<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 19, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BALLY TOTAL FITNESS HOLDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7991 36-3228107
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
8700 West Bryn Mawr Avenue
Chicago, Illinois, 60631
(773) 380-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
LEE S. HILLMAN
Bally Total Fitness Holding Corporation
8700 West Bryn Mawr Avenue
Chicago, Illinois 60631
(773) 380-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
IRV BERLINER MARC D. BASSEWITZ
Benesch, Friedlander, Coplan & Aronoff LLP Latham & Watkins
2300 BP America Building 5800 Sears Tower
200 Public Square Chicago, Illinois 60606
Cleveland, Ohio 44114 (312) 876-7700
(216) 363-4500
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==============================================================================================================================
PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) PRICE (2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share(3) 2,875,000 $29.19 $83,921,250 $24,757
==============================================================================================================================
</TABLE>
(1) Includes 375,000 shares subject to an option granted to the Underwriters to
cover any over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee.
Pursuant to Rule 457(c) under the Securities Act of 1933, as amended, the
registration fee applicable to the common stock, $.01 par value per share
("Common Stock"), is calculated upon the basis of the average high and low
prices of the Common Stock as reported on the Nasdaq National Market on
March 16, 1998.
(3) Associated with the Common Stock are preferred stock purchase rights that
will not be exercisable or evidenced separately from the Common Stock prior
to the occurrence of certain events.
------------------------
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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 19, 1998
P R O S P E C T U S
2,500,000 SHARES
BALLY
BALLY TOTAL FITNESS HOLDING CORPORATION
COMMON STOCK
------------------------
All of the 2,500,000 shares of common stock, $.01 par value per share (the
"Common Stock"), offered hereby (the "Offering") are being issued and sold by
Bally Total Fitness Holding Corporation, a Delaware corporation (the "Company"
or "Bally"). The Common Stock is currently quoted on the Nasdaq National Market
under the symbol "BFIT". On March 18, 1998, the last sale price of the Common
Stock as reported on the Nasdaq National Market was $29-1/16 per share. The
Company has applied for listing of the Common Stock on the New York Stock
Exchange under the symbol "BFT". See "Price Range of Common Stock and Dividend
Policy".
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===========================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.......................... $ $ $
- -----------------------------------------------------------------------------------------------------------
Total (3).......................... $ $ $
===========================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including certain liabilities under the Securities Act of 1933,
as amended. See "Underwriting".
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the several Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an additional 375,000
shares of Common Stock, to cover over-allotments, if any. If all such shares
are purchased, the total Price to Public, Underwriting Discount and Proceeds
to Company will be $ , $ and $ , respectively.
See "Underwriting".
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to the
approval of certain legal matters by counsel for the Underwriters and to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
the delivery of the shares of Common Stock will be made in New York, New York,
on or about , 1998.
------------------------
MERRILL LYNCH & CO.
LADENBURG THALMANN & CO. INC.
CIBC OPPENHEIMER
------------------------
The date of this Prospectus is , 1998.
<PAGE> 3
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission"). Reports, registration
statements, proxy statements and other information filed by the Company with the
Commission can be inspected and copied at the public reference facility
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and the Commission's Regional Offices, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material can also
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. The Commission maintains a web site at
http://www.sec.gov that contains reports, registration statements, proxy
statements and other information regarding registrants, such as the Company,
that file electronically with the Commission. Such reports, registration
statements, proxy statements and other information regarding the Company also
may be inspected at the offices of the Nasdaq Stock Market, Report Section, at
1735 K Street N.W., Washington DC 20006, while the Common Stock is reported on
the Nasdaq National Market. In the event that the Common Stock is listed on the
New York Stock Exchange, the Company's public filings will be available for
inspection at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") with the Commission under the Securities Act of 1933,
as amended (the "Securities Act"), in respect of the Common Stock offered
hereby. For purposes hereof, the term "Registration Statement" means the initial
Registration Statement and any and all amendments thereto. This Prospectus omits
certain information contained in the Registration Statement as permitted by the
rules and regulations of the Commission. For further information with respect to
the Company and the Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits thereto. Statements herein
concerning the contents of any contract or other document are not necessarily
complete, and in each instance reference is made to such contract or other
document filed with the Commission as an exhibit to the Registration Statement,
or otherwise, each such statement being qualified by, and subject to, such
reference in all respects.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission pursuant
to the Exchange Act are incorporated herein by reference:
(1) the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (file no. 0-27478); and
(2) the description of the Common Stock contained in the Company's
Registration Statement on Form 8-A/A filed with the Commission on January
3, 1996 (file no. 0-27478).
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Offering shall be deemed incorporated by reference in
this Prospectus and a part hereof from the respective date of filing each such
document. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
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.
------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING".
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING".
2
<PAGE> 4
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in this
Prospectus and is qualified by the more detailed information set forth elsewhere
in this Prospectus which should be read in its entirety. Unless otherwise
indicated, capitalized terms used in this Prospectus Summary have the respective
meanings ascribed to them elsewhere in this Prospectus. The information
contained in this Prospectus Summary contains forward-looking statements which
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. See "Special Note Regarding
Forward-Looking Statements" on page 8.
THE COMPANY
The Company is the largest (and only nationwide) commercial operator of
fitness centers in the United States in terms of revenues, the number of
members, and the number and square footage of facilities. As of February 28,
1998, the Company operated approximately 320 fitness centers concentrated in
major metropolitan areas in 27 states and Canada and had approximately four
million members. Bally's members made more than 100 million visits to its
fitness centers in each of 1996 and 1997.
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. In
addition, many of the Company's current fitness centers include pools, racquet
courts or other athletic facilities. The Company's new club prototype achieves
efficiency by focusing on those fitness services that receive a high 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 substantially all use the service mark "Bally Total Fitness", thereby
enhancing brand identity, concentrating advertising and eliminating the prior
practice of using more than 25 different regional service marks 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, with secondary target markets
including older and higher income segments. Bally markets itself to these
consumer segments 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 access
to 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 up to 36 months and subject to
downpayment requirements) or paid-in-full at the time of joining. Members are
generally required to pay monthly membership dues in order to use the Company's
fitness facilities. Management believes the various membership and payment plans
offered, in addition to Bally's strong brand identity and the convenience of its
multiple locations, constitute distinct competitive advantages for the Company.
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 a more financial and
operational orientation. The new management team quickly implemented a business
strategy designed to improve the operating results of the Company. These efforts
have contributed to recent increases in revenues and operating income.
3
<PAGE> 5
Core Business
During 1997, management developed and began implementing five strategies to
improve the underlying operations and the financial performance of the Company.
These strategies have already favorably impacted the Company's financial results
and management is committed to furthering their implementation.
- Emphasize the Sale of All-Club Membership Plans -- Prior to a public
offering of 8,000,000 shares of Common Stock in August 1997 which provided
net proceeds of $88.4 million to the Company (the "1997 Stock Offering"),
the Company managed its commission structure to emphasize the sale of
paid-in-full membership plans to generate immediate cash for short-term
liquidity at the expense of longer-term financial returns. The 1997 Stock
Offering provided additional working capital, allowing the Company to
emphasize the sale of all-club membership plans, which are typically
financed, rather than single-club membership plans. In 1997, this new
emphasis contributed to an 18% increase in the weighted-average price of
memberships sold to approximately $970 from approximately $820 in 1996.
Management believes that it can continue to increase new member revenues
through an emphasis on financed membership plans.
- Upgrade and Expand Fitness Centers -- Using a portion of the net
proceeds from the 1997 Stock Offering and cash flow from operations, the
Company has begun to expand and upgrade its existing facilities and
equipment in order to increase its membership base and more effectively
capitalize on its streamlined marketing and administrative functions. The
Company has budgeted approximately $15 million for this initiative (over
and above normal maintenance capital expenditures), most of which has been
spent or committed.
- Increase Dues Revenues -- The Company believes that its dues are
substantially less than those charged by its competitors and that it can
continue to increase dues for its members who are beyond their initial
financing period without any material loss in membership. In addition, the
Company has reduced promotions which discounted or waived dues. In 1997,
these initiatives contributed to an increase in dues collected of
approximately $11.2 million, or 6%, over 1996. Management believes that it
can continue to raise the dues charged to its members at a rate consistent
with past periods.
- Improve Collections on Financed Contracts -- The Company is
maintaining its focus on increasing downpayments on financed membership
plans and securing payments by electronic funds transfer ("EFT"), which the
Company's experience has shown results in higher quality receivables. This
effort yielded an increase of 11% in the average down payment, from $73 in
1996 to $81 in 1997. In addition to seeking higher down payments, the
Company continues to develop improved collection practices based on
information provided by "credit scoring" and behavioral modeling, which
management believes will also improve the yield from the receivables
portfolio.
- Continue to Leverage Fixed Cost Base -- A significant percentage of
the Company's operating costs are fixed in nature, both in terms of fitness
center operations and member processing and advertising. Over the past
several years, the Company has significantly reduced these operating costs
through aggressive cost management. As the Company pursues its growth
strategies described below, management will seek to leverage the Company's
fixed cost base to improve operating margins.
Growth Opportunities
In order to build upon the improved core operations and accelerate the
growth of the Company's business, management has identified the following
external growth opportunities:
- Develop New Fitness Centers -- Beginning in 1998, the Company
intends to increase its spending to approximately $20 million to $25
million per year to open 15 to 20 new facilities based on its new fitness
center prototype, which is designed to cost less to construct and maintain
than the Company's older facilities. The majority of the Company's new
fitness center facilities will be developed pursuant to long term lease
arrangements. The prototype model of new fitness centers developed over the
most recent years has required on average $1.3 million to fund leasehold
improvements and fitness equipment.
4
<PAGE> 6
- Selectively Acquire Club-Related Real Estate -- The Company operates
approximately 320 fitness centers, over 90% of which are leased.
Historically, the Company has not capitalized on opportunities to buy
leased properties at attractive terms due to capital constraints. The
Company's recently improved financial condition allows the Company to take
advantage of attractive opportunities to acquire leased properties. In
addition to pursuing these opportunities, the Company will also evaluate
purchasing parcels of land in strategic locations for new club expansion.
While the Company believes that from time to time there are attractive
opportunities to acquire real estate, either for existing club sites or new
locations, management intends only to pursue real estate transactions
following a very selective set of criteria, including strategic locale and
relative market values.
- Identify and Acquire Fitness Center Operators in Strategic
Geographic Locations -- The Company maintains an operating strategy of
clustering its clubs in major metropolitan areas in order to achieve
marketing and operating efficiencies. Consistent with this strategy,
management has identified major metropolitan areas where the Company is
absent or underrepresented. In an effort to establish a cluster of clubs
quickly in strategic locations, the Company plans to identify and acquire
fitness center operators where attractive opportunities exist and internal
growth would not be as effective due to various factors, including
timeliness and availability of prime real estate.
New Business Initiatives
Management believes that the Company can increase and diversify 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 member
visits in each of 1996 and 1997) by offering a number of ancillary products and
services. In order to pursue these growth opportunities, the Company has
implemented the following initiatives:
- Personal Training -- In 1997, the Company introduced a newly
developed personal training program which is now offered at most of its
fitness centers. The value of this service to members, coupled with
decreased outsourcing of this service, represents a significant profit
opportunity for the Company. In the fourth quarter of 1997, the Company
generated $2.0 million in revenues from the sale of personal training
programs. To better introduce personal training services and Bally-branded
nutritional products to its members, the Company began offering System 30
memberships at most of its fitness centers in January 1998. Members
selecting the System 30 membership receive the benefits of an all-club
membership plan plus a complete fitness analysis, a supply of Bally-branded
nutritional products and three personal training sessions during the first
month of membership.
- Private-Label Nutritional Products -- During 1997, the Company
launched the sale of an exclusive line of Bally-branded nutritional
products to the Company's members. The current line of Bally-branded
nutritionals includes meal replacement drinks, multi-vitamins, fat-free
snack wafers, a creatine mix and fat-reducing supplements. While these
products were only being introduced in 1997, sales for the year totaled
$2.2 million, including $1.0 million in the fourth quarter of 1997. The
Company continues to test market other nutritional products.
- Retail Stores -- To date, the Company has opened more than 60 BFIT
Essentials(TM) retail stores in its fitness centers. These retail stores
sell Bally-branded and complementary products from other manufacturers,
including nutritional products, workout apparel and related accessories.
The Company plans to have approximately 100 BFIT Essentials(TM) retail
stores in its fitness centers by the end of 1998.
- Outpatient Rehabilitative and Physical Therapy Services -- The
Company believes numerous opportunities exist to contract with third party
providers and managers of health care programs and services to provide
affordable, comprehensive outpatient rehabilitative and physical therapy
services in its fitness centers, and expects to offer these services to
members and non-members alike in up to 100 of its facilities within the
next three years, primarily using existing facilities and equipment.
Pursuant to an agreement with Continucare Corporation, two such facilities
are currently in operation in the Florida market, with plans already
developed to have four additional facilities operating during 1998.
5
<PAGE> 7
THE OFFERING
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<S> <C>
Common Stock offered........................ 2,500,000 shares(1)
Common Stock to be outstanding after the
Offering.................................. shares(1)(2)
Use of proceeds............................. To develop new fitness centers using the
Company's new club prototype, to selectively
acquire club-related real estate, to acquire
fitness center operators in strategic
locations and the balance, if any, for
general corporate and working capital
purposes.
Nasdaq National Market symbol............... BFIT
Proposed New York Stock Exchange symbol..... BFT
</TABLE>
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(1) Assumes that the Underwriters' over-allotment option to purchase up to
375,000 shares of Common Stock is not exercised.
(2) Does not give effect to any future exercise of outstanding warrants to
purchase 3,192,805 shares of Common Stock, outstanding stock options to
purchase shares of Common Stock and options to purchase an
additional shares of Common Stock which the Company is able to
grant under its existing stock option plans.
------------------------
The Company was a wholly-owned subsidiary of Bally Entertainment
Corporation ("Entertainment") until Entertainment spun-off the Company (the
"Spin-off") to its stockholders on January 9, 1996. The Company's executive
offices are located at 8700 West Bryn Mawr Avenue, Chicago, Illinois, 60631,
telephone number (773) 380-3000. As used in this Prospectus, unless the context
otherwise requires, the "Company" or "Bally" refers to Bally Total Fitness
Holding Corporation and its subsidiaries and their predecessors.
6
<PAGE> 8
SUMMARY FINANCIAL DATA
The following table presents summary consolidated financial data of the
Company. The financial data were derived from, and should be read in conjunction
with, financial information appearing elsewhere in this Prospectus. See
"Selected Consolidated Financial Data".
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- ---------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $661.0 $639.2 $653.4 $682.0 $ 666.7
Operating income (loss)................... 19.9 19.1 5.0 (16.1) (18.1)
Loss before extraordinary item and
cumulative effect on prior years of
change in accounting for income
taxes(a)(b)............................ (23.5) (24.9) (31.4) (39.5) (31.4)
Basic and diluted loss per common share
(pro forma for 1995)(c)................ (1.51) (2.04) (3.25)
BALANCE SHEET DATA (AT END OF YEAR):
Installment contracts receivable, net..... $343.6 $300.2 $303.4 $284.1 $ 322.7
Total assets.............................. 967.6 893.3 936.5 951.0 1,016.7
Long-term debt, less current maturities... 405.4 376.4 368.0 289.7 305.7
Stockholders' equity...................... 70.3 24.2 31.7 34.8 50.6
OTHER FINANCIAL DATA:
EBITDA(d)................................. $ 72.8 $ 75.0 $ 62.4 $ 42.8 $ 42.3
Cash provided by (used in):
Operating activities................... (35.9) (5.3) (9.9) 32.8 49.9
Investing activities................... (16.1) (9.8) (42.1) (21.4) (36.1)
Financing activities................... 97.2 10.4 60.4 (9.6) (13.6)
</TABLE>
- ---------------
(a) In 1997, the Company recognized an extraordinary loss on extinguishment of
debt of $21.4 million ($1.37 per share) resulting from a refinancing of the
Company's subordinated debt and credit facility. In 1996, the Company
recognized a net extraordinary gain on extinguishment of debt consisting of
(i) a gain of $9.9 million ($.81 per share) resulting from a $15.2 million
tax obligation to Entertainment which was forgiven as part of the December
1996 merger of Entertainment with and into Hilton Hotels Corporation
("Hilton") and (ii) a charge of $4.2 million ($.35 per share) resulting from
a refinancing of the Company's securitization facility. In 1993, the Company
recognized an extraordinary loss on extinguishment of debt of $6.0 million
resulting from a refinancing of certain indebtedness.
(b) 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.
(c) The net loss for 1995 reflects a federal income tax benefit arising from the
Company's prior tax sharing agreement with Entertainment of $7.1 million.
Pro forma loss per common share for 1995 (which is unaudited) has been
determined giving effect to (i) adjustments made to reflect the income tax
benefit as if the Company had filed its own separate consolidated income tax
return for the year, which results in a pro forma net loss of $38.5 million,
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 the year.
(d) 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.
7
<PAGE> 9
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THE PROSPECTUS SUMMARY AND UNDER THE HEADINGS "RISK
FACTORS", "BUSINESS", "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION", AND ELSEWHERE IN THIS PROSPECTUS CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS INVOLVE KNOWN
AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS 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. THESE FACTORS INCLUDE, AMONG OTHERS, THE
FOLLOWING: GENERAL ECONOMIC AND BUSINESS CONDITIONS; COMPETITION; SUCCESS OF
OPERATING INITIATIVES, ADVERTISING AND PROMOTIONAL EFFORTS; EXISTENCE OF ADVERSE
PUBLICITY OR LITIGATION; ACCEPTANCE OF NEW PRODUCT OFFERINGS; CHANGES IN
BUSINESS STRATEGY OR PLANS; QUALITY OF MANAGEMENT; AVAILABILITY, TERMS, AND
DEVELOPMENT OF CAPITAL; BUSINESS ABILITIES AND JUDGMENT OF PERSONNEL; CHANGES
IN, OR THE FAILURE TO COMPLY WITH, GOVERNMENT REGULATIONS; REGIONAL WEATHER
CONDITIONS; THOSE ITEMS SET FORTH UNDER THE HEADING "RISK FACTORS"; AND OTHER
FACTORS REFERENCED IN THIS PROSPECTUS.
RISK FACTORS
Prior to making an investment decision, prospective investors should
consider carefully all of the information set forth in this Prospectus and,
particularly, should evaluate the following risk factors.
NET LOSSES
The Company reported losses before extraordinary item of $23.5 million,
$24.9 million and $31.4 million for the years ended December 31, 1997, 1996 and
1995, respectively. On a pro forma basis, adjusting the income tax benefit as if
the Company had filed its own separate consolidated tax return, the loss for
1995 would have been $38.5 million.
RISKS ASSOCIATED WITH HIGHLY-LEVERAGED FINANCIAL POSITION
In December 1996, the Company issued $160.0 million of asset-backed
securities (the "Securitization") by selling undivided interests in the H&T
Master Trust (the "Trust"). The Trust consists primarily of a portfolio of
installment contracts receivable from membership plans and the proceeds thereof.
The Company plans to refinance the Securitization in the second or third quarter
of 1999; however, there can be no assurance that the Company will be able to
refinance the Securitization or that the terms of such refinancing will be as
favorable as those of the Securitization.
The Company's long-term debt includes the Securitization, $225 million
principal amount of 9-7/8% Senior Subordinated Notes due 2007 (the "9-7/8%
Notes") and a $70 million revolving credit facility which expires in November
2000, which was unused at December 31, 1997 except for outstanding letters of
credit totaling $7.2 million. At December 31, 1997, the Company had total
indebtedness of approximately $432.6 million. The Company's recent losses, total
indebtedness and provisions of existing debt instruments limit the Company's
ability to raise capital or borrow money. The provisions in the Company's
existing debt instruments limit the Company's ability to borrow additional funds
and to grant security interests and require the Company to maintain certain
financial ratios, including those relating to cash flow and interest expense. As
a result of the limitations, the Company may be more vulnerable to economic
downturns, may not be able to exploit certain business opportunities when they
arise and may have less flexibility to respond to changing economic conditions,
each of which could have a material adverse effect on the Company's financial
condition and results of operations.
RISKS ASSOCIATED WITH NEW INITIATIVES
The Company has introduced a number of new initiatives to capitalize on its
strong brand identity, extensive distribution infrastructure (approximately 320
facilities), significant member base (approximately four million members) and
frequency of visitation. These initiatives include selling and marketing
nutritional
8
<PAGE> 10
products, workout apparel and related accessories to its members in its clubs as
well as making comprehensive outpatient rehabilitative and physical therapy
services available to both members and non-members. 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, workout apparel and related
accessories and the provision of rehabilitative and physical therapy services
involve significant risks of competition. See "-- Competition". The provision of
rehabilitative and physical therapy 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.
RISKS RELATING TO ACQUISITIONS
A component of the Company's strategy is to identify and acquire fitness
center operators in strategic geographic locations. The success of this strategy
will depend upon a number of factors, including the Company's ability to
identify acceptable acquisition candidates in suitable locations, consummate
acquisitions on favorable terms, successfully integrate acquired businesses with
the Company's existing operations and expand its membership base at acquired
locations. There can be no assurance that the Company will successfully expand
or that any expansion will result in profitability. The failure to identify,
evaluate and effectively integrate acquired businesses could adversely affect
the Company's operating results.
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 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 markets. The Company believes competition has
increased in certain markets. There can be no assurance that the Company will be
able to compete effectively in the future in the markets in which it operates.
As the Company pursues new business initiatives, particularly the sale of
nutritional products and apparel, the Company competes 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 the Company will be able to compete
effectively with 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 has implemented 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 affecting the Company, any such
changes could have a material adverse effect on the Company's financial
condition and results of operations.
9
<PAGE> 11
In addition, the provision of rehabilitative and physical therapy services and
payments for such services are subject to government regulation. See
"Business -- Government Regulation" and " -- Legal Proceedings".
DILUTION
At the offering price of $ per share, purchasers of shares of
Common Stock offered hereby will experience an immediate dilution of $
per share. See "Dilution".
POTENTIAL IMPACT OF CERTAIN ANTITAKEOVER PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
(the "Company Certificate") and the Company's Amended and Restated By-Laws may
inhibit changes in control of the Company not approved by the Board of Directors
of the Company (the "Board"). These provisions include a stockholders rights
plan, a classified Board, advance notice provisions for nominations for election
of candidates to the Board and a "fair-price provision". The stockholder rights
plan, under which one right entitling the holder to purchase one one-hundredth
of a share of the Company's Series A Junior Participating Preferred Stock at a
price of $40 per share (subject to adjustment) is attached to each outstanding
share of Common Stock, renders an acquisition of control of the Company in a
transaction not approved by the Board more difficult. The Company's 1996
Long-Term Incentive Plan provides for acceleration of stock options and
restricted stock awards upon a change in control of the Company which has the
effect of making an acquisition of control of the Company more expensive. These
agreements may also inhibit a change in control of the Company and may have a
negative effect on the market price of the Common Stock. The indenture governing
the 9-7/8% Notes also includes change in control provisions which provide, among
other things, that upon a change in control of the Company, the holders of the
9-7/8% Notes may require the Company to repurchase the 9-7/8% Notes at 101% of
the principal amount thereof, together with accrued and unpaid interest to the
repurchase date. A change in control of the Company constitutes a default under
the Company's revolving credit agreement. In addition, certain Company officers
have severance compensation agreements with the Company that provide for
substantial cash payments and acceleration of other benefits in the event of
specified corporate changes related to the Company, including a change in
control of the Company.
DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS
The Company has not made cash dividend payments on the Common Stock since
the Spin-off and does not anticipate paying dividends on the Common Stock for
the foreseeable future. The terms of the Company's revolving credit agreement
provide that the Company is restricted from paying dividends without the consent
of the lenders during the term of the agreement. In addition, the indenture for
the 9-7/8% Notes generally limits dividends paid by the Company to the aggregate
of 50% of consolidated net income, as defined, earned after January 1, 1998 and
the net proceeds to the Company from any stock offerings and the exercise of
outstanding stock options and warrants.
FUTURE SALE AND PRICE OF COMMON STOCK
After the Offering, shares of Common Stock will be outstanding
(assuming the Underwriters' over-allotment option is not exercised). At that
time, the Company will also have (i) outstanding options to purchase
shares of Common Stock with a weighted-average exercise price of $ per
share, and (ii) the ability to grant options to purchase an additional
shares of Common Stock under the Company's stock option plans. In
addition, the Company has outstanding warrants to purchase 2,942,805 shares of
Common Stock at an exercise price of $5.26 per share. The warrants are held by
the Chairman of the Board and the President and Chief Executive Officer of the
Company and are exercisable until December 31, 2005. Further, the Company has
issued warrants to purchase 250,000 shares of Common Stock at an exercise price
of $10.05 per share to an affiliate of one of the Underwriters in connection
with a loan to the Company of $7.5 million in July 1997. See "Underwriting". The
effect, if any, on the market price of the Common Stock prevailing from time to
time as a result of the additional shares of Common Stock that would be
outstanding upon the exercise of stock options and warrants is unpredictable,
and no assurance can be given that the effect will not be adverse.
10
<PAGE> 12
USE OF PROCEEDS
At an offering price of $ per share (based on the closing price of
a share of Common Stock on the Nasdaq National Market on , 1998),
the net proceeds to be received by the Company from the sale of shares of Common
Stock (after deducting the underwriting discount and estimated expenses payable
by the Company) are estimated to be approximately $ million ($ million
if the Underwriters' over-allotment option is exercised in full). The Company
intends to use all of the net proceeds from this Offering to fund its growth
strategy to open new fitness centers based on the new club prototype, to
selectively acquire club-related real estate both currently leased and for the
development of new clubs and to acquire fitness center operators in strategic
geographic markets. The balance of the net proceeds to the Company, if any, will
be used for general corporate and working capital purposes. The Company is not
currently involved in any negotiations for the material acquisition of fitness
centers or the purchase of any material real estate. The Company will determine
the allocation of the net proceeds among the development of new fitness centers,
the acquisition of real estate and the acquisition of fitness center operators
based on business opportunities available to the Company and prevailing market
conditions. Pending such uses, the Company may temporarily invest available
funds from this Offering in short-term securities and for working capital
purposes.
DILUTION
The net tangible book value of the Company at December 31, 1997 was a
deficit of approximately $30.9 million, or $1.50 per share. The deficit in net
tangible book value per share represents the amount by which the Company's total
liabilities (including deferred revenues) exceed the Company's net tangible
assets at December 31, 1997, divided by 20,575,092 shares of Common Stock
outstanding at December 31, 1997. After giving effect to the sale by the Company
of 2,500,000 shares of Common Stock offered hereby (assuming the Underwriters'
over-allotment option is not exercised) at the offering price of $ per
share and after deducting the underwriting discount and estimated offering
expenses, the Company's net tangible book value at December 31, 1997 would have
been approximately $ million, or $ per share. This represents an
immediate increase in the net tangible book value of $ per share to
existing stockholders and an immediate dilution of $ per share to new
investors purchasing shares in the Offering. The following table illustrates
this dilution:
<TABLE>
<S> <C> <C>
Offering price per share.................................... $
Deficit in net tangible book value per share at December 31,
1997...................................................... $
Increase in net tangible book value per share attributable
to new investors..........................................
------
Net tangible book value per share after the Offering........
------
Dilution per share to new investors......................... $
======
</TABLE>
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<PAGE> 13
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is currently quoted on the Nasdaq National Market under
the symbol "BFIT". The following table sets forth for the periods indicated the
high and low quarterly sales prices for a share of Common Stock as reported on
the Nasdaq National Market since trading began on January 4, 1996, the date the
Company's initial Registration Statement on Form S-1 was declared effective. The
Company has applied for listing of the Common Stock on the New York Stock
Exchange under the symbol "BFT". The Company was a wholly-owned subsidiary of
Entertainment until January 9, 1996, the date on which 11,845,161 shares of
Common Stock were distributed by Entertainment in the Spin-off.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C> <C> <C>
1996:
First Quarter (from January 4, 1996)...................... $ 7 $ 3-3/4
Second Quarter............................................ 5-3/4 3-15/16
Third Quarter............................................. 5-1/8 4
Fourth Quarter............................................ 9-1/16 4-1/2
1997:
First Quarter............................................. $ 8-13/16 $ 6
Second Quarter............................................ 10-7/16 5-5/8
Third Quarter............................................. 17-1/2 8-1/2
Fourth Quarter............................................ 22 14-3/4
1998:
First Quarter (through March 18, 1998).................... $29-3/4 $19-1/16
</TABLE>
The last reported sale price of a share of Common Stock on the Nasdaq
National Market on March 18, 1998 is set forth on the cover page of this
Prospectus. As of February 28, 1998, there were 10,291 holders of record of the
Common Stock.
The Company does not anticipate paying dividends for the foreseeable
future. Currently, the Company is restricted from paying dividends by the terms
of its revolving credit agreement and the 9 7/8% Notes. See "Risk Factors --
Dividend Policy; Restrictions on Payment of Dividends".
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<PAGE> 14
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at December 31, 1997 and as adjusted to give effect to the sale by the
Company of 2,500,000 shares of Common Stock offered hereby (assuming the
Underwriters' over-allotment option is not exercised) at an assumed offering
price of $ per share and after deducting the underwriting discount and
estimated offering expenses, as if such transaction had occurred as of December
31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN MILLIONS)
<S> <C> <C>
Cash and equivalents....................................... $ 61.7 $
======= =======
Current maturities of long-term debt(1).................... $ 27.1 $ 27.1
======= =======
Long-term debt, less current maturities(1)................. $ 405.4 $ 405.4
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; 20,575,092 and 23,075,092 shares issued
and outstanding....................................... .2 .2
Contributed capital...................................... 392.7
Accumulated deficit...................................... (322.6) (322.6)
------- -------
Total stockholders' equity............................... 70.3
------- -------
Total capitalization................................ $ 475.7 $
======= =======
</TABLE>
(1) See "Consolidated Financial Statements" and "Management's Discussion
and Analysis of Results of Operations and Financial Condition" for
additional information with respect to the Company's consolidated
indebtedness.
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<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company presented below for
and as of the end of each of the four years ended December 31, 1997 were derived
from the audited consolidated financial statements of the Company. The data
presented below for and as of the end of the year ended December 31, 1993 are
unaudited. 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>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................. $ 661.0 $ 639.2 $ 653.4 $ 682.0 $ 666.7
Depreciation and amortization................ 52.9 55.9 57.4 58.9 60.4
Operating income (loss)...................... 19.9 19.1 5.0 (16.1) (18.1)
Loss before extraordinary item and cumulative
effect on prior years of change in
accounting for income taxes (a) (b)....... (23.5) (24.9) (31.4) (39.5) (31.4)
Basic and diluted loss per common share (pro
forma for 1995) (c)....................... (1.51) (2.04) (3.25)
BALANCE SHEET DATA (AT END OF YEAR):
Cash and equivalents......................... $ 61.7 $ 16.5 $ 21.3 $ 12.8 $ 11.0
Installment contracts receivable, net........ 343.6 300.2 303.4 284.1 322.7
Total assets................................. 967.6 893.3 936.5 951.0 1,016.7
Long-term debt, less current maturities...... 405.4 376.4 368.0 289.7 305.7
Stockholders' equity......................... 70.3 24.2 31.7 34.8 50.6
OTHER FINANCIAL DATA:
EBITDA (d)................................... $ 72.8 $ 75.0 $ 62.4 $ 42.8 $ 42.3
Cash provided by (used in):
Operating activities...................... (35.9) (5.3) (9.9) 32.8 49.9
Investing activities...................... (16.1) (9.8) (42.1) (21.4) (36.1)
Financing activities...................... 97.2 10.4 60.4 (9.6) (13.6)
</TABLE>
- ---------------
(a) In 1997, the Company recognized an extraordinary loss on extinguishment of
debt of $21.4 million ($1.37 per share) resulting from a refinancing of the
Company's subordinated debt and credit facility. In 1996, the Company
recognized a net extraordinary gain on extinguishment of debt consisting of
(i) a gain of $9.9 million ($.81 per share) resulting from a $15.2 million
tax obligation to Entertainment which was forgiven as part of the December
1996 merger of Entertainment with and into Hilton and (ii) a charge of $4.2
million ($.35 per share) resulting from a refinancing of the Company's
securitization facility. In 1993, the Company recognized an extraordinary
loss on extinguishment of debt of $6.0 million resulting from a refinancing
of certain indebtedness.
(b) 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.
(c) The net loss for 1995 reflects a federal income tax benefit arising from the
Company's prior tax sharing agreement with Entertainment of $7.1 million.
Pro forma loss per common share for 1995 (which is unaudited) has been
determined giving effect to (i) adjustments made to reflect the income tax
benefit as if the Company had filed its own separate consolidated income tax
return for the year, which results in a pro forma net loss of $38.5 million,
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 the year.
(d) EBITDA is defined as operating income (loss) before depreciation and
amortization. The Company has presented EBITDA supplementally because
management believes this information is useful given the significance of the
Company's depreciation and amortization and because of its highly leveraged
financial position. These data should not be considered as an alternative to
any measure of performance or liquidity as promulgated under generally
accepted accounting principles (such as net income/loss or cash provided
by/used in operating, investing and financing activities), nor should they
be considered as an indicator of the Company's overall financial
performance. Also, the EBITDA definition used herein may not be comparable
to similarly titled measures reported by other companies.
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<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The primary strategic initiative of management involves improving the
results of the Company's core business and, as capital is available, increasing
the number of fitness centers it operates through the replication of its
profitable new fitness center prototype. 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 memberships 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
60% of the total membership contracts in the receivables portfolio at December
31, 1997. Over the past several years, membership types and pricing options were
standardized, making the selling process less complicated for both the customer
and 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.
Following the 1997 Stock Offering, the Company began emphasizing the sale of
all-club memberships, which are typically financed, rather than the sale of
single-club memberships. 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 which process data
for membership accounts ("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 and 1997. 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 streamlined its processing
procedures and developed efficiencies that enable the RSCs to service members
better while reducing costs. The Company has completed an assessment of whether
its computer systems will function properly with respect to dates in 2000 and
thereafter and has determined that only two existing software applications
require modification, with such modifications expected to be completed in 1998
at an aggregate cost of less than $.1 million.
The rate of the Company's provision for doubtful receivables can vary from
year to year. 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 or the timing of write-offs. The Company
believes, based on its experience, that the qualitative profile of its
receivables portfolio at December 31, 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 membership plans and receipt of
dues 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 (more than 100 million member visits in each of 1996 and
1997), management has implemented the following new initiatives: (i) the
introduction of a newly developed personal training program now offered at most
of its fitness centers; (ii) the sale of an exclusive line of Bally-branded
nutritional products to the Company's members; (iii) the sale of nutritional
products, workout apparel and related accessories in BFIT Essentials(TM) retail
stores currently
15
<PAGE> 17
located in over 60 of its fitness centers; and (iv) the provision of affordable,
comprehensive outpatient rehabilitative and physical therapy services to both
members and non-members, presently in two of its fitness centers. These new
initiatives had a limited effect on the 1997 results, but beginning with 1998,
management expects their effect to be more meaningful.
RESULTS OF OPERATIONS
Comparison of the years ended December 31, 1997 and December 31, 1996
Net revenues for 1997 were $661.0 million compared to $639.2 million in
1996, an increase of $21.8 million (3%). This increase is substantially a result
of an increase in initial membership fees originated of $34.8 million (9%) in
1997, consisting of a $62.3 million (21%) increase in financed memberships
originated offset, in part, by a $27.5 million (32%) decrease in paid-in-full
memberships originated. These results generally reflect management's current
strategy of selling more all-club membership plans (which typically have been
financed and generate better long-term returns for the Company) and fewer
single-club membership plans. Accordingly, the average selling price of
contracts sold increased 18% and the number of contracts sold decreased 10%.
Further, these results were achieved while the average number of fitness centers
selling memberships decreased from 322 in 1996 to 317 in 1997, reflecting
management's continuing strategy to improve the quality of the Company's
facilities. During 1997 and 1996, the Company closed 19 older, typically smaller
and less profitable facilities and sold a fitness center to a franchisee while
opening 8 new, larger facilities, generally based on its new prototype. In
addition, deferred revenue accounting added only $1.0 million to revenues in
1997 compared to $29.8 million in 1996. Dues collected increased $11.2 million
(6%) over 1996, reflecting the Company's continuing strategy of increasing
renewal dues. Finance charges earned increased $2.8 million (8%) in 1997 due
primarily to the increase in the size of the receivables portfolio. Fees and
other revenues increased $1.9 million (14%) over 1996, primarily reflecting the
sale of nutritional and other retail products which the Company began selling in
1997 in certain of its fitness centers and the 1997 introduction of the new
personal training program.
Operating income for 1997 was $19.9 million compared to $19.1 million in
1996. The increase of $.8 million (4%) was due to the aforementioned increase in
revenues substantially offset by a $21.0 million (3%) increase in operating
costs and expenses, which includes a $15.7 million increase in the provision for
doubtful receivables. Operating expenses include charges of $5.9 million and
$5.1 million in 1997 and 1996, respectively ($2.1 million and $2.3 million of
which is amortization of unearned compensation in 1997 and 1996, respectively)
relating to restricted stock awards issued in conjunction with the Spin-off for
which restrictions lapsed in 1997 and 1996 and final vesting occurred in August
1997. Excluding the provision for doubtful receivables and charges related to
restricted stock awards, operating costs and expenses increased $4.5 million
(1%) from 1996. Fitness center operating expenses increased $17.7 million (5%)
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 certain operating costs associated with the new
initiatives described above. General and administrative expenses increased $5.4
million (23%) and primarily reflects fees paid to Hilton in 1997 under a license
agreement to use the name "Bally" (a similar payment was not required in 1996),
an increase of tax gross-up expense in 1997 from 1996 relating to the restricted
stock awards described above and increased corporate personnel and other
overhead incurred in 1997 relating principally to the new initiatives. Member
processing and collection center expenses decreased $3.6 million (9%),
reflecting 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 $2.4 million (5%) due to reduced
spending on television advertisements and the elimination of certain agency fees
in 1997 offset, in part, by increases in production costs and local promotional
activities.
The provision for doubtful receivables for 1997 was $96.1 million compared
to $80.4 million in 1996, an increase of $15.7 million (20%) primarily due to
the increase in financed memberships originated.
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Interest expense was $45.0 million in 1997 compared to $47.6 million in
1996, a decrease of $2.6 million (5%) primarily due to lower average interest
rates and an increase in the amount of capitalized interest offset, in part, by
a higher average level of debt.
The income tax provision for 1997 reflects state income taxes only, as no
federal benefit has been provided because the ultimate realization of additional
deferred tax assets cannot be assured. 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 because the ultimate realization of
additional deferred tax assets cannot be assured), net of a state income tax
provision.
Comparison of the years ended December 31, 1996 and December 31, 1995
Net revenues for 1996 were $639.2 million compared to $653.4 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 during 1996 and 1995. Initial
membership fees originated decreased $29.7 million (7%) in 1996, consisting of a
$19.6 million (6%) decrease in financed memberships originated and a $10.1
million (11%) decrease in paid-in-full memberships originated. The number of
contracts sold declined 12% and the average selling price of contracts sold
increased 6% as a result of the sale of more premium memberships in 1996. 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 $2.1
million (13%) 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 $19.1 million compared to $5.0 million in
1995. The increase of $14.1 million was due to a $28.3 million (4%) reduction in
operating costs and expenses offset, in part, by the aforementioned decrease in
revenues. The reduction in operating costs and expenses was achieved despite an
$8.3 million increase in the provision for doubtful receivables and a $5.1
million charge related to restricted stock awards issued in conjunction with the
Spin-off for which restrictions lapsed due to the increase in the market price
of the Common Stock. Excluding the provision for doubtful receivables and charge
related to restricted stock awards, operating costs and expenses decreased $41.7
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%) despite the
aforementioned decrease in financed memberships originated. Management believes
the additional provision for doubtful receivables in 1996 adequately reserved
for collection experience to be ultimately 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 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 files 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 because the
ultimate realization of additional deferred tax assets
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cannot be assured), 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company is in the process of expanding and upgrading 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 annually to
maintain and make minor upgrades to the Company's existing facilities, including
exercise equipment upgrades, heating, ventilation and air conditioning ("HVAC")
and other operating equipment upgrades and replacements, and locker room and
workout area refurbishments, among others. In addition, the Company expects to
invest approximately $10 million during the next year to complete its plans to
extensively add and upgrade exercise equipment, refresh interior and exterior
finishes to improve club ambience, and refurbish and make major upgrades to
approximately 25% of its clubs, including converting some low-usage pools and
racquet areas into expanded exercise areas and to a lesser extent retail and
outpatient rehabilitative and physical therapy service areas. 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. Beginning in 1998,
the Company intends to increase its spending to approximately $20 million to $25
million per year to open 15 to 20 new facilities based on its new prototype,
which is designed to cost less to construct and maintain than the Company's
older facilities. The new 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 generally focus on
only the most widely used amenities.
During 1997, the Company repaid approximately $25 million of indebtedness,
including the repayment of amounts drawn under the Company's credit facility,
from the net proceeds of the 1997 Stock Offering, and used approximately $2
million to support the introduction of new initiatives. Cash receipts from the
sale of paid-in-full memberships during the six months ended December 31, 1997
were approximately $5 million less than during the six months ended June 30,
1997 due to the Company's emphasis on the sale of financed membership plans.
This emphasis during the last six months of 1997 resulted in a corresponding
increase of approximately $26 million in net installment contracts receivable
from June 30, 1997 to December 31, 1997. Prior to completing the 1997 Stock
Offering, the Company was dependent on availability under its credit facility
and its operations to provide for cash needs. The Company managed liquidity
requirements in recent years by emphasizing the sale of single-club paid-in-full
membership plans and accelerating collections of financed memberships and dues
to increase available cash reserves and, to a lesser extent, sales of non-
strategic assets and sale/leaseback arrangements. Management believes use of
these techniques has had a negative impact on operating results, and that
available working capital has reduced the need for these techniques to be
continued.
In October 1997, the Company refinanced its subordinated debt to reduce
interest expense, extend debt maturities and improve financial flexibility. The
Company issued $225 million aggregate principal amount of the 9 7/8% Notes and
completed a tender offer and consent solicitation (the "Tender Offer") with
respect to its $200 million aggregate principal amount of 13% Senior
Subordinated Notes due 2003 (the "13% Notes"). Pursuant to the Tender Offer, the
Company purchased $177.4 million aggregate principal amount of the 13% Notes,
substantially all at a price of 108.3% of the principal amount, together with
accrued and unpaid interest. In January 1998, the Company redeemed 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 November 1997, the Company entered into a new revolving credit agreement
with a group of banks which provides for a three-year $70 million credit line.
The amount available under the credit line is reduced by any outstanding letters
of credit, which cannot exceed $30 million. At December 31, 1997, the revolving
credit agreement was unused except for outstanding letters of credit totaling
$7.2 million.
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The Company has no scheduled principal payments under the 9 7/8% Notes
until October 2007 and the principal amount of the certificates under the
Company's securitization facility remains fixed at $160 million through July
1999. Accordingly, exclusive of the remaining 13% Notes which were redeemed in
January 1998 using the remaining proceeds from the issuance of the 9 7/8% Notes,
debt service requirements (primarily interest) of the Company for the next
twelve months are approximately $43 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 1997
Stock Offering, the refinancing of subordinated debt and the new 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 February 28,
1998, the Company operated approximately 320 fitness centers concentrated in
major metropolitan areas in 27 states and Canada and had approximately four
million members. Bally's members made more than 100 million visits to its
fitness centers in each of 1996 and 1997.
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. In
addition, many of the Company's current fitness centers include pools, racquet
courts or other athletic facilities. The Company's new club prototype achieves
efficiency by focusing on those fitness services that receive a high 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 substantially all use the service mark "Bally Total Fitness", thereby
enhancing brand identity, concentrating advertising and eliminating the prior
practice of using more than 25 different regional service marks 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, with secondary target markets
including older and higher income segments. Bally markets itself to these
consumer segments 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 access
to 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 up to 36 months and subject to
downpayment requirements) or paid-in-full at the time of joining. Members are
generally required to pay monthly membership dues in order to use the Company's
fitness facilities. Management believes the various membership and payment plans
offered, in addition to Bally's strong brand identity and the convenience of its
multiple locations, constitute distinct competitive advantages for the Company.
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 a more financial and
operational orientation. The new management team quickly implemented a business
strategy designed to improve the operating results of the Company. These efforts
have contributed to recent increases in revenues and operating income.
Core Business
During 1997, management developed and began implementing five strategies to
improve the underlying operations and the financial performance of the Company.
These strategies have already favorably impacted the Company's financial results
and management is committed to furthering their implementation.
- Emphasize the Sale of All-Club Membership Plans -- Prior to the 1997
Stock Offering, the Company managed its commission structure to emphasize
the sale of paid-in-full membership plans to generate immediate cash for
short-term liquidity at the expense of longer-term financial returns. The
1997 Stock Offering provided additional working capital, allowing the
Company to emphasize the sale of all-club membership plans, which are
typically financed, rather than single-club membership plans. In 1997, this
new emphasis contributed to an 18% increase in the weighted-average price
of memberships sold to approximately $970 from approximately $820 in 1996.
Management believes that it can continue to increase new member revenues
through an emphasis on financed membership plans.
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- Upgrade and Expand Fitness Centers -- Using a portion of the net
proceeds from the 1997 Stock Offering and cash flow from operations, the
Company has begun to expand and upgrade its existing facilities and
equipment in order to increase its membership base and more effectively
capitalize on its streamlined marketing and administrative functions. The
Company has budgeted approximately $15 million for this initiative (over
and above normal maintenance capital expenditures), most of which has been
spent or committed.
- Increase Dues Revenues -- The Company believes that its dues are
substantially less than those charged by its competitors and that it can
continue to increase dues for its members who are beyond their initial
financing period without any material loss in membership. In addition, the
Company has reduced promotions which discounted or waived dues. In 1997,
these initiatives contributed to an increase in dues collected of
approximately $11.2 million, or 6%, over 1996. Management believes that it
can continue to raise the dues charged to its members at a rate consistent
with past periods.
- Improve Collections on Financed Contracts -- The Company is
maintaining its focus on increasing downpayments on financed membership
plans and securing payments by EFT, which the Company's experience has
shown results in higher quality receivables. This effort yielded an
increase of 11% in the average down payment, from $73 in 1996 to $81 in
1997. In addition to seeking higher down payments, the Company continues to
develop improved collection practices based on information provided by
"credit scoring" and behavioral modeling, which management believes will
also improve the yield from the receivables portfolio.
- Continue to Leverage Fixed Cost Base -- A significant percentage of
the Company's operating costs are fixed in nature, both in terms of fitness
center operations and member processing and advertising. Over the past
several years, the Company has significantly reduced these operating costs
through aggressive cost management. As the Company pursues its growth
strategies described below, management will seek to leverage the Company's
fixed cost base to improve operating margins.
Growth Opportunities
In order to build upon the improved core operations and accelerate the
growth of the Company's business, management has identified the following
external growth opportunities:
- Develop New Fitness Centers -- Beginning in 1998, the Company
intends to increase its spending to approximately $20 million to $25
million per year to open 15 to 20 new facilities based on its new fitness
center prototype, which is designed to cost less to construct and maintain
than the Company's older facilities. The majority of the Company's new
fitness center facilities will be developed pursuant to long term lease
arrangements. The prototype model of new fitness centers developed over the
most recent years has required on average $1.3 million to fund leasehold
improvements and fitness equipment.
- Selectively Acquire Club-Related Real Estate -- The Company operates
approximately 320 fitness centers, over 90% of which are leased.
Historically, the Company has not capitalized on opportunities to buy
leased properties at attractive terms due to capital constraints. The
Company's recently improved financial condition allows the Company to take
advantage of attractive opportunities to acquire leased properties. In
addition to pursuing these opportunities, the Company will also evaluate
purchasing parcels of land in strategic locations for new club expansion.
While the Company believes that from time to time there are attractive
opportunities to acquire real estate, either for existing club sites or new
locations, management intends only to pursue real estate transactions
following a very selective set of criteria, including strategic locale and
relative market values.
- Identify and Acquire Fitness Center Operators in Strategic
Geographic Locations -- The Company maintains an operating strategy of
clustering its clubs in major metropolitan areas in order to achieve
marketing and operating efficiencies. Consistent with this strategy,
management has identified major metropolitan areas where the Company is
absent or underrepresented. In an effort to establish a cluster of clubs
quickly in strategic locations, the Company plans to identify and acquire
fitness center operators where attractive opportunities exist and internal
growth would not be as effective due to various factors, including
timeliness and availability of prime real estate.
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New Business Initiatives
Management believes that the Company can increase and diversify 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 member
visits in each of 1996 and 1997) by offering a number of ancillary products and
services. In order to pursue these growth opportunities, the Company has
implemented the following initiatives:
- Personal Training -- In 1997, the Company introduced a newly
developed personal training program which is now offered at most of its
fitness centers. The value of this service to members, coupled with
decreased outsourcing of this service, represents a significant profit
opportunity for the Company. In the fourth quarter of 1997, the Company
generated $2.0 million in revenues from the sale of personal training
programs. To better introduce personal training services and Bally-branded
nutritional products to its members, the Company began offering System 30
memberships at most of its fitness centers in January 1998. Members
selecting the System 30 membership receive the benefits of an all-club
membership plan plus a complete fitness analysis, a supply of Bally-branded
nutritional products and three personal training sessions during the first
month of membership.
- Private-Label Nutritional Products -- During 1997, the Company
launched the sale of an exclusive line of Bally-branded nutritional
products to the Company's members. The current line of Bally-branded
nutritionals includes meal replacement drinks, multi-vitamins, fat-free
snack wafers, a creatine mix and fat-reducing supplements. While these
products were only being introduced in 1997, sales for the year totaled
$2.2 million, including $1.0 million in the fourth quarter of 1997. The
Company continues to test market other nutritional products.
- Retail Stores -- To date, the Company has opened more than 60 BFIT
Essentials(TM) retail stores in its fitness centers. These retail stores
sell Bally-branded and complementary products from other manufacturers,
including nutritional products, workout apparel and related accessories.
The Company plans to have approximately 100 BFIT Essentials(TM) retail
stores in its fitness centers by the end of 1998.
- Outpatient Rehabilitative and Physical Therapy Services -- The
Company believes numerous opportunities exist to contract with third party
providers and managers of health care programs and services to provide
affordable, comprehensive outpatient rehabilitative and physical therapy
services in its fitness centers, and expects to offer these services to
members and non-members alike in up to 100 of its facilities within the
next three years, primarily using existing facilities and equipment.
Pursuant to an agreement with Continucare Corporation, two such facilities
are currently in operation in the Florida market, with plans already
developed to have four additional facilities operating during 1998.
MEMBERSHIP PLANS
The Company currently offers prospective members a number of membership
plans which 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 nationwide. 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 presently range from
approximately $379 to $1,199 depending on the membership plan selected, the
diversity of facilities and services available at the club of enrollment and the
local business 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. Dues during
the typical financing period for memberships presently being sold are
approximately $6.00 per month and vary based on the market and the type of plan
purchased by the member. Some promotional programs offered by the Company in the
past have waived dues payments for up to 36 months if the member paid the
initiation fee in full at the time the membership originated. Renewal dues (paid
after the typical financing period ends) vary significantly and are typically
increased as contractually permitted. At December 31, 1997, approximately 90% of
the Company's members were being charged dues ranging from $2.00 to $15.00 per
month, with the overall average $7.86 per month. The Company has experienced an
average annual growth rate of dues revenues of 7% from 1992 to 1997. The
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Company expects annual increases in dues revenues will continue due to
contractual terms of current membership plans and the Company's belief it can
continue to 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 47%, and members faced with a membership renewal decision for
subsequent periods renewed at a rate of approximately 85%.
Members selecting financed 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 both these strategies result in
better quality receivables. See "Account Servicing".
FINANCING OF INITIAL MEMBERSHIP FEE
Generally, the Company offers financing terms of 36 months. 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). Financed portions of initial membership fees may be prepaid without
penalty at any time during the financing term. Management expects approximately
85% of all new membership contracts originated during 1998 will be financed to
some extent.
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 approximately the same date each month a predetermined amount is either
(i) automatically transferred from a member's bank account to the Company, or
(ii) automatically charged to a member's designated credit card. Currently,
approximately 80% 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 may change
their payment method at any time.
On average, the Company received a downpayment of $81 on financed
memberships sold during 1997. 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 members at the time they join due,
in part, to the high cost associated with performing credit checks on the large
volume of new members. The Company satisfactorily manages its credit risk by
measuring, from past performance, the average realizable value of contracts for
coupon book and EFT payers based on various downpayment criteria. Historical
analysis performed by the Company indicates the collection experience of EFT
accounts is approximately 50% better than coupon book accounts. As of December
31, 1997, approximately 60% of membership contract receivables consisted of
EFT-financed memberships compared to 29% at December 31, 1992.
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 requires a comprehensive training program for its service personnel and
offers its members orientations on the recommended use of exercise equipment.
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Generally, the Company's fitness centers constructed prior to 1980 are
smaller 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, squash
or basketball courts. The Company's current 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. The prototype club, which tends to be approximately 20,000 to 30,000
square feet, has recently averaged approximately $800,000 to construct,
exclusive of purchased real estate and exercise equipment and net of any
landlord contribution. The Company invests approximately $500,000 for exercise
equipment for a prototype club.
The Company is in the process of expanding and upgrading 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 annually to
maintain and make minor upgrades to the Company's existing facilities, including
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 during the
next year to complete its plans to extensively add and upgrade exercise
equipment, refresh interior and exterior finishes to improve club ambience, and
refurbish and make major upgrades to approximately 25% of its clubs, including
converting some low-usage pools and racquet areas into expanded exercise areas
and to a lesser extent retail and outpatient rehabilitative and physical therapy
service areas. 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. Beginning in 1998, the Company intends to increase its spending to
approximately $20 million to $25 million per year to open 15 to 20 new
facilities based on its new prototype, which is designed to cost less to
construct and maintain than the Company's older facilities. The new 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 generally focus on only the most widely used amenities.
At December 31, 1997, the Company had 41 of the new prototype facilities in
operation, of which 35 had been in operation for at least one year. The average
1997 net revenues in excess of operating costs (excluding depreciation and
amortization) for these 35 facilities was approximately $830,000 compared to the
average 1997 results for all the Company's other fitness facilities of
approximately $720,000.
In 1997, the Company 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.
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 substantially all use the service mark "Bally Total Fitness",
thereby enhancing brand identity, concentrating advertising and eliminating the
prior practice of using more than 25 different regional service marks and trade
names.
The Company's strategy is to cluster numerous fitness centers in major
media markets in order to increase the efficiency of its marketing and
advertising programs. The Company operates approximately 260 clubs in 26 of the
top 30 U.S. media markets.
The Company expects to spend approximately $50 million for advertising and
promotion during 1998 compared to approximately $45 million in 1997, $47 million
in 1996 and $50 million in 1995. The Company primarily advertises on television,
and, to a lesser extent, through newspapers, telephone directories, direct mail,
radio, outdoor signage and other promotional activities.
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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,
constitute distinct competitive advantages for the Company.
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 120 employees located at its Towson,
Maryland RSC dedicated primarily to inbound telemarketing renewal and outbound
service programs to existing members, although telemarketing is not currently
used to attract prospective new members.
The Company continually evaluates strategic marketing alliances to heighten
awareness of its fitness centers. For example, in February 1998 the Company
entered into an agreement with the owner and syndicator of the "Baywatch"
television series pursuant to which an episode of the show will be filmed on
location at one of the Company's fitness centers, and stars from the show will
make appearances at fitness center grand openings and other events for the
Company. In addition, the Company recently became the title sponsor for a series
of eight Olympic-length triathlons beginning in 1998.
ACCOUNT SERVICING
The Company administers and collects amounts owing under its membership
contracts according to uniform procedures implemented by its two RSCs. The RSCs
enable the Company to conduct centralized data processing of all membership
accounts. The RSCs employ approximately 800 people in the account processing and
collection areas, including approximately 150 employees dedicated to customer
service, approximately 350 employees dedicated to account processing and
administration and approximately 300 employees dedicated to account collections.
The two RSCs collectively receive, deposit and post more than $550 million of
membership transactions annually, including the processing of downpayments and
cash sales, and collections of financed receivables and dues. In addition, the
RSCs process, on average, 2,600 new membership accounts per day. RSC personnel
are also responsible for responding to and resolving member inquiries and
maintaining membership data.
All collections for past-due accounts are initially handled internally by
the RSCs. The Company systematically pursues past-due accounts by utilizing a
series of computer-generated correspondence and telephone contacts.
Computer-generated correspondence is sent to a delinquent member at 7 and 20
days after an account becomes past due. Collectors with varying levels of
experience are responsible for handling delinquent accounts, depending on the
period of delinquency. At 30 and 60 days past due, the accounts are assigned to
power dialer assisted collectors initially as a reminder and later as a demand
for payment. Accounts that have not been collected for a 90-day period are
transferred to a group of the most experienced collectors (unless the first
scheduled payment has not been received on such accounts, in which case they are
generally written off and any downpayment received is not refunded). All
remaining delinquent accounts are written off after 180 days without payment.
Accounts that are written off are reported to credit reporting bureaus and sold
to a third-party collection group. The Company is investigating opportunities to
enhance its collection efforts based on information provided by credit scoring
and behavioral modeling, 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 a poor credit history 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 likelihood of payment,
the Company believes it can
25
<PAGE> 27
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. As of March
1998, the Company has credit scored a majority of its financed members with
outstanding balances. The Company is also testing other collection techniques,
such as the use of monthly statements.
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 members. 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 other athletic clubs, country clubs,
weight-reducing salons and the home-use fitness equipment industry. However, the
Company believes its operating experience, its ability to allocate advertising
and administration costs over all of its fitness centers, its nationwide
operations, its purchasing power 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 competition has increased in certain markets,
reflecting the public's enthusiasm for fitness and a decrease in the cost of
entry into the market due to financing available from landlords and equipment
manufacturers. The Company believes 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 markets.
As the Company pursues new business initiatives, particularly the sale of
nutritional products and apparel, the Company competes 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 the Company will be able to compete
effectively with 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
land, buildings or both for the remainder of its fitness centers. Aggregate rent
expense for real estate (including office and administrative space) was $86.8
million, $85.8 million and $84.9 million for 1997, 1996 and 1995, 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. One fitness center accounted for between 1% to 2% of the Company's net
revenues during 1997. The Company believes its properties are adequate for its
current membership.
Leases for fitness centers entered into by the Company 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 contain at least one five-year option to
renew and often two or more such options.
The Company's executive offices are located in Chicago, Illinois, where it
is a co-tenant at a monthly base rental cost to the Company of $50,200. 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 substantially all use the service mark "Bally Total Fitness", thereby
enhancing brand identity, concentrating advertising and eliminat-
26
<PAGE> 28
ing the prior practice of using more than 25 different regional service marks or
trade names. The name "Bally Total Fitness" is a service mark of Hilton Hotels
Corporation as successor to Entertainment. In January 1996, the Company and
Entertainment entered into a 10-year trademark license agreement to allow the
Company to use certain marks, including the "Bally Total Fitness" service mark,
in connection with its fitness center business. The Company paid no royalty or
license fee for 1996 and pays a fee of $1.0 million per year thereafter.
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
then market rate or $1.0 million per year.
SEASONAL MEMBERSHIP FEE ORIGINATIONS
Historically, the Company has experienced greater membership fee
originations in the first quarter and lower membership fee originations in the
fourth quarter. Certain of the new initiatives the Company has implemented may
have the effect of further increasing the seasonality of the Company's business.
EMPLOYEES
The Company has approximately 13,900 employees, including approximately
7,300 part-time employees. Approximately 12,800 employees are involved in club
operations, including sales personnel, instructors, personal trainers,
supervisory and facilities personnel, approximately 800 are involved in the
operation of the RSCs and approximately 300 are administrative support
personnel, including accounting, management information systems, marketing,
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 regionally from time-to-time with respect
to sales personnel, which the Company believes periodically 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 its activities are in substantial compliance with all applicable
statutes, rules and decisions.
Under so-called "cooling-off" statutes in most states, 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 a Bally fitness center, 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.
27
<PAGE> 29
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 the Company to refrain
from activities not in compliance with applicable laws.
The provision of rehabilitative and physical therapy 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 rehabilitative and physical therapy 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 rehabilitative and physical therapy services. Further, in a
number of states and in certain circumstances pursuant to federal law, the
referral of patients to rehabilitative and physical therapy 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 rehabilitative and physical therapy services by the Company.
LEGAL PROCEEDINGS
A class action which has been certified 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 which has not been certified 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 financed 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 accurately determine within a
meaningful range the amount sought in these actions because Texas law on what
constitutes actual damages for any class member is unclear. 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.
28
<PAGE> 30
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Ladenburg Thalmann & Co.
Inc. ("Ladenburg Thalmann") and CIBC Oppenheimer Corp. are acting as
representatives (the "Representatives"), has severally agreed to purchase from
the Company, the respective numbers of shares of Common Stock set forth opposite
its name below at the public offering price less the underwriting discount set
forth on the cover page of this Prospectus. In the Purchase Agreement, the
several Underwriters have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock offered hereby if any of
such shares are purchased. In the event of default by an Underwriter, the
Purchase Agreement provides that, in certain circumstances, the purchase
commitments of the nondefaulting Underwriters may be increased or the Purchase
Agreement may be terminated.
<TABLE>
<CAPTION>
NUMBER
OF SHARES
UNDERWRITER ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Ladenburg Thalmann & Co. Inc................................
CIBC Oppenheimer Corp.......................................
------------
Total.......................................... 2,500,000
============
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the offering
price set forth on the cover page of this Prospectus, and to certain dealers at
such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other dealers. After the Offering
contemplated hereby, the offering price and other selling terms may be changed
by the Representatives.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
375,000 additional shares of Common Stock at the public offering price set forth
on the cover page hereof, less the underwriting discount. The Underwriters may
exercise such option only to cover over-allotments, if any, made in connection
with the sale of Common Stock offered hereby. To the extent that the
Underwriters exercise this option, each Underwriter will have a firm commitment,
subject to certain conditions, to purchase approximately the same percentage
thereof which the number of shares of Common Stock to be purchased by it shown
in the above table is of the 2,500,000 shares of Common Stock initially offered
hereby. If purchased, the Underwriters will offer such additional shares on the
same terms as those on which the 2,500,000 shares are being offered.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members (if any) to bid for and purchase the Common Stock. As an exception to
these rules, the Representatives are permitted to engage in certain transactions
that stabilize the price of the Common Stock. Such transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering (i.e., if they sell a greater number of shares of
Common Stock than is set forth on the cover page of this Prospectus), the
Representatives may reduce that short position by purchasing shares of Common
Stock in the open
29
<PAGE> 31
market. The Representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option described above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
In connection with this Offering, the Underwriters or their respective
affiliates and selling group members (if any) who are qualified market makers on
Nasdaq may engage in "passive market making" in the Common Stock on the Nasdaq
National Market in accordance with Rule 103 of Regulation M under the Exchange
Act. Rule 103 permits, upon the satisfaction of certain conditions, underwriters
and selling group members participating in a distribution that are also Nasdaq
market makers in the security being distributed (or a related security) to
engage in limited market making transactions during the period when Regulation M
under the Exchange Act would otherwise prohibit such activity. Rule 103
prohibits underwriters and selling group members engaged in passive market
making generally from entering a bid or effecting a purchase at a price that
exceeds the highest bid for those securities displayed on the Nasdaq National
Market by a market maker that is not participating in the distribution. Under
Rule 103, each underwriter or selling group member engaged in passive market
making is subject to a daily net purchase limitation equal to 30% of such
entity's average daily trading volume during the two full consecutive calendar
months immediately preceding the date of the filing of the registration
statement under the Securities Act pertaining to the security to be distributed
(or such related security).
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act.
The Company and each of Arthur M. Goldberg, Chairman of the Board of
Directors, Lee S. Hillman, President, Chief Executive Officer and Director, and
John W. Dwyer, Executive Vice President, Chief Financial Officer and Treasurer,
have agreed not to, directly or indirectly, offer, pledge, sell, contract to
sell or otherwise transfer or dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock
without the prior written consent of Merrill Lynch for a period of from the
date of this Prospectus, except that the Company may, without such consent,
issue shares of Common Stock upon the exercise or conversion of any outstanding
options or warrants, or grant options to purchase shares of Common Stock
pursuant to the Company's stock option plans.
In July 1997, Ladenburg Thalmann Capital Corporation ("LTCC"), an affiliate
of Ladenburg Thalmann, loaned the Company $7.5 million. The Company repaid the
loan from LTCC from the net proceeds of the 1997 Stock Offering. In connection
with the loan, LTCC received warrants to purchase 250,000 shares of Common Stock
at an exercise price of $10.05. The warrants, which are not transferable by LTCC
prior to August 1998, are exercisable for five years and have certain
registration rights.
From time to time, Merrill Lynch and Ladenburg Thalmann have provided
investment banking services to the Company for which they received normal and
customary fees, including in connection with the 1997 Stock Offering and the
placement of the 9 7/8% Notes.
LEGAL MATTERS
The validity, authorization and issuance of the shares of Common Stock
offered hereby will be passed upon for the Company by Benesch, Friedlander,
Coplan & Aronoff LLP of Cleveland, Ohio. George N. Aronoff, a partner in
Benesch, Friedlander, Coplan & Aronoff LLP, owns 22,359 shares of Common Stock.
Certain legal matters will be passed on for the Underwriters by Latham &
Watkins, Chicago, Illinois.
30
<PAGE> 32
EXPERTS
The consolidated financial statements and schedule of the Company at
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997, appearing in this Prospectus and the Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
31
<PAGE> 33
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of independent auditors.............................. F-2
Consolidated balance sheet at December 31, 1997 and 1996.... F-3
Consolidated statement of operations for the years ended
December 31, 1997, 1996 and 1995.......................... F-4
Consolidated statement of stockholders' equity for the years
ended December 31, 1997, 1996 and 1995.................... F-5
Consolidated statement of cash flows for the years ended
December 31, 1997, 1996 and 1995.......................... F-6
Notes to consolidated financial statements for the years
ended December 31, 1997, 1996 and 1995.................... F-8
Supplementary data:
Quarterly consolidated financial information
(unaudited)............................................ F-21
</TABLE>
F-1
<PAGE> 34
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Bally Total Fitness Holding Corporation
We have audited the accompanying consolidated balance sheets of Bally Total
Fitness Holding Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 17, 1998
F-2
<PAGE> 35
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 61,679 $ 16,534
Installment contracts receivable, net..................... 168,011 153,235
Other current assets...................................... 31,743 24,075
-------- --------
Total current assets................................... 261,433 193,844
Installment contracts receivable, net....................... 175,575 146,972
Property and equipment, at cost:
Land...................................................... 21,667 22,550
Buildings................................................. 109,613 108,361
Leasehold improvements.................................... 402,503 400,340
Equipment and furnishings................................. 91,958 99,073
-------- --------
625,741 630,324
Accumulated depreciation and amortization................. 314,544 304,865
-------- --------
Net property and equipment............................. 311,197 325,459
Intangible assets, less accumulated amortization of $54,124
and $49,619............................................... 101,220 105,725
Deferred income taxes....................................... 4,171 13,656
Deferred membership origination costs....................... 86,737 82,140
Other assets................................................ 27,233 25,506
-------- --------
$967,566 $893,302
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 36,908 $ 41,565
Income taxes payable...................................... 2,342 2,258
Deferred income taxes..................................... 5,660 15,145
Accrued liabilities....................................... 50,464 55,063
13% Senior Subordinated Notes due 2003, called for 1998
redemption............................................. 22,555
Other current maturities of long-term debt................ 4,590 8,401
Deferred revenues......................................... 270,853 265,465
-------- --------
Total current liabilities.............................. 393,372 387,897
Long-term debt, less current maturities..................... 405,425 376,397
Other liabilities........................................... 7,459 6,824
Deferred revenues........................................... 90,989 98,032
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; 20,575,092 and 12,495,161 shares issued and
outstanding............................................ 206 125
Contributed capital....................................... 392,718 303,811
Accumulated deficit....................................... (322,603) (277,733)
Unearned compensation (restricted stock).................. (2,051)
-------- --------
Total stockholders' equity............................. 70,321 24,152
-------- --------
$967,566 $893,302
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 36
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
Membership revenues-
Initial membership fees on financed memberships
originated........................................... $352,661 $290,378 $309,974
Initial membership fees on paid-in-full memberships
originated........................................... 58,117 85,624 95,695
Dues collected......................................... 194,084 182,909 177,783
Change in deferred revenues............................ 961 29,791 16,813
-------- -------- --------
605,823 588,702 600,265
Finance charges earned.................................... 39,218 36,405 36,889
Fees and other............................................ 15,996 14,092 16,220
-------- -------- --------
661,037 639,199 653,374
Operating costs and expenses:
Fitness center operations................................. 384,120 366,466 396,564
Member processing and collection centers.................. 38,627 42,257 50,255
Advertising............................................... 45,042 47,428 50,037
General and administrative................................ 28,952 23,586 21,603
Provision for doubtful receivables........................ 96,078 80,350 72,145
Depreciation and amortization............................. 52,878 55,940 57,359
Change in deferred membership origination costs........... (4,597) 4,113 428
-------- -------- --------
641,100 620,140 648,391
-------- -------- --------
Operating income............................................ 19,937 19,059 4,983
Interest income............................................. 1,928 988 179
Interest expense............................................ (45,021) (47,644) (43,750)
-------- -------- --------
Loss before income taxes and extraordinary item............. (23,156) (27,597) (38,588)
Income tax benefit (provision).............................. (300) 2,700 7,188
-------- -------- --------
Loss before extraordinary item.............................. (23,456) (24,897) (31,400)
Extraordinary gain (loss) on extinguishment of debt......... (21,414) 5,655
-------- -------- --------
Net loss.................................................... $(44,870) $(19,242) $(31,400)
======== ======== ========
Basic and diluted earnings (loss) per common share (pro
forma for 1995):
Loss before extraordinary item......................... $ (1.51) $ (2.04) $ (3.25)
Extraordinary gain (loss) on extinguishment of debt.... (1.37) .46
-------- -------- --------
Net loss............................................... $ (2.88) $ (1.58) $ (3.25)
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 37
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(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, 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
Net loss........................ (44,870) (44,870)
Issuance of common stock through
public offering............... 8,000,000 80 88,310 88,390
Issuance of common stock upon
exercise of stock options and
other......................... 79,931 1 597 598
Amortization of unearned
compensation.................. 2,051 2,051
---------- ----- -------- --------- ------ --------
Balance at December 31, 1997.... 20,575,092 $ 206 $392,718 $(322,603) $ -- $ 70,321
========== ===== ======== ========= ====== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 38
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING:
Loss before extraordinary item..................... $ (23,456) $ (24,897) $ (31,400)
Adjustments to reconcile to cash used --
Depreciation and amortization, including
amortization included in interest expense..... 55,287 59,124 60,701
Provision for doubtful receivables.............. 96,078 80,350 72,145
Change in operating assets and liabilities...... (163,770) (119,764) (112,922)
Other, net...................................... (75) (114) 1,622
--------- --------- ---------
Cash used in operating activities............. (35,936) (5,301) (9,854)
INVESTING:
Purchases and construction of property and
equipment....................................... (27,065) (20,612) (22,469)
Proceeds from sale of property and equipment....... 10,946
Reserve fund deposit refunded (paid) pursuant to
securitization facility......................... 10,000 (20,000)
Other, net......................................... 833 353
--------- --------- ---------
Cash used in investing activities............. (16,119) (9,779) (42,116)
FINANCING:
Debt transactions --
Proceeds from long-term borrowings.............. 225,052 162,318 150,000
Repayments of long-term debt.................... (208,034) (155,912) (82,917)
Debt issuance costs............................. (8,466) (2,815) (6,654)
--------- --------- ---------
Cash provided by debt transactions............ 8,552 3,591 60,429
Equity transactions --
Proceeds from issuance of common stock through
public offering............................... 88,390
Proceeds from issuance of common stock upon
exercise of stock options..................... 258
Capital contribution by Bally Entertainment
Corporation................................... 6,760
--------- --------- ---------
Cash provided by financing activities......... 97,200 10,351 60,429
--------- --------- ---------
Increase (decrease) in cash and equivalents.......... 45,145 (4,729) 8,459
Cash and equivalents, beginning of year.............. 16,534 21,263 12,804
--------- --------- ---------
Cash and equivalents, end of year.................... $ 61,679 $ 16,534 $ 21,263
========= ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 39
BALLY TOTAL FITNESS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<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...... $(140,096) $ (75,491) $ (91,422)
(Increase) decrease in other current and other
assets......................................... (8,402) (4,063) 1,589
(Increase) decrease in deferred membership
origination costs.............................. (4,597) 4,113 428
Decrease in accounts payable...................... (4,657) (475) (498)
Increase (decrease) in income taxes payable....... 84 (2,866) (503)
Decrease in accrued and other liabilities......... (5,141) (11,191) (5,703)
Decrease in deferred revenues..................... (961) (29,791) (16,813)
--------- --------- ---------
$(163,770) $(119,764) $(112,922)
========= ========= =========
Cash payments for interest and income taxes were
as follows --
Interest paid..................................... $ 48,427 $ 44,604 $ 42,221
Interest capitalized.............................. (511) (236) (278)
Income taxes paid (refunded), net................. 216 166 (6,685)
Investing and financing activities exclude the
following non-cash transactions --
Acquisition of property and equipment through
capital leases/borrowings....................... $ 14,044 $ 5,266 $ 2,445
Forgiveness of income tax obligations by Bally
Entertainment Corporation/Hilton Hotels
Corporation..................................... 15,200 44,507
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
</TABLE>
See accompanying notes.
F-7
<PAGE> 40
BALLY TOTAL FITNESS HOLDINGS 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. In addition,
certain reclassifications (primarily interest income) have been made to prior
years' financial statements to conform with the 1997 presentation.
Cash equivalents
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents. The carrying amount
of cash equivalents approximates fair value due to the short maturity of those
instruments.
Property and equipment
Depreciation of buildings, equipment and furnishings (including assets
under capital leases) is provided on the straight-line method over the estimated
economic lives of the related assets and amortization of leasehold improvements
is provided on the straight-line method over the lesser of the estimated useful
lives of the improvements or the lease periods. Depreciation and amortization of
property and equipment was $45,739, $48,444 and $51,999 for 1997, 1996 and 1995,
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,
1997 and 1996 were deferred finance costs of $9,828 and $8,252, respectively,
net of accumulated amortization of $2,511 and $4,430, 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
F-8
<PAGE> 41
BALLY TOTAL FITNESS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(All dollar amounts in thousands, except share data)
acquisition, and amounts assigned to acquired operating lease rights, which are
being amortized on the straight-line method over the remaining lease periods.
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 were 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, 1997. 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
ratably over the weighted average expected life of the memberships, which for
paid-in-full memberships and financed memberships sold after December 31, 1993
have 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, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------- -------------------------------
CURRENT LONG-TERM TOTAL CURRENT LONG-TERM TOTAL
-------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Financed initial membership
fees deferred................ $169,298 $ 43,901 $213,199 $148,251 $ 31,981 $180,232
Paid-in-full initial membership
fees deferred................ 61,453 36,703 98,156 75,614 55,278 130,892
Prepaid dues................... 40,102 10,385 50,487 41,600 10,773 52,373
-------- -------- -------- -------- -------- --------
$270,853 $ 90,989 $361,842 $265,465 $ 98,032 $363,497
======== ======== ======== ======== ======== ========
</TABLE>
F-9
<PAGE> 42
BALLY TOTAL FITNESS HOLDINGS 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, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Financed initial membership fees:
Originating.................................... $(352,661) $(290,378) $(309,974)
Less provision for doubtful receivables........ 96,078 80,350 72,145
--------- --------- ---------
Originating, net............................... (256,583) (210,028) (237,829)
Recognized..................................... 223,270 228,681 220,885
--------- --------- ---------
Decrease (increase) in deferral............. (33,313) 18,653 (16,944)
Paid-in-full initial memberships fees:
Originating.................................... (58,117) (85,624) (95,695)
Recognized..................................... 90,666 94,870 116,608
--------- --------- ---------
Decrease in deferral........................ 32,549 9,246 20,913
Decrease in prepaid dues......................... 1,725 1,892 12,844
--------- --------- ---------
Change in deferred revenues...................... $ 961 $ 29,791 $ 16,813
========= ========= =========
</TABLE>
Components of the change in deferred membership origination costs for the
years ended December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Incurred......................................... $ (84,104) $ (77,257) $ (82,720)
Amortized........................................ 79,507 81,370 83,148
--------- --------- ---------
Change in deferred membership origination
costs.......................................... $ (4,597) $ 4,113 $ 428
========= ========= =========
</TABLE>
Income taxes
For tax periods after January 9, 1996, the Company files 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 totaling $9,360 were received by the Company ($6,760 in
cash and $2,600 as an offset to certain indebtedness) representing a portion of
the benefit that Entertainment receives from the utilization of the Company's
loss carrybacks.
Earnings (loss) per common share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS No.
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic
F-10
<PAGE> 43
BALLY TOTAL FITNESS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(All dollar amounts in thousands, except share data)
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is computed similarly to the
way fully diluted earnings per share was computed pursuant to Accounting
Principles Board Opinion ("APB") No. 15. Earnings (loss) per share amounts for
all years have been presented to conform to SFAS No. 128.
Basic and diluted earnings (loss) per common share are computed by dividing
loss before extraordinary item, extraordinary gain (loss) on extinguishment of
debt, and net loss by the weighted average number of shares of common stock
outstanding during each year, which totaled 15,557,491 shares and 12,174,601
shares for 1997 and 1996, respectively. The assumed exercise of outstanding
warrants and stock options for diluted earnings (loss) per common share was not
applicable in either 1997 or 1996 because their effect was anti-dilutive. See
"Pro forma information (unaudited)" regarding 1995's pro forma loss per common
share.
EXTRAORDINARY ITEMS
The extraordinary loss on extinguishment of debt for 1997 of $21,414 ($1.37
per share) results from a refinancing of the Company's subordinated debt and
credit facility.
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 a refinancing of the Company's
securitization facility.
INSTALLMENT CONTRACTS RECEIVABLE
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current:
Installment contracts receivable.......................... $239,448 $226,173
Unearned finance charges.................................. (27,709) (24,467)
Allowance for doubtful receivables and cancellations...... (43,728) (48,471)
-------- --------
$168,011 $153,235
======== ========
Long-term:
Installment contracts receivable.......................... $226,735 $195,978
Unearned finance charges.................................. (14,357) (11,382)
Allowance for doubtful receivables and cancellations...... (36,803) (37,624)
-------- --------
$175,575 $146,972
======== ========
</TABLE>
The carrying amount of installment contracts receivable at December 31,
1997 and 1996 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.
ACCRUED LIABILITIES
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Payroll and benefit-related liabilities..................... $ 19,530 $ 16,384
Interest.................................................... 6,603 11,938
Taxes other than income taxes............................... 3,922 3,853
Other....................................................... 20,409 22,888
-------- --------
$ 50,464 $ 55,063
======== ========
</TABLE>
F-11
<PAGE> 44
BALLY TOTAL FITNESS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(All dollar amounts in thousands, except share data)
LONG-TERM DEBT
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Nonsubordinated:
Revolving credit agreement................................ $ -- $ --
Securitization facility................................... 160,000 160,000
Capital lease obligations................................. 13,126 6,686
Other secured and unsecured obligations................... 11,889 18,112
Subordinated:
9-7/8% Senior Subordinated Notes due 2007................. 225,000
13% Senior Subordinated Notes due 2003.................... 22,555 200,000
-------- --------
Total long-term debt........................................ 432,570 384,798
13% Senior Subordinated Notes due 2003, called for 1998
redemption................................................ (22,555)
Other current maturities of long-term debt.................. (4,590) (8,401)
-------- --------
Long-term debt, less current maturities..................... $405,425 $376,397
======== ========
</TABLE>
In November 1997, the Company entered into a new revolving credit agreement
with a group of banks which provides for a three-year $70,000 credit line. The
amount available under the credit line is reduced by any outstanding letters of
credit, which cannot exceed $30,000. At December 31, 1997, the revolving credit
agreement was unused except for outstanding letters of credit totaling $7,157.
The rate of interest on borrowings is at the Company's option, generally 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. The revolving credit agreement is secured by substantially all real
and personal property (excluding installment contracts receivable) of the
Company.
In December 1996, the Company refinanced its 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 (8.55% at December 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 exceeds 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 leases certain fitness center facilities and equipment under
capital leases expiring in periods ranging from one to twenty years. Included in
"Property and equipment" at December 31, 1997 and 1996 were assets under capital
leases of $18,194 and $7,125, respectively, net of accumulated amortization of
$1,751 and $586, respectively.
F-12
<PAGE> 45
BALLY TOTAL FITNESS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(All dollar amounts in thousands, except share data)
In October 1997, the Company refinanced its subordinated debt by issuing
$225,000 aggregate principal amount of 9-7/8% Senior Subordinated Notes due 2007
(the "9-7/8% Notes") and completing a tender offer and consent solicitation (the
"Tender Offer") with respect to its $200,000 aggregate principal amount of 13%
Senior Subordinated Notes due 2003 (the "13% Notes"). Pursuant to the Tender
Offer, the Company purchased $177,445 aggregate principal amount of the 13%
Notes, substantially all at a price of 108.3% of the principal amount, together
with accrued and unpaid interest. In January 1998, the Company redeemed the
remaining $22,555 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 9-7/8% Notes are not subject to any sinking
fund requirement, but may be redeemed beginning in October 2002, in whole or in
part, with premiums ranging from 4.9% in 2002 to zero in 2005 and thereafter.
The payment of the 9-7/8% Notes is subordinated to the prior payment in full of
all senior indebtedness of the Company, as defined (approximately $192,000 at
December 31, 1997).
The revolving credit agreement and the indenture for the 9 7/8% Notes
contain covenants that, among other things and subject to certain exceptions,
restrict the ability of the Company to incur additional indebtedness, pay
dividends, prepay certain indebtedness, dispose of certain assets, create liens
and make certain investments or acquisitions. The revolving credit agreement
also requires the maintenance of certain financial covenants.
Maturities of long-term debt (excluding the $22,555 aggregate principal
amount of the 13% Notes redeemed in January 1998) and future minimum payments
under capital leases together with the present value of future minimum rentals
as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL
DEBT LEASES TOTAL
--------- ------- --------
<S> <C> <C> <C>
1998............................................... $ 2,527 $ 3,498 $ 6,025
1999............................................... 67,054 3,129 70,183
2000............................................... 96,092 2,076 98,168
2001............................................... 1,118 1,523 2,641
2002............................................... 3,002 1,413 4,415
Thereafter......................................... 227,096 16,177 243,273
-------- ------- --------
396,889 27,816 424,705
Less amount representing interest.................. (14,690) (14,690)
-------- ------- --------
$396,889 $13,126 $410,015
======== ======= ========
</TABLE>
The fair value of the Company's long-term debt at December 31, 1997 and
1996 approximates its carrying amount except for the Company's subordinated
debt, which had a fair market value (based on quoted market prices) of $251,666
and $190,875 at December 31, 1997 and 1996, respectively. The fair values are
not necessarily indicative of the amounts the Company could acquire the debt for
in a purchase or redemption.
INCOME TAXES
The income tax benefit (provision) applicable to loss before income taxes
and extraordinary item consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Federal (all current).............................. $ -- $ 3,050 $ 7,069
State and other (all current)...................... (300) (350) 119
-------- ------- --------
$ (300) $ 2,700 $ 7,188
======== ======= ========
</TABLE>
F-13
<PAGE> 46
BALLY TOTAL FITNESS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(All dollar amounts in thousands, except share data)
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial accounting
and income tax purposes. Significant components of the Company's deferred tax
assets and liabilities as of December 31, 1997 and 1996, along with their
classification, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Installment contract revenues............. $ 1,677 $ -- $ 27,466 $ --
Amounts not yet deducted for tax purposes:
Bad debts............................... 33,259 33,509
Other................................... 13,079 14,275
Amounts not yet deducted for book
purposes:
Deferred membership origination costs... 36,042 32,412
Depreciation and capitalized costs........ 2,439 2,308
Tax loss carryforwards.................... 174,105 118,313
Other, net................................ 2,359 1,460
--------- ------- --------- -------
224,559 $38,401 193,563 $36,180
======= =======
Valuation allowance....................... (187,647) (158,872)
--------- ---------
$ 36,912 $ 34,691
========= =========
Current................................... $ 19,538 $25,198 $ 7,420 $22,565
Long-term................................. 17,374 13,203 27,271 13,615
--------- ------- --------- -------
$ 36,912 $38,401 $ 34,691 $36,180
========= ======= ========= =======
</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, 1997, estimated federal
AMT credit and tax loss carryforwards of $2,987 and $366,873, respectively, have
been recorded by the Company. The AMT credits can be carried forward
indefinitely, while the tax loss carryforwards expire through 2012. In addition,
the Company has substantial state tax loss carryforwards which begin to expire
in 1998 and fully expire through 2012. 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 cannot be assured. Accordingly, a valuation
allowance has been recorded to reduce deferred tax assets to a level which, more
likely than not, will be realized.
A reconciliation of the income tax benefit (provision) with amounts
determined by applying the U.S. statutory tax rate to loss before income taxes
and extraordinary item is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------- -----------
<S> <C> <C> <C>
Benefit at U.S. statutory tax rate (35%)............... $ 8,105 $ 9,659 $13,506
Add (deduct):
Operating losses without a current year tax
benefit........................................... (6,748) (5,509) (4,904)
State income taxes, net of related federal income tax
effect and valuation allowance.................... (195) (770) (96)
Amortization of cost in excess of acquired assets.... (1,412) (1,411) (1,391)
Other, net........................................... (50) 731 73
------- ------- -------
Income tax benefit (provision)......................... $ (300) $ 2,700 $ 7,188
======= ======= =======
</TABLE>
F-14
<PAGE> 47
BALLY TOTAL FITNESS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(All dollar amounts in thousands, except share data)
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
2,942,805 shares of Common Stock initially issued to Entertainment.
In the event that, at any time after a person or group of affiliated or
associated persons has become an Acquiring Person, (i) the Company consolidates
with or merges with or into any person and is not the surviving corporation,
(ii) any person merges with or into the Company and the Company is the surviving
corporation, but the shares of Common Stock are changed or exchanged, or (iii)
50% or more of the Company's assets or earning power are sold, each holder of a
Right will thereafter have the right to receive, upon the exercise thereof at
the then current exercise price of the Right, that number of shares of Common
Stock (or under certain circumstances, an economically equivalent security or
securities) of such other person which at the time of such transaction would
have a market value of two times the exercise price of the Right. The Rights,
which do not have voting privileges, are subject to adjustment to prevent
dilution and expire on January 5, 2006. The Company may redeem or exchange all,
but not less than all, of the Rights at a price of $.01 per Right, payable in
cash or Common Stock, at any time prior to such time as a person or group of
affiliated or associated persons becomes an Acquiring Person.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights that are or were owned beneficially by the
Acquiring Person (which, from and after the later of the Rights distribution
date and the date of the earliest of any such events, will be void), will
thereafter have the right to receive, upon exercise thereof at the then current
exercise price of the Right, that number of shares of Common Stock (or, under
F-15
<PAGE> 48
BALLY TOTAL FITNESS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(All dollar amounts in thousands, except share data)
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, 1997, 6,432,874 shares of Common Stock were reserved for
future issuance (3,192,805 shares in connection with outstanding warrants and
3,240,069 shares in connection with certain stock plans).
WARRANTS
In July 1997, in connection with a $7,500 bridge loan provided to the
Company by an affiliate of an underwriter of the August 1997 public offering of
Common Stock, the Company issued warrants entitling the affiliate to acquire
250,000 shares of Common Stock at an exercise price of $10.05 per share,
expiring in July 2002.
In connection with the Spin-off, the Company issued a warrant entitling
Entertainment to acquire 2,942,805 shares of Common Stock at an exercise price
of $5.26 per share (equal to 110% of the average daily closing price of the
Common Stock for the twenty consecutive trading days beginning on the first
trading day after the Distribution Date), expiring in December 2005. At the time
of the Merger, Entertainment sold the warrant to the Chairman of the Board of
Directors and the President and Chief Executive Officer of the Company.
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, 1997,
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. In 1997, the Incentive Plan was
amended to increase the aggregate number of shares of Common Stock which may be
granted under the Incentive Plan to 3,600,000 shares. At December 31, 1997,
1,005,608 shares of Common Stock were available for future grant under the
Incentive Plan. Awards may not be granted under the Incentive Plan after January
3, 2006.
Pursuant to the Incentive Plan, non-qualified stock options are generally
granted with an exercise price equal to the fair market value of the Common
Stock at the date of grant. Incentive stock options must be granted at not less
than the fair market value of the Common Stock at the date of grant. Option
grants become exercisable at the discretion of the Compensation Committee of the
Board of Directors (the "Compensation Committee"), generally in three equal
annual installments commencing one year from the date of grant. Option grants in
1997 and 1996 have a 10-year term.
F-16
<PAGE> 49
BALLY TOTAL FITNESS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(All dollar amounts in thousands, except share data)
A summary of 1996 and 1997 stock option activity under the Directors' Plan
and Incentive Plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-
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
Granted.......................................... 729,000 16.32 12.00-17.5625
Exercised........................................ (59,931) 4.125 4.125
Forfeited........................................ (109,268) 4.125 4.125
---------
Outstanding at December 31, 1997, 391,820 of
which were exercisable......................... 1,904,461 8.88 4.125-17.5625
=========
</TABLE>
The Company has elected to follow 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 the disclosure of pro forma net loss and loss per
share information as if the Company had accounted for stock options under the
fair value method prescribed by SFAS No. 123, which for 1997 is $45,783 and
$2.94 per share, and for 1996 is $20,032 and $1.65 per share, respectively. In
addition, the weighted-average fair value of stock options granted in 1997 and
1996 was $2.88 per share and $1.93 per share, respectively. 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 1997 and 1996:
risk-free interest rate of 5.67% and 6.22%, respectively; no dividend yield;
volatility factor of the expected market price of the Common Stock of 0.164 and
0.413, respectively; and a weighted-average expected life of the options of five
years. Pro forma results under SFAS No. 123 in 1997 and 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.
F-17
<PAGE> 50
BALLY TOTAL FITNESS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(All dollar amounts in thousands, except share data)
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 lapsed based upon the market price of the Common Stock reaching
certain targeted stock prices unless less than half of such shares awarded
vested within two years after the date of grant, at which time a number of
shares would vest so that the total number of vested shares equaled 50% of the
original grants. In addition, a recipient of these restricted stock awards
receives a cash payment from the Company upon the lapse of restrictions in an
amount sufficient to insure that the recipient receives 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 these shares generally lapsed upon
reaching certain targeted stock prices in 1997 and 1996 and, accordingly, the
fair value of these shares was amortized to expense ($2,051 in 1997 and $2,345
in 1996) in connection therewith. In addition, the tax gross-up expense related
to these restricted shares totaled $3,856 and $2,764 in 1997 and 1996,
respectively. The weighted-average fair value of restricted Common Stock awarded
in 1996 was $4.87 per share as determined under SFAS No. 123.
In November 1997, the Board of Directors of the Company adopted the Bally
Total Fitness Holding Corporation Employee Stock Purchase Plan (the "Stock
Purchase Plan"). The Stock Purchase Plan provides for the purchase of Common
Stock by eligible employees (as defined) electing to participate in the plan.
The stock can generally be purchased semi-annually at a price equal to the
lesser of: (i) 95% of the fair market value of the Common Stock on the date when
a particular offering commences or (ii) 95% of the fair market value of the
Common Stock on the date when a particular offering expires. For each offering
made under the Stock Purchase Plan, each eligible employee electing to
participate in the Stock Purchase Plan will automatically be granted shares of
Common Stock equal to the number of full shares which may be purchased from the
employee's elected payroll deduction, with a maximum payroll deduction equal to
10% of eligible compensation, as defined. The first offering under this plan
commenced on January 1, 1998 and expires on March 31, 1998. Thereafter,
offerings shall commence on each April 1 and October 1 and expire on the
following September 30 and March 31, respectively, until the Stock Purchase Plan
is terminated or no additional shares are available for purchase. At December
31, 1997, 250,000 shares of Common Stock were available for future purchases
under the Stock Purchase Plan. Pursuant to APB No. 25, no expense is recorded by
the Company in connection with this plan.
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.
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 $1,106, $974 and $557 in 1997, 1996 and 1995, respectively.
F-18
<PAGE> 51
BALLY TOTAL FITNESS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(All dollar amounts in thousands, except share data)
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 $89,384, $90,060 and $90,318 for 1997, 1996 and 1995,
respectively.
Minimum future rent payments under long-term noncancellable operating
leases in effect as of December 31, 1997, exclusive of taxes, insurance, other
expenses payable directly by the Company and contingent rent, are $84,519,
$82,807, $78,265, $73,782 and $70,353 for 1998 through 2002, respectively, and
$405,425 thereafter.
Included in the amounts above are leases with real estate partnerships in
which certain of the Company's then current executive officers had ownership
interests. Rent expense under these leases was $808, $2,002 and $1,991 for 1997,
1996 and 1995, respectively. In addition, these leases require minimum rent
payments of $845 for 1998.
Litigation
A class action which has been certified 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 which has not been certified 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 financed 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 accurately determine
within a meaningful range the amount sought in these actions because Texas law
on what constitutes actual damages for any class member is unclear. 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.
TRANSACTIONS WITH ENTERTAINMENT
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
service marks 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 1996 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.
F-19
<PAGE> 52
BALLY TOTAL FITNESS HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
(All dollar amounts in thousands, except share data)
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 $213 and $279 for 1997 and 1996, respectively. 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 by Entertainment in 1995 was
$3,045. Management believes that the method used to allocate these costs was
reasonable. In addition, certain of the Company's insurance coverage was
obtained by Entertainment pursuant to corporate-wide programs and Entertainment
charged the Company its proportionate share of the respective insurance
premiums, which totaled $4,625 and $5,668 for 1996 and 1995, 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 and $430 for 1996 and 1995, respectively.
PRO FORMA INFORMATION (UNAUDITED)
The net loss for 1995 reflects a federal income tax benefit arising from
the Company's prior tax sharing agreement with Entertainment of $7,069. Pro
forma loss per common share for 1995 has been determined giving effect to (i)
adjustments made to reflect the income tax benefit as if the Company had filed
its own separate consolidated income tax return for the year, which results in a
pro forma net loss of $38,469, 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 the year.
F-20
<PAGE> 53
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,
--------------- --------------- --------------- ---------------
1997 1996 1997 1996 1997 1996 1997 1996
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues.................... $168.4 $163.7 $161.8 $158.7 $165.1 $156.6 $165.7 $160.2
Operating income (loss)......... 6.2 (.2) 3.2 4.0 .9 2.8 9.6 12.5
Income (loss) before
extraordinary item............ (5.7) (12.0) (7.3) (7.9) (10.3) (9.2) (.2) 4.2
Extraordinary gain (loss) on
extinguishment of debt........ (21.4) 5.7
Net income (loss)............... (5.7) (12.0) (7.3) (7.9) (10.3) (9.2) (21.6) 9.9
Basic earnings (loss) per common
share:
Income (loss) before
extraordinary item....... $ (.46) $ (.98) $ (.59) $ (.65) $ (.60) $ (.76) $ (.01) $ .35
Extraordinary gain (loss)
on extinguishment of
debt..................... (1.04) .46
Net income (loss).......... (.46) (.98) (.59) (.65) (.60) (.76) (1.05) .81
Diluted earnings (loss) per
common share:
Income (loss) before
extraordinary item....... $ (.46) $ (.98) $ (.59) $ (.65) $ (.60) $ (.76) $ (.01) $ .33
Extraordinary gain (loss)
on extinguishment of
debt..................... (1.04) .44
Net income (loss).......... (.46) (.98) (.59) (.65) (.60) (.76) (1.05) .77
</TABLE>
- ---------------
1. The Company's operations are subject to seasonal factors.
2. 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.
3. The extraordinary loss on extinguishment of debt for the quarter ended
December 31, 1997 results from a refinancing of the Company's subordinated
debt and credit facility. The extraordinary gain on extinguishment of debt
for the quarter ended December 31, 1996 consists of (i) a gain of $9.9
million ($.81 per share basic and $.77 per share diluted) resulting from a
$15.2 million tax obligation to Entertainment which was forgiven as part of
the December 1996 merger of Entertainment with and into Hilton and (ii) a
charge of $4.2 million ($.35 per share basic and $.33 per share diluted)
resulting from a refinancing of the Company's securitization facility.
F-21
<PAGE> 54
=========================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................... 2
Incorporation of Certain Information by
Reference............................. 2
Prospectus Summary...................... 3
Special Note Regarding Forward-Looking
Statements............................ 8
Risk Factors............................ 8
Use of Proceeds......................... 11
Dilution................................ 11
Price Range of Common Stock and Dividend
Policy................................ 12
Capitalization.......................... 13
Selected Consolidated Financial Data.... 14
Management's Discussion and Analysis of
Results of Operations and Financial
Condition............................. 15
Business................................ 20
Underwriting............................ 29
Legal Matters........................... 30
Experts................................. 31
Index to Consolidated Financial
Statements............................ F-1
</TABLE>
=========================================================
=========================================================
2,500,000 SHARES
[BALLY LOGO]
BALLY TOTAL FITNESS
HOLDING CORPORATION
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
MERRILL LYNCH & CO.
LADENBURG THALMANN & CO. INC.
CIBC OPPENHEIMER
, 1998
=========================================================
<PAGE> 55
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses in connection with the issuance of
the Common Stock being registered. All of the amounts shown are estimates,
except the registration fee:
<TABLE>
<S> <C>
SEC registration fee........................................ $24,757
NASD filing fee............................................. 8,892
Accounting fees and expenses................................
Legal fees and expenses.....................................
Blue Sky fees and expenses..................................
Printing and engraving expenses.............................
Miscellaneous expenses......................................
-------
Total..................................................... $
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") permits the
indemnification of the directors and officers of the Company. The Company
By-laws provide that it will indemnify the officers, directors, employees and
agents of the Company to the extent permitted by the DGCL.
The Company Certificate provides for the indemnification of directors and
officers of the Company, and persons who serve or served at the request of the
Company as a director, officer, employee or agent of another corporation,
including service with respect to employee benefit plans, against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties in amounts paid or to be paid in settlement) reasonably
incurred with respect to any action, suit or proceeding, whether civil,
criminal, administrative or investigative, provided, however, the Company shall
indemnify any such person seeking indemnification in connection with a
proceeding initiated by such person only if such proceeding was authorized by
the Board. In the event a claim for indemnification by any person has not been
paid in full by the Company after written request has been received by the
Company, the claimant may at any time thereafter bring suit against the Company
to recover the unpaid amount of the claim and, if successful in whole or in
part, the claimant shall be entitled to be paid also the expense of prosecuting
such claim. The right to indemnification conferred in the Company Certificate is
a contract right and shall include the right to be paid by the Company the
expenses incurred in defending any such proceeding in advance of its final
disposition. The Company maintains insurance, at its expense, to protect itself
and any director, officer, employee or agent of the Company against any such
expense, liability or loss, whether or not the Company would have the power to
indemnify such person against such expense, liability or loss under state law.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Purchase Agreement among the Company and the
Underwriters.
*4.1 Specimen stock certificate (filed as an exhibit to the
Company's Registration Statement on Form 8-A/A dated January
3, 1996, File No. 0-27478).
5.1 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Benesch, Friedlander, Coplan & Aronoff LLP
(contained in its Opinion filed as Exhibit 5.1 hereto).
24.1 Powers of Attorney for the Company (set forth on the
signature page hereto).
</TABLE>
- ---------------
* Incorporated by reference.
II-1
<PAGE> 56
(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, 1997.
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 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-2
<PAGE> 57
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF ILLINOIS, ON MARCH 19, 1998.
BALLY TOTAL FITNESS HOLDING
CORPORATION
By: /s/ LEE S. HILLMAN
------------------------------------
Lee S. Hillman
Chief Executive Officer and
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Lee S. Hillman and John W. Dwyer, or either of
them, his or her true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact, agent or their substitutes or
substitute may lawfully do or cause to be done by virtue hereof.
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>
<C> <S> <C>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------------- ------------------------
/s/ ARTHUR M. GOLDBERG Chairman of the Board of March 19, 1998
- --------------------------------------------- Directors
Arthur M. Goldberg
/s/ LEE S. HILLMAN Chief Executive Officer, March 19, 1998
- --------------------------------------------- President, and Director
Lee S. Hillman
/s/ JOHN W. DWYER Executive Vice President, Chief March 19, 1998
- --------------------------------------------- Financial Officer and Treasurer
John W. Dwyer
/s/ GEOFFREY M. SCHEITLIN Vice President and Controller March 19, 1998
- ---------------------------------------------
Geoffrey M. Scheitlin
/s/ AUBREY C. LEWIS Director March 19, 1998
- ---------------------------------------------
Aubrey C. Lewis
/s/ J. KENNETH LOOLOIAN Director March 19, 1998
- ---------------------------------------------
J. Kenneth Looloian
/s/ JAMES F. MC ANALLY, M.D. Director March 19, 1998
- ---------------------------------------------
James F. Mc Anally, M.D.
/s/ LIZA M. WALSH Director March 19, 1998
- ---------------------------------------------
Lisa M. Walsh
</TABLE>
II-3
<PAGE> 58
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, 1997..................................... 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> 59
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, 1997 and 1996, and for each of
the three years in the period ended December 31, 1997, and have issued our
report thereon dated February 17, 1998 (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 17, 1998
S-2
<PAGE> 60
BALLY TOTAL FITNESS HOLDING CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(ALL DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
CHARGED TO CHARGED TO
BALANCE AT COSTS AND OTHER BALANCE AT
BEGINNING EXPENSES ACCOUNTS DEDUCTIONS END OF
DESCRIPTION OF YEAR (A) (B) (C) YEAR
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1997:
Allowance for doubtful receivables and
cancellations.......................... $ 86,095 $96,078 $107,660 $209,302 $ 80,531
======== ======= ======== ======== ========
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
======== ======= ======== ======== ========
</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, principally for cancellations.
(c) Deductions include write-offs of uncollectible amounts, net of recoveries.
S-3
<PAGE> 61
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER IN
SEQUENTIAL
NUMBERING
EXHIBIT SYSTEM
- ------- ----------
<C> <S> <C>
1.1 Form of Purchase Agreement among the Company and the
Underwriters.
*4.1 Specimen stock certificate (filed as an exhibit to the
Company's Registration Statement on Form 8-A/A dated January
3, 1996, File No. 0-27478).
5.1 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Benesch, Friedlander, Coplan & Aronoff LLP
(contained in its Opinion filed as Exhibit 5.1 hereto).
24.1 Powers of Attorney for the Company (set forth on the
signature page hereto).
</TABLE>
- ---------------
* Incorporated by reference.
<PAGE> 1
Exhibit 1.1
================================================================================
BALLY TOTAL FITNESS HOLDING CORPORATION
(a Delaware corporation)
2,500,000 Shares of Common Stock
PURCHASE AGREEMENT
Dated: _______________, 1998
================================================================================
<PAGE> 2
Table of Contents
<TABLE>
<S> <C>
PURCHASE AGREEMENT......................................................................1
SECTION 1. Representations and Warranties by the Company.............................3
(i) Compliance with Registration Requirements...................................3
(ii) Incorporated Documents.....................................................4
(iii) Independent Accountants...................................................4
(iv) Financial Statements.......................................................4
(v) No Material Adverse Change in Business......................................5
(vi) Good Standing of the Company...............................................5
(vii) Good Standing of Subsidiaries.............................................5
(viii) Capitalization...........................................................6
(ix) Authorization of Agreement.................................................6
(x) Authorization and Description of Securities.................................6
(xi) Absence of Defaults and Conflicts..........................................6
(xii) Absence of Labor Dispute..................................................7
(xiii) Absence of Proceedings...................................................7
(xiv) Accuracy of Exhibits......................................................8
(xv) Possession of Intellectual Property........................................8
(xvi) Absence of Further Requirements...........................................8
(xvii) Possession of Licenses and Permits.......................................8
(xviii) Title to Property.......................................................9
(xix) Compliance with Cuba Act..................................................9
(xx) Investment Company Act.....................................................9
(xxi) Environmental Laws........................................................9
(xxii) Tax Matters.............................................................10
(xxiii) Accounting Controls and Methodology....................................11
(xxiv) No Registration Rights..................................................11
(xxv) Solvency.................................................................11
(xxvi) Compliance with Laws....................................................11
SECTION 2. Sale and Delivery to Underwriters; Closing...............................11
(a) Initial Securities............................................................11
(b) Option Securities.............................................................12
(c) Payment.......................................................................12
(d) Denominations; Registration...................................................13
SECTION 3. Covenants of the Company.................................................13
(a) Compliance with Securities Regulations and Commission Requests................13
(b) Filing of Amendments..........................................................14
(c) Delivery of Registration Statements...........................................14
(d) Delivery of Prospectuses......................................................14
(e) Continued Compliance with Securities Laws.....................................14
(f) Blue Sky Qualifications.......................................................15
(g) Rule 158......................................................................15
(h) Use of Proceeds...............................................................15
(i) Listing.......................................................................15
(j) Restriction on Sale of Securities.............................................15
(k) Reporting Requirements........................................................16
SECTION 4. Payment of Expenses......................................................16
(a) Expenses......................................................................16
(b) Termination of Agreement......................................................17
(c) Allocation of Expenses........................................................17
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
SECTION 5. Conditions of Underwriters' Obligations..................................17
(a) Effectiveness of Registration Statement.......................................17
(b) Opinion of Counsel for Company................................................17
(c) Opinion of Counsel for Underwriters...........................................18
(d) Officers' Certificate.........................................................18
(e) Accountant's Comfort Letter...................................................18
(f) Bring-down Comfort Letter.....................................................18
(g) Approval of Listing...........................................................18
(h) No Objection..................................................................19
(i) Lock-up Agreements............................................................19
(j) Conditions to Purchase of Option Securities...................................19
(i) Officers' Certificate......................................................19
(ii) Opinion of Counsel for Company............................................19
(iii) Opinion of Counsel for Underwriters......................................19
(iv) Bring-down Comfort Letter.................................................19
(k) Additional Documents..........................................................20
(l) Termination of Agreement......................................................20
SECTION 6. Indemnification..........................................................20
(a) Indemnification of Underwriters...............................................20
(b) Indemnification of Company, Directors and Officers............................21
(c) Actions against Parties; Notification.........................................22
(d) Settlement without Consent if Failure to Reimburse............................22
SECTION 7. Contribution............................................................22
SECTION 8. Representations, Warranties and Agreements to Survive Delivery..........24
SECTION 9. Termination of Agreement................................................24
(a) Termination; General..........................................................24
(b) Liabilities...................................................................25
SECTION 10. Default by One or More of the Underwriters.............................25
SECTION 11. Default by the Company.................................................26
SECTION 12. Notices................................................................26
SECTION 13. Parties................................................................26
SECTION 14. GOVERNING LAW AND TIME.................................................26
SECTION 15. Effect of Headings.....................................................26
SCHEDULES
Schedule A - List of Underwriters...................................Sch A-1
Schedule B - Pricing Information....................................Sch B-1
Schedule C - List of Subsidiaries ..................................Sch C-1
Schedule D - List of Owned Locations with Mortgages.................Sch D-1
Schedule E - List of Persons and Entities Subject to Lock-up........Sch E-1
EXHIBITS
Exhibit A - Form of Opinion of Company's Counsel.......................... A-1
Exhibit B - Form of Lock-up Letter........................................ B-1
</TABLE>
ii
<PAGE> 4
BALLY TOTAL FITNESS HOLDING CORPORATION
(a Delaware corporation)
2,500,000 Shares of Common Stock
(Par Value $.01 Per Share)
PURCHASE AGREEMENT
________________, 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
LADENBURG THALMANN & CO. INC.
CIBC OPPENHEIMER CORP.
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Bally Total Fitness Holding Corporation, a Delaware corporation (the
"Company"), confirms its agreement with Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Ladenburg Thalmann & Co.
Inc. ("Ladenburg"), CIBC Oppenheimer Corp. ("CIBC"), and each of the other
Underwriters named in Schedule A hereto (collectively, the "Underwriters", which
term shall also include any underwriter substituted as hereinafter provided in
Section 10 hereof), for whom Merrill Lynch, Ladenburg and CIBC are acting as
representatives (in such capacity, the "Representatives"), with respect to (i)
the sale by the Company, and the purchase by the Underwriters, acting severally
and not jointly, of the respective numbers of shares of Common Stock, par value
$.01 per share, of the Company ("Common Stock") as set forth in Schedules A and
B hereto and (ii) the grant by the Company to the Underwriters, acting severally
and not jointly, of the option described in Section 2(b) hereof to purchase all
or any part of 375,000 additional shares of Common Stock to cover
over-allotments, if any. The aforesaid 2,500,000 shares of Common Stock (the
"Initial Securities") to be purchased by the Underwriters and all or any part of
the 375,000 shares of
1
<PAGE> 5
Common Stock subject to the option described in Section 2(b) hereof (the "Option
Securities") are hereinafter called, collectively, the "Securities".
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deem advisable after
this Agreement has been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (No. 333-_______) covering
the registration of the Securities under the Securities Act of 1933, as amended
(the "1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in such prospectus or in such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto, schedules thereto, if any, and the
documents incorporated by reference therein pursuant to Item 12 of Form S-3
under the 1933 Act, at the time it became effective and including the Rule 430A
Information and the Rule 434 Information, as applicable, is herein called the
"Registration Statement." Any registration statement filed pursuant to Rule
462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b)
Registration Statement," and after such filing the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. The final prospectus,
including the documents incorporated by reference therein pursuant to Item 12 of
Form S-3 under the 1933 Act, in the form first furnished to the Underwriters for
use in connection with the offering of the Securities is herein called the
"Prospectus." For purposes of this Agreement, all references to the Registration
Statement, any preliminary prospectus, the Prospectus or any Term Sheet or any
amendment or supplement to any of the foregoing shall be deemed to include the
copy filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval system ("EDGAR").
All references in this Agreement to financial statements and schedules
and other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary prospectus or the Prospectus (or other
references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is
2
<PAGE> 6
incorporated by reference in the Registration Statement, any preliminary
prospectus or the Prospectus, as the case may be; and all references in this
Agreement to amendments or supplements to the Registration Statement, any
preliminary prospectus or the Prospectus shall be deemed to mean and include the
filing of any document under the Securities Exchange Act of 1934 (the "1934
Act") which is incorporated by reference in the Registration Statement, such
preliminary prospectus or the Prospectus, as the case may be.
SECTION 1. Representations and Warranties by the Company.
The Company represents and warrants to each Underwriter as of the date
hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of
each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees
with each Underwriter, as follows:
(i) Compliance with Registration Requirements. The Company
meets the requirements for use of Form S-3 under the 1933 Act. Each of
the Registration Statement and any Rule 462(b) Registration Statement
has become effective under the 1933 Act and no stop order suspending
the effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and
any request on the part of the Commission for additional information
has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Securities
are purchased, at the Date of Delivery), the Registration Statement,
the Rule 462(b) Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations and
did not and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. Neither the
Prospectus nor any amendments or supplements thereto, at the time the
Prospectus or any such amendment or supplement was issued and at the
Closing Time (and, if any Option Securities are purchased, at the Date
of Delivery), included or will include an untrue statement of a
material fact or omitted or will omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434
is used, the Company will comply with the requirements of Rule 434. The
representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through Merrill
Lynch expressly for use in the Registration Statement or Prospectus.
3
<PAGE> 7
Each preliminary prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectus
delivered to the Underwriters for use in connection with this offering
was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.
(ii) Incorporated Documents. The documents incorporated or
deemed to be incorporated by reference in the Registration Statement
and the Prospectus, when they became effective or at the time they were
or hereafter are filed with the Commission, complied and will comply in
all material respects with the requirements of the 1933 Act and the
1933 Act Regulations or the 1934 Act and the rules and regulations of
the Commission thereunder (the "1934 Act Regulations"), as applicable,
and, when read together with the other information in the Prospectus,
at the time the Registration Statement became effective, at the time
the Prospectus was issued and at the Closing Time (and, if any Option
Securities are purchased, at the Date of Delivery), did not and will
not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading.
(iii) Independent Accountants. The accountants who certified
the financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required
by the 1933 Act and the 1933 Act Regulations.
(iv) Financial Statements. The financial statements included
in the Registration Statement and the Prospectus, together with the
related schedules and notes, present fairly the financial position of
the Company and its consolidated subsidiaries at the dates indicated
and the statement of operations, stockholders' equity and cash flows of
the Company and its consolidated subsidiaries for the periods
specified; said financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved, except as otherwise
described in such financial statements. The supporting schedules, if
any, included in the Registration Statement present fairly in
accordance with GAAP the information required to be stated therein. The
selected financial data and the summary financial information included
in the Prospectus present fairly the information shown therein and have
been compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement.
(v) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein, (A)
there has been no material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business
prospects of the
4
<PAGE> 8
Company and its subsidiaries considered as one enterprise, whether or
not arising in the ordinary course of business (a "Material Adverse
Effect"), (B) there have been no transactions entered into by the
Company or any of its subsidiaries, other than those in the ordinary
course of business, which are material with respect to the Company and
its subsidiaries considered as one enterprise, and (C) there has been
no dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(vi) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing
under the laws of the State of Delaware and has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and to enter into and perform
its obligations under this Agreement; and the Company is duly qualified
as a foreign corporation to transact business and is in good standing
in each other jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect.
(vii) Good Standing of Subsidiaries. Each subsidiary of the
Company (each a "Subsidiary" and, collectively, the "Subsidiaries") has
been duly incorporated or otherwise organized and is validly existing
as a corporation in good standing under the laws of the jurisdiction of
its incorporation or other formation, has due power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus and each Significant Subsidiary (as defined
herein) is duly qualified as a foreign corporation to transact business
and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the
failure to so qualify or to be in good standing would not result in a
Material Adverse Effect; except as otherwise disclosed in the
Registration Statement, all of the issued and outstanding capital of
each Subsidiary has been duly authorized and validly issued, is fully
paid and non-assessable, and, except as set forth on Schedule C
attached hereto, is directly or through Subsidiaries wholly owned by
the Company, free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity; none of the outstanding shares of
capital stock or other ownership interests of any Subsidiary was issued
in violation of preemptive or similar rights of any security holder of
such Subsidiary. Attached hereto as Schedule C is a true and complete
list of the Subsidiaries of the Company. As used herein, "Significant
Subsidiary" means any subsidiary designated by the Company as a
Significant Subsidiary in Schedule C attached hereto. The assets of the
Significant Subsidiaries (i) constitute at least 95% of the total
assets of the Company and its Subsidiaries considered as one enterprise
and (ii) produced at least 95% of the operating income of the Company
and its Subsidiaries considered as one enterprise in each of the last
three fiscal years, in each case determined in accordance with
generally accepted accounting principles.
5
<PAGE> 9
(viii) Capitalization. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities or
options referred to in the Prospectus). The shares of issued and
outstanding capital stock of the Company, have been duly authorized and
validly issued and are fully paid and non-assessable; none of the
outstanding shares of capital stock was issued in violation of the
preemptive or other similar rights of any securityholder of the
Company.
(ix) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by the Company.
(x) Authorization and Description of Securities. The
Securities have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered
by the Company pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued and fully paid
and non-assessable; the Common Stock conforms to all statements
relating thereto contained in the Prospectus and such statements
conform to the rights set forth in the instruments defining the same;
no holder of the Securities will be subject to personal liability by
reason of being such a holder; and the issuance of the Securities is
not subject to the preemptive or other similar rights of any
securityholder of the Company.
(xi) Absence of Defaults and Conflicts. Neither the Company
nor any of its Subsidiaries is in violation of its charter or by-laws
or in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or other
agreement or instrument to which the Company or any of its Subsidiaries
is a party or by which it or any of them may be bound, or to which any
of the property or assets of the Company or any Subsidiary is subject
(collectively, "Agreements and Instruments") except for such defaults
that would not result in a Material Adverse Effect; and the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein and in the Registration Statement
(including the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in the Prospectus
under the caption "Use of Proceeds") and compliance by the Company with
its obligations hereunder have been duly authorized by all necessary
corporate action and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined
below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
Subsidiary pursuant to, the Agreements and Instruments (except for such
conflicts, breaches or defaults or liens, charges or encumbrances that
would not result in a Material Adverse Effect), nor will such action
result in any violation of the provisions of the
6
<PAGE> 10
charter or by-laws of the Company or any Subsidiary or any applicable
law, statute, rule, regulation, judgment, order, writ or decree of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any Subsidiary or any of their
assets, properties or operations. As used herein, a "Repayment Event"
means any event or condition which gives the holder of any note,
debenture or other evidence of indebtedness (or any person acting on
such holder's behalf) the right to require the repurchase, redemption
or repayment of all or a portion of such indebtedness by the Company
or any Subsidiary.
(xii) Absence of Labor Dispute. No labor dispute with the
employees of the Company or any Subsidiary exists or, to the knowledge
of the Company, has been threatened, and the Company is not aware of
any existing or threatened labor disturbance by the employees of any of
its or any Subsidiary's principal suppliers, manufacturers or
contractors, which, in either case, may reasonably be expected to
result in a Material Adverse Effect.
(xiii) Absence of Proceedings. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened, against or affecting the
Company or any Subsidiary, which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or which
might reasonably be expected to result in a Material Adverse Effect, or
which might reasonably be expected to materially and adversely affect
the properties or assets thereof or the consummation of the
transactions contemplated in this Agreement or the performance by the
Company of its obligations hereunder; the aggregate of all pending
legal or governmental proceedings to which the Company or any
Subsidiary is a party or of which any of their respective property or
assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material
Adverse Effect.
(xiv) Accuracy of Exhibits. There are no contracts or
documents which are required to be described in the Registration
Statement, the Prospectus or the documents incorporated by reference
therein or to be filed as exhibits thereto which have not been so
described and filed as required.
(xv) Possession of Intellectual Property. The Company and its
Subsidiaries license, own or possess, or can acquire on reasonable
terms, adequate patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property") necessary
to carry on the business now operated by them, and neither the Company
nor any of its Subsidiaries has received any notice or is otherwise
aware of any infringement of or conflict with asserted rights of others
with
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respect to any Intellectual Property or of any facts or circumstances
which would render any Intellectual Property invalid or inadequate to
protect the interest of the Company or any of its Subsidiaries
therein, and which infringement or conflict (if the subject of any
unfavorable decision, ruling or finding) or invalidity or inadequacy,
singly or in the aggregate, would result in a Material Adverse Effect.
(xvi) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in connection with the offering, issuance or
sale of the Securities hereunder or the consummation of the
transactions contemplated by this Agreement, except such as have been
already obtained or as may be required under the 1933 Act or the 1933
Act Regulations or state or foreign securities laws.
(xvii) Possession of Licenses and Permits. The Company and its
Subsidiaries possess such permits, licenses, approvals, consents and
other authorizations (collectively, "Governmental Licenses") issued by
the appropriate federal, state, local or foreign regulatory agencies or
bodies necessary to conduct the business now operated by them; the
Company and its Subsidiaries are in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure
so to comply would not, singly or in the aggregate, have a Material
Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full
force and effect would not have a Material Adverse Effect; and neither
the Company nor any of its Subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect.
(xviii) Title to Property. The Company and its Subsidiaries
have good and marketable title to all real property owned by the
Company and its Subsidiaries and good title to all other properties
owned by them, in each case, free and clear of all mortgages, pledges,
liens, security interests, claims, restrictions or encumbrances of any
kind except such as (a) are described in the Prospectus, (b) are listed
on Schedule D hereto or (c) do not, singly or in the aggregate,
materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property by the Company or
any of its Subsidiaries; and all of the leases and subleases material
to the business of the Company and its Subsidiaries, considered as one
enterprise, and under which the Company or any of its Subsidiaries
holds properties described in the Prospectus, are in full force and
effect, and neither the Company nor any subsidiary has any notice of
any claim of any sort that has been asserted by anyone adverse to the
rights of the Company or any Subsidiary under any of the leases or
subleases mentioned above, or affecting or questioning the rights of
the Company or such Subsidiary to the continued possession of
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the leased or subleased premises under any such lease or sublease,
which, in either case, may be expected to result in a Material Adverse
Effect.
(xix) Compliance with Cuba Act. The Company has complied with,
and is and will be in compliance with, the provisions of that certain
Florida act relating to disclosure of doing business with Cuba,
codified as Section 517.075 of the Florida statutes, and the rules and
regulations thereunder (collectively, the "Cuba Act") or is exempt
therefrom.
(xx) Investment Company Act. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the
Prospectus will not be, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in
the Investment Company Act of 1940, as amended.
(xxi) Environmental Laws. Except as described in the
Registration Statement and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company
nor any of its Subsidiaries is in violation of any federal, state,
local or foreign statute, law, rule, regulation, ordinance, code,
policy or rule of common law or any judicial or administrative
interpretation thereof, including any judicial or administrative order,
consent, decree or judgment, relating to pollution or protection of
human health, the environment (including, without limitation, ambient
air, surface water, groundwater, land surface or subsurface strata) or
wildlife, including, without limitation, laws and regulations relating
to the release or threatened release of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum
or petroleum products (collectively, "Hazardous Materials") or to the
manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and its Subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements,
(C) there are no pending or threatened administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens,
notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company or any of its
Subsidiaries and (D) there are no events or circumstances that might
reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any of
its subsidiaries relating to Hazardous Materials or any Environmental
Laws.
(xxii) Tax Matters. All United States federal income tax
returns of the Company and its consolidated Subsidiaries required by
law to be filed have been filed and all taxes shown by said returns or
otherwise assessed which are due and payable have been paid, except
assessments against which appeals have been or will be promptly taken.
All United States federal income tax returns of Bally Entertainment
Corporation
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("Entertainment") and its consolidated subsidiaries, including the
Company, for tax periods prior to January 9, 1996, required by law to
be filed have been filed and all taxes shown by the said returns or
otherwise assessed which are due and payable have been paid, except
assessments against which appeals have been or will be promptly taken.
The United States federal income tax returns of Entertainment and its
consolidated subsidiaries, including the Company and its subsidiaries,
through the fiscal year ended [1982] have been settled and no
assessment in connection therewith has been made against the Company
or Entertainment in connection with the business of the Company. The
Company and its Significant Subsidiaries have filed all other tax
returns which are required to have been filed by them pursuant to
applicable state, local or other law except insofar as the failure to
file such returns individually and in the aggregate would not have a
Material Adverse Effect, and have paid all taxes due pursuant to said
returns or pursuant to any assessment received by the Company or its
Subsidiaries, except for such taxes, if any, as are being contested in
good faith and as to which adequate reserves have been provided. The
charges, accruals and reserves on the consolidated books of the
Company in respect of any income and corporation tax liability for any
years not finally determined are adequate to meet any assessment or
re-assessments for additional income tax for any years not finally
determined, except to the extent of any inadequacy which would not
have a Material Adverse Effect.
(xxiii) Accounting Controls and Methodology. The Company and
its Subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurances that (A) transactions are
executed in accordance with management's general or specific
authorization, (B) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to
maintain accountability for assets, (C) access to assets is permitted
only in accordance with management's general or specific authorization,
(D) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences and (E) the tax accounting method used
by the Company and its Subsidiaries to report income from membership
contracts is the proper method of accounting for United States federal
income tax purposes and is in accordance with agreements reached with
the Internal Revenue Service.
(xxiv) No Registration Rights. There are no holders of
securities of the Company who by reason of the filing of the
Registration Statement under the 1933 Act have the right to request the
Company to register under the 1933 Act securities held by them.
(xxv) Solvency. The Company is, and immediately after the
Closing Time will be, Solvent. As used herein, the term "Solvent"
means, with respect to the Company on a particular date, that on such
date (A) the fair market value of the assets of the Company is greater
than the total amount of liabilities (including contingent liabilities)
of the Company, (B) the present fair salable value of the assets of the
Company is greater than the amount that will be required to pay the
probable liabilities of the Company on its
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<PAGE> 14
debts as they become absolute and matured, (C) the Company is able to
realize upon its assets and pay its debts and other liabilities,
including contingent obligations, as they mature, and (D) the Company
does not have unreasonably small capital.
(xxvi) Compliance with Laws. The Company and its Subsidiaries
have conducted and are conducting their business in compliance with all
applicable federal, state and local laws, rules, regulations,
decisions, directives and orders, except where the failure to do so
would not have a Material Adverse Effect.
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, severally and not
jointly, and each Underwriter, severally and not jointly, agrees to purchase
from the Company, at the purchase price per share set forth in Schedule B, the
number of Initial Securities set forth in Schedule A opposite the name of such
Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the Underwriters, severally
and not jointly, to purchase up to an additional 375,000 shares of Common Stock,
at the purchase price per share set forth in Schedule B, less an amount per
share equal to any dividends or distributions declared by the Company and
payable on the Initial Securities but not payable on the Option Securities. The
option hereby granted will expire at 5:30 p.m. New York City time 30 days after
the date hereof and may be exercised in whole or in part from time to time only
for the purpose of covering over-allotments which may be made in connection with
the offering and distribution of the Initial Securities upon notice by the
Representatives to the Company setting forth the number of Option Securities as
to which the several Underwriters are then exercising the option and the time
and date of payment and delivery for such Option Securities. Any such time and
date of delivery (a "Date of Delivery") shall be determined by the
Representatives, but shall not be later than seven full business days after the
exercise of said option, nor in any event prior to the Closing Time, as
hereinafter defined. If the option is exercised as to all or any portion of the
Option Securities, each of the Underwriters, acting severally and not jointly,
will purchase that proportion of the total number of Option Securities then
being purchased which the number of Initial Securities set forth in Schedule A
opposite the name of such Underwriter bears to the total number of Initial
Securities, subject in each case to such adjustments as the Representatives in
their discretion shall make to eliminate any sales or purchases of fractional
shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Latham
& Watkins, Sears Tower, Suite 5800, Chicago, Illinois 60606, or at such other
place as shall be agreed upon by the Representatives and
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<PAGE> 15
the Company at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing
occurs after 4:30 P.M. (Eastern time) on any given day) business day after the
date hereof (unless postponed in accordance with the provisions of Section 10),
or such other time not later than ten business days after such date as shall be
agreed upon by the Representatives and the Company (such time and date of
payment and delivery being herein called the "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and the Company, on each Date of Delivery as specified in the notice from the
Representatives to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company against delivery to
the Representatives for the respective accounts of the Underwriters of
certificates for the Securities to be purchased by them. It is understood that
each Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Initial Securities or the Option Securities, if any, to be
purchased by any Underwriter whose funds have not been received by the Closing
Time or the relevant Date of Delivery, as the case may be, but such payment
shall not relieve such Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial
Securities and the Option Securities, if any, shall be in such denominations and
registered in such names as the Representatives may request in writing at least
one full business day before the Closing Time or the relevant Date of Delivery,
as the case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
SECTION 3. Covenants of the Company. The Company covenants with each
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(b), will comply with the requirements of Rule 430A
or Rule 434, as applicable, and will notify the Representatives immediately,
and, if requested by you, confirm the notice in writing, (i) when any
post-effective amendment to the Registration Statement shall become effective,
or any supplement to the Prospectus or any amended Prospectus shall have been
filed, (ii) of the receipt of any comments from the Commission, (iii) of any
request by the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information, and
(iv) of the issuance by the Commission of
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<PAGE> 16
any stop order suspending the effectiveness of the Registration Statement or of
any order preventing or suspending the use of any preliminary prospectus, or of
the suspension of the qualification of the Securities for offering or sale in
any jurisdiction, or of the initiation or threatening of any proceedings for any
of such purposes. The Company will promptly effect the filings necessary
pursuant to Rule 424(b) and will take such steps as it deems necessary to
ascertain promptly whether the form of prospectus transmitted for filing under
Rule 424(b) was received for filing by the Commission and, in the event that it
was not, it will promptly file such prospectus. The Company will make every
reasonable effort to prevent the issuance of any stop order and, if any stop
order is issued, to obtain the lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the Representatives
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), any Term Sheet or any
amendment, supplement or revision to either the prospectus included in the
Registration Statement at the time it became effective or to the Prospectus,
whether pursuant to the 1933 Act, the 1934 Act or otherwise, will furnish the
Representatives with copies of any such documents a reasonable amount of time
prior to such proposed filing or use, as the case may be, and will not file or
use any such document to which the Representatives or counsel for the
Underwriters shall object.
(c) Delivery of Registration Statements. The Company has furnished or
will deliver to the Representatives and counsel for the Underwriters, without
charge, signed copies of the Registration Statement as originally filed and of
each amendment thereto (including exhibits filed therewith or incorporated by
reference therein and documents incorporated or deemed to be incorporated by
reference therein) and signed copies of all consents and certificates of
experts, and will also deliver to the Representatives, without charge, a
conformed copy of the Registration Statement as originally filed and of each
amendment thereto (without exhibits) for each of the Underwriters. The copies of
the Registration Statement and each amendment thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus as
such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such
number of copies of the Prospectus (as amended or supplemented) as such
Underwriter may reasonably request. The Prospectus and any amendments or
supplements thereto furnished to the Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply
with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934 Act
Regulations so as to
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<PAGE> 17
permit the completion of the distribution of the Securities as contemplated in
this Agreement and in the Prospectus. If at any time when a prospectus is
required by the 1933 Act to be delivered in connection with sales of the
Securities, any event shall occur or condition shall exist as a result of which
it is necessary, in the opinion of counsel for the Underwriters or for the
Company, to amend the Registration Statement or amend or supplement the
Prospectus in order that the Prospectus will not include any untrue statements
of a material fact or omit to state a material fact necessary in order to make
the statements therein not misleading in the light of the circumstances existing
at the time it is delivered to a purchaser, or if it shall be necessary, in the
opinion of such counsel, at any such time to amend the Registration Statement or
amend or supplement the Prospectus in order to comply with the requirements of
the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and
file with the Commission, subject to Section 3(b), such amendment or supplement
as may be necessary to correct such statement or omission or to make the
Registration Statement or the Prospectus comply with such requirements, and the
Company will furnish to the Underwriters such number of copies of such amendment
or supplement as the Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company, in cooperation with the
Underwriters, will endeavor to qualify the Securities for offering and sale
under the applicable securities laws of such states and other jurisdictions as
the Representatives may designate and to maintain such qualifications in effect
for so long as may be required to complete the distribution of the Securities
contemplated by this Agreement; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify as a
foreign corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the Company will
file such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for so long as may be
required to complete the distribution of the Securities contemplated by this
Agreement.
(g) Rule 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of Section
11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received by
it from the sale of the Securities in the manner specified in the Prospectus
under "Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect and
maintain the quotation of the Securities on the Nasdaq National Market and will
file with the Nasdaq National Market all documents and notices required by the
Nasdaq National Market of companies that have securities that are traded in the
over-the-counter market and quotations for which are reported by the Nasdaq
National Market.
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(j) Restriction on Sale of Securities. During a period of 120 days from
the date of the Prospectus, the Company will not, without the prior written
consent of Merrill Lynch, (i) directly or indirectly, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of any share of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or file any registration
statement under the 1933 Act with respect to any of the foregoing or (ii) enter
into any swap or any other agreement or any transaction that transfers, in whole
or in part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
the Securities to be sold hereunder, (B) any shares of Common Stock issued by
the Company upon the exercise of an option or warrant or the conversion of a
security outstanding on the date hereof and referred to in the Prospectus, (C)
any shares of Common Stock issued or options to purchase Common Stock granted
pursuant to existing employee benefit plans of the Company referred to in the
Prospectus or (D) any shares of Common Stock issued pursuant or options to
purchase Common Stock granted to any non-employee director stock plan or
dividend reinvestment plan.
(k) Reporting Requirements. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will
file all documents required to be filed with the Commission pursuant to the 1934
Act within the time periods required by the 1934 Act and the 1934 Act
Regulations.
SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay or
cause to be paid all expenses incident to the performance of its obligations
under this Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriters of this Agreement, any Agreement among
Underwriters and such other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Securities, (iii) the
preparation, issuance and delivery of the certificates for the Securities to the
Underwriters, including any stock or other transfer taxes and any stamp or other
duties payable upon the sale, issuance or delivery of the Securities to the
Underwriters, (iv) the fees and disbursements of the Company's counsel,
accountants and other advisors, (v) the qualification of the Securities under
securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriters in connection therewith and in connection with the preparation
of the blue sky survey and any supplement thereto, (vi) the printing and
delivery to the Underwriters of copies of each preliminary prospectus, any Term
Sheets and of the Prospectus and any amendments or supplements thereto; (vii)
the preparation, printing and delivery to the Underwriters of copies of the blue
sky survey and any supplement thereto, (viii) the fees and expenses of any
transfer agent or registrar for the Securities and (ix) the filing fees incident
to, and the reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the National Association of Securities Dealers,
Inc. (the "NASD") of the terms of the
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<PAGE> 19
sale of the Securities and (x) the fees and expenses incurred in connection with
the inclusion of the Securities in the Nasdaq National Market.
(b) Termination of Agreement. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5, Section 9(a)(i)
or Section 11 hereof, the Company shall reimburse the Underwriters for all of
their out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters.
(c) Allocation of Expenses. The provisions of this Section shall not
affect any agreement that the Company may make for the sharing of such costs and
expenses.
SECTION 5. Conditions of Underwriters' Obligations. The obligations of
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company or any subsidiary of the Company
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of the
Registration Statement shall have been issued under the 1933 Act or proceedings
therefor initiated or threatened by the Commission, and any request on the part
of the Commission for additional information shall have been complied with to
the reasonable satisfaction of counsel to the Underwriters. A prospectus
containing the Rule 430A Information shall have been filed with the Commission
in accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434,
a Term Sheet shall have been filed with the Commission in accordance with Rule
424(b).
(b) Opinion of Counsel for Company. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Benesch, Friedlander, Coplan & Aronoff LLP, counsel for the Company, in
form and substance satisfactory to counsel for the Underwriters, together with
signed or reproduced copies of such letter for each of the other Underwriters to
the effect set forth in Exhibit A hereto and to such further effect as counsel
to the Underwriters may reasonably request. For purposes of such opinion, such
counsel may rely upon the opinion of the General Counsel of the Company to the
extent set forth in Exhibit A.
(c) Opinion of Counsel for Underwriters. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Latham & Watkins, counsel for the Underwriters, together with signed or
reproduced copies of such letter for each of the other Underwriters with respect
to the matters set forth in clauses (i), (v), (vi), (viii) through (x),
inclusive, and the second penultimate paragraph of Exhibit A hereto. In giving
such opinion
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such counsel may rely, as to all matters governed by the laws of jurisdictions
other than the law of the State of New York, the federal law of the United
States and the General Corporation Law of the State of Delaware, upon the
opinions of counsel satisfactory to the Representatives. Such counsel may also
state that, insofar as such opinion involves factual matters, they have relied,
to the extent they deem proper, upon certificates of officers of the Company and
its subsidiaries and certificates of public officials.
(d) Officers' Certificate. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any change which would result in a Material Adverse
Effect, and the Representatives shall have received a certificate of the
President or a Vice President of the Company and of the chief financial or chief
accounting officer of the Company, dated as of Closing Time, to the effect that
(i) there has been no such change which would result in a Material Adverse
Effect, (ii) the representations and warranties in Section 1 hereof are true and
correct with the same force and effect as though expressly made at and as of
Closing Time, (iii) the Company has complied with all agreements and satisfied
all conditions on its part to be performed or satisfied at or prior to Closing
Time, and (iv) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or are contemplated by the Commission.
(e) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Representatives shall have received from Ernst & Young LLP a
letter dated such date, in form and substance satisfactory to the
Representatives, together with signed or reproduced copies of such letter for
each of the other Underwriters containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(f) Bring-down Comfort Letter. At Closing Time, the Representatives
shall have received from Ernst & Young LLP a letter, dated as of Closing Time,
to the effect that they reaffirm the statements made in the letter furnished
pursuant to subsection (e) of this Section, except that the specified date
referred to shall be a date not more than three business days prior to Closing
Time.
(g) Approval of Listing. At Closing Time, the Securities shall have
been approved for inclusion in the Nasdaq National Market, subject only to
official notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the
Representatives shall have received an agreement substantially in the form of
Exhibit B hereto signed by the persons listed on Schedule E hereto.
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<PAGE> 21
(j) Conditions to Purchase of Option Securities. In the event that the
Underwriters exercise their option provided in Section 2(b) hereof to purchase
all or any portion of the Option Securities, the representations and warranties
of the Company contained herein and the statements in any certificates furnished
by the Company and any subsidiary of the Company hereunder shall be true and
correct as of each Date of Delivery and, at the relevant Date of Delivery, the
Representatives shall have received:
(i) Officers' Certificate. A certificate, dated such
Date of Delivery, of the President or a Vice President of the
Company and of the chief financial or chief accounting officer
of the Company confirming that the certificate delivered at
the Closing Time pursuant to Section 5(d) hereof remains true
and correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable
opinion of Benesch, Friedlander, Coplan & Aronoff LLP, counsel
for the Company, in form and substance satisfactory to counsel
for the Underwriters, dated such Date of Delivery, relating to
the Option Securities to be purchased on such Date of Delivery
and otherwise to the same effect as the opinion required by
Section 5(b) hereof.
(iii) Opinion of Counsel for Underwriters. The
favorable opinion of Latham & Watkins, counsel for the
Underwriters, dated such Date of Delivery, relating to the
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by
Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from Ernst &
Young LLP, in form and substance satisfactory to the
Representatives and dated such Date of Delivery, substantially
in the same form and substance as the letter furnished to the
Representatives pursuant to Section 5(e) hereof, except the
"specified date" in the letter furnished pursuant to this
paragraph shall be a date not more than five days prior to
such Date of Delivery.
(k) Additional Documents. At Closing Time and at each Date of Delivery
counsel for the Underwriters shall have been furnished with such documents and
opinions as they may reasonably require for the purpose of enabling them to pass
upon the issuance and sale of the Securities as herein contemplated, or in order
to evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be reasonably satisfactory in form and substance to
the Representatives and counsel for the Underwriters.
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<PAGE> 22
(l) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option Securities
on a Date of Delivery which is after the Closing Time, the obligations of the
several Underwriters to purchase the relevant Option Securities, may be
terminated by the Representatives by notice to the Company at any time at or
prior to Closing Time or such Date of Delivery, as the case may be, and such
termination shall be without liability of any party to any other party except as
provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any
such termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of Underwriters. The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act to the extent and in the manner set forth in clauses (i), (ii) and
(iii), as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission; provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including, subject to Section 6(c) hereof, the reasonable fees and
disbursements of counsel chosen by Merrill Lynch), reasonably incurred
in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under (i) or
(ii) above;
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<PAGE> 23
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of (i) any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) or (ii) with respect to the
sale of Securities by an Underwriter to any person, a failure by such
Underwriter to give a copy of the Prospectus to such person within the time
required by the 1933 Act (unless such failure was the result of the Company's
failure to furnish to such Underwriters sufficient copies of the Prospectus on a
timely basis) if, but only if, the untrue statement or alleged untrue statement
or omission or alleged omission of a material fact was corrected in the
Prospectus.
(b) Indemnification of Company, Directors and Officers. Each
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a)
of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through Merrill Lynch expressly for use in the Registration Statement (or any
amendment thereto) or such preliminary prospectus or the Prospectus (or any
amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior
20
<PAGE> 24
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 6 or Section 7 hereof (whether or not the
indemnified parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for reasonable fees and expenses of counsel, such indemnifying
party agrees that it shall be liable for any settlement of the nature
contemplated by Section 6(a)(ii) effected without its written consent if (i)
such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
SECTION 7. Contribution. If the indemnification provided for in Section
6 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other hand from the offering of the Securities
pursuant to this Agreement or (ii) if the allocation provided by clause (i) is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and of the Underwriters on the
other hand in connection with the statements or omissions which resulted in such
losses, liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the Securities
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Securities
pursuant to this Agreement (before deducting expenses) received by the Company
and the total underwriting discount received by the Underwriters, in each case
as set forth on the cover of the Prospectus, or, if Rule 434 is used, the
corresponding location on the Term Sheet bear to the aggregate initial public
offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand and the Underwriters
on the other hand shall be determined by reference to, among other things,
whether any such untrue or alleged
21
<PAGE> 25
untrue statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company or by the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries submitted pursuant hereto, shall remain operative and in full force
and effect, regardless of any investigation made by or on behalf of any
Underwriter or controlling person, or by or on behalf of the Company and shall
survive delivery of the Securities to the Underwriters.
SECTION 9. Termination of Agreement.
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<PAGE> 26
(a) Termination; General. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which is
such as to make it, in the judgment of the Representatives, impracticable to
market the Securities or to enforce contracts for the sale of the Securities, or
(iii) if trading in any securities of the Company has been suspended or
materially limited by the Commission or the Nasdaq National Market, or if
trading generally on the American Stock Exchange or the New York Stock Exchange
or in the Nasdaq National Market has been suspended or materially limited, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices have been required, by any of said exchanges or by such system or by
order of the Commission, the NASD or any other governmental authority, or (iv)
if a banking moratorium has been declared by Federal, Illinois or New York
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. Default by One or More of the Underwriters. If one or more
of the Underwriters shall fail at Closing Time or a Date of Delivery to purchase
the Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if, however, the Representatives shall not have
completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of Securities to be purchased on such date, each of the non-defaulting
Underwriters shall be obligated, severally and not jointly, to purchase the full
amount thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number of
Securities to be purchased on such date, this Agreement or, with respect to any
Date of Delivery which occurs after the Closing Time, the obligation of the
Underwriters to purchase and of the Company to sell
23
<PAGE> 27
the Option Securities to be purchased and sold on such Date of Delivery shall
terminate without liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either (i) the Representatives or (ii) the Company shall
have the right to postpone Closing Time or the relevant Date of Delivery, as the
case may be, for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements. As used herein, the term "Underwriter" includes any
person substituted for an Underwriter under this Section 10.
Section 11. Default by the Company. If the Company shall fail at
Closing Time or at the Date of Delivery to sell the number of Securities that it
is obligated to sell hereunder, then this Agreement shall terminate without any
liability on the part of any non-defaulting party; provided, however, that the
provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect.
No action taken pursuant to this Section shall relieve the Company from
liability, if any, in respect of such default.
SECTION 12. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at Sears Tower, Suite
5500, Chicago, Illinois 60606, attention of Todd Kaplan; notices to the Company
shall be directed to it at 8700 West Bryn Mawr Avenue, Chicago, Illinois 60631,
attention of Lee S. Hillman.
SECTION 13. Parties. This Agreement shall each inure to the benefit of
and be binding upon the Underwriters, the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters, the Company and their respective successors and the controlling
persons and officers and directors referred to in Sections 6 and 7 and their
heirs and legal representatives, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Underwriters, the Company and their respective
successors, and said controlling persons and officers and directors and their
heirs and legal representatives, and for the benefit of no other person, firm or
corporation. No purchaser of Securities from any Underwriter shall be deemed to
be a successor by reason merely of such purchase.
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<PAGE> 28
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK TIME.
SECTION 15. Effect of Headings. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
among the Underwriters and the Company in accordance with its terms.
Very truly yours,
BALLY TOTAL FITNESS HOLDING CORPORATION
By_____________________________________
Name:
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
LADENBURG THALMANN & CO. INC.
CIBC OPPENHEIMER CORP.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By_____________________________________________
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
25
<PAGE> 1
Exhibit 5.1
March 19, 1998
Board of Directors
Bally Total Fitness Holding Corporation
8700 West Bryn Mawr
Chicago, Illinois 60631
Re: Registration Statement on Form S-3
Gentlemen:
Bally Total Fitness Holding Corporation, a Delaware corporation (the
"Company"), has filed with the Securities and Exchange Commission pursuant to
the Securities Act of 1933, as amended, a Registration Statement on Form S-3
(the "Registration Statement"), which Registration Statement relates to a
proposed public offering of 2,875,000 shares of common stock, par value $.01
per share, of the Company (the "Shares") (including 375,000 Shares subject to
an underwriters' over-allotment option), to be sold pursuant to the terms of a
purchase agreement to be executed by the Company and by Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Ladenburg Thalmann & Co.
Inc. and certain other underwriters (the "Purchase Agreement").
You have requested our opinion in connection with the Company's filing
of the Registration Statement. In this regard, we have examined and relied on
originals or copies, certified or otherwise identified to our satisfaction as
being true copies, of all such records of the Company, all such agreements,
certificates of officers of the Company and others, and such other documents,
certificates and corporate or other records as we have deemed necessary as a
basis for the opinion expressed in this letter including, without limitation,
the Purchase Agreement, the Company's Certificate of Incorporation and the
Registration Statement.
In our examination, we have assumed the genuineness of all signatures,
the legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals and the conformity to original documents of all
documents submitted to us as certified or photostatic copies. As to facts
material to the opinions expressed in this letter, we have relied on statements
and certificates of officers of the Company and of state authorities.
We have investigated such questions of law for the purpose of rendering
the opinion in this letter as we have deemed necessary. We express no opinion in
this letter concerning any law other
<PAGE> 2
Board of Directors
Bally Total Fitness Holding Corporation
March 19, 1998
Page 2
than the General Corporation Law of the State of Delaware.
The opinion expressed herein assumes that there is no change in the
facts, circumstances and law in effect on the date of this opinion, particularly
as they relate to corporate authority and the Company's good standing under
Delaware law.
On the basis of and in reliance on the foregoing, we are of the opinion
that the Shares, when and if issued and paid for in accordance with the terms of
the Purchase Agreement, will be validly issued, fully paid and nonassessable.
The opinion in this letter is rendered in connection with the filing of
the Registration Statement. We hereby consent to the filing of this letter as an
exhibit to the Registration Statement and to being named in the Registration
Statement under the heading "Legal Matters" as counsel to the Company.
Very truly yours,
BENESCH, FRIEDLANDER,
COPLAN & ARONOFF LLP
<PAGE> 1
EXHIBIT 23.1
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 17, 1998, in the Registration Statement (Form
S-3 No. 333- ) and related Prospectus of Bally Total Fitness Holding
Corporation for the registration of 2,875,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
March 16, 1998
