment obligations when received in the form of, or stock or other
assets when disposed of for, cash or Temporary Cash Investments (except to the
extent that such obligations are financed or sold with recourse to the Company
or any Subsidiary) net of (i) brokerage commissions and other reasonable fees
and expenses (including fees and expenses of counsel and investment bankers)
related to such Asset Sale, (ii) provisions for all taxes payable as a result of
such Asset Sale, (iii) payments made to retire Indebtedness where payment of
such Indebtedness is secured by the assets or properties the subject of such
Asset Sale, (iv) amounts required to be paid to any Person (other than the
Company or any Subsidiary) owning a beneficial interest in the assets subject to
the Asset Sale and (v) appropriate amounts to be provided by the Company or any
Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against
any liabilities associated with such Asset Sale and retained by the Company or
any Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as reflected in an officers'
certificate delivered to the Trustee, and (b) with respect to any issuance or
sale of Capital Stock or options, warrants or rights to purchase Capital Stock,
or debt securities or Capital Stock that have been converted into or exchanged
for Capital Stock as referred to under "-- Certain Covenants -- Limitation on
Restricted Payments", the proceeds of such issuance or sale in the form of cash
or Temporary Cash Investments including payments in respect of deferred payment
obligations when received in the form of, or stock or other assets when disposed
of for, cash or Temporary Cash Investments (except to the extent that such
obligations are financed or sold with recourse to the Company or any
Subsidiary), net of attorneys' fees, accountants' fees and brokerage,
consultation, underwriting and other fees and expenses actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Pari Passu Indebtedness" means any Indebtedness of the Company that is
pari passu in right of payment to the Notes.
"Permitted Indebtedness" means:
(i) Indebtedness under the Bank Credit Facility in an aggregate
principal amount at any one time outstanding not to exceed $70.0 million,
minus any permanent reductions of the amount outstanding under the Bank
Credit Facility, which reduction is a result of the Limitation on Sale of
Assets covenant of the Indenture;
(ii) Indebtedness under the Securitization Facility in an aggregate
amount not to exceed the greater of $160.0 million or 80% of the net book
value of the consolidated accounts receivable of the Company and its
Subsidiaries, calculated in accordance with GAAP;
(iii) Indebtedness of the Company (a) represented by the Notes, or (b)
that is incurred, in any amount, and in whole or in part, to (1) redeem all
of the Notes outstanding as described herein, or (2) effect a complete
defeasance or a covenant defeasance thereof as described herein; provided,
in either case, that any Indebtedness incurred under this subclause (b) is
actually applied in accordance with the applicable redemption or defeasance
provision of the Indenture;
(iv) Indebtedness of the Company outstanding on the date of the
Indenture and listed on a schedule thereto;
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(v) Indebtedness of the Company owing to a Subsidiary; provided that
any Indebtedness of the Company owing to a Subsidiary is made pursuant to
an intercompany note and is expressly subordinated in right of payment to
the payment and performance of the Company's obligations under the Notes,
and, upon an Event of Default, such Indebtedness shall not be due and
payable until such Event of Default is cured, waived or rescinded;
provided, further, that any disposition, pledge or transfer of any such
Indebtedness to a Person (other than a disposition, pledge or transfer to a
Subsidiary) shall be deemed to be an incurrence of such Indebtedness by the
Company not permitted by this clause (v);
(vi) obligations of the Company entered into in the ordinary course of
business pursuant to Interest Rate Agreements designed to protect the
Company against fluctuations in interest rates in respect of Indebtedness
of the Company as long as such obligations do not exceed the aggregate
principal amount of such Indebtedness then outstanding;
(vii) Indebtedness of the Company represented by Capital Lease
Obligations or Purchase Money Obligations or other Indebtedness incurred or
assumed in connection with the acquisition, improvement or development of
real or personal, movable or immovable, property in each case incurred for
the purpose of financing or refinancing all or any part of the purchase
price or cost of construction or improvement of property used in the
business of the Company and any refinancings of such Indebtedness made in
accordance with subclauses (a), (b) and (c) of clause (xi) below, in an
aggregate principal amount pursuant to this clause (vii) not to exceed
$25.0 million outstanding at any time; provided that the principal amount
of any Indebtedness permitted under this clause (vii) did not in each case
at the time of incurrence exceed the cost of the acquired or constructed
asset or improvement so financed;
(viii) Indebtedness of the Company in respect of performance bonds,
surety bonds and replevin bonds provided by the Company in the ordinary
course of business;
(ix) other Indebtedness of the Company that does not exceed $50.0
million in the aggregate at any one time outstanding;
(x) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or other financial instrument drawn
against insufficient funds in the ordinary course of business, provided
that such Indebtedness is extinguished within four business days of its
incurrence; and
(xi) any renewals, extensions, substitutions, refundings, refinancings
or replacements (collectively, a "refinancing") of any Indebtedness
described in clauses (iv) and (v) of this definition of "Permitted
Indebtedness", including any successive refinancings (a) so long as the
borrower under such refinancing is the Company or, if not the Company, the
same as the borrower of the Indebtedness being refinanced, (b) the
aggregate principal amount of Indebtedness represented thereby as of the
date of the Indenture is not increased by such refinancing by an amount
greater than the lesser of (I) the stated amount of any premium or other
payment required to be paid in connection with such a refinancing pursuant
to the terms of the Indebtedness being refinanced or (II) the amount of
premium or other payment actually paid at such time to refinance the
Indebtedness, plus, in either case, the amount of expenses of the Company
incurred in connection with such refinancing, and (c) (A) in the case of
any refinancing of Indebtedness that is Subordinated Indebtedness, such new
Indebtedness is made subordinated to the Notes at least to the same extent
as the Indebtedness being refinanced and (B) in the case of Pari Passu
Indebtedness or Subordinated Indebtedness, as the case may be, such
refinancing does not reduce the Average Life to Stated Maturity or the
Stated Maturity of such Indebtedness.
"Permitted Investment" means: (i) Investments in any Subsidiary or any
Person which, as a result of such Investment, (a) becomes a Subsidiary or (b) is
merged or consolidated with or into, or transfers or conveys substantially all
of its assets to, or is liquidated into, the Company or any Subsidiary; (ii)
Indebtedness of the Company described under clause (v) of the definition of
"Permitted Indebtedness"; (iii) Investments in any of the Notes; (iv) Temporary
Cash Investments; (v) Investments acquired by the Company or any Subsidiary in
connection with an Asset Sale permitted under "-- Certain
Covenants -- Limitation on Sale of Assets" to the extent such Investments are
non-cash proceeds as permitted under such covenant; (vi) Investments in
existence on the date of the Indenture; (vii) Investments in the aggregate
amount of $5.0 million to purchase Capital Stock of
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any Subsidiary; (viii) any advance, loan (including guarantees) or other
extension of credit to any Person who purchases or acquires assets of the
Company or any Subsidiaries which are to be included in a business which will be
or is a party to the Franchise Program, limited to the purchase or acquisition
price of such assets; (ix) a one-time contribution of real property
independently valued at not more than $10.0 million to a real estate investment
trust which is an Affiliate of the Company and additional contributions (and/or
the non-cash component of sales in a situation where less than 75% of the
consideration was received in cash or Cash Equivalents) to such trust of real
property independently valued, which in the aggregate at the time of each
additional contribution, together with all previous additional contributions, do
not have a value in excess of 3% of the Company's Consolidated Tangible Assets
as of the end of the next immediately preceding fiscal year; and (x) any other
Investments in joint ventures, partnerships, real estate investment trusts or
other Persons reasonably related or complementary to the business of the Company
on the date of the Indenture in an aggregate amount not greater than $25.0
million at any one time outstanding. In connection with any assets or property
contributed or transferred to any Person as an Investment, such property and
assets shall be equal to the Fair Market Value (as determined by the board of
directors of the Company) at the time of Investment.
"Permitted Subsidiary Indebtedness" means:
(i) Indebtedness of a Subsidiary owing to the Company or another
Subsidiary; provided that such Indebtedness is made pursuant to an
intercompany note, and, upon an Event of Default, all amounts owing
pursuant to such Indebtedness are immediately due and payable; and
provided, further, that (a) any disposition, pledge or transfer of any such
Indebtedness to a Person (other than the Company or a Subsidiary) shall be
an incurrence of such Indebtedness by the obligor not within the definition
of "Permitted Subsidiary Indebtedness" pursuant to this clause (i), and (b)
any transaction pursuant to which any Subsidiary ceases to be a Subsidiary
shall be deemed to be the incurrence of Indebtedness by such Subsidiary
that is not within the definition of "Permitted Subsidiary Indebtedness"
pursuant to this clause (i);
(ii) Indebtedness of a Subsidiary represented by Indebtedness which
would be permitted by clause (iv), (vi), (vii), (viii), (ix), (x) or (xi)
of the definition of "Permitted Indebtedness" if incurred by the Company;
(iii) Acquired Indebtedness of a Subsidiary that would be permitted to
be incurred by the Company if such Acquired Indebtedness were being
incurred by the Company;
(iv) Indebtedness of a Subsidiary under the Securitization Facility;
(v) guarantees of Senior Indebtedness of the Company; and
(vi) guarantees of Indebtedness of Affiliates provided that the
Investment in such Affiliate complies with the limitation on Restricted
Payments covenant of the Indenture or constitutes a Permitted Investment.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class in such Person.
"Public Equity Offering" means an underwritten public offering of Capital
Stock (other than Redeemable Capital Stock) pursuant to a registration statement
that has been declared effective by the SEC (other than a registration statement
on Form S-8 or any successor form or otherwise relating to equity securities
issuable under any employee benefit plan of the Company).
"Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to the business of the Company and its Subsidiaries and any
additions and accessions thereto, which are purchased at any time after the
Notes are issued; provided that (i) the security agreement or conditional sales
or other title retention contract pursuant to which the Lien on such assets is
created (collectively a "Purchase Money Security
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Agreement") shall be entered into within 120 days after the purchase or
substantial completion of the construction of such assets and shall at all times
be confined solely to the assets so purchased or acquired, any additions and
accessions thereto and any proceeds therefrom, (ii) at no time shall the
aggregate principal amount of the outstanding Indebtedness secured thereby, be
increased, except in connection with the purchase of additions and accession
thereto and except in respect of fees and other obligations in respect of such
Indebtedness, and (iii) (A) the aggregate outstanding principal amount of
Indebtedness secured thereby (determined on a per asset basis in the case of any
additions and accessions) shall not at the time such Purchase Money Security
Agreement is entered into exceed 100% of the purchase price to the Company and
its Subsidiaries of the assets subject thereto, or (B) the Indebtedness secured
thereby shall be with recourse solely to the assets so purchased or acquired,
any additions and accessions thereto and any proceeds therefrom.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any Capital Stock that, either by its
terms or by the terms of any security into which it is convertible or
exchangeable or otherwise, is or upon the happening of any event or passage of
time would be, required to be redeemed prior to any Stated Maturity of the
principal of the Notes or is redeemable at the option of the holder thereof at
any time prior to any such Stated Maturity, or is convertible into or
exchangeable for debt securities at any time prior to any such Stated Maturity
at the option of the holder thereof.
"Refinancing" means (i) the offering and sale of the Notes pursuant to the
Indenture, (ii) the modification of the Bank Credit Facility, and (iii) the
consummation of the tender offer by the Company for its 13% Notes outstanding
prior to the Issue Date.
"SEC" means the United States Securities and Exchange Commission, as from
time to time constituted, created under the Exchange Act, or if at any time
after the execution of the Indenture such SEC is not existing and performing the
duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.
"Securities Act" means the United States Securities Act of 1933, as
amended, or any successor statute.
"Securitization Facility" means the asset-backed securities issued by the
H&T Master Trust on December 13, 1996 in the aggregate principal amount of
$160.0 million, as such facility in whole or in part, may be amended, renewed,
extended, substituted, refinanced, restructured, replaced (including, without
limitation, with bank financing secured by receivables), supplemented or
otherwise modified from time to time (including, without limitation, any
successive renewals, extensions, substitutions, refinancing, restructurings,
replacements, supplementations or other modifications of the foregoing).
"Significant Subsidiary" means any Subsidiary that would be a "Significant
Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X
promulgated by the SEC.
"Stated Maturity" means, when used with respect to any Indebtedness or any
installment of interest thereon, the dates specified in such Indebtedness as the
fixed date on which the principal of such Indebtedness or such installment of
interest, as the case may be, is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company which is by
its terms expressly subordinated in right of payment to the Notes.
"Subsidiary" means any Person, a majority of the equity ownership or the
Voting Stock of which is at the time owned, directly or indirectly, by the
Company or by one or more other Subsidiaries, or by the Company and one or more
other Subsidiaries; provided that (i) any Unrestricted Subsidiary shall not be
deemed a Subsidiary under the Indenture, and (ii) any real estate investment
trust in which the Company or any Subsidiary has invested pursuant to clause
(ix) of the definition of "Permitted Investment" shall not be deemed a
Subsidiary under the Indenture.
"Temporary Cash Investments" means (i) any evidence of Indebtedness,
maturing not more than one year after the date of acquisition, issued by the
United States of America, or an instrumentality or agency thereof, and
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guaranteed fully as to principal, premium, if any, and interest by the United
States of America, (ii) any certificate of deposit (or, with respect to non-U.S.
banking institutions, similar instruments) maturing not more than one year after
the date of acquisition, issued by, or time deposit of, a commercial banking
institution that is a member of the Federal Reserve System or a commercial
banking institution organized and located in a country recognized by the United
States of America, in each case, that has combined capital and surplus and
undivided profits of not less than $500 million (or the foreign currency
equivalent thereof), whose debt has a rating, at the time as of which any
investment therein is made, of "P-1" (or higher) according to Moody's Investors
Service, Inc. ("Moody's") or any successor rating agency or "A-1" (or higher)
according to Standard & Poor's Rating Group, a division of McGraw Hill, Inc.
("S&P") or any successor rating agency, (iii) commercial paper, maturing not
more than one year after the date of acquisition, issued by a corporation (other
than an Affiliate or Subsidiary of the Company) organized and existing under the
laws of the United States of America with a rating, at the time as of which any
investment therein is made, of "P-1" (or higher) according to Moody's or "A-1"
(or higher) according to S&P, (iv) any money market deposit accounts or demand
deposit accounts issued or offered by a domestic commercial bank or a commercial
banking institution organized and located in a country recognized by the United
States of America, in each case having capital and surplus in excess of $500
million (or the foreign currency equivalent thereof); provided that the
short-term debt of such commercial bank has a rating, at the time of Investment,
of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P,
and (v) any other Investments, that at any one time do not exceed $100,000 in
the aggregate, issued or offered by any domestic commercial bank or any
commercial banking institution organized and located in a country recognized by
the United States of America.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended, or
any successor statute.
"13% Notes" means the 13% Senior Subordinated Notes due 2003 of the
Company.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
exists on the Issue Date and is so designated as an Unrestricted Subsidiary on a
schedule attached to the Indenture, (ii) any subsidiary of the Company that at
the time of determination shall be an Unrestricted Subsidiary (as designated by
the board of directors of the Company, as provided below), and (iii) any
subsidiary of an Unrestricted Subsidiary. The board of directors of the Company
may designate any subsidiary of the Company (including any newly acquired or
newly formed subsidiary) to be an Unrestricted Subsidiary if all of the
following conditions apply: (a) neither the Company nor any of its Subsidiaries
provides credit support for Indebtedness of such Unrestricted Subsidiary
(including any undertaking, agreement or instrument evidencing such
Indebtedness), (b) such Unrestricted Subsidiary is not liable, directly or
indirectly, with respect to any Indebtedness other than Unrestricted Subsidiary
Indebtedness or the Bank Credit Facility, (c) any Investment by the Company in
such Unrestricted Subsidiary made as a result of designating such subsidiary an
Unrestricted Subsidiary shall not violate the provisions described under
"-- Certain Covenants -- Limitation on Unrestricted Subsidiaries" and such
Unrestricted Subsidiary is not party to any agreement, contract, arrangement or
understanding at such time with the Company or any other subsidiary of the
Company unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such other subsidiary than
those that might be obtained at the time from Persons who are not Affiliates of
the Company or, in the event such condition is not satisfied, the value of such
agreement, contract, arrangement or understanding to such Unrestricted
Subsidiary shall be deemed an Investment, and (d) such Unrestricted Subsidiary
does not own any Capital Stock in any subsidiary of the Company which is not
simultaneously being designated an Unrestricted Subsidiary. Any such designation
by the board of directors of the Company shall be evidenced to the Trustee by
filing with the Trustee a board resolution giving effect to such designation and
an officers' certificate certifying that such designation complies with the
foregoing conditions and any Investment by the Company in such Unrestricted
Subsidiary shall be deemed a Restricted Payment on the date of designation in an
amount equal to the greater of (1) the net book value of such Investment or (2)
the Fair Market Value of such Investment as determined in good faith by the
Company's board of directors. The board of directors of the Company may
designate any Unrestricted Subsidiary as a Subsidiary; provided (i) that if such
Unrestricted Subsidiary has any Indebtedness, that immediately after giving
effect to such designation, the Company could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness or Permitted Subsidiary
Indebtedness) pursuant to the restrictions under "-- Certain
Covenants -- Limitation on Indebtedness", and (ii) that all Indebtedness of such
Subsidiary shall be deemed to be incurred on the date such Unrestricted
Subsidiary becomes a Subsidiary.
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"Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary means
Indebtedness of any Unrestricted Subsidiary (i) as to which neither the Company
nor any Subsidiary is directly or indirectly liable (by virtue of the Company or
any such Subsidiary being the primary obligor on, guarantor of, or otherwise
liable in any respect to, such Indebtedness), and (ii) which, upon the
occurrence of a default with respect thereto, does not result in, or permit any
holder of any Indebtedness of the Company or any Subsidiary to declare, a
default on such Indebtedness of the Company or any Subsidiary or cause the
payment thereof to be accelerated or payable prior to its Stated Maturity.
"Voting Stock" means Capital Stock of the class or classes pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of a corporation (irrespective of whether or not at the time Capital
Stock of any other class or classes shall have or might have voting power by
reason of the happening of any contingency).
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of which
(other than qualifying shares, if any) is owned by the Company or another Wholly
Owned Subsidiary.
BOOK-ENTRY DELIVERY AND FORM
The Old Notes, which were offered and sold to qualified institutional
buyers (as defined under Rule 144A) ("QIBs") and were deposited with the Trustee
as custodian for DTC and registered in the name of Cede & Co. are registered in
book-entry form and are represented by two global notes, in definitive, fully
registered form without interest coupons (the "U.S. Global Notes").
The Old Notes (i) originally purchased by or transferred to "accredited
investors" (as defined in Rule 501(a)(1), (2), (3) and (7) under the Securities
Act) ("Institutional Accredited Investors") who are not QIBs, or (ii) held by
QIBs who elected to take physical delivery of their certificates instead of
holding their interest through the U.S. Global Notes (and which are then unable
to trade through DTC) (collectively referred to herein as the "Non-Global
Purchasers"), were issued in registered form without interest coupons
("Certificated Notes"). Upon the transfer of such Certificated Notes held by a
Non-Global Purchaser to a QIB, such Certificated Notes will, unless the
transferee requests otherwise or the U.S. Global Notes have previously been
exchanged in whole for Certificated Notes, be exchanged for an interest in the
U.S. Global Note.
The Old Notes offered and sold to persons outside the United States who
received such Old Notes pursuant to sales in accordance with Regulation S under
the Securities Act were each initially represented by a global note certificate
in fully registered form without interest coupons (the "Offshore Global Note
and, together with the U.S. Global Notes, the "Old Global Notes"). The Offshore
Global Note was deposited with the Trustee as custodian for DTC and registered
in the name of Cede & Co.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC holds securities for its participants and
facilitates the clearance and settlement of securities transactions between
participants through electronic computerized book-entry changes in accounts of
its participants, thereby eliminating the need for physical movement of
securities certificates. Participants include securities brokers and dealers,
banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Except as set forth below, it is expected that the New Notes will be issued
in global form (the "New Global Notes" and, together with the Old Global Notes,
the "Global Notes"). The Company expects that pursuant to procedures established
by DTC (a) upon the issuance of the New Global Notes, DTC or its custodian will
credit on its internal system portions of the New Global Notes which shall be
comprised of the corresponding respective principal amount of the Old Global
Note to the respective accounts of persons who have accounts with such
depositary, and (b) ownership of the New Notes will be shown on, and the
transfer of ownership thereof will be effected only through, records maintained
by DTC or its nominee (with respect to interests of Participants (as
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defined)) and the records of participants (with respect to interests of persons
other than participants). Such accounts initially will be designated by the
Exchange Agent and ownership of beneficial interest in the New Global Notes will
be limited to persons who have accounts with DTC ("Participants") or persons who
hold interests through Participants. QIBs may hold their interests in the New
Global Notes directly through DTC if they are Participants in such system, or
indirectly through organizations which are Participants in such system.
So long as DTC or its nominee is the registered owner or holder of a New
Global Note, DTC or such nominee, as the case may be, will be considered the
sole record owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owners of an interest
in the Global Notes will be able to transfer that interest except in accordance
with DTC's applicable procedures in addition to those provided for under the
Indenture.
Payments of the principal of, premium (if any) and interest on the New
Global Notes will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. None of the Company, the Trustee or any paying agent
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Notes or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium (if any) or interest in respect of the Global Notes will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial ownership interests in the principal amount of such Global
Note, as shown on the records of DTC or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in such Global
Note held through such participants will be governed by standing instructions
and customary practices, as is now the case with securities held for the
accounts of customers registered in the names of nominees for such customers.
Such payments will be the responsibility of such participants.
Transfer between participants in DTC will be effected in the ordinary way
in accordance with DTC rules. If a holder requires physical delivery of
Certificated Notes for any reason, including selling the Notes to persons in
states which require delivery of the Notes or pledging the Notes, such holder
must transfer its interest in the U.S. Global Note, in accordance with the
normal procedures of DTC and the procedures set forth in the Indenture.
Transfers between participants in Euroclear and Cedel will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
DTC has advised the Company that neither DTC nor Cede & Co. will consent or
vote with respect to the Global Notes. Under its usual procedures, DTC mails an
Omnibus Proxy to the Company as soon as possible after the record date. The
Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those direct
participants to whose accounts the Global Notes are credited on the record date
(identified in a listing attached to the Omnibus Proxy).
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Interests in the New Global Notes will be exchangeable or transferable, as
the case may be, for Certificated Notes if (i) DTC notifies the Company that it
is unwilling or unable to continue as depositary for such New Global Notes, or
DTC ceases to be a "Clearing Agency" registered under the Exchange Act, and a
successor depositary is not appointed by the Company within 90 days, or (ii) an
Event of Default has occurred and is continuing with respect to such New Notes.
Upon the occurrence of any of the events described in the preceding sentence,
the Company will cause the appropriate Certificated Notes to be delivered.
75
<PAGE> 78
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer may be deemed to be a statutory underwriter, must acknowledge
that it acquired the Old Notes for its own account as a result of market-making
activities or other trading activities and must agree that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such New Notes. This Prospectus, as it may be amended or supplemented
from time to time, may be used by Participating Broker-Dealers in connection
with resales of New Notes received in exchange for Old Notes if such Old Notes
were acquired by such Participating Broker-Dealers for their own accounts as a
result of market-making or other trading activities. Subject to certain
conditions, the Company has agreed that this Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of such New Notes. However, a Participating
Broker-Dealer who intends to use this Prospectus in connection with the resale
of New Notes received in exchange for Old Notes pursuant to the Exchange Offer
must notify the Company, or cause the Company to be notified, on or prior to the
Expiration Date, that it is a Participating Broker-Dealer. Such notice may be
given in the space provided for that purpose in the Letter of Transmittal or may
be delivered to the Exchange Agent at one of the addresses set forth herein
under "The Exchange Offer -- The Exchange Agent; Assistance". See "The Exchange
Offer -- Resales of the New Notes".
The Company will not receive any cash proceeds from the Exchange Offer. New
Notes received by broker-dealers for their own accounts in connection with the
Exchange Offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the New Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or at negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such New Notes.
Any broker-dealer that resells New Notes that were received by it for its
own account in connection with the Exchange Offer or any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of New Notes any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that by acknowledging that it will deliver and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange Act
and in accordance therewith, files reports, proxy statements and other
information with the SEC. Reports, registration statements, proxy statements and
other information filed by the Company with the SEC can be inspected and copied
at the public reference facility maintained by the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and the SEC's Regional
Offices, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can also be obtained from the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549. The SEC maintains a web site at
http://www.sec.gov that contains reports, registration statements, proxy
statements and other information regarding registrants, such as the Company,
that file electronically with the SEC.
The Company has filed a Registration Statement on Form S-4 (the
"Registration Statement") with the SEC under the Securities Act, in respect of
the New Notes offered for exchange hereby. For purposes hereof, the term
"Registration Statement" means the initial Registration Statement and any and
all amendments thereto. This Prospectus omits certain information contained in
the Registration Statement as permitted by the rules and regulations of the SEC.
For further information with respect to the Company and the New Notes offered
for exchange hereby, reference is made to the Registration Statement, including
the exhibits thereto. Statements herein concerning the contents of any contract
or other document are not necessarily complete, and in each instance reference
is made to such contract or other document filed with the SEC as an exhibit to
the Registration Statement, or otherwise, each such statement being qualified
by, and subject to, such reference in all respects.
76
<PAGE> 79
LEGAL MATTERS
The validity, authorization and issuance of the New Notes offered hereby
will be passed upon for the Company by Benesch, Friedlander, Coplan & Aronoff
LLP of Cleveland, Ohio. George N. Aronoff, a partner in Benesch, Friedlander,
Coplan & Aronoff LLP, owns 22,359 shares of the Company's common stock.
EXPERTS
The consolidated financial statements and schedule of the Company at
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996, appearing and incorporated by reference in this Prospectus
and the Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing herein and
incorporated by reference, and are included herein and incorporated by reference
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the SEC pursuant to the
Exchange Act are incorporated herein by reference:
(1) the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1996 (file no. 0-27478) (the "Annual Report");
(2) the Company's Quarterly Report on Form 10-Q/A for the quarter ended
March 31, 1997 (file no. 0-27478);
(3) the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 (file no. 0-27478);
(4) the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 (file no. 0-27478);
(5) the Company's Current Report on Form 8-K filed with the SEC on
August 4, 1997 (file no. 0-27478);
(6) the Company's Proxy Statement for its 1997 Annual Meeting of
Stockholders filed with the SEC on October 17, 1997 (file no.
0-27478); and
(7) the description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A/A filed with the SEC on
January 3, 1996 (file no. 0-27478).
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the Expiration Date shall be deemed incorporated by reference in this Prospectus
and a part hereof from the respective date of filing each such document. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company undertakes to provide, without charge, to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, upon the written or oral request of any such person, a copy of any
and all of the documents referred to above that have been incorporated in this
Prospectus by reference, other than exhibits to such documents. Requests for
such copies should be directed to the Secretary, Bally Total Fitness Holding
Corporation, 8700 West Bryn Mawr Avenue, Chicago, Illinois 60631, telephone
(773) 380-3000.
77
<PAGE> 80
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 81
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 September 30, 1997 (unaudited)....... F-23
Consolidated statement of operations for the nine months ended September 30,
1997 and 1996 (unaudited).................................................. F-24
Consolidated statement of stockholders' equity for the nine months ended
September 30, 1997 (unaudited)............................................. F-25
Consolidated statement of cash flows for the nine months ended September 30,
1997 and 1996 (unaudited).................................................. F-26
Notes to condensed consolidated financial statements for the nine months
ended September 30, 1997 and 1996 (unaudited).............................. F-28
</TABLE>
F-1
<PAGE> 82
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Bally Total Fitness Holding Corporation
We have audited the accompanying consolidated balance sheet of Bally Total
Fitness Holding Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Bally Total Fitness Holding Corporation at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
The consolidated financial statements referred to above have been restated
as discussed in the "Summary of significant accounting policies -- Restatement
and Membership revenue recognition" notes to the consolidated financial
statements.
ERNST & YOUNG LLP
Chicago, Illinois
February 25, 1997, except for the
"Summary of significant accounting
policies -- Restatement, Membership
revenue recognition and Impact of
recently issued accounting
standards" and "Income Taxes" notes,
as to which the date is July 14,
1997
F-2
<PAGE> 83
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> 84
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........................................... 14,092 16,220 20,929
---------- ---------- ----------
639,199 653,374 682,043
Operating costs and expenses:
Fitness center operations................................ 366,466 396,564 407,119
Member processing and collection centers................. 42,257 50,255 52,080
Advertising.............................................. 47,428 50,037 47,578
General and administrative............................... 23,586 21,603 21,925
Provision for doubtful receivables....................... 80,350 72,145 103,930
Depreciation and amortization............................ 55,940 57,359 58,856
Change in deferred membership origination costs.......... 4,113 428 6,692
---------- ---------- ----------
620,140 648,391 698,180
---------- ---------- ----------
Operating income (loss).................................... 19,059 4,983 (16,137)
Interest income............................................ 988 179
Interest expense........................................... (47,644) (43,750) (38,556)
---------- ---------- ----------
Loss before income taxes and extraordinary item............ (27,597) (38,588) (54,693)
Income tax benefit......................................... 2,700 7,188 15,213
---------- ---------- ----------
Loss before extraordinary item............................. (24,897) (31,400) (39,480)
Extraordinary gain on extinguishment of debt............... 5,655
---------- ---------- ----------
Net loss................................................... $ (19,242) $ (31,400) $ (39,480)
========== ========== ==========
Pro forma net loss reflecting income taxes
on a separate return basis............................... $ (38,469) $ (54,640)
========== ==========
Per common share (pro forma for 1995 and 1994):
Loss before extraordinary item........................... $ (2.04) $ (3.25) $ (4.61)
Extraordinary gain on extinguishment of debt............. .46
---------- ---------- ----------
Net loss................................................. $ (1.58) $ (3.25) $ (4.61)
========== ========== ==========
Average common shares outstanding (pro forma for
1995 and 1994)........................................... 12,174,601 11,845,161 11,845,161
========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 85
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> 86
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> 87
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> 88
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements include the accounts of
Bally Total Fitness Holding Corporation (the "Company") and the subsidiaries
which it controls. The Company, through its subsidiaries, is a nationwide
commercial operator of fitness centers with approximately 320 facilities
concentrated in 27 states and Canada. The Company operates in one industry
segment, and all significant revenues arise from the commercial operation of
fitness centers, primarily in major metropolitan markets in the United States.
Unless otherwise specified in the text, references to the Company include the
Company and its subsidiaries.
The Company was a wholly owned subsidiary of Bally Entertainment
Corporation ("Entertainment") until the consummation of Entertainment's spin-off
of the Company. On November 6, 1995, the Board of Directors of Entertainment
declared a distribution in the form of a dividend (the "Spin-off") to holders of
record of its common stock as of the close of business on November 15, 1995 (the
"Record Date") on the basis of one share of common stock, par value $.01 per
share (the "Common Stock") of the Company, along with an associated stock
purchase right (a "Right") issued pursuant to a stockholder rights plan (the
"Stockholders Rights Plan"), for every four shares of Entertainment common stock
held on the Record Date. On January 9, 1996 (the "Distribution Date"),
11,845,161 shares of Common Stock were distributed. For financial accounting
purposes, the Company has reflected the effect of the Spin-off as of December
31, 1995.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which require the
Company's management to make estimates and assumptions that affect the amounts
reported therein. Actual results could vary from such estimates.
Restatement
The Staff of the Securities and Exchange Commission (the "SEC Staff") has
advised the Company, in connection with an offering of Common Stock, it requires
all registrants operating fitness centers with membership plans that include
initial membership fees to follow a "deferral method" of accounting with respect
to the recognition of such initial membership fees. The Company's fitness
centers primarily offer a dues membership, which permits members, upon paying
initial membership fees, which may be financed, to maintain their membership on
a month-to-month basis as long as monthly dues payments are made. Since 1985,
the Company has recognized the initial membership fee portion of the membership
as revenue at the time the membership was sold (when contractually enforceable)
and deferred the dues portion of such membership (when the dues were waived or
prepaid) under a method that approximated the "selling and service" method. In
connection with an offering of Common Stock, the SEC Staff informed the Company
it no longer agreed with this methodology and the Company should change its
method of recognizing initial membership fees to a "deferral method", which
recognizes the initial membership fee over the weighted average expected life of
the memberships sold. Following a series of extensive discussions with the SEC
Staff, the Company has agreed to restate its consolidated financial statements
for all years presented to this new method. See "-- Membership revenue
recognition". Accordingly, the accompanying consolidated financial statements
have been restated from those originally reported to reflect the resolution of
these discussions between the Company and the SEC Staff regarding revenue
recognition methods. The deferral of historical revenues resulting from the
change in the method of recognizing membership revenue had no impact on the
Company's liquidity or cash flows; and
F-8
<PAGE> 89
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
summarized financial information illustrating the effect of the restatement on
the Company's consolidated financial statements is as follows:
<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>
In addition, certain reclassifications (primarily interest income) have
been made to the financial statements to conform with the current presentation.
Cash equivalents
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents. The carrying amount
of cash equivalents approximates fair value due to the short maturity of those
instruments.
Property and equipment
Depreciation of buildings, equipment and furnishings is provided on the
straight-line method over the estimated economic lives of the related assets and
amortization of leasehold improvements is provided on the straight-line method
over the lesser of the estimated economic lives of the improvements or the lease
periods. Depreciation and amortization of property and equipment was $48,444,
$51,999 and $53,476 for 1996, 1995 and 1994, respectively.
Deferred finance costs
Deferred finance costs are amortized over the terms of the related debt
using the bonds outstanding method. Included in "Other assets" at December 31,
1996 and 1995 were deferred finance costs of $8,252 and $10,971, respectively,
net of accumulated amortization of $4,430 and $4,034, respectively.
Intangible assets
Intangible assets consist principally of cost in excess of net assets of
acquired businesses (goodwill), which is being amortized on the straight-line
method over periods ranging up to forty years from dates of acquisition, and
amounts assigned to acquired operating lease rights, which are being amortized
on the straight-line method over the remaining lease periods.
F-9
<PAGE> 90
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
The Company evaluates annually whether the remaining estimated useful life
of goodwill may warrant revision or the remaining balance of goodwill may not be
recoverable, generally considering expectations of future profitability and cash
flows (undiscounted and without interest charges) on a consolidated basis. If
the sum of the Company's expected future cash flows was less than the carrying
value of the Company's long-lived assets and identifiable intangibles, an
impairment loss would be recognized equal to the amount by which the carrying
value of the Company's long-lived assets and identifiable intangibles exceeded
their fair value. Based on present operations and strategic plans, the Company
believes that no impairment of goodwill exists at December 31, 1996. However, if
future operations do not perform as expected, or if the Company's strategic
plans for its business were to change, a reduction in the carrying value of
these assets may be required.
Membership revenue recognition
The Company's fitness centers primarily offer a dues membership, which
permits members, upon paying initial membership fees, which may be financed, to
maintain their membership on a month-to-month basis as long as monthly dues
payments are made. Initial membership fees may be paid-in-full when members join
or may be financed via installment contracts over periods ranging up to 36
months. Revenues from initial membership fees are deferred and recognized
straight-line over the weighted average expected life of the memberships, which
for paid-in-full memberships and financed memberships sold after December 31,
1993 has been calculated to be 36 months and 22 months, respectively (previously
34 months and 20 months, respectively). Costs directly related to the
origination of memberships (substantially all of which are sales commissions
paid, which are included in "Fitness center operations") are also deferred and
are amortized using the same methodology as for initial membership fees
described above. Dues revenue is recorded as monthly services are provided.
Accordingly, when dues are prepaid, the prepaid portion is deferred and
recognized over the applicable term. Installment contracts bear interest at, or
are adjusted for financial accounting purposes at the time the contracts are
sold to, rates for comparable consumer financing contracts. Unearned finance
charges are amortized over the term of the contracts on the
sum-of-the-months-digits method, which approximates the interest method.
Components of deferred revenues as of December 31, 1996 and 1995 are as
follows:
<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> 91
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
Components of the change in deferred revenues for the years ended December
31, 1996, 1995 and 1994 are as follows:
<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> 92
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
Loss per common share
Loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the year, which
totalled 12,174,601 shares for 1996. Certain restricted stock was issued subject
to forfeiture unless certain conditions are met. These contingent shares are
considered common stock equivalents and are excluded from the loss per share
computation until the conditions are met because their effect would be
anti-dilutive.
Impact of recently issued accounting standards
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", which
provides new accounting and reporting standards for sales, securitizations, and
servicing of receivables and other financial assets, secured borrowing and
collateral transactions, and extinguishments of liabilities occurring after
December 31, 1996. SFAS No. 125 addresses whether a transfer of financial assets
constitutes a sale and, if so, the determination of any resulting gain or loss.
SFAS No. 125 is based on a "financial-components approach" that focuses on
control. Under this approach, following a transfer of financial assets
(including portions of financial assets), an entity recognizes the assets it
controls and liabilities it has incurred, and derecognizes financial assets for
which control has been surrendered and financial liabilities that have been
extinguished. The Company has determined that SFAS No. 125 does not have any
impact on the accounting for its securitization facility.
EXTRAORDINARY ITEM
The extraordinary gain on extinguishment of debt for 1996 consists of (i) a
gain of $9,880 ($.81 per share), net of income taxes of $5,320, resulting from a
$15,200 tax obligation to Entertainment which was forgiven as part of the
December 1996 merger (the "Merger") of Entertainment with and into Hilton Hotels
Corporation ("Hilton") and (ii) a charge of $4,225 ($.35 per share), net of
income taxes of $2,270, resulting from the refinancing of the Company's
securitization facility.
INSTALLMENT CONTRACTS RECEIVABLE
<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> 93
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 credit totalled $12,687. The
F-13
<PAGE> 94
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
revolving credit agreement is secured by substantially all real and personal
property (excluding installment contracts receivable) of the Company.
The Company leases certain fitness equipment under capital leases expiring
in periods ranging from three to five years. Included in "Property and
equipment" at December 31, 1996 and 1995 were assets recorded under capital
leases of $11,981 and $6,018, respectively, net of accumulated amortization of
$3,318 and $1,611, respectively.
The 13% Senior Subordinated Notes due 2003 (the "13% Notes") are not
subject to any sinking fund requirement, but may be redeemed beginning in
January 1998, in whole or in part, with premiums ranging from 6.5% in 1998 to
zero in 2000 and thereafter. The payment of the 13% Notes is subordinated to the
prior payment in full of all senior indebtedness of the Company, as defined
(approximately $198,000 at December 31, 1996).
The Company is restricted from paying cash dividends by the terms of its
13% Notes and its revolving credit agreement. The covenants also limit the
amounts available for capital expenditures, restrict additional borrowings, and
require maintenance of certain financial ratios.
Maturities of long-term debt and future minimum payments under capital
leases together with the present value of future minimum rentals as of December
31, 1996 are as follows:
<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 Company's
F-14
<PAGE> 95
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
deferred tax assets and liabilities as of December 31, 1996 and 1995, along with
their classification, are as follows:
<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, the settlement did not have
an adverse effect on the Company's consolidated financial position or results of
F-15
<PAGE> 96
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
operations. For financial accounting purposes, this settlement resulted in a
reversal of previously recorded pre-acquisition contingencies totaling $10,331,
which was reflected as a reduction of intangible assets. Since Entertainment had
agreed to indemnify the Company for a substantial portion of such contingencies,
the settlement resulted in a $7,669 reduction of contributed capital.
STOCKHOLDERS' EQUITY
The Series A Junior Participating Preferred Stock, $.10 par value (the
"Series A Junior Stock"), if issued, will have a minimum preferential quarterly
dividend payment equal to the greater of (i) $1.00 per share and (ii) an amount
equal to 100 times the aggregate dividends declared per share of Common Stock
during the related quarter. In the event of liquidation, the holders of the
shares of Series A Junior Stock will be entitled to a preferential liquidation
payment equal to the greater of (a) $100 per share and (b) an amount equal to
100 times the liquidation payment made per share of Common Stock. Each share of
Series A Junior Stock will have 100 votes, voting together with the shares of
Common Stock. Finally, in the event of any merger, consolidation or other
transaction in which shares of Common Stock are exchanged, each share of Series
A Junior Stock will be entitled to receive 100 times the amount received per
share of Common Stock. These rights are protected by customary antidilution
provisions.
The Board of Directors of the Company adopted the Stockholder Rights Plan
and issued and distributed a Right for each share of Common Stock distributed to
Entertainment stockholders pursuant to the Spin-off. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Junior Stock at a price of $40.00 per one one-hundredth of a share of
Series A Junior Stock, subject to adjustment (the "Purchase Price").
The Rights are not exercisable or transferable apart from the Common Stock
until the occurrence of one of the following: (i) ten days (or such later date
as may be determined by action of the Board of Directors of the Company prior to
such time as any person or group of affiliated persons becomes an Acquiring
Person) after the date of public announcement that a person (other than an
Exempt Person, as defined below) or group of affiliated or associated persons
has acquired, or obtained the right to acquire, beneficial ownership of 10% or
more of the Common Stock (an "Acquiring Person"), or (ii) ten days after the
date of the commencement of a tender offer or exchange offer by a person (other
than an Exempt Person) or group of affiliated or associated persons, the
consummation of which would result in beneficial ownership by such person or
group of 20% or more of the outstanding shares of Common Stock. "Exempt Persons"
include the Company, any subsidiary of the Company, employee benefit plans of
the Company, directors of the Company on January 5, 1996 who are also officers
of the Company, Entertainment and any person holding the warrant to purchase
shares of Common Stock initially issued to Entertainment.
In the event that, at any time after a person or group of affiliated or
associated persons has become an Acquiring Person, (i) the Company consolidates
with or merges with or into any person and is not the surviving corporation,
(ii) any person merges with or into the Company and the Company is the surviving
corporation, but the shares of Common Stock are changed or exchanged, or (iii)
50% or more of the Company's assets or earning power are sold, each holder of a
Right will thereafter have the right to receive, upon the exercise thereof at
the then current exercise price of the Right, that number of shares of Common
Stock (or under certain circumstances, an economically equivalent security or
securities) of such other person which at the time of such transaction would
have a market value of two times the exercise price of the Right. The Rights,
which do not have voting privileges, are subject to adjustment to prevent
dilution and expire on January 5, 2006. The Company may redeem or exchange all,
but not less than all, of the Rights at a price of $.01 per Right, payable in
cash or Common Stock, at any time prior to such time as a person or group of
affiliated or associated persons becomes an Acquiring Person.
F-16
<PAGE> 97
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights that are or were owned beneficially by the
Acquiring Person (which, from and after the later of the Rights distribution
date and the date of the earliest of any such events, will be void), will
thereafter have the right to receive, upon exercise thereof at the then current
exercise price of the Right, that number of shares of Common Stock (or, under
certain circumstances, an economically equivalent security or securities of the
Company) having a market value of two times the exercise price of the Right.
At December 31, 1996, 4,492,805 shares of Common Stock were reserved for
future issuance (2,942,805 shares in connection with outstanding warrants and
1,550,000 shares in connection with certain stock plans).
SAVINGS PLANS
The Company sponsors several defined contribution plans that provide
retirement benefits for certain full-time employees. Eligible employees may
elect to participate by contributing a percentage of their pre-tax earnings to
the plans. Employee contributions to the plans, up to certain limits, are
matched in various percentages by the Company. The expense related to the plans
totaled $974, $557 and $807 in 1996, 1995 and 1994, respectively.
STOCK PLANS
In January 1996, the Board of Directors of the Company adopted the 1996
Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). The
Directors' Plan provides for the grant of non-qualified stock options to
non-employee directors of the Company. Initially, 100,000 shares of Common Stock
were reserved for issuance under the Directors' Plan and at December 31, 1996,
80,000 shares of Common Stock were available for future grant under the
Directors' Plan. Stock options may not be granted under the Directors' Plan
after January 3, 2006.
Pursuant to the Directors' Plan, non-employee directors of the Company are
granted an option to purchase 5,000 shares of Common Stock upon the commencement
of service on the Board of Directors, with another option to purchase 5,000
shares of Common Stock granted on the second anniversary thereof. Options under
the Directors' Plan are generally granted with an exercise price equal to the
fair market value of the Common Stock at the date of grant. Option grants under
the Directors' Plan become exercisable in three equal annual installments
commencing one year from the date of grant and have a 10-year term.
Also in January 1996, the Board of Directors of the Company adopted the
1996 Long-Term Incentive Plan (the "Incentive Plan"). The Incentive Plan
provides for the grant of non-qualified stock options, incentive stock options
and compensatory restricted stock awards (collectively "Awards") to officers and
key employees of the Company. Initially, 2,100,000 shares of Common Stock were
reserved for issuance under the Incentive Plan and at December 31, 1996, 125,340
shares of Common Stock were available for future grant under the Incentive Plan.
Awards may not be granted under the Incentive Plan after January 3, 2006.
Pursuant to the Incentive Plan, non-qualified stock options are generally
granted with an exercise price equal to the fair market value of the Common
Stock at the date of grant. Incentive stock options must be granted at not less
than the fair market value of the Common Stock at the date of grant. Option
grants become exercisable at the discretion of the Compensation Committee of the
Board of Directors (the "Compensation Committee"). Option grants in 1996 under
the Incentive Plan have a 10-year term and are exercisable in four equal annual
installments commencing one year from the date of grant except, if at any time
on or before the third anniversary of the date of grant the fair market value of
the Common Stock reaches a targeted stock price, vesting of such options is
accelerated so that they become exercisable in three equal annual installments
commencing one year from the date of grant.
F-17
<PAGE> 98
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
A summary of 1996 stock option activity under the Directors' Plan and
Incentive Plan is as follows:
<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 upon reaching certain targeted stock prices in 1996 and, accordingly, the
fair value of these shares ($2,345) was amortized to
F-18
<PAGE> 99
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
expense in connection therewith. The weighted-average fair value of restricted
Common Stock awarded in 1996 was $4.87 per share as determined under SFAS No.
123.
Prior to the Spin-off, certain officers and key employees of the Company
participated in the 1989 Incentive Plan of Entertainment (the "1989 Plan"),
pursuant to which Entertainment granted these individuals options (generally
becoming exercisable in three equal annual installments commencing one year
after the date of grant) to purchase Entertainment common stock at a price equal
to the fair market value of the stock at the date of grant. Pursuant to the 1989
Plan, following the Spin-off, these officers and key employees no longer
affiliated with Entertainment could no longer participate in this plan. As a
result, their unexercisable options were cancelled on January 9, 1996, and their
vested options terminated 90 days thereafter to the extent not exercised prior
thereto.
COMMITMENTS AND CONTINGENCIES
Operating leases
The Company leases various fitness center facilities, office facilities,
and equipment under operating leases expiring in periods ranging from one to
twenty-five years excluding optional renewal periods. Certain of the leases
contain contingent rental provisions generally related to cost of living
criteria or revenues of the respective fitness centers. Rent expense under
operating leases was $86,717, $85,857 and $83,288 for 1996, 1995 and 1994,
respectively.
Minimum future rent payments under long-term noncancellable operating
leases in effect as of December 31, 1996, exclusive of taxes, insurance, other
expenses payable directly by the Company and contingent rent, are $82,441,
$82,638, $81,295, $75,248 and $70,036 for 1997 through 2001, respectively, and
$447,357 thereafter.
Included in the amounts above are leases with real estate partnerships in
which certain of the Company's current or former executive officers have
ownership interests. Rent expense under these leases was $2,002, $1,991 and
$1,953 for 1996, 1995 and 1994, respectively. In addition, these leases require
minimum rent payments of $1,954 for 1997.
Litigation
A class action entitled Jackson v. Health & Tennis Corporation of America
was filed in the state district court in Bexar County, Texas on May 8, 1995. The
complaint alleges that the defendant, a subsidiary of the Company, charged
excessive amounts on its financed memberships in violation of the Texas Credit
Code and the Texas Deceptive Trade Practices -- Consumer Protection Act. The
relief sought is damages equal to the alleged overpayments and statutory
remedies. The Company is currently unable to estimate the amount sought in this
action because the potential size of the class and the amount of damages for
each member of the putative class are currently unknown. The Company is
vigorously defending this action. The outcome of this litigation is not
currently determinable and, consequently, the Company cannot predict whether it
will have a material adverse effect on the Company's financial condition or
results of operations in any future period.
The Company is involved in various other claims and lawsuits incidental to
its business, including claims arising from accidents at its fitness centers. In
the opinion of management, the Company is adequately insured against such claims
and lawsuits, and any ultimate liability arising out of such claims and lawsuits
will not have a material adverse effect on the financial condition or results of
operations of the Company.
TRANSACTIONS WITH ENTERTAINMENT
In connection with the Spin-off, the Company issued Entertainment a warrant
(the "Warrant") entitling Entertainment to acquire 2,942,805 shares of Common
Stock at an exercise price of $5.26 per share (equal to 110% of the average
daily closing price of the Common Stock for the twenty consecutive trading days
beginning
F-19
<PAGE> 100
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
on the first trading day after the Distribution Date). At the time of the
Merger, Entertainment sold the Warrant to two directors and executive officers
of the Company. The Warrants are exercisable until December 31, 2005.
In January 1996, the Company and Entertainment entered into a Trademark
License Agreement pursuant to which Entertainment (Hilton after the Merger)
licenses the use of the name "Bally" and certain trademarks, trade names and
servicemarks to the Company in connection with its fitness center business. The
license is for a period of ten years, subject to termination in certain
circumstances. The Company paid no royalty or license fee for the first year and
pays a fee of $1,000 per year thereafter. Following the initial ten-year term,
the Company has an option to renew the license for an additional five-year
period at a rate equal to the greater of the then market rate or $1,000 per
year.
In connection with the Spin-off, Entertainment purchased a fitness center
from the Company for $6,200. The Company and Entertainment entered into a
management agreement pursuant to which the Company provides certain
administrative services to Entertainment in connection with the operation of
this fitness center, including membership contract processing, membership card
issuance, collections, processing cash receipts and renewal solicitation.
Entertainment pays the Company a management fee equal to 4% of membership
revenues and 2% of total revenues of this fitness center for these services,
which was $279 for 1996. In addition, Entertainment purchased from the Company
all of the shares of capital stock and warrants to purchase shares of capital
stock of Holmes Place PLC owned by the Company, as well as a note receivable
from Holmes Place PLC held by the Company, for $1,800. For financial accounting
purposes, because of Entertainment's ownership interest at the time, the excess
of the sales price over the historical net book value of the fitness center and
Holmes Place PLC assets of $5,988 was accounted for as an increase to
stockholders' equity, net of income taxes of $2,096.
In January 1996, the Company and Entertainment entered into a Transitional
Services Agreement pursuant to which Entertainment provided the Company certain
services for a period of one year following the Spin-off. The services provided
to the Company by Entertainment included services relating to insurance, tax
matters, accounting and other financial services and the administration of
employee benefit programs. The Company provided payroll services to
Entertainment during this period. The net amount charged to the Company by
Entertainment in 1996 pursuant to the Transitional Services Agreement was
$2,344, based on the costs incurred for such services. Prior to the Spin-off,
the Company and Entertainment reimbursed each other for the proportionate share
of costs (salaries, benefits, rent, etc.) related to employees performing
functions on behalf of both companies, based on estimates of time spent on
behalf of each company. The net amount charged to (by) Entertainment in 1995 and
1994 was $(3,045) and $1,510, respectively. The costs charged to (by)
Entertainment varied in amount from year to year primarily due to changes in the
time devoted to each company by personnel based on events at both companies.
Management believes that the method used to allocate these costs was reasonable.
In addition, certain of the Company's insurance coverage was obtained by
Entertainment pursuant to corporate-wide programs and Entertainment charged the
Company its proportionate share of the respective insurance premiums, which
totalled $4,625, $5,668 and $7,176 for 1996, 1995 and 1994, respectively.
Pursuant to the Transitional Services Agreement, the Company indemnified
Entertainment against (i) debts and liabilities of the Company and (ii)
liabilities relating to litigation currently pending or claims, controversies or
other causes of action relating to the Company's business arising through the
Distribution Date. The Transitional Services Agreement also provided for the
payment by the Company of $15,200 due Entertainment under the prior tax sharing
agreement (plus interest at 10% per annum from the Distribution Date). At the
time of the Merger, the $15,200 of indebtedness was forgiven by Hilton, which
the Company reflected as an extraordinary gain. The Company also paid interest,
calculated primarily at a prime rate, on advances from Entertainment. Interest
paid to Entertainment was $1,551, $430 and $720 for 1996, 1995 and 1994,
respectively.
F-20
<PAGE> 101
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(All dollar amounts in thousands, except share data)
PRO FORMA INFORMATION (UNAUDITED)
The net loss for the years ended December 31, 1995 and 1994 reflects a
federal income tax benefit arising from the Company's prior tax sharing
agreement with Entertainment of $7,069 and $15,160, respectively. Pro forma net
loss and related per share amounts have been presented on the consolidated
statement of operations giving effect to (i) adjustments made to reflect the
income tax provision/benefit as if the Company had filed its own separate
consolidated income tax return for each year and (ii) the distribution of
11,845,161 shares of Common Stock to Entertainment stockholders as if such
distribution had taken place as of the beginning of each year.
F-21
<PAGE> 102
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............................ $163.7 $165.1 $158.7 $160.2 $156.6 $163.1 $ 160.2 $165.0
Operating income (loss)................. (.2) 1.0 4.0 (.9) 2.8 (1.4) 12.5 6.3
Income (loss) before extraordinary item
(pro forma for 1995).................. (12.0) (9.0) (7.9) (11.6) (9.2) (12.9) 4.2 (5.0)
Extraordinary gain on extinguishment of
debt.................................. 5.7
Net income (loss) (pro forma for
1995)................................. (12.0) (9.0) (7.9) (11.6) (9.2) (12.9) 9.9 (5.0)
Per common share (pro forma for 1995):
Income (loss) before extraordinary
item................................ $ (.98) $ (.76) $ (.65) $ (.98) $ (.76) $(1.09) $ .35 $ (.42)
Extraordinary gain on extinguishment
of debt............................. .46
Net income (loss)..................... (.98) (.76) (.65) (.98) (.76) (1.09) .81 (.42)
</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> 103
BALLY TOTAL FITNESS HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
--------------
<S> <C>
ASSETS
Current assets:
Cash and equivalents.......................................................... $ 63,380
Installment contracts receivable, less unearned finance charges of $28,030 and
allowance for doubtful receivables and cancellations of $50,916............ 166,043
Other current assets.......................................................... 35,336
--------
Total current assets....................................................... 264,759
Installment contracts receivable, less unearned finance charges of $13,040 and
allowance for doubtful receivables and cancellations of $40,092............... 160,725
Property and equipment, less accumulated depreciation and amortization of
$310,078...................................................................... 303,336
Intangible assets, less accumulated amortization of $52,997..................... 102,347
Deferred income taxes........................................................... 24,561
Deferred membership origination costs........................................... 83,781
Other assets.................................................................... 25,518
--------
$965,027
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 40,378
Income taxes payable.......................................................... 2,418
Deferred income taxes......................................................... 26,050
Accrued liabilities........................................................... 51,468
Current maturities of long-term debt.......................................... 7,908
Deferred revenues............................................................. 269,909
--------
Total current liabilities.................................................. 398,131
Long-term debt, less current maturities......................................... 371,765
Other liabilities............................................................... 6,343
Deferred revenues............................................................... 97,267
Stockholders' equity............................................................ 91,521
--------
$965,027
========
</TABLE>
See accompanying notes.
F-23
<PAGE> 104
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------
1997 1996
-------- -----------
(AS RESTATED)
<S> <C> <C>
Net revenues:
Membership revenues --
Initial membership fees on paid-in-full memberships
originated..................................................... $ 47,564 $ 65,500
Initial membership fees on financed memberships originated...... 266,593 231,489
Dues collected.................................................. 144,577 129,282
Change in deferred revenues..................................... (4,372) 15,516
-------- --------
454,362 441,787
Finance charges earned............................................. 29,516 27,698
Fees and other..................................................... 11,492 9,530
-------- --------
495,370 479,015
Operating costs and expenses:
Fitness center operations.......................................... 288,750 281,540
Member processing and collection centers........................... 28,983 31,728
Advertising........................................................ 34,671 36,789
General and administrative......................................... 20,980 15,110
Provision for doubtful receivables................................. 72,617 64,334
Depreciation and amortization...................................... 40,703 41,119
Change in deferred membership origination costs.................... (1,641) 1,845
-------- --------
485,063 472,465
-------- --------
Operating income..................................................... 10,307 6,550
Interest income...................................................... 839 726
Interest expense..................................................... (34,081) (36,042)
-------- --------
Loss before income taxes............................................. (22,935) (28,766)
Income tax provision................................................. (300) (365)
-------- --------
Net loss............................................................. $(23,235) $ (29,131)
======== ========
Net loss per common share............................................ $ (1.68) $ (2.39)
======== ========
</TABLE>
See accompanying notes.
F-24
<PAGE> 105
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share data)
<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......................... (23,235) (23,235)
Issuance of common stock through
public offering................ 8,000,000 80 88,310 88,390
Issuance of common stock upon
exercise of stock options...... 51,886 1 162 163
Amortization of unearned
compensation................... 2,051 2,051
---------- ---- -------- -------- ------- --------
Balance at September 30, 1997.... 20,547,047 $206 $ 392,283 $(300,968) $ -- $91,521
========== ==== ======== ======== ======= ========
</TABLE>
See accompanying notes.
F-25
<PAGE> 106
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1997 1996
--------- -----------
(AS RESTATED)
<S> <C> <C>
OPERATING:
Net loss............................................................ $ (23,235) $ (29,131)
Adjustments to reconcile to cash used --
Depreciation and amortization, including amortization included in
interest expense................................................ 42,517 43,546
Provision for doubtful receivables............................... 72,617 64,334
Change in operating assets and liabilities....................... (116,789) (93,202)
Other, net....................................................... (75)
-------- --------
Cash used in operating activities........................... (24,965) (14,453)
INVESTING:
Purchases and construction of property and equipment................ (18,720) (13,346)
Proceeds from sale of property and equipment........................ 4,939
Other, net.......................................................... 564
-------- --------
Cash used in investing activities........................... (13,781) (12,782)
FINANCING:
Debt transactions --
Net borrowings under revolving credit agreement.................. 11,500
Proceeds from other long-term borrowings......................... 7,500 1,500
Repayments of other long-term debt............................... (10,203) (1,577)
Debt issuance costs.............................................. (258) (302)
-------- --------
Cash provided by (used in) debt transactions................ (2,961) 11,121
Equity transactions --
Proceeds from issuance of common stock through public offering... 88,390
Proceeds from issuance of common stock upon exercise of stock
options......................................................... 163
Capital contribution by Bally Entertainment Corporation.......... 6,760
-------- --------
Cash provided by financing activities....................... 85,592 17,881
-------- --------
Increase (decrease) in cash and equivalents........................... 46,846 (9,354)
Cash and equivalents, beginning of period............................. 16,534 21,263
-------- --------
Cash and equivalents, end of period................................... $ 63,380 $ 11,909
======== ========
</TABLE>
See accompanying notes.
F-26
<PAGE> 107
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) -- (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1997 1996
--------- -----------
(AS RESTATED)
<S> <C> <C>
SUPPLEMENTAL CASH FLOWS INFORMATION:
Changes in operating assets and liabilities, net of effects from the
sale of a fitness center, were as follows --
Increase in installment contracts receivable..................... $ (99,817) $ (60,113)
Increase in other current and other assets....................... (13,307) (4,645)
(Increase) decrease in deferred membership origination costs..... (1,641) 1,845
Decrease in accounts payable..................................... (1,187) (8,189)
Increase (decrease) in income taxes payable...................... 160 (1,527)
Decrease in accrued and other liabilities........................ (5,369) (5,057)
Increase (decrease) in deferred revenues......................... 4,372 (15,516)
-------- --------
$(116,789) $ (93,202)
======== ========
Cash payments for interest and income taxes were as follows --
Interest paid.................................................... $ 39,445 $ 39,271
Interest capitalized............................................. (691) (173)
Income taxes paid, net........................................... 140 1,892
Investing and financing activities exclude the following non-cash
transactions --
Acquisition of property and equipment through capital
leases/borrowings............................................... $ 3,585 $ 3,873
Repayment of long-term debt using proceeds from sale of property
and equipment................................................... 6,007
</TABLE>
See accompanying notes.
F-27
<PAGE> 108
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(All dollar amounts in thousands, except share data)
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Bally Total Fitness Holding Corporation (the "Company") and the
subsidiaries which it controls. The Company, through its subsidiaries, is a
nationwide commercial operator of fitness centers with approximately 320
facilities concentrated in 27 states and Canada. The Company operates in one
industry segment, and all significant revenues arise from the commercial
operation of fitness centers, primarily in major metropolitan markets in the
United States. Unless otherwise specified in the text, references to the Company
include the Company and its subsidiaries. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements of the Company for the years ended December 31, 1996, 1995 and 1994
included elsewhere herein.
All adjustments have been recorded which are, in the opinion of management,
necessary for a fair presentation of the condensed consolidated balance sheet of
the Company at September 30, 1997, its consolidated statements of operations and
cash flows for the nine months ended September 30, 1997 and 1996, and its
consolidated statement of stockholders' equity for the nine months ended
September 30, 1997. All such adjustments were of a normal recurring nature.
The accompanying condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles which
require the Company's management to make estimates and assumptions that affect
the amounts reported therein. Actual results could vary from such estimates.
RESTATEMENT
As more fully described in the "Summary of significant accounting
policies -- Restatement and Membership revenue recognition" notes to the
consolidated financial statements of the Company for the years ended December
31, 1996, 1995 and 1994 included elsewhere herein, following a series of
extensive discussions with the Staff of the Securities and Exchange Commission,
the Company restated its condensed consolidated financial statements for periods
prior to the issuance of its June 30, 1997 financial statements to reflect a
change in the method of recognizing membership revenue. Summarized financial
information illustrating the effect of the restatement on the Company's
consolidated statement of operations for the nine months ended September 30,
1996 is as follows:
<TABLE>
<CAPTION>
AS
ORIGINALLY AS
REPORTED RESTATED
---------- --------
<S> <C> <C>
Revenues....................................................... $ 488,443 $479,741
Operating income............................................... 20,082 7,276
Net loss....................................................... (16,225) (29,131)
Net loss per common share...................................... (1.33) (2.39)
</TABLE>
In addition, certain reclassifications (primarily interest income) have
been made to prior period financial statements to conform with the 1997
presentation.
SEASONAL FACTORS
The Company's operations are subject to seasonal factors and, therefore,
the results of operations for the nine months ended September 30, 1997 and 1996
are not necessarily indicative of the results of operations for the full year.
F-28
<PAGE> 109
BALLY TOTAL FITNESS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(All dollar amounts in thousands, except share data)
STOCK OFFERING
In August 1997, the Company completed a public offering of 8,000,000 shares
of its common stock, which provided net proceeds of $88,390 (the "Stock
Offering"). The Company has used or intends to use the proceeds of the Stock
Offering to develop new facilities and more extensively refurbish and upgrade
existing facilities, to repay certain indebtedness, to support the introduction
of new initiatives and for general corporate and working capital purposes.
LOSS PER COMMON SHARE
Loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during each period, which
totaled 13,868,305 shares and 12,170,161 shares for the nine months ended
September 30, 1997 and 1996, respectively. Certain restricted stock was issued
subject to forfeiture unless certain conditions were met. These contingent
shares were considered common stock equivalents and were excluded from the loss
per share computation until the conditions were met because their effect was
anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", which
establishes new standards for computing and presenting earnings per share. SFAS
No. 128 requires a dual presentation of basic earnings per share (computed by
dividing income (loss) available to common stockholders by the weighted-average
number of common shares outstanding for the period) and diluted earnings per
share (computed similarly to fully diluted earnings per share pursuant to APB
Opinion No. 15) on the face of the Company's statement of operations. The
Company will adopt SFAS No. 128 in the fourth quarter of 1997; earlier
application is not permitted. As computed under SFAS No. 128, basic and diluted
loss per share for the nine months ended September 30, 1997 each would have been
$1.68 per share.
SUBSEQUENT EVENT
In October 1997, the Company completed a refinancing (the "Refinancing").
The components of the Refinancing were (i) the issuance by the Company of
$225,000 aggregate principal amount of 9 7/8% Senior Subordinated Notes due 2007
(the "9 7/8% Notes"), (ii) the consummation of a tender offer and consent
solicitation by the Company (the "Tender Offer") with respect to its $200,000
aggregate principal amount of 13% Senior Subordinated Notes due 2003 (the "13%
Notes"), and (iii) the application of the net proceeds from the issuance of the
9 7/8% Notes to retire the 13% Notes. Pursuant to the Tender Offer, in October
1997 the Company purchased $177,400 aggregate principal amount of the 13% Notes
and the Indenture pursuant to which the 13% Notes were issued was substantially
amended. The Company has announced that in January 1998, it will redeem the
remaining $22,600 aggregate principal amount of the 13% Notes not tendered in
the Tender Offer at a price of 106.5% of the principal amount, together with
accrued and unpaid interest. The retirement of the 13% Notes will result in an
extraordinary loss totalling approximately $20,600.
F-29
<PAGE> 110
======================================================
ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, THE LETTER OF
TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE
AGENT AS FOLLOWS:
BY HAND, REGISTERED OR CERTIFIED MAIL OR OVERNIGHT
COURIER:
FIRST TRUST NATIONAL ASSOCIATION
FIRST TRUST CENTER
180 EAST FIFTH STREET
ST. PAUL, MN 55101
ATTENTION: THERESE LINSCHEID,
SPECIALIZED FINANCE DEPARTMENT
BY FACSIMILE:
(612) 244-1537
ATTENTION: THERESE LINSCHEID,
SPECIALIZED FINANCE DEPARTMENT
(ORIGINALS OF ALL DOCUMENTS SENT BY FACSIMILE SHOULD BE SENT PROMPTLY BY
HAND, REGISTERED OR CERTIFIED MAIL OR OVERNIGHT COURIER).
CONFIRM BY TELEPHONE: (612) 244-1234
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 5
Risk Factors............................... 17
The Exchange Offer......................... 21
The Refinancing............................ 29
Capitalization............................. 30
Selected Consolidated Financial Data....... 31
Management's Discussion and Analysis of
Results of Operations and Financial
Condition................................ 32
Business................................... 37
Management................................. 45
Description of Certain Other
Indebtedness............................. 47
Description of the New Notes............... 48
Plan of Distribution....................... 76
Available Information...................... 76
Legal Matters.............................. 77
Experts.................................... 77
Incorporation of Certain Information by
Reference................................ 77
Index to Consolidated Financial
Statements............................... F-1
</TABLE>
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS AND THE ACCOMPANYING LETTER OF
TRANSMITTAL DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY THE NEW NOTES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, NOR ANY
EXCHANGE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
======================================================
======================================================
$225,000,000
LOGO
BALLY TOTAL FITNESS
HOLDING CORPORATION
9 7/8% SENIOR SUBORDINATED NOTES DUE 2007
---------------------------------
PROSPECTUS
---------------------------------
OFFER TO EXCHANGE $1,000 IN PRINCIPAL AMOUNT OF ITS 9 7/8% SERIES B SENIOR
SUBORDINATED NOTES DUE 2007 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR EACH $1,000 IN PRINCIPAL AMOUNT OF ITS OUTSTANDING 9 7/8% SERIES A SENIOR
SUBORDINATED NOTES DUE 2007.
DECEMBER 11, 1997
======================================================
<PAGE> 111
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") permits the
indemnification of the directors and officers of the Company. The Company
By-laws provide that it will indemnify the officers, directors, employees and
agents of the Company to the extent permitted by the DGCL.
The Company Certificate provides for the indemnification of directors and
officers of the Company, and persons who serve or served at the request of the
Company as a director, officer, employee or agent of another corporation,
including service with respect to employee benefit plans, against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties in amounts paid or to be paid in settlement) reasonably
incurred with respect to any action, suit or proceeding, whether civil,
criminal, administrative or investigative, provided, however, the Company shall
indemnify any such person seeking indemnification in connection with a
proceeding initiated by such person only if such proceeding was authorized by
the Board. In the event a claim for indemnification by any person has not been
paid in full by the Company after written request has been received by the
Company, the claimant may at any time thereafter bring suit against the Company
to recover the unpaid amount of the claim and, if successful in whole or in
part, the claimant shall be entitled to be paid also the expense of prosecuting
such claim. The right to indemnification conferred in the Company Certificate is
a contract right and shall include the right to be paid by the Company the
expenses incurred in defending any such proceeding in advance of its final
disposition. The Company maintains insurance, at its expense, to protect itself
and any director, officer, employee or agent of the Company against any such
expense, liability or loss, whether or not the Company would have the power to
indemnify such person against such expense, liability or loss under state law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
**1.1 Purchase Agreement dated September 29, 1997 among Bally Total Fitness Holding
Corporation and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Chase Securities Inc., Societe Generale Securities Corporation
and Ladenburg Thalmann & Co. Inc.
**4.1 Indenture dated as of October 7, 1997 between Bally Total Fitness Holding
Corporation and First Trust National Association, as Trustee, including the
form of Old Note and form of New Note.
**4.2 Registration Rights Agreement dated as of October 7, 1997 among Bally Total
Fitness Holding Corporation and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Chase Securities Inc., Societe Generale
Securities Corporation and Ladenburg Thalmann & Co. Inc.
*4.3 Indenture dated as of January 15, 1993 between Bally Total Fitness Holding
Corporation and Amalgamated Bank of Chicago, as Trustee (filed as an exhibit
to Entertainment's Annual Report on Form 10-K, file no. 1-7244, for the
fiscal year ended December 31, 1993).
**4.4 Supplemental Indenture dated September 24, 1997 between Bally Total Fitness
Holding Corporation and Amalgamated Bank of Chicago, as Trustee.
**4.5 Senior Subordinated Note Specimen Certificate.
**5.1 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP.
10.1 Credit Agreement dated as of November 18, 1997 among Bally Total Fitness
Holding Corporation, the several banks and financial institutions which are
parties thereto and The Chase Manhattan Bank, as Agent.
10.2 Guarantee and Collateral Agreement dated as of November 18, 1997 made by
Bally Total Fitness Holding Corporation and certain of its subsidiaries in
favor of The Chase Manhattan Bank, as Collateral Agent.
**12.1 Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Ernst & Young LLP.
</TABLE>
II-1
<PAGE> 112
<TABLE>
<C> <S>
**23.2 Consent of Benesch, Friedlander, Coplan & Aronoff LLP (contained in its
Opinion filed as Exhibit 5.1 hereto).
**24.1 Powers of Attorney for the Company.
**25.1 Statement of Eligibility of Trustee on Form T-1.
</TABLE>
- ---------------
* Incorporated by reference.
** Filed previously.
(b) Financial Statement Schedule
Report of independent auditors on financial statement schedule
Schedule II -- Valuation and qualifying accounts for each of the three
years in the period ended December 31, 1996
All other schedules specified under Regulation S-X for the Company are
omitted because they are either not applicable or required under the
instructions, or because the information required is already set forth in
the consolidated financial statements or related notes thereto.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
II-2
<PAGE> 113
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-4 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF ILLINOIS, ON DECEMBER 11, 1997.
BALLY TOTAL FITNESS HOLDING
CORPORATION
By: /s/ JOHN W. DWYER
----------------------------------
John W. Dwyer
Executive Vice President,
Chief Financial Officer
and Treasurer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ---------------------------------- ---------------------
<S> <C> <C>
* Chairman of the Board of December 11, 1997
- ----------------------------------- Directors
Arthur M. Goldberg
* Chief Executive Officer, President, December 11, 1997
- ----------------------------------- and Director
Lee S. Hillman
* Executive Vice President, Chief December 11, 1997
- ----------------------------------- Financial Officer and Treasurer
John W. Dwyer
/s/ GEOFFREY M. SCHEITLIN Vice President and Controller December 11, 1997
- -----------------------------------
Geoffrey M. Scheitlin
* Director December 11, 1997
- -----------------------------------
Aubrey C. Lewis
* Director December 11, 1997
- -----------------------------------
J. Kenneth Looloian
* Director December 11, 1997
- -----------------------------------
James F. Mc Anally, M.D.
* Director December 11, 1997
- -----------------------------------
Liza M. Walsh
*By: /s/ JOHN W. DWYER
------------------------------
John W. Dwyer
Attorney-in-fact
</TABLE>
II-3
<PAGE> 114
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> 115
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
We have audited the consolidated financial statements of Bally Total
Fitness Holding Corporation as of December 31, 1996 and 1995, and for each of
the three years in the period ended December 31, 1996, and have issued our
report thereon dated February 25, 1997, except for the "Summary of significant
accounting policies -- Restatement, Membership revenue recognition and Impact of
recently issued accounting standards" and "Income Taxes" notes, as to which the
date is July 14, 1997 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule listed in Item 16(b) of
this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois
February 25, 1997, except for the
"Summary of significant accounting
policies -- Restatement, Membership
revenue recognition and Impact of
recently issued accounting
standards" and "Income Taxes" notes,
as to which the date is July 14,
1997
S-2
<PAGE> 116
BALLY TOTAL FITNESS HOLDING CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(All dollar amounts in thousands)
<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> 117
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER IN
SEQUENTIAL
NUMBERING
EXHIBIT SYSTEM
- ------- ---------
<C> <S> <C>
**1.1 Purchase Agreement dated September 29, 1997 among Bally Total Fitness
Holding Corporation and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Chase Securities Inc., Societe Generale
Securities Corporation and Ladenberg Thalmann & Co. Inc.
**4.1 Indenture dated as of October 7, 1997 between Bally Total Fitness
Holding Corporation and First Trust National Association, as Trustee,
including the form of Old Note and form of New Note.
**4.2 Registration Rights Agreement dated as of October 7, 1997 among Bally
Total Fitness Holding Corporation and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities Inc.,
Societe Generale Securities Corporation and Ladenburg, Thalmann & Co.
Inc.
*4.3 Indenture dated as of January 15, 1993 between Bally Total Fitness
Holding Corporation and Amalgamated Bank of Chicago, as Trustee (filed
as an exhibit to Entertainment's Annual Report on Form 10-K, file no.
1-7244, for the fiscal year ended December 31, 1993).
**4.4 Supplemental Indenture dated September 24, 1997 between Bally Total
Fitness Holding Corporation and Amalgamated Bank of Chicago, as Trustee.
**4.5 Senior Subordinated Note Specimen Certificate.
**5.1 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP.
10.1 Credit Agreement dated as of November 18, 1997 among the Bally Total
Fitness Holding Corporation, the several banks and financial
institutions which are parties thereto and The Chase Manhattan Bank, as
Agent.
10.2 Guarantee and Collateral Agreement dated as of November 18, 1997 made by
Bally Total Fitness Holding Corporation and certain of its subsidiaries
in favor of The Chase Manhattan Bank, as Collateral Agent.
**12.1 Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Ernst & Young LLP.
**23.2 Consent of Benesch, Friedlander, Coplan & Aronoff LLP (contained in its
Opinion filed as Exhibit 5.1 hereto).
**24.1 Powers of Attorney for the Company.
**25.1 Statement of Eligibility of Trustee on Form T-1.
</TABLE>
- ---------------
* Incorporated by reference.
** Filed previously.
<PAGE> 1
Exhibit 10.1
EXECUTION COPY
--------------
- --------------------------------------------------------------------------------
CREDIT AGREEMENT
AMONG
BALLY TOTAL FITNESS HOLDING CORPORATION,
as Borrower
The Several Banks and other Financial Institutions
Parties Hereto
AND
THE CHASE MANHATTAN BANK,
as Agent
Dated as of November 18, 1997
- --------------------------------------------------------------------------------
CHASE SECURITIES INC.,
as Arranger
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
ARTICLE I.
<S> <C> <C>
DEFINITIONS AND ACCOUNTING TERMINOLOGY.................................... 1
1.01 CERTAIN DEFINITIONS............................................................................... 1
1.02 FINANCIAL STANDARDS............................................................................... 20
1.03 INTERPRETATION.................................................................................... 20
ARTICLE II.
THE CREDIT.................................................. 21
2.01 THE REVOLVING CREDIT.............................................................................. 21
2.02 REQUESTS FOR ADVANCES; CONVERSION AND CONTINUATION OPTIONS........................................ 21
2.03 LENDING BRANCH AND EVIDENCE OF CREDIT............................................................. 22
2.04 COMPUTATION OF AND PAYMENT OF INTEREST............................................................ 23
2.05 PAYMENT OF ADVANCES............................................................................... 24
2.06 PAYMENTS.......................................................................................... 24
2.07 OPTIONAL PREPAYMENTS.............................................................................. 25
2.08 MANDATORY PREPAYMENTS AND COMMITMENT REDUCTIONS................................................... 25
2.09 FEES .......................................................................................... 26
2.10 OPTIONAL TERMINATION OR REDUCTION OF COMMITMENT AMOUNT............................................ 26
2.11 ARRANGEMENT COMPENSATION; AGENCY FEES............................................................. 27
2.12 TAXES .......................................................................................... 27
2.13 INCREASED COSTS; ILLEGALITY; INDEMNITY............................................................ 29
2.14 CAPITAL ADEQUACY.................................................................................. 30
2.15 LETTERS OF CREDIT................................................................................. 30
ARTICLE III.
SECURITY................................................... 36
3.01 SECURITY.......................................................................................... 36
3.02 COLLATERAL DOCUMENTS.............................................................................. 37
3.03 PRIORITY OF SECURITY INTEREST..................................................................... 37
3.04 NEW GUARANTORS.................................................................................... 37
3.05 REAL PROPERTY MATTERS............................................................................. 37
ARTICLE IV.
CONDITIONS PRECEDENT............................................. 38
4.01 CONDITIONS PRECEDENT TO CLOSING DATE.............................................................. 38
4.02 CONDITIONS PRECEDENT TO EACH ADVANCE AND LETTER OF CREDIT......................................... 43
ARTICLE V.
REPRESENTATIONS AND WARRANTIES........................................ 43
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
5.01 BORROWER'S EXISTENCE.............................................................................. 43
5.02 SUBSIDIARIES' EXISTENCE........................................................................... 43
5.03 BORROWER'S POWERS................................................................................. 44
5.04 POWER OF OFFICERS................................................................................. 44
5.05 GOVERNMENT APPROVALS.............................................................................. 44
5.06 COMPLIANCE WITH LAWS.............................................................................. 44
5.07 ENFORCEABILITY OF AGREEMENT....................................................................... 44
5.08 TITLE TO PROPERTY................................................................................. 44
5.09 LITIGATION........................................................................................ 44
5.10 EVENTS OF DEFAULT................................................................................. 44
5.11 COMPLIANCE WITH MARGIN REQUIREMENTS............................................................... 45
5.12 SUBSIDIARIES...................................................................................... 45
5.13 FINANCIAL INFORMATION............................................................................. 45
5.14 ERISA .......................................................................................... 45
5.15 INVESTMENT COMPANY ACT OF 1940.................................................................... 45
5.16 NO RESTRICTIONS ON SUBSIDIARIES................................................................... 45
5.17 SENIOR INDEBTEDNESS............................................................................... 46
5.18 ENVIRONMENTAL MATTERS............................................................................. 46
5.19 COLLATERAL DOCUMENTS.............................................................................. 46
5.20 COPYRIGHTS, PATENTS, TRADEMARKS AND LICENSES, ETC. ............................................... 47
ARTICLE VI.
AFFIRMATIVE COVENANTS............................................ 47
6.01 USE OF PROCEEDS AND LETTERS OF CREDIT............................................................. 48
6.02 NOTICES .......................................................................................... 48
6.03 FINANCIAL STATEMENTS, REPORTS, ETC. .............................................................. 49
6.04 FURTHER ASSURANCES................................................................................ 51
6.05 EXISTENCE, ETC. .................................................................................. 51
6.06 OWNERSHIP OF STOCK OF SUBSIDIARIES................................................................ 51
6.07 PAYMENT OF OBLIGATIONS............................................................................ 51
6.08 COMPLIANCE WITH LAWS.............................................................................. 51
6.09 INSURANCE AND CONDEMNATION........................................................................ 52
6.10 ADEQUATE BOOKS.................................................................................... 54
6.11 ERISA .......................................................................................... 54
6.12 INTEREST COVERAGE................................................................................. 54
6.13 1997 SUBORDINATED NOTES........................................................................... 55
6.14 HAZARDOUS MATERIALS............................................................................... 55
6.15 LEVERAGE RATIO.................................................................................... 56
6.16 REAL ESTATE TAXES................................................................................. 56
6.17 ADDITIONAL REAL ESTATE COLLATERAL................................................................. 57
6.18 CONDITIONS SUBSEQUENT............................................................................. 57
ARTICLE VII.
NEGATIVE COVENANTS.............................................. 57
7.01 INVESTMENTS AND RESTRICTED PAYMENTS............................................................... 57
7.02 OTHER OBLIGATIONS................................................................................. 58
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
7.03 OTHER SECURITY.................................................................................... 59
7.04 SUBORDINATED DEBT................................................................................. 59
7.05 LIQUIDATION; MERGER............................................................................... 60
7.06 CAPITAL EXPENDITURES.............................................................................. 60
7.07 CHANGE IN BUSINESS................................................................................ 60
7.08 DISPOSAL OF ASSETS................................................................................ 60
7.09 LIMITATION ON OPTIONAL PAYMENTS AND MODIFICATIONS OF DEBT INSTRUMENTS AND
RECEIVABLES PROGRAM DOCUMENTS............................................................. 62
7.10 LIMITATION ON TRANSACTIONS WITH AFFILIATES........................................................ 63
7.11 LIMITATION ON SALES AND LEASEBACKS................................................................ 63
7.12 LIMITATION ON CHANGES IN FISCAL YEAR.............................................................. 63
7.13 FUNDING CORP...................................................................................... 63
7.14 UNRESTRICTED SUBSIDIARIES......................................................................... 63
7.15 TAX ALLOCATION AND INDEMNITY AGREEMENT............................................................ 64
7.16 HEALTH & TENNIS (UK) LIMITED...................................................................... 64
ARTICLE VIII.
EVENTS OF DEFAULT.............................................. 64
8.01 NONPAYMENT........................................................................................ 64
8.02 REPRESENTATION OR WARRANTY........................................................................ 64
8.03 LIENS .......................................................................................... 64
8.04 JUDGMENTS......................................................................................... 64
8.05 VOLUNTARY BANKRUPTCY.............................................................................. 65
8.06 INVOLUNTARY BANKRUPTCY............................................................................ 65
8.07 REGULATORY ACTION................................................................................. 65
8.08 CHANGE OF CONTROL EVENT........................................................................... 65
8.09 GOVERNMENT APPROVALS.............................................................................. 65
8.10 CROSS DEFAULT..................................................................................... 65
8.11 ERISA .......................................................................................... 65
8.12 SPECIFIC DEFAULTS................................................................................. 66
8.13 GUARANTEE AND COLLATERAL AGREEMENT; IMPAIRMENT OF COLLATERAL DOCUMENTS............................ 66
8.14 CONDEMNATION...................................................................................... 66
8.15 PAYOUT EVENT...................................................................................... 66
8.16 ACTUAL OR ASSERTED INVALIDITY..................................................................... 66
8.17 OTHER DEFAULTS.................................................................................... 67
ARTICLE IX.
MISCELLANEOUS................................................ 67
9.01 NOTICES .......................................................................................... 67
9.02 SUCCESSORS AND ASSIGNS............................................................................ 68
9.03 BANKS' OBLIGATIONS SEVERAL........................................................................ 68
9.04 ASSIGNMENTS; PARTICIPATIONS....................................................................... 68
9.05 DELAYS AND WAIVERS................................................................................ 70
9.06 COSTS AND EXPENSES................................................................................ 70
9.07 TELEPHONE INDEMNITY............................................................................... 70
9.08 OTHER INDEMNITY................................................................................... 71
</TABLE>
-iii-
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
9.09 CHOICE OF LAW..................................................................................... 72
9.10 PERSONAL JURISDICTION............................................................................. 72
9.11 SERVICE OF PROCESS................................................................................ 72
9.12 WAIVER OF JURY TRIAL.............................................................................. 72
9.13 SECTION HEADINGS.................................................................................. 72
9.14 SEVERABILITY...................................................................................... 72
9.15 COUNTERPARTS...................................................................................... 73
9.16 NO RELIANCE BY BANKS.............................................................................. 73
9.17 ENTIRE AGREEMENT.................................................................................. 73
9.18 CONFIDENTIALITY................................................................................... 73
9.19 RECEIVABLES PROGRAM SAVINGS CLAUSE................................................................ 73
ARTICLE X.
RELATION OF BANKS.............................................. 74
10.01 AGENT AND COLLATERAL AGENT; ENFORCEMENT OF GUARANTIES............................................ 74
10.02 PRO RATA SHARING................................................................................. 74
10.03 SET-OFF.......................................................................................... 74
10.04 LIABILITY OF AGENT............................................................................... 75
10.05 RELIANCE BY AGENT................................................................................ 76
10.06 APPROVALS; AMENDMENTS............................................................................ 76
10.07 NOTICE OF DEFAULT................................................................................ 76
10.08 CREDIT DECISION.................................................................................. 77
10.09 BANKS' INDEMNITY................................................................................. 77
10.10 AGENT AS BANK.................................................................................... 77
10.11 NOTICE OF TRANSFER............................................................................... 78
10.12 RESIGNATION OF AGENT............................................................................. 78
10.13 COLLATERAL MATTERS............................................................................... 78
10.14 COLLATERAL AGENT................................................................................. 80
</TABLE>
-iv-
<PAGE> 6
Schedules
Schedule 1.01 Existing Liens
Schedule 1.01(b) List of Scandinavian Partnerships
Schedule 1.01(c) Unrestricted Subsidiaries
Schedule 4.01(l) Initial Mortgaged Properties
Schedule 5.09 Litigation
Schedule 5.14 ERISA Matters
Schedule 5.16 Restrictions on Subsidiaries
Schedule 5.18 Environmental Matters
Schedule 5.20 Trademark Disputes
Schedule 6.02(a) Additional Disclosed Litigation
Schedule 6.17 Additional Mortgaged Properties
Schedule 7.02(b) Existing Debt
Schedule 7.09(a) Prepayable Debt
Schedule 9.01 Address for Notices
Exhibits
Exhibit A. Form of Guarantee and Collateral Agreement
Exhibit B. Form of Collateral Agency Agreement
Exhibit C. List of Commitment Percentages
Exhibit D. List of Subsidiaries
Exhibit E. Form of Operating Bank Guaranty
Exhibit F. List of Real Estate Documents
Exhibit G. [Reserved].
Exhibit H. Form of Revolving Note
Exhibit I. [Reserved].
Exhibit J. Form of Opinions of Borrower's Counsel
Exhibit K. Form of Opinion of General Counsel
Exhibit L. Conditions Subsequent
Exhibit M. Form of Assignment and Acceptance
-v-
<PAGE> 7
CREDIT AGREEMENT
This Credit Agreement, dated as of November 18, 1997 (the
"Credit Agreement"), among BALLY TOTAL FITNESS HOLDING CORPORATION, a Delaware
corporation ("Borrower"), the banks and other financial institutions named on
the signature pages of this Agreement (collectively, "Banks" and individually, a
"Bank") and THE CHASE MANHATTAN BANK, as agent for Banks (in such capacity,
"Agent"), is entered into with respect to the following:
WHEREAS, the Borrower is party to the Existing Credit
Agreement (as hereafter defined); and
WHEREAS, in order to refinance and replace the Existing Credit
Agreement and for the other purposes described in Section 6.01, the Banks have
agreed to make available to the Borrower the $70,000,000 revolving credit
facility described herein;
NOW, THEREFORE, in consideration of the premises and other
good and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
ARTICLE I.
DEFINITIONS AND ACCOUNTING TERMINOLOGY
--------------------------------------
1.01 CERTAIN DEFINITIONS. In addition to the terms defined
elsewhere in this Agreement, the following terms have the following meanings
(such meanings to be equally applicable to both the singular and plural forms of
the terms defined):
"ADVANCE" means a borrowing under the Revolving Credit
pursuant to Section 2.01 or 2.15(c)(ii) hereof.
"AFFILIATE" of any Person means any other Person directly or
indirectly Controlling or Controlled by or under direct or indirect
common Control with such Person.
"AGREEMENT" shall mean the Credit Agreement, as the same may
be amended, supplemented or otherwise modified from time to time.
"APPLICABLE MARGIN" means, at any time, the rate per annum
based on the Leverage Ratio of the Borrower, set forth in the following
matrix which shall apply to each Type of Revolving Credit Advance, the
Letter of Credit fee payable pursuant to Section 2.09(a)(i) and the
commitment fee payable pursuant to Section 2.09(b), as applicable:
<PAGE> 8
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<TABLE>
<CAPTION>
=================================================================================================================================
EURODOLLAR REFERENCE LETTER OF
LEVERAGE RATIO MARGIN RATE MARGIN CREDIT RATE COMMITMENT FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
x greater than or equal to 3.00 3.00% 2.00% 2.00% .50%
- ---------------------------------------------------------------------------------------------------------------------------------
2.00 less than or equal to x less than 3.00 2.75% 1.75% 1.75% .50%
- ---------------------------------------------------------------------------------------------------------------------------------
x less than 2.00 2.50% 1.50% 1.50% .375%
=================================================================================================================================
</TABLE>
Changes in the Applicable Margin resulting from changes in the Leverage
Ratio shall become effective on the date (the "ADJUSTMENT DATE") on
which financial statements are delivered to the Lenders pursuant to
Section 6.03 (but in any event not later than the 50th day after the
end of each of the first three quarterly periods of each fiscal year or
the 105th day after the end of each fiscal year, as the case may be)
and shall remain in effect until the next change to be effected
pursuant to this paragraph. Each determination of the Leverage Ratio
pursuant to this definition shall be made with respect to the period of
four consecutive fiscal quarters of the Borrower ending at the end of
the period covered by the relevant financial statements. For the period
from the Closing Date to the date financial statements are delivered
pursuant to Section 6.03(a) with respect to the quarter ending
September 30, 1997, the Leverage Ratio shall be presumed to be greater
than 3:00 to 1 for purposes of this definition.
"BANKING DAY" means a day other than Saturday or Sunday on
which (i) banks are open for business in New York City and (ii) for any
calculation, determination or other matter with respect to Eurodollar
Rate Advances, dealings in foreign currencies and exchange between
banks may be carried on in London, England.
"BANKS" shall have the meaning set forth in the recitals
hereto.
"BORROWING DATE" means, with respect to each Advance, the date
such Advance is made.
"CAPITAL EXPENDITURES" means, without duplication, with
respect to Borrower and any Subsidiary of Borrower: any amounts
expended or incurred during or in respect of a period for any purchase,
exchange or other acquisition for value of any asset that is classified
on the consolidated balance sheet of Borrower prepared in accordance
with GAAP as a fixed or capital asset; provided that in no event shall
Capital Expenditures include amounts (a) expended in respect of
replacements and maintenance consistent with the business practices of
Borrower in respect of plant facilities, machinery, exercise equipment,
fixtures and other like capital assets utilized in the ordinary conduct
of business (to the extent such amounts are not capitalized in
preparing a consolidated balance sheet in accordance with GAAP), (b)
expended in the replacement, repair or reconstruction of any fixed or
capital asset which was destroyed, damaged or taken by eminent domain
or in lieu of condemnation, in whole or in part, to the extent of
insurance proceeds or condemnation awards received or due to be
received by Borrower or any such Subsidiary in respect of such
destruction, damage or taking, (c) expended or incurred in the
replacement of any fixed or capital asset to the extent such amounts
constitute Reinvestment Proceeds or (d) any interest which is
capitalized in accordance with GAAP. Capital Expenditures shall also
include amounts deemed to be Capital Expenditures in accordance with
Section 7.01(e).
<PAGE> 9
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"CAPITALIZED LEASE" means any lease which is or should be, in
accordance with GAAP, capitalized on the balance sheet of the lessee.
"CAPITAL STOCK" of any Person means any and all shares,
interests, participations or other equivalents (however designated) of
such Person's capital stock or other equity interests whether now
outstanding or issued after the Closing Date.
"CASH EQUIVALENTS" means (i) securities issued or directly and
fully guaranteed or insured by the United States of America or any
agency or instrumentality thereof (PROVIDED that the full faith and
credit of the United States of America is pledged in support thereof)
having maturities of not more than 12 months from the date of
acquisition, (ii) Dollar denominated time deposits, certificates of
deposit and bankers acceptances of any Bank or any bank whose
short-term commercial paper rating from Standard & Poor's Ratings
Group, a division of McGraw-Hill ("S&P"), is at least A-1 or the
equivalent thereof or from Moody's Investors Service, Inc. ("MOODY'S")
is at least P-1 or the equivalent thereof (any such bank, an "APPROVED
BANK"), with maturities of not more than 12 months from the date of
acquisition, (iii) repurchase obligations with a term of not more than
seven days for underlying securities of the type described in clause
(i) entered into with an Approved Bank, (iv) commercial paper issued
by, or guaranteed by, any Approved Bank or by the parent company of any
Approved Bank or commercial paper issued by, or guaranteed by, any
industrial or financial company with a short-term commercial paper
rating of at least A-1 or the equivalent thereof by S&P or at least P-1
or the equivalent thereof by Moody's, or issued by, or guaranteed by,
any industrial company with a long term unsecured debt rating of at
least A or A2, or the equivalent of each thereof, from S&P or Moody's,
respectively, and in each case maturing within 12 months after the date
of acquisition and (v) any fund or funds making substantially all of
their investments in investments of the type described in clauses (i)
through (iv) above.
"CHANGE OF CONTROL EVENT" means, without limitation, (a) the
acquisition of ownership, directly or indirectly, beneficially or of
record, by any Person (other than Arthur Goldberg or Lee S. Hillman or
their respective estates or descendants) or group (within the meaning
of the Securities Exchange Act of 1934 and the rules of the Securities
and Exchange Commission thereunder as in effect on the date hereof), of
shares representing more than 30% of the aggregate ordinary voting
power represented by the issued and outstanding Capital Stock of the
Borrower; (b) occupation of a majority of the seats (other than vacant
seats) on the board of directors of the Borrower by Persons who were
neither (i) nominated by the board of directors of the Borrower nor
(ii) appointed by directors so nominated; or (c) the acquisition of
direct or indirect Control of the Borrower by any Person (other than
Arthur Goldberg or Lee S. Hillman or their respective estates or
descendants) or group.
"CHASE" means The Chase Manhattan Bank, a New York banking
corporation.
"CLOSING DATE" means the date on which all of the conditions
in Section 4.01 are satisfied.
"CODE" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute.
"COLLATERAL" means all real, personal and mixed property and
interests in property and proceeds thereof now owned or hereafter
acquired by Borrower or any Guarantor and their respective Subsidiaries
in or upon which a security interest, pledge, lien or mortgage is
granted to the Banks or the Collateral Agent pursuant to the Collateral
Documents for the benefit of
<PAGE> 10
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the Secured Creditors whether under this Agreement or under any other
documents, instruments or writings executed by any such Persons in
connection with Advances or other credit extensions made hereunder and
delivered to the Collateral Agent or the Banks.
"COLLATERAL AGENCY AGREEMENT" means the Collateral Agency
Agreement among the Collateral Agent and the Secured Creditors in the
form of Exhibit B hereto, as amended, supplemented or otherwise
modified.
"COLLATERAL AGENT" means Chase or any successor agent thereto
acting as Collateral Agent for the Secured Creditors pursuant to the
Collateral Agency Agreement.
"COLLATERAL DOCUMENTS" means, collectively, (i) the Guarantee
and Collateral Agreement, the Collateral Agency Agreement, the
Mortgages, the Operating Bank Guaranty and all other security
agreements, mortgages, deeds of trust, patent and trademark
assignments, certificates of title, lease assignments, guarantees and
other agreements between Borrower or any Guarantor and their respective
Subsidiaries and any of the Banks or the Collateral Agent for the
benefit of the Banks or the Secured Creditors, now or hereafter
delivered to any of the Banks or the Collateral Agent pursuant to or in
connection with the transactions contemplated hereby, and all financing
statements (or comparable documents) now or hereafter filed in
accordance with the Uniform Commercial Code (or comparable law) against
Borrower or any Guarantor or any Subsidiaries in favor of any of the
Banks or the Collateral Agent for the benefit of the Banks or the
Secured Creditors and (ii) any amendments, supplements, modifications,
renewals, replacements, consolidations, substitutions and extensions of
any of the foregoing.
"COMMITMENT" means, as to any Bank, such Bank's Revolving
Credit Commitment and Letter of Credit Commitment; collectively, as to
all the Banks, the "COMMITMENTS".
"COMMITMENT AMOUNT" means $70,000,000 LESS any Commitment
Reductions.
"COMMITMENT PERCENTAGE" means, as to each Bank, the percentage
set opposite such Bank's name on Exhibit C hereto or, if such Bank
shall have acquired or disposed of any interest in the Credit pursuant
to Section 9.04(a), on the applicable instrument of assignment.
"COMMITMENT PERIOD" means the period from and including the
date of this Agreement to but excluding the Termination Date.
"COMMITMENT REDUCTIONS" shall mean the amount of the permanent
reductions of the Commitment Amount resulting from the application of
Sections 2.08, 2.10 or 7.08 or any other provision contained herein.
"CONSOLIDATED" or "CONSOLIDATED" means (i) when used herein
with reference to financial statements, ratios, assets, liabilities,
operating accounts or operations of Borrower and its Subsidiaries, that
any calculations have been made by combining the assets and liabilities
of Borrower and its Subsidiaries after eliminating all intercompany
items; and (ii) when used herein with reference to a Subsidiary, a
Subsidiary the financial statements of which have been presented
together with those of Borrower.
"CONSOLIDATED ADJUSTED EBITDA" means GAAP EBITDA of the
Borrower and its Subsidiaries, calculated in accordance with GAAP as in
effect from time to time, adding back (to the extent deducted in
calculating GAAP EBITDA) for all New Clubs, in the aggregate, the
<PAGE> 11
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actual GAAP EBITDA loss incurred by such New Clubs during a trailing
12-month period ending on the date of determination (the "NEW CLUBS
ADJUSTMENT"); PROVIDED that such New Club Adjustment may not exceed
$3,000,000 during any such twelve (12) month period.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, the
aggregate amount of interest that, in accordance with GAAP, would be
set forth opposite the caption "interest expense" or any like caption
on a consolidated income statement of the Borrower and its Subsidiaries
(including, but not limited to, imputed interest on Capitalized Leases,
all commissions, discounts and other fees and charges owed with respect
to letters of credit and bankers' acceptance financing, the net costs
associated with hedging obligations, amortization of other financing
fees and expenses, the interest portion of any deferred payment
obligation, amortization of discount or premium, if any, and all other
non-cash interest expense (other than previously capitalized interest
amortized to cost of sales)) plus, without duplication, all interest
accrued or paid by the Borrower or any of its Subsidiaries under any
Guaranty of Debt (including a Guaranty of principal, interest or any
combination thereof) of any Person for such period, in each case
determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" of the Borrower means, for any
period, the consolidated net income (or loss) of the Borrower and its
Subsidiaries for such period as determined in accordance with GAAP,
adjusted, to the extent included in calculating such net income (or
loss), by excluding (i) all extraordinary gains or losses (less all
fees and expenses relating thereto), (ii) the portion of net income (or
loss) of the Borrower and its Subsidiaries allocable to minority
interests in unconsolidated Persons to the extent that cash dividends
or distributions have not actually been received by the Borrower or one
of its Subsidiaries, (iii) net income (or loss) of any Person combined
with the Borrower or any of its subsidiaries on a "pooling of
interests" basis attributable to any period prior to the date of
combination, (iv) any gain or loss, net of taxes, realized upon the
termination of any Plan, (v) any gains or losses (less all fees and
expenses relating thereto) in respect of dispositions of assets other
than in the ordinary course of business, and (vi) the net income of any
Subsidiary to the extent that the declaration of the dividends or
similar distributions by that Subsidiary of that income is not at the
time permitted, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulations applicable to that Subsidiary
or its stockholders.
"CONSOLIDATED TOTAL FUNDED DEBT" means for the Borrower for
any period, the sum (without duplication) of (i) all indebtedness of
the Borrower and its Subsidiaries for borrowed money (excluding
indebtedness under the Receivables Program Documents), including,
without limitation, reimbursement obligations with respect to letters
of credit, whether or not matured or whether or not such letters of
credit have been drawn (excluding reimbursement obligations to the
extent that any letter of credit has been cash collateralized on terms
satisfactory to the issuer of such letter of credit), (ii) all
obligations of the Borrower and its Subsidiaries with respect to
Capitalized Leases determined in accordance with GAAP, (iii) all
Guarantees (without duplication of any amount of Debt included in
another clause of this definition) made by the Borrower and its
Subsidiaries, (iv) all obligations of the Borrower and its Subsidiaries
representing the deferred purchase price of real or personal property
or of services (other than current trade liabilities incurred in the
ordinary course of business and payable in accordance with customary
practices), and (v) all indebtedness arising under any Interest Expense
Hedging Arrangement of the Borrower and its Subsidiaries (excluding to
the extent otherwise included in (i), (a) any Interest Expense Hedging
Arrangement with respect to the Receivables Program and (b) up to
$25,000,000 of recourse Indebtedness under the Credit Card Program
Agreement), in each case calculated on a consolidated basis.
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"CONTRACT RECEIVABLES" means, during any period of
determination, gross accounts receivable of Borrower and its
Subsidiaries created from the sale to customers, on an installment
payment basis, of membership contracts for the use of fitness or
exercise centers, other than Receivables Program Receivables.
"CONTROL" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of
a Person, whether through the ability to exercise voting power, by
contract or otherwise. "CONTROLLING" and "CONTROLLED" have meanings
correlative thereto.
"CREDIT" means the credit available to Borrower under Article
II hereof.
"CREDIT CARD PROGRAM AGREEMENT" means the Credit Card Program
Agreement dated December 21, 1995 between the Borrower, Renaissance
Bankcard Services Inc. and Orchard Federal Savings Bank (or a
substitute agreement with a substitute provider), including the
attachments thereto.
"CREDIT AGREEMENT" has the meaning assigned in the recitals
hereto.
"CREDIT DOCUMENTS" means, collectively, this Agreement, the
Notes and the Collateral Documents.
"DEBT" means for any Person (i) all indebtedness of such
Person for borrowed money (including, without limitation, reimbursement
and all other obligations with respect to letters of credit, whether or
not matured), (ii) all obligations of such Person representing the
deferred purchase price of real or personal property or of services
(other than current trade liabilities incurred in the ordinary course
of business and payable in accordance with customary practices), (iii)
the amount of all obligations of such Person under Capitalized Leases
determined in accordance with GAAP, (iv) all indebtedness arising under
any Interest Expense Hedging Arrangement, and (v) without duplication
of any amount of Debt included in clause (i), (ii), (iii) or (iv) of
this definition, all Guaranties made by such Person. Notwithstanding
the foregoing, "Debt" shall not include up to $25,000,000 of recourse
Indebtedness under the Credit Card Program Agreement.
"DEFAULT" shall mean an event which with the giving of notice,
passage of time or both would constitute an Event of Default.
"DEMAND DEPOSIT ACCOUNTS" means the demand deposit accounts
listed on Annex 1 to the Operating Bank Guaranty maintained by Borrower
and/or any of its Subsidiaries with the respective Banks identified on
such Annex, and other demand deposit accounts established by Borrower
or any of its Subsidiaries with any Bank after the date hereof which
shall be promptly identified by such Bank in writing to Agent, Borrower
and the Guarantors.
"DESIGNATED SENIOR INDEBTEDNESS" means Designated Senior
Indebtedness of Borrower as defined in each of 1993 Indenture and the
1997 Indenture.
"DOLLARS" and "$" mean United States dollars.
"DOMESTIC SUBSIDIARY": any Subsidiary of the Borrower
organized under the laws of any jurisdiction within the United States.
<PAGE> 13
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"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and any regulations promulgated
thereunder.
"ERISA AFFILIATE" means any corporation, trade or business
that is, along with Borrower, a member of a controlled group of
corporations or a controlled group of trades or businesses, as
described in Section 414 of the Code or Section 4001 of ERISA.
"EUROCURRENCY RESERVE REQUIREMENTS" means, for any day as
applied to a Eurodollar Rate Advance, the aggregate (without
duplication) of the rates (expressed as a decimal) of reserve
requirements in effect on such day (including, without limitation,
basic, supplemental, marginal and emergency reserves under any
regulations of the Board of Governors of the Federal Reserve System or
other governmental authority having jurisdiction with respect thereto)
dealing with reserve requirements prescribed for eurocurrency funding
(currently referred to as "Eurocurrency Liabilities" in Regulation D of
such Board) maintained by a member bank of such System.
"EURODOLLAR BASE RATE" means, with respect to each day during
each Interest Period pertaining to a Eurodollar Rate Advance, the rate
per annum equal to the rate per annum for Dollar deposits with a
maturity comparable to such Interest Period which appears on the
Telerate British Bankers Assoc. Interest Settlement Rates Page at
approximately 10:00 a.m., London time, two Banking Days prior to the
commencement of such Interest Period; PROVIDED that if there shall no
longer exist a Telerate British Bankers Assoc. Interest Settlement
Rates Page (or if such page is not available on the relevant Banking
Day), the Eurodollar Base Rate shall mean an interest rate per annum
equal to the rate at which Dollar deposits (in an amount comparable to
the amount of Chase's Eurodollar Advances to be outstanding during such
Interest Period and for a maturity comparable to such Interest Period)
are offered to Chase in immediately available funds by prime banks in
the interbank market where Chase's eurodollar and foreign currency and
exchange operations are then being conducted at approximately 11:00
a.m., London time, two Banking Days prior to the commencement of such
Interest Period. "TELERATE BRITISH BANKERS ASSOC. INTEREST SETTLEMENT
RATES PAGE" shall mean the display designated as Page 3750 on
Teleratesystem Incorporated (or such other replacement page thereof
used to display London interbank offered rates of major banks).
"EURODOLLAR RATE" means, with respect to each day during each
Interest Period pertaining to a Eurodollar Rate Advance, a rate per
annum determined for such day in accordance with the following formula
(rounded upward to the nearest 1/100th of 1%):
EURODOLLAR BASE RATE
----------------------------------------
1.00 - Eurocurrency Reserve Requirements
"EURODOLLAR RATE ADVANCES" means Advances the rate of interest
applicable to which is based upon the Eurodollar Rate.
"EVENT OF DEFAULT" means any event listed in Article VIII.
"EXCHANGEABLE TRANSFEROR CERTIFICATE" shall have the meaning
attributed to such term in the Pooling & Servicing Agreement.
"EXISTING CREDIT AGREEMENT" means the Third Amended and
Restated Credit Agreement, dated as of June 26, 1995, as amended prior
to the date hereof, among the Borrower, the lenders party thereto and
Chase, as Agent.
<PAGE> 14
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"FAIR MARKET VALUE" means, with respect to any asset or
property, the sale value that would be obtained in an arm's-length
transaction between an informed and willing seller under no compulsion
to sell and an informed and willing buyer under no compulsion to buy.
"FEDERAL FUNDS RATE" means, for any period, a fluctuating
interest rate per annum equal for each day during such period to the
weighted average of the rates on overnight Federal funds transactions
with members of the Federal Reserve System arranged by Federal funds
brokers, as published for such day (or, if such day is not a Banking
Day, for the next preceding Banking Day) by the Federal Reserve Bank of
New York, or, if such rate is not so published for any day which is a
Banking Day, the average of the quotations for such day on such
transactions received by the Agent from three (3) Federal funds brokers
of recognized standing selected by it.
"FOREIGN SUBSIDIARIES" means (x) C.Z.W. Health Limited, a
corporation organized under the laws of Ontario, Canada, Bally Matrix
Fitness Centre Ltd., a corporation organized under the laws of Ontario,
Canada, and Health & Tennis (UK) Limited, a corporation organized under
the Companies Act of England, and (y) any other Subsidiary of the
Borrower organized under the laws of any jurisdiction outside the
United States of America, which is created or acquired in accordance
with the terms of this Agreement.
"FUNDING CORP." means H&T Receivable Funding Corporation, a
Delaware corporation and a wholly-owned Subsidiary of HTCA.
"FRANCHISE PROGRAM" means a program under which the Borrower
or its Subsidiaries grant franchises to third parties which require
franchisees, among other things, to pay fees to the Borrower and/or its
Subsidiaries, make use of certain collection and administrative
services of the Borrower and its Subsidiaries and contribute to a
national advertising program and which entitle the franchisees, among
other things, to receive training from the Borrower and its
Subsidiaries, to have nonexclusive licenses to use on a limited basis
certain service marks, trademarks and trade names and other
intellectual property of or licensed to the Borrower and its
Subsidiaries, and to sell memberships to use facilities of the
franchisee and the Borrower and its Subsidiaries. A Franchise Program
may include the conversion of certain facilities owned by the Borrower
or its Subsidiaries to franchised facilities, so long as such
conversions are consummated on terms and conditions permitted under
this Agreement.
"GAAP" means generally accepted accounting principles in the
United States of America in effect from time to time.
"GAAP EBITDA" means with respect to the Borrower and its
Subsidiaries on a consolidated basis, without duplication, for any
period of determination, (i) Consolidated Net Income (loss), PLUS, to
the extent deducted in determining Consolidated Net Income (loss), (ii)
provision for taxes, (iii) Consolidated Interest Expense, and (iv)
depreciation and amortization, all calculated in accordance with GAAP.
"GUARANTORS" means collectively, the Subsidiaries listed on
Exhibit D hereto (other than the Foreign Subsidiaries, Lincoln
Indemnity Company and Funding Corp.) and any other Subsidiary which
hereafter becomes a Guarantor pursuant to Section 3.04 (each
individually a "GUARANTOR").
"GUARANTY" means, as applied to any Debt, (i) a guaranty
(other than by endorsement of negotiable instruments for collection in
the ordinary course of business), direct or indirect,
<PAGE> 15
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in any manner, of any part or all of such obligation and (ii) an
agreement, direct or indirect, contingent or otherwise, the practical
effect of which is to assure in any way the payment or performance (or
payment of damages in the event of non-performance) of any part or all
of such obligation, including, without limiting the foregoing, the
payment of amounts drawn under letters of credit.
"H&T MASTER TRUST" means the trust created by the Pooling &
Servicing Agreement.
"HTCA" means Health & Tennis Corporation of America, a
Delaware corporation, which from and after June 1, 1995 is named Bally
Total Fitness Corporation.
"HAZARDOUS MATERIALS" means any (i) "hazardous substance" or
"toxic substances," as those terms are defined by the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA"), 42
U.S.C. Section 9601 ET SEQ. and the Hazardous Materials Transportation
Act, 49 U.S.C. Section 1802, all as amended or hereafter amended; (ii)
"hazardous waste", as defined by the Resource Conservation and Recovery
Act ("RCRA"), 42 U.S.C. Section 6901 ET SEQ., as amended or hereafter
amended; (iii) pollutant or contaminant or hazardous, dangerous or
toxic chemical, material, or substance within the meaning of any other
applicable federal, state or local law, regulation, ordinance, or
requirement (including consent decrees and administrative orders)
relating to protection of health, safety or the environment, as amended
or hereafter amended; (iv) crude oil or any fraction thereof which is
liquid at standard conditions of temperature and pressure (60 degrees
Fahrenheit and 14.7 pounds per square inch absolute); (v) any
radioactive material, including any source, special nuclear or
by-product material as defined at 42 U.S.C. Section 2011 ET SEQ., as
amended or hereafter amended; (vi) asbestos or asbestos containing
material ("ACM") in any form or condition and (vii) polychlorinated
biphenyls ("PCBs") or substances or compounds containing PCBs.
"HAZARDOUS MATERIALS CLAIMS" has the meaning ascribed to it in
Section 6.02(f).
"HAZARDOUS MATERIALS LAWS" means any federal, state or local
statute, regulation, ordinance or other legal requirement (including
consent decrees and administrative orders) relating to protection of
health, safety or environment, including but not limited to the
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), 42 U.S.C. Section 9601 ET SEQ.; the Resource Conservation
and Recovery Act ("RCRA"), 42 U.S.C. Section 6901 ET SEQ.; the Clean
Air Act, 42 U.S.C. Section 7401 ET SEQ.; the Clean Water Act, 33 U.S C.
Section 1251 ET SEQ.; the Occupational Safety and Health Act ("OSHA"),
29 U.S.C. Section 651 ET SEQ.; the Toxic Substances Control Act
("TSCA"), 15 U.S.C. Section 2601 ET SEQ.; any similar state oR local
laws; any regulations promulgated pursuant to any of the foregoing; and
all of the foregoing as amended or hereafter amended.
"INDENTURE" means both the 1993 Indenture and the 1997
Indenture.
"INTANGIBLE ASSET" means any asset which is treated as an
intangible asset in conformity with GAAP, including, without
limitation, leasehold rights, franchise rights, non-compete agreements,
goodwill, unamortized debt discounts, patents, patent applications,
trademarks, trade names, copyrights and licenses.
"INTEREST EXPENSE HEDGING ARRANGEMENT" means an interest rate
swap, cap or collar agreement or similar arrangement entered into with
the intent of protecting against fluctuations in interest rates or the
exchange of notional interest obligations, either generally or under
specific contingencies.
<PAGE> 16
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"INTEREST PAYMENT DATE" means (a) as to any Reference Rate
Advance, the last Banking Day of each March, June, September and
December, (b) as to any Eurodollar Rate Advance having an Interest
Period of three months or less, the last day of such Interest Period,
and (c) as to any Eurodollar Rate Advance having an Interest Period
longer than three months, (i) each day which is three months, or a
whole multiple thereof, after the first day of such Interest Period and
(ii) the last day of such Interest Period.
"INTEREST PERIOD" means with respect to any Eurodollar Rate
Advance:
(a) initially, the period commencing on the borrowing
or conversion date, as the case may be, with respect to such
Eurodollar Rate Advance and ending one, two, three or six
months thereafter, as selected by the Borrower in its notice
of borrowing or notice of conversion, as the case may be,
given with respect thereto; and
(b) thereafter, each period commencing on the last
day of the next preceding Interest Period applicable to such
Eurodollar Rate Advance and ending one, two, three or six
months thereafter, as selected by the Borrower by irrevocable
notice to the Agent not less than three Banking Days prior to
the last day of the then current Interest Period with respect
thereto;
PROVIDED that, all of the foregoing provisions relating to Interest
Periods are subject to the following:
(1) if any Interest Period pertaining to a Eurodollar
Rate Advance would otherwise end on a day that is not a
Banking Day, such Interest Period shall be extended to the
next succeeding Banking Day unless the result of such
extension would be to carry such Interest Period into another
calendar month in which event such Interest Period shall end
on the immediately preceding Banking Day;
(2) any Interest Period that would otherwise extend
beyond the Termination Date shall end on the Termination Date;
and
(3) any Interest Period pertaining to a Eurodollar
Rate Advance that begins on the last Banking Day of a calendar
month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such
Interest Period) shall end on the last Banking Day of a
calendar month.
"INVESTMENT" means any direct or indirect loans, advances,
capital contributions or transfers of assets, and any direct or
indirect purchases and other acquisitions of, or a beneficial interest
in, any capital stock or other securities; PROVIDED, HOWEVER, that the
allocation of corporate overhead to Foreign Subsidiaries shall not
constitute an "Investment". The amount of any Investment not consisting
of cash shall equal the Fair Market Value of such Investment at the
time it is made.
"ISSUING BANK" means Chase and other Banks acceptable to the
Agent and the Borrower.
"LENDING BRANCH" means with respect to each Bank the branches
or offices specified on the signature pages hereto or such other of its
branches or offices as such Bank may from time to time designate in
writing to Agent and Borrower.
<PAGE> 17
11
"LETTER OF CREDIT" means any letter of credit issued by an
Issuing Bank pursuant to Section 2.15.
"LEVERAGE RATIO" means at any time the ratio of Consolidated
Total Funded Debt at such time to Consolidated Adjusted EBITDA for the
period of four consecutive fiscal quarters of the Borrower most
recently ended.
"L/C COMMITMENTS" means the commitments of Banks to issue or
participate in Letters of Credit and to make L/C Advances pursuant to
Section 2.15 in the aggregate maximum amount specified in Section
2.15(a)(i), as such amount may be reduced or terminated from time to
time hereunder.
"L/C COMMITMENT AMOUNT": at any time, means the difference
between (i) the lesser of (a) the Commitment Amount at such time and
(b) $30,000,000 and (ii) any L/C Commitment Reductions.
"L/C COMMITMENT REDUCTIONS" shall mean the amount of the
permanent reductions of the L/C Commitment Amount resulting from the
application of Sections 2.08 or 7.08 or any other provision contained
herein.
"LIEN" means a mortgage, security interest, pledge, deed of
trust, encumbrance, lien, option, tax lien, mechanics' lien,
materialmen's lien or charge or encumbrance of any kind (including any
conditional sale or other title retention agreement, any financing
lease having substantially the same economic effect as any of the
foregoing, and the filing of any financing statement under the Uniform
Commercial Code).
"MAJORITY BANKS" means at any time Banks having aggregate
Commitment Percentages of 66-2/3% or more.
"MARGIN REGULATIONS" means Regulations G, T, U and X of the
Board of Governors of the Federal Reserve System, as amended from time
to time.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on
(a) the business, operations, property, condition (financial or
otherwise) or prospects of the Borrower and its Subsidiaries taken as
whole, (b) the validity or enforceability of (i) this Agreement, any of
the Notes or any of the other Credit Documents or (ii) the rights or
remedies of the Agent and the Banks hereunder or thereunder or (c) the
ability of the Borrower and its Subsidiaries to perform their
respective obligations under the Credit Documents.
"MORTGAGES" means all fee mortgages, leasehold mortgages,
assignments of leases, mortgage deeds, deeds of trust, deeds to secure
debt, security agreements, and other similar instruments described on
Exhibit F attached hereto, executed or to be executed by Borrower, the
Scandinavian Partnerships or the various Guarantors which shall provide
the Collateral Agent, for the benefit of the Secured Creditors, a Lien
on or other interest in any portion of any real property in which
Borrower or any Guarantor owns an interest.
"MULTIEMPLOYER PLAN" has the meaning ascribed to it in Section
3(37) of ERISA.
"NET CASH PROCEEDS OF SALE" shall mean cash proceeds
(including any cash received by way of deferred payments, purchase
price adjustments or otherwise, but only as and when so received)
received by Borrower or any of its Subsidiaries from the sale, lease,
assignment or
<PAGE> 18
12
other disposition (but excluding any such disposition permitted by
Sections 7.08(a), (b), (c), (e) or (f) or the proviso to Section
7.08(d), and excluding any such proceeds to the extent they constitute
Reinvestment Proceeds) of any asset or property of such Person or any
insurance or condemnation awards net of (i) the reasonable and
customary costs directly incurred in connection with such transaction,
(ii) taxes actually paid or in good faith estimated to be payable as a
result thereof and (iii) amounts applied to the repayment of other Debt
secured by a Permitted Lien on the asset disposed of. If in determining
"Net Cash Proceeds of Sale", amounts are deducted for estimated taxes
payable, and such amounts are not actually paid when due by Borrower in
cash in accordance with all applicable laws, then such deducted amounts
shall constitute "Net Cash Proceeds of Sale".
"NEW CLUBS" means, with respect to any date, the collective
reference to each health and fitness club (i) owned and operated by the
Borrower or any Subsidiary and (ii) opened within 18-months prior to
such date.
"NEW VENTURES" means the collective reference to each Person
(other than Subsidiaries and Unrestricted Subsidiaries) in which the
Borrower or any Subsidiary makes its initial Investment after the date
hereof.
"1996-1 CERTIFICATES" means the certificates executed by
Funding Corp. and authenticated by the trustee under the Pooling &
Servicing Agreement representing interests in Series 1996-1 of the H&T
Master Trust.
"1996-1 SUPPLEMENT" means the Series 1996-1 Supplement, dated
as of December 16, 1996, by and among Funding Corp., HTCA and Texas
Commerce Bank National Association, as trustee, supplementing the
Pooling & Servicing Agreement, as the same may be amended, supplemented
or otherwise modified in accordance with the terms of this Agreement.
"1997 INDENTURE" means that certain Indenture, dated as of
October 7, 1997, between Borrower and First Trust National Association,
as trustee (and any successor trustee thereto) relating to the 1997
Subordinated Notes;
"1997 SUBORDINATED NOTES" has the meaning ascribed to it in
the definition of Subordinated Debt in Section 1.01.
"1993 INDENTURE" means that certain Indenture, dated as of
January 25, 1993, between Borrower and Amalgamated Bank of Chicago, as
trustee (and any successor trustee thereto), as in effect on the date
hereof;
"1993 SUBORDINATED NOTES" has the meaning ascribed to it in
the definition of Subordinated Debt in Section 1.01.
"OBLIGATIONS" means all loans, advances, debts, liabilities,
obligations, covenants and duties owing to Agent, the Collateral Agent,
any Bank, any Issuing Bank or any of them or any of their respective
successors and assigns, of any kind or nature, present or future,
arising under this Agreement or under the Notes or under any Collateral
Document, whether or not for the payment of money, whether arising by
reason of an extension of credit, opening or amendment of a letter of
credit (or payment of any draft drawn thereunder), loan, guaranty,
indemnification, or in any other manner, whether direct or indirect
(including those acquired by assignment), absolute or contingent, due
or to become due, now existing or hereafter arising and however
acquired. The term includes, without limitation, all interest, charges,
expenses,
<PAGE> 19
13
fees, reasonable attorneys' fees and disbursements and paralegals'
fees, and any other sums chargeable to Borrower or any Guarantor under
this Agreement or any other Collateral Document.
"OPERATING BANK GUARANTY" means the Guaranty Agreement in the
form of Exhibit E hereto, as amended, supplemented or otherwise
modified, pursuant to which each of the Guarantors shall guaranty the
payment of the Operating Bank Obligations to the extent set forth
therein.
"OPERATING BANK OBLIGATIONS" means, collectively at any time,
up to Ten Million Dollars ($10,000,000) in the aggregate (including,
without limitation, principal, interest, fees, costs and expenses) of
the obligations of Borrower and/or any of its Subsidiaries to one or
more of the Operating Banks (including, without limitation, Chase in
its individual capacity) at such time under or by reason of any
customary banking deposit or disbursement transaction or service
performed for Borrower or any of its Subsidiaries in connection with
the Demand Deposit Accounts.
"OPERATING BANKS" means the Banks listed on Annex 1 to the
Operating Bank Guaranty and other Banks at which Borrower or any of its
Subsidiaries may from time to time establish Demand Deposit Accounts.
"PBGC" means the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.
"PERMITTED LIENS" means any one or more of the following:
(i) Liens for taxes, assessments, governmental
charges or levies either not yet delinquent (or, if
delinquent, in an aggregate amount not in excess of $100,000)
or the validity of which is being contested in good faith in
an appropriate manner diligently pursued and as to which
adequate reserves for the unpaid amount shall have been set
aside in conformity with GAAP;
(ii) Deposits or pledges to secure the payment of,
or to secure the Borrower's obligations with respect to
letters of credit that secure the payment of, workers'
compensation, unemployment insurance or social security or
other retirement benefits or obligations (exclusive of liens
arising under ERISA), or to secure the performance of bids,
trade contracts, leases, public or statutory obligations,
surety or appeal bonds and other obligations of a like nature
incurred in the ordinary course of business;
(iii) Materialmen's, mechanics', landlords',
workmen's, repairmen's, employees' or other like liens arising
in the ordinary course of business to secure obligations not
yet delinquent or being contested in good faith and as to
which adequate reserves for the unpaid amount shall have been
set aside in conformity with GAAP or as to which adequate
bonds shall have been obtained;
(iv) Purchase money liens, purchase money security
interests, mortgages or title retention arrangements upon or
in any property (real or personal) acquired or held by
Borrower or its Subsidiaries in the ordinary course of
business to secure Debt (including, without limitation,
Capitalized Leases) permitted hereunder (provided that the
security agreement or conditional sales or other title
retention contract pursuant to
<PAGE> 20
14
which the Lien on such property is created shall be entered
into within 120 days after the purchase or substantial
completion of the construction of such property) and incurred
solely for the purpose of financing the acquisition of such
property or improvements upon such property, or renewals,
extensions or refinancing thereof; PROVIDED, that any renewal,
extension or refinancing thereof shall not consist of any
capitalization of interest on the original Debt and such Liens
do not extend to any property of Borrower or any Subsidiary
other than the property acquired or financed with the original
purchase money Debt;
(v) Other Liens, so long as the aggregate amount
of all such other Liens does not exceed at any time an
aggregate amount of One Million Dollars ($1,000,000);
(vi) Other non-monetary Liens which do not have a
material adverse effect on the value or use of the property
subject to such Liens;
(vii) Precautionary UCC filings executed by
Borrower or any Subsidiary, as lessee, in the ordinary course
of business, on equipment, leasehold improvements and
furnishings;
(viii) Liens under the Collateral Documents;
(ix) Liens related to credit card processing
agreements, so long as the aggregate amount of such Liens does
not exceed at any time an aggregate amount of Three Million
Dollars ($3,000,000);
(x) Other existing Liens listed on Schedule 1.01;
(xi) Liens created after the Closing Date securing
Debt of the Borrower or any Subsidiary of the type described
in clause (iii) of the definition of "Debt", the incurrence of
which Debt is in the ordinary course of business of the
Borrower or such Subsidiary, and any renewals, extensions or
refinancings of such Debt permitted hereunder that do not
consist of any capitalization of interest on the original
Debt, PROVIDED that such Liens shall not extend to or encumber
any property other than the property financed by such Debt;
(xii) Liens on the Collateral securing revolving
credit commitments or letter of credit commitments from other
banks or financial institutions during the Commitment Period
permitted under Section 7.02(e); PROVIDED that Liens are pari
passu or subordinated to the Liens of the Collateral Agent and
the Banks hereunder and under the Collateral Documents; and
(xiii) Liens on the Receivables Program Receivables
created pursuant to the Receivables Program Documents.
"PERSON" means an individual, a corporation, a partnership,
limited liability company, a joint venture, an association, a trust or
any other entity or organization, including a governmental or political
subdivision or an agent or instrumentality thereof.
"PLAN" means, at any date, any employee pension benefit plan
(as defined in Section 3(2) of ERISA) which is subject to Title IV of
ERISA (other than a Multiemployer Plan) and to which Borrower or any
ERISA Affiliate may have any liability, including any liability by
<PAGE> 21
15
reason of having been a substantial employer within the meaning of
Section 4063 of ERISA at any time during the preceding five years, or
by reason of being deemed to be a contributing sponsor under Section
4069 of ERISA.
"POOLING & SERVICING AGREEMENT" means the Pooling & Servicing
Agreement, dated as of June 26, 1995, as amended and restated by the
Amended and Restated Pooling and Servicing Agreement dated as of
December 16, 1996, among Funding Corp., HTCA, and Texas Commerce Bank
National Association, as trustee, as the same may be amended,
supplemented or otherwise modified in accordance with the terms of this
Agreement.
"PROPERTIES" means all real properties owned in fee by
Borrower or its Subsidiaries or the Scandinavian Partnerships and all
real properties in which Borrower or its Subsidiaries hold a leasehold
interest.
"PURCHASE AGREEMENT" means the Purchase Agreement, dated as of
June 26, 1995, as amended and restated by the Amended and Restated
Purchase Agreement dated as of December 16, 1996, between Funding Corp.
and HTCA, as the same may be amended, supplemented or otherwise
modified in accordance with the terms of this Agreement.
"RECEIVABLES PROGRAM" means the program of sales of
Receivables Program Receivables from time to time by the Borrower and
its Subsidiaries to the H&T Master Trust pursuant to, and in accordance
with the terms and conditions of, the Receivables Program Documents.
"RECEIVABLES PROGRAM CERTIFICATES" means, collectively, the
1996-1 Certificates and all other certificates issued pursuant to the
Pooling & Servicing Agreement or any supplement thereto representing
interests in any series of the H&T Master Trust (other than any such
certificate held by Funding Corp. or any other Subsidiary of the
Borrower), as the same may be amended, supplemented or otherwise
modified in accordance with the terms of this Agreement.
"RECEIVABLES PROGRAM DOCUMENTS" means, collectively, the
Pooling & Servicing Agreement, the 1996-1 Supplement, the 1996-1
Certificates, all other supplements to the Pooling & Servicing
Agreement (including, without limitation, any supplement relating to
any series of Refinancing Certificates), all other Receivables Program
Certificates, the Purchase Agreement, all other purchase agreements
with respect to Receivables Program Receivables entered into in
connection with the Pooling & Servicing Agreement, and all other
agreements entered into in connection with the Receivables Program,
including, without limitation, any servicing agreements entered into
with any servicer of the Receivables Program Receivables, as any of the
same may be amended, supplemented or otherwise modified in accordance
with the terms of this Agreement.
"RECEIVABLES PROGRAM RECEIVABLE" means all right, title and
interest transferred to the H&T Master Trust for the benefit of the
holders of the Receivable Program Certificates, pursuant to the
Receivables Program Documents, in (a) the right to payment of amounts
in respect of the membership fee (including any sales tax thereon) and
finance charges relating thereto under an agreement made by HTCA or
another Subsidiary of HTCA, in the form of a written retail installment
sale contract, for membership in and the right to use facilities at,
and obtain services from, one or more health clubs owned by HTCA or
another Subsidiary of HTCA, (b) prior to the release thereof pursuant
to Section 2.2(b) of the Pooling & Servicing Agreement from the Trust
Property (as defined in the Pooling & Servicing Agreement), all
<PAGE> 22
16
amounts paid from time to time pursuant to such written retail
installment sale contract in respect of monthly dues, nsf fees, late
payment fees, cancellation fees for relocation cancellations, transfer
fees to transfer a membership, lost membership card replacement fees,
or other payments not constituting Collections or Transferor
Collections (as defined in the Pooling & Servicing Agreement), and
proceeds thereof (including without limitation amounts held in accounts
for the benefit of the H&T Master Trust and investments of such
amounts), and (c) such written retail installment sale contract and any
rights against the originator or seller thereof under the Purchase
Agreement or the other purchase agreements included in the Receivables
Program Documents, PROVIDED that any such right, title or interest in
any of the property identified in the foregoing clauses (a), (b) or (c)
of this definition shall automatically cease to constitute "Receivables
Program Receivables" at such time as each of the following conditions
is satisfied: (i) all Receivables Program Certificates are paid in
full, (ii) the H&T Master Trust is terminated pursuant to Section 12.1
of the Pooling & Servicing Agreement and, pursuant to Section 12.4 of
the Pooling & Servicing Agreement, the Exchangeable Transferor
Certificate is surrendered to the trustee in connection with the
reconveyance by the trustee to Funding Corp. of all right, title and
interest of the H&T Master Trust in the Receivables Program Receivables
and other property of the H&T Master Trust (except for amounts held by
the trustee pursuant to Section 12.3(b) of the Pooling & Servicing
Agreement), and (iii) in accordance with GAAP, the accounts receivable
constituting Receivables Program Receivables prior to such reconveyance
are upon such reconveyance properly included within Contract
Receivables on the consolidated balance sheet of the Borrower and its
consolidated Subsidiaries.
"REFERENCE RATE" means, for any day, a rate per annum (rounded
upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of
(a) the Prime Rate in effect on such day, (b) the Base CD Rate in
effect on such day plus 1% and (c) the Federal Funds Effective Rate in
effect on such day plus 1/2 of 1%. For purposes hereof: "PRIME RATE"
shall mean the rate of interest per annum publicly announced from time
to time by Chase as its prime rate in effect at its principal office in
New York City (each change in the Prime Rate to be effective on the
date such change is publicly announced); "BASE CD RATE" shall mean the
sum of (a) the product of (i) the Three-Month Secondary CD Rate and
(ii) a fraction, the numerator of which is one and the denominator of
which is one minus the C/D Reserve Percentage and (b) the C/D
Assessment Rate; "THREE-MONTH SECONDARY CD RATE" shall mean, for any
day, the secondary market rate for three-month certificates of deposit
reported as being in effect on such day (or, if such day shall not be a
Business Day, the next preceding Business Day) by the Board of
Governors of the Federal Reserve System (the "BOARD") through the
public information telephone line of the Federal Reserve Bank of New
York (which rate will, under the current practices of the Board, be
published in Federal Reserve Statistical Release H.15(519) during the
week following such day), or, if such rate shall not be so reported on
such day or such next preceding Business Day, the average of the
secondary market quotations for three-month certificates of deposit of
major money center banks in New York City received at approximately
10:00 A.M., New York City time, on such day (or, if such day shall not
be a Business Day, on the next preceding Business Day) by the Agent
from three New York City negotiable certificate of deposit dealers of
recognized standing selected by it; "C/D ASSESSMENT RATE" shall mean,
for any day, the net annual assessment rate (rounded upward to the
nearest 1/100th of 1%) determined by Chase to be payable on such day to
the Federal Deposit Insurance Corporation or any successor ("FDIC") for
FDIC's insuring time deposits made in Dollars at offices of Chase in
the United States; "C/D RESERVE PERCENTAGE" shall mean, for any day,
that percentage (expressed as a decimal) which is in effect on such
day, as prescribed by the Board, for determining the maximum reserve
requirement for a member bank of the Federal Reserve System in New York
City with deposits exceeding one billion Dollars
<PAGE> 23
17
in respect of new non-personal time deposits in Dollars in New York
City having a maturity of three months and in an amount of $100,000 or
more; and "FEDERAL FUNDS EFFECTIVE RATE" shall mean, for any day, the
weighted average of the rates on overnight federal funds transactions
with members of the Federal Reserve System arranged by federal funds
brokers, as published on the next succeeding Business Day by the
Federal Reserve Bank of New York, or, if such rate is not so published
for any day which is a Business Day, the average of the quotations for
the day of such transactions received by the Agent from three federal
funds brokers of recognized standing selected by it. If for any reason
the Agent shall have determined (which determination shall be
conclusive absent manifest error) that it is unable to ascertain the
Base CD Rate or the Federal Funds Effective Rate, or both, for any
reason, including the inability or failure of the Agent to obtain
sufficient quotations in accordance with the terms thereof, the
Reference Rate shall be determined without regard to clause (b) or (c),
or both, of the first sentence of this definition, as appropriate,
until the circumstances giving rise to such inability no longer exist.
Any change in the Reference Rate due to a change in the Prime Rate, the
Three-Month Secondary CD Rate or the Federal Funds Effective Rate shall
be effective on the effective day of such change in the Prime Rate, the
Three-Month Secondary CD Rate or the Federal Funds Effective Rate,
respectively.
"REFERENCE RATE ADVANCE" means an Advance the rate of interest
applicable to which is based upon the Reference Rate.
"REFINANCING CERTIFICATES" shall have the meaning set forth in
Section 7.09(d).
"REINVESTMENT PROCEEDS" means, at any time, all net proceeds
of dispositions of any assets by Borrower and its Subsidiaries (but
excluding any such dispositions permitted by Sections 7.08(a), (b),
(c), (e) or (f) or the proviso to Section 7.08(d)), to the extent that
(i) such net proceeds have not yet been applied to the acquisition of
like-kind replacement assets or to the permanent reduction of the
Commitment Amount and the Revolving Credit Commitment Amount and the
prepayment of the Advances and cash collateralization of the Letters of
Credit, and with respect to which less than 360 days has elapsed since
the disposition giving rise to such proceeds, or (ii) an amount equal
to or greater than such net proceeds has been applied to the
acquisition of like-kind replacement assets within 180 days prior to
the disposition giving rise to such proceeds, PROVIDED that, to the
extent that the Borrower and its Subsidiaries dispose of assets the net
proceeds of the disposal of which exceed $10,000,000 (but excluding any
such dispositions permitted by Sections 7.08(a), (b), (c), (e) or (f)
or the proviso to Section 7.08(d)) in any fiscal year of the Borrower,
any net proceeds of assets disposed of during such fiscal year in
excess of such aggregate amount shall not be Reinvestment Proceeds.
"REINVESTMENT PROCEEDS AMOUNT" means, at any time, the
aggregate amount of Reinvestment Proceeds at such time.
"REPORTABLE EVENT" shall be as defined in Section 4043 of
ERISA.
"RESTRICTED PAYMENT" means with respect to any Person (a) any
dividend or other distribution of assets, properties, cash, rights,
obligations or securities, direct or indirect, on account of any shares
of any class of the capital stock or other equity interests of such
Person; or (b) any amount paid in redemption, retirement, repurchase,
direct or indirect, of (x) any shares of any class of capital stock or
other equity interests or (y) any warrants, options or other rights to
acquire any shares of any class of capital stock or other equity
interests of such Person.
<PAGE> 24
18
"REVOLVING CREDIT" means the credit described in Section 2.01
hereof.
"REVOLVING CREDIT COMMITMENT" has the meaning ascribed to it
in Section 2.01(a).
"REVOLVING CREDIT COMMITMENT AMOUNT": means (i) the lesser of
(a) the Commitment Amount and (b) $70,000,000 (ii) less any Revolving
Credit Commitment Reductions.
"REVOLVING CREDIT COMMITMENT REDUCTIONS" shall mean the amount
of the permanent reductions of the Revolving Credit Commitment Amount
resulting from the application of Sections 2.08, 2.10 or 7.08 or any
other provision contained herein.
"REVOLVING NOTE" or "NOTE" means the master promissory note of
Borrower payable to the order of a Bank in substantially the form of
Exhibit H hereto; and "REVOLVING NOTES" or "NOTES" means all of such
Revolving Notes.
"SCANDINAVIAN PARTNERSHIPS" means those certain partnerships
listed on Schedule 1.01(b) hereto.
"SECURED CREDITORS" means, collectively, Chase (as successor
to Manufacturers Hanover Trust Company and Chemical Bank) and the
Operating Banks in their separate financial arrangements with Borrower,
and the Agent, the Collateral Agent, the Banks and the Issuing Banks,
each in connection with the Secured Obligations.
"SECURED OBLIGATIONS" means, collectively, the Obligations and
the Operating Bank Obligations.
"SENIOR INDEBTEDNESS" means Senior Indebtedness of Borrower as
defined in each of 1993 Indenture and the 1997 Indenture.
"SUBORDINATED DEBT" means (a) Borrower's 13% Senior
Subordinated Notes ("1993 Subordinated Notes") due January 15, 2003,
issued under and pursuant to the 1993 Indenture, (b) Borrower's 9-7/8%
Senior Subordinated Notes due 2007, issued under and pursuant to the
1997 Indenture ("1997 Subordinated Notes", and together with the 1993
Subordinated Notes, the "Subordinated Notes"), and (c) any other Debt
of Borrower which is subordinated to the Debt created under this
Agreement and the Notes in a manner and containing terms and provisions
satisfactory to Majority Banks.
"SUBORDINATED NOTES" has the meaning ascribed to it in the
definition of Subordinated Debt in Section 1.01.
"SUBSIDIARY" means any corporation, association or other
business entity of which a Person owns, directly or indirectly, more
than fifty percent (50%) of the voting securities thereof or which such
Person otherwise controls; PROVIDED that, other than for purposes of
Sections 6.08 and 7.14, the definition of "Subsidiary" shall not
include any Unrestricted Subsidiary. Unless the reference is
specifically otherwise, "Subsidiary" shall refer to a Subsidiary of
Borrower.
"SUBSTANTIAL SUBSIDIARY" means any Subsidiary of Borrower with
respect to which (a) the aggregate book value of its assets, determined
in accordance with GAAP at such time, is greater than 1% of the
aggregate book value of the assets of Borrower and its Subsidiaries
taken as a whole or (b) the aggregate gross revenues of such
Subsidiary, determined in
<PAGE> 25
19
accordance with GAAP for the immediately preceding fiscal quarter, is
greater than 1% of the aggregate gross revenues of Borrower and its
Subsidiaries taken as a whole, for such period.
"TAX ALLOCATION AND INDEMNITY AGREEMENT" means the Tax
Allocation and Indemnity Agreement, dated as of January 9, 1996, among
Bally Entertainment Corporation, a Delaware corporation, the Borrower
and their respective direct and indirect subsidiaries.
"TERMINATION DATE" means the earliest to occur of
(a) the date the Commitment Amount is terminated by
the Borrower pursuant to Section 2.10 or is otherwise
terminated or reduced to zero pursuant to the terms of this
Agreement, PROVIDED that all amounts payable under this
Agreement and the Notes are fully repaid on or prior to such
date,
(b) the date the Credit hereunder is terminated or
accelerated pursuant to Article VIII, and
(c) November 18, 2000.
"TERMINATION EVENT" means (i) the institution of steps by
Borrower, an ERISA Affiliate, PBGC or any other Person under Section
4041 or 4042, as applicable, of ERISA to terminate a Plan, (ii) the
occurrence of a Reportable Event which is a basis under Section 4042 of
ERISA for PBGC to institute steps to terminate a Plan, (iii) the
occurrence of a contribution failure with respect to a Plan sufficient
to give rise to a lien under Section 302(f) of ERISA, (iv) the
withdrawal by Borrower or any ERISA Affiliate from a Plan as to which
it is a substantial employer under Sections 4062(e) and 4063 of ERISA
or (v) the withdrawal by Borrower or any ERISA Affiliate from a
Multiemployer Plan under Section 4203 or 4205 of ERISA.
"TRANSFEREE" has the meaning ascribed to it in Section
9.04(c).
"TYPE" means, as to any Advance, its nature as a Reference
Rate Advance or a Eurodollar Rate Advance.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of the
Borrower that exists on the Closing Date and is so designated as an
Unrestricted Subsidiary on Schedule 1.01(c), (ii) any subsidiary of the
Borrower that at the time of determination shall be an Unrestricted
Subsidiary (as designated by the Board of Directors of the Borrower, as
provided below), and (iii) any subsidiary of an Unrestricted
Subsidiary. The Board of Directors may designate any subsidiary of the
Borrower (including any newly acquired or newly formed subsidiary) to
be an Unrestricted Subsidiary if all of the following conditions apply:
(a) neither the Borrower nor any of its Subsidiaries provides credit
support for Debt or other obligations of such Unrestricted Subsidiary
(including any undertaking, agreement or instrument evidencing such
Debt or obligations), (b) such Unrestricted Subsidiary is not liable,
directly or indirectly, with respect to any Debt other than
Unrestricted Subsidiary Indebtedness, (c) any Investment by the
Borrower in such Unrestricted Subsidiary made as a result of
designating such subsidiary an Unrestricted Subsidiary shall not
violate the provisions described under Section 7.01 and such
Unrestricted Subsidiary is not party to any agreement, contract,
arrangement or understanding at such time with the Borrower or any
other Subsidiary of the Borrower unless the terms of any such
agreement, contract, arrangement or understanding are no less favorable
to the Borrower or such other Subsidiary than those that might be
obtained at the time from Persons
<PAGE> 26
20
who are not Affiliates of the Borrower or, in the event such condition
is not satisfied, the value of such agreement, contract, arrangement or
understanding to such Unrestricted Subsidiary shall be deemed an
Investment, and (d) such Unrestricted Subsidiary does not own any
Capital Stock in any Subsidiary of the Borrower which is not
simultaneously being designated an Unrestricted Subsidiary. Any such
designation by the Board of Directors shall be evidenced to the Agent
by filing with the Agent a resolution of the Board of Directors of the
Borrower giving effect to such designation and an officer's certificate
certifying that such designation complies with the foregoing conditions
and any Investment by the Borrower in such Unrestricted Subsidiary
shall be deemed the making of an Investment on the date of designation
in an amount equal to the greater of (1) the net book value of such
Investment or (2) the Fair Market Value of such Investment as
determined in good faith by the Board of Directors (and evidenced by a
resolution of the Board of Directors). The Board of Directors may
designate any Unrestricted Subsidiary as a Subsidiary; PROVIDED (i)
that, if such Unrestricted Subsidiary has any Debt, immediately after
giving effect to such designation, no Default or Event of Default would
result, and (ii) that all Debt of such Subsidiary shall be deemed to be
incurred on the date such Unrestricted Subsidiary becomes a Subsidiary.
"UNRESTRICTED SUBSIDIARY INDEBTEDNESS" of any Unrestricted
Subsidiary means Debt of such Unrestricted Subsidiary (a) as to which
neither the Borrower nor any Subsidiary is directly or indirectly
liable (by virtue of the Borrower or any such Subsidiary being the
primary obligor on, guarantor of, or otherwise liable in any respect
to, such Debt), and (b) which, upon the occurrence of a default with
respect thereto, does not result in, or permit any holder of any Debt
of the Borrower or any Subsidiary to declare, a default on such Debt of
the Borrower or any Subsidiary or cause the payment thereof to be
accelerated or payable prior to its stated maturity.
1.02 FINANCIAL STANDARDS. All accounting terms not expressly
defined herein shall be construed, except where the context otherwise requires
or if it has otherwise been indicated herein, in accordance with GAAP. If any
changes in accounting principles are hereafter occasioned by promulgation of
rules, regulations, pronouncements or opinions by or are otherwise required by
the Securities and Exchange Commission, the Financial Accounting Standards Board
or the American Institute of Certified Public Accountants (or successors thereto
or agencies with similar functions), and any of such changes result in a change
in the method of calculation of, or affect the results of such calculation of,
any of the financial covenants and the definitions relating to such financial
covenants, then the parties hereto agree to enter into and diligently pursue
negotiations in order to amend such financial covenants or terms so as to
equitably reflect such changes, with the desired result that the criteria for
evaluating Borrower's financial condition and results of operations shall be the
same after such changes as if such changes had not been made.
1.03 INTERPRETATION. References to Exhibits and Schedules are
to those to this Agreement, unless otherwise indicated. References to agreements
and other contractual instruments shall be deemed to include all exhibits and
appendices attached thereto and all amendments, supplements and other
modifications to such instruments, but only to the extent such amendments,
supplements and other modifications are not prohibited by the terms of this
Agreement; and references to Persons include their respective permitted
successors and assigns and, in the case of governmental authorities, Persons
succeeding to their respective functions and capacities.
ARTICLE II.
<PAGE> 27
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THE CREDIT
----------
2.01 THE REVOLVING CREDIT. (a) From time to time during the
Commitment Period and subject to the terms and conditions of this Agreement,
each Bank severally agrees to lend to Borrower sums at any one time outstanding
not in excess of an aggregate amount equal to such Bank's Commitment Percentage
of the Revolving Credit Commitment Amount (as to each Bank its "Revolving Credit
Commitment") PROVIDED, that no Bank shall make any Advance if, after giving
effect to such Advance, the aggregate outstanding principal amount of all
Advances plus the aggregate undrawn amount of all Letters of Credit then
outstanding plus the aggregate amount of all unreimbursed drawings under Letters
of Credit would exceed the Commitment Amount. Each Bank's maximum obligation
under the Revolving Credit at any time is the amount derived by multiplying its
Commitment Percentage by the Revolving Credit Commitment Amount.
(b) The Revolving Credit is a revolving credit and Borrower
may, prior to the Termination Date, borrow, repay and reborrow amounts repaid up
to the maximum amount available under Section 2.01(a), subject to the reductions
required by Section 2.08 hereof and the reductions permitted by Section 2.10
hereof.
(c) The Revolving Credit may from time to time consist of (i)
Eurodollar Rate Advances, (ii) Reference Rate Advances or (iii) a combination
thereof, as determined by the Borrower and notified to the Agent in accordance
with Section 2.02, PROVIDED that no Advance shall be made as a Eurodollar Rate
Advance after the day that is one month prior to the Termination Date.
2.02 REQUESTS FOR ADVANCES; CONVERSION AND CONTINUATION
OPTIONS. (a) Each Advance shall be made upon the irrevocable request of Borrower
received by Agent by 12:00 p.m. noon, New York time, on the Borrowing Date
therefor in the case of Reference Rate Advances and three (3) Banking Days prior
to the Borrowing Date therefor in the case of Eurodollar Rate Advances,
specifying: (i) the Borrowing Date for such Advance, which shall be a Banking
Day; (ii) the amount of such Advance; (iii) whether the Advance is to be of
Reference Rate Advances, Eurodollar Rate Advances or a combination thereof; (iv)
if the Advance is to consist entirely or partly of Eurodollar Rate Advances, the
amount of such Eurodollar Rate Advances and the length of the initial Interest
Period therefor; and (v) the account of Borrower with Agent for the deposit of
the proceeds of such Advance.
(b) Each request for an Advance may be made in writing or by
telephone, provided, however, that any such telephonic request shall be
confirmed immediately by telecopier and also in writing delivered to Agent by
Borrower not more than three (3) Banking Days after the date such telephonic
request is made, PROVIDED, HOWEVER, that telephonic requests shall be subject to
the indemnity provisions set forth in Section 9.07 hereof.
(c) Upon receipt of such borrowing request, Agent shall
promptly notify Banks thereof.
(d) Each Reference Rate Advance hereunder shall be in the
minimum aggregate amount of One Million Dollars ($1,000,000) or in integral
multiples of Five Hundred Thousand Dollars ($500,000) in excess thereof (or, if
the excess of the Revolving Credit Commitments then in effect over the aggregate
principal amount of all Advances then outstanding is less than $1,000,000, such
lesser amount). Each Eurodollar Rate Advance shall be in the minimum aggregate
amount of Five Million Dollars ($5,000,000) or in integral multiples of One
Million Dollars ($1,000,000) in excess thereof.
<PAGE> 28
22
(e) Each Advance shall be made on a pro rata basis by all
Banks, and each Bank's portion of each Advance shall be equal to its Commitment
Percentage of such Advance.
(f) The Borrower may elect from time to time to convert
Eurodollar Rate Advances to Reference Rate Advances by giving the Agent at least
two Banking Days' prior irrevocable notice of such election, PROVIDED that any
such conversion of Eurodollar Rate Advances may only be made on the last day of
an Interest Period with respect thereto. The Borrower may elect from time to
time to convert Reference Rate Advances to Eurodollar Rate Advances by giving
the Agent at least three Banking Days' prior irrevocable notice of such
election. Any such notice of conversion to Eurodollar Rate Advances shall
specify the length of the initial Interest Period or Interest Periods therefor.
Upon receipt of any such notice the Agent shall promptly notify each Bank
thereof. All or any part of outstanding Eurodollar Rate Advances or Reference
Rate Advances may be converted as provided herein, PROVIDED that (i) no Advance
may be converted into a Eurodollar Rate Advance when any Default or Event of
Default has occurred and is continuing and the Agent or the Majority Banks have
determined that such a conversion is not appropriate, and (ii) no Advance may be
converted into a Eurodollar Rate Advance after the date that is one month prior
to the Termination Date.
(g) Any Eurodollar Rate Advances may be continued as such upon
the expiration of the then current Interest Period with respect thereto by the
Borrower's giving notice to the Agent, in accordance with the applicable
provisions of the term "Interest Period" set forth in Section 1.01, of the
length of the next Interest Period to be applicable to such Advance, PROVIDED
that no Eurodollar Rate Advance may be continued as such (i) when any Default or
Event of Default has occurred and is continuing and the Agent or the Majority
Banks have determined that such a continuation of a Eurodollar Rate Advance is
not appropriate, or (ii) after the date that is one month prior to the
Termination Date and PROVIDED, FURTHER, that if the Borrower shall fail to give
any required notice as described above in this paragraph or if such continuation
is not permitted pursuant to the preceding proviso such Advances shall be
automatically converted to Reference Rate Advances on the last day of such then
expiring Interest Period.
2.03 LENDING BRANCH AND EVIDENCE OF CREDIT. (a) Each Bank's
proportionate interest in the Revolving Credit shall be evidenced by a Revolving
Note. Each such Revolving Note shall be executed by Borrower, dated the Closing
Date and provide for the payment of interest and principal in accordance with
the terms of this Agreement. Each Bank shall record in its records, or at its
option on the schedule attached to its respective Revolving Note, the date,
amount and Type of each Advance made by such Bank and each repayment thereof,
each continuation thereof, each conversion of all or a portion thereof to
another Type and, in the case of Eurodollar Rate Advances, the length of each
Interest Period with respect thereto. The aggregate unpaid principal amount so
recorded shall constitute PRIMA FACIE evidence of the principal amount owing and
unpaid on such Revolving Note absent manifest error. The failure so to record
any such amount or any error in so recording any such amount shall not, however,
limit or otherwise affect the obligations of Borrower hereunder or under any
Revolving Note to repay the principal amount of the Advances together with all
interest accruing thereon and fees accruing with respect thereto.
(b) Each Bank's proportionate interest in each Advance and
each payment to such Bank under this Agreement and the Revolving Notes shall be
made for the account of such Bank's Lending Branch.
2.04 COMPUTATION OF AND PAYMENT OF INTEREST. (a) From and
including the relevant Borrowing Date to the Termination Date, the outstanding
principal balance of each Advance hereunder, subject to Section 2.04(d), shall
bear interest until paid in full at a rate per annum equal to:
<PAGE> 29
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(i) with respect to Reference Rate Advances, at the
Reference Rate for each day plus the Applicable Margin; and
(ii) with respect to Eurodollar Rate Advances, for each
day during an Interest Period therefor, at the Eurodollar Rate for such
day plus the Applicable Margin;
(b) Interest on each Advance shall be paid in arrears on each
Interest Payment Date. Interest shall also be payable on the date of any
prepayment of Advances pursuant to Section 2.08 or 2.09(b) for the portion of
the Advances so prepaid and upon payment (including prepayment) in full thereof
and, after the occurrence and during the continuance of any Event of Default,
interest shall be payable on demand.
(c) Interest on Reference Rate Advances calculated on the
basis of the Prime Rate shall be computed on the basis of a year of three
hundred sixty-five (365) or three hundred sixty-six (366) days, as the case may
be; otherwise, interest and fees payable hereunder shall be computed on the
basis of a year of three hundred sixty (360) days, in each case for actual days
elapsed, including the first day and excluding the last day.
(d) During the period (i) from and including the stated due
date for payment of any amount under this Agreement or the date of acceleration
of any amount pursuant to Article VIII which Borrower fails to pay on such due
date or date of acceleration and (ii) to but excluding the date on which such
amount is paid in full, Borrower shall, on demand and to the extent permitted by
applicable law, pay interest on such unpaid amount at a rate per annum equal to
(A) in the case of overdue principal of Revolving Credit, the sum of the rate of
interest otherwise applicable to such unpaid amount plus two percent (2%) or (B)
in the case of any other overdue amount, the Reference Rate plus the Applicable
Margin plus 2%; PROVIDED, HOWEVER, that upon the occurrence and during the
continuation of an Event of Default under Section 8.01(a), the entire principal
amount of the Advances outstanding hereunder and under the Notes shall bear
interest as provided in this Section 2.04(d). Interest under this Section
2.04(d) shall be computed on the basis of a three hundred sixty (360) day year
and actual days elapsed.
(e) Each determination of an interest rate by the Agent
pursuant to any provision of this Agreement shall be conclusive and binding on
the Borrower and the Banks in the absence of manifest error. The Agent shall, at
the request of the Borrower, deliver to the Borrower a statement showing the
quotations used by the Agent in determining any interest rate pursuant to
Section 2.04(a).
(f) If prior to the first day of any Interest Period:
(i) the Agent shall have determined (which determination
shall be conclusive and binding upon the Borrower) that, by reason of
circumstances affecting the relevant market, adequate and reasonable
means do not exist for ascertaining the Eurodollar Rate for such
Interest Period, or
(ii) the Agent shall have received notice from the Majority
Banks that the Eurodollar Rate determined or to be determined for such
Interest Period will not adequately and fairly reflect the cost to such
Banks (as conclusively certified by such Banks) of making or
maintaining their affected Advances during such Interest Period,
then the Agent shall give telecopy or telephonic notice thereof to the Borrower
and the Banks as soon as practicable thereafter. If such notice is given (x) any
Eurodollar Rate Advances requested to be made on the first day of such Interest
Period shall be made as Reference Rate Advances, (y) any
<PAGE> 30
24
Advances that were to have been converted on the first day of such Interest
Period to Eurodollar Rate Advances shall be converted to or continued as
Reference Rate Advances and (z) any outstanding Eurodollar Rate Advances shall
be converted, on the first day of such requested Interest Period, to Reference
Rate Advances. Until such notice has been withdrawn by the Agent, no further
Eurodollar Rate Advances shall be made or continued as such, nor shall the
Borrower have the right to convert Advances to Eurodollar Rate Advances. The
Agent shall give telecopy or telephonic notice of such withdrawal to the
Borrower and the Banks as soon as practicable thereafter.
2.05 PAYMENT OF ADVANCES. Borrower shall repay the outstanding
amount of all Advances made pursuant to the Revolving Credit on the Termination
Date.
2.06 PAYMENTS. (a) Each payment to Borrower hereunder, and
each payment of principal, interest and other sums due from Borrower under this
Agreement shall be made in immediately available funds at Agent's address for
payments indicated on the signature page of this Agreement.
(b) Each Bank agrees that upon receipt of notice from Agent,
it will make the funds which it is to advance hereunder available to Agent at
Agent's address for payments indicated on the signature page of this Agreement
not later than 1:00 p.m., New York time, on the date of disbursement, and Agent
will thereupon advance to Borrower the amount so received from Banks.
(c) Payment of all sums under this Agreement shall be made by
Borrower to Agent for the account of Banks, and the Agent shall promptly
distribute to each Bank its share of such payments by wire transfer of
immediately available funds. Each payment by Borrower shall be made without
setoff, deduction or counterclaim not later than 1:00 p.m., New York time, on
the day such payment is due. All sums received after such time shall be deemed
received on the next Banking Day and such extension of time shall be included in
the computation of payment of interest, fees or other sums, as the case may be.
(d) Unless Agent shall have been notified by telephone
(confirmed in writing), by any Bank prior to a borrowing date, that such Bank
will not make available to Agent the amount which would constitute its
Commitment Percentage of the Advances to be made on such date, Agent may assume
that such Bank has made such amount available to Agent and, in reliance thereon,
may (but shall not be required to) make available to Borrower a corresponding
amount. If such Bank makes its Commitment Percentage of an Advance available to
Agent after a borrowing date, such Bank shall pay to Agent on demand an amount
equal to the product of (i) the daily average Federal Funds Rate from and
including the borrowing date to but excluding the date the Commitment Percentage
of such Advance was made available to Agent (the "Out of Funds Period")
multiplied by (ii) an amount equal to its Commitment Percentage of such Advance
multiplied by (iii) the quotient of the number of days in the Out of Funds
Period divided by 365 or 366, as the case may be. A certificate from Agent
submitted to any Bank with respect to any amounts owing under this paragraph (d)
shall be conclusive in the absence of manifest error. If any Bank's Commitment
Percentage of an Advance is not in fact made available to Agent by such Bank
within one (1) Banking Day after a borrowing date, Agent shall be entitled to
recover such amount, with interest thereon at the rate per annum then applicable
to the Advances hereunder, on demand from Borrower, without prejudice to Agent's
and Borrower's rights against such defaulting Bank.
(e) Unless Agent shall have been notified by telephone
(confirmed in writing), by Borrower, prior to any date on which a payment is due
hereunder, that Borrower will not make the required payment on such date, Agent
may assume that Borrower will make such payment to Agent and, in reliance upon
such assumption, may (but shall not be required to) make available to each Bank
<PAGE> 31
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the amount due to it on such date. If such amount is not in fact paid to Agent
by Borrower within one (1) Banking Day after such payment is due, Agent shall be
entitled to recover from each Bank the amount paid to it by Agent, together with
interest thereon in the amount equal to the product of (i) the daily average
Federal Funds Rate from and including the payment date to but excluding the date
the payment was made available to Agent (the "Out of Funds Interval") multiplied
by (ii) an amount equal to such Bank's Commitment Percentage of the amount paid
multiplied by (iii) the quotient of the number of days in the Out of Funds
Interval divided by 365 or 366, as the case may be. A certificate from Agent
submitted to any Bank with respect to any amounts owing under this paragraph (e)
shall be conclusive in the absence of manifest error.
2.07 OPTIONAL PREPAYMENTS. Upon written notice (or telephone
notice confirmed promptly in writing) received by Agent not later than 12:00
noon, New York City time, on the date thereof, Borrower may at any time prepay
any Reference Rate Advance in full or in part, without premium or penalty, in
the amount of One Million Dollars ($1,000,000) or an integral multiple of Five
Hundred Thousand Dollars ($500,000) in excess thereof (or, if the outstanding
principal amount of all Reference Rate Advances is less that $1,000,000, such
lesser amount). Upon written notice (or telephone notice confirmed promptly in
writing) received by Agent not later than 12:00 noon, New York time, received at
least three (3) Banking Days prior to the date of prepayment, which notice shall
specify the date and amount of prepayment and the amount of Eurodollar Rate
Advances being prepaid, Borrower may on the last day of any Interest Period with
respect thereto prepay any Eurodollar Rate Advance in full or in part, without
premium or penalty (other than costs required to be paid pursuant to Section
2.13(d)), in the amount of Five Million Dollars ($5,000,000) or an integral
multiple of One Million Dollars ($1,000,000) in excess thereof. Each such
prepayment made pursuant to this Section 2.07 may be reborrowed subject to the
terms and conditions of this Agreement. Any prepayments made pursuant to this
Section 2.07 shall be applied FIRST to Reference Rate Advances then outstanding
and THEN to Eurodollar Rate Advances then outstanding, subject to Section
2.13(d).
2.08 MANDATORY PREPAYMENTS AND COMMITMENT REDUCTIONS. (a)
Within ten (10) days of the date of receipt by Borrower or any of its
Subsidiaries of any Net Cash Proceeds of Sale, Borrower shall make a mandatory
prepayment, without premium or penalty (other than costs required to be paid
pursuant to Section 2.13(d)), of the outstanding Advances or, to the extent that
at such time no Advances are outstanding, shall cash collateralize any
outstanding Letters of Credit, in an amount equal to 100% of such Net Cash
Proceeds of Sale. In the event a mandatory prepayment or cash collateralization
is required to be made under this Section 2.08(a), the Commitment Amount shall
be permanently reduced immediately by the amount thereof.
(b) If at any time (A) the sum of the aggregate principal
amount of the outstanding Advances plus the aggregate undrawn amount of all
outstanding Letters of Credit plus the aggregate amount of all unreimbursed
drawings under Letters of Credit shall exceed (B) the excess of Commitment
Amount over the Reinvestment Proceeds Amount, Borrower shall, without demand or
notice, prepay Advances or cash collateralize or replace Letters of Credit in
such amount as may be necessary to eliminate such excess, and Borrower shall
take such action on the Banking Day on which Borrower learns or is notified of
the excess, if Borrower so learns or is so notified prior to 1:00 p.m. (New York
City time) on such day, and otherwise on the immediately succeeding Banking Day.
Notwithstanding any contrary provision contained herein, the prepayment of any
Advance or cash collateralization or replacement of any Letter of Credit
hereunder (including, without limitation, pursuant to this Section 2.08 or
Section 2.10) as a result of the termination or permanent reduction of the
Commitment Amount, the Revolving Credit Commitment Amount or the L/C Commitment
Amount shall be accompanied by the payment of accrued interest on the amount
prepaid to the date of payment.
<PAGE> 32
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(c) Any prepayments made pursuant to this Section 2.08 shall
be applied first to Reference Rate Advances to the extent then outstanding and
then to Eurodollar Rate Advances to the extent then outstanding, subject to
Section 2.13(d).
2.09 FEES. Borrower shall pay to Agent for the ratable benefit
of each Bank (except as otherwise provided):
(a) (i) in respect of each Letter of Credit, a commission on
the maximum amount available for drawing under such Letter of Credit,
calculated at the rate per annum equal to the Letter of Credit Rate (as
set forth under the definition of Applicable Margin in Section 1.01) on
the face amount of such Letter of Credit, computed for the period from
the date such Letter of Credit is issued to the date upon which the
next payment is due under this subsection (and, thereafter, from the
date of payment under this subsection to the date upon which the next
payment is due under this subsection), and payable quarterly in arrears
(calculated on the basis of a three hundred sixty (360) day year for
the actual days elapsed) on the last Banking Day of each March, June,
September and December after the issuance of such Letter of Credit and
on the Termination Date;
(ii) a fronting fee in an amount equal to one-quarter
percent (1/4%) of the face amount of such Letter of Credit, computed
for the period from the date such Letter of Credit is issued to the
date upon which the next payment is due under this subsection (and,
thereafter, from the date of payment under this subsection to the date
upon which the next payment is due under this subsection), and payable
quarterly in arrears (calculated on the basis of a three hundred sixty
(360) day year for the actual days elapsed) on the last Banking Day of
each March, June, September and December after the issuance of such
Letter of Credit and on the Termination Date; PROVIDED that such fee
shall be for the Issuing Bank's sole account; and
(iii) all customary and normal costs and expenses as are
incurred or charged by the Issuing Bank in negotiating, issuing,
effecting payment under, amending or otherwise administering any Letter
of Credit, provided that payment of such costs and expenses shall be
for the Issuing Bank's sole account; and
(b) a commitment fee at the rate per annum equal to the
commitment fee (as set forth in the definition of Applicable Margin in
Section 1.01) on the difference between (i) the average daily
Commitment Amount, and (ii) the average daily principal amount of the
outstanding Advances plus the undrawn amount of all outstanding Letters
of Credit. The commitment fees under this Section 2.09(b) shall be
payable quarterly in arrears (calculated on the basis of a three
hundred sixty (360) day year for the actual days elapsed) payable on
the last Banking Day of each March, June, September and December and on
the Termination Date.
2.10 OPTIONAL TERMINATION OR REDUCTION OF COMMITMENT AMOUNT.
The Borrower shall have the right, upon not less than five Banking Days' notice
to the Agent, to terminate the Commitments or, from time to time, to reduce the
Commitment Amount. Any such reduction shall be in an amount equal to $2,000,000
or a whole multiple thereof and shall reduce permanently the Commitment Amount
then in effect; PROVIDED HOWEVER, that the Commitment Amount may not at any time
be reduced (after giving effect to any prepayments made on the date of such
reduction pursuant to Section 2.08(b)) below the sum of (i) the principal amount
of the outstanding Advances, (ii) the Reinvestment Proceeds Amount at such time,
(iii) the undrawn amount of all outstanding Letters of Credit and (iv) the
aggregate amount of all unreimbursed drawings under Letters of Credit on the
date
<PAGE> 33
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of reduction or termination. Any Commitment Reduction pursuant to this Section
2.10 shall be permanent.
2.11 ARRANGEMENT COMPENSATION; AGENCY FEES. Borrower agrees to
compensate Chase, for Chase's sole use and benefit, for Chase's arrangement and
agency services in the amounts and at the times as may be from time to time
agreed in writing between Borrower and Chase.
2.12 Taxes.
-----
(a) All payments or reimbursements under this Agreement and
any instrument or agreement required hereunder shall be made free and clear of
and without deduction for any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect thereto,
EXCLUDING,
(i) in the case of each Bank and Agent, taxes imposed
on its net income, and franchise taxes imposed on it, by the
jurisdiction under the laws of which such Bank or Agent (as the case
may be) is organized or any political subdivision thereof,
(ii) in the case of each Bank, taxes imposed on its net
income, and franchise taxes imposed on it, by the jurisdiction of such
Bank's Lending Branch or any political subdivision thereof, and
(iii) in addition to (i) and (ii), in the case of each
Bank organized under the laws of a jurisdiction outside the United
States, United States federal withholding tax payable with respect to
payments by Borrower that would not have been imposed had such Bank, to
the extent then required thereunder, delivered to Borrower and Agent
the form(s) required by Section 2.12(d),
(all such non-excluded taxes, levies, imposts, deductions, charges, withholdings
and liabilities being hereinafter referred to as "Taxes"). If Borrower or Agent
shall be required by law to deduct any Taxes from or in respect of any sum
payable hereunder to any Bank or Agent,
(i) the sum payable by Borrower shall be increased as
may be necessary so that after Borrower or Agent has made all required
deductions (including deductions applicable to additional sums payable
under this Section 2.12) such Bank or Agent (as the case may be)
receives an amount equal to the sum it would have received had no such
deductions been made,
(ii) Borrower or Agent shall make such deductions and
(iii) Borrower or Agent shall pay the full amount
deducted to the relevant taxation authority or other authority in
accordance with applicable law.
(b) In addition, Borrower agrees to pay any present or future
stamp or documentary taxes or any other excise or property taxes, charges or
similar levies which arise from any payment made by Borrower or by Agent
hereunder or from the execution, delivery or registration of, or otherwise with
respect to, this Agreement (hereinafter referred to as "Other Taxes").
(c) Borrower will indemnify each Bank and Agent for the full
amount of Taxes or Other Taxes (including, without limitation, any Taxes or
Other Taxes imposed by any jurisdiction on amounts payable under this Section
2.12) paid by such Bank or Agent (as the case may be) and any
<PAGE> 34
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liability (including penalties, interest and expenses) arising therefrom or with
respect thereto, whether or not such Taxes or Other Taxes were correctly or
legally asserted. This indemnification shall be made within 30 days from the
date such Bank or Agent (as the case may be) makes written demand therefor. Any
such demand shall show in reasonable detail the amount payable and the
calculations used to determine such amount and shall provide reasonably
acceptable evidence of payment of such Tax or Other Tax.
(d) Each Bank which is a foreign person (a person other than a
United States person for United States Federal income tax purposes) hereby
agrees that:
(i) it shall, no later than the Closing Date (or, in
the case of a Bank which becomes a party hereto pursuant to Section
9.04(a) after the Closing Date, the date upon which such Bank becomes a
party hereto) deliver to Borrower through Agent:
(A) if any Lending Branch is located in the United
States, two (2) accurate and complete signed originals of
Internal Revenue Service Form 4224 or any successor thereto
("Form 4224"), and/or
(B) if any Lending Branch is located outside the
United States, two (2) accurate and complete signed originals
of Internal Revenue Service Form 1001 or any successor thereto
("Form 1001"),
in each case certifying that such Bank is on the date of delivery
thereof entitled to receive payments of principal, interest and fees
for the account of such Lending Branch under this Agreement free from
withholding of United States Federal income tax;
(ii) if at any time such Bank changes its Lending Branch
or selects an additional Lending Branch as herein provided, it shall at
the same time or reasonably promptly thereafter, deliver to Borrower
through Agent in replacement for, or in addition to, the forms
previously delivered by it hereunder:
(A) if such changed or additional Lending Branch is
located in the United States, two (2) accurate and complete
signed originals of Form 4224; or
(B) otherwise, two accurate and complete signed
originals of Form 1001,
in each case indicating that such Bank is on the date of delivery
thereof entitled to receive payments of principal, interest and fees
for the account of such changed or additional Lending Branch under this
Agreement free from withholding of United States Federal income tax;
(iii) it shall, before or promptly after the occurrence
of any event (including the passing of time but excluding any event
mentioned in (ii) above) requiring a change in the most recent Form
4224 or Form 1001 previously delivered by such Bank and if the delivery
of the same be lawful, deliver to Borrower through Agent two (2)
accurate and complete original signed copies of Form 4224 or Form 1001
in replacement for the forms previously delivered by such Bank, in each
case indicating that such Bank is on the date of delivery thereof
entitled to receive payments of principal, interest and fees free from
withholding of United States Federal income tax;
(iv) it shall, promptly upon Borrower's or Agent's
reasonable request to that effect, deliver to Borrower such other forms
or similar documentation as may be required from
<PAGE> 35
29
time to time by any applicable law, treaty, rule or regulation in order
to establish such Bank's tax status for withholding purposes; and
(v) it shall, promptly upon Agent's request to that
effect, deliver copies of any documents delivered by it to the Agent
(or any predecessor agent) or the Borrower prior to the Closing Date.
Unless Borrower and Agent have received forms or other documents satisfactory to
them indicating that payments under this Agreement are not subject to United
States withholding tax, Borrower or Agent shall in the case of payments to or
for any Bank organized under the laws of a jurisdiction outside the United
States, withhold taxes from such payments at the applicable statutory rate, or
at a rate reduced by any applicable tax treaty (provided that Borrower and Agent
have received forms or other documents satisfactory to them indicating that such
reduced rate applies) and pay such Bank such payment net of any taxes withheld.
(e) Any Bank claiming any additional amounts payable pursuant
to this Section 2.12 shall use reasonable efforts (consistent with its internal
policy and legal and regulatory restrictions) to change the jurisdiction of its
Lending Branch if the making of such a change would avoid the need for, or
reduce the amount of, any such additional amounts which may thereafter accrue
and would not, in the judgment of such Bank, be otherwise disadvantageous to
such Bank.
(f) Without prejudice to the survival of any other agreement
of Borrower hereunder, the agreements and obligations of the Borrower contained
in this Section 2.12 shall survive the payment in full of principal and interest
under this Agreement and the Notes and all other Obligations under this
Agreement.
2.13 INCREASED COSTS; ILLEGALITY; INDEMNITY. (a) Borrower
shall reimburse or compensate each Bank, upon demand by such Bank, for all costs
incurred, losses suffered (including lost profit) or payments made by such Bank
which are applied or allocated by such Bank to the Credit (all as determined by
such Bank in its sole and absolute discretion) by reason of:
(i) any Bank's being subject to any tax of any kind
whatsoever with respect to this Agreement, any Note or any Advance made
by it, or change in the basis of taxation of payments to such Bank in
respect thereof (except for taxes covered by Section 2.12 and changes
in the rate of tax on the overall net income of such Bank);
(ii) the imposition, modification or holding applicable
of any reserve, special deposit, compulsory loan or similar requirement
against assets held by, deposits or other liabilities in or for the
account of, advances, loans or other extensions of credit by, or any
other acquisition of funds by, any office of such Bank which is not
otherwise included in the determination of the Eurodollar Rate; or
(iii) compliance by such Bank with any direction,
requirement or request from any regulatory authority, whether or not
having the force of law.
(b) Any Bank seeking (i) reimbursement from Borrower for the
costs incurred, losses suffered or payments made as described in subsection (a)
of this Section 2.13, or (ii) payment from Borrower under Section 2.14 hereof,
may recover such sums from Borrower by delivering to Borrower a statement
setting forth the amount owed to such Bank and showing how such calculation was
made, signed by a duly authorized officer of such Bank, which statement shall be
conclusive evidence of the amount owed absent manifest error; provided, however,
that (A) reimbursement or payment under this
<PAGE> 36
30
subsection (b) shall not be demanded by any Bank for the period prior to the
Closing Date, and (B) each Bank shall notify Borrower as promptly as practicable
of any event occurring after the date of this Agreement that would entitle such
Bank to reimbursement or payment under this subsection (b).
(c) Notwithstanding any other provision herein, if the
adoption of or any change in any requirement of law or in the interpretation or
application thereof shall make it unlawful for any Bank to make or maintain
Eurodollar Rate Advances as contemplated by this Agreement, (A) the commitment
of such Bank hereunder to make Eurodollar Rate Advances, continue Eurodollar
Rate Advances as such and convert Reference Rate Advances to Eurodollar Rate
Advances shall forthwith be cancelled and (B) such Bank's Advances then
outstanding as Eurodollar Rate Advances, if any, shall if required by law, be
converted automatically to Reference Rate Advances on the respective last days
of the then current Interest Periods with respect to such Advances or within
such earlier period as required by law. If any such conversion of a Eurodollar
Rate Advance occurs on a day which is not the last day of the then current
Interest Period with respect thereto, the Borrower shall pay to such Bank such
amounts, if any, as may be required pursuant to paragraph (d) below.
(d) The Borrower agrees to indemnify each Bank and to hold
each Bank harmless from any loss or expense which such Bank may sustain or incur
as a consequence of (A) default by the Borrower in payment when due of the
principal amount of or interest on any Eurodollar Rate Advance, (B) default by
the Borrower in making a borrowing of, conversion into or continuation of
Eurodollar Rate Advances after the Borrower has given a notice requesting the
same in accordance with the provisions of this Agreement, (C) default by the
Borrower in making any prepayment after the Borrower has given a notice thereof
in accordance with the provisions of this Agreement or (D) the making of a
prepayment of Eurodollar Rate Advances on a day which is not the last day of an
Interest Period with respect thereto, including, without limitation, in each
case, any such loss or expense arising from the reemployment of funds obtained
by it or from fees payable to terminate the deposits from which such funds were
obtained. The covenants contained in Subsections (b) and (d) of this Section
2.13 shall survive the termination of this Agreement and the payment of the
Notes and all other amounts payable hereunder.
2.14 CAPITAL ADEQUACY. If any Bank shall have determined that,
after the date hereof, the adoption of any applicable law, rule, regulation or
guideline regarding capital adequacy, or any change therein, or any change in
the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any Bank (or its Lending Branch or any
corporation controlling such Bank) with any direction, requirement or request
regarding capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, affects or would affect the amount
of capital required or expected to be maintained by such Bank or any corporation
controlling such Bank and such Bank (taking into consideration such Bank's
policies with respect to capital adequacy and such Bank's targeted return on
capital) determines that the amount of such capital is increased or required to
be increased as a consequence of such Bank's obligations under this Agreement,
then, upon demand by such Bank, Borrower shall immediately pay to such Bank,
from time to time as specified by such Bank, additional amounts sufficient to
compensate such Bank for such increase.
2.15 LETTERS OF CREDIT. (a) THE LETTERS OF CREDIT. (i) From
time to time during the Commitment Period, each Issuing Bank agrees on the terms
and conditions set forth herein to issue Letters of Credit for the account of
the Borrower; PROVIDED, that no Issuing Bank shall issue any Letter of Credit if
after giving effect to such issuance, the aggregate undrawn amount of all
Letters of Credit then outstanding plus the aggregate amount of all unreimbursed
drawings under Letters of Credit would exceed the L/C Commitment Amount and
PROVIDED, FURTHER, that no Bank shall issue any Letters of Credit if, after
giving effect to such issuance, the sum of the aggregate undrawn amount of
<PAGE> 37
31
all Letters of Credit then outstanding plus the aggregate outstanding principal
amount of all Advances plus the Reinvestment Proceeds Amount plus the aggregate
amount of unreimbursed drawings under Letters of Credit would exceed the
Commitment Amount.
(ii) No Issuing Bank shall be under any obligation to issue any
Letter of Credit if:
(A) any order, judgment or decree of any governmental
authority or arbitrator shall purport by its terms to enjoin or
restrain such Issuing Bank from issuing such Letter of Credit or any
legal requirement applicable to such Issuing Bank or any request or
directive (whether or not having the force of law) from any
governmental authority with jurisdiction over such Issuing Bank shall
prohibit, or request that such Issuing Bank refrain from the issuance
of letters of credit generally or such Letter of Credit in particular
or shall impose upon such Issuing Bank with respect to such Letter of
Credit any restriction or reserve or capital requirement (for which
such Issuing Bank is not otherwise compensated) not in effect on the
Closing Date, or any unreimbursed loss, cost or expense which was not
applicable, in effect or known to such Issuing Bank on the Closing Date
and which such Issuing Bank in good faith deems material to it; or
(B) such Issuing Bank has received notice from Agent, or from
Agent at the request of any Bank, on or prior to the Banking Day
immediately prior to the requested date of issuance of such Letter of
Credit that one or more of the conditions contained in Section 4.02 is
not then satisfied; or
(C) such requested Letter of Credit has an expiration date
which is after the earlier of (x) five Banking Days prior to the
Termination Date and (y) one year (or such later date agreed to by the
Issuing Lender) after the date of issuance.
(iii) Subject to Section 2.15(g), Letters of Credit with a
one-year tenor may be by their terms automatically renewable (such automatically
renewable Letters of Credit hereby referred to as "RENEWABLE LETTERS OF CREDIT")
for additional one-year periods (which shall in no event extend beyond the date
referred to in clause (x) of the preceding paragraph (a)(ii)(C)). The Issuing
Bank shall notify all beneficiaries of Renewable Letters of Credit that such
Letters of Credit shall not be renewed or extended unless the Agent and the
Issuing Bank shall have received the request from the Borrower required under
Section 2.15(g) and all conditions precedent to the issuance of Letters of
Credit set forth in Section 4.02 are satisfied at the time of such renewal or
extension (which time, for purposes of this Section and Section 4.02, shall be
deemed to be the time of such renewal or extension and not the expiry date of
such Letters of Credit).
(b) Issuance of Letters of Credit.
-----------------------------
(i) Each Letter of Credit shall be issued upon the
irrevocable written request of Borrower, received by Agent at least seven (7)
days (or such shorter time as Agent may agree in a particular instance) prior to
the proposed date of issuance. Each Letter of Credit outstanding under the
Existing Credit Agreement which survives the Closing Date shall be deemed to be
reissued under this Agreement on the Closing Date.
(ii) Each request for issuance of a Letter of Credit
shall be by telecopy, confirmed immediately in writing, on the form specified by
the Issuing Bank as being its then customary form for letter of credit
applications and shall specify: (A) the proposed date of issuance
(which shall be a Banking Day); (B) the face amount of the Letter of Credit; (C)
the date of expiration of the Letter of Credit; (D) the purpose of such Letter
of Credit, (E) the name and address of the
<PAGE> 38
32
beneficiary thereof; (F) the documents to be presented by the beneficiary of the
Letter of Credit in case of any drawing thereunder; and (G) the full text of any
certificate to be presented by the beneficiary in case of any drawing
thereunder.
(iii) No Letter of Credit shall be issued (or renewed or
extended) if such Letter of Credit would thereupon have an expiration date which
is after the date which is five Banking Days prior to the Termination Date.
(iv) Unless an Issuing Bank has received notice on or
before the Banking Day immediately preceding the date such Issuing Bank is to
issue a requested Letter of Credit (A) from the Agent directing such Issuing
Bank not to issue such Letter of Credit because the amount specified in Section
2.15(a)(i) would be exceeded and/or (B) from any Bank that one or more
conditions specified in Section 4.02 are not then satisfied, then subject to the
terms and conditions of this Section 2.15 and provided that the applicable
conditions set forth in Section 4.02 hereof have been satisfied, such Issuing
Bank shall, on the requested date, issue a Letter of Credit for the account of
Borrower in accordance with the Issuing Bank's usual and customary business
practices. Prior to issuing any Letter of Credit, the Issuing Bank of such
Letter of Credit will consult with the Agent to confirm that the amount
specified in Section 2.15(a)(i) would not be exceeded, and that the conditions
specified in Section 4.02 have been satisfied.
(v) Promptly after issuance of each Letter of Credit, the
Issuing Bank shall deliver to Borrower and Agent a copy of such Letter of
Credit. Agent shall promptly deliver a copy thereof to each other Bank. Each
Letter of Credit shall provide that, except as otherwise determined in the sole
discretion of the Issuing Bank, payment thereunder shall not be made earlier
than two (2) business days after receipt of any requisite documents demanding
such payment.
(c) Participations, Drawings and Reimbursements.
-------------------------------------------
(i) Immediately upon the issuance of each Letter of
Credit, each Bank (other than the Issuing Bank) shall be deemed to, and hereby
agrees to, have irrevocably purchased from the Issuing Bank a participation in
such Letter of Credit and each drawing thereunder in a percentage equal to the
Commitment Percentage of such Bank.
(ii) The Borrower shall reimburse the Agent for the
full amount of any drawing under the Letter of Credit on the same date such
drawing is honored by the Issuing Bank. In the event Borrower shall fail to
reimburse Agent for the full amount of any drawing on the same date such drawing
is honored by the Issuing Bank under any Letter of Credit, the Issuing Bank
shall promptly notify Agent and Agent shall as promptly as possible notify each
Bank thereof and Borrower shall be deemed to have requested that a Reference
Rate Advance be made by the Banks to be disbursed on the date of payment by the
Issuing Bank under such Letter of Credit, subject to the amount of the
unutilized portion of the Revolving Credit Commitment Amount on such date and
subject to the conditions set forth in Section 4.02. Any notice given by the
Issuing Bank or Agent pursuant hereto may be oral if immediately confirmed in
writing (including telecopy or telex); PROVIDED that the lack of such an
immediate confirmation shall not affect the conclusiveness and binding effect of
such notice. The proceeds of such Advances shall be paid to the Agent which
will, in turn, disburse such proceeds to the Issuing Bank as reimbursement for
such drawings. Notwithstanding the foregoing, if at any time an Event of Default
described in Section 8.05 or 8.06 has occurred and is continuing, such drawings
shall be reimbursed by the Banks' purchasing pro rata participation interests in
such Letter of Credit.
<PAGE> 39
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(iii) Any unreimbursed Letter of Credit drawing which
shall not be converted into an Advance pursuant to Section 2.15(c)(ii) in whole
or in part because such conversion would have caused the Revolving Credit
Commitment Amount to be exceeded or because of Borrower's failure to satisfy the
conditions set forth in Section 4.02, shall become due and payable upon the date
such drawing is paid by the Issuing Bank. Agent shall promptly notify Borrower
and Banks of the occurrence of any unreimbursed drawing under a Letter of
Credit.
(iv) Each Bank will, promptly upon receipt of notice of
an unreimbursed drawing under a Letter of Credit pursuant to Section
2.15(c)(iii), make available to Agent for the account of the Issuing Bank an
amount in immediately available funds equal to its Commitment Percentage of the
amount of the such unreimbursed drawing. If any Bank so notified shall fail to
make available to Agent for the account of the Issuing Bank the amount of its
Commitment Percentage of any such unreimbursed drawing on the date the relevant
Letter of Credit drawing was honored by the Issuing Bank (the "PARTICIPATION
DATE"), then interest shall accrue on such Bank's obligation to make such
payment, (i) from the Participation Date to but not including the second Banking
Day after the Participation Date at a rate per annum equal to the Federal Funds
Rate, and (ii) from the second Banking Day after the Participation Date at the
same rate specified in Section 2.04(a) for Reference Rate Advances. Agent will
as promptly as practicable (but in no event later than two (2) Banking Days
after the occurrence thereof) give notice of the occurrence of the Participation
Date, but failure of Agent to give any such notice on the Participation Date or
in sufficient time to enable any Bank to effect such payment on such date shall
not relieve such Bank from its obligations under this Section 2.15(c)(iv).
(v) The obligation of each Bank to provide Agent with
such Bank's Commitment Percentage of the amount of any payment or disbursement
made by any Issuing Bank under any outstanding Letter of Credit shall be
absolute and unconditional under any and all circumstances and irrespective of
any setoff, counterclaim or defense to payment which such Bank may have or have
had against such Issuing Bank (or any other Bank), including, without
limitation, any defense based on the failure of the demand for payment under
such Letter of Credit to conform to the terms of such Letter of Credit or the
legality, validity, regularity or enforceability of such Letter of Credit or any
defense based on the identity of the transferee of such Letter of Credit or the
sufficiency of the transfer if such Letter of Credit is transferable; PROVIDED,
HOWEVER, that Banks shall not be obligated to reimburse such Issuing Bank for
any wrongful payment or disbursement made under any Letter of Credit as a result
of acts or omissions constituting gross negligence or willful misconduct on the
part of such Issuing Bank or any of its officers, employees or agents. Further,
each Bank agrees to perform its obligations under Section 2.15(c)(iv) despite
the occurrence of a Default or an Event of Default or any inability of Borrower
to require such Bank to fulfill its other obligations hereunder including,
without limitation, any inability resulting from the operation of Bankruptcy
Code Section 365(c)(2) (11 U.S.C. Section 365(c)(2)) or otherwise.
(d) Repayment of Participations.
----------------------------
(i) Upon and only upon receipt by Agent for the account
of the Issuing Bank of funds from Borrower,
(A) in reimbursement of any payment made under a Letter of
Credit with respect to which any Bank has theretofore paid Agent for
the account of the Issuing Bank for such Bank's participation in the
Letter of Credit pursuant to Section 2.15(c)(iv); or
(B) in payment of interest thereon;
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34
Agent will pay to each Bank which has funded its participating interest
therein, in the same funds as those received by Agent for the account
of the Issuing Bank, such Bank's Commitment Percentage of such funds.
(ii) If Agent or the Issuing Bank is required at any
time to return to Borrower or to a trustee, receiver, liquidator, custodian or
other similar official any portion of the payments made by Borrower to Agent for
the account of the Issuing Bank pursuant to paragraph (i) in reimbursement of
payment made under the Letter of Credit or interest thereon, each Bank shall, on
demand of Agent, forthwith return to Agent or the Issuing Bank its Commitment
Percentage of any amounts so returned by Agent or the Issuing Bank plus interest
thereon from the date such demand is made to but not including the date such
amounts are returned by such Bank to Agent or the Issuing Bank, at a rate per
annum equal to the Federal Funds Rate.
(e) ROLE OF ISSUING BANK. (i) Each Issuing Bank will exercise
and give the same care and attention to any Letter of Credit as it gives to its
other letters of credit and similar obligations.
(ii) Each Bank participating in a Letter of Credit
agrees that, in paying any drawing under any Letter of Credit, the Issuing Bank
shall not have any responsibility to obtain any document (other than the sight
draft and certificates required by the Letter of Credit) or to ascertain or
inquire as to the validity or accuracy of any such document or the authority of
the Person delivering any such document. Neither the Issuing Bank nor any of its
representatives, officers, employees or agents shall be liable to any Bank for:
(A) any action taken or omitted in connection herewith at the
request or with the approval of the Majority Banks;
(B) any action taken or omitted in the absence of gross
negligence or wilful misconduct; or
(C) the execution, effectiveness, genuineness, validity or
enforceability of any Letter of Credit or any other document
contemplated hereby or thereby.
(f) OBLIGATIONS ABSOLUTE. The obligations of Borrower under
this Agreement and any other agreements or instrument relating to any Letter of
Credit to reimburse each Issuing Bank shall be unconditional and irrevocable,
and shall be paid strictly in accordance with the terms of this Agreement and
such other agreement or instrument under all circumstances, including, without
limitation, the following circumstances:
(A) any lack of validity or enforceability of this Agreement,
any Letter of Credit, or any other agreement or instrument relating
thereto (collectively, the "L/C Related Documents");
(B) any change in the time, manner or place of payment of, or
in any other term of, all or any of the obligations of Borrower in
respect of any Letter of Credit or any other amendment or waiver of or
any consent to departure from all or any of the L/C Related Documents;
(C) the existence of any claim, set-off, defense or other
right that Borrower may have at any time against any beneficiary or any
transferee of any Letter of Credit (or any Person for whom any such
beneficiary or any such transferee may be acting), the Issuing Bank or
any
<PAGE> 41
35
other Person, whether in connection with this Agreement, the
transactions contemplated hereby or by the L/C Related Documents or any
unrelated transaction;
(D) any statement and other document presented under any
Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
(E) any payment by the Issuing Bank under any Letter of Credit
against presentation of a draft or certificate that does not strictly
comply with the terms of any Letter of Credit;
(F) any exchange, release or non-perfection of any Collateral,
or any release or amendment or waiver of or consent to departure from
any Collateral Document, for all or any of the obligations of Borrower
in respect of any Letter of Credit;
(G) any other circumstance or happening whatsoever, whether or
not similar to any of the foregoing, including, without limitation, any
other circumstance that might otherwise constitute a defense available
to, or a discharge of, Borrower or any Guarantor but excluding any
action constituting the Issuing Bank's gross negligence or willful
misconduct; or
(H) the occurrence of a Default or an Event of Default.
(g) REQUESTS REGARDING RENEWALS AND EXTENSIONS OF RENEWABLE
LETTERS OF CREDIT. The Borrower shall deliver to the Agent and the applicable
Issuing Bank, not earlier than thirty (30) days, and not later than fourteen
(14) days, before notice of non-renewal or non-extension is required under the
Renewable Letters of Credit issued by such Issuing Bank, a written request for
renewal or extension of each Renewable Letter of Credit which the Borrower
desires to renew or extend. Such request shall specify the required date for
notice by the Issuing Bank of non-renewal or non-extension under the Renewable
Letters of Credit and include a certification by the Borrower that as of the
date of such request, no Default or Event of Default shall have occurred and be
continuing and all of the representations and warranties contained in this
Agreement and the Collateral Documents are true and correct in all material
respects, except as to representations and warranties contained in Section 5.09
and which expressly relate to an earlier date and for changes which are
contemplated or permitted by this Agreement. No such request shall be made by
the Borrower which would cause the expiry date of such Renewable Letter of
Credit to extend beyond the Termination Date, except as otherwise provided under
Sections 2.15(a)(ii)(C) and (b)(iii). For purposes of this Section 2.15(g),
valid delivery by the Borrower of the required request shall be deemed to have
occurred only upon actual receipt of such notice by the Agent and the Issuing
Bank. If the Borrower fails to deliver such a notice within such period with
respect to such Renewable Letter of Credit, the Issuing Bank of such Renewable
Letter of Credit shall deliver appropriate notices of non-extension or
non-renewal with respect to such Renewable Letter of Credit.
(h) If any change in any requirement of law shall either (i)
impose, modify or deem or make applicable any reserve, special deposit,
assessment or similar requirement against Letters of Credit issued by any
Issuing Bank or against a Bank's participation in such Letter of Credit or (ii)
impose on any Issuing Bank or any Bank participating in such Letter of Credit (a
"PARTICIPATING BANK") any other condition regarding this Agreement or any Letter
of Credit, and the result of any event referred to in clause (i) or (ii) above
shall be to increase the cost to such Issuing Bank of issuing or maintaining any
Letter of Credit, or to such Participating Bank of purchasing or maintaining
such participating interest in any Letter of Credit (which increase in cost
shall be the result of such Issuing Bank's, or participating Bank's, as the case
may be, reasonable allocation of the aggregate of such cost increases resulting
from such events), then from time to time following notice by such Issuing Bank
<PAGE> 42
36
(or such Participating Bank, as the case may be) to the Borrower, the Borrower
shall pay to such Person, as specified by such Person, additional amounts which
shall be sufficient to compensate such Person for such increased cost, together
with interest on each such amount from the date demanded until payment in full
thereof at a rate per annum equal to the Reference Rate plus the Applicable
Margin plus 2% per annum. A certificate submitted by such Issuing Bank or
Participating Bank to the Borrower concurrently with any such demand by such
Person, shall be conclusive, absent manifest error, as to the amount thereof.
ARTICLE III.
SECURITY
--------
3.01 Security.
---------
(a) As security for the prompt payment and performance of all
Secured Obligations of Borrower, Borrower has heretofore granted and assigned or
shall grant and assign, in accordance with the provisions of the Collateral
Documents applicable to Borrower, to the Collateral Agent for the benefit of the
Secured Creditors with respect to all of Borrower's Secured Obligations, all of
its right, title and interest in and to all of the Collateral. Additionally, all
Secured Obligations shall be guaranteed by each Guarantor under the Guarantee
and Collateral Agreement and the Operating Bank Guaranty, to the extent provided
therein, and the obligations of the Guarantors under the Guarantee and
Collateral Agreement shall be secured pursuant to the terms of the Collateral
Documents required to be executed and delivered by them hereunder. Upon the sale
of all of the stock owned by Borrower or any Subsidiary of, or the sale of all
of the assets of, any Guarantor permitted hereunder and upon Agent's receipt of
the Net Cash Proceeds of Sale thereof to the extent required under Section
2.08(a), such Guarantor shall be released from all obligations under the
Guarantee and Collateral Agreement.
(b) Upon the application by the Borrower or any Subsidiary of any
Reinvestment Proceeds to the acquisition of any new property or assets, the
Borrower or such Subsidiary at its expense shall immediately cause such acquired
property or assets to become subject to Liens and security interests in favor of
the Collateral Agent to secure the Secured Obligations to the same extent, and
with the same priority, as the Liens and security interests to which were
subject the property or assets the disposition of which gave rise to such
Reinvestment Proceeds, PROVIDED, however, that if any portion of the gross
proceeds realized upon the disposition of such asset were applied to discharge
any Debt or other obligations secured by a Lien on such assets which was prior
to the Liens granted under the Collateral Documents, then there shall not be
permitted to be any Lien on the replacement property, other than Liens under the
Collateral Documents, except for Liens permitted pursuant to clause (iv) of the
definition of "Permitted Liens" in connection with the acquisition of such
replacement assets, PROVIDED that such Liens do not secure Debt or other
obligations in an amount in excess of the Debt or other obligations discharged
with respect to the asset disposed of (except for acquisitions of individual
items of replacement exercise equipment which may be subject to purchase money
financing on customary terms in accordance with the practices of the Borrower
and its Subsidiaries, and except that, with respect to dispositions of not more
than two health clubs during the term of this Agreement on which the Collateral
Agent held Liens of second priority, the Debt and other obligations secured by
Liens on the replacement property having priority over the Liens under the
Collateral Documents may exceed the amount of the Debt or other obligations with
respect to the assets disposed of by not more than (i) $3,000,000 with respect
to either such replacement property or (ii) $5,000,000 for both such replacement
properties). Upon any such acquisition, such acquired property or assets shall
be deemed to constitute Collateral for all purposes of this Agreement and the
Collateral Documents, any collateral documents executed and delivered by the
Borrower or any of its Subsidiaries to grant the liens and
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37
security interests required by this Section shall be deemed to be Collateral
Documents for all purposes of this Agreement and the other Credit Documents, and
any such application of Reinvestment Proceeds and acquisition of such property
or assets shall be deemed a representation and warranty that, as of the date of
such acquisition, all representations and warranties contained in this Agreement
and the Collateral Documents applicable to such Collateral are true and correct
in all material respects.
3.02 COLLATERAL DOCUMENTS. The Borrower and certain of the
Guarantors have heretofore executed and delivered or will execute and deliver to
the Collateral Agent certain Collateral Documents, and the Borrower shall
execute and deliver to the Collateral Agent for the benefit of the Secured
Creditors (and shall cause each Guarantor to so execute and deliver) all such
further Collateral Documents and such other collateral documents as may be
reasonably requested by the Collateral Agent in order to perfect and protect
Collateral Agent's security interest in the Collateral granted pursuant to the
Collateral Documents, all in form and substance reasonably acceptable to the
Collateral Agent.
3.03 PRIORITY OF SECURITY INTEREST. The lien and security
interest of the Collateral Agent in the Collateral shall, to the extent
permissible by applicable law, at all times, be and continue to be a first lien
in all jurisdictions, whether state, federal or foreign, subject to no other
Lien of any kind (except Permitted Liens).
3.04 NEW GUARANTORS. Borrower shall cause each Domestic
Subsidiary which is hereafter created or acquired (but in any event excluding
Lincoln Indemnity Company and H&T Receivable Funding Corporation) to promptly
execute and deliver a supplement or addendum to each of the Guarantee and
Collateral Agreement and the Operating Banks Guaranty, in form and substance
satisfactory to the Collateral Agent, pursuant to which such Subsidiary shall
become a party to such agreements as a Guarantor, together with such Collateral
Documents and other documents, instruments and opinions reasonably requested by
Agent or the Collateral Agent in order to perfect and protect the Collateral
Agent's security interest in the Collateral granted pursuant to such Collateral
Documents, all in form and substance reasonably satisfactory to Agent and the
Collateral Agent.
3.05 REAL PROPERTY MATTERS. As additional security for the
Secured Obligations, Borrower and the Guarantors have heretofore executed,
delivered and recorded, and will execute, deliver and record, certain mortgages,
deeds of trust, leasehold mortgages and leasehold deeds of trust, and Borrower
agrees, as of the Closing Date, to execute, deliver and record and to cause each
Guarantor to execute, deliver and record, any new mortgages, deeds of trust,
leasehold mortgages and leasehold deeds of trust and similar instruments, or
amendments to any existing mortgages, deeds of trust, leasehold mortgages and
leasehold deeds of trust and similar instruments (collectively, such existing
and new instruments are called the "REAL PROPERTY SECURITY DOCUMENTS"), relating
to all of such Person's right, title and interest in all of those plots, pieces
or parcels of land now owned or leased by such Person (the "REAL PROPERTY") and
more particularly described in the Collateral Documents and Exhibit F hereto,
which Real Property Security Documents are or shall be in form and substance
reasonably satisfactory to Agent and grant Liens on the Real Property to the
Collateral Agent. Borrower agrees from time to time (x) upon the reasonable
request of the Agent during the occurrence and continuation of a Default or an
Event of Default, to provide or cause the applicable Guarantor to provide, to
the Collateral Agent (a) surveys or survey recertifications of its Real Property
acceptable to Agent and (b) mortgagee title insurance policies and/or
endorsements thereto in form and amount acceptable to Agent covering its Real
Property and (y) to perform the other actions required by Section 6.16 and
Exhibit L. In addition, Borrower agrees, upon the reasonable request of the
Agent during the occurrence and continuation of a Default or Event of Default,
to deliver promptly to the Agent (at the Borrower's sole cost and expense)
appraisals, or updates of appraisals previously delivered to the Agent and the
Banks, of substantially all of the real properties and other Property
<PAGE> 44
38
owned or leased by the Borrower or its Subsidiaries (as agreed to by the
Borrower and the Agent) by an appraiser reasonably satisfactory to the Agent.
As additional security for the Secured Obligations, Borrower
agrees that in the event Borrower or any Guarantor acquires any real property or
enters into any lease for real property upon which Borrower or any Guarantor
shall own the improvements, then, from time to time, upon request of the Agent,
Borrower shall, or shall cause such Guarantor to, execute, deliver and record
Real Property Security Documents encumbering such owned or ground-leased
property (provided that the lease permits the granting of such security interest
in favor of Collateral Agent; PROVIDED, HOWEVER, that before entering into any
said ground lease, Borrower or such Guarantor shall request that the ground
lessor agree to permit such security interest in favor of the Collateral Agent
in the provisions of the ground lease), which Real Property Security Documents
shall be substantially in the same form as the Real Property Security Documents
provided on and/or in effect as of the date hereof. In connection with such
hereafter owned, leased or otherwise acquired real property, Borrower agrees to
provide, or cause the applicable Guarantor to provide, to the Collateral Agent
(a) surveys of said real property reasonably acceptable to Agent and (b)
mortgagee title insurance policies in form and amount reasonably acceptable to
Agent covering said real property.
ARTICLE IV.
CONDITIONS PRECEDENT
--------------------
4.01 CONDITIONS PRECEDENT TO CLOSING DATE. This Agreement
shall become effective as of the Closing Date, subject to the conditions
precedent that Agent shall have received, for its account and the accounts of
the respective lenders party to the Existing Credit Agreement in accordance with
their interests, on or before the Closing Date, payment of all accrued and
unpaid interest, fees, expenses, and other amounts payable under the Existing
Credit Agreement in respect of the period prior to the Closing Date and subject
to the further conditions precedent that on or prior to the Closing Date:
(a) OPINIONS OF COUNSEL TO BORROWER, ETC. There shall have
been delivered to Agent (with sufficient copies for distribution to all
Banks), in form and substance satisfactory to Agent and its counsel, an
opinion, dated the Closing Date, of (i) Benesch, Friedlander, Coplan &
Aronoff LLP, counsel for Borrower and the Guarantors, substantially in
the form of Exhibit J-1 hereto and (ii) Winston & Strawn, special
counsel for the Borrower and the Guarantors, substantially in the form
of Exhibit J-2 hereto;
(b) OTHER OPINIONS. There shall have been delivered to Agent
(with sufficient copies for distribution to all Banks), in form and
substance satisfactory to Agent and its counsel, an opinion, dated the
Closing Date, of Cary Gaan, Esq., or other acceptable in-house counsel,
substantially in the form of Exhibit K hereto;
(c) BORROWER'S INCORPORATION PAPERS. There shall have been
delivered to Agent (with sufficient copies for distribution to all
Banks), in form and substance satisfactory to Agent and its counsel, a
copy of Borrower's certificate of incorporation, certified by the
Secretary of State of Delaware, as of a recent date, and a copy of the
Borrower's by-laws, certified by the Secretary or an Assistant
Secretary of Borrower;
(d) BORROWER'S CORPORATE RESOLUTION. There shall have been
delivered to Agent (with sufficient copies for distribution to all
Banks), in form and substance satisfactory to Agent and
<PAGE> 45
39
its counsel, a copy of a resolution or resolutions passed by the Board
of Directors of Borrower, certified by the Secretary or an Assistant
Secretary of Borrower as being in full force and effect on the Closing
Date, authorizing the borrowing provided for herein and the execution,
delivery and performance of this Agreement, the Notes, the Collateral
Documents to which it is a party and any other instrument or agreement
required hereunder;
(e) BORROWER'S INCUMBENCY CERTIFICATE. There shall have been
delivered to Agent (with sufficient copies for distribution to all
Banks), in form and substance satisfactory to Agent and its counsel, a
certificate, signed by the Secretary or an Assistant Secretary of
Borrower and dated the Closing Date, as to the incumbency, and
containing the specimen signature or signatures (not photocopied), of
the person or persons authorized to execute and deliver this Agreement,
the Notes, the Collateral Documents to which it is a party and any
other instrument or agreement required hereunder on behalf of Borrower;
(f) GUARANTORS' INCORPORATION PAPERS. There shall have been
delivered to Agent (with sufficient copies for distribution to all
Banks), in form and substance satisfactory to Agent and its counsel,
with respect to each Guarantor, a copy of each such Guarantor's
certificate of incorporation or articles of association and by-laws or
partnership agreement, as the case may be, certified by the Secretary
or an Assistant Secretary of such Guarantor;
(g) GUARANTORS' RESOLUTIONS. There shall have been delivered
to Agent (with sufficient copies for distribution to all Banks), in
form and substance satisfactory to Agent and its counsel, a copy of a
resolution or resolutions passed by the Board of Directors (or similar
body) of each Guarantor (or, with respect to a Guarantor which is a
partnership, of such Guarantor's general partner), certified by the
Secretary or an Assistant Secretary of such Guarantor (or general
partner) as being in full force and effect on the Closing Date,
authorizing the execution, delivery and performance of the Collateral
Documents to which it is a party;
(h) GUARANTORS' INCUMBENCY CERTIFICATES. There shall have been
delivered to Agent (with sufficient copies for distribution to all
Banks), in form and substance satisfactory to Agent and its counsel, a
certificate, signed by the Secretary or an Assistant Secretary of each
Guarantor (or, with respect to a Guarantor which is a partnership, of
such Guarantor's general partner) and dated the Closing Date, as to the
incumbency, and containing the specimen signature or signatures (not
photocopied), of the person or persons authorized to execute and
deliver the Collateral Documents to which it is a party on behalf of
such Guarantor (or on behalf of such general partner for such
Guarantor);
(i) APPROVALS AND CONSENTS. There shall have been delivered to
Agent (with sufficient copies for distribution to all Banks), in form
and substance satisfactory to Agent and its counsel, certified copies
of all approvals, consents, exemptions and other actions by, and
notices to and filings with, any governmental authority or any other
Person and any trustee or holder of any indebtedness or obligation of
Borrower or of any Guarantor which are required in connection with any
transaction contemplated hereby (other than landlords under leases and
first mortgage holders constituting Permitted Liens, but subject to
Section 6.16);
(j) AGREEMENT. There shall have been delivered to Agent (with
sufficient copies for distribution to all Banks), in form and substance
satisfactory to Agent and its counsel, sufficient counterparts of this
Agreement, duly executed by an authorized officer of Borrower;
<PAGE> 46
40
(k) NOTES. There shall have been delivered to the Agent, for
the account of each Bank, a Revolving Note, each with appropriate
insertions and completions and conforming to the requirements hereof
and executed by a duly authorized officer of the Borrower;
(l) COLLATERAL DOCUMENTS. There shall have been delivered to
Agent (with sufficient copies for distribution to all Banks), in form
and substance satisfactory to Agent and its counsel, sufficient
counterparts of (i) the Guarantee and Collateral Agreement, executed by
a duly authorized officer of each of the Borrower and the Guarantors,
(ii) Mortgages covering each of the Properties listed on Schedule
4.01(l), executed by a duly authorized officer of each of the Borrower
and each of the Guarantors which holds an interest in the applicable
Property and (iii) the other Collateral Documents, executed by a duly
authorized officer of each of the Borrower and the Guarantors party to
such Collateral Documents;
(m) PLEDGE OF SHARES. The Collateral Agent shall have received
(x) (i) the certificates representing the certificated shares of
Funding Corp. and each of the Guarantors listed on Exhibit D hereto and
(ii) the certificates representing 65% of the certificated shares of
the Foreign Subsidiaries (other than Health & Tennis U.K. Limited),
which certificates are to be pledged pursuant to the Guarantee and
Collateral Agreement, together with (y) an undated stock power for each
such certificate executed in blank by a duly authorized officer of the
pledgor thereof;
(n) [Intentionally Left Blank]
(o) ACKNOWLEDGEMENTS. If requested by the Agent, there shall
have been delivered to Agent (with sufficient copies for distribution
to all Banks), in form and substance satisfactory to Agent and its
counsel, sufficient counterparts of an amendment and/or acknowledgment
from each Person which executed a consent or acknowledgement in
connection with the Existing Credit Agreement and any other document or
agreement identified by the Agent (including landlord's consents and
consents by other partners in partnerships to the liens on certain
interests in such partnerships created by the Collateral Documents
confirming that such consent or acknowledgement remains effective after
giving effect to the refinancing of the Existing Credit Agreement by
this Agreement, but excluding those consents and acknowledgements
specified in Exhibit L);
(p) SURVEYS. The Agent shall have received, and the Title
Insurance Company (defined below) shall have received, (A) an as-built
survey of the sites of the property covered by each Mortgage (including
leasehold mortgages) certified to the Agent and the Title Insurance
Company in a manner satisfactory to them, dated a date satisfactory to
the Agent and the Title Insurance Company by an independent
professional licensed land surveyor satisfactory to the Agent and the
Title Insurance Company, and the surveys on which they are based shall
be made in accordance with the Minimum Standard Detail Requirements for
Land Title Surveys jointly established and adopted by the American Land
Title Association and the American Congress on Surveying and Mapping in
1992, and, without limiting the generality of the foregoing, there
shall be surveyed and shown on such maps, plats or surveys the
following: (i) the locations on such sites of all the buildings,
structures and other improvements and the established building setback
lines; (ii) the lines of streets abutting the sites and width thereof;
(iii) all access and other easements appurtenant to the sites or
necessary or desirable to use the sites; (iv) all roadways, paths,
driveways, easements, encroachments and overhanging projections and
similar encumbrances affecting the site, whether recorded, apparent
from a physical inspection of the sites or otherwise known to the
surveyor; (v) any encroachments on any adjoining property by the
building structures and improvements on the sites; and (vi) a
<PAGE> 47
41
legend relating to the survey, or (B) in lieu of an as-built survey,
the Borrower or its Subsidiaries shall have delivered any affidavits or
other documents required by the Title Insurance Company to insure the
state of facts set forth in a survey which was previously included in a
title insurance policy delivered by the Borrower or a Subsidiary to the
Agent.
(q) TITLE INSURANCE POLICY. The Agent shall have received in
respect of each parcel covered by each Mortgage covering the real
property set forth on Schedule 4.01(l) a mortgagee's title policy (or
policies) or marked up unconditional binder for such insurance dated
the Closing Date. Each such policy shall (i) be in an amount
satisfactory to the Agent; (ii) be issued at ordinary rates; (iii)
insure that the Mortgage insured thereby creates a valid first Lien on
such parcel free and clear of all defects and encumbrances, except such
as may be approved by the Agent; (iv) name the Agent for the benefit of
the Banks as the insured thereunder; (v) be in the form of ALTA Loan
Policy - 1970 (Amended 10/17/70); (vi) contain such endorsements and
affirmative coverage as the Agent may request and (vii) be issued by a
title company (the "TITLE INSURANCE COMPANY") satisfactory to the
Agent. The Agent shall have received evidence satisfactory to it that
all premiums in respect of each such policy, and all charges for
mortgage recording tax, if any, have been paid.
(r) FLOOD INSURANCE. If requested by the Agent, the Agent
shall have received (i) a policy of flood insurance which (A) covers
any parcel of improved real property which is encumbered by any
Mortgage, (B) is written in an amount not less than the outstanding
principal amount of the indebtedness secured by such Mortgage which is
reasonably allocable to such real property or the maximum limit of
coverage made available with respect to the particular type of property
under the National Flood Insurance Act of 1968, whichever is less, and
(C) has a term ending not earlier than the maturity of the indebtedness
secured by such Mortgage and (ii) confirmation that the Borrower has
received the notice required pursuant to Section 208(e)(3) of
Regulation H of the Board of Governors of the Federal Reserve System.
(s) COPIES OF DOCUMENTS. The Agent shall have received a copy
of all recorded documents referred to, or listed as exceptions to title
in, the title policy or policies referred to in Section 4.01(q) and a
copy, certified by such parties as the Agent may deem appropriate, of
all other documents affecting the property covered by each Mortgage
covering the real property listed on Schedule 4.01(l).
(t) LOCAL COUNSEL OPINIONS. The Agent shall have received
opinions of local counsel in Georgia, Maryland, Pennsylvania, Virginia
and Washington relating to the Mortgages in form and substance
satisfactory to Agent and its counsel.
(u) NO LITIGATION. No litigation, inquiry, injunction or
restraining order shall be pending, entered or threatened (including
any proposed statute, rule or regulation) which, in the reasonable
opinion of the Majority Banks, could have a Material Adverse Effect;
(v) NO MATERIAL ADVERSE CHANGE. There shall not have occurred
since December 31, 1996 any change or development, which in either case
in the opinion of the Majority Banks could have a Material Adverse
Effect;
(w) FILINGS. Any filings and other actions required to create
and perfect the appropriate security interests in all Collateral
(including, without limitation, the filing of duly executed financing
statements on Form UCC-1 in the jurisdictions set forth in Schedule 3
to the Guarantee and Collateral Agreement and in any other
jurisdiction, in the opinion of the Agent, desirable to perfect the
Liens on the Collateral) shall have been duly made or taken (or,
<PAGE> 48
42
in the case of UCC-1s, executed and delivered in proper form for
filing), and all Collateral shall be free and clear of other liens
other than Permitted Liens.
(x) GOOD STANDING CERTIFICATES. There shall have been
delivered to Agent (with sufficient copies for distribution to all
Banks), in form and substance satisfactory to Agent and its counsel,
good standing certificates (or bring-down telexes or other evidence of
good standing) for Borrower and for each Guarantor from the Secretary
of State of the state of incorporation of each such Person and good
standing certificates (or similar authorization to conduct business as
a foreign corporation) for Borrower and each Guarantor from the
Secretary of State of each state with respect to which Borrower makes
the representations contained in Sections 5.01 and 5.02 hereof;
(y) PAYMENT OF FEES AND EXPENSES. The Agent shall have
received, for the account of the Banks and for its own account, payment
by Borrower of all fees and expenses (including reasonable legal fees
and expenses) required to be paid hereunder, including without
limitation, under Sections 2.09, 2.11 and 9.06, to the extent invoices
therefor have been presented to Borrower prior to the Closing Date;
(z) OFFICER'S CERTIFICATE. There shall have been delivered to
Agent (with sufficient copies for distribution to all Banks), in form
and substance satisfactory to Agent and its counsel, a certificate
signed by a Senior Vice President of Borrower, dated as of the Closing
Date, certifying that:
(i) the representations and warranties
contained in Article V and in each Collateral Document are
true and correct in all material respects on and as of such
date, as though made on and as of such date;
(ii) no event has occurred and is continuing,
or would result from the transactions provided for herein,
which has or would constitute an Event of Default; and
(iii) there has occurred since December 31,
1996, no development, event or circumstance which has had or
is reasonably likely to have a Material Adverse Effect;
(aa) INSURANCE POLICIES. There shall have been delivered to
the Agent a certificate evidencing the Borrower's insurance coverage in
form and substance reasonably satisfactory to the Agent;
(ab) PROJECTIONS. There shall have been delivered to Agent
(with sufficient copies for distribution to all Banks), in form and
substance satisfactory to Agent and its counsel, the consolidated plan
and financial forecast for the then current and next succeeding two (2)
fiscal years of Borrower and its Subsidiaries, including, without
limitation, (i) a forecasted consolidated balance sheet and a
consolidated statement of income and cash flows of Borrower for each
such fiscal year, and (ii) forecasted consolidated statements of income
and cash flows of Borrower for each quarter of the first such fiscal
year. Such plan and forecast for the current fiscal year shall include
a summary of significant assumptions. The Banks acknowledge that
projections satisfying the condition in this Section 4.01(ab) have
previously been delivered by the Borrower;
<PAGE> 49
43
(ac) OTHER EVIDENCE AGENT MAY REQUIRE. There shall have been
delivered to Agent (with sufficient copies for distribution to all
Banks), in form and substance satisfactory to Agent and its counsel,
such other evidence or documents as Agent may reasonably request
consistent with the other terms of this Agreement to establish the
consummation of the transactions contemplated hereby, the taking of all
proceedings in connection herewith and compliance with the conditions
set forth in this Agreement.
4.02 CONDITIONS PRECEDENT TO EACH ADVANCE AND LETTER OF
CREDIT. The obligation of each Bank to make any Advance or to issue any Letter
of Credit (or to renew or extend any Letter of Credit) hereunder is subject to
the following conditions precedent:
(a) No Default or Event of Default has occurred and is
continuing on the date of each Advance or the date of issuance (or the
date of renewal or extension, as the case may be) of each Letter of
Credit or would result from the incurring of obligations by Borrower
under this Agreement;
(b) The representations and warranties contained herein, in
the Collateral Documents and in any guaranty hereafter executed and
delivered by a new Guarantor pursuant to Section 3.04, shall be true
and correct in all material respects on the date of each Advance or the
date of issuance (or the date of renewal or extension, as the case may
be) of each Letter of Credit, except for the representations and
warranties contained in Section 5.09 and except as to representations
and warranties which expressly relate to an earlier date and except for
changes which are expressly permitted by this Agreement; and
(c) there has occurred since the date hereof, no event,
development or circumstance which has had or is reasonably likely to
have a Material Adverse Effect.
Each borrowing by or credit extension to Borrower hereunder shall constitute a
representation and warranty by Borrower as of the date of each such borrowing or
credit extension that the conditions in Section 4.02 have been satisfied.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants to each Bank that:
5.01 BORROWER'S EXISTENCE. Borrower is a corporation duly
organized and validly existing under the laws of the State of Delaware, and is
in good standing and properly licensed to conduct business in every jurisdiction
in which the nature of the business conducted by it makes such license and good
standing necessary and where failure to so comply would have a material adverse
effect on the consolidated financial condition or the business of Borrower and
its Subsidiaries.
5.02 SUBSIDIARIES' EXISTENCE. Each Substantial Subsidiary is
duly organized and validly existing under the laws of the jurisdiction of its
formation, and is in good standing and properly licensed to conduct business in
the State in which its principal operations are located and in every
jurisdiction in which the nature of the business conducted by it makes such
compliance necessary and where failure to comply would have a material adverse
effect on the business of any such Subsidiary.
<PAGE> 50
44
5.03 BORROWER'S POWERS. The execution, delivery and
performance of this Agreement, the Notes, the other Credit Documents and any
other instrument or agreement required to be executed and delivered by Borrower
hereunder are within Borrower's corporate powers, have been duly authorized, and
are not in conflict with the terms of any charter, by-law or other organization
papers of Borrower, or any material instrument or agreement to which Borrower or
any Subsidiary is a party or by which Borrower or any Subsidiary is bound or
affected (including, but not limited to, the Indenture).
5.04 POWER OF OFFICERS. The officers of Borrower executing
this Agreement, the Notes, the other Credit Documents and any other certificate,
instrument or agreement required to be delivered hereunder are duly authorized
to execute same.
5.05 GOVERNMENT APPROVALS. No approval, consent, exemption or
other action by, or notice to or filing with, any governmental authority is
necessary in connection with the execution, delivery, performance or enforcement
of this Agreement, the Notes, the other Credit Documents or any other instrument
or agreement required hereunder, except as may have been obtained and certified
copies of which have been delivered to Agent or except where the failure to so
comply would not reasonably be expected to have a Material Adverse Effect.
5.06 COMPLIANCE WITH LAWS. There is no law, rule or
regulation, nor is there any judgment, decree or order of any court or
governmental authority binding on Borrower or any Subsidiary, which would be
contravened by the execution, delivery, performance or enforcement of this
Agreement, the Notes, the other Credit Documents or any instrument or agreement
required hereunder, except where the failure to so comply would not reasonably
be expected to have a Material Adverse Effect.
5.07 ENFORCEABILITY OF AGREEMENT. Each of this Agreement, the
Notes and each of the other Credit Documents to which the Borrower or any of its
Subsidiaries is a party are legal, valid and binding agreements and obligations
of Borrower, or such Subsidiary, as the case may be, enforceable against
Borrower or such Subsidiary, as the case may be, in accordance with their
respective terms, and any other instrument or agreement required hereunder, when
executed and delivered, will be similarly legal, valid, binding and enforceable,
subject, in each case, to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally and general equitable principles (whether
considered in a proceeding in equity or at law).
5.08 TITLE TO PROPERTY. Borrower and its Subsidiaries have
good title to their respective personal properties and assets, and good and
marketable title to their respective real properties, free and clear of all
Liens, except for Permitted Liens on such properties and assets. The execution,
delivery or performance of this Agreement, the Notes, the other Credit Documents
or any instrument or agreement required hereunder will not result in the
creation of any Lien, other than in favor of the Secured Creditors pursuant to
the Collateral Documents.
5.09 LITIGATION. Except as disclosed on Schedule 5.09, there
are no suits, proceedings, claims or disputes pending or, to the knowledge of
Borrower, threatened against or affecting Borrower or any Subsidiary or their
respective property, the adverse determination of which could reasonably be
expected to have a Material Adverse Effect.
5.10 EVENTS OF DEFAULT. No event has occurred and is
continuing or would result from the incurring of obligations by Borrower under
this Agreement and the other Credit Documents which is a Default or an Event of
Default.
<PAGE> 51
45
5.11 COMPLIANCE WITH MARGIN REQUIREMENTS. Borrower is not in
violation of any provision of Section 7 of the Securities Exchange Act of 1934
or any Margin Regulation, nor will Borrower's activities cause it to violate
such provision or any Margin Regulation.
5.12 SUBSIDIARIES. All of Borrower's Subsidiaries are listed
on Exhibit D hereto or on an amendment thereto delivered pursuant to Section
6.03(d) hereof.
5.13 FINANCIAL INFORMATION. The audited consolidated financial
statements of Borrower and its Subsidiaries for the fiscal year ending December
31, 1996 and the unaudited consolidated financial statements of the Borrower and
its subsidiaries for the fiscal quarter ending June 30, 1997 have been furnished
by Borrower to Banks. Such financial statements have been prepared in accordance
with GAAP and practices consistently applied and accurately and fairly present
in all material respects the consolidated financial condition and results of
operations of the entities referred to therein as of such dates. Since the date
of the most recent audited financial statements referred to above, there has
been no change in Borrower's consolidated financial condition or results of
operations sufficient to impair Borrower's ability to repay the Credit in
accordance with the terms hereof. Neither Borrower nor any Subsidiary has any
contingent obligations, liabilities for taxes or other outstanding financial
obligations which are material in the aggregate, except those for which adequate
reserves are established or as disclosed in such statements or in the statements
or reports delivered or to be delivered for the period in which such obligations
were incurred pursuant to Section 6.03.
5.14 ERISA. Each Plan is in compliance in all material
respects with the applicable provisions of ERISA, the Code and any other
applicable federal or state law, and except as listed on Schedule 5.14 no event
or condition is occurring nor is there any present intent to cause any such
event or condition to occur with respect to any Plan or Multiemployer Plan with
respect to which Borrower would be under an obligation to furnish a report to
Banks in accordance with Section 6.02(d) hereof and which, taking all such
events or conditions arising within the last twelve-month period, in the
aggregate would result in liability to Borrower or an ERISA Affiliate in excess
of One Million Dollars ($1,000,000). For purposes of this representation and
warranty, Borrower, or any ERISA Affiliate if not the Plan administrator, shall
be deemed to have knowledge of all facts attributable to the Plan administrator
designated pursuant to ERISA; provided, however, that the foregoing
representation with respect to Multiemployer Plans is made with respect to
matters of which Borrower or any ERISA Affiliate has actual knowledge. The
aggregate withdrawal liability under Section 4201 of ERISA which could be
incurred by Borrower and each ERISA Affiliate, collectively, upon a complete
withdrawal, within the meaning of Section 4203 of ERISA, from each and all
Multiemployer Plans to which each is contributing or has contributed within the
past five calendar years, plus the aggregate of the excess of benefit
liabilities, within the meaning of Section 4001(a)(16) of ERISA, of each Plan
upon termination of such Plan over the assets of such Plan, does not exceed Five
Million Dollars ($5,000,000).
5.15 INVESTMENT COMPANY ACT OF 1940. Neither Borrower nor any
of its Subsidiaries is an "investment company" or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended.
5.16 NO RESTRICTIONS ON SUBSIDIARIES. No Subsidiary is
prohibited by the terms of any agreement to which it is a party or by which it
is bound or affected from paying dividends to or making loans or advances to
Borrower or any Subsidiary directly controlling it, except (a) as disclosed in
Schedule 5.16; (b) restrictions imposed by this Agreement or any Collateral
Agreement; (c) customary non-assignment provisions restricting subletting or
assignment of any lease or assignment of any contract of any Subsidiary;
customary net worth provisions contained in leases and other agreements entered
into by a Subsidiary in the ordinary course of business; and customary
provisions
<PAGE> 52
46
in instruments or agreements relating to a Lien created, incurred or assumed in
accordance with this Agreement prohibiting the transfer of the property subject
to such Lien, in each case in existence on the Closing Date; (d) restrictions on
Debt secured by any Permitted Lien described in clauses (iv), (xii), (xiii) or
(xiv) of the definition of "Permitted Lien" limiting the right of such
Subsidiaries to dispose of the assets securing such Debt to the extent that the
agreement governing such Debt prohibits the transfer of such assets as a
Restricted Payment; (e) customary restrictions with respect to a Subsidiary
pursuant to an agreement that has been entered into for the sale or disposition
of all or substantially all of the capital stock or assets of such Subsidiary;
and (f) any restrictions pursuant to any agreement that extends, refinances,
renews or replaces any agreement containing any of the restrictions described in
the foregoing clauses (a) through (e), provided that the terms and conditions of
any such restrictions are not less favorable to the Banks than those under or
pursuant to the agreement extended, refinanced, renewed or replaced.
5.17 SENIOR INDEBTEDNESS. All sums outstanding under this
Agreement and the Revolving Notes and all other monetary obligations of the
Borrower under this Agreement will constitute Senior Indebtedness and Designated
Senior Indebtedness.
5.18 ENVIRONMENTAL MATTERS. As of the Closing Date:
(a) except as disclosed on Schedule 5.18, the property, assets
and operations of Borrower and the Subsidiaries and the Scandinavian
Partnerships comply in all material respects with all applicable
Hazardous Materials Laws and all governmental permits relating to the
use and/or operation thereof (except to the extent that failure to
comply with such Hazardous Materials Laws or applicable permits would
not have a material adverse effect on the financial condition or
business of Borrower and its Subsidiaries taken as a whole);
(b) to the best knowledge of Borrower, after reasonable
inquiry, (i) none of the real property owned in fee, or the assets or
operations of Borrower and the Subsidiaries related thereto is the
subject of federal or state investigation mandating any remedial
action, involving expenditures, which is needed to respond to a release
of any Hazardous Materials into the environment, (ii) there are no
underground storage tanks present on or under the Properties owned in
fee, and (iii) there are no pending or threatened: (A) actions or
proceedings from any governmental agency or any other person or entity
regarding the disposal of Hazardous Materials, or regarding any
Hazardous Materials Laws or evaluation, or (B) liens or governmental
actions, notices of violations, notices of noncompliance or other
proceedings of any kind relating to any of the Hazardous Materials Laws
with respect to the Properties; and
(c) neither Borrower nor any Subsidiary has any material
liability (material to the Borrower and its Subsidiaries taken as a
whole) in connection with any release of any Hazardous Materials into
the environment.
5.19 COLLATERAL DOCUMENTS. (a) The provisions of each of the
Collateral Documents (other than the Mortgages, subject to (b) below, and the
collateral assignments of tenant's rights in leases) are effective to create in
favor of the Collateral Agent, for the benefit of the Secured Creditors, a
legal, valid and enforceable security interest in all right, title and interest
of Borrower and its Subsidiaries in the Collateral described therein; and
financing statements have been filed (or, in the case of UCC-1 financing
statements delivered on the Closing Date, executed and delivered in the proper
form for filing) in the offices in all of the jurisdictions listed in the
schedules to the Guarantee and Collateral Agreement.
<PAGE> 53
47
(b) Each Mortgage when delivered will be effective to grant to
the Collateral Agent for the benefit of the Secured Creditors, a legal, valid
and enforceable mortgage lien on all the right, title and interest of the
mortgagor under such Mortgage in the real property and fixtures described
therein. When each such Mortgage is duly recorded in the appropriate land
records offices and the mortgage recording fees and taxes in respect thereof are
paid and compliance is otherwise had with the formal requirements of state law
applicable to the recording of real estate mortgages generally, each such
Mortgage shall constitute a perfected mortgage lien on such mortgaged property,
subject to the encumbrances and exceptions to title set forth therein and except
as noted in the title policies and title endorsements thereto delivered to the
Collateral Agent and described in Exhibit F, and such Mortgage also creates a
legal, valid, enforceable and perfected first lien on, and security interest in,
all right, title and interest of Borrower or such Subsidiary under such Mortgage
in all fixtures which are covered by such Mortgage, subject to no other Liens,
except the encumbrances and exceptions to title set forth therein and except as
noted in the title policies and title endorsements thereto delivered to the
Collateral Agent and described in Exhibit F and Permitted Liens.
(c) The provisions of the Guarantee and Collateral Agreement,
after giving effect to (i) the delivery to the Collateral Agent of the
certificates representing the certificated shares of the capital stock and other
equity interests of the Subsidiaries described in the Guarantee and Collateral
Agreement (the "Pledged Stock") accompanied by appropriate undated stock powers
executed in blank, (ii) the registration of the Pledged Partnership Interests
(as defined in the Guarantee and Collateral Agreement and, together with the
Pledged Stock, the "Pledged Securities") pursuant to the forms attached as
exhibits to the Guarantee and Collateral Agreement and (iii) the filing of UCC-1
financing statements in the offices set forth on the schedules to such Guarantee
and Collateral Agreement, shall be effective to create, in favor of the
Collateral Agent, for the ratable benefit of the Secured Creditors, a fully
perfected first Lien on, and security interest in, all right, title and interest
of Borrower and the Guarantors in the "Collateral", as defined in the Guarantee
and Collateral Agreement (except for Permitted Liens), and the Pledged Stock has
been delivered, where applicable, to the Collateral Agent or its nominee.
5.20 COPYRIGHTS, PATENTS, TRADEMARKS AND LICENSES, ETC. Except
as disclosed in Schedule 5.20, Borrower and its Subsidiaries own or are licensed
or otherwise have the right to use all of the patents, trademarks, service
marks, trade names, copyrights and franchises that are reasonably necessary for
the operations of their respective businesses as currently conducted, without
conflict with the rights of any other Person with respect thereto and except
where the failure to be in compliance with this sentence would not have a
material adverse effect on Borrower or any Substantial Subsidiary. To the best
knowledge of Borrower, no slogan or other advertising device, product, process,
method, substance, part or other material now employed, or now contemplated to
be employed by Borrower or any of its Subsidiaries infringes upon any rights
obtained by any other Person, except where the failure to be in compliance with
this sentence would not have a material adverse effect on Borrower or any
Substantial Subsidiary, and no claim or litigation regarding any of the
foregoing is pending or threatened.
ARTICLE VI.
AFFIRMATIVE COVENANTS
---------------------
Borrower covenants and agrees that so long as the Credit shall
remain available, and until the full and final payment of all Obligations, it
will, and with respect to Sections 6.04, 6.05, 6.06, 6.07, 6.08, 6.09, 6.10,
6.11, 6.14, 6.16, 6.17 and 6.18, it will cause each Subsidiary to, unless
Majority Banks waive compliance in writing:
<PAGE> 54
48
6.01 USE OF PROCEEDS AND LETTERS OF CREDIT. Use (a) the
proceeds of the Advances solely (i) to refinance and replace Indebtedness under
the Existing Credit Agreement, (ii) to finance expansions and investments
permitted hereunder and (iii) for working capital purposes in the ordinary
course of business; and (b) the Letters of Credit (i) to provide security as
required under applicable state consumer protection statutes and for utility
deposits, (ii) to provide credit support for insurance, construction bonds, rent
deposits and utility bonds, (iii) to secure the payment of workers' compensation
benefits and obligations, (iv) for the purposes described in clause (ii) of the
definition of "Permitted Liens" and to provide credit support for the
obligations described therein, and (v) for the general corporate purposes of the
Borrower and its Subsidiaries in the ordinary course of business. For purposes
of this Section 6.01, a "hostile takeover" of another entity or a "tender offer"
in furtherance of same is not a proper purpose.
6.02 NOTICES. Promptly, but within five (5) Banking Days,
unless otherwise provided below, give written notice to Agent of:
(a) except for matters previously disclosed on Schedule 5.09
and Schedule 6.02(a) (unless there is a significant development with
respect to these matters), any litigation affecting Borrower or any
Subsidiary, the adverse determination of which could materially and
adversely affect the financial condition or business of Borrower and
its Subsidiaries taken as a whole, or where the amount Borrower or such
Subsidiary expects to pay the other parties to the litigation is more
than One Million Dollars ($1,000,000);
(b) (i) any dispute which may exist between Borrower or any
Subsidiary and any governmental regulatory body or law enforcement
authority which has not been previously disclosed and could have a
material adverse effect on its operations, and (ii) any lien for taxes
(other than taxes unless such taxes are due), assessments, governmental
charges, or levies, in each case in excess of One Million Dollars
($1,000,000), immediately upon the filing thereof or the attachment
thereof to any property of Borrower or any of its Subsidiaries;
(c) any labor controversy resulting in or reasonably likely to
result in a strike against Borrower or any Subsidiary which could have
a Material Adverse Effect;
(d) the occurrence of a Reportable Event with respect to any
Plan which could result in the incurrence by Borrower or any ERISA
Affiliate of any liability, fine or penalty; the institution of any
steps to terminate any Plan (together with copies of any communication
between the PBGC and Borrower or any ERISA Affiliate related to such
termination); the institution of any steps to withdraw from any Plan,
within the meaning of Section 4062(e) or 4063 of ERISA, or any
Multiemployer Plan, within the meaning of Section 4203 or 4205 of
ERISA; the incurrence of any material increase in the contingent
liability of Borrower or any ERISA Affiliate with respect to any
post-retirement welfare benefits; the failure of Borrower or any other
Person to make a required contribution to a Plan if such failure is
sufficient to give rise to a lien under Section 302(f) of ERISA; or the
adoption of an amendment to any Plan that pursuant to Section
401(a)(29) of the Code or Section 307 of ERISA would require Borrower
or an ERISA Affiliate to provide security to the Plan in accordance
with the provisions of such Sections;
(e) any Default or Event of Default, specifying the nature and
the period of existence thereof and what action Borrower has taken or
proposes to take with respect thereto;
(f) upon, but in no event later than ten (10) days after,
becoming aware of (i) any and all enforcement, cleanup, removal or
other governmental or regulatory actions instituted,
<PAGE> 55
49
completed or threatened against Borrower or any Subsidiary or any of
their properties pursuant to any applicable Hazardous Materials Laws
which has the reasonable likelihood of subjecting Borrower or any
Subsidiary to environmental liability of One Million Dollars
($1,000,000) or more, (ii) all claims made or threatened by any third
party against Borrower or any Subsidiary with respect to or because of
its or their property relating to damage, responsibility, contribution,
cost recovery, compensation, loss or injury resulting from any
Hazardous Materials which has the reasonable likelihood of subjecting
Borrower or any Subsidiary to environmental liability of One Million
Dollars ($1,000,000) or more (the matters set forth in clauses (i) and
(ii) above are hereinafter referred to as "Hazardous Materials
Claims"), and (iii) any environmental or similar condition on any real
property adjoining or in the vicinity of the property of Borrower or
any Subsidiary that could reasonably be anticipated to cause the
property owned by Borrower or any Subsidiary or any part thereof to be
subject to any restrictions on the ownership, occupancy,
transferability or use of such property under any Hazardous Materials
Laws, together with copies of all inquiries, reports or notices
relating to the matters set forth in clauses (i), (ii) and (iii);
(g) following receipt by Borrower of a material notice from
any holder or representative of Subordinated Debt, a copy of such
notice and, concurrently with the sending of any notice by Borrower to
the holder or representative of any Subordinated Debt, a copy of such
notice; and
(h) any other matter which has resulted or is reasonably
likely to result in a Material Adverse Effect.
6.03 FINANCIAL STATEMENTS, REPORTS, ETC. Deliver or cause to
be delivered to each Bank:
(a) As soon as available but no later than fifty (50) days
after the close of each of the first three fiscal quarters of each of
Borrower's fiscal years, Borrower's unaudited consolidated statement of
income and retained earnings as of the close of such quarter, its
consolidated balance sheet and statement of income and retained
earnings for that portion of the fiscal year ending with such quarter,
and its unaudited consolidated statement of cash flows for such quarter
and that portion of the fiscal year ending with such quarter. Each of
such financial statements shall be certified by a responsible officer
of Borrower as being prepared in accordance with GAAP; PROVIDED, that
the delivery to each Bank of a Form 10-Q Quarterly Report of the
Borrower within the time period set forth above shall satisfy the
Borrower's obligations pursuant to this paragraph (a);
(b) as soon as available but no later than one hundred five
(105) days after the close of each of its fiscal years, a copy of the
unqualified, audited financial statements of Borrower and such other
audited financial statements of Subsidiaries of Borrower that have been
prepared (if any). Such financial statements shall include at least the
balance sheet of Borrower as of the close of such year and statements
of income and retained earnings and of changes in financial position
and cash flows for such year, prepared (in the case of Borrower) on a
consolidated basis, and such consolidated financial statements shall be
certified by Ernst & Young or by other independent public accountants
of national reputation selected by Borrower and reasonably satisfactory
to Banks. The delivery to each Bank of a Form 10-K Annual Report within
the time period set forth above shall satisfy the Borrower's
obligations pursuant to the preceding portion of this Section 6.03(b);
PROVIDED that the consolidated financial statements included in such
Form 10-K shall be certified by Ernst & Young or by other independent
public accountants of national reputation selected by Borrower and
<PAGE> 56
50
reasonably satisfactory to Banks. The accountants' certification (x)
shall not be qualified or limited because of restricted or limited
examination by such accountants of any material portion of the records
of Borrower or any such Subsidiary for which audited financial
statements have been prepared and (y) shall not contain a "going
concern" or like qualification or exception. Such accountants for
Borrower shall state in a letter to Banks that in the course of their
examination such accountants, without undertaking any special
procedures for the purpose of such certificate, have obtained no
knowledge of the occurrence of any condition, event or act which would
constitute a Default or an Event of Default, or, if such accountants
shall have obtained knowledge of any such violation, condition, event
or act, they shall specify in such letter all such violations,
conditions, events and acts and the nature and status thereof. If any
of the materials required to be delivered pursuant to paragraph (c) of
this Section 6.03 are delivered in connection with the delivery of the
financial statements pursuant to this Section 6.03(b), the Borrower
shall not be required to deliver separately such statements pursuant to
such paragraph (c). Borrower shall promptly deliver to Agent a copy of
any management letters from such accountants to Borrower;
(c) promptly after filing with the Securities and Exchange
Commission, a copy of each Form 8-K Current Report, Form 10-K Annual
Report, Form 10-Q Quarterly Report and Form 11-K Annual Report, Annual
Report to Shareholders, Proxy Statement and Registration Statement of
(i) Borrower and (ii) Borrower's Subsidiaries;
(d) not later than fifty (50) days after the close of each of
the first three (3) quarters of the fiscal year of Borrower nor later
than one hundred five (105) days after the close of each of the
Borrower's fiscal years, a quarterly certificate executed by any of the
chief financial officer, vice president, treasurer or controller of
Borrower, stating that such officer is familiar with this Agreement and
the business and operations of Borrower and (i) showing Borrower's
compliance with Sections 6.12, 6.15, 7.01, 7.02, 7.06, 7.08 and 7.11
(ii) if Borrower or any Subsidiary is not in compliance therewith,
showing such failure to comply, the amount thereof and explaining the
reason therefor, (iii) specifying changes during such quarter in the
list of Subsidiaries previously delivered by the Borrower to the Banks,
other than changes previously reported to the Agent during such
quarter, (iv) stating that Borrower has performed all its obligations
hereunder and under any judgment, decree or order of any court or
governmental authority binding on Borrower except as may be contested
in good faith upon advice of counsel and for the possible payment of
which adequate reserves are being maintained, (v) stating that no event
has occurred which constitutes a Default or an Event of Default, or, if
such event has occurred, the nature and status thereof and the steps
that Borrower is taking or has taken to cure the same and (vi) stating
the name and jurisdiction of organization of each Unrestricted
Subsidiary created during such quarter;
(e) not later than forty (40) days after the end of each month
(other than the last month in each fiscal quarter), Borrower's
unaudited consolidated statement of income for that portion of the
fiscal year ending with such month. Such item shall be certified by a
responsible officer of Borrower as being complete and correct and
fairly presenting its results of operations and shall include a
comparison to the same period for the prior fiscal year;
(f) commencing March 1, 1998, on such date and on the first
day of each March thereafter, projections which are similar in form and
substance to the projections delivered pursuant to Section 4.01(ab);
(g) such other statements, lists of property and accounts,
budgets, forecasts or reports as Agent or any Bank may reasonably
request;
<PAGE> 57
51
(h) within 10 Banking Days after (i) the receipt of proceeds
from a disposition of assets which receipt causes the amount of
Reinvestment Proceeds not theretofore reinvested or applied to
prepayment of Advances and cash collateralization of Letters of Credit
to exceed $1,000,000 or (ii) the receipt of proceeds from the
disposition of assets when the Reinvestment Proceeds not theretofore
reinvested or applied to prepayment of Advances and cash
collateralization of Letters of Credit exceeds $1,000,000, a statement
of a responsible officer of the Borrower certifying the amount of such
proceeds and the amount of Reinvestment Proceeds as of such date of
receipt;
(i) concurrently with the delivery thereof pursuant to the
Receivables Program Documents, a copy of (A) each Settlement Statement
(as defined in the Pooling & Servicing Agreement) delivered pursuant to
Section 3.4 of the Pooling & Servicing Agreement and (B) upon the
request of any Bank, through Agent, each officer's certificate
delivered pursuant to Section 3.5 of the Pooling & Servicing Agreement,
each independent accountant's report and management letter delivered
pursuant to Section 3.6 of the Pooling & Servicing Agreement and such
other information relating to the Receivables Program as shall be
requested by any Bank; and
(j) at each time financial statements of the Borrower are
required to be delivered pursuant to paragraph (a) or (b) above, copies
of the combined balance sheet of the Unrestricted Subsidiaries as of
the close of the applicable quarter or fiscal year and combined
statements of income and retained earnings of the Unrestricted
Subsidiaries for the portion of the fiscal year then ended, all set
forth in a format which reconciles such financial statements of the
Unrestricted Subsidiaries to the corresponding financial statements
delivered pursuant to paragraphs (a) and (b).
6.04 FURTHER ASSURANCES. Borrower shall execute and deliver,
or cause to be executed and delivered, to Banks, Agent or the Collateral Agent,
such documents and agreements, and shall take or cause to be taken such actions,
as Agent, the Collateral Agent or the Majority Banks may, from time to time
reasonably request to carry out the terms and conditions of this Agreement and
all of the Collateral Documents.
6.05 EXISTENCE, ETC. Subject to Section 7.05, maintain and
preserve its existence and all rights, privileges and franchises now enjoyed and
necessary for use in its business, and keep all its properties material to its
operations consistent with industry practice in good working order and
condition.
6.06 OWNERSHIP OF STOCK OF SUBSIDIARIES. Subject to Sections
7.05 and 7.08, maintain at least the same ownership of the capital stock or
other equity interests of each of its Subsidiaries as in effect on the Closing
Date.
6.07 PAYMENT OF OBLIGATIONS. Pay all material obligations,
including tax claims, when due, except such as may be diligently contested in
good faith and by appropriate proceedings or as to which a bona fide dispute may
exist and for which adequate reserves are being maintained.
6.08 COMPLIANCE WITH LAWS. At all times comply with all laws,
rules, regulations, orders and directions of any governmental authority
applicable to or having jurisdiction over it or its business, the violation of
which could have a material adverse effect on its financial condition or
continued operation, or on the validity or enforceability of this Agreement, any
of the Notes or any of the other Credit Documents, or the rights or remedies of
the Agent and the Banks hereunder or thereunder.
<PAGE> 58
52
6.09 INSURANCE AND CONDEMNATION. Maintain at all times
substantially the same type of insurance coverage in respect of its properties
and assets as that maintained in respect thereof immediately prior to the
execution of this Agreement:
(a) in amounts not less than the amount of the coverage
immediately prior to the execution of this Agreement for all insurance
other than that described in clause (b) below including, without
limitation, fire and extended coverage insurance for the full and
insurable replacement value of all buildings and other improvements
located on its properties and business interruption and workmen's
compensation insurance. All such insurance (other than workmen's
compensation insurance) relating to assets of Borrower or its
Subsidiaries shall name the Collateral Agent as loss payee (and in the
case of each item of real property on which the Collateral Agent has a
security interest, mortgage loss payee) and an additional insured for
the interests relating to the assets of Borrower and its Subsidiaries,
for the benefit of the Collateral Agent and each Bank, as their
interests may appear, and shall not be modified, reduced or cancelled
in the absence of thirty (30) days prior written notice to the
Collateral Agent. Borrower shall promptly notify Agent of any loss,
damage, or destruction to the Collateral in excess of $500,000 for each
such casualty, whether or not covered by insurance. The Collateral
Agent is hereby authorized to collect all insurance proceeds directly.
With respect to insurance proceeds arising from loss, damage or other
casualty to any of the Collateral or any part thereof, such proceeds
shall be applied as hereinafter provided. Destruction or damage to any
real or personal property of Borrower or any Subsidiary which gives
rise to insurance proceeds shall be deemed to be a disposition of such
property for purposes of Section 7.08(d); PROVIDED, HOWEVER, that if
the total amount of the proceeds from such casualty is reasonably
expected to be less than $3,500,000 and neither an Event of Default nor
a Default shall have occurred and be continuing, Borrower shall have
the exclusive right to negotiate a settlement regarding such proceeds
with the applicable insurance company and the Collateral Agent shall
promptly forward such proceeds to Borrower and the Borrower shall use
such proceeds to pay for the repair or replacement (it being agreed
that a destroyed or damaged fitness center may be replaced at any site
within five miles of the site of such fitness center) of the Collateral
subject to such casualty; PROVIDED, FURTHER, however, that if an Event
of Default or a Default shall have occurred and be continuing, or the
proceeds of insurance from such casualty are reasonably expected to be
equal to or greater than $3,500,000, Borrower shall not enter into any
settlement agreement with the applicable insurance company without the
prior written consent of Agent, which consent shall not be unreasonably
withheld, and if a determination has been made to utilize such proceeds
to replace or rebuild the Collateral affected by such casualty, the
Collateral Agent shall release such proceeds to Borrower from time to
time during the course of said reconstruction, repair or restoration,
but not more often than once each thirty (30) day interval, in
accordance with the Collateral Agent's customary practices for
disbursements of construction loans, including, without limitation,
customary conditions precedent to disbursement, PROVIDED that:
(i) at the time of any requested release of
funds, no Event of Default or Default shall have occurred and
be continuing (to the extent such Event of Default or Default
is cured or waived, Borrower may again request the release of
such funds);
(ii) if at the time of any such request by
Borrower the cost of completing the repair, replacement or
reconstruction, lien-free and ready for use, is in excess of
insurance proceeds and other sums then in the Collateral
Agent's hand pursuant to this Section 6.09, funds to cover
such excess shall either (x) be promptly deposited by Borrower
with the Collateral Agent and shall be disbursed under this
Section 6.09 in the same manner as insurance proceeds or (y)
to the extent some or all of such amount
<PAGE> 59
53
is available to be borrowed pursuant to Section 2.01(a)
hereof, Borrower may, in lieu of the deposit set forth in
subsection (x) above, elect to borrow such amounts as an
Advance in accordance with the terms of Article II hereof when
and as needed to complete the repair;
(iii) costs of administering this disbursement
procedure shall be paid by Borrower out of funds on deposit
with the Collateral Agent or otherwise;
(iv) when repair, replacement or reconstruction
has been completed and paid for, all insurance proceeds then
remaining in the Collateral Agent's hands shall be applied to
the payment of the Obligations in accordance with Section
7.08(d) and Section 2.08(a);
(v) the Collateral Agent shall be satisfied
that, upon release of such proceeds, it shall have for the
ratable benefit of the Secured Creditors, a first priority
perfected security interest on all property acquired (or to be
acquired), but subject to Permitted Liens, with such proceeds;
and
(vi) each release of funds shall be conditioned
upon receipt by Agent of such documentation as Agent may
reasonably require such as bills of sale, other evidences of
ownership by the Borrower (or a Subsidiary) of property
acquired with such proceeds, completion certificates, waivers
of mechanic's liens, etc.
The Collateral Agent shall, pending disbursement or
application of funds in accordance with the terms of this Section 6.09,
hold any insurance proceeds (and other funds deposited with it pursuant
to clause (ii) above) deposited with it in an interest bearing account
as to which the Collateral Agent shall not be liable in any respect to
Borrower for any investment results. Interest thereon shall be held and
disposed of in the same manner as other monies held by the Collateral
Agent under this Section 6.09. On each anniversary date of this
Agreement, Borrower shall provide Agent with a summary of each
insurance policy satisfactory to Agent reflecting the insurance
coverage required under this Section 6.09 (together with complete
copies of any insurance policies which Agent may request promptly after
such request but not later than six months after such request). In the
event of foreclosure of any mortgage or deed of trust in favor of
Collateral Agent encumbering the Properties or transfer of title to the
Properties in lieu of foreclosure, all right, title and interest of
Borrower in and to any insurance policies then in force with respect to
the Properties (other than liability policies of Borrower) shall pass
to the purchaser, grantee or assignee. In the event of any taking of
any portion of any of the Properties by condemnation, seizure or
appropriation by any governmental authority which does not constitute
an Event of Default hereunder, all awards or proceeds on account of
said taking shall be collected and applied in the same manner and shall
be subject to the same conditions precedent to the disbursement thereof
as applicable to insurance proceeds under this Section 6.09.
Notwithstanding the foregoing, the rights of the Agent and the Banks
under this paragraph (a) with respect to property and casualty
insurance proceeds relating to loss, destruction or damage, or a taking
of, real property (x) leased by the Borrower or any of its Subsidiaries
or (y) which is subject to a mortgage lien which is prior to the lien
of any Mortgage in favor of the Collateral Agent thereon, and for which
in either case the Collateral Agent is named as loss payee, shall be
subordinate to the rights, if any, of the owner of such real property
or the holder of such prior mortgage lien to the extent such owner or
holder is also named as loss payee; and
<PAGE> 60
54
(b) in an amount not less than One Hundred Million Dollars
($100,000,000) for general liability coverage, including both bodily
injury and property damage, on a per occurrence basis (the "Minimum
Liability Coverage"), provided, however, that the Minimum Liability
Coverage may be reduced from time to time to a coverage limit of not
less than Twenty-Five Million Dollars ($25,000,000) on a per occurrence
basis (the "Lowered Coverage") if, within thirty (30) days prior to the
expiration of any Minimum Liability Coverage policy, and thereafter
within thirty (30) days after the end of each fiscal year of Borrower
until the Minimum Liability Coverage is reinstated, Borrower delivers
to Agent a certificate signed by the chief operating officer of
Borrower stating that Borrower has obtained a lesser amount of
coverage, setting forth the amount thereof, and that Borrower was
unable to obtain Minimum Liability Coverage and was able to obtain
general liability coverage only in the amount set forth in the
Borrower's certificate; provided, further, however, that the Lowered
Coverage may be reduced from time to time to a coverage limit of not
less than Twenty-Five Million Dollars ($25,000,000) on a "claims made"
basis if, within thirty (30) days prior to the expiration of any
Lowered Coverage policy and thereafter within thirty (30) days after
the end of each fiscal year of Borrower until the Minimum Liability
Coverage is reinstated, Borrower delivers to Agent a certificate signed
by the chief operating officer of Borrower stating that Borrower has
obtained a lesser amount of coverage, setting forth the amount thereof,
and that Borrower was unable to obtain Minimum Liability Coverage or
Lowered Coverage and was able to obtain general liability coverage only
in the amount set forth in the Borrower's certificate.
6.10 ADEQUATE BOOKS. Maintain adequate books, accounts and
records in accordance with GAAP, and at any reasonable time upon reasonable
notice, during normal business hours, permit employees or agents of each Bank at
any reasonable time to inspect its properties and examine or audit its books,
accounts and records and make copies and memoranda thereof.
6.11 ERISA. Make prompt payment contributions required to meet
the minimum funding standards of ERISA (including any funding waivers granted
thereunder) or as required pursuant to a collective bargaining agreement and to
maintain, and cause each of its ERISA Affiliates to maintain, each employee
benefit plan (as defined in Section 3(3) of ERISA) as to which it may have any
liability in material compliance with all applicable requirements of law and
regulations.
6.12 INTEREST COVERAGE. At the end of any fiscal quarter of
the Borrower set forth below, maintain a ratio of (i) Consolidated Adjusted
EBITDA to (ii) Consolidated Interest Expense, for any period of four consecutive
fiscal quarters of the Borrower then ended, commencing with such period ending
December 31, 1997, equal to or greater than the following:
<TABLE>
<CAPTION>
=============================================================================
QUARTER ENDING MINIMUM REQUIRED
- -----------------------------------------------------------------------------
<S> <C>
December 31, 1997 through 1.40x
September 30, 1998
- -----------------------------------------------------------------------------
December 31, 1998 through 1.70x
September 30, 1999
- -----------------------------------------------------------------------------
December 31, 1999 through 1.95x
September 30, 2000
- -----------------------------------------------------------------------------
</TABLE>
<PAGE> 61
55
<TABLE>
<CAPTION>
<S> <C>
December 31, 2000 and 2.20x
thereafter
=============================================================================
</TABLE>
6.13 1997 SUBORDINATED NOTES. To the extent that any 1993
Subordinated Notes remain outstanding on the date of this Agreement, such
remaining 1993 Subordinated Notes shall be redeemed and cancelled by the
Borrower prior to January 31, 1998.
6.14 HAZARDOUS MATERIALS. (a) Conduct, and cause each
Subsidiary to conduct, its operations and keep and maintain its property in
compliance with all Hazardous Materials Laws (except to the extent that failure
to comply with such Hazardous Materials Laws would not have a material adverse
effect on the business, operations, properties, assets or financial condition of
Borrower and its Subsidiaries taken as a whole).
(b) Conduct, and cause to be conducted, the ongoing operations
of Borrower and its Subsidiaries in a manner that will not give rise to the
imposition of liability, or require expenditures, under or in connection with
any Hazardous Materials Law (except for any liabilities or expenditure which, in
the aggregate, would not have a material adverse effect on the business,
operations, properties, assets or financial condition of Borrower and its
Subsidiaries taken as a whole).
(c) Agent and its agents and representatives shall have the
right at any reasonable time to enter and visit the property (whether owned or
leased) of Borrower or any of its Subsidiaries for the purpose of observing such
property. Agent is under no duty, however, to visit or observe any such
property, and any such acts by Agent shall be solely for the purposes of
protecting Banks' security and preserving Banks' rights under the Collateral
Documents. No site visit or observation by Agent shall result in a waiver of any
default of Borrower or any Subsidiary or impose any liability on Agent or Banks.
In no event shall any site visit or observation by Agent be a representation
that Hazardous Materials are or are not present in, on, or under such property,
or that there has been or shall be compliance with any Hazardous Materials Laws.
Neither the Borrower nor any other party is entitled to rely on any site visit
or observation by Agent. Agent owes no duty to inform Borrower or any other
party of any Hazardous Materials or any other adverse condition affecting any
such property. Agent shall not be obligated to disclose to Borrower or any other
party any report or findings made as a result of, or in connection with, any
site visit or observation by Agent. In each instance, Agent shall give Borrower
reasonable notice before entering any such property. Agent shall make reasonable
efforts to avoid interfering with the use of any such property in exercising any
rights provided in this Section 6.14.
(d) At the Collateral Agent's reasonable request, which the
Collateral Agent may make at all reasonable times and from time to time,
Borrower shall cause Phase I environmental audits of the Properties on which the
Collateral Agent has Liens to be conducted by technical consultants acceptable
to the Collateral Agent and detailed written reports thereof to be furnished to
the Collateral Agent, for its benefit, all in a form acceptable to the
Collateral Agent, PROVIDED that no more than one such audit may be required for
any property unless at any time the Collateral Agent reasonably determines that
a material change in the environmental condition of such property may have
occurred. In the event said Phase I environmental audits disclose any
environmental condition of any of the Properties which could cause a material
violation of the Hazardous Materials Laws, Borrower shall cause a Phase II
environmental audit of the applicable Property to be conducted by said technical
consultant acceptable to the Collateral Agent and a detailed written report
thereof to be furnished to the Collateral Agent. Borrower shall take all
reasonable remedial measures indicated in said Phase II environmental audit
necessary to be in compliance with law. If Borrower fails to obtain said Phase I
<PAGE> 62
56
or Phase II environmental audits as aforesaid, the Collateral Agent may, but
shall not be obligated to, cause said Phase I or Phase II environmental audits
to be conducted at Borrower's sole cost.
(e) Borrower hereby acknowledges that nothing in this Section
is either intended to or actually does give Collateral Agent or the Banks
control of Borrower's or its Subsidiaries' or the Scandinavian Partnerships'
Properties or business or any of its or their business decisions.
6.15 LEVERAGE RATIO. Maintain the Leverage Ratio at the end of
each fiscal quarter of the Borrower set forth below at a level not to exceed the
level set forth opposite such period:
<TABLE>
<CAPTION>
=============================================================================
QUARTER ENDING MAXIMUM REQUIRED
- -----------------------------------------------------------------------------
<S> <C>
December 31, 1997 through 3.90x
September 30, 1998
- -----------------------------------------------------------------------------
December 31, 1998 through 3.60x
September 30, 1999
- -----------------------------------------------------------------------------
December 31, 1999 through 2.75x
September 30, 2000
- -----------------------------------------------------------------------------
December 31, 2000 and thereafter 2.50x
=============================================================================
</TABLE>
For the purpose of calculating the Leverage Ratio for the
fiscal quarter ending December 31, 1997, Consolidated Total Funded Debt shall
exclude the aggregate principal amount of any 1993 Subordinated Notes which were
outstanding on the date hereof.
6.16 REAL ESTATE TAXES. Borrower shall pay and discharge, and
shall cause its Subsidiaries and the Scandinavian Partnerships to pay and
discharge, as and when due and payable, before any penalty attaches, all
charges, impositions, levies, assessments and taxes (whether general, special or
otherwise), water charges, sewer service charges and all other municipal or
governmental charges, impositions, levies, assessments and taxes of any kind or
nature that may be at any time levied, assessed or imposed upon or against any
real property owned in fee by any Subsidiary or the Scandinavian Partnerships or
in which any Subsidiary has a leasehold interest (but only to the extent
Borrower or any Subsidiary is required to pay such taxes in accordance with the
terms of the lease), and shall promptly deliver to Collateral Agent upon
Collateral Agent's request therefor, duplicate receipts evidencing payment
thereof prior to delinquency. Notwithstanding anything to the contrary in the
foregoing, Borrower may contest any tax imposed, assessed, levied or due with
respect to or from said real property, by instituting and diligently and in good
faith prosecuting by appropriate judicial proceedings the validity or amount of
a tax, charge, imposition or assessment (said tax, charge, imposition or
assessment being hereinafter referred to in this Section as "impositions") if
(i) the contest or decision relating thereto will not and cannot result in the
forfeiture of said real property or the Subsidiary's leasehold interest therein
prior to or pending resolution of such contest and the invalidity, forfeiture,
loss of priority or unenforceability of Collateral Agent's mortgage lien on said
real property or the Subsidiary's leasehold interest therein will not and cannot
result from such contest or failure to pay such impositions, (ii) no Event of
Default shall exist hereunder, and (iii) prior to commencement and during the
duration of such proceeding, Borrower shall maintain adequate reserves on
account of the failure to pay such imposition and/or the contest of the amount
and/or validity thereof. Upon resolution of such contest, Borrower shall
promptly pay the impositions then due. If, at any time during the continuance of
the contest described in the preceding sentence, said real property or the
<PAGE> 63
57
Subsidiary's leasehold interest therein is, in Collateral Agent's reasonable
determination, in imminent danger of being forfeited, lost or rendered invalid
or unenforceable, then, in any of said events, Borrower shall, at Collateral
Agent's demand, use the aforesaid reserve to pay such impositions and if such
reserve is insufficient to pay in full the required payment, Borrower promptly
shall pay the amount of such insufficiency.
6.17 ADDITIONAL REAL ESTATE COLLATERAL. Within 60 days of the
date hereof, Borrower and the Subsidiaries shall have met each of the
requirements set forth in Sections 4.01(p)-(t) in connection with the real
property set forth on Schedule 6.17.
6.18 CONDITIONS SUBSEQUENT. Within the time periods specified
in Exhibit L, Borrower and the Subsidiaries shall perform the actions set forth
in such Exhibit L.
ARTICLE VII.
NEGATIVE COVENANTS
------------------
Borrower covenants and agrees that so long as the Credit shall
remain available, and until full and final payment of all Obligations, it will
not, and with respect to Sections 7.01, 7.02, 7.03, 7.04, 7.05, 7.06, 7.07,
7.08, 7.09, 7.10, 7.11, 7.13, 7.14 and 7.16, it will not permit any Subsidiary
to, unless Majority Banks waive compliance in writing:
7.01 INVESTMENTS AND RESTRICTED PAYMENTS. Except as otherwise
permitted herein, make any Investments in any Person or any Restricted Payments
except:
(a) Borrower or any Subsidiary may make Investments in any
Guarantor or in the Borrower;
(b) Any Subsidiary may make Restricted Payments to Borrower or
any Guarantor;
(c) Borrower may make Investments in Cash Equivalents;
(d) Investments may be made in the ordinary course of business
related to employees, such as payments in respect of relocation, travel
advances, and loans to employees to exercise stock options, all of
which Investments do not exceed in the aggregate at any one time One
Million Dollars ($1,000,000);
(e) Borrower or any Subsidiary may acquire on a friendly basis
at least 51% of each class of capital stock of any fitness center
located in the United States, provided that (i) such fitness center
shall immediately become a Guarantor and shall comply with Section 3.04
hereof, and (ii) the amount of any such acquisition shall be deemed a
Capital Expenditure for purposes of this Agreement (except to the
extent that the same represents the reinvestment of Reinvestment
Proceeds). As used in this Section 7.01(e), "fitness center" means any
corporation whose business is comparable to any of the businesses
currently operated by Borrower or any of its Subsidiaries (other than a
finance company);
(f) Borrower and its Subsidiaries may make mandatory
Investments in Funding Corp., and Funding Corp. may make required
Investments in the H&T Master Trust and HTCA, in each case pursuant to
and in accordance with the Receivables Program Documents;
<PAGE> 64
58
(g) (i) Investments in Foreign Subsidiaries and Lincoln
Indemnity Company existing on the Closing Date and (ii) additional
Investments in Foreign Subsidiaries and Lincoln Indemnity Company made
after the Closing Date in an aggregate amount (valued at the time of
the making thereof, and after taking into account any return after the
Closing Date from dividends, distributions and repayments in respect of
such Investments), at any time outstanding, not to exceed $5,000,000;
(h) Investments by the Borrower and its Subsidiaries in New
Ventures, Foreign Subsidiaries, Lincoln Indemnity Company,
non-Consolidated Subsidiaries and Unrestricted Subsidiaries after the
date hereof; PROVIDED that the aggregate amount of such Investments
made after the Closing Date (valued at the time of the making thereof,
and after taking into account any return after the Closing Date from
dividends, distributions and repayments in respect of such Investments)
does not exceed, at any one time outstanding, $20,000,000; PROVIDED
FURTHER that the cumulative outstanding Investment in any Subsidiary on
the date that such Subsidiary is converted to an Unrestricted
Subsidiary in accordance with the terms hereof shall be deemed an
Investment made on such conversion date in an Unrestricted Subsidiary
for purposes of determining compliance with this Section 7.01(h);
(i) Investments to the extent funded by common stock of the
Borrower or the proceeds thereof; and
(j) Investments consisting of cash reserves established, in
the ordinary course of the Borrower's and its Subsidiaries' business
and consistent with past practice, pursuant to the Credit Card Program
Agreement.
7.02 OTHER OBLIGATIONS. Except as provided in this Agreement,
create, incur, assume or permit to exist any Debt, or create, incur or enter
into any Guaranty of any Debt of any other Person, other than:
(a) the Secured Obligations;
(b) Any Debt existing on the Closing Date listed on Schedule
7.02(b) hereto, and any renewal, extension or refinancing of any
purchase money Debt listed on such Schedule (and identified as such on
such Schedule) that does not consist of any capitalization of interest
on the original Debt; PROVIDED, that the principal amount of such
renewal, extension or refinancing Debt (the "REFINANCING DEBT") shall
not exceed the principal amount of the original Debt listed on such
Schedule, the maturity date of each installment or principal of such
Refinancing Debt shall not be earlier than the maturity date of the
corresponding installment of the original Debt, and the Liens securing
the Refinancing Debt constitute "Permitted Liens" under clause (iv) of
the definition of such term;
(c) Standby letters of credit obtained in the ordinary course
of business;
(d) Debt of Borrower to any of its Subsidiaries and of any
Guarantor to Borrower or any other Guarantor;
(e) Debt under revolving credit commitments or letter of
credit commitments made available by banks or other financial
institutions otherwise than under this Agreement to the extent that the
Commitment Amount shall have been permanently reduced by the amount of
such revolving
<PAGE> 65
59
credit commitments or letter of credit commitments on the date such
revolving credit commitments or letter of credit commitments are
incurred and the terms of such revolving credit commitments or letter
of credit commitments are reasonably satisfactory to the Majority Banks
in all material respects;
(f) additional Debt (including Guarantees of Debt permitted
under paragraph (g) of Section 7.02 to the extent such Guarantee would
be in excess of the amount permitted by paragraphs (g) hereof) incurred
or assumed by the Borrower and its Subsidiaries in an aggregate
principal amount not to exceed $30,000,000; PROVIDED that (x) if the
Leverage Ratio of the Borrower at the end of any fiscal quarter of the
Borrower after the Closing Date is less than 2.75 to 1.00, the
foregoing limitation shall thereafter be $40,000,000 and (y) if the
Leverage Ratio of the Borrower at the end of any fiscal quarter of the
Borrower after the Closing Date is less than 2.00 to 1.00, the
foregoing limitation shall thereafter be $50,000,000; PROVIDED,
FURTHER, that (i) such Debt is not secured by any property constituting
Collateral under the Collateral Documents (except to the extent that
such Debt may be secured by Liens described under clause (iv) of the
definition of "Permitted Liens") and (ii) before and after giving
effect to the incurrence of such Debt, no Default or Event of Default
shall have occurred and be continuing and PROVIDED, FURTHER, that
Guarantees of such Debt shall not be considered Debt for the purposes
of this paragraph (f) of this Section 7.02;
(g) Guarantees of Debt permitted under paragraph (b) of this
Section 7.02 in an aggregate amount not to exceed $7,000,000; and
(h) Debt incurred as an Investment permitted by Section 7.01.
7.03 OTHER SECURITY. Other than as expressly permitted under
Section 7.08, create, assume or suffer to exist any Lien on any of its or its
Subsidiaries' property, real or personal or mixed (including without limitation,
any leasehold interests), whether now owned or hereafter acquired, except
Permitted Liens and licenses of intellectual property pursuant to a Franchise
Program.
7.04 SUBORDINATED DEBT. (a) Pay interest, principal, or
premium on any Subordinated Debt (other than the Subordinated Notes) if at the
time of such payment or proposed payment there has occurred and is continuing
under this Agreement, or if as a result of any such payment or proposed payment
there would occur, a Default or an Event of Default;
(b) Pay interest, principal or premium on the 1997
Subordinated Notes in violation of Article Thirteen of the 1997 Indenture, or
make any payment thereunder or with respect to any other Subordinated Debt to
any holder or the trustee named therein prior to one (1) Banking Day preceding
the times set forth therein for the payment of same, or make any payment,
purchase or redemption of the 1997 Subordinated Notes pursuant to Article Four,
Five, Ten, Eleven, Twelve or Thirteen of the 1997 Indenture or deliver any
notice to the trustee under the Indenture or the holders of the 1997
Subordinated Notes of its intention to make any such payment, purchase or
redemption, or make any "Company Request" under Section 12.1 of the 1997
Indenture;
(c) Amend or waive the Indenture, the Subordinated Notes or
any other agreement relating to Subordinated Debt without first obtaining the
consent of Majority Banks; or
(d) Prepay, redeem, defease, purchase or repurchase all or any
part of any Subordinated Debt including, but not limited to, the Subordinated
Notes (other than as permitted by Section 7.09(a) hereof), or take any action to
effect the foregoing, without the consent of all the Banks; PROVIDED that,
notwithstanding any other provision contained in this Section 7.04, the Borrower
shall redeem and
<PAGE> 66
60
cancel the 1993 Subordinated Notes prior to January 31, 1998 pursuant to the
terms of the 1993 Indenture.
7.05 LIQUIDATION; MERGER. Liquidate or dissolve, or enter into
any consolidation, merger, partnership, joint venture or other combination, or
sell, lease or dispose of its business or assets as a whole or in an amount
which constitutes a substantial portion thereof; PROVIDED, HOWEVER, that (a) any
Subsidiary may merge into, consolidate with or transfer its business or assets
to Borrower or any other Subsidiary (so long as such acquiring Subsidiary is a
Guarantor) pro rata, to the extent owned by Borrower or such Subsidiary, (b)
Borrower may merge with any other corporation so long as Borrower is the
surviving corporation and no Default or Event of Default would exist under this
Agreement after giving effect to such merger, (c) any Subsidiary may liquidate
or dissolve if upon such liquidation or dissolution all or substantially all of
the business or assets of such Subsidiary are distributed to Borrower or any
other Subsidiary (so long as such transferee Subsidiary is also a Guarantor) pro
rata, to the extent owned by Borrower or such Subsidiary, and (d) in the event
that a Subsidiary has distributed its business or assets to Borrower or any
Subsidiary pursuant to Section 7.05(c), neither Borrower nor any Subsidiary
shall be required to preserve any right, license, or franchise of such
Subsidiary or the corporate existence of such Subsidiary if the Board of
Directors of Borrower or the Subsidiary to which the business or assets of such
Subsidiary were distributed shall determine that the preservation thereof is no
longer desirable and that the loss thereof is not adverse in any material
respect to Banks.
7.06 CAPITAL EXPENDITURES. During any fiscal year of Borrower,
permit the aggregate amount of Capital Expenditures (including amounts expended
for acquisitions permitted by Section 7.01(e)) of Borrower and its Subsidiaries
to exceed $50,000,000; PROVIDED that (i) up to $5,000,000 of any unused amount
in any fiscal year may be carried forward to the next year only and (ii) up to
$5,000,000 for any fiscal year may be carried backward to the immediately
preceding fiscal year (provided that any amounts so carried backward from a
fiscal year shall be deducted from the amount of Capital Expenditures allowed
pursuant to this Section 7.06 during such fiscal year); PROVIDED FURTHER that
Capital Expenditures financed with the capital stock of the Borrower (or the
proceeds from the sale thereof) shall be excluded in determining the foregoing
limitation.
7.07 CHANGE IN BUSINESS. Engage in any business activities or
operations substantially and materially different from or unrelated to business
activities existing on the Closing Date; PROVIDED, HOWEVER, that this Section
7.07 shall not prohibit the Borrower or its Subsidiaries from managing non-owned
fitness centers or providing payment, processing and collection services for
non-owned fitness centers, or from commencing and operating a Franchise Program,
or from operating a captive insurance company.
7.08 DISPOSAL OF ASSETS. Dispose of any accounts receivable,
any fixed or capital assets (including, without limitation, the entering into of
any sale and leaseback agreement covering any of its fixed or capital assets),
any Capital Stock of Subsidiaries or any Intangible Assets, or enter into any
license, franchise or sublease arrangements; PROVIDED, however, that:
(a) dispositions of assets among and between Borrower and the
Guarantors shall not be prohibited hereunder;
(b) the Borrower and its Subsidiaries may dispose of the
Receivables Program Receivables on the terms and subject to the
conditions set forth in the Receivables Program Documents, PROVIDED
that none of such Receivables Program Receivables may be so disposed of
for the purpose of supporting any series of Receivables Program
Certificates other than the 1996-1 Certificates or other Receivables
Program Certificates permitted under this Agreement without the prior
consent of the Majority Banks;
<PAGE> 67
61
(c) to the extent the Borrower or any Subsidiary may at any
time be a party to the Credit Card Program Agreement, licensing
arrangements contemplated by the Credit Card Program Agreement shall
not be prohibited under this Section 7.08;
(d) Borrower or any Subsidiary may dispose of accounts
receivable, fixed or capital assets (including, but not limited to (i)
disposition of any interest in the Exchangeable Transferor Certificate
(including, but not limited to, any such disposition in connection with
any issuance of any additional series of Receivables Program
Certificates permitted under this Agreement) and (ii) dispositions by
sale and leaseback agreements covering fixed or capital assets),
capital stock or Intangible Assets, or enter into any license,
franchise or sublease arrangement (other than pursuant to a Franchise
Program), so long as the proceeds of such disposition, to the extent
the same constitutes Reinvestment Proceeds, shall be applied to the
acquisition of replacement assets of a like kind as the assets so
disposed of, and otherwise the proceeds of such disposition shall be
applied to the permanent reduction of the Commitment Amount, the
Revolving Credit Commitment Amount and L/C Commitment Amount, and the
prepayment of the Advances and the cash collateralization of the
Letters of Credit, as set forth in Section 2.08; PROVIDED, HOWEVER,
that (i) Borrower or any Subsidiary may dispose of surplus or obsolete
equipment or fixtures in the ordinary course of business, and up to One
Million Dollars ($1,000,000) per year of the proceeds of such
dispositions shall not be subject to the requirements of this Section
7.08(d) and (ii) Borrower and its Subsidiaries may license certain
rights with respect to its trade name or other intellectual property
pursuant to franchising arrangements permitted by Section 7.08(e) and
the proceeds of such license and franchise activities shall not be
subject to the requirements of this Section 7.08(d);
(e) Borrower and its Subsidiaries may license certain rights
with respect to its trade name and other intellectual property (i) to
franchisees for the operation of health clubs pursuant to a Franchise
Program and (ii) for other purposes intended to generate proceeds to
the Borrower; and
(f) Borrower and its Subsidiaries may sell assets (and related
liabilities) consisting of health and fitness clubs to Persons which
simultaneously become franchisees pursuant to a Franchise Program;
PROVIDED that (i) such assets are sold at their net fair market value
(taking into account the amount of such liabilities) and (ii) the
aggregate net cash proceeds arising from such sales does not exceed
$2,000,000.
7.09 LIMITATION ON OPTIONAL PAYMENTS AND MODIFICATIONS OF DEBT
INSTRUMENTS AND RECEIVABLES PROGRAM DOCUMENTS. Without limitation of any
obligation under any other Section of this Article VII:
(a) make any optional payment or prepayment on or redemption
or purchase or defeasance of any Debt or make or set aside any sinking
fund payments with respect to any Debt (other than the Advances and
reimbursement obligations in respect of any Letter of Credit);
PROVIDED, HOWEVER, Borrower or its Subsidiaries may prepay or make
optional payments on any purchase money Debt or Capitalized Leases
where the Agent, for the benefit of the Banks, is granted a Lien in the
relevant asset of the Borrower or its Subsidiary, as the case may be,
in the amount of such prepayment or optional payment; PROVIDED FURTHER,
HOWEVER, the Borrower shall be permitted to redeem or prepay (i) the
1993 Subordinated Notes pursuant to Section 7.04(d), (ii) the 1997
Subordinated Notes from the proceeds of a public offering of the
Borrower's common stock after the Closing Date, to the extent permitted
by the "equity clawback" provision set forth in Section 11.1(b) of the
1997 Indenture, and (iii) Debt existing on the date hereof and
identified on Schedule 7.09(a);
<PAGE> 68
62
(b) amend, modify or change in any material respect, or
consent or agree to any such amendment, modification or change to, any
of the terms of any such Debt (other than any such amendment,
modification or change to the terms of any Debt which would extend the
maturity or reduce the amount of any payment of principal thereof or
which would reduce the rate or extend the date for payment of interest
thereon); or
(c) amend, modify or change, or consent or agree to any
amendment, modification or change to the Receivables Program Documents
which would affect the amortization of the Receivables Program
Certificates thereunder, the collateral thereunder, the sale of
Receivables Program Receivables at a discount, or the interest rate
applicable to the Receivables Program Certificates or the Exchangeable
Transferor Certificate (other than any such amendment, modification or
change which would extend the maturity or reduce the amount of payment
of principal on the affected Receivables Program Certificates or which
would reduce the rate or extend the time of payment of any interest
thereon, or would not increase any amount of schedulized amortization
for any period prior to the Termination Date); PROVIDED that the
aggregate principal amount of the Receivable Program Certificates can
be increased if (i) such increase is in connection with a corresponding
increase in the amount of Receivable Program Receivables sold in the
Receivables Program, (ii) the terms governing such additional
Receivable Program Certificates are substantially similar to, or no
less favorable to the Borrower and its Subsidiaries than, the existing
Receivable Program Certificates and (iii) no part of such increased
amount has a scheduled amortization prior to the Termination Date; or
(d) permit any series of Receivables Program Certificates to
be issued other than the 1996-1 Certificates or as contemplated by the
proviso to the preceding paragraph (c), except that a series of
Receivables Program Certificates may be issued to replace or refinance
the 1996-1 Certificates in whole or in part (such new series of
Receivables Program Certificates, a "REFINANCING SERIES" and such new
Receivables Program Certificates, "REFINANCING CERTIFICATES") if (y)
such Refinancing Series contains no material covenants and no Payout
Events not applicable to the 1996-1 Certificates and each of the
covenants and defaults contained in the supplement creating such
replacement series are not materially more burdensome or restrictive
than those covenants contained in the 1996-1 Supplement and (z) no
scheduled amortization of such replacement series shall be scheduled to
occur prior to the Termination Date in amounts in excess, for any
period prior to the Termination Date, than that scheduled for the
1996-1 Certificates.
7.10 LIMITATION ON TRANSACTIONS WITH AFFILIATES. Enter into
any transaction, including, without limitation, any purchase, sale, lease or
exchange of property or the rendering of any service, with any Affiliate (other
than a Subsidiary) unless such transaction is (a) otherwise permitted under this
Agreement, and (b) upon fair and reasonable terms no less favorable to the
Borrower or such Subsidiary, as the case may be, than it would obtain in a
comparable arm's length transaction with a Person which is not an Affiliate.
7.11 LIMITATION ON SALES AND LEASEBACKS. Enter into
arrangements providing for the leasing by the Borrower or any Subsidiary of real
or personal property which has been or is to be sold or transferred by the
Borrower or such Subsidiary to a third person on the security of such property
or rental obligations of the Borrower or such Subsidiary if the net proceeds
from sale or transfer with respect to such arrangements exceed, in the
aggregate, $10,000,000.
7.12 LIMITATION ON CHANGES IN FISCAL YEAR. Permit the fiscal
year of the Borrower to end on a day other than December 31.
<PAGE> 69
63
7.13 FUNDING CORP. (a) Permit Funding Corp. to (i) assume,
guarantee or otherwise become liable in any manner with respect to any Debt
other than Debt arising under the Purchase Agreement, (ii) consolidate or merge
with any Person, (iii) purchase or acquire any business or property other than
receipt or purchase of Receivables Program Receivables under the Purchase
Agreement for transfer to the H&T Master Trust under the Pooling & Servicing
Agreement, (iv) make any Investment in any Person other than Investments in the
H&T Master Trust and HTCA pursuant to the Receivables Program Documents, (v)
conduct any business other than the transactions required to be performed by it
under the Receivables Program Documents, or (vi) create, assume or suffer to
exist any Lien on any of its property (including, without limitation, any
Released Amounts (as defined in the Pooling & Servicing Agreement)), whether now
owned or hereafter acquired, except Liens pursuant to, and in accordance with
the terms of, the Receivables Program Documents.
(b) Fail to cause the management, business and affairs of
Funding Corp. to be conducted in a manner as required by the Receivables Program
Documents and consistent with the assumptions set forth in the opinion of
Winston & Strawn delivered in connection with the Pooling & Servicing Agreement
relating to the issue of whether Funding Corp. would be substantively
consolidated with HTCA in a bankruptcy of HTCA.
7.14 UNRESTRICTED SUBSIDIARIES. (a) Create or otherwise
designate any Subsidiary as an Unrestricted Subsidiary unless the terms set
forth in the definition of Unrestricted Subsidiary are complied with respect to
such Subsidiary and no Default or Event of Default then exists (unless the
creation or designation of the Unrestricted Subsidiary would cure the Default or
Event of Default) or would result from the designation, creation and operation
of such Unrestricted Subsidiary.
(b) Without the prior written consent of the Majority Banks,
change the characterization of a Subsidiary from a Subsidiary to an Unrestricted
Subsidiary or an Unrestricted Subsidiary to a Subsidiary; PROVIDED HOWEVER, the
prior written consent of the Majority Banks shall not be required if (A) no
Default or Event of Default shall have occurred and be continuing at such time
or would result therefrom, (B) after giving effect to such re-characterization,
each of the representations and warranties made by in the Borrower in or
pursuant to this Agreement or the Collateral Documents shall be true and correct
in all material respects as of the date of such re-characterization, (C) if
re-characterized as a Subsidiary, such Subsidiary shall have complied with the
provisions of Article III as if it were a new Subsidiary and (D) the Borrower
provides the Agent five Banking Days advance written notice of its intent to
re-characterize such Subsidiary.
(c) Permit any Unrestricted Subsidiary to fail to comply with
the requirements set forth in the definition of "Unrestricted Subsidiary."
7.15 TAX ALLOCATION AND INDEMNITY AGREEMENT. Amend, modify or
change, or consent or agree to any amendment, modification or change to the Tax
Allocation and Indemnity Agreement in any manner which is materially adverse to
the Banks.
7.16 HEALTH & TENNIS (UK) LIMITED. For so long as Health &
Tennis (UK) Limited is a Subsidiary, permit Health & Tennis (UK) Limited to own
assets with a value in excess of $100,000 unless, prior to owning such assets,
65% of the Capital Stock of Health & Tennis (UK) Limited is pledged to the
Collateral Agent for the benefit of the Banks and the Operating Banks pursuant
to documentation reasonably acceptable to the Collateral Agent.
ARTICLE VIII.
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EVENTS OF DEFAULT
-----------------
If one or more of the following events (herein called "Events
of Default") shall occur and be continuing:
8.01 NONPAYMENT. (a) Borrower shall fail to pay, when due, any
portion of principal or interest due hereunder or under the Notes in accordance
with the terms hereof or thereof; or
(b) Borrower shall fail to pay, when due, any fees,
commissions or any other sum due hereunder in accordance with the terms hereof.
8.02 REPRESENTATION OR WARRANTY. Any representation or
warranty made by Borrower or any Subsidiary herein or in any other Credit
Document or in any agreement, instrument or certificate executed or delivered to
Banks, Agent or the Collateral Agent pursuant hereto or in connection with any
transaction contemplated here shall prove to have been false or misleading in
any material respect when made or when deemed to have been made;
8.03 LIENS. (a) Any involuntary lien or liens securing payment
of the aggregate sum of One Million Dollars ($1,000,000) or more, of any kind or
character, except for Permitted Liens, shall attach to any assets or property of
Borrower or any Subsidiary, if such lien is not discharged or execution thereon
is not stayed within thirty (30) days after the date of the notice of
attachment, or (b) any lien or liens for taxes, assessments, governmental
charges or levies, in the aggregate sum of One Million Dollars ($1,000,000) or
more shall attach to any assets or property of Borrower or any Subsidiary if
such lien is not discharged within thirty (30) days after the date of the filing
thereof or attachment (or in the case of real estate tax liens, the date on
which such real estate taxes are due);
8.04 JUDGMENTS. There shall be entered against Borrower or any
of its Subsidiaries one or more judgments (or any judgment against an ERISA
Affiliate, if such judgment is in favor of a Multiemployer Plan) in excess of
One Million Dollars ($1,000,000) in the aggregate at any one time outstanding
excluding those judgments (i) that have been outstanding less than thirty (30)
calendar days from the entry thereof, (ii) for not more than Five Million
Dollars ($5,000,000) during the time which a stay of enforcement of such
judgment is in effect by reason of a pending appeal or otherwise or (iii) for
and to the extent which Borrower or such Subsidiary is insured and with respect
to which the insurer has admitted liability in writing.
8.05 VOLUNTARY BANKRUPTCY. Borrower or any Guarantor shall
fail to pay, or admit in writing its inability to pay, its debts generally as
they come due, or shall file any petition or action for relief under any
bankruptcy, reorganization, insolvency or moratorium law, or any other law or
laws for the relief of, or relating to, debtors, or Borrower or any Guarantor
shall take any corporate action to authorize, or in furtherance of, any of the
foregoing.
8.06 INVOLUNTARY BANKRUPTCY. Involuntary petition shall be
filed under any bankruptcy statute against Borrower or any Guarantor, or a
custodian, receiver, trustee, assignee for the benefit of creditors (or other
similar official) shall be appointed to take possession, custody or control of
the properties of Borrower or any Guarantor, unless such petition or appointment
is set aside or withdrawn or ceases to be in effect within sixty (60) days from
the date of said filing or appointment.
8.07 REGULATORY ACTION. Any governmental regulatory authority
shall take action which will materially and adversely affect Borrower's
consolidated condition, operations or ability to repay the Obligations unless
such action is set aside, dismissed or withdrawn within sixty (60) days of its
institution or such action is being contested in good faith and its effect is
stayed during such contest.
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8.08 CHANGE OF CONTROL EVENT. A Change of Control Event shall
occur.
8.09 GOVERNMENT APPROVALS. Any approval, consent, exemption or
other action of any governmental authority or any other Person required under
this Agreement is withdrawn or becomes ineffective and the absence thereof would
materially and adversely affect Borrower's consolidated condition, operations or
ability to repay the Obligations and no reinstatement of same shall occur within
thirty (30) days after such withdrawal or ineffectiveness.
8.10 CROSS DEFAULT. Any breach or default shall occur with
respect to any Debt or any operating lease agreement in excess of Two Million
Dollars ($2,000,000) (except with respect to Debt under this Agreement)
individually or in the aggregate, under which Borrower or any of its
Subsidiaries may be obligated as borrower or guarantor, if such breach or
default consists of the failure to pay any such indebtedness when due whether by
acceleration or otherwise (and remains uncured or continues beyond any
applicable grace period) or if such breach or default results in or permits (or,
with the passage of time, the giving of notice or both, may permit) the
acceleration of any such indebtedness of or the termination of any commitment to
lend to Borrower or any such Subsidiary.
8.11 ERISA. (a) The occurrence of a Termination Event with
respect to one or more Plans and/or one or more Multiemployer Plans if
Borrower's maximum liability (as measured, (A) in the case of a Termination
Event described in clauses (i) through (iii) of the definition of "Termination
Event", by the amount by which plan assets are insufficient to satisfy benefit
liabilities upon termination under ERISA with respect to each Plan as to which
such Termination Event has occurred, (B) in the case of a Termination Event
described in clause (iv) of said definition, by the withdrawal liability under
Section 4063 of ERISA with respect to each Plan as to which such Termination
Event has occurred, and (C) in the case of a Termination Event described in
clause (v) of the definition of "Termination Event", by the excess, if any of
(i) the aggregate of annual contributions due or paid during a plan year plus
payments and interest due or paid pursuant to Section 4219 of ERISA during the
same plan year, with respect to each Multiemployer Plan as to which a
Termination Event has occurred, over (ii) the annual contribution amount due or
paid for such Multiemployer Plan for the plan year preceding the plan year in
which such Termination Event occurred) which could arise upon the occurrence of
all such Termination Events that occur within a twelve consecutive month period
exceeds One Million Dollars ($1,000,000); or
(b) The aggregate withdrawal liability which could be incurred
under Section 4201 of ERISA of Borrower and all ERISA Affiliates, collectively,
upon a complete withdrawal, within the meaning of Section 4203 of ERISA, from
each and all Multiemployer Plans to which each is or has contributed within the
past five calendar years, plus the aggregate of the excess of benefit
liabilities, within the meaning of Section 4001(a)(16) of ERISA, of each Plan
upon termination of such Plan over the assets of such Plan, exceeds Five Million
Dollars ($5,000,000).
8.12 SPECIFIC DEFAULTS. (i) Borrower shall fail duly and
promptly to perform or observe any term or provision specified in any of
Sections 6.01, 6.02(e), 6.05, 6.06, 6.12, 6.13 or 6.15 or Article VII hereof or
(ii) Borrower shall fail to perform or observe any term or provision specified
in Section 6.09 and shall not remedy such failure to perform or observe any term
or provision specified in such Section 6.09 within 10 calendar days.
8.13 GUARANTEE AND COLLATERAL AGREEMENT; IMPAIRMENT OF
COLLATERAL DOCUMENTS. (a) Any breach or default shall occur under the Guarantee
and Collateral Agreement or the Guarantee and Collateral Agreement shall be
revoked by, or become ineffective as to, the Borrower or any Guarantor;
provided, however, that any merger, liquidation, consolidation or transfer of
any Guarantor with any
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66
other Guarantor or Borrower in accordance with Section 7.05(c) or Section
7.05(d) shall not constitute an Event of Default under this Agreement;
(b) (i) any provision of any Collateral Document (other than
the collateral assignments of tenant's rights in leases) necessary for the
practical realization of the substantial benefits thereof shall for any reason
cease to be valid and binding on or enforceable against Borrower or any
Subsidiary or Borrower or any Subsidiary shall so state in writing or bring an
action to limit its obligations or liabilities thereunder; or
(ii) any of the Collateral Documents shall for any reason
(other than pursuant to the terms thereof) cease to create a valid security
interest in the Collateral purported to be covered thereby or such security
interest shall for any reason cease to be a perfected security interest having
the priority purported to be created by such Collateral Document (other than by
or as a result of any action by the Collateral Agent).
8.14 CONDEMNATION. Any governmental authority shall condemn,
seize or appropriate any property of Borrower or any Subsidiary if the fair
market value of the property prior to being condemned, seized or taken is equal
to or greater than Five Million Dollars ($5,000,000) and if such governmental
authority fails to compensate such entity for such taking within one (1) year
after such entity loses quiet enjoyment of such property due to such taking in
an amount at least equal to the fair market value as a going concern of the
property taken.
8.15 PAYOUT EVENT. A "Payout Event" (as defined in the Pooling
& Servicing Agreement or in the 1996-1 Supplement to the Pooling & Servicing
Agreement including the occurrence of a Series 1996-1 Pay-Out-Event under
Section 7 thereof, or any future supplement to the Pooling and Servicing
Agreement) shall have occurred with respect to the 1996-1 Certificates or any
other Receivables Program Certificates, whether or not the occurrence or
continuance of such Payout Event has been waived.
8.16 ACTUAL OR ASSERTED INVALIDITY. (i) This Agreement, any
Note, any Collateral Document or any instrument or certificate executed or
delivered to Banks, the Agent or the Collateral Agent pursuant to this Agreement
or in connection with any transaction contemplated herewith shall cease, for any
reason (other than solely as a result of any action or inaction on the part of
the Agent or any of the Banks), to be in full force and effect, or the Borrower
or any of its Affiliates shall so assert or (ii) any Lien created thereby or
subordination provision therein shall cease to be enforceable and of the same
effect and priority purported to be created thereby as a result of any action or
inaction on the part of the Borrower or any of its Affiliates.
8.17 OTHER DEFAULTS. Borrower or any Subsidiary shall breach,
or default under, any term, condition, provision, covenant, representation or
warranty contained in this Agreement not specifically referred to in this
Article or in any Collateral Document, if such breach or default shall continue
for thirty (30) days after notice from Agent as required by Majority Banks;
THEN:
(a) In the case of an Event of Default other than one referred
to in Section 8.05 or 8.06 of this Article VIII, upon request of
Majority Banks to Agent, any obligation on the part of Banks to make or
continue the Credit or any obligation on the part of any Issuing Bank
to issue or amend any Letter of Credit shall terminate and, at the
further option of Majority Banks, Agent shall declare all sums of
principal and interest outstanding on the Credit and all other sums
outstanding under or in respect of this Agreement and the Notes
immediately due and
<PAGE> 73
67
payable, without notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor, or other notices or
demands of any kind or character (other than as stated in any of the
foregoing sections of this Article VIII), all of which are hereby
expressly waived by Borrower; and
(b) in the case of an Event of Default referred to in Section
8.05 or 8.06 of this Article VIII, Banks' obligations to make or
continue the Credit and the Issuing Banks' obligations to issue or
amend any Letter of Credit shall be automatically cancelled and all
sums of principal and interest on the Credit and all other sums
outstanding under or in respect of this Agreement and the Notes shall
automatically become immediately due and payable without notice of
default, presentment or demand for payment, protest or notice of
nonpayment or dishonor, all of which are hereby expressly waived by
Borrower.
Agent shall promptly advise Borrower of any declaration under clause (a), above,
but failure to do so shall not impair the effectiveness of such declaration.
Additionally, upon the occurrence of any Event of Default, Agent, at the request
of the Majority Banks, shall require Borrower to deposit immediately with Agent
cash collateral pursuant to documentation reasonably acceptable to the Agent,
for application against drawings under any Letter of Credit issued for
Borrower's account hereunder, in an amount equal to the undrawn amount of such
Letter of Credit. Any amount so deposited that is not applied to satisfy
drawings under such Letter of Credit will be repaid with interest (at Agent's
applicable certificate of deposit rate in effect on the date of such deposit) to
Borrower, provided that Banks have received all other amounts due to them under
this Agreement and the Notes. Borrower shall not make (or declare) any
Restricted Payments otherwise permitted under Section 7.01 if a Default or an
Event of Default has occurred and is continuing on the date of such payment (or
declaration), or would result from such payment (or declaration).
ARTICLE IX.
MISCELLANEOUS
-------------
9.01 NOTICES. Except as otherwise provided herein, any notice
required hereunder shall be in writing, and shall be deemed to have been validly
served, given or delivered (i) four (4) Banking Days following deposit in the
United States mails, with proper postage prepaid, and addressed to the party to
be notified; (ii) upon delivery thereof if delivered by hand to the party to be
notified; (iii) on the Banking Day after delivery to a reputable overnight
courier, with all charges prepaid, and addressed to the party to be notified; or
(iv) upon acknowledgment of receipt thereof if transmitted by telecopy to a
valid telecopier number for the party to be notified; in each case such
notification shall be addressed to Borrower at:
Bally Total Fitness Holding Corporation
8700 West Bryn Mawr, 2nd Floor
Chicago, Illinois 60631
Attention: General Counsel
Telecopy: 713-399-0126
Phone: 773-399-1300
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68
and shall be addressed to Agent at:
The Chase Manhattan Bank
10 S. LaSalle Street - 23rd Floor
Chicago, Illinois 60603
Attention: Steve Faliski
Telecopy: 312-807-4077
Phone: 312-807-4073
With a copy to:
Chase Manhattan Bank Agency Services
One Chase Manhattan Plaza, 8th Floor
New York, New York 10081
Attention: Rose Clinton
Telecopy: 212-552-5662
Phone: 212-552-7915
and with respect to the other parties hereto, as set forth on Schedule 9.01
hereof, or to such other address as each party may designate for itself by like
notice. Notices to Agent shall not be effective until received by Agent.
9.02 SUCCESSORS AND ASSIGNS. This Agreement shall bind and
inure to the benefit of the parties hereto and their respective successors and
assigns; PROVIDED, HOWEVER, that Borrower shall not assign this Agreement or any
of the rights of Borrower hereunder without the prior written consent of each
Bank. Any purported assignment in contravention of the foregoing shall be null
and void.
9.03 BANKS' OBLIGATIONS SEVERAL. The obligations of each Bank
under this Agreement are several. Neither Agent, Collateral Agent nor any Bank
shall be liable for the failure of any other Bank to perform its obligations
under this Agreement.
9.04 ASSIGNMENTS; PARTICIPATIONS. (a) Any Bank may, with the
consent of Agent, each Issuing Bank to whom obligations are owed in respect of
Letters of Credit issued by it and (unless a Default or Event of Default has
occurred and is continuing) Borrower, which consent of Agent, such Issuing Bank
and the Borrower shall not be unreasonably withheld or delayed, at any time
assign and delegate to one or more banks or other entities and may, with notice
to Borrower and Agent but without the consent of Borrower or Agent, assign to
any of its Affiliates or any other Bank (each an "ASSIGNEE"), all or any part of
the Advances, the Revolving Credit Commitment, any Letter of Credit
participations, reimbursement obligations in respect of any Letter of Credit or
any other rights or obligations of such Bank hereunder; PROVIDED, HOWEVER, that
such assignment must be in a minimum amount (unless otherwise agreed in writing
by the Borrower and the Agent) of One Million Dollars ($1,000,000) (or, if less,
the full amount of such assigning Bank's Advances, Letter of Credit
Participations, reimbursement obligations in respect of any Letter of Credit or
any other rights and obligations of such Bank hereunder); PROVIDED, further,
that (i) Borrower shall not be required to pay any increased costs or taxes
pursuant to Section 2.12 or 2.13 by reason of any such assignment; (ii) Borrower
and Agent shall be entitled to continue to deal solely and directly with such
Bank in connection with the interests so assigned to the Assignee until written
notice of such assignment, together with payment instructions, addresses and
related information with respect to the Assignee shall have been given to
Borrower and Agent by such Bank and the Assignee; and (iii) such Bank shall not
be released from its obligations hereunder with respect to the assigned portion
of any such rights or
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obligations until the Assignee shall have delivered to Borrower and Agent an
agreement to be bound by the terms and conditions of this Agreement (which
agreement shall be substantially in the form of Exhibit M) and the assignor Bank
shall have paid a processing fee to Agent in the amount of Two Thousand Dollars
$2,000, and thereupon shall be released from its obligations with respect to the
assigned portion.
(b) Any Bank may, without the consent of Agent, any other Bank
to whom obligations are owed in respect of Letters of Credit issued by it or
Borrower, at any time sell to one or more banks or other entities (a
"PARTICIPANT") participating interests in any Advances, the Revolving Credit
Commitment, any Letter of Credit participations or any reimbursement obligations
of such Bank in respect of any Letter of Credit hereunder; PROVIDED, HOWEVER,
that such participation shall not increase the amount payable by Borrower in
respect of taxes pursuant to Section 2.11 and, PROVIDED FURTHER that (i) such
Bank's obligations under this Agreement shall remain unchanged; (ii) such Bank
shall remain solely responsible for the performance of its obligations
hereunder; (iii) Borrower and Agent shall continue to deal solely and directly
with such Bank in connection with such Bank's rights and obligations under this
Agreement; (iv) no Bank shall transfer, grant or assign any participation under
which the Participant shall have rights to approve any amendment or waiver of
this Agreement except to the extent such amendment or waiver would (A) extend
the Termination Date beyond November 18, 2000 or the scheduled date for the
payment of any installment of principal or interest of the Advances in which
such Participant is participating, (B) reduce the amount of any scheduled
installment of principal of the Advances hereunder in which such Participant is
participating, (C) reduce the interest rate applicable to Advances hereunder in
which such Participant is participating or (D) reduce any fees or commissions
payable hereunder in which such Participant is participating; and (v) such Bank
shall require its Participants to comply with the provisions of Section
10.03(b). In the case of any such participation, the Participant shall not have
any rights under this Agreement or any of the other documents in connection
herewith and all amounts payable by Borrower hereunder shall be determined as if
such Bank had not sold such participation, except that Borrower agrees that if
amounts outstanding under this Agreement are due and unpaid, or shall have been
declared or shall have become due and payable upon the occurrence of an Event of
Default, each Participant shall be deemed to have the right of set-off in
respect of its participating interest in amounts owing under this Agreement and
the Notes to the same extent as if the amount of its participating interest were
owing directly to it as a lender under this Agreement. The Borrower agrees that
each Participant shall be entitled to the benefits of Sections 2.12, 2.13 and
2.14 with respect to its participation in the Commitments and the Advances and
Letters of Credit outstanding from time to time as if it was a Bank; PROVIDED
that, in the case of Sections 2.12, 2.13 and 2.14, such Participant shall have
complied with the requirements of said Section and PROVIDED, FURTHER, that no
Participant shall be entitled to receive any greater amount pursuant to any such
Section than the transferor Bank would have been entitled to receive in respect
of the amount of the participation transferred by such transferor Bank to such
Participant had no such transfer occurred.
(c) Borrower authorizes each Bank to disclose to any
Participant or Assignee (each, a "Transferee") and any prospective Transferee
such financial and other information in such Bank's possession concerning
Borrower or its Subsidiaries which has been delivered to Banks pursuant to this
Agreement or which has been delivered to Banks by Borrower in connection with
Banks' credit evaluation of Borrower prior to entering into this Agreement.
(d) Nothing herein shall prohibit any Bank from pledging or
assigning any Note in accordance with applicable law, including to any Federal
Reserve Bank.
9.05 DELAYS AND WAIVERS. No delay or omission by Agent,
Collateral Agent or Banks to exercise any right under this Agreement, the
Collateral Documents or any instrument or agreement contemplated hereunder or
thereunder shall impair any such right, nor shall it be construed to be a
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70
waiver thereof. No waiver of any single breach or default under this Agreement
shall be deemed a waiver of any other breach or default. Any waiver, consent or
approval under this Agreement must be in writing to be effective.
9.06 COSTS AND EXPENSES. Borrower agrees:
(a) to pay or reimburse Agent, the Collateral Agent and the
Issuing Banks on demand for all reasonable out-of-pocket costs and
expenses incurred by them in connection with the development,
preparation, delivery, administration and execution of, and any
amendment, supplement or modification to, this Agreement, any
Collateral Document and any other documents or instruments prepared in
connection herewith or therewith, the consummation of the transactions
contemplated hereby and thereby, and the consummation of the
transactions to occur on the Closing Date, including, without
limitation, (i) the reasonable fees and out-of-pocket expenses of
outside and local counsel and special tax counsel to Agent and the
Collateral Agent (and the allocated cost of Agent's staff counsel) with
respect thereto and (ii) the reasonable fees and out-of-pocket expenses
of Agent's outside accounting consultant;
(b) to pay or reimburse each Bank, the Collateral Agent, the
Agent and the Issuing Banks on demand for all reasonable costs and
expenses incurred by any of them in connection with the enforcement or
preservation of any rights under this Agreement, the Notes, any
Collateral Document, and any other documents or instruments prepared in
connection herewith or therewith and in connection with any refinancing
or restructuring of the Credit in the nature of a "work-out",
including, without limitation, reasonable fees and out-of-pocket
expenses of outside and local counsel (and the allocated cost of staff
counsel) to Agent, the Collateral Agent and to each of the several
Banks; and
(c) to pay or reimburse Agent or the Collateral Agent on
demand for all reasonable appraisal, accounting, audit, search,
recordation and filing fees, incurred or sustained by them in
connection with the matters referred to under paragraphs (a) and (b)
above.
9.07 TELEPHONE INDEMNITY. Borrower shall protect Banks and
Agent and hold them harmless from and not liable for any and all loss, damage,
claim or expense (including, without limitation, reasonable attorneys' fees and
the allocated costs of any Bank's in-house legal counsel) incurred by Agent or
Banks in connection with or in relation to any act or any failure to act upon
telephone instructions received by Banks or Agent from Borrower or any Person
who has identified himself as an authorized officer of Borrower, whether or not
the instructions are actually given by an authorized officer of Borrower.
9.08 OTHER INDEMNITY. (a) Borrower agrees to indemnify and
hold harmless Agent, the Collateral Agent, each Bank and each of their
respective officers, directors, agents and employees from and against any and
all claims, damages, liabilities, costs and expenses (including, without
limitation, reasonable fees, expenses and disbursements of counsel) which may be
incurred by or asserted against Agent, the Collateral Agent, any Bank, any
Issuing Bank or any such other indemnified Person in connection with or arising
out of any investigation, litigation or proceeding related to this Agreement,
the Revolving Credit Commitments, the Letters of Credit or the negotiation and
preparation of documentation in connection herewith or therewith, whether or not
Agent, the Collateral Agent, any Issuing Bank or such Bank is a party thereto;
PROVIDED, HOWEVER, that Borrower shall not be required to indemnify any such
indemnified Person from or against any portion of such claims, damages,
liabilities or expenses arising out of gross negligence or willful misconduct of
such indemnified Person. The foregoing indemnification shall be binding on the
Borrower forever, and shall survive repayment of the Obligations and the release
of any liens under the Collateral Documents.
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71
(b) Borrower hereby agrees to indemnify, defend and hold
harmless Agent, the Collateral Agent, the Issuing Banks and each Bank, and each
of their respective officers, directors, employees and agents, from and against
any and all claims, losses, liabilities, damages and expenses (including,
without limitation, reasonable attorneys' fees), which may be incurred by or
asserted against Agent, the Collateral Agent, the Issuing Banks or any Bank or
any such indemnified Person in connection with or arising out of any
investigation, litigation or proceeding, or any action taken by any Person, with
respect to any Hazardous Materials Claim arising out of or related to any of the
Properties which are subject to a Lien in favor of the Collateral Agent as
contemplated hereunder (including, without limitation, any Hazardous Materials
Claim arising out of or relating to any (i) release of Hazardous Materials on,
upon, under or into any such Properties or (ii) damage to real or personal
property or natural resources and/or harm or injury to Persons alleged to have
resulted from such release of Hazardous Materials on, upon or into any such
Properties); PROVIDED, HOWEVER, that Borrower shall not be required to
indemnify, defend or hold harmless any such indemnified Person from or against
any portion of such loss, liability, damage or expense arising out of the gross
negligence or willful misconduct of such indemnified Person. The foregoing
indemnification is the personal obligation of Borrower, binding on Borrower
forever, and shall survive repayment of the Obligations and release of record of
the mortgages or deeds of trust in favor of Collateral Agent encumbering the
Properties and any transfer of the Properties by foreclosure or by deed in lieu
of foreclosure. The foregoing indemnification shall not be affected or negated
by any exculpatory clause that may be contained in any of the Collateral
Documents. It is expressly understood and agreed that to the extent that
Collateral Agent and/or Banks are strictly liable under any such law,
regulation, ordinance or requirement, Borrower's obligation to Collateral Agent
and Banks under this indemnity shall likewise be without regard to fault on the
part of Borrower or its Subsidiaries with respect to the violation or condition
which results in liability to Collateral Agent and/or Banks; PROVIDED, HOWEVER,
that Borrower shall not be required to indemnify, defend or hold harmless any
such indemnified Person from or against any portion of such loss, liability,
damage or expense arising after the Collateral Agent shall have foreclosed or
otherwise taken possession of such property which is caused by any action or
inaction of the Collateral Agent after such time.
(c) Agent, the Collateral Agent and each Bank agree that in
the event that any such investigation, litigation or proceeding is asserted or
threatened in writing or instituted against it or any of its officers,
directors, agents, and employees, or any remedial, removal or response action is
requested of it or any of its officers, directors, agents and employees, for
which Agent, the Collateral Agent or any Bank may desire indemnity or defense
hereunder, Agent, the Collateral Agent or such Bank shall promptly notify
Borrower in writing.
(d) Borrower at the request of Agent, the Collateral Agent or
any Bank, shall have the obligation to defend against such investigation,
litigation or proceeding or requested remedial, removal or response action, and
Agent, in any event, may participate in the defense thereof with legal counsel
of Agent's choice if Agent asserts defenses that raise potential conflicts of
interest with Borrower. No action taken by legal counsel chosen by Agent or any
Bank in defending against any such investigation, litigation or proceeding or
requested remedial, removal or response action shall vitiate or in any way
impair Borrower's obligation and duty hereunder to indemnify and hold harmless
Agent, the Collateral Agent and each Bank (unless such action is grossly
negligent).
9.09 CHOICE OF LAW. EXCEPT FOR COLLATERAL DOCUMENTS GOVERNED
BY THE LAWS OF ANOTHER STATE OR COUNTRY, AGENT, COLLATERAL AGENT AND BANKS AND
BORROWER AGREE THAT ANY DISPUTE ARISING OUT OF, CONNECTED WITH, RELATED TO, OR
INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS
AGREEMENT, THE NOTES AND ALL OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH,
AND WHETHER ARISING IN CONTRACT, TORT,
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EQUITY, OR OTHERWISE, SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
9.10 PERSONAL JURISDICTION. AGENT, COLLATERAL AGENT AND BANKS
MAY ENFORCE ANY CLAIM ARISING UNDER THIS AGREEMENT, THE NOTES, OR ANY COLLATERAL
DOCUMENT IN ANY STATE OR FEDERAL COURT HAVING SUBJECT MATTER JURISDICTION AND
LOCATED IN CHICAGO, ILLINOIS OR NEW YORK, NEW YORK. FOR THE PURPOSE OF ANY
ACTION OR PROCEEDING INSTITUTED WITH RESPECT TO ANY SUCH CLAIM, BORROWER HEREBY
IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURTS.
9.11 SERVICE OF PROCESS. THE PARTIES HERETO IRREVOCABLY
CONSENT TO THE SERVICE OF PROCESS OF ANY OF THE AFORESAID COURTS IN ANY SUCH
ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED
MAIL, POSTAGE PREPAID, TO SUCH PARTY AT ITS ADDRESS PROVIDED HEREIN NOT LESS
THAN FIVE (5) DAYS AFTER THE APPLICABLE SUMMONS IS ISSUED AND SHALL BECOME
EFFECTIVE UPON MAILING. NOTHING CONTAINED IN THIS SECTION 9.11 SHALL AFFECT THE
RIGHT OF AGENT, COLLATERAL AGENT, ANY BANK OR ANY HOLDER OF A NOTE TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR COMMENCE LEGAL PROCEEDINGS OR
OTHERWISE PROCEED AGAINST BORROWER OR ANY GUARANTOR IN ANY OTHER JURISDICTION.
9.12 WAIVER OF JURY TRIAL. EACH OF AGENT, COLLATERAL AGENT,
BANKS AND BORROWER WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY
DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN AGENT, BANKS
AND BORROWER ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT.
INSTEAD, ANY DISPUTES RESOLVED IN COURT WILL BE RESOLVED IN A BENCH TRIAL
WITHOUT A JURY.
9.13 SECTION HEADINGS. Section headings are for reference
only, and shall not affect the interpretation or meaning of any provision of
this Agreement.
9.14 SEVERABILITY. The illegality or unenforceability of any
provision of this Agreement or any instrument or agreement required hereunder
shall not in any way affect or impair the legality or enforceability of the
remaining provisions of this Agreement or any instrument or agreement required
hereunder.
9.15 COUNTERPARTS. This Agreement may be executed in as many
counterparts as may be deemed necessary or convenient, and by the different
parties hereto on separate counterparts (provided that Borrower shall execute
each counterpart), each of which, when so executed, shall be deemed an original,
but all such counterparts shall constitute but one and the same agreement.
9.16 NO RELIANCE BY BANKS. Banks hereby acknowledge that they
have not, in good faith, relied upon any margin stock (as defined in Regulation
U of the Board of Governors of the Federal Reserve System) as collateral in
extending or maintaining the loans under this Agreement.
9.17 ENTIRE AGREEMENT. This Agreement, any writing referred to
in Section 2.11 and any agreement, document or instrument attached hereto or
referred to herein (i) integrate all the terms and conditions mentioned herein
or incidental hereto, (ii) supersede all oral negotiations and prior writings in
respect to the subject matter hereof, and (iii) are intended by the parties as
the final
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expression of the agreement with respect to the terms and conditions set forth
in this Agreement and any such agreement, document or instrument (including such
letter agreement) and as the complete and exclusive statement of the terms
agreed to by the parties.
9.18 CONFIDENTIALITY. Each Bank and Agent agree to keep
information obtained by it pursuant hereto and the other Collateral Documents
confidential in accordance with such Bank's or Agent's, as the case may be,
customary practices and agrees that it will only use such information in
connection with the transactions contemplated by this Agreement and not disclose
any of such information other than (i) to such Bank's or Agent's, as the case
may be, employees, representatives, agents or affiliates who are advised of the
confidential nature of such information, (ii) to the extent such information
presently is or hereafter becomes available to such Bank or Agent, as the case
may be, on a non-confidential basis from a source other than Borrower or such
information that is in the public domain at the time of disclosure, (iii) to the
extent disclosure is required by law, regulation, subpoena or judicial order or
process (which requirement or order shall be promptly notified to Borrower
unless such notice is legally prohibited) or requested or required by bank
regulators or auditors or any administrative body or commission to whose
jurisdiction such Bank or Agent, as the case may be, may be subject, (iv) to
assignees or participants or potential assignees or participants who agree to be
bound by the provisions of this Section 9.18, (v) to the extent required in
connection with any litigation between Borrower and/or any Guarantor and any
Bank or Agent, (vi) following an Event of Default, in connection with the sale
or other realization on any Collateral under any Collateral Document, or (vii)
with Borrower's prior written consent.
9.19 RECEIVABLES PROGRAM SAVINGS CLAUSE. Notwithstanding
anything to the contrary contained herein, in the event that any action taken by
the Borrower, any Guarantor or any Subsidiary (including Funding Corp.), which
is contemplated and permitted under the Receivables Program Documents, would
violate one or more provisions of this Agreement or any Collateral Document,
then such violation shall not constitute or give rise to a Default or Event of
Default hereunder or thereunder, PROVIDED that such action is permitted or
contemplated by one or more other provisions of this Agreement or the Collateral
Documents.
ARTICLE X.
RELATION OF BANKS
-----------------
10.01 AGENT AND COLLATERAL AGENT; ENFORCEMENT OF GUARANTIES.
(a) Each Bank hereby irrevocably appoints, designates and authorizes Agent to
take such action on its behalf under the provisions of this Agreement and each
other instrument or agreement contemplated hereunder and to exercise such powers
and perform such duties as are expressly delegated to it by the terms of this
Agreement or such other instrument or agreement, together with such powers as
are reasonably incidental thereto. Each Bank agrees that no Bank shall have the
right individually to enforce the Guarantee and Collateral Agreement or the
Mortgages and hereby appoints Agent to act upon the direction of the Majority
Banks to enforce each such Agreement. Chase (as successor to Manufacturers
Hanover Trust Company and Chemical Bank) and the Operating Banks agree that none
of such Banks shall take any action to enforce the Operating Bank Guaranty,
respectively, until Agent has commenced to enforce the Guarantee and Collateral
Agreement upon the direction of the Majority Banks pursuant to the preceding
sentence. Notwithstanding any provision to the contrary contained elsewhere in
this Agreement or in such other instrument or agreement, Agent shall not have
any duties or any fiduciary relationship with any Bank, and no implied
covenants, functions, responsibilities, duties, obligations or liabilities shall
be read into this Agreement or any such other instrument or agreement or
otherwise exist against the Agent. Agent may execute any of its duties under
this Agreement by or through agents,
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employees or attorneys-in-fact and shall be entitled to advice of counsel
concerning all matters pertaining to such duties. Agent shall not be responsible
for the negligence or misconduct of any agent or attorney-in-fact that it
selects with reasonable care.
(b) Each Bank hereby authorizes the Collateral Agent to enter
into the Collateral Documents to which it is a party and to take all action
contemplated by the Collateral Agency Agreement; PROVIDED that the Collateral
Agent shall not enter into or consent to any amendment, modification,
termination or waiver of any provision contained in any Collateral Document or
take any action thereunder without the direction of Agent. Agent shall not
direct the Collateral Agent to enter into or consent to any amendment,
modification, termination or waiver of any provision of any Collateral Document
or direct the Collateral Agent to take any action thereunder without the prior
consent of the Majority Banks. Each Bank agrees that no Bank shall have any
right individually to seek or to enforce or to realize upon the security granted
to the Collateral Agent under the Collateral Documents, it being understood and
agreed that such rights and remedies may be exercised by the Collateral Agent
for the benefit of all of the Secured Creditors upon the terms of the Collateral
Documents and the Collateral Agency Agreement.
10.02 PRO RATA SHARING. All principal, interest and fee
payments on the Credit (other than sums under Sections 2.09(a)(ii), 2.09(a)(iii)
and 2.11) and all sums realized under the Guarantee and Collateral Agreement (or
any guaranty executed and delivered pursuant to Section 3.04) and all proceeds
of Collateral distributed to Banks under the Collateral Agency Agreement shall
be divided PRO RATA among Banks in accordance with their Commitment Percentages,
and any reduction in the maximum limits for borrowing under this Agreement shall
reduce Banks' Revolving Credit Commitments or L/C Commitments on a PRO RATA
basis.
10.03 SET-OFF. (a) Subject to the rights of the Secured
Creditors with respect to any Collateral and in addition to any Liens granted by
Borrower or any of its Subsidiaries to the Collateral Agent and any rights now
or hereafter granted under applicable law and not by way of limitation of any
such Lien or rights, upon the occurrence and during the continuance of an Event
of Default, each Secured Creditor is hereby authorized by Borrower at any time
and from time to time, without notice to Borrower, or to any other Person (any
such notice being hereby expressly waived) to set-off all deposits of Borrower
and any other Debt at any time held or owing by such Secured Creditor to or for
the credit of Borrower against and on account of the Secured Obligations owing
to such Secured Creditor irrespective of whether or not Agent or such Secured
Creditor shall have made demand under this Agreement or any Collateral Document
and although the Secured Obligations may be unmatured. Each of the Banks agrees
that it shall not, without the express consent of Agent, set-off against the
Obligations or any other amounts owing to such Bank any accounts of Borrower now
or hereafter maintained with such Bank. Each Bank further agrees that it shall
not, unless specifically requested to do so by Agent, take or cause to be taken
any action, including, without limitation, the commencement of any legal or
equitable proceedings, to foreclose any Lien on, or otherwise enforce any
security interest in, any of the Collateral for the purpose of which is, or
could be, to give such Bank any preference or priority against any other Secured
Creditor with respect to the Collateral.
(b) If at any time or times any Bank shall receive by payment,
foreclosure, set-off or otherwise, any proceeds of any Collateral or any
payments with respect to the Secured Obligations arising under, or relating to,
this Agreement or the Collateral Documents, except for any such proceeds or
payments received by such Bank or any Issuing Bank from Agent pursuant to the
terms of this Agreement or the Collateral Agency Agreement, such Bank shall
promptly purchase, without recourse or warranty, an undivided interest and
participation in the Secured Obligations owed to the other Banks (or, after an
Event of Default, the other Secured Creditors) so that such excess payment
received shall be applied ratably as among Banks in accordance with their
respective Commitment Percentages; (or,
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after an Event of Default, among the Secured Creditors as provided for in the
Collateral Agency Agreement); PROVIDED, HOWEVER, that if all or part of such
excess payment received by the purchasing party is thereafter recovered from it,
those purchases of participations shall be rescinded in whole or in part, as
applicable, and the applicable portion of the purchase price paid therefor shall
be returned to such purchasing party, but without interest except to the extent
that such purchasing party is required to pay interest in connection with the
recovery of the excess payment. Notwithstanding any contrary provision contained
herein, the proceeds of any drawing under any Letter of Credit issued hereunder
in favor of Chase in its individual capacity (without affecting Chase's
obligation to purchase a participation in any such Letter of Credit in
accordance with Section 2.15(c)(i)) shall be for Chase's sole benefit.
(c) Each Secured Creditor other than in its capacity as a Bank
shall be entitled to any rights conferred upon it under this Agreement or any of
the Collateral Documents only on the condition and understanding that it shall
be bound by the terms of this Section 10.03 to the same extent as Banks.
10.04 LIABILITY OF AGENT. Neither Agent nor any of its
officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be
(i) liable for any action taken or omitted to be taken by any of them under or
in connection with this Agreement (except for its or such Person's own gross
negligence or willful misconduct) or (ii) responsible in any manner to any of
the Banks for any recital, statement, representation or warranty made by
Borrower or any Subsidiary or any officer thereof contained in this Agreement or
in any other instrument or agreement contemplated hereunder or in any
certificate, report, statement or other document referred to or provided for in,
or received by Agent under or in connection with, this Agreement or any other
instrument or agreement contemplated hereunder or for the value of any
Collateral or the validity, effectiveness, genuineness, enforceability or
sufficiency of this Agreement or any other instrument or agreement contemplated
hereunder or for any failure of Borrower or any Subsidiary to perform its
obligations hereunder or thereunder. Agent shall not be under any obligation to
any Bank to ascertain or to inquire as to the observance or performance of any
of agreements contained in, or conditions of, this Agreement or any other
instrument or agreement contemplated hereunder, or to inspect the properties,
books or records of Borrower or any Subsidiary.
10.05 RELIANCE BY AGENT. Agent shall be entitled to rely, and
shall be fully protected in relying, upon any writing, resolution, notice,
consent, certificate, affidavit, letter, telegram, telecopy, telex or telephone
message, statement or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons and upon advice and statements of legal counsel (including counsel to
Borrower or any Guarantor), independent accountants and other experts selected
by Agent. Agent shall be fully justified in failing or refusing to take any
action under this Agreement or any other instruction or agreement contemplated
hereunder unless it shall first receive such advice or concurrence of the
Majority Banks as it deems appropriate and, if it so requests, it shall first be
indemnified to its satisfaction by the Banks against any and all liability and
expense which may be incurred by it by reason of taking or continuing to take
any such action. Agent shall in all cases be fully protected in acting, or in
refraining from acting, under this Agreement or any other instrument or
agreement contemplated hereunder in accordance with a request or consent of the
Majority Banks and such request and any action taken or failure to act pursuant
thereto shall be binding upon all Banks.
10.06 APPROVALS; AMENDMENTS. This Agreement and the Collateral
Documents may be amended only upon the prior express written consent of Borrower
or Guarantors, as the case may be, party thereto and the Majority Banks. Upon
any occasion requiring or permitting an approval, consent, waiver, election or
other action on the part of Majority Banks, action shall be taken by Agent for
and on behalf or for the benefit of all Banks upon the direction of Majority
Banks, and any such action shall be
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binding on all Banks; PROVIDED, HOWEVER, that unless all Banks agree in writing,
no amendment, modification, consent or waiver shall be effective which:
(a) increases the amount of the Credit or the amount of the
Revolving Credit Commitment or L/C Commitment of any Bank,
(b) reduces interest, principal, commissions or fees owing
hereunder,
(c) extends the scheduled date on which any sum is due
hereunder,
(d) releases any Guarantor from its obligations under the
Guarantee and Collateral Agreement or, subject to the proviso in
Section 8.13(a), releases any material portion of the Collateral
(except (i) in connection with dispositions thereof permitted under
this Agreement, (ii) as permitted by subsection 10.13(b), (iii) any
Guarantor may be released from its obligations under the Credit
Documents if all of the Capital Stock of, or substantially all of the
assets of, such Guarantor are disposed of in a transaction permitted by
this Agreement or (iv) as otherwise expressly permitted by this
Agreement),
(e) changes the definition of "Majority Banks", or
(f) amends or waives the provisions of Sections
2.15(a)(ii)(C), 2.15(b)(iii), 7.04(d), 8.08, 8.15 or this Section 10.6.
10.07 NOTICE OF DEFAULT. Agent shall not be deemed to have
knowledge or notice of the occurrence of any Event of Default, except with
respect to defaults in the payment of principal, interest, commissions and fees
payable to Agent hereunder for the account of Banks, unless Agent shall have
received notice from a Bank or Borrower referring to this Agreement, describing
such Event of Default and stating that such notice is a "notice of default". In
the event that Agent receives such a notice, Agent shall give prompt notice
thereof to Banks. Agent shall take such action with respect to such Event of
Default as shall be requested by the Majority Banks in accordance with Article
VIII; PROVIDED, HOWEVER, that unless and until Agent shall have received any
such request, Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Event of Default as it
shall deem advisable in the best interests of Banks.
10.08 CREDIT DECISION. Each Bank expressly acknowledges that
neither Agent nor any other Bank nor any of their Affiliates nor any officer,
director, employee, agent or attorney-in-fact of any of them has made any
representation or warranty to it and that no act by Agent or any other Bank
hereafter taken, including any review of the affairs of Borrower and its
Subsidiaries and their Affiliates, shall be deemed to constitute any
representation or warranty by Agent or any other Bank to such Bank. Each Bank
represents to Agent and to each other Bank that it has, independently and
without reliance upon Agent or any other Bank and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, prospects, operations, property, financial and
other condition and creditworthiness of Borrower and Guarantors and made its own
decision to enter into this Agreement and extend credit to Borrower hereunder
(without reliance on the Agent or any other Bank). Each Bank also represents
that it will, independently and without reliance upon Agent or any other Bank
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Agreement, and to make such
investigations as it deems necessary to inform itself as to the business,
prospects, operations, property, financial and other condition and
creditworthiness of Borrower and Guarantors (without reliance on the Agent or
any other Bank). Except for notices, reports and other documents expressly
required to be furnished to Banks by Agent
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hereunder, Agent shall not have any duty or responsibility to provide any Bank
with any credit or other information concerning the business, prospects,
operations, property, financial and other condition or creditworthiness of
Borrower or any Guarantor which may come into the possession of Agent or any of
its officers, directors, employees, agents, attorneys-in-fact or Affiliates.
10.09 BANKS' INDEMNITY. Each Bank agrees to indemnify Agent
(to the extent not reimbursed by or on behalf of Borrower and without limiting
the obligation of Borrower to do so), ratably, according to its respective
Commitment Percentage, from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses and
disbursements of any kind whatsoever which may at any time (including at any
time following the repayment of the Advances or the Letters of Credit) be
imposed on, incurred by or asserted against Agent in any way relating to or
arising out of this Agreement or any document contemplated by or referred to
herein or therein or the transactions contemplated hereby or thereby or any
action taken or omitted by Agent under or in connection with any of the
foregoing; PROVIDED HOWEVER, that no Bank shall be liable for the payment to
Agent of any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements resulting
solely from Agent's gross negligence or willful misconduct. Without limitation
of the foregoing, each Bank agrees to reimburse Agent promptly upon demand for
its ratable share of any out-of-pocket expenses (including reasonable fees and
expenses of counsel and the allocated cost of in-house counsel) incurred by
Agent in connection with the preparation, execution, delivery, administration,
modification, amendment or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement, any Collateral Document, or any document
contemplated by or referred to herein to the extent that Agent is not reimbursed
for such expenses by or on behalf of Borrower.
10.10 AGENT AS BANK. Chase shall have the same rights and
powers hereunder as any other Bank and may exercise the same as though it were
not Agent; and the term "Banks" shall include Chase in its individual capacity.
Chase and its subsidiaries and affiliates may accept deposits from, lend money
to, act as agent or trustee for other lenders to, and generally engage in any
kind of banking, trust or other business with Borrower or any of its
Subsidiaries or Affiliates as if it were not Agent.
10.11 NOTICE OF TRANSFER. Subject to Section 9.04(a), Agent
may deem and treat a Bank party to this Agreement as the owner of such Bank's
portion of the Credit for all purposes hereof unless and until a written notice
of the assignment or transfer thereof executed by such Bank shall have been
received by Agent.
10.12 RESIGNATION OF AGENT. Agent may resign at any time by
giving written notice to Banks and Borrower. Upon any such resignation, Majority
Banks shall have the right to appoint a successor Agent (which shall be either a
Bank or a commercial bank with capital and surplus in excess of One Hundred
Million Dollars ($100,000,000) and which successor Agent, unless a Default or an
Event of Default has occurred and is continuing, shall be reasonably acceptable
to Borrower). If no successor Agent shall have accepted such appointment within
thirty (30) days after the retiring Agent's giving of notice of resignation, the
retiring Agent may, on behalf of Banks, appoint a successor Agent. Upon the
acceptance by the successor Agent of its appointment hereunder, the successor
Agent shall succeed to and become vested with all the rights and obligations of
the retiring Agent, and the retiring Agent shall be discharged from its
obligations under this Agreement. The provisions of this Article X and Sections
9.06, 9.07 and 9.08 shall inure to the benefit of the retiring Agent as to any
actions taken or omitted to be taken by it while it was Agent under this
Agreement.
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10.13 COLLATERAL MATTERS. (a) Agent may from time to time,
before or after the occurrence of an Event of Default, make such disbursements
and advances to the Collateral Agent ("Agent Advances") which Agent, in its sole
discretion, deems necessary or desirable to preserve or protect the Collateral
or any portion thereof, to enhance the likelihood or maximize the amount of
repayment of the Obligations or to pay any other amount chargeable to Borrower
or any Guarantor pursuant to the terms of this Agreement or any Collateral
Document, including, without limitation, costs, fees and expenses as described
in Section 9.06; PROVIDED, HOWEVER, that the Agent Advances shall not exceed One
Hundred Thousand Dollars ($100,000) without the prior written consent of
Majority Banks. The Agent Advances shall be repayable on demand and be secured
by the Collateral. The Agent Advances shall not constitute Advances but shall
otherwise constitute Obligations hereunder. Agent shall notify each Bank in
writing of each such Agent Advance, which notice shall include a description of
the purpose of such Agent Advance. Without limitation to its obligations
pursuant to Section 10.09, each Bank agrees that it shall make available to
Agent, upon Agent's demand, in immediately available funds, the amount equal to
such Bank's Commitment Percentage of each such Agent Advance. If such funds are
not made available to Agent by such Bank within one (1) Banking Day after
Agent's demand therefor, Agent will be entitled to recover any such amount from
such Bank together with interest thereon at the Federal Funds Rate for each day
during the period commencing the date of such demand and ending on the date such
amount is received.
(b) Banks hereby irrevocably authorize Agent, at its option
and in its discretion, to direct the Collateral Agent to release or subordinate
on terms satisfactory to the Collateral Agent any Lien granted to or held by the
Collateral Agent upon any Collateral (i) upon termination of the Revolving
Credit Commitments and indefeasible payment in full and satisfaction of all of
the Obligations; or (ii) constituting property being sold or disposed of if the
sale or disposition is permitted hereunder; or (iii) constituting property in
which neither Borrower nor any Guarantor owned an interest at the time the Lien
was granted or at any time thereafter; or (iv) constituting property leased to
Borrower or any Guarantor; or (v) if approved, authorized or ratified in writing
by the Majority Banks; or (vi) subject to a Permitted Lien; or (vii) not owned
by the Borrower or any Guarantor. Upon request by Agent at any time, Banks will
confirm in writing Agent's authority to so direct the release of particular
types or items of Collateral pursuant to this Section 10.13(b). The Banks hereby
irrevocably authorize Agent, at its option and discretion (1) to direct the
Collateral Agent to release and subordinate, on terms satisfactory to the
Collateral Agent, Liens on Collateral which is also subject to Permitted Liens,
(2) to execute any release, subordination or acknowledgement documents requested
by the Borrower in order to effect any release or subordination described in
this paragraph (b) and (3) to execute acknowledgements with respect to leases to
the effect that the Property subject to such leases is not subject to the Liens
created by the Credit Documents or Collateral. This paragraph (b) is intended as
an authorization by the Lenders to permit the Agent and the Collateral Agent to
take the actions described herein and neither the Borrower nor any of its
Subsidiaries or any other Person shall be entitled to the benefits hereof.
(c) Without in any manner limiting Agent's authority to act
without any specific or further authorization or consent by the Majority Banks
(as set forth in Section 10.13(b) above), each Bank agrees to confirm in
writing, upon request by Borrower, the authority to direct the release of
Collateral conferred upon the Agent under clauses (i) through (v) of Section
10.13(b) above. So long as no Event of Default is then continuing, upon receipt
by Agent of confirmation from the Majority Banks of its authority to direct the
release of any particular item or types of Collateral, and upon at least five
(5) Banking Days' prior written request by Borrower, Agent shall (and is hereby
irrevocably authorized by Banks to) direct the Collateral Agent to execute such
documents as may be necessary to evidence the release of the Liens granted to
the Collateral Agent for the benefit of the Secured Creditors herein or pursuant
hereto upon such Collateral; PROVIDED, HOWEVER, that (i) Agent shall not be
required to direct the Collateral Agent to execute any such document on terms
which, in Agent's opinion, would expose
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Agent or the Collateral Agent to liability or create any obligation or entail
any consequence other than the release of such Liens without recourse or
warranty, and (ii) such release shall not in any manner discharge, affect or
impair the Obligations or any Liens upon (or obligations of Borrower in respect
of) all interests retained by Borrower, including (without limitation) the
proceeds of any sale, all of which shall continue to constitute part of the
Collateral.
(d) Neither Agent nor Collateral Agent shall have any
obligation whatsoever to any Bank to assure that the Collateral exists or is
owned by Borrower or is cared for, protected or insured or has been encumbered
or that the Liens granted to the Collateral Agent pursuant to any Collateral
Document have been properly or sufficiently or lawfully created, perfected,
protected or enforced or are entitled to any particular priority, or to exercise
at all or in any particular manner or under any duty of care, disclosure or
fidelity, or to continue exercising, any of the rights, authorities and powers
granted or available to Agent or Collateral Agent in this Section 10.13 or in
any of the Collateral Documents, it being understood and agreed that in respect
of the Collateral, or any act, omission or event related thereto, Agent may act
in any manner it may deem appropriate, in its sole discretion, given Agent's own
interest in the Collateral as one of the Banks and that Agent shall have no duty
or liability whatsoever to any Bank (except as specifically provided in this
Agreement and the Collateral Documents).
EACH BANK FURTHER ACKNOWLEDGES AND AGREES THAT AGENT SHALL NOT
BE RESPONSIBLE FOR, AND SHALL HAVE NO LIABILITY OR OBLIGATION WITH RESPECT TO,
THE VALIDITY, EFFECTIVENESS, GENUINENESS, ENFORCEABILITY OR SUFFICIENCY OF THIS
AGREEMENT, THE REVOLVING NOTES, THE COLLATERAL DOCUMENTS, ANY OTHER INSTRUMENT
OR AGREEMENT CONTEMPLATED HEREUNDER OR THEREUNDER, ANY ACTION TAKEN OR NOT TAKEN
OR ANY DECISION MADE BY ANY PERSON (OTHER THAN AGENT) WITH RESPECT TO ANY
THEREOF OR WITH RESPECT TO THE COLLATERAL, THE FAILURE OF THE BORROWER OR ANY
SUBSIDIARY TO PERFORM ITS OBLIGATIONS HEREUNDER OR THEREUNDER, ANY
MISREPRESENTATION BY BORROWER OR ANY SUBSIDIARY HEREUNDER OR THEREUNDER, OR THE
VALUE OF ANY COLLATERAL OR THE CREATION, ATTACHMENT, PERFECTION OR PRIORITY OF
ANY SECURITY INTEREST OR LIEN PURPORTED TO BE CREATED BY THE COLLATERAL
DOCUMENTS, THIS AGREEMENT OR SUCH OTHER INSTRUMENTS OR AGREEMENTS AND THAT
AGENT, AS COLLATERAL AGENT AND AGENT, HAS UNDERTAKEN NO INDEPENDENT REVIEW OR
ANALYSIS WITH RESPECT TO ANY OF THE FOREGOING.
(e) The benefit of the Collateral Documents and of the
provisions of this Agreement relating to the Collateral shall extend to and be
available in respect of the Secured Obligations (as defined in the Collateral
Agency Agreement) solely on the condition and understanding, as among Agent and
Banks, that (i) the Secured Obligations shall be entitled to the benefit of the
Collateral to the extent expressly set forth in the Collateral Documents, and to
such extent the Collateral Agent shall hold, and have the right and power to act
with respect to, the Collateral on behalf of and as agent for the holders of the
Secured Obligations; but Agent in its separate capacity as agent hereunder is
acting solely as agent for the Banks and shall have no separate fiduciary duty,
duty of loyalty, duty of care, duty of disclosure or other obligations
whatsoever to any holder of Secured Obligations; and (ii) all matters, acts and
omissions relating in any manner to the Collateral, or the omission, creation,
perfection, priority, abandonment or release of any Lien, shall be governed
solely by the provisions of this Agreement and the Collateral Documents, and no
separate Lien, right, power or remedy shall arise or exist in favor of any Bank
under any separate instrument or agreement or in respect of any Secured
Obligations; and (iii) each Bank shall be bound by all actions taken or omitted,
in accordance with the provisions of this Agreement or the Collateral Documents,
by the Collateral Agent, at the direction of
<PAGE> 86
80
Agent on behalf of the Banks; and (iv) no holder of Secured Obligations shall
exercise any right of setoff, banker's lien or similar right except as expressly
provided in Section 10.03.
(f) Any Collateral proceeds received by Agent from the
Collateral Agent pursuant to Section 3(b) of the Collateral Agency Agreement
shall be applied and paid to the Obligations as follows (unless Agent and
Majority Banks otherwise agree):
FIRST: To Agent and the Collateral Agent in an amount equal to
all costs and expenses incurred in connection with performing their
respective duties hereunder and under the Collateral Documents,
including, without limitation, those related to or in connection with
the administration of this Agreement or the enforcement of their
respective rights under the Collateral Documents;
SECOND: To any accrued and unpaid interest outstanding
hereunder or under the Notes;
THIRD: To the unpaid principal amount of the Advances
outstanding under the Notes;
FOURTH: To Agent for deposit as cash collateral, for
application against drawings under any Letters of Credit, up to an
amount equal to the undrawn amount of such Letters of Credit;
FIFTH: To any accrued and unpaid fees, commissions or other
sums payable pursuant to this Agreement; and
SIXTH: Any surplus then remaining shall be paid to Borrower or
its successors or assigns, or to whomever may be lawfully entitled to
receive the same, or as a court of competent jurisdiction may direct.
10.14 COLLATERAL AGENT. The Collateral Agent shall be entitled
to the standards of care, indemnities and other rights set forth in this Article
Ten as are set forth for the Agent, MUTATIS MUTANDIS, except as may be expressly
provided otherwise hereunder, or in the Collateral Documents.
[Remainder of Page Intentionally Left Blank]
<PAGE> 87
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement by their duly authorized officers as of the day and year first above
written.
BALLY TOTAL FITNESS HOLDING CORPORATION
By: /s/ John w. Dwyer
----------------------------------
Name: John w. Dwyer
Title: Senior Vice President and
Chief Financial Officer
<PAGE> 88
THE CHASE MANHATTAN BANK,
as Agent and as Bank
By: /s/ Robert W. Mathews
---------------------------------
Name: Robert W. Mathews
Title: Vice President
<PAGE> 89
U.S. BANK NATIONAL ASSOCIATION,
successor by merger to, and
doing business as First Bank
National Association
By: /s/ Jack L. Quitmeyer
---------------------------------
Name: Jack L. Quitmeyer
Title: Vice President
<PAGE> 90
LASALLE NATIONAL BANK
By: /s/ Lori K. BELKER
---------------------------------
Name: Lori K. BELKER
Title: Vice President
<PAGE> 91
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Edward M. Tessalone
----------------------------------
Name: Edward M. Tessalone
Title: Vice President
<PAGE> 92
SOCIETE GENERALE
By: /s/ Donald L. Schubert
---------------------------------
Name: Donald L. Schubert
Title: Vice President
<PAGE> 93
THE SUMITOMO BANK, LIMITED, CHICAGO BRANCH
By: /s/ Ken-Ichiro Kobayashi
---------------------------------
Name: Ken-Ichiro Kobayashi
Title: Joint General Manager
<PAGE> 1
EXECUTION COPY
--------------
Exhibit 10.2
===============================================================================
GUARANTEE AND COLLATERAL AGREEMENT
made by
BALLY TOTAL FITNESS HOLDING CORPORATION
and certain of its Subsidiaries
in favor of
THE CHASE MANHATTAN BANK,
as Collateral Agent
Dated as of November 18, 1997
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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<S> <C>
SECTION 1. DEFINED TERMS....................................................................................... 1
1.1 Definitions....................................................................................... 2
1.2 Other Definitional Provisions..................................................................... 6
SECTION 2. GUARANTEE........................................................................................... 6
2.1 Guarantee......................................................................................... 6
2.2 Right of Contribution............................................................................. 7
2.3 No Subrogation.................................................................................... 7
2.4 Amendments, etc. with respect to the Borrower Obligations......................................... 7
2.5 Guarantee Absolute and Unconditional.............................................................. 8
2.6 Reinstatement..................................................................................... 8
2.7 Payments.......................................................................................... 9
SECTION 3. GRANT OF SECURITY INTEREST.......................................................................... 9
SECTION 4. REPRESENTATIONS AND WARRANTIES...................................................................... 10
4.1 Representations in Credit Agreement............................................................... 10
4.2 Title; No Other Liens............................................................................. 10
4.3 Perfected First Priority Liens.................................................................... 10
4.4 Chief Executive Office............................................................................ 10
4.5 Inventory and Equipment........................................................................... 11
4.6 Farm Products..................................................................................... 11
4.7 Pledged Securities................................................................................ 11
4.8 Receivables....................................................................................... 11
4.9 Contracts......................................................................................... 11
4.10 Intellectual Property............................................................................ 12
SECTION 5. COVENANTS........................................................................................... 12
5.1 Covenants in Credit Agreement..................................................................... 12
5.2 Delivery of Instruments and Chattel Paper......................................................... 12
5.3 Maintenance of Insurance.......................................................................... 12
5.4 Payment of Obligations............................................................................ 12
5.5 Maintenance of Perfected Security Interest; Further Documentation................................. 13
5.6 Changes in Locations, Name, etc................................................................... 13
5.7 Notices........................................................................................... 13
5.8 Pledged Securities................................................................................ 14
5.9 Contracts......................................................................................... 14
5.10 Intellectual Property............................................................................ 15
SECTION 6. REMEDIAL PROVISIONS................................................................................. 16
6.1 Certain Matters Relating to Receivables........................................................... 16
6.2 Communications with Obligors; Grantors Remain Liable.............................................. 16
6.3 Pledged Securities................................................................................ 17
6.4 Proceeds to be Turned Over To Collateral Agent.................................................... 18
6.5 Application of Proceeds........................................................................... 18
i
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<PAGE> 3
<TABLE>
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<S> <C>
6.6 Code and Other Remedies........................................................................... 18
6.7 Registration Rights............................................................................... 19
6.8 Waiver; Deficiency................................................................................ 19
SECTION 7. THE COLLATERAL AGENT................................................................................ 20
7.1 Collateral Agent's Appointment as Attorney-in-Fact, etc........................................... 20
7.2 Duty of Collateral Agent.......................................................................... 21
7.3 Execution of Financing Statements................................................................. 21
7.4 Authority of Collateral Agent..................................................................... 22
SECTION 8. MISCELLANEOUS....................................................................................... 22
8.1 Amendments in Writing............................................................................. 22
8.2 Notices........................................................................................... 22
8.3 No Waiver by Course of Conduct; Cumulative Remedies............................................... 22
8.4 Enforcement Expenses; Indemnification............................................................. 22
8.5 Successors and Assigns............................................................................ 23
8.6 Set-Off........................................................................................... 23
8.7 Counterparts...................................................................................... 23
8.8 Severability...................................................................................... 23
8.9 Section Headings.................................................................................. 23
8.10 Integration...................................................................................... 24
8.11 GOVERNING LAW.................................................................................... 24
8.12 Submission To Jurisdiction; Waivers.............................................................. 24
8.13 Acknowledgements................................................................................. 24
8.14 WAIVER OF JURY TRIAL............................................................................. 25
8.15 Additional Grantors.............................................................................. 25
8.16 Releases; Exercise of Remedies................................................................... 25
8.17 Operating Bank Obligations....................................................................... 26
ii
</TABLE>
<PAGE> 4
GUARANTEE AND COLLATERAL AGREEMENT
GUARANTEE AND COLLATERAL AGREEMENT, dated as of November 18,
1997, made by each of the signatories hereto (together with any other entity
that may become a party hereto as provided herein, the "GRANTORS"), in favor of
THE CHASE MANHATTAN BANK, as Collateral Agent (in such capacity, the "COLLATERAL
AGENT") pursuant to the Collateral Agency Agreement dated as of November 18,
1997.
W I T N E S S E T H:
WHEREAS, pursuant to the Credit Agreement, dated as of
November 18, 1997 (as amended, supplemented or otherwise modified from time to
time, the "CREDIT AGREEMENT"), among Bally Total Fitness Holding Corporation
(the "BORROWER"), the several banks and other financial institutions (the
"BANKS") from time to time parties thereto and The Chase Manhattan Bank, as
agent, the Banks have severally agreed to make extensions of credit to the
Borrower upon the terms and subject to the conditions set forth therein;
WHEREAS, the Borrower is a member of an affiliated group of
companies that includes each other Grantor;
WHEREAS, the proceeds of the extensions of credit under the
Credit Agreement will be used in part to enable the Borrower to make valuable
transfers to one or more of the other Grantors in connection with the operation
of their respective businesses;
WHEREAS, the Borrower and the other Grantors are engaged in
related businesses, and each Grantor will derive substantial direct and indirect
benefit from the making of the extensions of credit under the Credit Agreement;
WHEREAS, the Operating Banks (as defined in the Credit
Agreement) have provided, and may from time to time provide, independently of
the Banks and the Credit Agreement, customary banking deposit and disbursement
services to the Borrower and/or its Subsidiaries in connection with the Demand
Deposit Accounts (as defined in the Credit Agreement) established by the
Borrower and/or its Subsidiaries with such Operating Banks;
WHEREAS, it is a condition precedent to the obligation of the
Banks to make their respective extensions of credit to the Borrower under the
Credit Agreement that the Grantors shall have executed and delivered this
Agreement to the Collateral Agent for the benefit of the Banks and the Operating
Banks;
NOW, THEREFORE, in consideration of the premises and to induce
the Collateral Agent and the Banks to enter into the Credit Agreement and to
induce the Banks to make their respective extensions of credit to the Borrower
thereunder, each Grantor hereby agrees with the Collateral Agent, for the
benefit of the Banks and the Operating Banks, as follows:
SECTION 1. DEFINED TERMS
<PAGE> 5
2
1.1 DEFINITIONS. (a) Unless otherwise defined herein, terms
defined in the Credit Agreement and used herein shall have the meanings given to
them in the Credit Agreement, and the following terms which are defined in the
Uniform Commercial Code in effect in the State of New York on the date hereof
are used herein as so defined: Chattel Paper, Documents, Equipment, Farm
Products, Instruments, Investment Property and Inventory; excluding in each case
the Receivables Program Receivables.
(b) The following terms shall have the following meanings:
"ACCOUNTS": as defined in the Uniform Commercial Code in
effect in the State of New York on the date hereof including accounts,
accounts receivable and other rights of any Grantor to payment for
goods sold or leased or for services rendered (except for Receivables
Program Receivables (as defined in the Credit Agreement)), whether now
existing or hereafter arising and wherever arising, and whether or not
they have been earned by performance.
"AGREEMENT": this Guarantee and Collateral Agreement, as the
same may be amended, supplemented or otherwise modified from time to
time.
"BORROWER OBLIGATIONS": the collective reference to the unpaid
principal of and interest on the Advances and reimbursement obligations
in respect of Letters of Credit and all other obligations and
liabilities of the Borrower (including, without limitation, interest
accruing at the then applicable rate provided in the Credit Agreement
after the maturity of the Advances and reimbursement obligations in
respect of Letters of Credit and interest accruing at the then
applicable rate provided in the Credit Agreement after the filing of
any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, relating to the Borrower, whether or
not a claim for post-filing or post-petition interest is allowed in
such proceeding) to the Agent, the Collateral Agent or any Bank (or, in
the case of any Hedge Agreement referred to below, any Affiliate of any
Bank), whether direct or indirect, absolute or contingent, due or to
become due, or now existing or hereafter incurred, which may arise
under, out of, or in connection with, the Credit Agreement, this
Agreement, the other Credit Documents, any Letter of Credit or any
Hedge Agreement entered into by the Borrower with any Bank (or any
Affiliate of any Bank) or any other document made, delivered or given
in connection therewith, in each case whether on account of principal,
interest, reimbursement obligations, fees, indemnities, costs, expenses
or otherwise (including, without limitation, all fees and disbursements
of counsel to the Collateral Agent or to the Banks that are required to
be paid by the Borrower pursuant to the terms of any of the foregoing
agreements).
"COLLATERAL": as defined in Section 3.
"COLLATERAL ACCOUNT": any collateral account established by
the Collateral Agent as provided in Section 6.1 or 6.4.
"CONTRACTS": all contracts and agreements to which the Grantor
is a party on the date hereof or becomes a party subsequent to the date
hereof, as the same may be amended, supplemented or otherwise modified
from time to time, including, without limitation, (i) all rights of any
Grantor to receive moneys due and to become due to it thereunder or in
connection therewith, (ii) all rights of any Grantor to damages arising
thereunder and (iii) all rights of any Grantor to perform and to
exercise all remedies thereunder; excluding in each case the
Receivables Program Receivables.
<PAGE> 6
3
"CONTRACTUAL OBLIGATION": as to any Person, any provision of
any security issued by such Person or of any agreement, instrument or
other undertaking to which such Person is a party or by which it or any
of its property is bound; excluding in each case the Receivables
Program Receivables.
"COPYRIGHT LICENSES": any written agreement naming any Grantor
as licensor or licensee (including, without limitation, those listed in
SCHEDULE 6), granting any right under any Copyright, including, without
limitation, the grant of rights to manufacture, distribute, exploit and
sell materials derived from any Copyright.
"COPYRIGHTS": (i) all copyrights arising under the laws of the
United States, any other country or any political subdivision thereof,
whether registered or unregistered and whether published or unpublished
(including, without limitation, those listed in SCHEDULE 6), all
registrations and recordings thereof, and all applications in
connection therewith, including, without limitation, all registrations,
recordings and applications in the United States Copyright Office, and
(ii) the right to obtain all renewals thereof.
"GENERAL INTANGIBLES": all "general intangibles" as such term
is defined in Section 9-106 of the Uniform Commercial Code in effect in
the State of New York on the date hereof and, in any event, including,
without limitation, with respect to any Grantor, all contracts,
agreements, instruments and indentures in any form, and portions
thereof, to which such Grantor is a party or under which such Grantor
has any right, title or interest or to which such Grantor or any
property of such Grantor is subject, as the same may from time to time
be amended, supplemented or otherwise modified, including, without
limitation, (i) all rights of such Grantor to receive moneys due and to
become due to it thereunder or in connection therewith, (ii) all rights
of such Grantor to damages arising thereunder and (iii) all rights of
such Grantor to perform and to exercise all remedies thereunder, in
each case to the extent the grant by such Grantor of a security
interest pursuant to this Agreement in its right, title and interest in
such contract, agreement, instrument or indenture is not prohibited by
such contract, agreement, instrument or indenture without the consent
of any other party thereto, would not give any other party to such
contract, agreement, instrument or indenture the right to terminate its
obligations thereunder, or is permitted with consent if all necessary
consents to such grant of a security interest have been obtained from
the other parties thereto (it being understood that the foregoing shall
not be deemed to obligate such Grantor to obtain such consents);
PROVIDED, that the foregoing limitation shall not affect, limit,
restrict or impair the grant by such Grantor of a security interest
pursuant to this Agreement in any Receivable or any money or other
amounts due or to become due under any such contract, agreement,
instrument or indenture; excluding in each case the Receivables Program
Receivables.
"GUARANTOR OBLIGATIONS": with respect to any Guarantor, the
collective reference to (i) the Borrower Obligations and the Operating
Bank Obligations and (ii) all obligations and liabilities of such
Guarantor which may arise under or in connection with this Agreement or
any other Credit Document to which such Guarantor is a party, in each
case whether on account of guarantee obligations, reimbursement
obligations, fees, indemnities, costs, expenses or otherwise
(including, without limitation, all reasonable fees and disbursements
of counsel to the Collateral Agent or to the Banks that are required to
be paid by such Guarantor pursuant to the terms of this Agreement or
any other Credit Document).
"GUARANTORS": the collective reference to each Grantor other
than the Borrower.
<PAGE> 7
4
"HEDGE AGREEMENTS": as to any Person, all interest rate swaps,
caps or collar agreements or similar arrangements entered into by such
Person providing for protection against fluctuations in interest rates
or currency exchange rates or the exchange of nominal interest
obligations, either generally or under specific contingencies.
"INTELLECTUAL PROPERTY": the collective reference to all
rights, priorities and privileges relating to intellectual property,
whether arising under United States, multinational or foreign laws or
otherwise, including, without limitation, the Copyrights, the Copyright
Licenses, the Patents, the Patent Licenses, the Trademarks and the
Trademark Licenses, and all rights to sue at law or in equity for any
infringement or other impairment thereof, including the right to
receive all proceeds and damages therefrom.
"INTERCOMPANY NOTE": any promissory note evidencing loans made
by any Grantor to the Borrower or any of its Subsidiaries.
"ISSUERS": the collective reference to each issuer of a
Pledged Security.
"NEW YORK UCC": the Uniform Commercial Code as from time to
time in effect in the State of New York.
"OBLIGATIONS": (i) in the case of the Borrower, the Borrower
Obligations and the Operating Bank Obligations and (ii) in the case of
each Guarantor, its Guarantor Obligations.
"OPERATING BANK OBLIGATIONS": as defined in the Credit
Agreement.
"PATENT LICENSE": all agreements, whether written or oral,
providing for the grant by or to any Grantor of any right to
manufacture, use or sell any invention covered in whole or in part by a
Patent, including, without limitation, any of the foregoing referred to
in SCHEDULE 6.
"PATENTS": (i) all letters patent of the United States, any
other country or any political subdivision thereof, all reissues and
extensions thereof and all goodwill associated therewith, including,
without limitation, any of the foregoing referred to in SCHEDULE 6,
(ii) all applications for letters patent of the United States or any
other country and all divisions, continuations and
continuations-in-part thereof, including, without limitation, any of
the foregoing referred to in SCHEDULE 6, and (iii) all rights to obtain
any reissues or extensions of the foregoing.
"PLEDGED NOTES": all promissory notes listed on SCHEDULE 2,
all Intercompany Notes at any time issued to any Grantor and all other
promissory notes issued to or held by any Grantor (other than
promissory notes issued in connection with extensions of trade credit
by any Grantor in the ordinary course of business).
"PLEDGED PARTNERSHIP INTERESTS": in each case, whether now
existing or hereafter acquired, all of each Grantor's right, title and
interest in and to:
(i) any Issuer listed on Schedule 2 that is a
partnership, but not any of such Grantor's obligations from
time to time as a general or limited partner, as the case may
be, in any such Issuer (unless the Collateral Agent or its
designee, on behalf of the Collateral Agent, the Banks and the
Operating Banks, shall elect to become a
<PAGE> 8
5
general or limited partner, as the case may be, in any such
Issuer in connection with its exercise of remedies pursuant to
the terms hereof);
(ii) any and all moneys due and to become due to
such Grantor now or in the future by way of a distribution
made to such Grantor in its capacity as a general partner or
limited partner, as the case may be, in any such Issuer or
otherwise in respect of such Grantor's interest as a general
partner or limited partner, as the case may be, in any such
Issuer;
(iii) any other Property of any such Issuer to
which such Grantor now or in the future may be entitled in
respect of its interests as a general partner or limited
partner, as the case may be, in any such Issuer by way of
distribution, return of capital or otherwise;
(iv) any other claim or right which such Grantor
now has or may in the future acquire in respect of its general
or limited partnership interests in any such Issuer;
(v) the partnership agreement or other
organizational documents of any such Issuer;
(vi) all certificates, options or rights of any
nature whatsoever that may be issued or granted by any such
Issuer to such Grantor while this Agreement is in effect; and
(vii) to the extent not otherwise included, all
Proceeds of any or all of the foregoing.
"PLEDGED SECURITIES": the collective reference to the Pledged
Notes, the Pledged Stock and the Pledged Partnership Interests.
"PLEDGED STOCK": the shares of Capital Stock listed on
SCHEDULE 2 (which, in the case of Foreign Subsidiaries, shall not
exceed 65% of the Capital Stock of such Foreign Subsidiaries and which
shall not include Lincoln Indemnity Company), together with any other
shares, stock certificates, options or rights of any nature whatsoever
in respect of the Capital Stock of any Person that may be issued or
granted to, or held by, any Grantor after the date hereof, while this
Agreement is in effect (which, in the case of Foreign Subsidiaries,
shall not exceed 65% of the Capital Stock of such Foreign Subsidiaries
and which shall not include Lincoln Indemnity Company).
"PROCEEDS": all "proceeds" as such term is defined in Section
9-306(1) of the Uniform Commercial Code in effect in the State of New
York on the date hereof and, in any event, shall include, without
limitation, all dividends or other income from the Pledged Securities,
collections thereon or distributions or payments with respect thereto;
excluding in each case the Receivables Program Receivables.
"RECEIVABLES": any right to payment for goods sold or leased
or for services rendered, whether or not such right is evidenced by an
Instrument or Chattel Paper and whether or not it has been earned by
performance, including without limitation, any Account; excluding in
each case Receivables Program Receivables.
<PAGE> 9
6
"SECURITIES ACT": the Securities Act of 1933, as amended.
"TRADEMARKS": (i) all trademarks, trade names, corporate
names, company names, business names, fictitious business names, trade
styles, service marks, logos and other source or business identifiers,
and all goodwill associated therewith, now existing or hereafter
adopted or acquired, all registrations and recordings thereof, and all
applications in connection therewith, excluding "Intent to Use"
filings, whether in the United States Patent and Trademark Office or in
any similar office or agency of the United States, any State thereof or
any other country or any political subdivision thereof, or otherwise,
and all common-law rights related thereto, including, without
limitation, any of the foregoing referred to in SCHEDULE 6, and (ii)
the right to obtain all renewals thereof.
"TRADEMARK LICENSE": any agreement, whether written or oral,
providing for the grant by or to any Grantor of any right to use any
Trademark, including, without limitation, any of the foregoing referred
to in SCHEDULE 6; excluding "Intent to Use" filings.
1.2 OTHER DEFINITIONAL PROVISIONS. (a) The words "hereof,"
"herein", "hereto" and "hereunder" and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular
provision of this Agreement, and Section and Schedule references are to this
Agreement unless otherwise specified.
(b) The meanings given to terms defined herein shall be
equally applicable to both the singular and plural forms of such terms.
(c) Where the context requires, terms relating to the
Collateral or any part thereof, when used in relation to a Grantor, shall refer
to such Grantor's Collateral or the relevant part thereof.
SECTION 2. GUARANTEE
2.1 GUARANTEE. (a) Each of the Guarantors hereby, jointly and
severally, unconditionally and irrevocably, guarantees to the Collateral Agent,
for the benefit of the Banks and their respective successors, indorsees,
transferees and assigns, the prompt and complete payment and performance by the
Borrower when due (whether at the stated maturity, by acceleration or otherwise)
of the Borrower Obligations.
(b) Anything herein or in any other Credit Document to the
contrary notwithstanding, the maximum liability of each Guarantor hereunder and
under the other Credit Documents shall in no event exceed the amount which can
be guaranteed by such Guarantor under applicable federal and state laws relating
to the insolvency of debtors (after giving effect to the right of contribution
established in Section 2.2).
(c) Each Guarantor agrees that the Borrower Obligations may at
any time and from time to time exceed the amount of the liability of such
Guarantor hereunder without impairing the guarantee contained in this Section 2
or affecting the rights and remedies of the Collateral Agent or any Bank
hereunder.
(d) The guarantee contained in this Section 2 shall remain in
full force and effect until all the Borrower Obligations and the obligations of
each Guarantor under the guarantee contained in
<PAGE> 10
7
this Section 2 shall have been satisfied by payment in full, no Letter of Credit
shall be outstanding and the Commitments shall be terminated, notwithstanding
that from time to time during the term of the Credit Agreement the Borrower may
be free from any Borrower Obligations.
(e) No payment made by the Borrower, any of the Guarantors,
any other guarantor or any other Person or received or collected by the
Collateral Agent or any Bank from the Borrower, any of the Guarantors, any other
guarantor or any other Person by virtue of any action or proceeding or any
set-off or appropriation or application at any time or from time to time in
reduction of or in payment of the Borrower Obligations shall be deemed to
modify, reduce, release or otherwise affect the liability of any Guarantor
hereunder which shall, notwithstanding any such payment (other than any payment
made by such Guarantor in respect of the Borrower Obligations or any payment
received or collected from such Guarantor in respect of the Borrower
Obligations, remain liable for the Borrower Obligations up to the maximum
liability of such Guarantor hereunder until the Borrower Obligations are paid in
full, no Letter of Credit shall be outstanding and the Commitments are
terminated.
2.2 RIGHT OF CONTRIBUTION. Each Guarantor hereby agrees that
to the extent that a Guarantor shall have paid more than its proportionate share
of any payment made hereunder, such Guarantor shall be entitled to seek and
receive contribution from and against any other Guarantor hereunder which has
not paid its proportionate share of such payment. Each Guarantor's right of
contribution shall be subject to the terms and conditions of Section 2.3. The
provisions of this Section 2.2 shall in no respect limit the obligations and
liabilities of any Guarantor to the Collateral Agent and the Banks, and each
Guarantor shall remain liable to the Collateral Agent and the Banks for the full
amount guaranteed by such Guarantor hereunder.
2.3 NO SUBROGATION. Notwithstanding any payment made by any
Guarantor hereunder or any set-off or application of funds of any Guarantor by
the Collateral Agent or any Bank, no Guarantor shall be entitled to be
subrogated to any of the rights of the Collateral Agent or any Bank against the
Borrower or any other Guarantor or any collateral security or guarantee or right
of offset held by the Collateral Agent or any Bank for the payment of the
Borrower Obligations, nor shall any Guarantor seek or be entitled to seek any
contribution or reimbursement from the Borrower or any other Guarantor in
respect of payments made by such Guarantor hereunder, until all amounts owing to
the Collateral Agent and the Banks by the Borrower on account of the Borrower
Obligations are paid in full, no Letter of Credit shall be outstanding and the
Commitments are terminated. If any amount shall be paid to any Guarantor on
account of such subrogation rights at any time when all of the Borrower
Obligations shall not have been paid in full, such amount shall be held by such
Guarantor in trust for the Collateral Agent and the Banks, segregated from other
funds of such Guarantor, and shall, forthwith upon receipt by such Guarantor, be
turned over to the Collateral Agent in the exact form received by such Guarantor
(duly indorsed by such Guarantor to the Collateral Agent, if required), to be
applied against the Borrower Obligations, whether matured or unmatured, in such
order as the Collateral Agent may determine.
2.4 AMENDMENTS, ETC. WITH RESPECT TO THE BORROWER OBLIGATIONS.
Each Guarantor shall remain obligated hereunder notwithstanding that, without
any reservation of rights against any Guarantor and without notice to or further
assent by any Guarantor, any demand for payment of any of the Borrower
Obligations made by the Collateral Agent or any Bank may be rescinded by the
Collateral Agent or such Bank and any of the Borrower Obligations continued, and
the Borrower Obligations or the liability of any other Person upon or for any
part thereof, or any collateral security or guarantee therefor or right of
offset with respect thereto, may, from time to time, in whole or in part, be
renewed, extended, amended, modified, accelerated, compromised, waived,
surrendered or
<PAGE> 11
8
released by the Collateral Agent or any Bank, and the Credit Agreement and the
other Credit Documents and any other documents executed and delivered in
connection therewith may be amended, modified, supplemented or terminated, in
whole or in part, as the Collateral Agent (or the Required Banks or all Banks,
as the case may be) may deem advisable from time to time, and any collateral
security, guarantee or right of offset at any time held by the Collateral Agent
or any Bank for the payment of the Borrower Obligations may be sold, exchanged,
waived, surrendered or released. Neither the Collateral Agent nor any Bank shall
have any obligation to protect, secure, perfect or insure any Lien at any time
held by it as security for the Borrower Obligations or for the guarantee
contained in this Section 2 or any property subject thereto.
2.5 GUARANTEE ABSOLUTE AND UNCONDITIONAL. Each Guarantor
waives any and all notice of the creation, renewal, extension or accrual of any
of the Borrower Obligations and notice of or proof of reliance by the Collateral
Agent or any Bank upon the guarantee contained in this Section 2 or acceptance
of the guarantee contained in this Section 2; the Borrower Obligations, and any
of them, shall conclusively be deemed to have been created, contracted or
incurred, or renewed, extended, amended or waived, in reliance upon the
guarantee contained in this Section 2; and all dealings between the Borrower and
any of the Guarantors, on the one hand, and the Collateral Agent and the Banks,
on the other hand, likewise shall be conclusively presumed to have been had or
consummated in reliance upon the guarantee contained in this Section 2. Each
Guarantor waives diligence, presentment, protest, demand for payment and notice
of default or nonpayment to or upon the Borrower or any of the Guarantors with
respect to the Borrower Obligations. Each Guarantor understands and agrees that
the guarantee contained in this Section 2 shall be construed as a continuing,
absolute and unconditional guarantee of payment without regard to (a) the
validity or enforceability of the Credit Agreement or any other Credit Document,
any of the Borrower Obligations or any other collateral security therefor or
guarantee or right of offset with respect thereto at any time or from time to
time held by the Collateral Agent or any Bank, (b) any defense, set-off or
counterclaim (other than a defense of payment or performance) which may at any
time be available to or be asserted by the Borrower or any other Person against
the Collateral Agent or any Bank, or (c) any other circumstance whatsoever (with
or without notice to or knowledge of the Borrower or such Guarantor) which
constitutes, or might be construed to constitute, an equitable or legal
discharge of the Borrower for the Borrower Obligations, or of such Guarantor
under the guarantee contained in this Section 2, in bankruptcy or in any other
instance. When making any demand hereunder or otherwise pursuing its rights and
remedies hereunder against any Guarantor, the Collateral Agent or any Bank may,
but shall be under no obligation to, make a similar demand on or otherwise
pursue such rights and remedies as it may have against the Borrower, any other
Guarantor or any other Person or against any collateral security or guarantee
for the Borrower Obligations or any right of offset with respect thereto, and
any failure by the Collateral Agent or any Bank to make any such demand, to
pursue such other rights or remedies or to collect any payments from the
Borrower, any other Guarantor or any other Person or to realize upon any such
collateral security or guarantee or to exercise any such right of offset, or any
release of the Borrower, any other Guarantor or any other Person or any such
collateral security, guarantee or right of offset, shall not relieve any
Guarantor of any obligation or liability hereunder, and shall not impair or
affect the rights and remedies, whether express, implied or available as a
matter of law, of the Collateral Agent or any Bank against any Guarantor. For
the purposes hereof "demand" shall include the commencement and continuance of
any legal proceedings.
2.6 REINSTATEMENT. The guarantee contained in this Section 2
shall continue to be effective, or be reinstated, as the case may be, if at any
time payment, or any part thereof, of any of the Borrower Obligations is
rescinded or must otherwise be restored or returned by the Collateral Agent or
any Bank upon the insolvency, bankruptcy, dissolution, liquidation or
reorganization of the
<PAGE> 12
9
Borrower or any Guarantor, or upon or as a result of the appointment of a
receiver, intervenor or conservator of, or trustee or similar officer for, the
Borrower or any Guarantor or any substantial part of its property, or otherwise,
all as though such payments had not been made.
2.7 PAYMENTS. Each Guarantor hereby guarantees that payments
hereunder will be paid to the Collateral Agent without set-off or counterclaim
in Dollars at the office of the Collateral Agent located at 270 Park Avenue, New
York, New York 10017.
SECTION 3. GRANT OF SECURITY INTEREST
3.1 GRANT OF SECURITY INTEREST. Each Grantor hereby assigns
and transfers to the Collateral Agent, and hereby grants to the Collateral
Agent, for the benefit of the Banks and the Operating Banks, a security interest
in all of the following property now owned or at any time hereafter acquired by
such Grantor or in which such Grantor now has or at any time in the future may
acquire any right, title or interest (collectively, the "COLLATERAL"), as
collateral security for the prompt and complete payment and performance when due
(whether at the stated maturity, by acceleration or otherwise) of such Grantor's
Obligations:
(a) all Accounts;
(b) all Chattel Paper;
(c) all Contracts;
(d) all Documents;
(e) all Equipment;
(f) all General Intangibles;
(g) all Instruments;
(h) all Intellectual Property;
(i) all Inventory;
(j) all Investment Property;
(k) all Pledged Securities;
(l) all Receivables;
(m) all books and records pertaining to the Collateral; and
(n) to the extent not otherwise included, all Proceeds and
products of any and all of the foregoing and all collateral security
and guarantees given by any Person with respect to any of the
foregoing.
<PAGE> 13
10
Notwithstanding the foregoing, "Collateral" shall not include
any right, title or interest of any Grantor, now owned or at any time hereafter
acquired, in the Receivables Program Receivables.
3.2 FORMALITIES. (a) STOCK POWERS. Concurrently with the
delivery to the Collateral Agent of each certificate representing one or more
shares of Pledged Stock to the Collateral Agent, the Grantor owning such Pledged
Stock shall deliver an undated stock power covering such certificate, duly
executed in blank by such Grantor.
(b) POWERS; REGISTRATION OF PARTNERSHIP PLEDGE. (i)
Concurrently with the delivery to the Collateral Agent of any certificate
representing any Pledged Partnership Interests, the Grantor owning such Pledged
Partnership Interests shall, if requested by the Collateral Agent, deliver an
undated power covering such certificate, duly executed in blank by such Grantor;
and
(ii) Concurrently with the execution of this Agreement, each
Grantor will send to each Issuer of Pledged Partnership Interests written
instructions substantially in the form of Exhibit A hereto and shall cause such
Issuer to, and such Issuer shall, deliver to the Collateral Agent the
transaction statement in the form of Exhibit B hereto confirming that such
Issuer has registered the pledge effected by this Agreement on its books.
SECTION 4. REPRESENTATIONS AND WARRANTIES
To induce the Collateral Agent and the Banks to enter into the
Credit Agreement and to induce the Banks to make their respective extensions of
credit to the Borrower thereunder, each Grantor hereby represents and warrants
to the Collateral Agent and each Bank that:
4.1 REPRESENTATIONS IN CREDIT AGREEMENT. In the case of each
Guarantor, the representations and warranties set forth in Article V of the
Credit Agreement as they relate to such Guarantor or to the Credit Documents to
which such Guarantor is a party, each of which is hereby incorporated herein by
reference, are true and correct in all material respects, and the Collateral
Agent and each Bank shall be entitled to rely on each of them as if they were
fully set forth herein, PROVIDED that each reference in each such representation
and warranty to the Borrower's knowledge shall, for the purposes of this Section
4.1, be deemed to be a reference to such Guarantor's knowledge.
4.2 TITLE; NO OTHER LIENS. Except for the security interest
granted to the Collateral Agent for the benefit of the Banks and the Operating
Banks pursuant to this Agreement and the other Liens permitted to exist on the
Collateral by the Credit Agreement, such Grantor owns each item of the
Collateral free and clear of any and all Liens or claims of others. No financing
statement or other public notice with respect to all or any part of the
Collateral is on file or of record in any public office, except such as have
been filed in favor of the Collateral Agent, for the benefit of the Banks and
the Operating Banks, pursuant to this Agreement or as are permitted by the
Credit Agreement.
4.3 PERFECTED FIRST PRIORITY LIENS. The security interests
granted pursuant to this Agreement (a) upon completion of the filings and other
actions specified on SCHEDULE 3 (which, in the case of all filings and other
documents referred to on said Schedule, have been delivered to the Collateral
Agent in completed and duly executed form) will constitute valid perfected
security interests in all of the Collateral in favor of the Collateral Agent,
for the benefit of the Banks and the Operating Banks, as collateral security for
such Grantor's Obligations, enforceable in accordance with the terms hereof
against all creditors of such Grantor and any Persons purporting to purchase any
Collateral from such Grantor and (b) are prior to all other Liens on the
Collateral in existence on the date hereof
<PAGE> 14
11
except for (i) unrecorded Liens permitted by the Credit Agreement which have
priority over the Liens on the Collateral by operation of law and (ii) Permitted
Liens as defined in the Credit Agreement.
4.4 CHIEF EXECUTIVE OFFICE. On the date hereof, such Grantor's
jurisdiction of organization and the location of such Grantor's chief executive
office or sole place of business are specified on SCHEDULE 4.
4.5 INVENTORY AND EQUIPMENT. On the date hereof, the Inventory
and the Equipment (other than mobile goods) are kept at the locations listed on
SCHEDULE 5.
4.6 FARM PRODUCTS. None of the Collateral constitutes, or is
the Proceeds of, Farm Products.
4.7 PLEDGED SECURITIES. (a) The shares of Pledged Stock
pledged by such Grantor hereunder constitute all the issued and outstanding
shares of all classes of the Capital Stock of each domestic corporate Issuer
owned by such Grantor (and 65% of all the issued and outstanding classes of the
Capital Stock of each Foreign Subsidiary Issuer).
(b) The Pledged Partnership Interests pledged by each Grantor
constitute all of the issued and outstanding partnership interests of each
Issuer that is a partnership in which such Grantor has any right, title and
interest.
(c) All the shares of the Pledged Stock and all of the Pledged
Partnership Interests have been duly and validly issued and are fully paid and
nonassessable.
(d) Each of the Pledged Notes constitutes the legal, valid and
binding obligation of the obligor with respect thereto, enforceable in
accordance with its terms, subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at law) and an
implied covenant of good faith and fair dealing.
(e) Such Grantor is the record and beneficial owner of, and
has good and marketable title to, the Pledged Securities pledged by it
hereunder, free of any and all Liens or options in favor of, or claims of, any
other Person, except the security interest created by this Agreement and as set
forth on SCHEDULE 4.7.
4.8 RECEIVABLES. (a) No amount in excess of $250,000 payable
to such Grantor under or in connection with any Receivable is evidenced by any
Instrument or Chattel Paper which has not been delivered to the Collateral
Agent.
(b) None of the obligors on any Receivables is a Governmental
Authority.
(c) The amounts represented by such Grantor to the Banks from
time to time as owing to such Grantor in respect of the Receivables will at such
times be accurate.
4.9 CONTRACTS. (a) Neither such Grantor nor (to the best of
such Grantor's knowledge) any of the other parties to the Contracts is in
default in the performance or observance of any of the terms thereof in any
manner that, in the aggregate, could reasonably be expected to have a Material
Adverse Effect.
<PAGE> 15
12
(b) The right, title and interest of such Grantor in, to and
under the Contracts are not subject to any defenses, offsets, counterclaims or
claims that, in the aggregate, could reasonably be expected to have a Material
Adverse Effect.
(c) No amount in excess of $250,000 payable to such Grantor
under or in connection with any Contract is evidenced by any Instrument or
Chattel Paper which has not been delivered to the Collateral Agent.
(d) None of the parties to any Contract is a Governmental
Authority.
4.10 INTELLECTUAL PROPERTY. (a) SCHEDULE 6 lists all
Intellectual Property owned by such Grantor in its own name on the date hereof.
(b) On the date hereof, all material Intellectual Property is
valid, subsisting, unexpired and enforceable, has not been abandoned and does
not infringe the intellectual property rights of any other Person.
(c) Except as set forth in SCHEDULE 6, on the date hereof,
none of the Intellectual Property is the subject of any licensing or franchise
agreement pursuant to which such Grantor is the licensor or franchisor.
(d) No holding, decision or judgment has been rendered by any
Governmental Authority which would limit, cancel or question the validity of, or
such Grantor's rights in, any Intellectual Property in any respect that could
reasonably be expected to have a Material Adverse Effect.
(e) No action or proceeding is pending, or, to the knowledge
of such Grantor, threatened, on the date hereof (i) seeking to limit, cancel or
question the validity of any Intellectual Property or such Grantor's ownership
interest therein, or (ii) which, if adversely determined, would have a material
adverse effect on the value of any Intellectual Property.
SECTION 5. COVENANTS
Each Grantor covenants and agrees with the Collateral Agent
and the Banks that, from and after the date of this Agreement until the
Obligations shall have been paid in full, no Letter of Credit shall be
outstanding and the Commitments shall have terminated:
5.1 COVENANTS IN CREDIT AGREEMENT. In the case of each
Guarantor, such Guarantor shall take, or shall refrain from taking, as the case
may be, each action that is necessary to be taken or not taken, as the case may
be, so that no Default or Event of Default is caused by the failure to take such
action or to refrain from taking such action by such Guarantor or any of its
Subsidiaries.
5.2 DELIVERY OF INSTRUMENTS AND CHATTEL PAPER. If any amount
payable under or in connection with any of the Collateral shall be or become
evidenced by any Instrument or Chattel Paper, such Instrument or Chattel Paper
(other than any Instrument or Chattel which evidences an amount payable which
does not exceed $250,000) shall within 14 days be delivered (unless a Default or
Event of Default has occurred and is continuing, in which case delivery shall be
immediate) to the Collateral Agent, duly indorsed in a manner satisfactory to
the Collateral Agent, to be held as Collateral pursuant to this Agreement.
<PAGE> 16
13
5.3 MAINTENANCE OF INSURANCE. The Grantors agree to maintain
insurance as required by the Credit Agreement.
5.4 PAYMENT OF OBLIGATIONS. Such Grantor will pay and
discharge or otherwise satisfy at or before maturity or before they become
delinquent, as the case may be, all taxes, assessments and governmental charges
or levies imposed upon the Collateral or in respect of income or profits
therefrom, as well as all claims of any kind (including, without limitation,
claims for labor, materials and supplies) against or with respect to the
Collateral, except that no such charge need be paid if the amount or validity
thereof is currently being contested in good faith by appropriate proceedings,
reserves in conformity with GAAP with respect thereto have been provided on the
books of such Grantor and such proceedings could not reasonably be expected to
result in the sale, forfeiture or loss of any material portion of the Collateral
or any interest therein.
5.5 MAINTENANCE OF PERFECTED SECURITY INTEREST; FURTHER
DOCUMENTATION. (a) Such Grantor shall maintain the security interest created by
this Agreement as a perfected security interest having at least the priority
described in Section 4.3 and shall defend such security interest against the
claims and demands of all Persons whomsoever.
(b) Such Grantor will furnish to the Collateral Agent and the
Banks from time to time statements and schedules further identifying and
describing the Collateral and such other reports in connection with the
Collateral as the Collateral Agent may reasonably request, all in reasonable
detail.
(c) At any time and from time to time, upon the written
request of the Collateral Agent, and at the sole expense of such Grantor, such
Grantor will promptly and duly execute and deliver, and have recorded, such
further instruments and documents and take such further actions as the
Collateral Agent may reasonably request for the purpose of obtaining or
preserving the full benefits of this Agreement and of the rights and powers
herein granted, including, without limitation, the filing of any financing or
continuation statements under the Uniform Commercial Code (or other similar
laws) in effect in any jurisdiction with respect to the security interests
created hereby.
5.6 CHANGES IN LOCATIONS, NAME, ETC. Such Grantor will not,
except upon 15 days' prior written notice to the Collateral Agent and delivery
to the Collateral Agent of (a) all additional executed financing statements and
other documents reasonably requested by the Collateral Agent to maintain the
validity, perfection and priority of the security interests provided for herein
and (b) if applicable, a written supplement to SCHEDULE 5 showing any additional
location at which Inventory or Equipment shall be kept:
(i) permit any of the Inventory or Equipment to be kept at
a location other than those listed on SCHEDULE 5;
(ii) change the location of its chief executive office or
sole place of business from that referred to in Section 4.4; or
(iii) change its name, identity or corporate structure to
such an extent that any financing statement filed by the Collateral
Agent in connection with this Agreement would become misleading.
5.7 NOTICES. Such Grantor will advise the Collateral Agent and
the Banks promptly, in reasonable detail, of:
<PAGE> 17
14
(a) any Lien (other than security interests created hereby or
Liens permitted under the Credit Agreement) on any of the Collateral
which would materially adversely affect the ability of the Collateral
Agent to exercise any of its remedies hereunder; and
(b) of the occurrence of any other event which could
reasonably be expected to have a material adverse effect on the
aggregate value of the Collateral or on the security interests created
hereby.
5.8 PLEDGED SECURITIES. (a) If such Grantor shall become
entitled to receive or shall receive any certificate or instrument (including,
without limitation, any certificate representing a stock dividend or a
distribution in connection with any reclassification, increase or reduction of
capital or any certificate issued in connection with any reorganization), option
or rights in respect of the Capital Stock of any Issuer, whether in addition to,
in substitution of, as a conversion of, or in exchange for, any shares or units
of the Pledged Stock or the Pledged Partnership Interests, or otherwise in
respect thereof, such Grantor shall accept the same as the agent of the
Collateral Agent and the Banks, hold the same in trust for the Collateral Agent
and the Banks and deliver the same forthwith to the Collateral Agent in the
exact form received, duly indorsed by such Grantor to the Collateral Agent, if
required, together with an undated stock or other power covering such
certificate duly executed in blank by such Grantor and with, if the Collateral
Agent so requests, signature guaranteed, to be held by the Collateral Agent,
subject to the terms hereof, as additional collateral security for the
Obligations. Any sums paid upon or in respect of the Pledged Securities upon the
liquidation or dissolution of any Issuer during the continuation of a Default or
Event of Default shall be paid over to the Collateral Agent to be held by it
hereunder as additional collateral security for the Obligations, and in case any
distribution of capital shall be made on or in respect of the Pledged Securities
or any property shall be distributed upon or with respect to the Pledged
Securities pursuant to the recapitalization or reclassification of the capital
of any Issuer or pursuant to the reorganization thereof, the property so
distributed shall, unless otherwise subject to a perfected security interest in
favor of the Collateral Agent, be delivered to the Collateral Agent to be held
by it hereunder as additional collateral security for the Obligations. If any
sums of money or property so paid or distributed in respect of the Pledged
Securities shall be received by such Grantor during the continuation of a
Default or Event of Default, such Grantor shall, until such money or property is
paid or delivered to the Collateral Agent, hold such money or property in trust
for the Banks, segregated from other funds of such Grantor, as additional
collateral security for the Obligations.
(b) Without the prior written consent of the Collateral Agent,
such Grantor will not (i) vote to enable, or take any other action to permit,
any Issuer to issue any stock, partnership interests or other equity securities
of any nature or to issue any other securities convertible into or granting the
right to purchase or exchange for any stock or other equity securities of any
nature of any Issuer, (ii) sell, assign, transfer, exchange, or otherwise
dispose of, or grant any option with respect to, the Pledged Securities or
Proceeds thereof (except pursuant to a transaction expressly permitted by the
Credit Agreement), (iii) create, incur or permit to exist any Lien or option in
favor of, or any claim of any Person with respect to, any of the Pledged
Securities or Proceeds thereof, or any interest therein, except for the security
interests created by this Agreement or set forth on SCHEDULE 4.7 or (iv) enter
into any agreement or undertaking restricting the right or ability of such
Grantor or the Collateral Agent to sell, assign or transfer any of the Pledged
Securities or Proceeds thereof.
(c) In the case of each Grantor which is an Issuer, such
Issuer agrees that (i) it will be bound by the terms of this Agreement relating
to the Pledged Securities issued by it and will comply with such terms insofar
as such terms are applicable to it, (ii) it will notify the Collateral Agent
promptly in writing of the occurrence of any of the events described in Section
5.8(a) with respect to
<PAGE> 18
15
the Pledged Securities issued by it and (iii) the terms of Sections 6.3(c) and
6.7 shall apply to it, MUTATIS MUTANDIS, with respect to all actions that may be
required of it pursuant to Section 6.3(c) or 6.7 with respect to the Pledged
Securities issued by it.
5.9 CONTRACTS. Such Grantor will perform and comply in all
material respects with all its obligations under the Contracts.
5.10 INTELLECTUAL PROPERTY. (a) Such Grantor (either itself or
through licensees) will (i) continue to use each material Trademark on each and
every trademark class of goods applicable to its current line as reflected in
its current catalogs, brochures and price lists in order to maintain such
Trademark in full force in all material respects free from any claim of
abandonment for non-use, (ii) maintain as in the past the quality of products
and services offered under such Trademark, (iii) use such Trademark with the
appropriate notice of registration and all other notices and legends required by
applicable Requirements of Law, (iv) not adopt or use any mark which is
confusingly similar or a colorable imitation of such Trademark unless the
Collateral Agent, for the benefit of the Banks and the Operating Banks, shall
obtain a perfected security interest in such mark pursuant to this Agreement,
and (v) not (and not permit any licensee or sublicensee thereof to) do any act
or knowingly omit to do any act whereby such Trademark may become invalidated or
impaired in any way.
(b) Such Grantor (either itself or through licensees) will not
do any act, or omit to do any act, whereby any material Patent may become
forfeited, abandoned or dedicated to the public.
(c) Such Grantor (either itself or through licensees) (i) will
employ each material Copyright and (ii) will not (and will not permit any
licensee or sublicensee thereof to) do any act or knowingly omit to do any act
whereby any material portion of the Copyrights may become invalidated or
otherwise impaired. Such Grantor will not (either itself or through licensees)
do any act whereby any material portion of the Copyrights may fall into the
public domain.
(d) Such Grantor (either itself or through licensees) will not
do any act that knowingly uses any material Intellectual Property to infringe
the intellectual property rights of any other Person.
(e) Such Grantor will notify the Collateral Agent and the
Banks immediately if it knows, or has reason to know, that any application or
registration relating to any material Intellectual Property may become
forfeited, abandoned or dedicated to the public, or of any adverse determination
or development (including, without limitation, the institution of, or any such
determination or development in, any proceeding in the United States Patent and
Trademark Office, the United States Copyright Office or any court or tribunal in
any country) regarding such Grantor's ownership of, or the validity of, any
material Intellectual Property or such Grantor's right to register the same or
to own and maintain the same.
(f) Whenever such Grantor, either by itself or through any
agent, employee, licensee or designee, shall file an application for the
registration of any Intellectual Property with the United States Patent and
Trademark Office, the United States Copyright Office or any similar office or
agency in any other country or any political subdivision thereof, such Grantor
shall report such filing to the Collateral Agent within five Business Days after
the last day of the fiscal quarter in which such filing occurs. Upon request of
the Collateral Agent, such Grantor shall execute and deliver, and have recorded,
any and all agreements, instruments, documents, and papers as the Collateral
Agent may request to evidence the Collateral Agent's and the Banks' security
interest in any Copyright, Patent or Trademark and the goodwill and general
intangibles of such Grantor relating thereto or represented thereby.
<PAGE> 19
16
(g) Such Grantor will take all reasonable and necessary steps,
including, without limitation, in any proceeding before the United States Patent
and Trademark Office, the United States Copyright Office or any similar office
or agency in any other country or any political subdivision thereof, to maintain
and pursue each application (and to obtain the relevant registration) and to
maintain each registration of the material Intellectual Property, including,
without limitation, filing of applications for renewal, affidavits of use and
affidavits of incontestability.
(h) In the event that any material Intellectual Property is
infringed, misappropriated or diluted by a third party, such Grantor shall (i)
take such actions as such Grantor shall reasonably deem appropriate under the
circumstances to protect such Intellectual Property and (ii) if such
Intellectual Property is of material economic value, promptly notify the
Collateral Agent after it learns thereof and sue for infringement,
misappropriation or dilution, to seek injunctive relief where appropriate and to
recover any and all damages for such infringement, misappropriation or dilution.
SECTION 6. REMEDIAL PROVISIONS
6.1 CERTAIN MATTERS RELATING TO RECEIVABLES. (a) At any time
after the occurrence and during the continuation of a Default or an Event of
Default, (x) the Collateral Agent shall have the right to make test
verifications of the Receivables in any manner and through any medium that it
reasonably considers advisable, and each Grantor shall furnish all such
assistance and information as the Collateral Agent may require in connection
with such test verifications; and (y) upon the Collateral Agent's request and at
the expense of the relevant Grantor, such Grantor shall cause independent public
accountants or others satisfactory to the Collateral Agent to furnish to the
Collateral Agent reports showing reconciliations, aging and test verifications
of, and trial balances for, the Receivables.
(b) The Collateral Agent hereby authorizes each Grantor to
collect such Grantor's Receivables, subject to the Collateral Agent's direction
and control, and the Collateral Agent may curtail or terminate said authority at
any time after the occurrence and during the continuance of an Event of Default.
If required by the Collateral Agent at any time after the occurrence and during
the continuance of an Event of Default, any payments of Receivables, when
collected by any Grantor, (i) shall be forthwith (and, in any event, within two
Business Days) deposited by such Grantor in the exact form received, duly
indorsed by such Grantor to the Collateral Agent if required, in a Collateral
Account maintained under the sole dominion and control of the Collateral Agent,
subject to withdrawal by the Collateral Agent for the account of the Banks only
as provided in Section , and (ii) until so turned over, shall be held by such
Grantor in trust for the Collateral Agent and the Banks, segregated from other
funds of such Grantor. Each such deposit of Proceeds of Receivables shall be
accompanied by a report identifying in reasonable detail the nature and source
of the payments included in the deposit.
(c) At the Collateral Agent's request at any time after the
occurrence and during the continuation of an Event of Default, each Grantor
shall deliver to the Collateral Agent all original and other documents
evidencing, and relating to, the agreements and transactions which gave rise to
the Receivables, including, without limitation, all original orders, invoices
and shipping receipts.
6.2 COMMUNICATIONS WITH OBLIGORS; GRANTORS REMAIN LIABLE. (a)
The Collateral Agent in its own name or in the name of others may at any time
after the occurrence and during the continuance of an Event of Default
communicate with obligors under the Receivables and parties to
<PAGE> 20
17
the Contracts to verify with them to the Collateral Agent's satisfaction the
existence, amount and terms of any Receivables or Contracts.
(b) Upon the request of the Collateral Agent at any time after
the occurrence and during the continuance of an Event of Default, each Grantor
shall notify obligors on the Receivables and parties to the Contracts that the
Receivables and the Contracts have been assigned to the Collateral Agent for the
benefit of the Banks and the Operating Banks and that payments in respect
thereof shall be made directly to the Collateral Agent.
(c) Anything herein to the contrary notwithstanding, each
Grantor shall remain liable under each of the Receivables and Contracts to
observe and perform all the conditions and obligations to be observed and
performed by it thereunder, all in accordance with the terms of any agreement
giving rise thereto. Neither the Collateral Agent nor any Bank shall have any
obligation or liability under any Receivable (or any agreement giving rise
thereto) or Contract by reason of or arising out of this Agreement or the
receipt by the Collateral Agent or any Bank of any payment relating thereto, nor
shall the Collateral Agent or any Bank be obligated in any manner to perform any
of the obligations of any Grantor under or pursuant to any Receivable (or any
agreement giving rise thereto) or Contract, to make any payment, to make any
inquiry as to the nature or the sufficiency of any payment received by it or as
to the sufficiency of any performance by any party thereunder, to present or
file any claim, to take any action to enforce any performance or to collect the
payment of any amounts which may have been assigned to it or to which it may be
entitled at any time or times.
6.3 PLEDGED SECURITIES. (a) Unless an Event of Default shall
have occurred and be continuing and the Collateral Agent shall have given notice
to the relevant Grantor of the Collateral Agent's intent to exercise its
corresponding rights pursuant to Section 6.3(b), each Grantor shall be permitted
to receive all cash dividends or distributions or other amounts paid in respect
of the Pledged Stock, all distributions in respect of the Pledged Partnership
Interests and all payments made in respect of the Pledged Notes, in each case
paid in the normal course of business of the relevant Issuer and consistent with
past practice, to the extent permitted in the Credit Agreement, and to exercise
all voting and corporate and partnership rights with respect to the Pledged
Securities; PROVIDED, HOWEVER, that no vote shall be cast or corporate or
partnership right exercised or other action taken which, in the Collateral
Agent's reasonable judgment, would impair the Collateral or which would be
inconsistent with or result in any violation of any provision of the Credit
Agreement, this Agreement or any other Credit Document.
(b) If an Event of Default shall occur and be continuing and
the Collateral Agent shall give notice of its intent to exercise such rights to
the relevant Grantor or Grantors, (i) the Collateral Agent shall have the right
to receive any and all cash dividends, payments or other Proceeds paid in
respect of the Pledged Securities and make application thereof to the
Obligations in such order as the Collateral Agent may determine, and (ii) any or
all of the Pledged Securities shall be registered in the name of the Collateral
Agent or its nominee, and the Collateral Agent or its nominee may thereafter
exercise (x) all voting, corporate, partnership and other rights pertaining to
such Pledged Securities at any meeting of shareholders or partners (as the case
may be) of the relevant Issuer or Issuers or otherwise and (y) any and all
rights of conversion, exchange and subscription and any other rights, privileges
or options pertaining to such Pledged Securities as if it were the absolute
owner thereof (including, without limitation, the right to exchange at its
discretion any and all of the Pledged Securities upon the merger, consolidation,
reorganization, recapitalization or other fundamental change in the corporate or
partnership structure (as the case may be) of any Issuer, or upon the exercise
by any Grantor or the Collateral Agent of any right, privilege or option
pertaining to such Pledged Securities, and in connection therewith, the right to
deposit and deliver any and all of the Pledged
<PAGE> 21
18
Securities with any committee, depositary, transfer agent, registrar or other
designated agency upon such terms and conditions as the Collateral Agent may
determine), all without liability except to account for property actually
received by it, but the Collateral Agent shall have no duty to any Grantor to
exercise any such right, privilege or option and shall not be responsible for
any failure to do so or delay in so doing.
(c) Each Grantor hereby authorizes and instructs each Issuer
of any Pledged Securities pledged by such Grantor hereunder to (i) comply with
any instruction received by it from the Collateral Agent in writing that (x)
states that an Event of Default has occurred and is continuing and (y) is
otherwise in accordance with the terms of this Agreement, without any other or
further instructions from such Grantor, and each Grantor agrees that each Issuer
shall be fully protected in so complying, and (ii) unless otherwise expressly
permitted hereby, pay any dividends, distributions or other payments with
respect to the Pledged Securities directly to the Collateral Agent.
6.4 PROCEEDS TO BE TURNED OVER TO COLLATERAL AGENT. In
addition to the rights of the Collateral Agent and the Banks specified in
Section 6.1 with respect to payments of Receivables, if an Event of Default
shall occur and be continuing, all Proceeds (other than Receivables Program
Receivables) received by any Grantor consisting of cash, checks and other
near-cash items shall be held by such Grantor in trust for the Collateral Agent
and the Banks, segregated from other funds of such Grantor, and shall, forthwith
upon receipt by such Grantor, be turned over to the Collateral Agent in the
exact form received by such Grantor (duly indorsed by such Grantor to the
Collateral Agent, if required). All Proceeds received by the Collateral Agent
hereunder shall be held by the Collateral Agent in a Collateral Account
maintained under its sole dominion and control. All Proceeds while held by the
Collateral Agent in a Collateral Account (or by such Grantor in trust for the
Collateral Agent and the Banks) shall continue to be held as collateral security
for all the Obligations and shall not constitute payment thereof until applied
as provided in Section .
6.5 APPLICATION OF PROCEEDS. At such intervals as may be
agreed upon by the Borrower and the Collateral Agent, or, if an Event of Default
shall have occurred and be continuing, at any time at the Collateral Agent's
election, the Collateral Agent may apply all or any part of Proceeds held in any
Collateral Account in payment of the Obligations in such order as the Collateral
Agent may elect, and any part of such funds which the Collateral Agent elects
not so to apply and deems not required as collateral security for the
Obligations shall be paid over from time to time by the Collateral Agent to the
Borrower or to whomsoever may be lawfully entitled to receive the same. Any
balance of such Proceeds remaining after the Obligations shall have been paid in
full, no Letters of Credit shall be outstanding and the Commitments shall have
terminated shall be paid over to the Borrower or to whomsoever may be lawfully
entitled to receive the same.
6.6 CODE AND OTHER REMEDIES. If an Event of Default shall
occur and be continuing, the Collateral Agent, on behalf of the Banks, may
exercise, in addition to all other rights and remedies granted to them in this
Agreement and in any other instrument or agreement securing, evidencing or
relating to the Obligations, all rights and remedies of a secured party under
the New York UCC or any other applicable law. Without limiting the generality of
the foregoing, the Collateral Agent, without demand of performance or other
demand, presentment, protest, advertisement or notice of any kind (except any
notice required by law referred to below) to or upon any Grantor or any other
Person (all and each of which demands, defenses, advertisements and notices are
hereby waived), may in such circumstances forthwith collect, receive,
appropriate and realize upon the Collateral, or any part thereof, and/or may
forthwith sell, lease, assign, give option or options to purchase, or otherwise
dispose of and deliver the Collateral or any part thereof (or contract to do any
of the foregoing), in one or more parcels at public or private sale or sales, at
any exchange, broker's board or office of the
<PAGE> 22
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Collateral Agent or any Bank or elsewhere upon such terms and conditions as it
may deem advisable and at such prices as it may deem best, for cash or on credit
or for future delivery without assumption of any credit risk. The Collateral
Agent or any Bank shall have the right upon any such public sale or sales, and,
to the extent permitted by law, upon any such private sale or sales, to purchase
the whole or any part of the Collateral so sold, free of any right or equity of
redemption in any Grantor, which right or equity is hereby waived and released.
Each Grantor further agrees, at the Collateral Agent's request, to assemble the
Collateral and make it available to the Collateral Agent at places which the
Collateral Agent shall reasonably select, whether at such Grantor's premises or
elsewhere. The Collateral Agent shall apply the net proceeds of any action taken
by it pursuant to this Section 6.6, after deducting all reasonable costs and
expenses of every kind incurred in connection therewith or incidental to the
care or safekeeping of any of the Collateral or in any way relating to the
Collateral or the rights of the Collateral Agent and the Banks hereunder,
including, without limitation, reasonable attorneys' fees and disbursements, to
the payment in whole or in part of the Obligations, in such order as the
Collateral Agent may elect, and only after such application and after the
payment by the Collateral Agent of any other amount required by any provision of
law, including, without limitation, Section 9-504(1)(c) of the New York UCC,
need the Collateral Agent account for the surplus, if any, to any Grantor. To
the extent permitted by applicable law, each Grantor waives all claims, damages
and demands it may acquire against the Collateral Agent or any Bank arising out
of the exercise by them of any rights hereunder. If any notice of a proposed
sale or other disposition of Collateral shall be required by law, such notice
shall be deemed reasonable and proper if given at least 10 days before such sale
or other disposition.
6.7 REGISTRATION RIGHTS. (a) Each Grantor recognizes that the
Collateral Agent may be unable to effect a public sale of any or all the Pledged
Stock or Pledged Partnership Interests, by reason of certain prohibitions
contained in the Securities Act and applicable state securities laws or
otherwise, and may be compelled to resort to one or more private sales thereof
to a restricted group of purchasers which will be obliged to agree, among other
things, to acquire such securities for their own account for investment and not
with a view to the distribution or resale thereof. Each Grantor acknowledges and
agrees that any such private sale may result in prices and other terms less
favorable than if such sale were a public sale and, notwithstanding such
circumstances, agrees that any such private sale shall be deemed to have been
made in a commercially reasonable manner. The Collateral Agent shall be under no
obligation to delay a sale of any of the Pledged Stock or Pledged Partnership
Interests for the period of time necessary to permit the Issuer thereof to
register such securities for public sale under the Securities Act, or under
applicable state securities laws, even if such Issuer would agree to do so.
(b) Each Grantor agrees to use its best efforts to do or cause
to be done all such other acts as may be necessary to make such sale or sales of
all or any portion of the Pledged Stock or Pledged Partnership Interests
pursuant to this Section 6.7 valid and binding and in compliance with any and
all other applicable Requirements of Law. Each Grantor further agrees that a
breach of any of the covenants contained in this Section 6.7 will cause
irreparable injury to the Collateral Agent and the Banks, that the Collateral
Agent and the Banks have no adequate remedy at law in respect of such breach
and, as a consequence, that each and every covenant contained in this Section
6.7 shall be specifically enforceable against such Grantor, and such Grantor
hereby waives and agrees not to assert any defenses against an action for
specific performance of such covenants except for a defense that no Event of
Default has occurred under the Credit Agreement.
6.8 WAIVER; DEFICIENCY. Each Grantor waives and agrees not to
assert any rights or privileges which it may acquire under Section 9-112 of the
New York UCC. Each Grantor shall remain liable for any deficiency if the
proceeds of any sale or other disposition of the Collateral are
<PAGE> 23
20
insufficient to pay its Obligations and the fees and disbursements of any
attorneys employed by the Collateral Agent or any Bank to collect such
deficiency.
SECTION 7. THE COLLATERAL AGENT
7.1 COLLATERAL AGENT'S APPOINTMENT AS ATTORNEY-IN-FACT, ETC.
(a) Each Grantor hereby irrevocably constitutes and appoints the Collateral
Agent and any officer or agent thereof, with full power of substitution, as its
true and lawful attorney-in-fact with full irrevocable power and authority in
the place and stead of such Grantor and in the name of such Grantor or in its
own name, for the purpose of carrying out the terms of this Agreement, to take
any and all appropriate action and to execute any and all documents and
instruments which may be necessary or desirable to accomplish the purposes of
this Agreement, and, without limiting the generality of the foregoing, each
Grantor hereby gives the Collateral Agent the power and right, on behalf of such
Grantor, without notice to or assent by such Grantor, to do any or all of the
following:
(i) in the name of such Grantor or its own name, or
otherwise, take possession of and indorse and collect any checks,
drafts, notes, acceptances or other instruments for the payment of
moneys due under any Receivable or Contract or with respect to any
other Collateral and file any claim or take any other action or
proceeding in any court of law or equity or otherwise deemed
appropriate by the Collateral Agent for the purpose of collecting any
and all such moneys due under any Receivable or Contract or with
respect to any other Collateral whenever payable;
(ii) in the case of any Intellectual Property, execute and
deliver, and have recorded, any and all agreements, instruments,
documents and papers as the Collateral Agent may request to evidence
the Collateral Agent's and the Banks' security interest in such
Intellectual Property and the goodwill and general intangibles of such
Grantor relating thereto or represented thereby;
(iii) pay or discharge taxes and Liens levied or placed on
or threatened against the Collateral, effect any repairs or any
insurance called for by the terms of this Agreement and pay all or any
part of the premiums therefor and the costs thereof;
(iv) execute, in connection with any sale provided for in
Section 6.6 or 6.7, any indorsements, assignments or other instruments
of conveyance or transfer with respect to the Collateral; and
(v) (i) direct any party liable for any payment under any
of the Collateral to make payment of any and all moneys due or to
become due thereunder directly to the Collateral Agent or as the
Collateral Agent shall direct; (ii) ask or demand for, collect, and
receive payment of and receipt for, any and all moneys, claims and
other amounts due or to become due at any time in respect of or arising
out of any Collateral; (iii) sign and indorse any invoices, freight or
express bills, bills of lading, storage or warehouse receipts, drafts
against debtors, assignments, verifications, notices and other
documents in connection with any of the Collateral; (iv) commence and
prosecute any suits, actions or proceedings at law or in equity in any
court of competent jurisdiction to collect the Collateral or any
portion thereof and to enforce any other right in respect of any
Collateral; (v) defend any suit, action or proceeding brought against
such Grantor with respect to any Collateral; (vi) settle, compromise or
adjust any such suit, action or proceeding and, in connection
therewith, give such discharges or
<PAGE> 24
21
releases as the Collateral Agent may deem appropriate; (vii) assign any
Copyright, Patent or Trademark (along with the goodwill of the business
to which any such Copyright, Patent or Trademark pertains), throughout
the world for such term or terms, on such conditions, and in such
manner, as the Collateral Agent shall in its sole discretion determine;
and (viii) generally, sell, transfer, pledge and make any agreement
with respect to or otherwise deal with any of the Collateral as fully
and completely as though the Collateral Agent were the absolute owner
thereof for all purposes, and do, at the Collateral Agent's option and
such Grantor's expense, at any time, or from time to time, all acts and
things which the Collateral Agent deems necessary to protect, preserve
or realize upon the Collateral and the Collateral Agent's and the
Banks' security interests therein and to effect the intent of this
Agreement, all as fully and effectively as such Grantor might do.
Anything in this Section 7.1(a) to the contrary notwithstanding, the
Collateral Agent agrees that it will not exercise any rights under the power of
attorney provided for in this Section 7.1(a) unless an Event of Default shall
have occurred and be continuing.
(b) If any Grantor fails to perform or comply with any of its
agreements contained herein, the Collateral Agent, at its option, but without
any obligation so to do, may perform or comply, or otherwise cause performance
or compliance, with such agreement.
(c) The expenses of the Collateral Agent incurred in
connection with actions undertaken as provided in this Section 7.1, together
with interest thereon at a rate per annum equal to the rate per annum at which
interest would then be payable on past due Reference Rate Advances under the
Credit Agreement, from the date of payment by the Collateral Agent to the date
reimbursed by the relevant Grantor, shall be payable by such Grantor to the
Collateral Agent on demand.
(d) Each Grantor hereby ratifies all that said attorneys shall
lawfully do or cause to be done by virtue hereof. All powers, authorizations and
agencies contained in this Agreement are coupled with an interest and are
irrevocable until this Agreement is terminated and the security interests
created hereby are released.
7.2 DUTY OF COLLATERAL AGENT. The Collateral Agent's sole duty
with respect to the custody, safekeeping and physical preservation of the
Collateral in its possession, under Section 9-207 of the New York UCC or
otherwise, shall be to deal with it in the same manner as the Collateral Agent
deals with similar property for its own account. Neither the Collateral Agent,
any Bank nor any of their respective officers, directors, employees or agents
shall be liable for failure to demand, collect or realize upon any of the
Collateral or for any delay in doing so or shall be under any obligation to sell
or otherwise dispose of any Collateral upon the request of any Grantor or any
other Person or to take any other action whatsoever with regard to the
Collateral or any part thereof. The powers conferred on the Collateral Agent and
the Banks hereunder are solely to protect the Collateral Agent's and the Banks'
interests in the Collateral and shall not impose any duty upon the Collateral
Agent or any Bank to exercise any such powers. The Collateral Agent and the
Banks shall be accountable only for amounts that they actually receive as a
result of the exercise of such powers, and neither they nor any of their
officers, directors, employees or agents shall be responsible to any Grantor for
any act or failure to act hereunder, except for their own gross negligence or
willful misconduct.
7.3 EXECUTION OF FINANCING STATEMENTS. Pursuant to Section
9-402 of the New York UCC and any other applicable law, each Grantor authorizes
the Collateral Agent to file or record financing statements and other filing or
recording documents or instruments with respect to the Collateral without the
signature of such Grantor in such form and in such offices as the Collateral
<PAGE> 25
22
Agent reasonably determines appropriate to perfect the security interests of the
Collateral Agent under this Agreement. A photographic or other reproduction of
this Agreement shall be sufficient as a financing statement or other filing or
recording document or instrument for filing or recording in any jurisdiction.
The Collateral Agent shall furnish Borrower with a copy of any documents filed
or recorded pursuant to this SECTION 7.3; provided that failing to furnish such
copies shall not affect the validity or effectiveness of such filing or
recordation.
7.4 AUTHORITY OF COLLATERAL AGENT. Each Grantor acknowledges
that the rights and responsibilities of the Collateral Agent under this
Agreement with respect to any action taken by the Collateral Agent or the
exercise or non-exercise by the Collateral Agent of any option, voting right,
request, judgment or other right or remedy provided for herein or resulting or
arising out of this Agreement shall, as between the Collateral Agent and the
Banks, be governed by the Credit Agreement and by such other agreements with
respect thereto as may exist from time to time among them, but, as between the
Collateral Agent and the Grantors, the Collateral Agent shall be conclusively
presumed to be acting as agent for the Banks with full and valid authority so to
act or refrain from acting, and no Grantor shall be under any obligation, or
entitlement, to make any inquiry respecting such authority.
SECTION 8. MISCELLANEOUS
8.1 AMENDMENTS IN WRITING. None of the terms or provisions of
this Agreement may be waived, amended, supplemented or otherwise modified except
in accordance with Section 10.06 of the Credit Agreement.
8.2 NOTICES. All notices, requests and demands to or upon the
Collateral Agent or any Grantor hereunder shall be effected in the manner
provided for in Section 9.01 of the Credit Agreement; PROVIDED that any such
notice, request or demand to or upon any Guarantor shall be addressed to such
Guarantor at its notice address set forth on SCHEDULE 1.
8.3 NO WAIVER BY COURSE OF CONDUCT; CUMULATIVE REMEDIES.
Neither the Collateral Agent nor any Bank shall by any act (except by a written
instrument pursuant to Section 8.1), delay, indulgence, omission or otherwise be
deemed to have waived any right or remedy hereunder or to have acquiesced in any
Default or Event of Default. No failure to exercise, nor any delay in
exercising, on the part of the Collateral Agent or any Bank, any right, power or
privilege hereunder shall operate as a waiver thereof. No single or partial
exercise of any right, power or privilege hereunder shall preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
A waiver by the Collateral Agent or any Bank of any right or remedy hereunder on
any one occasion shall not be construed as a bar to any right or remedy which
the Collateral Agent or such Bank would otherwise have on any future occasion.
The rights and remedies herein provided are cumulative, may be exercised singly
or concurrently and are not exclusive of any other rights or remedies provided
by law.
8.4 ENFORCEMENT EXPENSES; INDEMNIFICATION. (a) Each Guarantor
agrees to pay or reimburse each Bank and the Collateral Agent and the Operating
Banks, as the case may be, for all its costs and expenses incurred in collecting
against such Guarantor under the guarantee contained in Section 2 or otherwise
enforcing or preserving any rights under this Agreement and the other Credit
Documents to which such Guarantor is a party, including, without limitation, the
reasonable fees and disbursements of counsel (including the allocated fees and
expenses of in-house counsel) to each Bank and of counsel to the Collateral
Agent and the Operating Banks.
<PAGE> 26
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(b) Each Guarantor agrees to pay, and to save the Collateral
Agent and the Banks and the Operating Banks harmless from, any and all
liabilities with respect to, or resulting from any delay in paying, any and all
stamp, excise, sales or other taxes which may be payable or determined to be
payable with respect to any of the Collateral or in connection with any of the
transactions contemplated by this Agreement.
(c) Each Guarantor agrees to pay, and to save the Collateral
Agent and the Banks and the Operating Banks harmless from, any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever with respect
to the execution, delivery, enforcement, performance and administration of this
Agreement to the extent the Borrower would be required to do so pursuant to
Section 9.08 of the Credit Agreement.
(d) The agreements in this Section 8.4 shall survive repayment
of the Obligations and all other amounts payable under the Credit Agreement and
the other Credit Documents.
8.5 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon the successors and assigns of each Grantor and shall inure to the benefit
of the Collateral Agent and the Banks and their successors and assigns; PROVIDED
that no Grantor may assign, transfer or delegate any of its rights or
obligations under this Agreement without the prior written consent of the
Collateral Agent.
8.6 SET-OFF. Each Grantor hereby irrevocably authorizes the
Collateral Agent and each Bank at any time and from time to time without notice
to such Grantor or any other Grantor, any such notice being expressly waived by
each Grantor, to set-off and appropriate and apply any and all deposits (general
or special, time or demand, provisional or final), in any currency, and any
other credits, indebtedness or claims, in any currency, in each case whether
direct or indirect, absolute or contingent, matured or unmatured, at any time
held or owing by the Collateral Agent or such Bank to or for the credit or the
account of such Grantor, or any part thereof in such amounts as the Collateral
Agent or such Bank may elect, against and on account of the obligations and
liabilities of such Grantor to the Collateral Agent or such Bank hereunder and
claims of every nature and description of the Collateral Agent or such Bank
against such Grantor, in any currency, whether arising hereunder, under the
Credit Agreement, any other Credit Document or otherwise, as the Collateral
Agent or such Bank may elect, whether or not the Collateral Agent or any Bank
has made any demand for payment and although such obligations, liabilities and
claims may be contingent or unmatured. The Collateral Agent and each Bank shall
notify such Grantor promptly of any such set-off and the application made by the
Collateral Agent or such Bank of the proceeds thereof, PROVIDED that the failure
to give such notice shall not affect the validity of such set-off and
application. The rights of the Collateral Agent and each Bank under this Section
8.6 are in addition to other rights and remedies (including, without limitation,
other rights of set-off) which the Collateral Agent or such Bank may have.
8.7 COUNTERPARTS. This Agreement may be executed by one or
more of the parties to this Agreement on any number of separate counterparts
(including by telecopy), and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
8.8 SEVERABILITY. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
<PAGE> 27
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8.9 SECTION HEADINGS. The Section headings used in this
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
8.10 INTEGRATION. This Agreement and the other Credit
Documents and the documents and agreements entered into with respect to the
Operating Bank Obligations represent the agreement of the Grantors, the
Collateral Agent and the Banks with respect to the subject matter hereof and
thereof, and there are no promises, undertakings, representations or warranties
by the Collateral Agent or any Bank relative to subject matter hereof and
thereof not expressly set forth or referred to herein or in the other Credit
Documents or such other documents and agreements.
8.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE
STATE OF NEW YORK.
8.12 SUBMISSION TO JURISDICTION; WAIVERS. Each Grantor hereby
irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement and the other Credit Documents to
which it is a party, or for recognition and enforcement of any judgment
in respect thereof, to the non-exclusive general jurisdiction of the
Courts of the States of New York and Illinois, the courts of the United
States of America for the Southern District of New York and for
Chicago, Illinois, and appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought
in such courts and waives any objection that it may now or hereafter
have to the venue of any such action or proceeding in any such court or
that such action or proceeding was brought in an inconvenient court and
agrees not to plead or claim the same;
(c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or
certified mail (or any substantially similar form of mail), postage
prepaid, to such Grantor at its address referred to in Section 8.2 or
at such other address of which the Collateral Agent shall have been
notified pursuant thereto;
(d) agrees that nothing herein shall affect the right to
effect service of process in any other manner permitted by law or shall
limit the right to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any
right it may have to claim or recover in any legal action or proceeding
referred to in this Section any special, exemplary, punitive or
consequential damages.
8.13 ACKNOWLEDGEMENTS. Each Grantor hereby acknowledges that:
(a) it has been advised by counsel in the negotiation,
execution and delivery of this Agreement and the other Credit Documents
to which it is a party;
(b) neither the Collateral Agent nor any Bank has any
fiduciary relationship with or duty to any Grantor arising out of or in
connection with this Agreement or any of the other Credit Documents,
and the relationship between the Grantors, on the one hand, and the
<PAGE> 28
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Collateral Agent and Banks, on the other hand, in connection herewith
or therewith is solely that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Credit
Documents or otherwise exists by virtue of the transactions
contemplated hereby among the Banks or among the Grantors and the
Banks.
8.14 WAIVER OF JURY TRIAL. EACH GRANTOR HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL
ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER CREDIT
DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
8.15 ADDITIONAL GRANTORS. Each Subsidiary of the Borrower that
is required to become a party to this Agreement pursuant to Section 3.04 of the
Credit Agreement shall become a Grantor for all purposes of this Agreement upon
execution and delivery by such Subsidiary of an Assumption Agreement in the form
of Annex 1 hereto.
8.16 RELEASES; EXERCISE OF REMEDIES. (a) At such time as the
Advances, reimbursement obligations in respect of Letters of Credit and the
other Obligations shall have been paid in full, the Commitments have been
terminated and no Letters of Credit shall be outstanding, the Collateral shall
be released from the Liens created hereby, and this Agreement and all
obligations (other than those expressly stated to survive such termination) of
the Collateral Agent and each Grantor hereunder shall terminate, all without
delivery of any instrument or performance of any act by any party, and all
rights to the Collateral shall revert to the Grantors. At the request and sole
expense of any Grantor following any such termination, the Collateral Agent
shall deliver to such Grantor any Collateral held by the Collateral Agent
hereunder, and execute and deliver to such Grantor such documents as such
Grantor shall reasonably request to evidence such termination.
(b) If any of the Collateral shall be sold, transferred or
otherwise disposed of by any Grantor in a transaction permitted by the Credit
Agreement, then the Collateral Agent, at the request and sole expense of such
Grantor, shall execute and deliver to such Grantor all releases or other
documents reasonably necessary or desirable for the release of the Liens created
hereby on such Collateral. At the request and sole expense of the Borrower, a
Subsidiary Guarantor shall be released from its obligations hereunder in the
event that all the Capital Stock of such Subsidiary Guarantor shall be sold,
transferred or otherwise disposed of in a transaction permitted by the Credit
Agreement; provided that the Borrower shall have delivered to the Collateral
Agent, at least ten Business Days prior to the date of the proposed release, a
written request for release identifying the relevant Subsidiary Guarantor and
the terms of the sale or other disposition in reasonable detail, including the
price thereof and any expenses in connection therewith, together with a
certification by the Borrower stating that such transaction is in compliance
with the Credit Agreement and the other Credit Documents.
(c) The Collateral Agent hereby acknowledges and agrees, on
behalf of itself and each holder of the Obligations, for the benefit of each
holder of a Receivables Program Certificate and the trustee under the Pooling
and Servicing Agreement acting on behalf of such holders, and for the benefit of
Texas Commerce Bank National Association ("TCB"), in its capacity as back-up
servicer under that certain back-up servicing agreement dated as of June 26,
1995, as amended and restated as of December 16, 1996 (the "Back-Up Servicing
Agreement") (which was entered into as part of the Receivables Program
Documents), that (i) pursuant to the Back-Up Servicing Agreement, TCB has agreed
to become the "Successor Servicer" under the Pooling and Servicing Agreement
upon any
<PAGE> 29
26
resignation or termination of HTCA as the "Servicer" thereunder; (ii) if TCB is
appointed as Successor Servicer, in performing its obligations under the Pooling
and Servicing Agreement, TCB would receive and process payments and collections
from customers of Borrower and its Subsidiaries, which payments and collections
may include amounts not attributable or allocable to the Receivables Program
Receivables, which amounts would constitute Released Amounts (as defined in the
Pooling and Servicing Agreement) upon identification thereof, and upon
identification as Released Amounts would be subject to the Liens provided for
herein which secure the Obligations; and (iii) notwithstanding the interest of
the Collateral Agent and the holders of the Obligations in such Released
Amounts, the Collateral Agent and such holders will take no action to impair or
impede TCB from acting as Successor Servicer in accordance with the Back-Up
Servicing Agreement and the Pooling and Servicing Agreement, or which would
otherwise interfere with TCB receiving and processing such payments and
collections from such customers; PROVIDED, HOWEVER, that nothing contained in
this Section 8.16 is intended or shall construed as releasing, subordinating or
otherwise waiving the Liens or other interests of the Collateral Agent and the
holders of Obligations in Released Amounts upon identification thereof, or the
rights of the Collateral Agent and such holders which otherwise exist at any
time under the Collateral Documents or applicable law, to receive any such
Released Amounts.
(d) The Collateral Agent, in accepting the pledge of shares of
Funding Corp., acknowledges the bankruptcy remote structure created by the
Receivables Program Documents.
8.17 OPERATING BANK OBLIGATIONS. No Operating Bank shall be
entitled to the benefits of this Agreement or the Operating Bank Guaranty unless
it has signed and delivered to the Agent an executed counterpart of the
Collateral Agency Agreement in its capacity as an Operating Bank and thereby
become a party thereto.
[Remainder of Page Intentionally Left Blank]
<PAGE> 30
IN WITNESS WHEREOF, each of the undersigned has caused this
Guarantee and Collateral Agreement to be duly executed and delivered as of the
date first above written.
BALLY TOTAL FITNESS HOLDING CORPORATION
By: /s/ John W. Dwyer
--------------------------------------------------
Title: Senior Vice President
and Chief Financial Officer
BALLY'S FITNESS AND RACQUET CLUBS, INC.
BALLY FITNESS FRANCHISING, INC.
BALLY FRANCHISE RSC, INC.
BALLY FRANCHISING HOLDINGS, INC.
BALLY TOTAL FITNESS CORPORATION
BALLY'S PACWEST, INC.
BALLY'S S.C. MANAGEMENT, INC.
BFIT REHAB OF BOCA RATON, INC.
BFIT REHAB OF CORAL GABLES, INC.
BFIT REHAB OF KENDALL, INC.
BFIT REHAB OF SUNRISE, INC.
BFIT REHAB OF WEST PALM BEACH, INC.
BFIT REHABILITATION SERVICES, INC.
CONNECTICUT COAST FITNESS CENTERS, INC.
CONNECTICUT VALLEY FITNESS CENTERS, INC.
GREATER PHILLY NO. 1 HOLDING COMPANY
GREATER PHILLY NO. 2 HOLDING COMPANY
HEALTH & TENNIS CORPORATION OF NEW YORK
HOLIDAY HEALTH & FITNESS CENTERS OF NEW YORK, INC.
HOLIDAY HEALTH CLUBS AND FITNESS CENTERS, INC.
HOLIDAY HEALTH CLUBS OF THE EAST COAST, INC.
HOLIDAY HEALTH CLUBS OF THE SOUTHEAST, INC.
HOLIDAY SPA HEALTH CLUBS OF CALIFORNIA
HOLIDAY/SOUTHEAST HOLDING CORP.
HOLIDAY UNIVERSAL, INC.
HOUSTON HEALTH CLUBS INC.
JACK LA LANNE FITNESS CENTERS, INC.
JACK LA LANNE HOLDING CORP.
MANHATTAN SPORTS CLUB, INC.
NEW FITNESS HOLDING CO., INC.
NYCON HOLDING CO., INC.
PENN HILLS SPA LIMITED PARTNERSHIP
PHYSICAL FITNESS CENTERS OF PHILADELPHIA, INC.
PROVIDENCE FITNESS CENTERS, INC.
RHODE ISLAND HOLDING COMPANY
SCANDINAVIAN DEVELOPMENT COMPANY
SCANDINAVIAN HEALTH SPA, INC.
SCANDINAVIAN U.S. SWIM & FITNESS, INC.
SO. CAL. NAUTILUS FITNESS CENTERS, INC.
<PAGE> 31
SPA ASSOCIATES LIMITED PARTNERSHIP
TIDELANDS HOLIDAY HEALTH CLUBS, INC.
U.S. HEALTH, INC.
VERTICAL FITNESS AND RACQUET CLUB, LTD.
VIC TANNY OF GREATER MICHIGAN, INC.
VIC TANNY INTERNATIONAL, INC.
VIC TANNY INTERNATIONAL OF CLEVELAND, INC.
VIC TANNY INTERNATIONAL OF MISSOURI, INC.
VIC TANNY INTERNATIONAL OF TOLEDO, INC.
By: /s/ John W. Dwyer
----------------------------------------------
Title: Senior Vice President and Chief
Financial Officer
------------------------------------------
for each of the Guarantors listed above
\
<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 and incorporation by reference 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
the Registration Statement (Amendment No. 2 to Form S-4) and related Prospectus
of Bally Total Fitness Holding Corporation for the registration of $225,000,000
of 9 7/8% Senior Subordinated Notes due 2007.
ERNST & YOUNG LLP
Chicago, Illinois
December 5, 1997
