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As filed with the Securities and Exchange Commission on March 18, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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BALLY TOTAL FITNESS HOLDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7991 36-3228107
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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8700 WEST BRYN MAWR AVENUE
CHICAGO, ILLINOIS 60631
(773) 380-3000
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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LEE S. HILLMAN
Bally Total Fitness Holding Corporation
8700 West Bryn Mawr Avenue
Chicago, Illinois 60631
(773) 380-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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Copies to:
IRV BERLINER
Benesch, Friedlander, Coplan & Aronoff LLP
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114
(216) 363-4500
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement
becomes effective and all other conditions to the exchange
offer pursuant to the registration rights
agreement described in the enclosed
prospectus have been satisfied or waived.
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If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement of the earlier effective registration statement for the
same offering. [ ]
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CALCULATION OF REGISTRATION FEE
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Title of Class Of Securities Amount to be Maximum Aggregate Amount of
To Be Registered Registered Offering Price Offering Price (1) Registration Fee
Per Note
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9 7/8% Series D Senior Subordinated $300,000,000 100% $300,000,000 $83,400
Notes Due 2007 . . . . . . . . .
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</TABLE>
(1) Calculated in accordance with Rule 457(f)(2) under the Securities Act.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion
Preliminary Prospectus Dated March 18, 1999
[LOGO] BALLY TOTAL FITNESS HOLDING CORPORATION
PROSPECTUS
Offer to Exchange
All Outstanding
9 7/8% Series B Senior Subordinated Notes Due 2007 and
9 7/8% Series C Senior Subordinated Notes Due 2007
($300,000,000 aggregate principal amount outstanding)
FOR 9 7/8% SERIES D SENIOR SUBORDINATED NOTES DUE 2007
Terms of Exchange Offer
o Expires 5:00 p.m., New York o We believe that the exchange
City time, ___________, 1999, of notes will not be a taxable
unless extended exchange for U.S. federal
income tax purposes
o Not subject to any condition
other than that the exchange o We will not receive any
offer not violate applicable proceeds from the exchange
law or any applicable offer
interpretation of the
Securities and Exchange o The terms of the Series D
Commission notes to be issued are
substantially identical to the
o All outstanding Series B and outstanding Series B and
Series C notes that are Series C notes, except for
validly tendered and not transfer restrictions and
validly withdrawn will be registration rights relating
exchanged for Series D notes to the outstanding Series C
notes
o Tenders of outstanding Series
B and Series C notes may be
withdrawn at any time prior to
the expiration of the exchange
offer
THIS EXCHANGE OFFER INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SERIES D NOTES TO BE DISTRIBUTED
IN THE EXCHANGE OFFER, NOR HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
_________ __, 1999
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PROSPECTUS SUMMARY
Unless otherwise described in this prospectus, the words "Bally," "we", "our,"
"ours," and "us" refer to Bally Total Fitness Holding Corporation and its
subsidiaries. The following summary contains basic information about this
exchange offer. For further information regarding this exchange offer, we
encourage you to read this entire document and the documents we have referred
you to.
BACKGROUND OF THE EXCHANGE OFFER
On October 7, 1997, Bally Total Fitness Holding Corporation completed the
private offering of $225,000,000 principal amount of 9 7/8% Series A Senior
Subordinated Notes Due 2007. The Series A notes were subsequently part of an
exchange offer, which allowed holders to exchange $1,000 principal amount of
Series A notes for $1,000 principal amount of 9 7/8% Series B Senior
Subordinated Notes Due 2007, which were registered under the Securities Act of
1933, as amended. On December 16, 1998, Bally completed the private offering of
$75,000,000 principal amount of 9 7/8% Series C Senior Subordinated Notes Due
2007.
As a part of the private offering of Series C notes, Bally entered into a
Registration Rights Agreement in which we agreed to deliver to you this
prospectus and to complete the exchange offer on or prior to _______, 1999. You
are entitled to exchange in the exchange offer your Series B notes, which are
already registered under the Securities Act, or your Series C notes, or both,
for 9 7/8% Series D Senior Subordinated Notes Due 2007, which will be
registered under the Securities Act and will contain substantially identical
terms to both the Series B notes and Series C notes.
You should read the discussion under the headings "-- Summary of the Terms
of Series D Notes" and "Description of the Series D Notes" for further
information regarding the Series D notes and the discussion under the headings
"-- Summary of the Exchange Offer" and "The Exchange Offer" for further
information regarding the exchange offer and resale of the Series D notes.
BUSINESS DESCRIPTION
Bally is the only nationwide commercial operator of fitness centers in the
United States. It is also the largest commercial operator in terms of revenues,
the number of members, and the number and square footage of facilities. Bally
offers value to its members 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 and other group fitness training programs.
Bally was a wholly-owned subsidiary of Bally Entertainment Corporation
until it was spun-off to Bally Entertainment's stockholders on January 9, 1996.
Bally's executive offices are located at 8700 West Bryn Mawr Avenue, Chicago,
Illinois 60631. Bally's telephone number is (773) 380-3000.
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SUMMARY OF THE EXCHANGE OFFER
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The Exchange Offer............................. We are offering to exchange $1,000 principal amount of our 9 7/8% Series D
Subordinated Notes due 2007 for each $1,000 principal amount of our
outstanding Series B notes or Series C notes, or both.
As of ________, 1999, there are $300 million aggregate principal amount of
Series B notes and Series C notes outstanding.
We will issue Series D notes on or promptly after _______________, 1999,
unless we extend the exchange offer.
Resales........................................ We believe the Series D notes issued in the exchange offer may be
resold by you without compliance with the registration and prospectus
delivery provisions of the Securities Act, subject to the conditions
described under "The Exchange Offer - Resales of the Series D notes".
Expiration Date................................ The exchange offer will expire at 5:00 p.m., New York City time,
_______________, 1999, unless we extend the exchange offer.
Conditions to the Exchange Offer............... The exchange offer is not subject to any condition other than the
exchange offer not violate applicable law or any applicable interpretation
of the staff of the Securities and Exchange Commission.
Procedures for Tendering Outstanding
Series B Notes and Series C Notes.......... The procedures for tendering outstanding Series B notes and Series C
notes, as well as guaranteed delivery procedures, are described in "The
Exchange Offer - Procedures for Tendering Series B Notes and Series C Notes"
and "The Exchange Offer - Guaranteed Delivery Procedures."
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Withdrawal Rights.............................. You may withdraw the tender of your Series B notes or Series C notes at
any time prior to 5:00 p.m. New York City time on _______________, 1999.
Certain U.S. Federal Income Tax
Consequences............................... We believe the exchange of Series B notes or Series C notes will not
be a taxable exchange for United States federal income tax purposes. We
believe you will not recognize any taxable gain or loss or any interest
income as a result of this exchange.
Use of Proceeds................................ We will not receive any proceeds from the issuance of Series D notes
pursuant to the exchange offer. We will pay all expenses incident to the
exchange offer.
Exchange Agent................................. The exchange agent is the U.S. Bank Trust National Association.
SUMMARY OF TERMS OF SERIES D NOTES
Total Amount of Series D
Notes Offered.............................. $300 million principal amount of 9 7/8% Series D Senior Subordinated Notes
due 2007.
Maturity....................................... October 15, 2007.
Issue Price.................................... Par plus accrued interest from April 15, 1999.
Interest....................................... Annual rate 9 7/8%. Payment frequency - every six months on April 15 and
October 15. First payment - October 15, 1999.
Ranking........................................ The Series D notes are senior subordinated debts of Bally.
They rank behind all of our current senior debt and all of our future
indebtedness, except indebtedness that expressly provides that it is not
senior to the Series D notes.
As of December 31, 1998, the Series D notes would have been subordinated to
approximately $185.7 million of senior debt.
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Optional Redemption............................ On or after October 15, 2002, we may redeem some or all of the Series D
notes at any time at the redemption prices listed in "Description
of the Series D Notes -- Optional Redemption."
On or after October 15, 2000, we may redeem up to $105 million of the Series
D notes with the proceeds of certain public offerings of our equity at the
price listed in "Description of the Series D Notes -- Optional Redemption."
Mandatory Offer to Repurchase.................. If we sell certain assets or experience specific kinds of changes of
control, we must offer to repurchase the notes at the prices listed in
"Description of the Series D Notes."
Basic Covenants of Indenture................... We will issue the Series D notes under an indenture with U.S. Bank Trust
National Association, as Trustee. The indenture will, to the same extent as
the indenture governing the Series B notes, restrict our ability and the
ability of our subsidiaries to, among other things:
o borrow money;
o pay dividends on our stock or purchase our stock;
o make investments;
o use assets as security in other transactions; and
o sell certain assets or merge with or into other companies.
For more details, see "Description of the Series D Notes -- Certain
Covenants."
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SUMMARY FINANCIAL DATA
The following table presents summary consolidated financial data of Bally.
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".
During several years, Bally has experienced extraordinary gains and losses.
In 1997, Bally recognized an extraordinary loss on extinguishment of debt of
$21.4 million ($1.37 per share) resulting from a refinancing of Bally's
subordinated debt and revolving credit facility. In 1996, Bally recognized a net
extraordinary gain on extinguishment of debt consisting of (1) a gain of $9.9
million ($.81 per share) resulting from a $15.2 million tax obligation to Bally
Entertainment which was forgiven as part of the December 1996 merger of Bally
Entertainment with and into Hilton Hotels Corporation and (2) a charge of $4.2
million ($.35 per share) resulting from a refinancing of Bally's securitization
facility.
The ratio of earnings to fixed charges is calculated by dividing: (1)
income (loss) before income taxes and extraordinary items plus fixed charges
(adjusted for capitalized interest) by (2) fixed charges. Fixed charges consist
of interest incurred (expensed or capitalized) and the portion of rent expense
which is deemed representative of interest. Earnings were insufficient to cover
fixed charges by $22.2 million, $26.2 million, $37.1 million and $53.1 million
for the years ended December 31, 1997, 1996, 1995 and 1994, respectively.
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<CAPTION>
YEARS ENDED DECEMBER 31,
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1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues $ 742.5 $ 661.0 $ 639.2 $ 653.4 $ 682.0
Operating income (loss) 52.8 19.9 19.1 5.0 (16.1)
Income (loss) before extraordinary
items 13.3 (23.5) (24.9) (31.4) (39.5)
Basic earnings (loss) per common share
(pro forma for 1995) (a) .59 (1.51) (2.04) (3.25)
Diluted earnings (loss) per common
share (pro forma for 1995) (a) .51 (1.51) (2.04) (3.25)
BALANCE SHEET DATA (AT END OF YEAR):
Installment contracts receivable, net $ 422.1 $ 343.6 $ 300.2 $ 303.4 $ 284.1
Total assets 1,128.8 967.6 893.3 936.5 951.0
Long-term debt, less current
maturities 482.2 405.4 376.4 368.0 289.7
Stockholders' equity 161.8 70.3 24.2 31.7 34.8
Ratio of earnings to fixed charges 1.2
</TABLE>
(a) The net loss for 1995 reflects a federal income tax benefit
arising from Bally's prior tax sharing agreement with Bally
Entertainment of $7.1 million. Pro forma loss per common share
for 1995 (which is unaudited) has been determined giving effect
to (1) adjustments made to reflect the income tax benefit as if
Bally 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 (2) the distribution of 11,845,161 shares of
Bally common stock to Bally Entertainment stockholders as if
such distribution had taken place as of the beginning of the
year.
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RISK FACTORS
This prospectus includes "forward looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934 including, in particular, the statements about our plans, strategies,
and prospects under the headings "Prospectus Summary," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and "Business."
Although we believe our plans, intentions and expectations reflected in or
suggested by such forward-looking statements are reasonable, we can give no
assurance such plans, intentions or expectations will be achieved. Important
factors that could cause actual results to differ materially from the
forward-looking statements we make in this prospectus are set forth below and
elsewhere in this prospectus. All forward-looking statements attributable to
Bally or persons acting on our behalf are expressly qualified in their entirety
by the following cautionary statements.
SUBSTANTIAL LEVERAGE -- OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT THE
FINANCIAL HEALTH OF BALLY AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER
THESE NOTES.
We have now, and, after the exchange offer, will continue to have, a
significant amount of indebtedness. Our substantial indebtedness could have
important consequences to you. For example, it could:
o make it more difficult for us to satisfy our obligations with respect
to the Series D notes;
o increase our vulnerability to general adverse economic and industry
conditions;
o require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund capital expenditures and other
general corporate purposes;
o limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
o limit, along with the financial and other restrictive covenants in
our indebtedness, our ability to borrow additional funds.
Failing to comply with any covenants contained in our indebtedness could
result in an event of default which, if not cured or waived, could have a
material adverse effect on us.
The following chart shows certain important credit statistics and is
presented assuming we completed the exchange offer as of the dates or at the
beginning of the periods specified below and applied the proceeds as intended:
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<CAPTION>
AT DECEMBER 31, 1998
<S> <C>
Total indebtedness
(including outstanding letters of credit)............................. approximately $491.7 million
Long-term debt (less current maturities)
to total capitalization .............................................. approximately 74%
FOR THE YEAR ENDED
DECEMBER 31, 1998
-----------------
Ratio of earnings to fixed
charges.............................................. 1.2 x
</TABLE>
Our long-term debt currently includes:
o $160.0 million of asset-backed securities, which are undivided
interests in the H&T Master Trust. The H&T Master Trust consists
primarily of a portfolio of installment contracts receivable from
the financing of initial membership fees and the proceeds from those
contracts;
o $225.0 million principal amount of Series B notes;
o $75.0 million principal amount of Series C notes, reduced by an
unamortized discount of $1.5 million;
o $29.5 million of other borrowings principally related to capital
lease obligations; and
o A revolving credit facility which provides up to $100.0 million of
credit expiring November, 2000. The maximum amount currently
available under this credit facility is $90.0 million. As of December
31, 1998, the revolving credit facility was unused except for
outstanding letters of credit totaling $3.7 million.
SUBORDINATION -- YOUR RIGHT TO RECEIVE PAYMENTS ON THE SERIES D NOTES IS JUNIOR
TO THE RIGHTS OF HOLDERS OF MOST OF OUR EXISTING INDEBTEDNESS AND POSSIBLY ALL
OF OUR FUTURE BORROWINGS.
The Series D notes rank behind all of our existing senior indebtedness and
all of our future borrowings, except any future indebtedness that expressly
provides that it ranks equal with, or subordinated in right of payment to,
these notes. These notes rank equal in payment to the Series B notes and Series
C notes. As a result, upon any distribution to our creditors in a bankruptcy,
liquidation or reorganization or similar proceeding relating to us or our
property, the holders of senior debt of Bally will be entitled to be paid in
full in cash before any payment may be made with respect to the Series D notes.
To the extent any distribution will be made to the holders of Series D notes
after payment of all our senior debt, it will have to be shared with other
holders of subordinated indebtedness of Bally, including the Series B notes and
Series C notes. In any of these cases, we may not have sufficient funds to pay
all of our creditors, and holders of the Series D notes may not receive the
full amount due under the Series D notes or may not receive anything at all.
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In addition, all payments on the Series D notes may be blocked in the
event of a default on senior debt.
As of December 31, 1998, the Series D notes would have been subordinated
to approximately $185.7 million of senior debt and approximately $86.3 million
would have been available for borrowing as additional senior debt under our
revolving credit facility.
In certain circumstances, under the indenture, we may be obligated to
repurchase or to make an offer to repurchase the Series D notes, Series C notes
and Series B notes. The subordination of the Series D notes, Series C notes and
Series B notes to all our existing and future senior debt and our available
funds may limit our ability to repurchase any of the notes. Our revolving credit
facility currently prohibits us from making repurchases of any of the notes.
SUBORDINATION -- BALLY'S HOLDING COMPANY STRUCTURE EFFECTIVELY MAKES PAYMENTS
ON THE SERIES D NOTES SUBORDINATED TO OBLIGATIONS OF OUR SUBSIDIARIES.
Our operations are conducted through our subsidiaries. Unless Bally is a
trade creditor with claims against its subsidiaries, claims of creditors of
those subsidiaries, including trade creditors, will be entitled to be paid in
full before any payment may be made to creditors of Bally, including the
holders of the Series D notes. This is true even though these obligations of
our subsidiaries are not considered senior debt. As of December 31, 1998,
subsidiary liabilities (which also include some senior debt) were approximately
$99.6 million, excluding $361.8 million of deferred revenues and $18.9 million
of deferred income taxes, which do not reflect future cash obligations of the
subsidiaries.
RESTRICTIONS IMPOSED BY INDEBTEDNESS -- THE DOCUMENTS GOVERNING OUR
INDEBTEDNESS CONTAIN COVENANTS AND RESTRICTIONS WHICH, IF NOT COMPLIED WITH,
COULD RESULT IN DEFAULT AND ACCELERATION OF ANY OR ALL OF OUR DEBT.
The documents governing our revolving credit facility and the indentures
governing the Series D notes, Series C notes and Series B notes contain
covenants that restrict our ability to incur additional indebtedness, pay
dividends, prepay certain indebtedness (including the Series D notes), dispose
of certain assets, create liens and make certain investments or acquisitions.
Our ability to comply with these provisions may be affected by events beyond
our control. The breach of any of these covenants could result in a default
under the revolving credit facility documents. In the event of any default
under the revolving credit facility, depending on the actions taken by the
lenders under the revolving credit facility, the lenders could accelerate the
indebtedness due under the revolving credit facility, together with accrued
interest. A default under the revolving credit facility documents or the
instruments governing Bally's other indebtedness could constitute a
cross-default under the indentures governing the Series D notes, Series C notes
or Series B notes and any instruments governing Bally's other indebtedness.
Conversely, a default under the indentures governing the Series D notes, Series
C notes or Series B notes could constitute a cross-default under the revolving
credit facility documents and any instruments governing Bally's other
indebtedness.
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DILUTION OF VOTING POWER -- THE INDIVIDUAL VOTING INTEREST OF HOLDERS OF SERIES
C NOTES WILL BE SUBSTANTIALLY DILUTED TO THE EXTENT SERIES B NOTES ARE ALSO
EXCHANGED.
To the extent Series B notes are also exchanged for the Series D notes, up
to $300.0 million aggregate principal amount of the Series D notes will be
outstanding after the exchange offer, and the Series D notes will be deemed to
be a single series of debt securities outstanding under the indenture.
Accordingly, the individual voting interest of each holder of Series C notes
under the indenture will be diluted. See "Description of Notes."
RISKS OF MULTIPLE INDENTURES -- SINCE THE SERIES B NOTES ARE GOVERNED BY A
DIFFERENT INDENTURE THAN THE SERIES C NOTES AND SERIES D NOTES, BALLY WILL BE
SUBJECT TO TWO SETS OF COVENANTS.
To the extent Series B notes are not exchanged for the Series D notes,
Bally will be subject to the covenants under the indenture governing the Series
B notes regardless of any amendment or waiver of the terms of the indenture
governing the Series C notes and the Series D notes.
NET LOSSES-- WE REPORTED LOSSES IN 1995, 1996 AND 1997. LOSSES MAY PREVENT US
FROM FULFILLING OUR OBLIGATIONS UNDER THE SERIES D NOTES.
Although we have reported earnings before extraordinary items of $13.3
million in 1998, we reported losses before extraordinary items 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
provision/benefit as if we had filed our own separate consolidated tax returns,
the loss for 1995 would have been $38.5 million.
OUR NEW BUSINESS INITIATIVES -- THE POSITIVE RESULTS ACHIEVED FROM INTRODUCING
NEW BUSINESS INITIATIVES DURING THE MOST RECENT TWO YEARS MAY NOT CONTINUE IN
THE FUTURE.
We have introduced a number of new business initiatives to capitalize
on our brand identity, distribution infrastructure (approximately 330
facilities), significant member base (approximately four million members) and
frequency of visitation. However, before 1998 we had not previously generated
significant revenues from any of these new business initiatives and they may
not be successful in the future. These initiatives primarily focus on selling
ancillary products and services to our members within our fitness centers and
include: providing personal training services, selling private-label
nutritional products, opening retail stores within our fitness centers that
sell nutritional products, work-out apparel and related accessories and
rehabilitative and physical therapy services. We have limited experience in
marketing new products to our members. The sale and marketing of nutritional
products and work-out apparel and related accessories and the provision of
rehabilitative and physical therapy services involve significant risk of
competition. See "-- Competition." The provision of rehabilitative and physical
therapy services also involves risks of government regulation. See "--
Government Regulation."
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RISKS ASSOCIATED WITH PRICING STRATEGY -- OUR PRICES FOR INITIAL MEMBERSHIP
FEES AND MONTHLY DUES MAY BE SUBJECT TO COMPETITIVE PRESSURE IN SOME MARKETS.
Competitive conditions in some markets in which we operate may limit our
ability to maintain or increase pricing of initial membership fees and monthly
dues.
RISKS RELATED TO ACQUISITIONS -- OUR ACQUISITION STRATEGY MAY NOT BE
PROFITABLE.
A component of our business strategy is to identify and acquire fitness
center operators in strategic geographic locations. However, we may not expand
our operations and any expansion may not be profitable. The success of this
strategy will depend upon a number of factors, including our ability to
identify acceptable acquisition candidates in suitable locations, complete
acquisitions on favorable terms, successfully integrate acquired businesses
with our existing operations and expand our membership base at acquired
locations. The failure to identify, evaluate and effectively integrate acquired
businesses could adversely affect our operating results.
COMPETITION -- WE MAY NOT BE ABLE TO CONTINUE TO COMPETE EFFECTIVELY IN EACH
OF OUR MARKETS IN THE FUTURE.
We are the largest operator, or among the largest operators, of fitness
centers in every major market in which we operate fitness centers. Within each
market, we compete with other commercial fitness centers, physical fitness and
recreational facilities established by local governments, hospitals and
businesses for their employees , the YMCA and similar organizations and, to a
certain extent, with racquet, tennis and other athletic clubs, country clubs,
weight reducing salons and the home-use fitness equipment industry. We also
compete, to some extent, with entertainment and retail businesses for the
discretionary income of our target markets. We may not be able to continue to
compete effectively in each of our markets in the future.
As we pursue new business initiatives, particularly the sale of
nutritional products and apparel, we will be competing against large,
established companies with more experience selling products on a retail basis.
In some instances, our competitors for these products have substantially
greater financial resources than us. We may not be able to compete effectively
against these established companies.
SEASONAL MEMBERSHIP FEE ORIGINATIONS
Historically, we have experienced greater membership fee originations in
the first quarter and lower membership fee originations in the fourth quarter.
Our new products and services may have the effect of further increasing the
seasonality of our business.
GOVERNMENT REGULATION -- OUR OPERATIONS AND BUSINESS PRACTICES ARE SUBJECT TO
REGULATION AND ANY CHANGES IN THE LAW MAY HAVE A MATERIAL ADVERSE EFFECT ON US.
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Our operations and business practices are subject to regulation at
federal, state and local levels. The general rules and regulations of the
Federal Trade Commission, and of state and local consumer protection agencies,
apply to our advertising, sales and other trade practices. Any changes in any
statutes, rules or regulations could cause us to change our operations and
business practices and could increase the costs of regulatory compliance,
either of which could have a material adverse effect on our financial condition
and results of operations.
POTENTIAL IMPACT OF YEAR 2000 -- THE FINANCIAL INSTITUTIONS THAT WE DEAL WITH
COULD EXPERIENCE YEAR 2000 PROBLEMS.
We have completed an assessment of whether our systems and those of third
parties, which could have a material impact on our business, will function
properly with respect to dates in 2000 and thereafter. We have determined that
our payroll applications require modification. The necessary modifications are
expected to be completed in early to mid-1999 at an aggregate cost of less than
$.1 million. We believe the only third parties that could have a material impact
on our business are the major financial institutions that process our
collections of installment receivables and monthly dues by electronic payment
method. We believe these financial institutions are currently working on
modifications to their internal systems to insure those systems will function
properly with respect to dates in 2000 and thereafter and expect these
modifications will be completed in 1999. If any of these financial institutions
do not complete their modifications, or if the modifications are not successful,
it could have a material adverse effect on us. We do not anticipate the
noncompliance, if any, with Year 2000 of any of our non-information technology
systems, such as embedded microcontrollers, will materially or adversely affect
our business. We are currently undertaking an analysis of worst-case scenarios
and developing contingency plans to deal with these scenarios.
NO PRIOR MARKET FOR THE SERIES D NOTES -- YOU CANNOT BE SURE THAT AN ACTIVE
TRADING MARKET WILL DEVELOP FOR THE SERIES D NOTES.
The Series D notes are new securities for which there currently is no
market. We have been informed by the initial purchasers in the private offering
of Series C notes that they intend to make a market in the Series D notes.
However, those initial purchasers may cease their market making at any time. As
a result, you cannot be sure that an active trading market will develop for the
Series D notes. We do not intend to apply for listing of the Series D notes on
any securities exchange or for quotation through the Nasdaq National Market or
any other quotation system.
CERTAIN MARKET CONSEQUENCES OF FAILURE TO EXCHANGE SERIES B NOTES OR SERIES C
NOTES - THE MARKET PRICE AND LIQUIDITY FOR ANY SERIES B NOTES OR SERIES C NOTES
REMAINING OUTSTANDING AFTER THE EXCHANGE OFFER MAY BE ADVERSELY AFFECTED.
To the extent any Series B notes or Series C notes are tendered and
accepted for exchange pursuant to the exchange offer, the trading market for
Series B notes or Series C notes that remain outstanding may be significantly
more limited, which might adversely affect the liquidity of the Series B notes
or Series C notes not exchanged. The number of holders of Series B notes or
Series C notes remaining and the interest in maintaining a market in such
Series B notes or Series C notes on the part of securities firms will largely
determine the extent of the market and availability of price quotations. The
market price for Series B notes or
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Series C notes that are not exchanged in the exchange offer may be affected
adversely to the extent that the amount of Series B notes or Series C notes
exchanged pursuant to the exchange offer reduces the outstanding market value
available for trading. This may also make the market price of the Series B
notes or Series C notes that are not exchanged more volatile.
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<PAGE> 15
THE EXCHANGE OFFER
PURPOSE AND EFFECT
On December 16, 1998, Bally sold the Series C notes in a private placement
transaction exempt from the registration requirements of the Securities Act. In
connection with this sale, Bally entered into a registration rights agreement,
where Bally agreed, with respect to the Series B notes (which were issued in
____________, 1997 in a transaction registered under the Securities Act) and
the Series C notes, to use its best efforts:
(1) to file, on or prior to March 16, 1999, a
registration statement concerning the exchange offer with the
Commission under the Securities Act;
(2) to cause the registration statement filed by
Bally with respect to the exchange offer to be declared
effective by the Commission on or prior to May 16, 1999;
(3) to keep the registration statement filed by
Bally with respect to the exchange offer effective until the
closing of the exchange offer; and
(4) to cause the exchange offer to be completed on
or before June 16, 1999.
The exchange offer is intended to satisfy Bally's exchange offer
obligations under the registration rights agreement.
The exchange offer is not being made to, and Bally will not accept tenders
for exchange from, eligible holders of Series B notes or Series C notes in any
jurisdiction in where the exchange offer or the acceptance of notes would not be
in compliance with the securities or blue sky laws of that jurisdiction. As used
in this prospectus, "eligible holders" means the registered owner of any Series
B notes or Series C notes or any person whose Series B notes or Series C notes
are held of record by DTC or some other nominee.
TERMS OF THE EXCHANGE OFFER
Bally will, upon the terms and subject to the conditions described in this
prospectus and in the accompanying letter of transmittal, exchange outstanding
Series B notes and Series C notes for an equal principal amount of Series D
notes. Bally will accept for exchange any and all Series B notes and Series C
notes that are validly tendered and not withdrawn prior to 5:00 p.m., New York
City time, on ____________, 1999. Tenders of the Series B notes and Series C
notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
____________, 1999. The Series D notes issued in the exchange offer will be
delivered promptly after acceptance of the Series B notes and Series C notes.
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<PAGE> 16
Series B notes and Series C notes may be tendered only in multiples of
$1,000. Subject to the foregoing, eligible holders may tender less than the
aggregate principal amount represented by their Series B notes and Series C
notes, provided that they appropriately indicate this fact on the letter of
transmittal accompanying the tendered notes (or so indicate pursuant to the
procedures for book-entry transfer).
As of the date of this prospectus, $225 million aggregate principal amount
of Series B notes were outstanding and $75 million aggregate principal amount
of Series C notes were outstanding. Solely for reasons of administration, Bally
has fixed the close of business on ____________, 1999, as the record date for
purposes of determining the persons to whom this prospectus and the letter of
transmittal will be mailed initially. Only an eligible holder of Series B notes
or Series C notes (or that eligible holder's legal representative or
attorney-in-fact) may participate in the exchange offer. There will be no fixed
record date for determining eligible holders of the Series B notes or Series C
notes entitled to participate in the exchange offer. Bally believes that, as of
the date of this prospectus, no eligible holder of Series B notes or Series C
notes is an affiliate (as defined in Rule 405 under the Securities Act) of
Bally.
If any tendered Series B notes or Series C notes are not accepted for
exchange because of an invalid tender, the occurrence of certain other events
described in this prospectus or otherwise, certificates for any unaccepted
Series B notes or Series C notes will be returned, without expense, to the
tendering eligible holder as promptly as practicable after ____________, 1999.
THE BOARD OF DIRECTORS OF BALLY DOES NOT MAKE ANY RECOMMENDATION TO
HOLDERS OF SERIES B NOTES OR SERIES C NOTES AS TO WHETHER TO TENDER OR REFRAIN
FROM TENDERING ALL OR ANY PORTION OF THEIR SERIES B NOTES OR SERIES C NOTES
PURSUANT TO THE EXCHANGE OFFER. In addition, no one has been authorized to make
any such recommendation.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The exchange offer will expire on _______________, 1999 at 5:00 p.m., New
York City time, unless Bally, in its sole discretion, extends the exchange
offer.
Bally expressly reserves the right, in its sole and absolute discretion:
(1) to delay accepting any Series B notes or Series C notes;
(2) to extend the exchange offer;
(3) to terminate the exchange offer; and
(4) to waive any condition or otherwise amend the terms of the
exchange offer in any manner.
If the exchange offer is amended in a manner determined by Bally to
constitute a material change, Bally will promptly disclose the amendment by
means of a prospectus supplement that will be distributed to the eligible
holders of Series B notes and Series C notes.
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<PAGE> 17
Any delay in acceptance, extension, termination, amendment or waiver will
be followed promptly by oral or written notice to the exchange agent and by
making a public announcement of it, and the notice and announcement in the case
of an extension will be made no later than 9:00 a.m, New York City time, on the
next business day after the exchange offer was previously scheduled to expire.
Subject to applicable law, Bally may make this public announcement by issuing a
release to the Dow Jones News Service.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provisions of the exchange offer, or any
extension of the exchange offer, Bally will not be required to exchange any
Series B notes or Series C notes for Series D notes, and, as described below,
may terminate the exchange offer, whether or not any Series B notes or Series C
notes have been accepted for exchange, or may waive any conditions to or amend
the exchange offer, if:
(1) the exchange offer, or the making of any
exchange by an eligible holder of Series B notes or Series C
notes, violates any applicable law or any applicable
interpretation of the staff of the Commission;
(2) the Series B notes and Series C notes have not
been tendered in accordance with the exchange offer; and
(3) each eligible holder of Series B notes and
Series C notes exchanged in the exchange offer has not made
customary representations, including:
(a) that the eligible holder is not an
"affiliate" of Bally within the meaning of
Rule 405 under the Securities Act;
(b) that all Series D notes to be received by
the eligible holder will be acquired in the
ordinary course of its business;
(c) that at the time of the consummation of the
exchange offer, the eligible holder has no
arrangement or understanding with any
person to participate in the "distribution"
(within the meaning of the Securities Act)
of the Series D notes; and
(d) any other representation that may be
reasonably necessary under applicable
Commission rules, regulations or
interpretations to allow eligible holders
to use the registration statement filed by
Bally with respect to the exchange offer.
If the waiver or amendment constitutes a material change to the exchange
offer, Bally will promptly disclose the waiver or amendment by means of a
prospectus supplement that will be distributed to the registered holders of
Series B notes and Series C notes, and Bally will extend the exchange offer to
the extent required by Rule 14e-1 under the Exchange Act.
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<PAGE> 18
Bally expects that these conditions will be satisfied. These conditions
are for the sole benefit of Bally and may be waived by Bally in whole or in
part at any time and from time to time in its sole discretion. The failure by
Bally at any time to exercise any of these rights will not be deemed a waiver
of these rights and each right shall be deemed an ongoing right which may be
asserted at any time and from time to time. Any determination by Bally
concerning the events described above will be final and binding upon all
parties.
REGISTRATION DEFAULT
It will be a registration default if Bally does not:
(1) file a registration statement concerning the
exchange offer with the Commission by March 16, 1999;
(2) have the registration statement concerning the
exchange offer declared effective by the Commission by May 16,
1999;
(3) close the exchange offer by June 16, 1999;
(4) if required, have a shelf registration statement
declared effective by the Commission by May 16, 1999; or
(5) if a shelf registration statement is being filed
because of the request of the initial purchasers of the Series
C notes acquiring a majority of the initial aggregate principal
amount of the Series C notes, have the shelf registration
statement declared effective by the Commission 60 days after
the request by the initial purchasers.
If there is a registration default, the interest rate on the Series C
notes will be increased by one-quarter of one percent (0.25%) per year, which
rate will again increase by an additional one-quarter of one percent (0.25%)
each 90-day period that the additional interest continues to accrue under any
such circumstance. The interest rate will increase a maximum of one percent
(1%) per year. The interest in excess of 9 7/8% paid by Bally after a
registration default will be referred to in this prospectus as "additional
interest". After all registration defaults are cured, the accrual of additional
interest will cease and the interest rate will revert to 9 7/8%. With respect
to a registration default described in paragraphs (3) through (5) above,
additional interest will accrue only on the Series C notes which have not been
exchanged in the exchange offer.
TERMINATION OF NOTEHOLDERS' RIGHTS
Holders of Series D notes will not be and, after the exchange offer,
eligible holders of Series C notes will no longer be, entitled to (1) the right
to receive additional interest upon the occurrence of a registration default,
or (2) other rights under the registration rights agreement intended for the
holders of unregistered securities.
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<PAGE> 19
However, (1) an eligible holder of Series B notes or Series C notes who is
not legally permitted to participate in the exchange offer based upon advice of
counsel or who does not receive fully tradeable Series D notes through the
exchange offer, and (2) the initial purchasers acquiring a majority of the
initial aggregate principal amount of the Series C notes acquired directly from
Bally, will have the right to require Bally to file a shelf registration
statement solely for the benefit of those eligible holders of Series C notes
and will be entitled to receive additional interest following a registration
default in connection with the filing of the shelf registration statement.
Series B notes and Series C notes not tendered in the exchange offer will
remain outstanding and continue to accrue interest in accordance with their
terms.
ACCRUED INTEREST ON THE SERIES B NOTES AND SERIES C NOTES
Interest on the Series D notes will accrue from April 15, 1999. Eligible
holders of Series B notes and Series C notes accepted for exchange will be
deemed to have waived the right to receive any other payments or accrued
interest on those notes.
PROCEDURES FOR TENDERING SERIES B NOTES AND SERIES C NOTES
The term "registered holder" as used in this section with respect to the
Series B notes and Series C notes means any person in whose name the Series B
notes and Series C notes are registered on the books of the registrar.
Registered Holders. A registered holder who wishes to tender Series B
notes or Series C notes for exchange pursuant to the exchange offer must
transmit those notes, together with a properly completed and duly executed
letter of transmittal, including all other documents required by the letter of
transmittal, to the exchange agent at the address on the back cover page of
this prospectus prior to 5:00 p.m., New York City time, on ____________, 1999.
The method of delivery of Series B notes and Series C notes, letters of
transmittal and all other required documents is at the election and risk of the
registered holder. IF DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED
MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, IS USED. INSTEAD OF
DELIVERY BY MAIL, IT IS RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR HAND
DELIVERY SERVICE. In all cases, sufficient time should be allowed to assure
timely delivery.
DTC Book-Entry Transfer. A registered holder who is a participant in DTC's
Book-Entry Transfer Facility system may make book-entry delivery of the Series B
notes and Series C notes by causing DTC to transfer those notes into the
exchange agent's account at DTC in accordance with DTC's procedures for such
transfer. Registered holders who tender Series B notes and Series C notes
through DTC's Book-Entry Transfer Facility system need not submit a physical
letter of transmittal if those registered holders comply with the transmittal
procedures for DTC's Book-Entry Transfer Facility system. Confirmation of the
book-entry transfer must be received by the exchange agent at its address on the
back cover page of this prospectus on or before ____________, 1999.
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Nominee Holders. Any beneficial owner of the Series B notes or Series C
notes whose notes are registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and who wishes to tender those notes in
the exchange offer should contact the registered holder promptly and instruct
the registered holder to tender on their behalf. If the beneficial owner wishes
to tender directly, the beneficial owner must, before completing and executing
the letter of transmittal and tendering Series B notes or Series C notes, make
appropriate arrangements to register ownership of those notes in the beneficial
owner's name. Beneficial owners should be aware that the transfer of registered
ownership may take considerable time.
If these documents and procedures cannot be delivered and completed to the
exchange agent on or before ____________, 1999, then the holders of Series B
notes and Series C notes who want to receive Series D notes through the
exchange offer will have to follow the guaranteed delivery procedures described
in "-- Guaranteed Delivery Procedures."
If the Series B notes or Series C notes surrendered for exchange are
tendered (1) by a registered holder of those notes who has completed the box
entitled "Special Delivery Instructions" in the letter of transmittal, or (2)
for the account of an eligible institution, then each signature on a letter of
transmittal or a notice of withdrawal, as the case may be, must be guaranteed.
If a signature has to be guaranteed, it must be guaranteed by a participant in
a recognized Medallion Signature Program. If the letter of transmittal is
signed by a person other than the registered holder of the Series B notes or
Series C notes, then the notes surrendered for exchange must be endorsed by the
registered holder, with a guaranteed signature. The term "eligible institution"
as used in this section means a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or any other "eligible guarantor institution" as such term is
defined in Rule 17Ad-15 under the Exchange Act.
All questions as to the validity, form, eligibility, time of receipt,
acceptance and withdrawal of Series B notes and Series C notes tendered for
exchange will be determined by Bally in its sole discretion and will be final
and binding. Bally reserves the absolute right to reject any and all Series B
notes and Series C notes not properly tendered. Bally may also reject any
Series B notes or Series C notes if, in the opinion of Bally's counsel, it
would be unlawful. Bally also reserves the absolute right to waive any defects,
irregularities or conditions of the exchange offer as to particular Series B
notes or Series C notes either before or after ____________, 1999, including
the right to waive the ineligibility of any holder who seeks to tender Series B
notes or Series C notes in the exchange offer. Unless waived, any defects or
irregularities in connection with tenders of Series B notes or Series C notes
for exchange must be cured within the period of time Bally determines. Tenders
of the Series B notes and Series C notes will not be deemed to have been made
until any irregularities have been cured or waived.
If any letter of transmittal, endorsement, bond power, power of attorney
or any other document required by the letter of transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
that person should so indicate when signing, and, unless waived by Bally,
provide proper evidence satisfactory to Bally of that person's authority to so
act.
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By tendering through either DTC's Book-Entry Transfer Facility system or
by executing a letter of transmittal, each registered holder represents to
Bally that:
(1) the Series D notes to be acquired in connection
with the exchange offer are being acquired by the eligible
holder and each beneficial owner in the ordinary course of
business;
(2) the eligible holder and each beneficial owner
are not participating, do not intend to participate, and have
no arrangement or understanding with any person to participate,
in the distribution of the Series D notes;
(3) the eligible holder and each beneficial owner
acknowledge and agree that any person who is an affiliate of
Bally or who is participating in the exchange offer for the
purpose of distributing the Series D notes must comply with the
registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale
transaction of the Series D notes acquired by that person and
cannot rely on the position of the staff of the Commission set
forth in no-action letters that are discussed in this
prospectus under "Resales of New Notes";
(4) that if the eligible holder is a broker-dealer
that acquired Series B notes and Series C notes as a result of
market-making or other trading activities, it will deliver a
prospectus in connection with any resale of Series D notes
acquired in the exchange offer, however, the eligible holder
will not be deemed to admit that it is an "underwriter" within
the meaning of Section 2(ii) of the Securities Act;
(5) the eligible holder and each beneficial owner
understand that a secondary resale transaction described in
clause (3) above should be covered by an effective registration
statement containing the selling security holder information
required by Item 507 of Regulation S-K;
(6) neither the eligible holder nor any beneficial
owner is an "affiliate," as defined under Rule 405 of the
Securities Act, of Bally except as otherwise disclosed to Bally
in writing; and
(7) the eligible holder and each beneficial owner
has full power and authority to tender, exchange, assign and
transfer its Series B notes and Series C notes through the
exchange offer and Bally will acquire good and unencumbered
title to those notes, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any
adverse claim. Each registered holder and beneficial owner
will, upon request, execute and deliver any additional
documents that Bally determines is necessary or desirable to
complete the assignment and transfer of the Series B notes and
Series C notes tendered through the exchange offer.
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GUARANTEED DELIVERY PROCEDURES
Eligible holders who wish to tender their Series B notes or Series C notes
but (1) cannot comply with DTC's Book-Entry Transfer Facility system by
____________, 1999, (2) do not have their Series B notes and Series C notes
immediately available, or (3) cannot deliver their Series B notes or Series C
notes, the letter of transmittal or any other documents required by the letter
of transmittal to the exchange agent on or before ____________, 1999, may
tender their notes according to the guaranteed delivery procedures described in
the letter of transmittal. To use the guaranteed delivery procedures:
(1) tender must be made by or through an eligible
institution and a notice of guaranteed delivery must be signed
by the eligible holder,
(2) on or before ____________, 1999, the exchange
agent must have received from the eligible institution a
properly completed and duly executed letter of transmittal and
a notice of guaranteed delivery, and
(3) properly completed and executed documents
required by the letter of transmittal and the tendered Series B
notes or Series C notes in proper form for transfer, or
confirmation of a book-entry transfer of the Series B notes or
Series C notes into the exchange agent's account at DTC, must
be received by the exchange agent within three New York Stock
Exchange trading days after ____________, 1999.
Any eligible holder who wishes to tender Series B notes or Series C notes
through the guaranteed delivery procedures described in this paragraph must
ensure that the exchange agent receives the notice of guaranteed delivery and
letter of transmittal relating to the Series B notes and Series C notes before
5:00 p.m., New York City time, on ____________, 1999.
WITHDRAWAL RIGHTS
Holders of the Series B notes and Series C notes may withdraw tenders of
their notes by delivering a telegram, telex, facsimile transmission or letter
to the exchange agent, at its address listed on the back cover page of this
prospectus, at any time prior to 5:00 p.m., New York City time, on
____________, 1999. The notice of withdrawal must:
(1) specify the name of the person who deposited
the Series B notes and Series C notes;
(2) identify the Series B notes and Series C notes
to be withdrawn, including the certificate number or numbers
and principal amount of those notes, as applicable;
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(3) be signed by the eligible holder. The eligible
holder must sign in the same manner as the original signature
on the letter of transmittal by which the notes were tendered,
including any required signature guarantees, or be accompanied
by a bond power in the name of the person withdrawing the
tender; and
(4) specify the name in which the Series B notes and
Series C notes are to be re-registered, if different from the
person who originally tendered the notes.
Withdrawal of Series B notes and Series C notes tendered through DTC's
Book-Entry Transfer Facility system must comply with the procedures for
withdrawal established by DTC.
All questions as to the validity, form, eligibility and time of receipt of
these notices will be determined by Bally, in its sole discretion. The Series B
notes and Series C notes withdrawn will be deemed to have not been validly
tendered for exchange for purposes of the exchange offer. Any Series B notes
and Series C notes which have been tendered for exchange but which are
withdrawn will be returned to the eligible holder thereof without cost as soon
as practicable after withdrawal. Properly withdrawn Series B notes and Series C
notes may be retendered by following one of the procedures described under "--
Procedures for Tendering Series B Notes and Series C Notes" at any time on or
before ____________, 1999.
THE EXCHANGE AGENT; ASSISTANCE
U.S. Bank Trust National Association, a national banking corporation, is
the exchange agent. All tendered Series B notes and Series C notes, executed
letters of transmittal and other related documents should be directed to the
exchange agent. Questions and requests for assistance and requests for
additional copies of the prospectus, the letter of transmittal and other
related documents should be sent to the exchange agent at the address on the
back cover page of this prospectus.
FEES AND EXPENSES
All fees and expenses in connection with the exchange offer will be paid
for by Bally.
Bally has not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptance of the exchange offer. However, Bally will pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection with the exchange offer.
Bally will pay all transfer taxes, if any, applicable to the exchange of
Series B notes and Series C notes pursuant to the exchange offer. If a transfer
tax is imposed for any reason other than the exchange of Series B notes and
Series C notes pursuant to the exchange offer, then the amount of those
transfer taxes, whether imposed on the registered holder or any other persons,
will be payable by the tendering holder. The amount of those transfer taxes
will be billed directly to the tendering holder if satisfactory evidence of the
tax payment or exemption is not submitted with the letter of transmittal.
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ACCOUNTING TREATMENT
The Series D notes will be recorded at the same carrying value as the
Series B notes and Series C notes, as reflected in Bally's accounting records
on the date of the exchange. Accordingly, no gain or loss will be recognized by
Bally for accounting purposes. The expenses of the exchange offer will be
amortized over the term of the Series D notes.
RESALES OF THE SERIES D NOTES
Upon completion of the exchange offer, holders of Series C notes who did
not tender their notes and who were legally permitted to participate in the
exchange offer will not have any registration rights under the registration
rights agreement with respect to those nontendered Series C notes. However,
those holders will still have rights with respect to a request for a shelf
registration statement by the initial purchasers acquiring a majority of the
initial aggregate principal amount of the Series C notes with respect to the
Series C notes acquired directly from Bally. The Series C notes not tendered in
the exchange offer will continue to be subject to the restrictions on transfer
contained in the legend printed on the note. In general, the Series C notes may
not be offered or sold unless registered under the Securities Act and
applicable state securities laws, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. Bally does not intend to register the Series C notes under the Securities
Act.
Bally is making the exchange offer in reliance on the position of the
staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, Bally has not sought in its
own interpretive letter and there can be no assurance that the staff of the
Commission would make a similar determination with respect to the exchange
offer as it has in the interpretive letters to third parties. Based on these
interpretations by the staff of the Commission, and subject to the following
sentences, Bally believes that the Series D notes issued through the exchange
offer to an eligible holder in exchange for Series B notes and Series C notes
may be offered for resale, resold and otherwise transferred by an eligible
holder, without further compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that:
(1) the Series D notes issued in the exchange offer
are being acquired by the eligible holder in the ordinary
course of business;
(2) the eligible holder is not participating, does
not intend to participate, and has no arrangement or
understanding with any person to participate, in the
distribution of the Series D notes issued in the exchange
offer;
(3) the eligible holder is not an "affiliate" of
Bally; and
(4) the eligible holder is not a broker-dealer who
purchased Series C notes directly from Bally for its own
account.
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Eligible holders wishing to accept the exchange offer must represent
to Bally that these conditions have been met. If Bally's belief is inaccurate
and an eligible holder transfers any Series D notes issued to it in the
exchange offer without delivering a prospectus meeting the requirements of the
Securities Act, that eligible holder may incur liability under the federal
securities laws. Bally does not assume or indemnify the eligible holder against
that liability.
"Affiliates" of Bally and eligible holders who intend to participate
in the exchange offer for the purpose of distributing the Series D notes:
(1) will not be able to rely on the
interpretations of the staff of the Commission set forth in the
previously mentioned interpretive letters;
(2) will not be permitted or entitled to tender
the Series C notes in the exchange offer; and
(3) must comply with the registration and
prospectus delivery requirements of the Securities Act in
connection with any sale or other transfer of the Series C
notes unless such sale is made pursuant to an exemption from
such requirement.
Each broker-dealer that receives Series D notes for its own account
through the exchange offer:
(1) may be deemed to be a statutory underwriter;
(2) must acknowledge that it acquired the
Series C notes for its own account as a result of market-making
activities or other trading activities; and
(3) must agree that it will deliver a prospectus
meeting the requirements of the Securities Act in connection
with any resale of Series D notes.
The letter of transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. Based on the
position taken by the staff of the Commission in the interpretive letters
referred to above, Bally believes that broker-dealers who acquired Series C
notes for their own accounts, as a result of market-making or other trading
activities, may fulfill their prospectus delivery requirements with respect to
the Series D notes with this prospectus, as it may be amended or supplemented
from time to time.
Subject to certain conditions, Bally has agreed that this prospectus, as
it may be amended or supplemented from time to time, may be used by these
broker-dealers in connection with resales of the Series D notes. See "Plan of
Distribution." However, broker-dealers who intend to use this prospectus in
connection with the resale of the Series D notes must notify Bally on or before
____________, 1999, that it is a broker-dealer who must comply with the
prospectus delivery requirements. The notice may be given in the space provided
for that purpose in the letter of transmittal or may be delivered to the
exchange agent at the address on the back cover
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page of this prospectus. Any broker-dealer who is an "affiliate" of Bally may
not rely on these interpretive letters and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction.
In that regard, each of these broker-dealers who surrender Series C notes
pursuant to the exchange offer will be deemed to have agreed, by notifying
Bally that it intends to use this prospectus in connection with the resale of
Series D notes, that, upon receipt of notice from Bally of the occurrence of
any event or the discovery of any fact which makes any statement contained in
this prospectus untrue in any material respect or which causes this prospectus
to omit to state a material fact necessary in order to make the statements
contained in this prospectus, in light of the circumstances under which they
were made, not misleading or of the occurrence of other events specified in the
registration rights agreement, the broker-dealer will suspend the sale of
Series D notes pursuant to this prospectus until Bally has amended or
supplemented this prospectus to correct the misstatement or omission and has
furnished copies of the amended or supplemented prospectus to the broker-dealer
or Bally has given notice that the sale of the Series D notes may be resumed,
as the case may be.
MISCELLANEOUS
Participation in the exchange offer is voluntary and holders should
carefully consider whether to accept. Holders of the Series B notes and Series
C notes are urged to consult their financial and tax advisors in making their
own decisions on what action to take.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
During 1997 and 1998, our three primary strategic objectives were to
improve the operating margins of our fitness center membership operations, our
core business; increase the number of fitness centers we operate based on our
recently designed more profitable fitness center prototype; and introduce new
products and services to our members. The strategic initiatives we developed
and implemented to meet these objectives are summarized as follows:
Improve Core Business Operating Margins. The primary approach to improving the
operating margins was to grow and improve the quality of revenues while
leveraging the largely fixed cost structure of our business. In late 1997, we
increased our emphasis on the sale of higher margin all-club memberships, which
are typically financed, rather than the sale of lower margin single-club
memberships. In late 1998, we significantly increased the monthly charge to new
members for dues. We also continued our focus on increasing down payments on
financed membership plans and securing installment payments electronically.
This resulted in approximately a 12% growth in average down payments during
1998 to $91 and, as of December 31, 1998, approximately 63% of the financed
initial membership fees in our receivables portfolio using an electronic
payment method. In addition, we reduced core business operating costs,
including personnel costs, advertising expenses and other operating expenses.
We believe that all of these actions, some of which reduced new membership unit
sales and revenues, will ultimately improve cash flows and operating income.
New Facilities Expansion. In 1998, we initiated a plan to increase new facility
openings of our recently designed more profitable fitness center prototype.
Seven of these facilities were opened during 1998 and a number were under
construction at the end of the year. Due to deferral accounting, new fitness
centers generally require nearly a full year before generating incremental
earnings before interest, taxes, depreciation and amortization and operating
income and require, on average, three or more years to approach maturity. From
time-to-time we identify opportunities to acquire existing fitness center
operations, at attractive prices, that fit our strategic goals. Recently,
acquired fitness center operations generally were immediately additive on a per
share basis in terms of earnings before interest, taxes, depreciation and
amortization and operating income. During 1998 we acquired nine existing
fitness centers in the San Francisco area where we had no previous fitness
centers, and one additional fitness center in Chicago.
Add Products and Services. We also believe significant opportunities exist to
increase revenues beyond those generated by the sale of membership plans and
receipt of monthly dues. These additional revenues do not require significant
capital investment. Beginning in mid-1997, we implemented and greatly expanded
during 1998, our new product and service offerings including:
o Personal training services are now offered at most of our fitness
centers;
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o An exclusive line of Bally-branded nutritional products sold to our
members; and
o BFIT Essentials(SM) retail stores, which sell nutritional products,
workout apparel and related soft goods, are currently located in
approximately 100 of our fitness centers.
We expect the benefits from these new products and services to continue to grow
in 1999.
RESULTS OF OPERATIONS
Comparison of the years ended December 31, 1998 and December 31, 1997
Net revenue for 1998 were $742.5 million compared to $661.0 million in
1997, an increase of $81.5 million (12%). Net revenue from comparable fitness
centers increased 11%. This significant increase in net revenues resulted from
the following:
o The weighted average price of memberships sold increased 21% over the
prior year. As a result, membership fees originated increased $33.7
million (8%), consisting of a $61.5 million (17%) increase in
financed memberships originated offset, in part, by a $27.8 million
(48%) decrease in paid-in-full memberships originated. Total
membership units sold during 1998 declined slightly compared to the
prior year period reflecting the planned curtailment of sales of the
lower priced, lower margin, single-club and discounted upgrade and
add-on membership plans in 1998. Unit sales of all other memberships
increased year over year by 11%.
o As a result of our long-term strategy to improve the total yield from
individual membership plans, including the monthly dues component,
the slight decline in the number of individual memberships during
1998 consisted entirely of memberships with monthly dues of less than
$3. This strategy to continually improve membership yield, combined
with significantly lower member attrition, improved monthly dues
collected $11.0 million (6%) from 1997.
o Finance charges earned increased $11.0 million (28%) in 1998 due to
the growth in size and improved quality of the receivables portfolio.
Receivables written off in 1998, as a percent of average receivables,
improved 10% compared to the prior year. Additionally, the percentage
of accounts current with all contractual payments improved to 85% as
of December 31, 1998 from 83% as of December 31, 1997. The average
interest rate for finance charges to members was substantially
unchanged during the periods.
o Fees and other revenues increased $23.6 million (148%) over 1997,
primarily reflecting the increased sale of personal training services
and nutritional and other retail products.
o Deferral accounting increased revenues by $2.2 million more in 1998
than in 1997.
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The weighted average number of fitness centers increased to 320 during
1998 from 317 during 1997, less than a 1% increase. During 1998, we closed 6
older, typically smaller and less profitable facilities while opening 7 new,
larger facilities, based on our new fitness center prototype. In addition,
during 1998 we acquired 10 fitness centers, 9 located in the San Francisco area
and 1 in Chicago.
Operating income for 1998 was $52.8 million compared to $19.9 million in
1997. The increase of $32.9 million (165%) was due to the increase in revenues
partially offset by a $48.6 million (8%) increase in operating costs and
expenses, which included a $22.5 million increase in the provision for doubtful
receivables. Excluding the provision for doubtful receivables and the effect of
deferral accounting, operating costs and expenses increased $32.7 million (6%)
from 1997. Fitness center operating expenses increased $39.4 million (10%) due,
in part, to increased spending to improve fitness center operations and
appearance, additional commissions from the growth in initial membership fees
originated, operating costs associated with the new products and services and
the incremental cost of operating new fitness centers. A substantial portion of
commission expense is deferred through deferral accounting. Deferral accounting
decreased expenses by $6.6 million more in 1998 than in 1997. General and
administrative expenses decreased $2.9 million (10%) reflecting that the 1997
period included changes related to vesting of 1996 restricted stock awards.
Member processing and collection center expenses increased $.6 million (1%). In
addition, advertising expenses remained substantially unchanged and
depreciation and amortization expense, as expected, declined $4.6 million
largely as the result of amortization in 1997 related to the 1996 restricted
stock awards.
The provision for doubtful receivables, included in operating costs and
expenses, was $118.6 million in 1998 compared to $96.1 million in 1997, an
increase of $22.5 million (23%), due to the increase in initial membership fees
on financed memberships originated. The total provision rate, including the
provision for canceled financed membership plans which are reflected in the
financial statements as a direct reduction of initial membership revenue, was
41% of gross financed initial membership fees during each of 1998 and 1997.
Interest expense was $41.5 million in 1998 compared to $45.0 million in
1997. The decrease of $3.5 million (8%) was primarily due to lower average
interest rates offset, in part, by a higher average level of debt.
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%). Net revenue from comparable fitness
centers increased 4%. This increase in net revenues resulted from the
following:
o The weighted average price of memberships sold increased 18% over the
prior year. As a result, membership fees originated increased $34.8
million (9%), 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. Total
membership units sold during 1997 decreased 10% from the prior year
reflecting the
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planned curtailment of sales of the lower priced, lower margin,
single-club and discounted upgrade and add-on membership plans in
1997. Unit sales for these memberships decreased 32% while the unit
sales of all other memberships increased year over year by 1%.
o Dues collected increased $11.2 million (6%) over 1996, reflecting our
continuing strategy of increasing monthly dues.
o Finance charges earned increased $2.8 million (8%) in 1997 due
primarily to the increase in the size of the receivables portfolio.
o Fees and other revenues increased $1.9 million (14%) over 1996,
primarily reflecting an introduction of personal training services
into the fitness centers. The sale of nutritional and other retail
products also began in mid-1997 in some fitness centers.
o Deferral accounting added $28.8 million less to revenues in 1997 than
in 1996.
The weighted average number of fitness centers selling memberships
decreased from 322 in 1996 to 317 in 1997, reflecting our continuing strategy
to improve the quality of our fitness facilities. During 1997 and 1996, we
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 our new prototype.
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 increase in revenues
partially offset by a $21.0 million (3%) increase in operating costs and
expenses, which included 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, relating to restricted stock awards for
which restrictions lapsed in 1997 and 1996 and final vesting occurred in August
1997. Included in these amounts were $2.1 million and $2.3 million of
amortization of unearned compensation in 1997 and 1996, respectfully. 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 fitness center operations and appearance,
additional commissions from the growth in initial membership fees originated,
and operating costs associated with the new products and services. A
substantial portion of commission expense is deferred through the change in
deferred membership origination costs. Deferral accounting decreased expenses
by $8.7 million more in 1997 than in 1996. General and administrative expenses
increased $5.4 million (23%) and primarily reflects fees paid to Hilton Hotels
Corporation in 1997 under a license agreement to use the name "Bally Total
Fitness(R)", an increase of tax gross-up expense in 1997 from 1996 relating to
the restricted stock awards and increased corporate personnel and other
overhead incurred in 1997 relating principally to the new products and
services. Member processing and collection center expenses decreased $3.6
million (9%), reflecting decreases in telephone expenses, printing expense and
equipment rental costs. The decrease in telephone expenses resulted from
renegotiated rates and fewer member service calls. Advertising expenses
decreased $2.4 million (5%) due to reduced spending on television
advertisements and the elimination of some agency fees in 1997 offset, in part,
by increases in production costs and local promotional activities.
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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.
Interest expense was $45.0 million in 1997 compared to $47.6 million in
1996. The decrease of $2.6 million (5%) was 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.
Income Taxes
The income tax provisions for 1998, 1997, and 1996 reflect state income
taxes only. The federal provision for 1998 was offset by the utilization of
prior years' net operating losses. No federal tax benefit was provided in 1997
due to the uncertainty that we would ultimately be able to use additional
deferred tax assets. The income tax benefit for 1996 reflects a benefit equal
to the federal provision allocated to an extraordinary item. The federal
provision benefit was limited to the extraordinary item in 1996 due to
uncertainty related to the eventual use of additional deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
We are continuously upgrading and expanding our facilities in order to
increase our membership base and more effectively capitalize on our marketing
and administrative functions. We invest approximately $10.0 million to $15.0
million annually to maintain and make minor upgrades to our existing
facilities. In addition, during 1998 we invested approximately $17.0 million to
refurbish and make major upgrades to approximately 25% of our fitness centers
including adding and upgrading exercise equipment and refreshing interior and
exterior finishes to improve club ambiance. An additional $25.0 million was
invested to extensively add and upgrade exercise equipment in most of our other
fitness centers.
In recent years we have invested $6.0 million to $15.0 million annually,
as funds were available, to open new or replacement facilities. During 1998 we
invested approximately $25.0 million in new facilities generally based on our
new prototype. Seven of these facilities opened in 1998 and a number were under
construction at the end of the year. In 1999, we expect to increase our annual
investment to approximately $20.0 million to $35.0 million to open 15 to 20 new
fitness centers annually based on our new prototype. The prototype fitness
center ranges in size from approximately 15,000 to 35,000 square feet. The
prototype is designed to cost less to construct and maintain than our older
facilities and has the capacity to accommodate significantly more members than
the older fitness centers of the same size because they generally focus on the
most widely used amenities.
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In May 1998, we sold 2,800,000 shares of our common stock to the public
for net proceeds of $82.7 million and in December 1998, we completed a $75.0
million private placement of 9 7/8% Series C senior subordinated notes due
October 15, 2007. We are using these proceeds to fund our growth strategies to
open new fitness centers, to acquire fitness center operations in strategic
geographic markets and to selectively acquire club-related real estate. We will
allocate these proceeds among the contemplated uses based on available business
opportunities and prevailing market conditions. We are currently engaged in
various stages of discussions to acquire regional fitness centers operators.
None of the individual negotiations are for a material acquisition of fitness
centers or club-related real estate.
In August 1998, we announced our intention to repurchase up to 1,500,000
shares of our common stock on the open market from time to time. As of March 1,
1999, we have repurchased 554,800 shares at an average price of $17 per share.
No purchases have been made since September 1998.
In November 1998, we amended our three-year revolving credit facility to
provide up to $100.0 million of credit. The maximum amount currently available
under this credit facility is $90.0 million. The amount available under the
credit line is reduced by any outstanding letters of credit, which cannot
exceed $30.0 million. At December 31, 1998, the credit line was unused except
for outstanding letters of credit totaling $3.7 million.
We have no scheduled principal payments under our subordinated debt until
October 2007 and the principal amount of the certificates under our
securitization facility remains fixed at $160.0 million through July 1999 at,
or prior to, which time the entire securitization facility will be refinanced
or the 1999 principal maturities will be funded with borrowings from the
existing revolving credit facility. Our debt service requirements, including
interest, but excluding principal payments under the securitization, during
1999 are approximately $52.0 million. We believe that we will be able to
satisfy our 1999 requirements for debt service, capital expenditures and any
stock repurchases, out of available cash balances, cash flow from operations
and if necessary, borrowings on the revolving credit facility.
Cash used in operating activities during 1998 was $32.0 million compared
to $35.9 million in 1997. Net installment contracts receivable grew $78.4
million during 1998 compared to $44.0 million in 1997. Excluding the growth in
receivables, operating activities for 1998 provided cash of $46.4 million
compared to $8.1 million for 1997. The year over year improvement of $38.3
million principally reflects the $36.8 million increase in profitability for
1998 compared to 1997.
Prior to completing public offerings of 8,000,000 shares of common stock
in August 1997 and 2,800,000 shares in May 1998, which provided aggregate net
proceeds totaling $171.0 million, we depended on availability under our
revolving credit facility and operations to provide for cash needs. We managed
liquidity requirements in past years by emphasizing the sale of lower margin
paid-in-full membership plans and accelerating collections through promotional
discounting of financed memberships and monthly dues to increase available
cash. We believe the use of these techniques negatively impacted our operating
results and improved near-term
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operating cash flows while negatively affecting future periods. The
availability of working capital substantially reduced the need for these
techniques to be continued beyond mid-1997. By the end of 1998, monthly cash
flows from collections, from financed memberships and from monthly dues had
grown to levels that substantially eliminated the negative impact from prior
years discounting activities.
YEAR 2000
We have completed an assessment of whether our systems and those of third
parties which could have a material impact on our business will function
properly with respect to dates in 2000 and thereafter. We have determined that
our payroll applications require modification. The necessary modifications are
expected to be completed in early to mid-1999 at an aggregate cost of less then
$.1 million. We believe the only third parties that could have a material
impact on our business are the major financial institutions that process our
collections of installment receivables and monthly dues by electronic payment
methods. We believe these financial institutions are currently working on
modifications to their internal systems to insure that those systems will
function properly with respect to dates in 2000 and thereafter and expect that
these modifications will be completed in 1999. We do not anticipate that the
noncompliance, if any, with Year 2000 of any of our non-information technology
systems, such as embedded microcontrollers, will materially or adversely affect
our business. We are currently undertaking an analysis of worst-case scenarios
and developing contingency plans to deal with these scenarios.
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BUSINESS DESCRIPTION
Bally is a Delaware corporation. Bally is the only nationwide commercial
operator of fitness centers in the United States. It is also the largest
commercial operator in terms of revenues, number of members, and number and
square footage of facilities. As of March 1, 1999, we operated approximately
330 fitness centers and had approximately four million members. Our fitness
centers are concentrated in major metropolitan areas in 27 states and Canada,
with approximately 260 fitness centers located in 23 of the top 25 population
centers in the United States representing over 50% of the United States
population. Our members made more than 100 million visits to our fitness
centers in each of the past three years.
Bally offers value to its members by providing access to state-of-the-art
fitness facilities with affordable membership programs. Our fitness centers
feature an outstanding selection of cardiovascular, conditioning and strength
equipment and offer extensive aerobic and other group fitness training
programs. In addition, many of our current fitness centers include pools,
racquet courts or other athletic facilities. Our new fitness center prototype
achieves efficiency by focusing on those fitness services our members use most
frequently. We have clustered our fitness centers in major metropolitan areas
in order to achieve marketing and operating efficiencies. Over 80% of our
fitness centers are located in markets in which we have five or more
facilities, with our largest concentrations in New York, Los Angeles, Chicago,
Baltimore/Washington D.C., Dallas, Houston, Detroit, Miami and Philadelphia.
The majority of our fitness centers use the service mark "Bally Total
Fitness", including eight that are known as "Bally Sports Clubs (SM)". The
nationwide use of the service mark enhances brand identity and adds advertising
efficiencies. The prior practice of using more than 25 different regional
service marks and trade names was eliminated in 1996. As a result of
acquisitions in 1998, we also operate six fitness centers as "Pinnacle
Fitness(R)" and two as "Gorilla Sports (SM)" and plan to expand the use of these
brands.
Our primary target market for new members is the 18 to 34-year old, middle
income segments of the population, with secondary target markets including
older and higher income segments. We market ourselves to these consumer
segments through the use of a variety of membership options and payment plans.
Our membership options range from single-club memberships to our most popular
premium memberships which provide additional amenities and access to all of our
fitness centers nationwide. Similarly, we offer a broad range of payment
alternatives. Typically, our members pay an initial membership fee which can
either be financed or paid-in-full at the time of joining. Members who choose
to finance their initial membership fee generally do so for up to 36 months,
subject to state and local regulation and minimum down payment requirements. In
addition to the initial membership fee, members are generally required to pay
monthly membership dues in order to use our fitness facilities. We believe the
various memberships and payment plans offered, in addition to our strong brand
identity and the convenience of multiple locations, constitute distinct
competitive advantages.
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OPERATING STRATEGIES
In October 1996, a new management team began to implement a business
strategy designed to improve our operating results. These efforts have
contributed to recent improvements in operating results; growing net income to
$13.3 million in 1998 from losses before extraordinary items of $23.5 million
and $24.9 million in 1997 and 1996, respectively.
In 1997, this management team identified three primary strategic
objectives to improve the overall business value. The three objectives
identified were:
o Improve the operating margins of our fitness center membership
operations, our core business.
o Increase the number of fitness centers we operate based on our
recently designed, more profitable fitness center prototype.
o Introduce new products and services to our members.
We developed and implemented a number of key strategic initiatives to meet
these objectives.
Improve Core Business Operating Margins
The primary approach to improving operating margins has been to grow and
improve the quality of revenues while leveraging the largely fixed cost
structure of our business. We focused on the following strategic initiatives:
Emphasize the Sale of Higher Margin All-Club Membership Plans. In the third
quarter of 1997 we completed a common stock offering. The proceeds provided
working capital allowing us to increase our emphasis on the sale of higher
margin all-club membership plans with greater long-term cash flows but lower
amounts of immediate cash. The previous strategy focused on near-term cash
needs, resulting in an emphasis on lower margin single-club membership plans.
Our all-club membership is historically our most popular membership plan and
its initial membership fees are typically financed, subject to down payment
requirements. This emphasis contributed to a 43% increase in the weighted
average price of memberships sold over the past two years.
Increase Dues Revenue. We believe our monthly dues are substantially less than
those charged by most of our competitors and believe we can continue to raise
monthly dues at a rate consistent with past periods without a material loss in
membership. In addition, we significantly reduced promotions offering
discounted or waived monthly dues. These initiatives contributed to a 6% annual
increase in monthly dues collected in 1997 and 1998.
Upgrade and Expand Existing Fitness Centers. In late 1997, we began to upgrade
and expand many of our existing facilities and much of our exercise equipment
beyond normal maintenance requirements. We believe these upgrades will increase
our membership base and more effectively capitalize on our streamlined
marketing and administrative functions. During 1998, we invested extensively to
refurbish and make major upgrades to approximately 25% of our fitness centers
including adding and upgrading exercise equipment and refreshing interior and
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exterior finishes to improve club ambiance. Additional investments during 1998
extensively added and upgraded exercise equipment in most of our other fitness
centers.
Improve Collections of Financed Initial Membership Fees. We continue to focus
on increasing down payments on financed membership plans and securing
installment payments electronically through direct withdrawal from a member's
bank account or charge to a member's credit card. Our experience has shown that
electronic payments result in higher quality receivables. These efforts yielded
a 12% increase in the average down payment to $91 in 1998 from $81 in 1997,
which had increased 11% over the 1996 average down payment of $73. Memberships
sold where the member selected an electronic payment method have increased each
of the last three years and is now exceeding 75%. In addition, we continue to
develop improved collection practices based on information provided by "credit
scoring" and behavioral modeling, among others, which, we believe, will also
improve the yield from the receivable portfolio.
Continue to Leverage Fixed Cost Base. A significant percentage of our core
business operating costs are fixed in nature. Over the past several years, we
have significantly reduced these operating costs through aggressive cost
management.
New Facilities Expansion
To build upon our improved core operations and accelerate the growth of
our business we have invested in facilities expansion in two ways:
Replicate the New Fitness Center Prototype. In 1998 we initiated a plan to
increase new facility openings based on our new prototype. The prototype is
designed to cost less to build and maintain than our older facilities, and on
average, provides almost 40% more useable space for our members in the same
average square footage. The new facilities are generally developed pursuant to
long-term lease arrangements and currently require, on average, approximately
$1.5 million per fitness center to fund leasehold improvements and exercise
equipment. During 1998, we invested approximately $25.0 million to develop new
facilities. Seven of these facilities opened during 1998 and a number were
under construction at the end of the year.
Selectively Acquire Fitness Center Operations. From time-to-time we identify
opportunities to acquire existing fitness center operations, at attractive
prices, that fit our strategic goals. During 1998, we acquired nine existing
fitness centers in the San Francisco area where we had no previous fitness
centers, and one additional fitness center in Chicago.
Add Products and Services
Since mid-1997 we have been successfully increasing and diversifying our
revenues by offering our members a number of new ancillary products and
services. These strategic initiatives focused primarily on products and
services delivered to members within our facilities and include:
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Personal Training. We have added fee based personal training services for
members in most of our fitness centers. Since January 1997, we have added
approximately 1,600 personal trainers to our staff and grown revenues from this
service to more than $17.0 million in 1998. Our research indicates the
availability of personal training services enhances the perceived value of
membership and we believe demand for these services is growing.
Private-Label Nutritional Products. We began offering a private-label line of
Bally-branded nutritional products to our members in mid-1997. These products
currently include, among others:
o Meal replacement drinks;
o Multi-vitamins;
o Low calorie snack wafers;
o Creatine; and
o Energy bars.
Sales of these products grew to $9.3 million in 1998 and we continue to test
market other nutritional products, with plans to expand the product line to
over twenty products by mid-1999. As a policy, we require our suppliers of
these nutritional products to maintain significant amounts of product liability
insurance to minimize any liability that may arise related to these nutritional
products.
Retail Stores. Since early 1997, we have opened approximately 100 BFIT
Essentials retail stores in our fitness centers. These stores contributed
$4.2 million of revenue in 1998, selling primarily nutritional products,
workout apparel and related soft goods and accessories labeled both Bally Total
Fitness and other brand names. We plan to continue to increase the number of
BFIT Essentials retail stores in our fitness centers during 1999.
Rehabilitative and Physical Therapy Services. In late 1998, we entered into a
joint venture arrangement with Kessler Rehabilitation Corporation, a leading
provider of rehabilitation services, to open rehabilitation centers in up to
100 fitness centers during the next three years. These centers will primarily
be located in our fitness centers in the northeastern United States. As of
March 1, 1999, we have opened eight rehabilitation centers including five
centers with Kessler. We have also contracted with providers of chiropractic
services and as of March 1, 1999, eleven of our fitness centers offer these
services, including nine in California. In addition, we continue to investigate
similar arrangements in other operating regions.
MEMBERSHIP PLANS
Currently, we offer prospective members a number of membership plans that
differ primarily by the inclusion of priority access to in-club services and
access to other fitness centers we operate, either locally or nationally. From
time to time, we also offer special membership plans which limit a member's
access to a fitness center to certain days and non-peak hours. The one-time
initial membership fees for access to our fitness center facilities, excluding
limited special offers and corporate programs, range from approximately $600 to
approximately $1,400
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and can be financed for up to 36 months, subject to down payment requirements
and state and local regulations. Lower-priced initial membership fee programs
generally include higher monthly dues. Generally, the initial membership fee is
based on:
o The membership plan selected;
o The diversity of facilities and services available at the fitness
center of enrollment;
o Market conditions; and
o Seasonal promotional strategies.
In addition to one-time initial membership fees, members generally pay
monthly dues in order to maintain membership privileges. Monthly dues are
generally fixed, as to rate, while the member is paying their financed initial
membership fee and may increase thereafter, subject to stated terms and limits.
At December 31, 1998, approximately 90% of our members were being charged
monthly dues ranging from $3.00 to $20.00 per month, with the overall average
collected of approximately $7.00 per month. The average annual growth rate of
our monthly dues revenues was over 6% from 1992 through 1998. We expect the
annual increases in monthly dues revenues will continue due to the contractual
terms of current membership plans. Additionally, we believe we can continue to
increase monthly dues for our members who are beyond their initial financing
period without material loss in membership. Our recent experience has shown
that members faced with a membership renewal decision for the first time
renewed at a rate of approximately 62%. Members faced with a membership renewal
decision for subsequent periods renewed at a rate of approximately 85%.
Members electing to finance their one-time initial membership fees can
choose from several payment methods and down payment options. We continue to
focus on increasing down payments from members who finance their initial
membership fees and on securing installment payments electronically by direct
withdrawal from a member's bank account or charge to a member's credit card. We
believe both these strategies result in better quality receivables. See " --
Account Servicing".
FINANCING OF INITIAL MEMBERSHIP FEES
Generally, we offer financing terms of 36 months. Shorter terms are
offered on a promotional basis or as required by applicable state or local
regulation. Initial membership fees are financed at a fixed annual percentage
rate which generally is between 16% and 18%, except where limited by applicable
state laws. Financed portions of initial membership fees may be prepaid without
penalty at any time during the financing term. Based on experience in 1998, we
expect in excess of 90% of all new memberships originated during 1999 will be
financed to some extent.
We currently use three payment methods for financed initial membership
fees and monthly dues: electronic payments, monthly statements and coupon
books. Members may change their payments to an electronic or monthly statement
method at any time. These methods are described as follows:
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o Electronic Payments. This is the most popular method for payment of
financed initial membership fees and monthly dues. Under this method,
on approximately the same date each month, a fixed payment is either
(a) automatically transferred from a member's bank account, or (b)
automatically charged to a member's designated credit card.
Memberships sold where the member selected an electronic payment
method has increased each of the last three years and is now
exceeding 75%.
o Monthly Statements. We implemented a monthly statement program in
October 1998. New members electing not to pay by an electronic
payment method are sent monthly statements setting forth the amount
due and owing for their initial membership fees and monthly dues.
Members then mail checks to our regional member processing and
collection center along with the remittance portion of the monthly
statement.
o Coupon Books. This mechanism requires a member to mail a check
monthly to our regional member processing and collection center
accompanied by a payment coupon. In October 1998, we replaced this
payment option with monthly statements for newly financed initial
membership fees or for converting existing accounts.
Minimum down payments are specified for financed initial membership fees
to adequately defray both the initial account set-up cost as well as collection
costs should the account become immediately delinquent. On average, we received
a down payment of $91 on financed memberships sold during 1998. As a result, we
cover the incremental cost of new membership processing and collection through
the down payment and do not perform individual credit checks on members. We
manage our credit risk by measuring, from past performance, the expected
realizable value of financed initial membership fees for members paying by
electronic methods, monthly statements or coupon books based on various
criteria. For example, our historical analysis indicates the collection
experience for electronic payments is approximately 50% better than coupon book
accounts. As of December 31, 1998, approximately 63% of financed initial
membership fees were being paid by electronic payment methods compared to 29%
at December 31, 1992, when we first started emphasizing electronic payment
methods for membership payments.
FITNESS CENTERS
Most of our fitness centers are located near regional, urban and suburban
shopping areas and in downtown areas of major cities. Fitness centers vary in
size, available facilities and types of services provided. All of our fitness
centers contain a wide variety of state-of-the-art progressive resistance,
cardiovascular and conditioning exercise equipment as well as free weights. A
member's use of a fitness center may include group exercise programs or
personal
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training instruction stressing cardiovascular conditioning, strength
development or improved appearance. We require completion of a comprehensive
educational training program by our sales and service personnel. Members are
offered orientations on the recommended use of exercise equipment by our
personnel.
Generally, our fitness centers constructed prior to 1980 are smaller in
size and have fewer amenities than the fitness centers constructed since. The
fitness centers we developed in the 1980's 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 or squash courts. Our current prototype fitness
center generally focuses on those fitness services our members most frequently
use rather than services that receive a lower degree of member use, such as
pools, racquet courts or other athletic facilities. Our prototype fitness
center, which tends to range from 15,000 to 35,000 square feet, has recently
averaged approximately $950,000 to construct, exclusive of purchased real
estate and exercise equipment and net of landlord contributions. The new
prototype is designed to cost less to construct and maintain than our older
facilities and has the capacity to accommodate significantly more members than
older fitness centers of the same size because they focus on the most widely
used amenities. We generally invest approximately $550,000 for exercise
equipment in a prototype fitness center, all or a portion of which may be
leased or financed.
We continuously upgrade and expand our facilities in order to increase our
membership base and more effectively capitalize on our marketing and
administrative functions. Approximately $10 million to $15 million is invested
annually to maintain and make minor upgrades to our existing facilities. These
improvements include:
o Exercise equipment upgrades;
o Heating, ventilation and air conditioning and other operating
equipment upgrades and replacements; and
o Locker room and workout area refurbishment.
In addition, during 1998 we invested approximately $17 million to
refurbish and make major upgrades to approximately 25% of our fitness centers
including adding and upgrading exercise equipment and refreshing interior and
exterior finishes to improve club ambiance. An additional $25.0 million was
invested to extensively add and upgrade exercise equipment in most of our other
fitness centers.
In recent years we have invested $6.0 million to $15.0 million annually,
as funds were available, to open new or replacement facilities. During 1998 we
invested approximately $25 million in new facilities generally based on our new
prototype. Seven of these facilities opened in 1998. In 1999, we expect to
increase our annual investment to approximately $20 million to $35 million to
open 15 to 20 new fitness centers annually based on our new prototype.
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In 1997, we entered into an agreement pursuant to which three fitness
centers in Syracuse, New York, including one facility we previously owned, are
operated by a third party under the service mark "Bally Total Fitness". We
plan to seek additional franchise relationships for facilities located in
smaller markets; but expect new relationships will begin no sooner than the
year 2000.
SALES AND MARKETING
We devote substantial resources to the marketing and promotion of our
fitness centers and their services because we believe strong marketing support
is critical to attracting new members both at existing and new fitness centers.
The majority of our fitness centers use the service mark "Bally Total
Fitness", including eight fitness centers that are known as "Bally Sports
Clubs". The nationwide use of the service mark enhances brand identity and
adds advertising efficiencies. The prior practice of using more than 25
different regional service marks and trade names was eliminated in 1996. As a
result of acquisitions in 1998, we also operate six fitness centers as
"Pinnacle Fitness" and two as "Gorilla Sports" and plan to expand the use
of these brands.
We cluster numerous fitness centers in major media markets in order to
increase the efficiency of our marketing and advertising programs. We operate
approximately 260 fitness centers in 23 of the top 25 population centers in the
United States representing over 50% of the United States population.
We spent approximately $45.2 million in 1998, $45.0 million in 1997 and
$47.4 million in 1996 for advertising and promotion and expect to spend similar
amounts during 1999, with some additional spending anticipated to support new
media markets. Historically, we have primarily advertised on television, and,
to a lesser extent, through newspapers, telephone directories, direct mail,
radio, outdoor signage and other promotional activities. Currently, we are
placing greater emphasis on direct mail and other promotions based on extensive
research activities we are undertaking.
Our sales and marketing programs emphasize the benefits of health,
physical fitness and exercise by appealing to the public's desire to look and
feel better. Advertisements are augmented with individual sales presentations
made by sales personnel in our fitness centers. We believe the various
membership and payment plans, in addition to our strong brand identity and the
convenience of multiple locations, constitute distinct competitive advantages.
Our marketing efforts also include corporate membership sales and
insurance-eligible programs which are designed to reduce workers' compensation
costs and improve productivity. In addition to advertising, personal sales
presentations and targeted marketing efforts, we have increasingly used in-club
marketing programs. Open-houses and other activities 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 and enhance member loyalty.
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Direct mail reminders encourage renewal of existing memberships. We have
approximately 100 employees within our regional member processing and collection
centers dedicated primarily to inbound renewal programs and outbound
telemarketing service programs to existing members. Telemarketing is used, but
not extensively, to attract prospective new members. We also attract membership
interest from Internet visitors to our home page at www.ballyfitness.com.
We continually evaluate strategic marketing alliances to heighten public
awareness of our fitness centers. For example, in 1998 we entered into an
agreement with the owner and syndicator of the "Baywatch" television series
pursuant to which portions of an episode of the show were themed around our
fitness centers, and cast members make appearances at our fitness center
events. Recently, we introduced through major retail outlets a licensed Bally
Total Fitness line of portable exercise equipment and a home-kit of our popular
exercise program "Power-Flex(TM) by Bally Total Fitness." Strategic
partnerships with Visa, Mastercard, Time Warner, Coca Cola, Interpublic Group
and Sports Display, Inc. have been developed to grow and build brand position
and develop incremental sources of revenue.
ACCOUNT SERVICING
Membership contracts are administered and collected under uniform
procedures implemented by our two regional member processing and collection
centers. The centers enable us to conduct centralized data processing of all our
membership accounts. These regional centers employ approximately 820 people in
the account processing and collection areas, including approximately 240
employees dedicated to customer service, approximately 70 employees dedicated to
management information systems, approximately 270 employees dedicated to account
processing and administration, which includes the 100 telemarketers discussed in
"--Sales and Marketing", and approximately 240 employees dedicated to account
collections. The centers collectively receive, deposit and post more than $560
million of membership transactions annually, including the processing of down
payments and cash sales, and collections of financed initial membership fees and
monthly dues. In addition, the centers process, on average, 2,500 new membership
accounts per day. Employees at the centers also respond to and resolve member
inquiries and maintain membership data.
All collections for past-due accounts are initially handled internally by
the regional centers. We systematically pursue 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. At 60 days past-due, members are generally denied entry to the
fitness centers. Accounts that have not been collected for a 90-day period are
transferred to a group of the most experienced collectors. However, if the
first scheduled payment has not been received, the account is generally
written-off and any down payment 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 selected
accounts are then sold to a third-party collection group.
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We continue to investigate opportunities to enhance our collection efforts
based on information provided by credit scoring and behavioral modeling, among
others, which we believe will improve the yield from the receivables portfolio.
We prioritize our collection approach based on credit scores at various levels
of delinquency. By tailoring our collection approach to reflect a delinquent
member's likelihood of payment, we believe that we can collect more of our
receivables at a lower cost. We use a national bureau which charges a nominal
fee per account to credit score. We also believe that other collection
techniques such as monthly statements, which have been used since October 1998
for all new members who financed their initial membership fee and did not elect
an electronic payment method, will result in better collection of our
receivable portfolio.
COMPETITION
Bally is the only nationwide commercial operator of fitness centers in the
United States. It is also the largest commercial operator in terms of revenues,
number of members, and number and square footage of facilities.
We are the largest operator, or among the largest operators, of fitness
centers in every major market in which we operate fitness centers. Within each
market, we compete with other commercial fitness centers, physical fitness and
recreational facilities established by local governments, hospitals, and
businesses for their employees, the YMCA and similar organizations, and, to a
certain extent, with racquet, tennis and other athletic clubs, country clubs,
weight reducing salons and the home-use fitness equipment industry. We also
compete, to some extent, with entertainment and retail businesses for the
discretionary income of our target markets. However, we believe our brand
identity, operating experience, ability to allocate advertising and
administration costs over all of our fitness centers, nationwide operations,
purchasing power and account processing and collection infrastructure provide
us with distinct competitive advantages. We may not be able to continue to
compete effectively in each of our markets in the future.
We believe competition has increased to some extent in certain markets,
reflecting the public's enthusiasm for fitness and the decrease in the cost of
entry into the market due to financing available from landlords and equipment
manufacturers. We believe our brand identity is strong, membership plans are
affordable and we have the flexibility to be responsive to economic conditions.
As we pursue new business initiatives, particularly the sale of
nutritional products and apparel, we are competing against large, established
companies with more experience selling those products on a retail basis. In
some instances, our competitors for these products have substantially greater
financial resources than Bally. We may not be able to compete effectively
against these established companies.
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PROPERTIES
We operate approximately 330 fitness centers in 27 states and Canada. At
December 31, 1998, we owned 33 fitness centers and leased either the land,
building or both for the remainder of our fitness centers. Aggregate rent
expense, including office and administrative space, was $91.4 million, $86.8
million and $85.8 million for 1998, 1997 and 1996, respectively. Most of our
leases require us to pay real estate taxes, insurance, maintenance and, in the
case of shopping center and office building locations, common-area maintenance
fees. A limited number of leases also provide for percentage rental based on
receipts. Various leases also provide for rent adjustments based on changes in
the Consumer Price Index, most with limits provided to protect us from large
increases in annual rental payments. One fitness center accounted for between
1% to 2% of our net revenues during 1998. We believe our properties are
adequate for our current membership.
The leases for fitness centers we have entered into in the last five years
generally provide for an original term of no less than 15 years and, in some
cases, for 20 years. Most leases give us at least one five-year option to renew
and often two or more such options.
Our executive offices are located in Chicago, Illinois. The lease expires
in January 2003. We also lease space in Huntington Beach, California and
Towson, Maryland for our regional member processing and collection centers.
TRADEMARKS AND TRADE NAMES
The majority of our fitness centers, use the service mark "Bally Total
Fitness" including eight fitness centers that are known as "Bally Sports
Clubs". The nationwide use of the service mark enhances brand identity and
adds advertising efficiencies. The prior practice of using more than 25
different regional service marks or trade names was eliminated in 1996. As a
result of acquisitions in 1998, we also operate six fitness centers as
"Pinnacle Fitness" and two as "Gorilla Sports" and plan to expand the use
of these brands.
In January 1996, we entered into a 10-year trademark license agreement
with our former parent corporation which allows us to use certain marks,
including the "Bally Total Fitness" service mark, in connection with our
fitness center business. The name "Bally Total Fitness" is a service mark of
Park Place Entertainment Corporation. We paid no royalty or license fee for
1996 and now pay a fee of $1.0 million per year. Following the initial ten-year
term, we have the option to renew the license for an additional five-year
period at a rate equal to the greater of the fair market value or $1.0 million
per year.
SEASONAL MEMBERSHIP FEE ORIGINATIONS
Historically, we experienced greater membership fee originations in the
first quarter and lower membership fee originations in the fourth quarter. Our
new products and services may have the effect of further increasing the
seasonality of our business.
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EMPLOYEES
We have approximately 14,800 employees, including approximately 7,700
part-time employees. The distribution of our employees is summarized as
follows:
o Approximately 13,750 employees are involved in fitness center
operations, including sales personnel, instructors, personal
trainers, supervisory and facility personnel;
o Approximately 820 employees are involved in the operation of our
regional member processing and collection centers, including
management information systems; and
o Approximately 230 employees are accounting, marketing, human
resources, real estate, new product development and operations, legal
and administrative support personnel.
We are not a party to a collective bargaining agreement with any of our
employees. Although we experience high turnover of non-management personnel,
historically we have not experienced difficulty in obtaining adequate
replacement personnel. Periodically, our sales personnel become somewhat more
difficult to replace due, in part, to increased competition for skilled retail
sales personnel.
GOVERNMENT REGULATION
Our operations and business practices are subject to regulation at
federal, state and local levels. General rules and regulations of the Federal
Trade Commission, and of state and local consumer protection agencies, apply to
our advertising, sales and other trade practices.
State statutes and regulations affecting the fitness industry have been
enacted or proposed in all of the states in which we conduct business.
Typically, these statutes and regulations prescribe certain forms and regulate
the terms and provisions of membership contracts, including:
o Giving the member the right to cancel the contract, in most cases,
within three business days after signing;
o 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,
o Establishing maximum prices and terms for membership contracts and
limitations on the term of contracts.
In addition, we are 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
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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. We maintain internal review procedures in order to comply with
these requirements and believe our activities are in substantial compliance
with all applicable statutes, rules and decisions.
Under so-called "cooling-off" statutes in most states, new 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 and are entitled
to refunds of any payment made. The amount of time new members have to cancel
their membership contract depends on the applicable state law. In addition, our
membership contracts provide that a member may cancel his or her membership at
any time for qualified medical reasons or if the member relocates a certain
distance away from a Bally fitness center. In addition, 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 upon
cancellation and we may offset that amount against any refunds owed.
We are a party to several state and federal consent orders. From time to
time, we make minor adjustments to our operating procedures to comply with
those consent orders. The consent orders essentially require continued
compliance with applicable laws and require us to refrain from activities not
in compliance with applicable laws.
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. These laws and regulations are summarized as
follows:
o The opening of a rehabilitation facility may require approval from
state and/or local governments and re-licensing from time to time,
both of which may be subject to a number of conditions.
o A substantial number of recipients of rehabilitative and physical
therapy services have fees paid by governmental programs, as well as
private third-party payers. Governmental reimbursement programs such
as 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 payers 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.
o 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.
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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 our provision of
rehabilitative and physical therapy services.
WHERE YOU CAN FIND MORE INFORMATION
Bally is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith, files annual,
quarterly and current reports, proxy statements and other information with the
Commission. Reports, registration statements, proxy statements and other
information filed by Bally 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. Please call the Commission at 1-800-SEC-0330 for further information on
the public reference rooms. Such material may also be accessed electronically
by means of the Commission's web site at http://www.sec.gov. Bally's common
stock is listed on the New York Stock Exchange, and reports, proxy statements
and other information concerning Bally are available for inspection at the
offices of the New York Stock Exchange located at 20 Broad Street, New York,
New York 10005.
Bally has filed a registration statement on Form S-4 with the Commission
under the Securities Act, in respect of the Series D notes offered for exchange
by this prospectus. 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 Bally and the Series D
notes offered for exchange by this prospectus, reference is made to the
registration statement, including the exhibits thereto. Statements contained in
this prospectus or in any document incorporated in this prospectus by reference
regarding the contents of any contract or other document are not necessarily
complete, and, in each instance, you should refer to the copy of the contract
or other document filed with the Commission as an exhibit to the registration
statement or other document, each statement being qualified in all respects by
such reference.
The following documents filed by Bally with the Commission pursuant to the
Exchange Act are incorporated into this prospectus by reference:
(1) Bally's annual report on Form 10-K for the year ended
December 31, 1998 (file no. 0-27478);
(2) the description of Bally's common stock contained in
Bally's registration statement on Form 8-A/A filed with the
Commission on January 3, 1996 (file no. 0-27478); and
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(3) all documents filed by Bally pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of
this prospectus and before _______________, 1999.
Any statement contained in a document incorporated or deemed to be
incorporated by reference into this prospectus 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.
Bally will 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 that are incorporated by
reference unless such exhibits are specifically incorporated by reference into
the information that this prospectus incorporates. 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.
Persons requesting copies of exhibits that were not specifically incorporated
by reference in such documents will be charged the costs of reproduction.
DESCRIPTION OF OTHER INDEBTEDNESS
REVOLVING CREDIT FACILITY
The revolving credit facility was amended in November 1998 to provide up to
$100.0 million of credit. The maximum amount currently available under the
revolving credit facility is $90.0 million. The amount available under the
credit line is reduced by any outstanding letters of credit which cannot exceed
$30.0 million. The rate of interest on borrowings is at Bally's option,
generally based upon either the agent bank's prime rate plus 1.75% or a
Eurodollar rate plus 2.75%. A fee of 2.00% on outstanding letters of credit is
payable quarterly. A commitment fee of one-half of 1% is payable quarterly on
the unused portion of the revolving credit facility. At December 31, 1998, the
entire line of credit was unused except for outstanding letters of credit
totaling $3.7 million. The revolving credit facility is secured by
substantially all real and personal property (excluding installment contracts
receivable) of Bally.
SECURITIZATION FACILITY
In December 1996, Bally completed a private placement of asset-backed
securities pursuant to which $145.5 million of 8.43% accounts receivable trust
certificates and $14.5 million of floating rate accounts receivable trust
certificates were issued as undivided interests in the H&T Master Trust. The
floating rate certificates bear interest (8.11% at December 31, 1998) at 2.57%
above the London interbank offer rate, with the interest rate on the floating
rate 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
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agreement. The trust includes a portfolio of substantially all Bally's
installment contracts receivable from membership sales and the proceeds
thereof. The amount by which installment contracts receivable in the trust
exceed the $160.0 million principal amount of certificates issued by the trust
is generally retained by Bally.
Bally services the installment contracts receivable held by the trust and
earns a servicing fee which approximates the servicing costs incurred by Bally.
Through July 1999, the principal amount of the certificates remains fixed and
collections of installment contracts receivable flow through to Bally 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.
DESCRIPTION OF SERIES D NOTES
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions." In this section, "Description of
Series D Notes," Bally refers only to Bally Total Fitness Holding Corporation
and not its subsidiaries.
We will issue the Series D notes under an indenture with U.S. Bank Trust
National Association, as trustee. The terms of the Series D notes include those
stated in the Indenture and those made part of the indenture by reference to
the Trust Indenture Act of 1939.
The following description is a summary of the material provisions of the
Indenture. It does not restate the indenture in its entirety. We urge you to
read the Indenture because it, and not this description, defines your rights as
holders of the Series D notes. We have filed copies of the indenture as an
exhibit to the registration statement which includes this prospectus.
BRIEF DESCRIPTION OF THE NOTES
The Series D Notes
o are unsecured obligations of Bally;
o are subordinated in right of payment to all existing and future
senior debt of Bally;
o are senior in right of payment to any future subordinated
indebtedness of Bally;
o mature on October 15, 2007;
o bear interest at a rate of 9 7/8% per year; and
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o pay accrued interest every six months on each April 15 and October
15, beginning on October 15, 1999, to each registered holder on the
immediately preceding April 1 and October 1.
As of December 31, 1998, the Series D notes would have been subordinated
to approximately $185.7 million of senior debt and approximately $86.3 million
would have been available for borrowing as additional senior debt under our
revolving credit facility. As indicated above and as discussed in detail below
under the subheading "Subordination," payments on the Series D notes will be
subordinated to the payment of senior debt.
PRINCIPAL, MATURITY AND INTEREST
We will issue Series D notes with a maximum aggregate principal amount of
$300 million. We will issue the Series D notes in fully registered form without
coupons, in denominations of $1,000 and integral multiples of $1,000. The
Series D notes will mature on October 15, 2007.
Interest on the Series D notes will accrue at the rate of 9 7/8% per annum
and will be payable semi-annually in arrears on April 15 and October 15,
commencing on October 15, 1999. Bally will make each interest payment to the
holders of record of the Series D notes on the immediately preceding April 1
and October 1.
Interest on the Series D notes will accrue from April 15, 1999. Interest
will be computed on the basis of a 360-day year made up of twelve 30-day
months.
PAYMENTS ON THE SERIES D NOTES
All principal of, premium, if any, and interest on the Series D notes will
be payable at Bally's office or agency in the City of New York maintained for
this purpose. Initially, payments will be made at the corporate trust office of
the trustee. However, Bally can make interest payments by check mailed to the
holders at their address set forth in the security register.
Payments of principal of and interest on the Series D notes will be made
in funds which are available the same day. The Series D notes will trade in the
same day funds settlement system of DTC until maturity, and secondary market
trading activity for the Series D notes will therefore settle in same day
funds.
TRANSFER AND EXCHANGE
You may transfer or exchange the Series D notes in accordance with the
indenture. The transfer or exchange will be made at Bally's office or agency in
the City of New York maintained for this purpose, which will initially be the
corporate trust office of the trustee. No service charge will be made for any
registration of transfer, exchange or redemption of Series D notes, except in
certain circumstances for any tax or other governmental charge that may be
imposed.
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The registered holder of a Series D note will be treated as the owner of
it for all purposes.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Series D
notes and other obligations under the indenture will be subordinated to the
prior payment in full of all our senior debt. The Series D notes rank equally
with all other existing and future senior subordinated debt, including the
Series B notes and Series C notes, and rank senior to all existing and future
subordinated indebtedness.
The holders of senior debt will be entitled to receive payment in full of
all amounts due in respect of senior debt before the holders of Series D notes
will be entitled to receive any payment or distribution with respect to the
Series D notes, in the event of any distribution to creditors of Bally:
(1) in a voluntary or involuntary liquidation, receivership, reorganization or
other winding up of Bally;
(2) in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to Bally or its property;
(3) in an assignment for the benefit of Bally's creditors; or
(4) in any marshaling of Bally's assets and liabilities.
However, the holders of Series D notes may receive amounts set aside with the
trustee or payments previously made as described under "--Defeasance or
Covenant Defeasance" or "--Satisfaction and Discharge" and may receive
distributions of certain equity interests or subordinated securities.
Other than the permitted payments and distributions described above, Bally
may not make any other payment or distribution in respect of the Series D notes
if:
(1) a payment default on Designated Senior Debt occurs and is continuing
beyond any applicable grace period; or
(2) the trustee and Bally receive written notice of default (a "Payment
Blockage Notice") from a representative of holders of any Designated
Senior Debt during any nonpayment default on Designated Senior Debt that
permits holders of the Designated Senior Debt to accelerate its maturity.
Payments on the Series D notes may and will be resumed, including any
missed payments:
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(1) in the case of a payment default, when the default is cured or waived or
the Designated Senior Debt has been discharged or paid in full; and
(2) in the case of a nonpayment default, upon the earliest of:
(a) when the nonpayment default is cured or waived,
(b) 179 days after the applicable Payment Blockage Notice is received,
(c) when the Designated Senior Debt has been discharged or paid in full,
or
(d) when the representative of the holder of the defaulted Designated
Senior Debt gives notice to Bally or the Trustee that payment on the
Series D notes can resume.
No payment on the Series D notes will be prohibited by reason of a
nonpayment default for more than 179 days from the day the Payment Blockage
Notice is received. During any consecutive 365 days, only one prohibition of
payment on account of a nonpayment default can occur and it cannot last longer
than 179 days.
A nonpayment default that existed on the date of delivery of any Payment
Blockage Notice will not be the basis for another Payment Blockage Notice
unless that default has been cured or waived for a period of at least 90
consecutive days.
Bally must promptly notify holders of senior debt if payment of the Series
D notes is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event
of a bankruptcy, liquidation or reorganization of Bally, holders of the Series
D notes will not be paid until after all the senior debt has been paid in full.
To the extent any distribution is made to the holders of Series D notes after
these payments, it will have to be shared with the holders of other senior
subordinated debt, including the Series B notes and Series C notes. Bally may
not have sufficient funds to pay all of its creditors, and holders of the
Series D notes may not receive the full amount due under the Series D notes or
may not receive anything at all. See "Risk Factors -- Subordination."
If Bally fails to make any payment on the Series D notes when due or
within any applicable grace period, whether or not on account of the payment
blockage provisions, that failure would constitute an Event of Default under
the Indenture and would enable the holders of the Series D notes to accelerate
the maturity of the Series D notes. See "--Events of Default."
The Indenture will limit, but not prohibit, the incurrence by Bally and
its Subsidiaries of additional Indebtedness, and the Indenture will prohibit
the incurrence by Bally of Indebtedness that is subordinated in right of
payment to any Senior Debt and senior in right of payment to the Series D
notes.
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The Series D notes will be effectively subordinated to all Indebtedness
and other liabilities, including trade payables and lease obligations, of the
Subsidiaries. Any right to receive assets of any Subsidiary upon liquidation or
reorganization of Subsidiary, and the right of the holders of the Series D
notes to participate in those assets, will be effectively subordinated to the
claims of that Subsidiary's creditors. However, if Bally is itself recognized
as a creditor of that Subsidiary, then it will only be subordinate to any
security in the assets of the Subsidiary and any Indebtedness of the Subsidiary
senior to that held by Bally.
OPTIONAL REDEMPTION
Beginning October 15, 2000, Bally may on any one or more occasions redeem
up to 35% of the aggregate principal amount of Series D notes originally issued
under the Indenture at a redemption price of 109-7/8% of the principal amount
thereof, plus accrued and unpaid interest to the redemption date, with the net
cash proceeds of one or more Public Equity Offerings. However,
(1) at least 65% of the Series D notes originally issued and Series B notes
must remain outstanding immediately after the redemption;
(2) the redemption must be completed within 90 days of the closing of the
Public Equity Offering; and
(3) Bally must mail a notice of redemption no later than 60 days after the
closing of the Public Equity Offering.
Except pursuant to the preceding paragraph, the Series D notes will not be
redeemable at our option prior to October 15, 2002.
Beginning October 15, 2002, Bally may redeem the Series D notes, in
integral multiples of $1,000, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest, if any, to the applicable redemption date:
<TABLE>
<CAPTION>
IF WE REDEEM ON OR AFTER: REDEMPTION PRICE
<S> <C>
October 15, 2002..........................................104.938%
October 15, 2003..........................................103.292%
October 15, 2004..........................................101.646%
October 15, 2005 and thereafter...........................100.000%
</TABLE>
Bally will give between 30 and 60 days prior notice of any optional redemption
described in this paragraph.
If less than all the Series D notes are going to be redeemed, the Trustee
will select the Series D notes or portions to be redeemed pro rata, by lot or
by any other method the Trustee deems fair and reasonable.
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REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
If a Change of Control occurs, each holder of Series D notes will have the
right to require Bally to make a Change of Control Offer, which is an offer to
repurchase all or any part of that holder's Series D notes, in integral
multiples of $1,000. In the Change of Control Offer, Bally will offer to pay
the Change of Control Purchase Price in cash equal to 101% of the aggregate
principal amount of Series D notes repurchased plus accrued and unpaid
interest, if any, to the date of purchase. Within thirty days following any
Change of Control, Bally will notify the Trustee and mail a notice to each
Holder describing the transaction or transactions that constitute the Change of
Control and offering to repurchase the Series D notes for the Change of Control
Purchase Price on the Change of Control Payment Date specified in the notice.
The Change of Control Payment Date will be between 30 and 60 days from the date
that the notice is first mailed. Bally will comply with the applicable tender
offer rules and any other applicable securities laws or regulations in
connection with the repurchase of the Series D notes as a result of a Change of
Control.
Bally's senior debt currently prohibits Bally from purchasing any Series D
notes. If a Change of Control occurs at a time when Bally is prohibited from
purchasing the Series D notes, Bally could seek the consent of its senior
lenders to the purchase of the Series D notes or could attempt to refinance the
borrowings that contain the prohibition. If Bally does not obtain a consent or
repay the borrowings, Bally will remain prohibited from purchasing the Series D
notes. Even if Bally obtained the consent or repaid the borrowings, Bally may
not have available funds sufficient to pay the Change of Control Purchase Price
for all the Series D notes that might be tendered by holders of the Series D
notes seeking to accept the Change of Control Offer. In either case, Bally's
failure to make or complete the Change of Control Offer or pay the Change of
Control Purchase Price when due will be an Event of Default under the indenture
which could, in turn, constitute a default under the senior debt.
Bally's requirement to make a Change of Control Offer may deter a third
party from acquiring Bally in a Change of Control transaction.
In addition to Bally's requirements under the Series D notes upon a Change
of Control, the indebtedness under the revolving credit facility will become
immediately due and payable upon a "change of control" as defined in the
revolving credit facility documents.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the assets of Bally. The term "all or substantially all" has not been
interpreted under New York law, which governs the Indenture, to represent a
specific quantitative test. Accordingly, the ability of a holder of Series D
notes to require Bally to repurchase their Series D notes as a result of a
sale, lease, transfer, conveyance or other disposition of less than all of the
assets of Bally to another Person or group may be uncertain.
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CERTAIN COVENANTS
Under the indenture, Bally and its Subsidiaries are subject to, among
others, the covenants described in this section. However, Bally's Unrestricted
Subsidiaries will not be subject to any of the restrictive covenants described
in this section.
Asset Sales. Neither Bally nor its Subsidiaries will consummate an Asset
Sale unless:
(1) Bally or the Subsidiary, as the case may be, receives consideration at the
time of the Asset Sale at least equal to the Fair Market Value of the
shares or assets issued or sold or otherwise disposed of;
(2) such Fair Market Value is determined by Bally's board of directors and
evidenced by a resolution of the board of directors; and
(3) at least 75% of the consideration received by Bally or the Subsidiary is
in the form of cash or Cash Equivalents;
As long as none of the Net Cash Proceeds from the Asset Sale are required
to prepay any senior debt as required by the terms of that senior debt then,
within 360 days after the receipt of any Net Cash Proceeds from an Asset Sale,
Bally may apply the Net Cash Proceeds at its option:
(1) to repay senior debt;
(2) to acquire properties and assets that replace the properties and assets
that were the subject of the Asset Sale;
(3) to acquire properties and assets that will be used in the businesses of
Bally or its Subsidiaries existing on October 7, 1997 or in businesses
reasonably related or complementary.
Any Net Cash Proceeds from Asset Sales that are not applied or
invested as provided in the preceding paragraph will constitute Excess
Proceeds. When the aggregate amount of Excess Proceeds exceeds $15.0 million:
(1) Bally will make an offer to purchase an aggregate principal amount of
Series C notes and Series D notes equal to the Excess Proceeds multiplied
by a fraction, the numerator of which is the outstanding aggregate
principal amount of Series C notes and Series D notes, and the denominator
of which is the outstanding aggregate principal amount of the Series C
notes, the Series D notes and any Pari Passu Indebtedness, and
(2) Bally will make an offer to purchase any Pari Passu Indebtedness that has
provisions requiring Bally to make an offer to purchase upon an Asset
Sale, including any Series B notes that are not exchanged, in an aggregate
principal amount equal to the remaining Excess Proceeds after the purchase
described in paragraph (1) above. The offer price for the Series C notes
and Series D notes will be equal to 100% of principal amount plus accrued
and unpaid interest, if any, to the date of purchase, and will be payable
in cash.
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If any Excess Proceeds remain after these purchases, Bally may use the
remaining Excess Proceeds for any purpose not otherwise prohibited by the
indenture. If the aggregate principal amount of Series C notes and Series D
notes and any Pari Passu Indebtedness tendered in these purchases exceeds the
amount of Excess Proceeds, the trustee shall select the Series C notes and
Series D notes and Pari Passu Indebtedness to be purchased on a pro rata basis.
Upon completion of these purchases, the amount of Excess Proceeds shall be
reset at zero.
Bally will complete the purchase of any Series C notes, Series D notes and
any Pari Passu Indebtedness between 30 and 60 days from the date the holders
receive notice of the purchase offer, or later as may be necessary to comply
with the requirements under the Exchange Act. Bally will comply with the
applicable tender offer rules, including Rule 14e-1 under the Exchange Act, and
any other applicable securities laws or regulations in connection with this
offer to purchase Series C notes, Series D notes and Pari Passu Indebtedness.
Restricted Payments. Except for Permitted Investments, neither Bally nor
its Subsidiaries will:
(1) declare or pay any dividend on, or make any other payment or distribution
to, any shares of Bally's Capital Stock, other than dividends or
distributions payable solely in shares of its Qualified Capital Stock or
in options, warrants or other rights to acquire shares of Qualified
Capital Stock;
(2) purchase, redeem or otherwise acquire or retire for value the Capital
Stock of Bally or any Affiliate of Bally, other than Capital Stock of any
Wholly-Owned Subsidiary;
(3) make any principal payment on, or repurchase, redeem, defease, retire or
otherwise acquire for value, any Subordinated Indebtedness, except a
scheduled principal payment, sinking fund payment or maturity;
(4) declare or pay any dividend or distribution on any Capital Stock of any
Subsidiary or purchase, redeem or otherwise acquire or retire for value
any Capital Stock of any Subsidiary, in either case, other than to or from
Bally or any of its Wholly Owned Subsidiaries;
(5) incur, create or assume any guarantee of Indebtedness of any Affiliate of
Bally, other than a Wholly Owned Subsidiary; or
(6) make any Investment in any Person (all payments and other actions
described in paragraphs (1) through (6) above collectively referred to as
"Restricted Payments"),
unless, immediately before and immediately after giving effect to the
Restricted Payment:
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(1) no Default or Event of Default exists or would exist, after notice or
lapse of time, or both, under the terms of any Indebtedness of Bally or
its Subsidiaries;
(2) Bally could incur at least $ 1.00 of additional Indebtedness (other than
Permitted Indebtedness or Permitted Subsidiary Indebtedness) under the
covenant described below under-- "Limitation on Indebtedness"; and
(3) the Restricted Payment, together with the aggregate amount of all other
Restricted Payments made by Bally and its Subsidiaries after October 7,
1997 plus Permitted Payments described in clause (6) of the next
succeeding paragraph, is less than $5.0 million plus the sum of
(a) 50% of the aggregate Consolidated Net Income of Bally accrued on a
cumulative basis during the period beginning on January 1, 1998 and
ending on the last day of Bally's last fiscal quarter ending before
the date of the Restricted Payment (or, if the aggregate cumulative
Consolidated Net Income is a loss, minus 100% of such loss); plus
(b) The aggregate Net Cash Proceeds received after October 7, 1997 by
Bally either (x) as capital contributions in the form of common
equity to Bally or (y) from the issuance or sale, other than to any
of its Subsidiaries, of Qualified Capital Stock of Bally or any
options, warrants or rights to purchase Qualified Capital Stock of
Bally (except, in each case, to the extent those proceeds are used to
purchase, redeem or otherwise retire Capital Stock or Subordinated
Indebtedness as described in clause (2) or (3) of the next succeeding
paragraph), in each case, other than Net Cash Proceeds received from
the issuance or sale of Qualified Capital Stock or options, warrants
or rights to purchase Qualified Capital Stock in or otherwise
received in connection with, the Refinancing; plus
(c) the aggregate Net Cash Proceeds received after October 7, 1997 by
Bally, other than from any of its Subsidiaries, upon the exercise of
any options, warrants or rights to purchase Qualified Capital Stock
of Bally; plus
(d) the aggregate Net Cash Proceeds received after October 7, 1997 by
Bally from the conversion or exchange, if any, of debt securities or
Redeemable Capital Stock of Bally or its Subsidiaries into or for
Qualified Capital Stock of Bally plus, to the extent those debt
securities or Redeemable Capital Stock were issued after October 7,
1997, the aggregate of Net Cash Proceeds from their original
issuance; plus
(e) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment made after October 7, 1997, an
amount equal to the lesser of the return of capital with respect to
that Investment and the initial amount of that Investment, in either
case, less the cost of the disposition of that Investment.
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So long as no Default exists, the preceding provisions will not prohibit
the following Permitted Payments:
(1) the payment of any dividend within 60 days after the date of declaration;
(2) the redemption, repurchase, retirement, or other acquisition of any shares
of any class of Capital Stock of Bally in exchange for, or out of the Net
Cash Proceeds of a substantially concurrent sale, other than to a
Subsidiary, of other shares of Qualified Capital Stock of Bally; provided
that the Net Cash Proceeds from the issuance of Qualified Capital Stock
will, to the extent used, be excluded from clause (3)(b) of the preceding
paragraph;
(3) the repurchase, redemption, defeasance, retirement or acquisition for
value or payment of principal of any Subordinated Indebtedness or
Redeemable Capital Stock in exchange for, or in an amount not in excess of
the Net Cash Proceeds of, a substantially concurrent issuance and sale for
cash, other than to any Subsidiary, of any Qualified Capital Stock of
Bally, provided that the Net Cash Proceeds from the issuance of the shares
of Qualified Capital Stock are, to the extent so used, excluded from
clause (3)(b) of the preceding paragraph;
(4) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Subordinated
Indebtedness, other than Redeemable Capital Stock (a "refinancing"),
through the substantially concurrent issuance of new Subordinated
Indebtedness of Bally, provided that any such new Subordinated
Indebtedness
(a) shall be in a principal amount that is not greater than the principal
amount so refinanced, plus the lesser of
(i) the stated amount of any premium or other payment required to be
paid to complete a refinancing, or
(ii) the amount of premium or other payment actually paid at the time
of refinancing the Indebtedness, plus, in either case, the
amount of expenses Bally incurred in connection with the
refinancing;
(b) has an Average Life to Stated Maturity greater than the remaining
Average Life to Stated Maturity of Series D notes;
(c) has a Stated Maturity for its final scheduled principal payment later
than the Stated Maturity for the final scheduled principal payment of
the Series D notes; and
(d) is expressly subordinated in right of payment to the Series D notes
at least to the same extent as the Subordinated Indebtedness to be
refinanced;
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(5) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of any Redeemable Capital Stock through
the substantially concurrent issuance of new Redeemable Capital Stock of
Bally, provided that any new Redeemable Capital Stock
(a) will have an aggregate liquidation preference that does not exceed
the aggregate liquidation preference of the amount being refinanced;
(b) has an Average Life to Stated Maturity greater than the remaining
Average Life to Stated Maturity of the Series D notes; and
(c) has a Stated Maturity later than the Stated Maturity for the final
scheduled principal payment of the Series D notes;
(6) the repurchase of shares of, or options or warrants to purchase shares of,
common stock of Bally or any of its Subsidiaries from employees, former
employees, directors or former directors of Bally or any of its
Subsidiaries (or permitted transferees of such employees, former
employees, directors or former directors), pursuant to the terms of the
agreements (including employment agreements) or plans (or amendments
thereto) approved by the board of directors of Bally under which those
individuals purchase or sell or are granted the option to purchase or
sell, shares of common stock; and
(7) the repurchase, redemption, defeasance, retirement or acquisition for
value of the 13% Notes on or prior to their scheduled maturity.
In addition, if any Series B notes are outstanding, the foregoing covenants
will not restrict the ability of any Subsidiary to (1) pay dividends or make any
other distribution on its Capital Stock, (2) pay any Indebtedness owed to Bally
or any other Subsidiary, (3) make any Investment in Bally or any other
Subsidiary, or (4) transfer any of its properties or assets to Bally or any
other Subsidiary, to the extent these restrictions would violate the terms of
the indenture governing the Series B notes.
Incurrence of Indebtedness. Bally will not incur any Indebtedness,
including Acquired Debt. However, Bally may incur Indebtedness, including
Acquired Debt, if the Consolidated Fixed Charge Coverage Ratio for the most
recently ended four full fiscal quarters for which financial statements are
available immediately preceding the date on which the additional Indebtedness
is incurred, taken as one period, would have been at least 2.0 to 1, determined
on a pro forma basis (including a pro forma application of the net proceeds
therefrom), as if:
(1) the additional Indebtedness had been incurred on the first day of the
four-quarter period;
(2) the incurrence, repayment or retirement of any other Indebtedness since
the first day of the four-quarter period had occurred on the first day of
the four-quarter period;
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(3) in the case of Acquired Debt, the related acquisition had taken place on
the first day of the four-quarter period; and
(4) any acquisition or disposition of any company or any business or any
assets out of the ordinary course of business since the first day of the
four-quarter period had been completed on the first day of the
four-quarter period.
Bally will not allow any of its Subsidiaries to incur any Indebtedness, except
for Permitted Subsidiary Indebtedness.
The preceding paragraph will not prohibit the incurrence of any Permitted
Indebtedness, as defined below:
(1) Not more than $70.0 million aggregate principal amount outstanding
under the revolving credit facility, minus any permanent reductions
of the amount outstanding under the revolving credit facility as a
result of the Limitation on Sale of Assets covenant of the Indenture;
(2) Indebtedness under the Securitization Facility in an aggregate amount
not to exceed which ever amount is greater, $160.0 million or 80% of
the net book value of the consolidated accounts receivable of Bally
and its Subsidiaries, calculated in accordance with GAAP;
(3) Indebtedness of Bally
(a) represented by the Series C notes and Senior D notes, or
(b) that is incurred and actually applied, in any amount, and in
whole or in part, to
(i) redeem all of the Series C notes and Series D notes
outstanding, or
(ii) effect a Legal Defeasance or a Covenant Defeasance;
(4) Indebtedness of Bally under the Series B notes or otherwise
outstanding on October 7, 1997 and listed on a schedule to the
indenture governing the Series B notes;
(5) Indebtedness of Bally owing to a Subsidiary and not transferring to
any other Person
(a) that is made pursuant to an intercompany note and is expressly
subordinated in right of payment to the Series C notes and
Series D notes, and
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(b) will not be due and payable upon an Event of Default until it is
cured, waived or rescinded;
(6) Interest Rate Agreements entered into in the ordinary course of
business as long as these obligations do not exceed the aggregate
principal amount of the Indebtedness then outstanding to which the
Interest Rate Agreements apply;
(7) Up to $25.0 million aggregate principal amount outstanding at any one
time of Capital Lease Obligations, Purchase Money Obligations or
other Indebtedness incurred or assumed in connection with the
acquisition, improvement or development of any real or personal
property, in each case incurred for the purpose of financing or
refinancing all or any part of the purchase price or cost of
construction or improvement of property used in the business of Bally
and any refinancings of such Indebtedness made in accordance with
paragraph (11) below; provided that the principal amount of any
Indebtedness permitted under this paragraph 7 was not, at the time of
incurrence, more than the cost of the acquired or constructed asset
or improvement that was financed;
(8) Indebtedness of Bally in respect of performance bonds, surety bonds
and replevin bonds provided by Bally in the ordinary course of
business;
(9) other Indebtedness of Bally that is not greater than $50.0 million in
the aggregate at any one time outstanding;
(10) Indebtedness arising from a bank or other financial institution
honoring a check, draft or other financial instrument drawn against
insufficient funds in the ordinary course of business, provided that
it is extinguished within four business days of its incurrence; and
(11) any renewals, extensions, substitutions, refundings, refinancings or
replacements of any Indebtedness described in paragraphs (4) and (5)
of this definition of "Permitted Indebtedness", including any
successive refinancings if:
(a) the borrower is Bally or, if not Bally, the same as the borrower
of the Indebtedness being refinanced,
(b) the aggregate principal amount of Indebtedness as of December
16, 1998 is not increased by more than the lesser of:
(i) the stated amount of any premium or other payment required
to be paid to complete a refinancing; or
(ii) the amount of premium or other payment actually paid at the
time of refinancing the Indebtedness, plus, in either case,
the amount of expenses of Bally incurred in connection with
the refinancing.
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(c) (i) in the case of any refinancing of Indebtedness that is
Subordinated Indebtedness, the new Indebtedness is made
subordinate to the Series C notes and Series D notes at
least to the same extent as the Indebtedness being
refinanced; and
(ii) in the case of Pari Passu Indebtedness or Subordinated
Indebtedness, as the case may be, the refinancing does not
reduce the Average Life to Stated Maturity or the Stated
Maturity of the Indebtedness.
No Senior Subordinated Debt. Bally will not incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that is subordinate
or junior in right of payment to any Indebtedness of Bally, unless the
Indebtedness is also pari passu with the Series C notes and Series D notes or
subordinate in right of payment to the Series C notes and Series D notes at
least to the same extent as the Series C notes and Series D notes are
subordinate in right of payment to the Senior Debt.
Liens. Neither Bally nor its Subsidiaries will create any Lien securing
any Pari Passu Indebtedness or Subordinated Indebtedness upon any property or
assets of Bally or any Subsidiary owned on the date of the Indenture or
acquired after the date of the Indenture, or any income or profits therefrom,
unless the Series C notes and Series D notes are directly secured equally and
ratably with, or in the case of Subordinated Indebtedness, senior to the
obligations or liability secured by the Lien, except for Liens:
(1) securing any Indebtedness pursuant to an transaction permitted under
"-- Consolidation, Merger, Sale of Assets" or securing Acquired Debt,
which were created prior to, and not in contemplation of, the
incurrence of the Pari Passu Indebtedness or Subordinated
Indebtedness,
(2) securing any Indebtedness incurred in any refinancing, renewal,
substitution or replacement of any Indebtedness described in
paragraph (1) above, so long as the Indebtedness does not increase by
an amount greater than the lesser of
(a) the stated amount of any premium or other payment required to be
paid in connection with the refinancing, plus Bally's expenses
incurred in the refinancing, or
(b) the amount of premium or other payment actually paid to
refinance the Indebtedness, plus Bally's expenses incurred in
the refinancing, or
(3) securing Indebtedness incurred to effect a defeasance of the Series B
notes or the Series C notes and Series D notes.
With regards to the exceptions in paragraphs (1) and (2) above, the Lien can
only extend to the assets that were subject to such Lien prior to the related
acquisition by Bally or its Subsidiaries.
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Dividend and Other Payment Restrictions Affecting Subsidiaries. Neither
Bally nor its Subsidiaries will create or permit to exist any consensual
encumbrance or restriction on the ability of any Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock;
(2) pay any indebtedness owed to Bally or any other Subsidiary;
(3) make any Investment in Bally or any other Subsidiary; or
(4) transfer any of its properties or assets to Bally or any other Subsidiary.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) any agreement in effect on October 7, 1997;
(2) with respect to a Subsidiary that was not a Subsidiary on October 7, 1997,
any agreement or otherwise in existence at the time the Person becomes a
Subsidiary and was not incurred in connection with or in contemplation of,
this Person becoming a Subsidiary,
(3) customary non-assignment or subletting provisions in leases, licenses or
other contracts;
(4) restrictions entered into in the ordinary course of business contained in
any lease of any Subsidiary or any security agreement or mortgage securing
Indebtedness of any Subsidiary to the extent the restriction restricts the
transfer of property subject to the security agreement, mortgage or lease;
(5) any restriction contained in an agreement pursuant to which Permitted
Subsidiary Indebtedness is incurred; and
(6) any amendments, substitutions, restructurings, supplements, extensions,
renewals, refinancings, replacements of or other modifications to any
agreement described in paragraphs (1) through (5) above and this paragraph
(6), provided that these are no more restrictive in any material respect
than those contained in the agreements, as in effect on December 15, 1998.
Merger, Consolidation or Sale of Assets. Bally will not, in one or more
related transactions: (1) consolidate or merge with or into another Person, (2)
sell, assign, transfer, convey, lease or otherwise dispose of all or
substantially all of its properties or assets to another Person or (3) permit
any of its Subsidiaries to enter into any transaction or series of related
transactions if the transaction or series of related transactions, in the
aggregate, would result in a sale, assignment, conveyance, transfer, lease or
disposition of all or substantially all of the properties and assets of Bally
and its Subsidiaries on a Consolidated basis to another Person; unless:
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(1) either: (a) Bally is the surviving corporation; or (b) the Person formed
by or surviving the consolidation or merger (if other than Bally) or to
which the sale, assignment, transfer, conveyance or other disposition
shall have been made is a corporation organized and existing under the
laws of the United States, any state thereof or the District of Columbia;
(2) the Person formed by or surviving the consolidation or merger (if other
than Bally) or the Person to which the sale, assignment, transfer,
conveyance or other disposition shall have been made expressly assumes all
the obligations of Bally under the Series C notes and Series D notes and
the Indenture pursuant to agreements reasonably satisfactory to the
Trustee;
(3) immediately before and after the transaction no Default or Event of
Default exists;
(4) immediately before and after giving the transaction pro forma effect and
any related financing transactions as if the same had occurred on the
first day of the applicable four-quarter period, Bally or the Person
formed by or surviving the consolidation or merger (if other than Bally)
or the Person to which the sale, assignment, transfer, conveyance or other
disposition shall have been made, could incur at least $1.00 of additional
Indebtedness (other than Permitted Debt or Permitted Subsidiary Debt)
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "-- Incurrence
of Indebtedness;" and
(5) The trustee has received the required documentation, including an opinion
of counsel, regarding the transaction's compliance with the provisions of
the indenture. This "Merger, Consolidation or Sale of Assets" covenant
will not apply to a merger between Bally and any of its Subsidiaries,
provided Bally is the surviving corporation, or among Subsidiaries.
Transactions with Affiliates. Neither Bally nor its Subsidiaries will
enter into any transaction or series of related transactions with or for the
benefit of any Affiliate (each, an "Affiliate Transaction"), unless:
(1) it is no less favorable to Bally or the relevant Subsidiary than would
have been obtained in a comparable transaction by Bally or such Subsidiary
in arm's-length dealings with an unrelated Person;
(2) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate value in excess of $1.0 million, Bally
delivers to the Trustee an officers' certificate certifying that such
Affiliate Transaction complies with this covenant; and
(3) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate value in excess of $10.0 million, either
Bally delivers to the Trustee an opinion as to the fairness to Bally or
such Subsidiary of such Affiliate Transaction from a financial point of
view issued by an accounting, appraisal or investment banking firm of
national standing or the transaction or series of related transactions has
been approved by a majority of the Disinterested Directors of Bally.
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The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any transaction with an employee or director of Bally or any of its
Subsidiaries entered into by Bally or the Subsidiary in the ordinary
course of business;
(2) transactions between or among Bally and/or its Subsidiaries;
(3) any transaction related to the Securitization Facility;
(4) Restricted Payments that are permitted by the provisions of the Indenture
described above under the caption "--Restricted Payments" or Permitted
Payments.
(5) management or similar agreements between Bally or any Subsidiary and
Affiliates in which Bally or any Subsidiary has made an Investment; and
(6) contributions by Bally or any Subsidiary to a real estate investment trust
pursuant to paragraph (9) of the definition of Permitted Investments.
Preferred Stock of Subsidiaries. Except for the acquisition of all the
outstanding Preferred Stock of the Subsidiary, Bally will not permit:
(1) its Subsidiaries to issue any Preferred Stock, except for
(a) Preferred Stock issued to Bally or a Wholly Owned Subsidiary,
and
(b) Preferred Stock issued by a Person before that Person becomes a
Subsidiary, merges with or into a Subsidiary or has a Subsidiary
merge with or into them but not in contemplation of any of these
transactions,
(2) any Person, other than Bally or a Wholly Owned Subsidiary, to acquire
Preferred Stock of any Subsidiary from Bally or any Subsidiary.
Unrestricted Subsidiaries. Neither Bally nor its Subsidiaries will make,
an Investment in Unrestricted Subsidiaries, unless
(1) the aggregate amount of the Investments would not exceed the amount
of Restricted Payments then allowed, or
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(2) the Investment is a Permitted Investment.
Except for Permitted Investments, any Investment in an Unrestricted Subsidiary
must be made in accordance with the procedures described in "--Limitation on
Restricted Payments" and may be made in cash or property.
Reports. Whether or not required by the Commission, so long as any Series
C notes or Series D notes are outstanding, Bally will furnish to the holders of
Series C notes or Series D notes and file with the Trustee, within 15 days of
the time periods specified in the Commission's rules and regulations:
(1) all quarterly and annual reports on Forms 10-Q and 10-K; and
(2) all current reports on Form 8-K.
In addition, whether or not required by the Commission, Bally will file a
copy of all of the information and reports referred to in paragraphs (1) and
(2) above with the Commission for public availability within the time periods
specified in the Commission's rules and regulations. If the Commission will not
accept such filings, then, upon written request and payment of reasonable
copying and delivery expenses, Bally will provide those documents to any
prospective holder of Series C notes or Series D notes. Bally also agrees to
provide to any prospective purchaser or beneficial owner of Series C notes or
Series D notes, the information required by Rule 144A(d)(4) under the
Securities Act until the Series C notes have all been exchanged for Series D
notes or until the holders of Series C notes have disposed of the notes
pursuant to an effective registration statement under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on the Notes;
(2) default in payment when due of the principal of or premium, if any, on the
Series C notes or Series D notes;
(3) failure by Bally to perform or comply with any covenant or agreement
contained in the Indenture if the failure continues for 30 days after
written notice has been given to Bally by the Trustee or to Bally and the
Trustee by the holders of at least 25% in aggregate principal amount of
outstanding Series D notes;
(4) failure by Bally to comply with the provisions described in "--Certain
Covenants--Merger, Consolidation or Sale of Assets," or failure to make
the offer to purchase the Series C notes and Series D notes as described
in "--Repurchase at the Option of Holders--Change of Control" and
"--Certain Covenants--Asset Sales";
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(5) default under any agreement, indenture or instrument under which Bally or
any Subsidiary has outstanding Indebtedness of greater than $10.0 million,
individually or in the aggregate, if that default:
(a) is caused by a failure to pay principal of or premium, if any, or
interest on the Indebtedness prior to maturity; or
(b) results in the acceleration of the Indebtedness prior to its express
maturity;
(6) the rendering against Bally or any Subsidiary or any of their respective
properties of judgments, orders or decrees for the payment of money
aggregating more than $10.0 million (net of any insurance coverage
available), which was not discharged and which a creditor has begun
enforcement or which has not been stayed for a period of 60 consecutive
days; and
(7) certain events of bankruptcy or insolvency with respect to Bally or any of
its Significant Subsidiaries.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to Bally, all outstanding Series C notes
and Series D notes, along with accrued and unpaid interest, will become due and
payable immediately without further action or notice. If any other Event of
Default occurs and is continuing, the Trustee or the holders of at least 25% in
principal amount of the then outstanding Series C notes and Series D notes may
declare all the Series C notes and Series D notes to be due and payable
immediately.
The holders of a majority in aggregate principal amount of the Series C
notes and Series D notes then outstanding may by notice to the Trustee waive
any past Default or Event of Default and its consequences under the Indenture
except a continuing Default or Event of Default (1) in the payment of interest
on, or the principal of, the Series C notes or Series D notes or (2) of a
covenant or provision of the Indenture that cannot be modified or amended
without the consent of the holder of the note affected by the modification or
amendment.
After a declaration that all the Series C notes and Series D notes are due
and payable, but before the Trustee has obtained a judgment or decree for
payment of the money, the holders of a majority in aggregate principal amount
of the Series C notes and Series D notes then outstanding, may rescind the
declaration if:
(1) Bally has paid or deposited with the Trustee:
(a) all amounts advanced by the Trustee and the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and
counsel;
(b) all overdue interest on all Series C notes and Series D notes then
outstanding;
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(c) the principal of and premium, if any, on the Series C notes and
Series D notes then outstanding which are due and payable
notwithstanding this declaration; and
(d) to the extent it is lawful to do so, interest upon overdue interest;
and
(2) all Events of Default, other than the nonpayment of principal of the
Series C notes and Series D notes which have become due and payable
because of this declaration, have been cured or waived.
If a declaration is rescinded, it will have no effect on any later default or
any right which the Trustee or the holders of the Series C notes and Series D
notes can exercise.
If the Trustee becomes a creditor of Bally, the Trust Indenture Act limits
the rights of the Trustee to obtain payment of claims in certain cases or to
realize on certain property received by it in respect of those claims. If the
Trustee acquires a conflicting interest it must eliminate the conflict upon an
Event of Default or must resign.
Bally is required to deliver to the Trustee annually a written statement
regarding compliance with the Indenture. Within ten business days of any
Default or Event of Default, Bally is required to deliver to the Trustee a
statement specifying such Default or Event of Default.
DEFEASANCE OR COVENANT DEFEASANCE
Bally may discharge its obligations with respect to the outstanding Series
C notes and Series D notes ("Legal Defeasance") except for:
(1) the rights of holders of outstanding Series C notes and Series D notes to
receive payments in respect of the principal of, premium, if any, and
interest on the Series C notes and Series D notes when such payments are
due from the trust referred to below;
(2) Bally's obligations with respect to the Series C notes and Series D notes
concerning issuing temporary Series C notes and Series D notes,
registration of Series C notes and Series D notes, mutilated, destroyed,
lost or stolen Series C notes and Series D notes and the maintenance of an
office or agency for payment and money for security payments held in
trust;
(3) the rights, powers, trusts, duties and immunities of the Trustee, and
Bally's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, Bally may elect to have its obligations released with respect
to most covenants that are contained in the indenture ("Covenant Defeasance")
and thereafter any omission to comply with those covenants shall not constitute
a Default or Event of Default with
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respect to the Series C notes and Series D notes. In the event Covenant
Defeasance occurs, certain events (not including nonpayment, bankruptcy and
insolvency events) described under "Events of Default" will no longer
constitute an Event of Default with respect to the Series C notes and Series D
notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Bally must irrevocably deposit with the trustee, in trust, for the benefit
of the holders of the Series C notes and Series D notes, cash in U.S.
dollars, U.S. Government Obligations (as defined in the Indenture), or a
combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants or a
nationally recognized investment banking firm, to pay the principal of,
premium, if any, and interest on the outstanding Series C notes and Series
D notes on the stated maturity or on the applicable redemption date, after
October 15, 2002, if Bally delivers to the trustee an irrevocable notice
to redeem all the outstanding Series C notes and Series D notes on that
date;
(2) in the case of Legal Defeasance, Bally shall have delivered to the Trustee
an opinion of counsel confirming that (a) Bally has received from, or
there has been published by, the Internal Revenue Service a ruling or (b)
since the date of the Indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the holders of the
outstanding Series C notes and Series D notes will not recognize income,
gain or loss for federal income tax purposes as a result of the Legal
Defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
the Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, Bally shall have delivered to the
Trustee an opinion of counsel confirming that the holders of the
outstanding Series C notes and Series D notes will not recognize income,
gain or loss for federal income tax purposes as a result of the Covenant
Defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing
either: (a) on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such
deposit); or (b) or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance shall not cause the Trustee
to have a conflicting interest as defined in the Indenture and for
purposes of the Trust Indenture Act with respect to any securities of
Bally;
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(6) such Legal Defeasance or Covenant Defeasance will not result in a breach
or violation of, or constitute a default under the Indenture or any other
agreement or instrument to which Bally or any Significant Subsidiary is a
party or by which Bally or any Significant Subsidiary is bound if the
breach, violation or default would have a material adverse effect on Bally
and its Subsidiaries taken as a whole;
(7) such Legal Defeasance or Covenant Defeasance will not result in the trust
created by this deposit constituting an investment company within the
meaning of the Investment Company Act of 1940, unless the trust is
registered under that Act as exempt from that registration;
(8) Bally must have delivered to the Trustee an opinion of counsel to the
effect that after the 91st day following the deposit, the trust funds will
not be subject to avoidance under the Bankruptcy Law;
(9) Bally must deliver to the Trustee an officers' certificate stating that
the deposit was not made by Bally with the intent of preferring the
holders of Series C notes and Series D notes over the other creditors of
Bally with the intent of defeating, hindering, delaying or defrauding
creditors of Bally or others;
(10) no event or condition shall exist that would prevent Bally from making
payments of the principal of, premium, if any, and interest on the Series
C notes and Series D notes on the date of deposit or at any time ending on
the 91st day after the deposit; and
(11) Bally must deliver to the Trustee an officers' certificate and an opinion
of counsel, each stating that all conditions precedent relating to the
Legal Defeasance or the Covenant Defeasance have been complied with.
MODIFICATIONS AND AMENDMENTS
Without the consent of the holder affected, an amendment or waiver may
not:
(1) reduce the principal amount of Series C notes and Series D notes whose
holders must consent to a supplemental indenture or any waiver or
compliance with certain provisions of the Indenture;
(2) reduce the principal of or change the fixed maturity of any Series C note
or Series D note or alter the provisions with respect to the redemption of
the Series C notes and Series D notes, other than provisions relating to
the covenants described above under the caption "--Repurchase at the
Option of Holders";
(3) reduce the rate of or change the time for payment of interest on any
Series C note or Series D note;
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(4) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Series C notes and Series D notes,
except a rescission of acceleration of the Series C notes and Series D
notes by the holders of at least a majority in aggregate principal amount
of the Series C notes and Series D notes and a waiver of the payment
default that resulted from such acceleration;
(5) make any Series C note or Series D note payable in money other than that
stated in the notes;
(6) impair the right to institute suit for the enforcement of any payment
after the fixed maturity of the Series C note or Series D note, or after
the redemption date, if appropriate;
(7) amend, change or modify the obligation of Bally to make and complete an
offer to purchase the Series C notes and Series D notes upon an Asset
Sale;
(8) amend, change or modify the obligation of Bally to make and complete an
offer to purchase the Series C notes and Series D notes upon a Change of
Control;
(9) make any change in the provisions of the Indenture relating to
supplemental indentures or relating to waivers of past Defaults or waivers
of certain covenants, except to increase the percentage of outstanding
Series C notes and Series D notes required for these consents and waivers;
(10) except as described under "--Consolidation, Merger or Sale of Assets,"
consent to the assignment or transfer by Bally of any of its rights and
obligations under the Indenture; and
(11) amend or modify any of the subordination and other ranking provisions of
the Indenture in any manner adverse to the holders of the Series C notes
and Series D notes.
Notwithstanding the preceding, without the consent of any holder of Series
C notes or Series D notes, Bally and the Trustee may modify or amend the
Indenture:
(1) to cure any ambiguity, defect or inconsistency that does not adversely
affect the legal rights under the Indenture of any holder of Series C
notes or Series D notes;
(2) to provide for the assumption of Bally's obligations to holders of Series
C notes or Series D notes in the case of a merger or consolidation or sale
of all or substantially all of Bally's assets;
(3) to comply with requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act.
(4) to add covenants of Bally for the benefit of the holders of the Series C
notes and Series D notes or take away any right or power of Bally under
the Indenture;
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(5) to evidence and accept the appointment of a successor Trustee; or
(6) to give security for the payment and performance of Bally's obligations
under the Indenture.
The holders of a majority in aggregate principal amount of the Series C
notes and Series D notes outstanding may waive compliance with certain
restrictive covenants and provisions of the Indenture.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and be of no further effect when:
(1) either:
(a) all Series C notes and Series D notes issued and outstanding
have been delivered to the Trustee for cancellation, or
(b) Bally has irrevocably deposited with the Trustee as trust funds
in trust an amount sufficient to pay and discharge the entire
amount owing on all Series C notes and Series D notes not
delivered to the Trustee for cancellation and those notes
(i) have become due and payable,
(ii) will become due and payable at their Stated Maturity within
one year, or
(iii) are to be called for redemption within one year,
(2) Bally has paid all other sums payable under the Indenture, and
(3) Bally has delivered to the Trustee an officers' certificate and an
opinion of independent counsel that
(a) all conditions of the Indenture relating to the satisfaction and
discharge of the Indenture have been satisfied, and
(b) the satisfaction and discharge will not breach or constitute a
default under, the Indenture or any other material agreement of
Bally or any Subsidiary.
GOVERNING LAW
The Indenture and the Series C notes and Series D notes will be governed
by, and construed in accordance with, the laws of the State of New York.
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CONCERNING THE TRUSTEE
If the Trustee becomes a creditor of Bally, the Indenture limits its right
to obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. The Trustee
will be permitted to engage in other transactions. However, if it acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding
Series C notes and Series D notes will have the right to direct the time,
method and place of conducting any proceeding for exercising any remedy
available to the Trustee, subject to certain exceptions. The Indenture provides
that in case an Event of Default shall occur and be continuing, the Trustee
will be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to such provisions, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request of any holder of Series C notes and Series D
notes, unless that holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means Indebtedness of a Person:
(1) existing at the time that Person becomes a Subsidiary or merges with
Bally or any Subsidiary, or
(2) assumed in connection with the acquisition of assets from that
Person.
However, Indebtedness incurred in connection with, or in contemplation of, a
Person becoming a Subsidiary or the acquisition of assets will not be Acquired
Debt. Acquired Debt is incurred on the date of the related acquisition of
assets or the date the acquired Person becomes a Subsidiary.
"Adjusted Consolidated Interest Expense" of any Person means, for any
period, the sum of:
(1) the interest expense of the Person and its Consolidated Subsidiaries,
not including deferred financing fees and any premiums or penalties
paid in connection with redeeming or retiring any Indebtedness prior
to its stated maturity for the period, on a Consolidated basis,
including,
(a) amortization of debt discount,
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(b) the net cost under interest rate contracts, including
amortization of discounts,
(c) the interest portion of any deferred payment obligation, and
(d) accrued interest, plus
(2) the interest component of the Capital Lease Obligations paid, accrued
and/or scheduled to be paid or accrued by the Person during the
period, plus
(3) all capitalized interest of such Person and its Consolidated
Subsidiaries,
in each case as determined in accordance with GAAP consistently applied.
"Affiliate" means, with respect to any specified Person:
(1) any other Person directly or indirectly controlling or controlled by
or under direct or indirect common control with the specified Person;
(2) any other Person that owns, directly or indirectly,
(a) 10% or more of the specified Person's Capital Stock, or, if the
Person is a real estate investment trust, 10% or more beneficial
interest,
(b) any officer or director of the specified Person or other Person,
or
(c) with respect to any natural Person, any person having a
relationship with such Person by blood, marriage or adoption not
more remote than first cousin; or
(3) any other Person 10% or more of the Voting Stock of which is
beneficially owned or held directly or indirectly by the specified
Person.
For the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person, directly or indirectly, through ownership of voting securities, by
contract or otherwise.
The terms "controlling" and "controlled" have the meanings implied by "control."
"Asset Sale" means any transfer, directly or indirectly, in one or a
series of related transactions, of:
(1) any Capital Stock of any Subsidiary;
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(2) all or substantially all of the properties and assets of any division
or line of business of Bally or its Subsidiaries; or
(3) any other properties or assets of Bally or any Subsidiary, other than
in the ordinary course of business.
However, Asset Sale does not include any transfer of properties and assets:
(1) governed by the provisions described under "--Consolidation, Merger
or Sale of Assets",
(2) by any Subsidiary to Bally or any Wholly Owned Subsidiary in
accordance with the terms of the Indenture,
(3) of obsolete equipment or other obsolete assets in the ordinary course
of business,
(4) that constitutes the making of a Permitted Investment (other than
pursuant to paragraph (5) of the definition of "Permitted
Investment," which refers to Investments in connection with an Asset
Sale),
(5) the Fair Market Value of which in the aggregate does not exceed $1.0
million in any transaction or series of related transactions,
(6) sales of accounts receivable and other transactions among Bally and
its Subsidiaries pursuant to the Securitization Facility, or
(7) investments by Bally which comply with the terms of paragraph (9) of
the definition of "Permitted Investments," referring to one-time
contributions of real property.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing:
(1) the sum of the products of
(a) the number of years from the date of determination to the date
or dates of each successive scheduled principal payment of the
Indebtedness multiplied by
(b) the amount of each principal payment; by
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(2) the sum of all the principal payments.
"B Indenture" means the indenture dated October 7, 1997 between Bally and
the Trustee providing for the issuance of the Series B notes in the aggregate
principal amount of $225.0 million.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding up, liquidation, reorganization
or relief of debtors or any amendment to, succession to or change in any such
law.
"Banks" means the lenders under the Revolving Credit Facility.
"Capital Lease Obligation" of any Person means any obligation of the
Person and its Subsidiaries on a Consolidated basis under any capital lease of
real or personal property recorded as a capitalized lease obligation in
accordance with GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents, however
designated, of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests, whether general or limited; and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or
distributions of assets of, the issuing Person.
"Cash Equivalents" means:
(1) Temporary Cash Investments;
(2) securities received by Bally or any Subsidiary from the transferee in
an Asset Sale that are promptly converted by Bally or the Subsidiary
into cash;
(3) the assumption of Indebtedness or other obligations or liabilities of
Bally or any Subsidiary in connection with an Asset Sale; and
(4) in connection with an Asset Sale to a Person where the assets
transferred are included in a business which will be a party to the
Franchise Program, the net present value of payments by that Person
under the Franchise Program.
"Change of Control" means the happening of any of the following events:
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(1) any "person" or "group" is or becomes the "beneficial owner",
directly or indirectly, of more than a majority of the total
outstanding Voting Stock of Bally;
(a) the terms "person" or "group" are used as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act.
(b) the term "beneficial owner" is used as defined in Rules 13d-3
and 13d-5 under the Exchange Act, except that a Person shall be
deemed to have beneficial ownership of all shares that such
Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time.
(2) during any period of two consecutive years, individuals who at the
beginning of this period constituted the board of directors of Bally,
along with any new directors whose election or nomination was
approved by 66 2/3% of the directors then still in office who were
either directors at the beginning of this period or whose election or
nomination was previously so approved, cease for any reason to
constitute a majority of the board of directors then in office;
(3) Bally consolidates with or merges with or into any Person or conveys,
transfers or leases all or substantially all of its assets to any
Person, or any corporation consolidates with or merges into or with
Bally in any such event as a follow-up to a transaction in which the
outstanding Voting Stock of Bally is changed into or exchanged for
cash, securities or other property, other than
(a) any such transaction where the outstanding Voting Stock of Bally
is not changed or exchanged at all (except to the extent
necessary to reflect a change in the jurisdiction of
incorporation of Bally) or
(b) where the outstanding Voting Stock of Bally is changed into or
exchanged for
(i) Voting Stock of the surviving corporation which is not
Redeemable Capital Stock or
(ii) cash, securities and other property, other than Capital
Stock of the surviving corporation, in an amount which
could be paid by Bally as a Restricted Payment as described
under "--Certain Covenants--Limitation on Restricted
Payments" (and such amount will be treated as a Restricted
Payment subject to the provisions in the Indenture
described under "--Certain Covenants--Limitation on
Restricted Payments") and
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(c) where no "person" or "group" owns immediately after such
transaction, directly or indirectly, more than a majority of the
total outstanding Voting Stock of the surviving corporation; or
(4) Bally is liquidated or dissolved or adopts a plan of liquidation or
dissolution other than in a transaction which complies with the
provisions described under "--Consolidation, Merger or Sale of
Assets".
"Commission" means the United States Securities and Exchange Commission.
"Consolidated Fixed Charge Coverage Ratio" of any Person means, for any
period, the ratio of EBITDA to the sum of Adjusted Consolidated Interest
Expense for the period and cash dividends paid on any Preferred Stock of that
Person during that period; provided that
(1) in making such computation, the Adjusted Consolidated Interest
Expense attributable to interest on any Indebtedness will be computed
on a pro forma basis and
(a) where that Indebtedness was outstanding during the period and
bore a floating interest rate, interest will be computed as if
the rate in effect on the date of computation had been the
applicable rate for the entire period, and
(b) where that Indebtedness was not outstanding during the period
for which the computation is being made but which bears, at the
option of Bally, a fixed or floating rate of interest, will be
computed by applying either the fixed or floating rates, and
(2) in making that computation, the Adjusted Consolidated Interest
Expense of the Person attributable to interest on any Indebtedness
under a revolving credit facility computed on a pro forma basis will
be computed based upon the average daily balance of the Indebtedness
during the applicable period.
"Consolidated Income Tax Expense" of any Person means, for any period, the
provision for federal, state, local and foreign income taxes of that Person and
its Consolidated Subsidiaries for the period as determined in accordance with
GAAP.
"Consolidated Net Income (Loss)" of any Person means, for any period, the
Consolidated net income (or loss) of the Person and its Subsidiaries for the
period on a Consolidated basis as determined in accordance with GAAP, adjusted,
to the extent included in calculating net income (or loss), by excluding,
without duplication,
(1) all extraordinary gains or losses (exclusive of all fees and expenses
relating to the gain or loss),
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(2) the portion of net income (or loss) of the Person and its
Subsidiaries on a Consolidated basis allocable to minority interests
in unconsolidated Persons to the extent that cash dividends or
distributions have not actually been received by the Person or one of
its Subsidiaries,
(3) net income (or loss) of any Person combined with the Person or any of
its Subsidiaries on a "pooling of interests" basis attributable to
any period prior to the date of combination,
(4) any gain or loss, net of taxes, realized upon the termination of any
employee pension benefit plan,
(5) net gains (or losses) (except for all fees and expenses relating to
net gains or losses) in respect of dispositions of assets other than
in the ordinary course of business,
(6) the net income of any Subsidiary to the extent that the declaration
of dividends or similar distributions by that Subsidiary of that
income is not at the time permitted, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to that Subsidiary or its stockholders,
(7) any gain arising from the acquisition of any securities, or the
extinguishment, under GAAP, of any Indebtedness of such Person,
(8) transaction costs charged in connection with the Refinancing, or
(9) amortization of intangible assets of the Person and its Subsidiaries
on a consolidated basis under GAAP.
"Consolidated Non-Cash Charges" of any Person means, for any period, the
aggregate depreciation, amortization and other non-cash charges of the Person
and its Subsidiaries on a Consolidated basis for the period, as determined in
accordance with GAAP. However, Consolidated Non-Cash Charges does not include
any non-cash charge which requires an accrual or reserve for cash charges for
any future period.
"Consolidated Tangible Assets" means consolidated total assets of Bally
and its Subsidiaries as reported in Bally's Consolidated balance sheet from
time to time as required by "--Provision of Financial Statements" after making
the following adjustments
(1) subtract any asset which is treated as an intangible asset in
conformity with GAAP, including leasehold rights, franchise rights,
non-compete agreements, goodwill, unamortized debt discounts,
patents, patent applications, trademarks, trade names, copyrights and
licenses, and
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(2) subtract any deferred charges determined in conformity with GAAP,
including deferred finance charges and deferred membership
origination costs, and
(3) add any treasury stock.
"Consolidation" means, with respect to any Person, the consolidation of
the accounts of the Person and each of its Subsidiaries if and to the extent
these accounts would normally be consolidated with those of the Person, all in
accordance with GAAP. The term "Consolidated" will have a similar meaning.
"Credit Card Program Guarantee" means Bally's obligation to remit funds in
excess of the sum of
(1) $25.0 million plus
(2) a reserve of up to 25% of the amount owed to Bally by a member,
which becomes an obligation due to the credit card issuer by
such member, pursuant to Bally's Credit Card Program Agreement
dated December 21, 1995, as that agreement may be amended,
renewed, extended, substituted, refinanced, restructured,
replaced, supplemented, or otherwise modified from time to time.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Debt" means
(1) all senior debt under the revolving credit facility and the
Securitization Facility, and
(2) any other senior debt which at the time of determination,
(a) has an aggregate principal amount outstanding of at least $15
million and
(b) is specifically designated as "Designated Senior Indebtedness"
by Bally.
"Disinterested Director" means, a member of the board of directors of
Bally who does not have any material direct or indirect financial interest in
or with respect to a transaction or series of related transactions.
"EBITDA" means the sum of Consolidated Net Income, Adjusted Consolidated
Interest Expense, Consolidated Income Tax Expense and Consolidated Non-Cash
Charges deducted in computing Consolidated Net Income of Bally and its
Subsidiaries on a Consolidated basis, all determined in accordance with GAAP
consistently applied.
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"Fair Market Value" means the sale value that would be obtained in an
arm's-length transaction between an informed and willing seller under no
compulsion to sell and an informed and willing buyer under no compulsion to
buy. Fair Market Value will be determined by the board of directors of Bally
acting in good faith and will be evidenced by a resolution of the board of
directors.
"Franchise Program" means the program under which Bally and/or its
Subsidiaries grant franchises to third parties. These franchisees are required
to, among other things, pay fees to Bally and/or its Subsidiaries, and have the
right to receive training from Bally or its Subsidiaries or sell memberships to
use facilities of the franchisee and Bally or its Subsidiaries. The Franchise
Program may include the conversion of facilities owned by Bally or its
Subsidiaries to franchise facilities and includes such a program as it may be
amended, renewed, extended, substituted, restructured, replaced, supplemented
or otherwise modified from time to time.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied,
which were in effect on October 7, 1997.
"Guaranteed Debt" of any Person means all Indebtedness of any other Person
guaranteed directly or indirectly in any manner by such Person, or in effect
guaranteed directly or indirectly by such Person through an agreement
(1) to pay or purchase the Indebtedness or to advance or supply funds for
the payment or purchase of the Indebtedness,
(2) to purchase, sell or lease (as lessee or lessor) property, or to
purchase or sell services, primarily for the purpose of enabling the
debtor to make payment of the Indebtedness or to assure the holder of
the Indebtedness against loss,
(3) to supply funds to, or in any other manner invest in, the debtor,
including any agreement to pay for property or services without
requiring that the property be received or the services be rendered,
(4) to maintain working capital or equity capital of the debtor, or
otherwise to maintain the net worth, solvency or other financial
condition of the debtor, or
(5) otherwise to assure a creditor against loss.
However, "guarantee" does not include endorsements for collection or deposit in
the ordinary course of business or guarantees of operating leases.
"Indebtedness" means, with respect to any Person
(1) all obligations of the Person for borrowed money or for the deferred
purchase price of property or services,
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(a) excluding any trade payables and other accrued current
liabilities arising in the ordinary course of business, but
(b) including all obligations, contingent or otherwise, of the
Person in connection with any letters of credit issued
(i) under letter of credit facilities,
(ii) under acceptance facilities or other similar facilities,
and
(iii) in connection with any agreement to purchase, redeem,
exchange, convert or otherwise acquire for value any
Capital Stock of such Person, or any warrants, rights or
options to acquire such Capital Stock,
(2) all obligations of the Person evidenced by bonds, notes, debentures
or other similar instruments,
(3) all obligations created or arising under any conditional sale or
other title retention agreement with respect to property acquired by
the Person (even if the rights and remedies of the seller or lender
under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade payables
arising in the ordinary course of business,
(4) all obligations under Interest Rate Agreements of the Person,
(5) all Capital Lease Obligations of the Person,
(6) all Indebtedness referred to in paragraphs (1) through (5) above of
other Persons and all dividends of other Persons, if the payment of
the Indebtedness is secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be
secured by) any Lien, upon or with respect to property, including
accounts and contract rights, owned by such Person, even though such
Person has not assumed or become liable for the payment of such
Indebtedness,
(7) all Guaranteed Debt of the Person,
(8) all Redeemable Capital Stock issued by such Person valued at the
greater of its voluntary or involuntary maximum fixed repurchase
price plus accrued and unpaid dividends,
(9) the Credit Card Program Guarantee,
(10) financial obligations incurred by a real estate investment trust in
which Bally or any Subsidiary has invested pursuant to paragraph (9)
of the definition of "Permitted Investments" and as to which, in the
event that Bally controls such trust, any of Bally or any Subsidiary
is directly or indirectly liable, and
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(11) any amendment, supplement, modification, deferral, renewal,
extension, refunding or refinancing of any liability which
constitutes Indebtedness of the types referred to in paragraphs (1)
through (9) above.
As used in this definition of Indebtedness, the "maximum fixed repurchase
price" of any Redeemable Capital Stock which does not have a fixed repurchase
price will be calculated in accordance with the terms of such Redeemable
Capital Stock as if the repurchase occurred on the date on which Indebtedness
will be determined under the Indenture. If such price is based upon the Fair
Market Value of such Redeemable Capital Stock, the Fair Market Value will be
determined in good faith by the board of directors of the issuer of such
Redeemable Capital Stock.
"Interest Rate Agreements" means any interest rate protection agreement,
including interest rate swaps, caps, floors, collars and other types of
interest rate hedging agreements.
"Investment" means:
(1) any advance, loan, guarantee or other extension of credit or capital
contribution;
(2) any purchase, acquisition or ownership of any Capital Stock, bonds,
notes, debentures or other securities issued or owned by any other
Person; and
(3) all other items that would be classified as investments on a balance
sheet prepared in accordance with GAAP.
However, the ownership of any Capital Stock, bonds, notes, debentures or
other securities obtained without making any advance, loan, payment, extension
of credit or capital contribution is not an Investment.
"Issue Date" means the date the Series C notes and Series D notes are
originally issued under the Indenture.
"Lien" means any mortgage or deed of trust, charge, pledge, statutory or
other lien, privilege, security interest, assignment, deposit, arrangement,
easement, hypothecation, claim, preference, priority or other encumbrance upon
or with respect to any property of any kind. A Lien includes any conditional
sale, capital lease or other title retention agreement, any leases and any
agreement to give any security interest.
"Maturity", when used with respect to the Series C notes and Series D
notes means the date the principal of the Series C notes and Series D notes
becomes due and payable as provided in the Series C notes and Series D notes or
in the Indenture, including:
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(1) Stated Maturity,
(2) the Change of Control Payment Date,
(3) the redemption date, and
(4) any declaration of acceleration.
"Net Cash Proceeds" means
(1) with respect to all Asset Sales, the proceeds from any Asset Sale in
the form of cash or Temporary Cash Investments, net of:
(a) brokerage commissions and other reasonable fees and expenses
related to the Asset Sale, including fees and expenses of
counsel and investment bankers,
(b) provisions for all taxes payable as a result of the Asset Sale,
(c) payments made to satisfy any Indebtedness that is secured by the
assets which are the subject of the Asset Sale,
(d) amounts required to be paid to any Person owning a beneficial
interest in the assets subject to the Asset Sale, other than
Bally or any Subsidiary,
(e) appropriate amounts to be provided by Bally or any Subsidiary,
as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by Bally or any
Subsidiary, as the case may be, after the Asset Sale.
(2) with respect to any issuance or sale of Capital Stock or options,
warrants or rights to purchase Capital Stock, or debt securities or
Capital Stock that have been converted into or exchanged for Capital
Stock as referred to under "-- Certain Covenants--Limitation on
Restricted Payments", the proceeds from the issuance or sale in the
form of cash or Temporary Cash Investments, net of attorneys' fees,
accountants' fees and brokerage, consultation, underwriting and other
fees and expenses actually incurred in connection with the issuance
or sale and net of associated taxes paid or payable.
"Pari Passu Indebtedness" means any Indebtedness that is equal in right of
payment to the Series C notes and Series D notes, including the Series B notes.
"Permitted Investment" means:
(1) Investments in any Subsidiary or any Person which, as a result of the
Investment,
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(a) becomes a Subsidiary, or
(b) is merged or consolidated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, Bally
or any Subsidiary;
(2) Indebtedness of Bally described under paragraph (5) of the definition
of "Permitted Indebtedness";
(3) Investments in any of the Series B notes, Series C notes or Series D
notes;
(4) Temporary Cash Investments;
(5) Investments acquired by Bally or any Subsidiary in connection with an
Asset Sale permitted under "--Certain Covenants--Limitation on Sale
of Assets" to the extent the Investments are non-cash proceeds as
permitted under that covenant;
(6) Investments in existence on October 7, 1997;
(7) Investments in the aggregate amount of $5.0 million to purchase
Capital Stock of any Subsidiary;
(8) any advance, loan, guarantee or other extension of credit to any
Person who purchases or acquires assets of Bally or any Subsidiaries
which are to be included in a business which will be or is a party to
the Franchise Program, which amount cannot be more than the purchase
or acquisition price of such assets;
(9) a one-time contribution of real property independently valued at not
more than $10.0 million to a real estate investment trust which is an
Affiliate of Bally and additional contributions or the non-cash
component of sales in a situation where less than 75% of the
consideration was received in either cash or Cash Equivalents, or
both, to such trust of real property independently valued, which in
the aggregate at the time of each additional contribution, together
with all previous additional contributions, do not have a value in
excess of 3% of Bally's Consolidated Tangible Assets as of the end of
the next immediately preceding fiscal year; and
(10) up to $25.0 million aggregate amount outstanding at any one time in
any other Investments in joint ventures, partnerships, real estate
investment trusts or other Persons reasonably related or
complementary to the business of Bally on December 16, 1998.
In connection with any assets or property contributed or transferred to any
Person as an Investment, the property and assets will be valued at the Fair
Market Value, as determined by the board of directors of Bally, at the time of
Investment.
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"Permitted Subsidiary Indebtedness" means:
(1) Indebtedness of a Subsidiary owing to Bally or another Subsidiary
made pursuant to an intercompany note and that, upon an Event of
Default, will be immediately due and payable. However,
(a) any disposition, pledge or transfer of any such Indebtedness to
a Person, other than Bally or a Subsidiary, will be an
incurrence of such Indebtedness by the obligor outside the
definition of "Permitted Subsidiary Indebtedness" pursuant to
this paragraph (1), and
(b) any transaction pursuant to which any Subsidiary ceases to be a
Subsidiary will be deemed to be the incurrence of Indebtedness
by such Subsidiary that is not within the definition of
"Permitted Subsidiary Indebtedness" pursuant to this paragraph
(1);
(2) Indebtedness of a Subsidiary which would be permitted by paragraphs
(4), (6), (7), (8), (9), (10) or (11) of the definition of "Permitted
Indebtedness" if incurred by Bally;
(3) Acquired Debt of a Subsidiary which would be permitted to be incurred
by Bally if such Acquired Debt were being incurred by Bally;
(4) Indebtedness of a Subsidiary under the Securitization Facility;
(5) guarantees of Bally's Senior Debt; and
(6) guarantees of any Affiliate's Indebtedness if the Investment in the
Affiliate complies with the limitation on Restricted Payments
covenant of the Indenture or constitutes a Permitted Investment.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision.
"Preferred Stock" with respect to any Person means, any Capital Stock of
any class or classes which is preferred as to the payment of dividends or
distributions, or as to the distribution of assets upon any voluntary or
involuntary liquidation or dissolution of such Person, over the Capital Stock
of any other class in such Person.
"Public Equity Offering" means an underwritten public offering of Capital
Stock, other than Redeemable Capital Stock, pursuant to a registration
statement that has been declared effective by the Commission. However, any
public offering on a registration statement on Form S-8 or any successor form
or otherwise relating to equity securities issuable under any employee benefit
plan of Bally will not be a Public Equity Offering.
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"Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to the business of Bally and its Subsidiaries and any additions
and accessions which are purchased at any time after the Series C notes and
Series D notes are issued so long as:
(1) the security agreement or conditional sales or other title retention
contract pursuant to which the Lien on such assets is created
(collectively, a "Purchase Money Security Agreement") will be entered
into within 120 days after the purchase or substantial completion of
the construction of such assets and will at all times be confined
solely to the assets so purchased or acquired, any additions and
accessions and any proceeds,
(2) the aggregate principal amount of the outstanding Indebtedness
secured by the Purchase Money Security Agreement will not be
increased, except in connection with the purchase of additions and
accession and except in respect of fees and other obligations in
respect of the Indebtedness, and
(3) (a) the aggregate outstanding principal amount of Indebtedness
secured by the Purchase Money Security Agreement (determined on
a per asset basis in the case of any additions and accessions)
will not, at the time the Purchase Money Security Agreement is
entered into, exceed 100% of the purchase price to Bally and its
Subsidiaries of the assets subject thereto, or
(b) the Indebtedness secured will be with recourse solely to the
assets so purchased or acquired, any additions and accessions
and any proceeds.
"Qualified Capital Stock" means any and all Capital Stock of a Person
other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any Capital Stock that, either by its
terms or by the terms of any security into which it is convertible or
exchangeable or otherwise,
(i) is, or upon the happening of any event or passage of time would be,
required to be redeemed prior to any Stated Maturity of the principal
of the Series C or Series D notes,
(ii) is redeemable at the option of the holder of the Capital Stock at any
time prior to any Stated Maturity, or
(iii) is convertible into or exchangeable for debt securities at any time
prior to any such Stated Maturity at the option of the holder.
"Refinancing" means
(1) the offering and sale of the Series B notes pursuant to the B
Indenture,
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(2) the modification of the Revolving Credit Facility, and
(3) the consummation of the tender offer by Bally for its 13% Notes.
"Revolving Credit Facility" means the third amended and restated Credit
Agreement dated as of June 26, 1995 among Bally, the Banks and The Chase
Manhattan Bank, as agent, as amended from time to time.
"Securitization Facility" means the asset-backed securities issued by the
H&T Master Trust on December 13, 1996 in the aggregate principal amount of
$160.0 million, including any amendment, renewal, extension, substitution,
refinancing, restructuring, replacement, supplement or other modification.
"Senior Debt" means the principal of, premium, if any, and interest on any
Indebtedness of Bally unless the instrument creating or evidencing the
Indebtedness expressly provides that the Indebtedness is not senior in right of
payment to the Series C notes and Series D notes. Senior Debt includes
Indebtedness under the Revolving Credit Facility and the Securitization
Facility, except if any refinancing, refunding or replacement of either is
expressly subordinate to any other Indebtedness of Bally.
Senior Debt does not include:
(1) the Series B notes, Series C notes and Series D notes;
(2) Indebtedness that by its express terms is subordinate or junior in
right of payment to any Indebtedness of Bally;
(3) Indebtedness which, when incurred and without respect to any election
under certain provisions of the Bankruptcy Law, is without recourse
to Bally;
(4) Redeemable Capital Stock;
(5) any liability for foreign, federal, state, local or other taxes owing
by Bally to the extent this liability constitutes Indebtedness;
(6) Indebtedness of Bally to a Subsidiary or any other Affiliate of Bally
or any of the Affiliate's subsidiaries, and
(7) any Indebtedness which is issued in violation of the Indenture.
"Significant Subsidiary" means any Subsidiary that would be a "Significant
Subsidiary" of Bally within the meaning of Rule 1-02 under Regulation S-X
promulgated by the Commission.
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"Stated Maturity" means the dates specified as the fixed date when the
principal of any Indebtedness or any installment of interest is due and
payable.
"Subordinated Indebtedness" means Indebtedness of Bally which by its term
is expressly subordinated in right of payment to the Series C and Series D
notes.
"Subsidiary" means any Person with a majority of the equity ownership or
the Voting Stock of which is at the time owned, directly or indirectly, by
Bally or by one or more other Subsidiaries, or by Bally and one or more other
Subsidiaries. However, neither of the following will be a Subsidiary:
(a) any Unrestricted Subsidiary, and
(b) any real estate investment trust in which Bally or any Subsidiary has
invested pursuant to clause (9) of the definition of "Permitted
Investment".
"Temporary Cash Investments" means
(1) any evidence of Indebtedness,
(a) maturing one year or earlier after the date of acquisition,
(b) issued by the United States of America, or an instrumentality or
agency thereof, and
(c) guaranteed fully as to principal, premium, if any, and interest
by the United States of America;
(2) any certificate of deposit (or, with respect to non-U.S. banking
institutions, similar instruments)
(a) maturing one year or earlier after the date of the acquisition,
(b) issued by a commercial banking institution that is a member of
the Federal Reserve System or a commercial banking institution
organized and located in a country recognized by the United
States of America,
(c) that has combined capital and surplus and undivided profits of
not less than $500 million, or the foreign currency equivalent
thereof, and
(d) whose debt has a rating, at the time any investment is made,
(i) of at least "P-1" according to Moody's Investors Service,
Inc. ("Moody's") or any successor rating agency, or
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(ii) of at least "A-1" according to Standard & Poor's Rating
Group, a division of McGraw Hill, Inc. ("S&P");
(3) commercial paper, maturing one year or earlier after the date of
acquisition, issued by a corporation, other than an Affiliate or
Subsidiary of Bally, organized and existing under the laws of the
United States of America with a rating, at the time when any
Investment is made, of at least "P-1" according to Moody's or at
least "A-1" according to S&P;
(4) any money market deposit accounts or demand deposit accounts issued
or offered by a domestic commercial bank or a commercial banking
institution organized and located in a country recognized by the
United States of America,
(a) having capital and surplus in excess of $500 million, or the
foreign currency equivalent thereof; and
(b) whose short-term debt has a rating, at the time of investment,
of at least "P-1" according to Moody's or of at least "A-1"
according to S&P; and
(5) any other Investments, that at any one time do not exceed $100,000 in
the aggregate, issued or offered by any domestic commercial bank or
any commercial banking institution organized and located in a country
recognized by the United States of America.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended,
or any successor statute.
"13% Notes" means Bally's 13% Senior Subordinated Notes due in the year
2003.
"Unrestricted Subsidiary" means
(1) BTFCC, Inc.,
(2) any other Subsidiary of Bally that has been designated by the board
of directors of Bally as an Unrestricted Subsidiary, and
(3) any subsidiary of an Unrestricted Subsidiary.
The board of directors of Bally may designate any subsidiary of Bally,
including any newly acquired or newly formed subsidiary, to be an Unrestricted
Subsidiary if all of the following conditions apply:
(1) neither Bally nor any of its Subsidiaries provides credit support for
Indebtedness of the Unrestricted Subsidiary, including any
undertaking, agreement or instrument evidencing the Indebtedness,
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(2) such Unrestricted Subsidiary is not liable, directly or indirectly,
with respect to any Indebtedness other than Unrestricted Subsidiary
Indebtedness or the Revolving Credit Facility,
(3) any Investment by Bally in such Unrestricted Subsidiary made as a
result of designating such subsidiary an Unrestricted Subsidiary will
not violate the provisions described under "--Certain
Covenants--Limitation on Unrestricted Subsidiaries" and
(a) such Unrestricted Subsidiary is not party to any agreement,
contract, arrangement or understanding at the designation time
with Bally or any other subsidiary of Bally, unless the terms of
any the agreement, contract, arrangement or understanding are no
less favorable to Bally or such other subsidiary than those that
might be obtained at the time from Persons who are not
Affiliates of Bally or,
(b) in the event the condition described in subparagraph (a) is not
satisfied, the value of the agreement, contract, arrangement or
understanding to such Unrestricted Subsidiary will be considered
an Investment, and
(4) such Unrestricted Subsidiary does not own any Capital Stock in any
subsidiary of Bally which is not simultaneously being designated an
Unrestricted Subsidiary.
Any such designation by the board of directors of Bally will be evidenced to
the Trustee by the filing with the Trustee:
(1) a board resolution giving effect to such designation, and
(2) an officers' certificate certifying that such designation complies
with the foregoing conditions described in the definition
Any Investment by Bally in any Unrestricted Subsidiary will be deemed a
Restricted Payment on the date of designation in an amount equal to the greater
of
(a) the net book value of such Investment, or
(b) the Fair Market Value of such Investment as determined in good
faith by Bally's board of directors. The board of directors may
designate any Unrestricted Subsidiary as a Subsidiary, so long
as
(i) if such Unrestricted Subsidiary has any Indebtedness, that
immediately after giving effect to the designation, Bally
could incur $1.00 of additional Indebtedness pursuant to
the restrictions under "--Certain Covenants--Limitation on
Indebtedness", other
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than Permitted Indebtedness or Permitted Subsidiary
Indebtedness, and
(ii) all Indebtedness of such Subsidiary will be considered to be
incurred on the date the Unrestricted Subsidiary becomes a
Subsidiary.
"Unrestricted Subsidiary Indebtedness" means Indebtedness of any
Unrestricted Subsidiary
(1) that neither Bally nor any Subsidiary is directly or indirectly
liable, and
(2) upon the occurrence of a default with respect to the Indebtedness,
does not result in, or permit any holder of any Indebtedness of Bally
or any Subsidiary to declare a default on such Indebtedness of Bally
or any Subsidiary or cause the payment of the Indebtedness to be
accelerated or payable prior to its Stated Maturity.
"Voting Stock" means the class or classes of Capital Stock that allow the
stockholder, under ordinary circumstances, to have general voting power to
elect at least a majority of (1) the board of directors, (2) managers or (3)
trustees of a corporation, regardless of whether or not Capital Stock of any
other class or classes will have or might have voting power by reason of the
happening of any contingency.
"Wholly Owned Subsidiary" means a Subsidiary in which Bally or another
Wholly Owned Subsidiary owns all the Capital Stock, other than qualifying
shares, if any.
BOOK-ENTRY DELIVERY AND FORM
The Series C notes, which were offered and sold to qualified institutional
buyers (as defined under Rule 144A) ("QIBs") and were deposited with the
Trustee as custodian for DTC and registered in the name of Cede & Co. are
registered in book-entry form and are represented by one global note, in
definitive, fully registered form without interest coupons.
The Series C notes (1) originally purchased by or transferred to
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) and (7) under
the Securities Act) who are not QIBs, or (2) held by QIBs who elected to take
physical delivery of their certificates instead of holding their interest
through the global note (and which are then unable to trade through DTC)
(collectively referred to herein as the "Non-Global Purchasers"), were issued
in registered form without interest coupons ("Certificated Notes"). Upon the
transfer of Certificate Notes held by a Non-Global Purchaser to a QIB, those
Certificate Notes will, unless the transferee requests otherwise or the global
note has previously been exchanged in whole for Certificated Notes, be
exchanged for an interest in the global note.
90
<PAGE> 93
DTC has advised Bally as follows: DTC is a limited purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC holds securities for its participants and
facilitates the clearance and settlement of securities transactions between
participants through electronic computerized book-entry changes in accounts of
its participants, thereby eliminating the need for physical movement of
securities certificates. Participants include securities brokers and dealers,
banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Except as set forth below, it is expected that the Series D notes will be
issued in global form. Bally expects that pursuant to procedures established by
DTC (1) upon the issuance of the new global note, DTC or its custodian will
credit on its internal system portions of the new global note which will be
comprised of the corresponding respective principal amount of the old global
note to the respective accounts of persons who have accounts with such
depositary, and (2) ownership of the Series D notes will be shown on, and the
transfer of ownership thereof will be effected through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of persons other than participants).
Such accounts initially will be designated by the exchange agent and ownership
of beneficial interest in the new global note will be limited to persons who
have accounts with DTC ("participants") or persons who hold interests through
participants. QIBs may hold their interests in the new global note directly
through DTC if they are participants in such system, or indirectly through
organizations which are participants in such system.
So long as DTC or its nominee is the registered owner or holder of a new
global note, DTC or such nominee, as the case may be, will be considered the
sole record owner or holder of the Series D notes represented by the new global
note for all purposes under the Indenture and the Series D notes. No beneficial
owners of an interest in the new global note will be able to transfer that
interest except in accordance with DTC's applicable procedure in addition to
those provided for under the Indenture.
Payments of the principal of, premium, if any, and interest on the new
global note will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. None of Bally, the Trustee or any paying agent will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests in the new global
note or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Bally expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the new global note will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial ownership interests in the principal amount of the new
global note, as shown on the records of DTC or its nominee. Bally
91
<PAGE> 94
also expects that payments by participants to owners of beneficial interests in
the new global note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfer between participants in DTC will be effected in the ordinary way
in accordance with DTC rules. If a holder requires physical delivery of
Certificated Notes for any reason, including selling the Series D notes to
persons in states which require delivery of the Series D notes or pledging the
Series D notes, such holder must transfer its interest in the new global note,
in accordance with the normal procedures of DTC and the procedures set forth in
the Indenture.
DTC has advised Bally that neither DTC nor Cede & Co., DTC's partnership
nominee, will consent or vote with respect to the new global note. Under its
usual procedures, DTC mails an Omnibus Proxy to Bally as soon as possible after
the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting
rights to those direct participants to whose accounts the new global note is
credited on the record date, which are identified in a listing attached to the
Omnibus Proxy.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the new global note among participants of DTC, it is
under no obligation to perform these procedures, and these procedures may be
discontinued at any time. Neither Bally nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Interests in the new global note will be exchangeable or transferable, as
the case may be, for Certificated Notes if (1) DTC notifies Bally that it is
unwilling or unable to continue as depositary for the new global note, or DTC
ceases to be a "Clearing Agency" registered under the Exchange Act, and a
successor depositary is not appointed by Bally within 90 days, or (2) an Event
of Default has occurred and is continuing with respect to the Series D notes.
Upon the occurrence of any of the events described in the preceding sentence,
Bally will cause the appropriate Certificated Notes to be delivered.
YEAR 2000
The following information has been provided by DTC:
DTC's management is aware that some computer applications, systems, and
the like for processing data that are dependent upon calendar dates, including
dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its participants and other members of the financial
community that it has developed and is implementing a program so that its
systems, as they relate to the timely payment of distributions, including
principal and income payments, to securityholders, book-entry deliveries, and
settlement of trades within DTC, continue to function appropriately. This
program includes a technical assessment and a remediation plan, each of which
is complete. Additionally, DTC's plan includes a testing phase, which is
expected to be completed within appropriate time frames.
92
<PAGE> 95
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the financial community that it is contacting,
and will continue to contact, third party vendors from whom DTC acquires
services to (1) impress upon them the importance of such services being Year
2000 compliant; and (2) determine the extent of their efforts for Year 2000
testing and remediation of their services. In addition, DTC is in the process
of developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the financial community for informational purposes only and is not
intended to serve as a representation, warranty, or contract modification of
any kind.
93
<PAGE> 96
PLAN OF DISTRIBUTION
Each broker-dealer that receives Series D notes for its own account
through the exchange offer may be deemed to be a statutory underwriter, must
acknowledge that it acquired the Series B notes and Series C notes for its own
account as a result of market-making activities or other trading activities and
must agree that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of the Series D notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by broker-dealers in connection with resales of Series D notes received in
exchange for Series B notes and Series C notes if the Series B notes and Series
C notes were acquired by the broker-dealers for their own accounts as a result
of market-making or other trading activities. Subject to certain conditions,
Bally has agreed that this prospectus, as it may be amended or supplemented
from time to time, may be used by a broker-dealer in connection with the resale
of Series D notes received in exchange for Series B notes and Series C notes
through the exchange offer must notify Bally, or cause Bally to be notified, on
or prior to ________________, 1999, that it is a broker-dealer who must comply
with the prospectus delivery requirements. This notice may be given in the
space provided for that purpose in the letter of transmittal or may be
delivered to the exchange agent at one of the addresses set forth under "The
Exchange Offer -- The Exchange Agent; Assistance". Any broker-dealer who is an
"affiliate" of Bally must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
See "The Exchange Offer -- Resales of the New Notes".
Bally will not receive any cash proceeds form the exchange offer. Series D
notes received by broker-dealers for their own accounts in connection with the
exchange offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the Series D notes or a combination of such methods of resale, at
market prices prevailing at the time of resale, at prices related to such
prevailing market prices or at negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any Series D notes.
Any broker-dealer that resells Series D notes that were received by it for
its own account in connection with the exchange offer or any broker or dealer
that participates in a distribution of the Series D notes may be deemed to be
an "underwriter" within the meaning of the Securities Act, and any profit on
any such resale of Series D notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The letter of transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
94
<PAGE> 97
LEGAL MATTERS
The validity, authorization and issuance of the Series D notes offered by
this prospectus will be passed upon for Bally by Benesch, Friedlander, Coplan &
Aronoff LLP of Cleveland, Ohio. George N. Aronoff, a partner in Benesch,
Friedlander, Coplan & Aronoff LLP, owns 18,000 shares of Bally common
stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements (and schedule) included in our annual report on Form 10-K
for the year ended December 31, 1998, as set forth in their report, which is
incorporated in this prospectus by reference. Our consolidated financial
statements are incorporated by reference in reliance on their report, given
their authority as experts in accounting and auditing.
95
<PAGE> 98
===============================================================================
All tendered Series B or Series C notes, executed Letters of Transmittal
and other related documents should be directed to the exchange agent. Questions
and requests for assistance and requests for additional copies of the
prospectus, the letter of transmittal and other related documents should be
addressed to the Exchange Agent as follows:
By Hand, Registered or Certified Mail or Overnight Courier:
U.S. Bank Trust National Association
U.S. Bank Trust Center
180 East Fifth Street
St. Paul, MN 55101
Attention: Flora Gomez, Specialized Finance Department
By Facsimile:
(651) 244-1537
Attention: Flora Gomez, Specialized Finance Department
(Originals of all documents sent by facsimile should be sent promptly by
hand, registered or certified mail or overnight courier).
Confirm by telephone: (651) 244-5011
-----------------------------
TABLE OF CONTENTS
-----------------------------
Page
----
Prospectus Summary............................
Risk Factors..................................
The Exchange Offer............................
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Bally's Business..............................
Where You Can Find More Information...........
Description of Other Indebtedness.............
Description of Series D Notes ................
Plan of Distribution..........................
Legal Matters.................................
Experts.......................................
No dealer, salesperson or any other individual has been authorized to give
any information or to make any representations not contained in this prospectus
in connection with the offering covered by this Prospectus. If given or made,
such information and representations must not be relied upon as having been
authorized by the Company. This prospectus and the accompanying letter of
transmittal does not constitute an offer to sell or a solicitation of an offer
to buy the Series D notes in any jurisdiction where, or to any person to whom,
it is unlawful to make such offer or solicitation. Neither the delivery of this
prospectus or the accompanying letter of transmittal, or both together, nor any
exchange made hereunder shall, under any circumstances, create an implication
that there has not been any change in the facts set forth in this Prospectus or
in the affairs of the Company since the date hereof.
===============================================================================
===============================================================================
$300,000,000
[LOGO]
BALLY TOTAL FITNESS
HOLDING CORPORATION
9 7/8% CLASS D
SENIOR SUBORDINATED NOTES
DUE 2007
--------------------------
PROSPECTUS
--------------------------
Offer to Exchange Its 9 7/8% Series D Senior
Subordinated Notes Due 2007 Which Have
Been Registered Under the Securities Act for
Its Outstanding 9 % Series B Senior
Subordinated Notes Due 2007 and Its
Outstanding 9 7/8% Series C Senior
Subordinated Notes Due 2007.
___________, 1999
<PAGE> 99
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") permits
the indemnification of the directors and officers of Bally. Bally's By-laws
provide that it will indemnify the officers, directors, employees and agents of
Bally to the extent permitted by the DGCL.
Bally's Certificate provides for the indemnification of its directors
and officers, and persons who serve or served at the request of Bally as a
director, officer, employee or agent of another corporation, including service
with respect to employee benefit plans, against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
in amounts paid or to be paid in settlement) reasonably incurred with respect
to any action, suit or proceeding, whether civil, criminal, administrative or
investigative, provided, however, Bally shall indemnify any such person seeking
indemnification in connection with a proceeding initiated by such person only
if such proceeding was authorized by the Board. In the event a claim for
indemnification by any person has not been paid in full by Bally after written
request has been received by Bally, the claimant may at any time thereafter
bring suit against Bally to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. The right to indemnification conferred
in Bally's Certificate is a contract right and shall include the right to be
paid by Bally the expenses incurred in defending any such proceeding in advance
of its final disposition. Bally maintains insurance, at its expense, to protect
itself and any director, officer, employee or agent of Bally against any such
expense, liability or loss, whether or not Bally would have the power to
indemnify such person against such expense, liability or loss under state law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
*1.1 - Purchase Agreement dated December 9, 1998 among
Bally Total Fitness Holding Corporation and Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Jefferies & Company, Inc. (filed as
Exhibit 1.1 to Bally's annual report on Form 10-K for
the year ended December 31, 1998).
*4.1 - Indenture dated as of December 16, 1998 between
Bally Total Fitness Holding Corporation and U.S. Bank
Trust National Association, as Trustee, including the
form of Series C notes and form of Series D notes
(filed as Exhibit 4.9 to Bally's annual report on Form
10-K for the year ended December 31, 1998).
*4.2 - Registration Rights Agreement dated as of December 16,
1998 among Bally Total Fitness Holding Corporation and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Jefferies & Company, Inc.
(filed as Exhibit 4.10 to Bally's annual report on Form
10-K for the year ended December 31, 1998).
*4.3 - Senior Subordinated Note Specimen Certificate
(filed as Exhibit 4.9 to Bally's annual report on Form
10-K for the year ended December 31, 1997).
<PAGE> 100
5.1 - Opinion of Benesch, Friedlander, Coplan & Aronoff LLP.
12.1 - Computation of Ratio of Earnings to Fixed Charges.
23.1 - Consent of Ernst & Young LLP.
23.2 - Consent of Benesch, Friedlander, Coplan & Aronoff LLP
(contained in its Opinion filed as Exhibit 5.1
hereto).
24.1 - Powers of Attorney for the Company (set forth on the
signature page hereof).
25.1 - Statement of Eligibility of Trustee on Form T-1.
- -------------
* Incorporated herein by reference as indicated.
(b) Financial Statement Schedule
Incorporated by reference to Bally's annual report on Form 10-K
for the year ended December 31, 1998.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
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.
<PAGE> 101
The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the Prospectus pursuant
to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
<PAGE> 102
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM S-4 AND HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF ILLINOIS, ON MARCH 16, 1999.
BALLY TOTAL FITNESS
HOLDING CORPORATION
By: /s/ Lee S. Hillman
-------------------------------------
Lee S. Hillman
President and Chief Executive Officer
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>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Arthur M. Goldberg
- ----------------------------------- Chairman of the Board of Directors March 16, 1999
Arthur M. Goldberg
/s/ Lee S. Hillman
- ----------------------------------- President, Chief Executive Officer March 16, 1999
Lee S. Hillman and Director
/s/ John W. Dwyer
- ----------------------------------- Executive Vice President, Chief Financial March 16, 1999
John W. Dwyer Officer and Treasurer
/s/ Geoffrey M. Scheitlin
- ----------------------------------- Vice President and Controller March 16, 1999
Geoffrey M. Scheitlin
/s/ Aubrey C. Lewis
- ----------------------------------- Director March 16, 1999
Aubrey C. Lewis
/s/ J. Kenneth Looloian
- ----------------------------------- Director March 16, 1999
J. Kenneth Looloian
/s/ James F. McAnally, M.D.
- ----------------------------------- Director March 16, 1999
James F. McAnally, M.D.
/s/ Liza M. Walsh
- ----------------------------------- Director March 16, 1999
Liza M. Walsh
</TABLE>
<PAGE> 1
Exhibit 5.1
March 18, 1999
Board of Directors
Bally Total Fitness Holding Corporation
8700 West Bryn Mawr
Chicago, Illinois 60631
Re: Registration Statement on Form S-4
Exchange Offer Registration Statement
Gentlemen:
It is our understanding that Bally Total Fitness Holding Corporation, a
Delaware corporation (the "Company"), intends to file with the Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended, a
Registration Statement on Form S-4 (the "Registration Statement"), which
Registration Statement relates to a proposed public offering of up to
$300,000,000 aggregate principal amount of 9 7/8% Series D Senior Subordinated
Notes due 2007 (the "Series D Notes") to be issued by the Company in exchange
for up to $225,000,000 aggregate principal amount of 9 7/8% Series B Senior
Subordinated Notes due 2007 (the "Series B Notes") and up to $75,000,000
aggregate principal amount of 9 7/8% Series C Senior Subordinated Notes due 2007
(the "Series C Notes"). The Series B Notes were issued pursuant to an Indenture
dated as of October 7, 1997 between the Company and First Trust National
Association, as trustee (nka U.S. Bank Trust National Association). The Series C
Notes were issued pursuant to an Indenture (the "New Indenture") dated as of
December 16, 1998 between the Company and U.S. Bank Trust National Association,
as trustee (the "Trustee"). The Series D Notes will also be issued pursuant to
the New Indenture.
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 New Indenture, the Company's Restated Certificate of Incorporation and the
Registration Statement.
<PAGE> 2
Board of Directors
Bally Total Fitness Holding Corporation
March 18, 1999
Page 2
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 than the law of the State of New York.
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 New
York law.
On the basis of and in reliance on the foregoing, we are of the opinion
that the Series D Notes, when duly executed and delivered to, and authenticated
by, the Trustee and exchanged for the Series B Notes or Series C Notes in
accordance with the procedures specified in the Registration Statement, will be
valid and binding obligations of the Company and will be entitled to the
benefits of the New Indenture.
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,
/s/ Benesch, Friedlander,
Coplan & Aronoff LLP
BENESCH, FRIEDLANDER,
COPLAN & ARONOFF LLP
<PAGE> 1
EXHIBIT 12.1
BALLY TOTAL FITNESS HOLDING CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Income (loss) before
income taxes and
extraordinary items.......... $ 13,822 $ (23,156) $ (27,597) $ (38,588) $ (54,693)
Add:
Interest expense(a).......... 41,494 45,021 47,644 43,750 38,556
Amortization of capitalized
interest..................... 1,033 1,508 1,622 1,790 1,859
Interest component of rent
expense(b)................... 30,455 28,937 28,906 28,619 27,763
------------ ------------ ------------ ------------ ------------
Earnings available for fixed
charges........................... $ 86,804 $ 52,310 $ 50,575 $ 35,571 $ 13,485
============ ============ ============ ============ ============
Fixed charges:
Interest expense(a).......... $ 41,494 $ 45,021 $ 47,644 $ 43,750 $ 38,556
Capitalized interest......... 540 511 236 278 253
Interest component of rent
expense(b)................... 30,455 28,937 28,906 28,619 27,763
------------ ------------ ------------ ------------ ------------
Total fixed charges............... $ 72,489 $ 74,469 $ 76,786 $ 72,647 $ 66,572
============ ============ ============ ============ ============
Ratio of earnings to fixed
charges........................... 1.2 (c) (c) (c) (c)
============ ============ ============ ============ ============
</TABLE>
- ----------
(a) Includes amortization of debt issuance costs.
(b) Interest component estimated to be one-third of rent expense.
(c) Earnings were insufficient to cover fixed charges by $22,159, $26,211,
$37,076, and $53,087 for the years ended December 31, 1997, 1996, 1995
and 1994, respectively.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-4 No. 333- ) of Bally Total Fitness Holding Corporation and in the related
Prospectus of our report dated February 11, 1999, with respect to the
consolidated financial statements and schedule of Bally Total Fitness Holding
Corporation included in the Form 10-K for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Chicago, Illinois
March 11, 1999
<PAGE> 1
Exhibit 25.1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
Statement of Eligibility Under the
Trust Indenture Act of 1939 of a Corporation
Designated to Act as Trustee
U.S. BANK TRUST NATIONAL ASSOCIATION
(Exact name of Trustee as specified in its charter)
United States 41-0257700
(State of Incorporation) (I.R.S. Employer
Identification No.)
U.S. Bank Trust Center
180 East Fifth Street
St. Paul, Minnesota 55101
(Address of Principal Executive Offices) (Zip Code)
BALLY TOTAL FITNESS HOLDING CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 36-3228107
(State of Incorporation) (I.R.S. Employer
Identification No.)
8700 West Bryn Mawr Avenue
Chicago, Illinois 60631
(Address of Principal Executive Offices) (Zip Code)
9 7/8% Senior Subordinated Notes due 2007
(Title of the Indenture Securities)
<PAGE> 2
GENERAL
1. General Information Furnish the following information as to the
Trustee.
(a) Name and address of each examining or supervising authority
to which it is subject.
Comptroller of the Currency
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS If the obligor or any
underwriter for the obligor is an affiliate of the Trustee, describe
each such affiliation.
None
See Note following Item 16.
Items 3-15 are not applicable because to the best of the Trustee's
knowledge the obligor is not in default under any Indenture for which
the Trustee acts as Trustee.
16. LIST OF EXHIBITS List below all exhibits filed as a part of this
statement of eligibility and qualification.
1. Copy of Articles of Association.*
2. Copy of Certificate of Authority to Commence Business.*
3. Authorization of the Trustee to exercise corporate trust
powers (included in Exhibits 1 and 2; no separate
instrument).*
4. Copy of existing By-Laws.*
5. Copy of each Indenture referred to in Item 4. N/A.
6. The consents of the Trustee required by Section 321(b} of the
act.
7. Copy of the latest report of condition of the Trustee
published pursuant to law or the requirements of its
supervising or examining authority is incorporated by
reference to Registration Number 333-70709.
* Incorporated by reference to Registration Number 22-27000.
<PAGE> 3
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligors within three
years prior to the date of filing this statement, or what persons are owners of
10% or more of the voting securities of the obligors, or affiliates, are based
upon information furnished to the Trustee by the obligors. While the Trustee has
no reason to doubt the accuracy of any such information, it cannot accept any
responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, U.S. Bank Trust National Association, an Association organized and
existing under the laws of the United States, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, and its seal to be hereunto affixed and attested, all
in the City of Saint Paul and State of Minnesota on the 17th day of March, 1999.
U.S. BANK TRUST NATIONAL ASSOCIATION
/s/ Judith M. Zuzek
---------------------------------------
Judith M. Zuzek
Trust Officer
/s/ Richard H. Prokosch
- -----------------------
Richard M. Prokosch
Assistant Secretary
<PAGE> 4
EXHIBIT 6
CONSENT
In accordance with Section 321(b) of the Trust Indenture Act of 1939,
the undersigned, U.S. BANK TRUST NATIONAL ASSOCIATION hereby consents that
reports of examination of the undersigned by Federal, State, Territorial or
District authorities may be furnished by such authorities to the Securities and
Exchange Commission upon its request therefor.
Dated: March 17, 1999
U.S. BANK TRUST NATIONAL ASSOCIATION
/s/ S. Judith M. Zuzek
----------------------
Judith M. Zuzek
Trust Officer
