Bally to file Ch. 11 bankruptcy plan in July; buyers circle

After months of speculation, Bally Total Fitness Holding (Pink Sheets: BFTH) announced on May 31 it will enter into Chapter 11 bankruptcy protection with a restructuring agreement that allows the company to raise $77.5 million in new cash.

Bally said it plans to implement its reorganization through a voluntary, prepackaged bankruptcy filing in July. The company said it expects to complete its reorganization within 60 days of filing its bankruptcy petition.

The company said its restructuring calls for it to swap $150 million of 9.875 percent senior subordinated notes maturing this year for new subordinated notes, common equity, and the right to participate in a $77.5 million rights offering.

It said holders of more than 80 percent of the 9.875 percent notes have agreed in principle to the swap. A Chapter 11 filing would also require consents from other bondholders, Bally said.

Stockholders would receive nothing for their shares, Bally said. The company would also not be subject to public reporting obligations once it emerges from Chapter 11, it said.

The company also said its existing equity would be canceled and that it expects to continue normal club operations during the restructuring process and continue to invest in its fitness centers, said Don Kornstein, Bally’s chief restructuring officer and interim chairman, in a SEC filing. Bally operates more than 400 clubs in 29 U.S. states and several countries, has more than 3.5 million clients and 20,000 employees.

Bally believes it will be able to file its delayed annual report for the year ended Dec. 31, 2006, by the end of June. It was due in March.

The announcement comes after a particularly difficult two months, during which the company defaulted on its debt, lost its acting chief executive and was delisted from the New York Stock Exchange. Shares now trade on the Pink Sheets (www.pinksheets.com).

Bally said in mid-March that it might have to seek Chapter 11 bankruptcy protection if it was unable to restructure its hefty debt amid higher expenses and weak profits. At that time, Bally had about $45 million in cash and $827 million in debt outstanding.

Additionally, Bally closed on the sale of its Toronto, Canada, facilities to Extreme Fitness Inc. and GoodLife Fitness Centres Inc., realizing net cash proceeds of approximately $18 million.

The company said the proceeds from the transaction will be reinvested into its business and increase its liquidity to approximately $60 million.

Timeline of Bally’s rocky road
November 2004: Bally to restate more than four years — 2000 through first quarter 2004 — of financial results to change the way it accounted for membership fees. As a result, Bally delays all financial statements until the restatement is completed — which is projected to be July 2005.

February 2005: Bally retains The Blackstone Group, a leading financial advisor and investment bank, to assist in its turnaround strategy. Blackstone works with the company on evaluating and refining its business plan and developing a long-term financial strategy to improve its capital structure and maximize free cash flow, enabling Bally to focus its financial resources on its operations.

February 2005: After five months of investigation, Bally fires two executives and accuses its former CEO and CFO of misleading accounting practices. The Audit Committee review finds multiple accounting errors in Bally’s financial statements and concludes that Bally’s former Chairman and CEO Lee Hillman (from 1996 to 2002) and former CFO John Dwyer (from 1996 to 2004) were responsible for “multiple accounting errors and creating a culture within the accounting and finance groups that encouraged aggressive accounting.” Bally says the investigation also found improper conduct on the part of its Vice President and Controller Ted Noncek (from 2001 to 2005) and Vice President and Treasurer Geoff Scheitlin (former Controller from 1997 to 2001).

February 2005: Following the announcement of alleged accounting errors by four former finance executives, Bally Total Fitness Holding Corp. (NYSE: BFT) says the U.S. Attorney for the District of Columbia has opened a criminal investigation and ordered the company to save accounting records. Bally says it is fully cooperating.

July 2005: The announcement by Bally Total Fitness that it was seeking an extension for filing its financial statements for 2002 to 2004 leads to a war of words between the Bally’s board of directors and members of Liberation Investment Group LLC, which owns a 12 percent stake in the chain.

October 2005: Bally’s board implements a stockholder’s rights plan to protect shareholders while it awaits the company’s issuance of restated financial statements. The board wants the plan to prevent outsiders from attempting to buy the company for a too-low price. In July 2006, it allows the “poison pill” to expire.

December 2005: Deluging inboxes everywhere with notices of SEC filings, Bally finally releases all of its back financial statements for fiscal 2004 and 2005 and restates earnings going back to 2000, as well as held its first earnings call in nearly 18 months.

January 2006: Bally finalizes the sale of Crunch Fitness to Marc Tascher and Angelo, Gordon & Co. for $45 million. Under the terms of the agreement, the new owners acquire all of the Crunch sites in New York, Chicago, Los Angeles, Atlanta, Miami and San Francisco, as well as two Gorilla Sports Clubs and two Pinnacle Fitness clubs in San Francisco.

January 2006: Bally and Liberation Investment Group, one of two hedge funds at odds with the health club operator, express their views in two different conference calls hosted by proxy advisor Glass, Lewis & Co. In the first call, Liberation’s General Manager Emanuel Pearlman and Nicole Jacoby, its director of research, field questions about its solicitation. Liberation is looking to amend Bally’s by-laws giving shareholders the authority to remove the company’s CEO, as well as to amend the company’s bylaws to increase stockholder authority with respect to director tenure and the removal of officers of the company. In the second call, Bally’s Chairman and CEO Paul Toback and Bally Director Adam Metz talk about the company’s performance, its capital structure and proposed board nominees.

January 2006: The proxies are in and close to 70 percent of shareholders vote in favor of three directors — Charles Burdick, Barry Elson and Don Kornstein — who were proposed by Pardus Capital Partners, one of Bally’s majority shareholder funds, which has been a vocal dissident. Bally’s current audit committee chairman, Eric Langshur, loses his seat. Although CEO Paul Toback takes a beating in the voting, the measure to kick him out of the CEO seat doesn’t garner the needed percent for passage. A management proposal to authorize stock-grant incentives for management also fails.

March 2006: Virgin group billionaire Sir Richard Branson reportedly weighs a $1.2 billion bid to buy Bally and sees the health club operator as a way to grow the company’s U.K.-based Virgin fitness club business into the United States. The deal never comes to fruition.

July 2006: Slightly ahead of schedule, Bally files its 2005 annual report and its quarterly report for the first quarter 2006 with the SEC. Additionally, it reports fourth-quarter financial results for 2005, which have a narrower loss compared to the previous year.

August 2006: The company announces the resignation of Chairman, CEO and President Paul Toback, and its appointment of Don Kornstein as interim chairman and Barry Elson as acting CEO.

September 2006: Majority shareholders Liberation Investment Group and Pardus Capital Management both execute a confidentiality agreement with Bally where the fitness operator agrees to make information on its business and financial position available to the hedge funds on a confidential basis.

March 2006: Shares of Bally lose more than half their value on Mar. 16 after the company says it may file for bankruptcy because it has $827 million in outstanding debt, making it the top percentage loser on the New York Stock Exchange’s Big Board. Its stock drops $1.24, or 62 percent, closing at 75 cents a share. Bally’s shares had fallen more than 90 percent in the previous year. The stock hit a 52-week low of 52 cents earlier and traded at a 52-week high of $9.92 in March 2005.

October 2006: Bally closes on a $284 million line of credit in an effort to improve the company’s financial footing. It plans to use the financing to fund capital expenditures and for additional liquidity.

April 2007: The New York Stock Exchange suspends Bally’s shares and formally delists Bally’s common stock. NYSE cites the company’s failure to meet continued listing standards, including minimum average share price and market capitalization requirements, for the delisting decision. Bally is also delinquent in filing its 2006 annual financial report due to errors in historical member data. Bally does not appeal the decision and starts trading on the Pink Sheets electronic quotation service.

May 2007: Barry Elson steps down as acting CEO of Bally. Don Kornstein takes over in a new role of “chief restructuring officer” to facilitate the transition. Elson had been named acting CEO when former CEO Paul Toback left the company in August 2006.

May 2007: Bally announces it will enter into Chapter 11 bankruptcy protection in July with a restructuring agreement that allows the company to raise $77.5 million in new cash.

June 2007: Bally shares on the Pink Sheets over-the-counter trading exchange jump dramatically after an announcement of the pending bankruptcy filing and reported interest in a possible buyout or restructuring by several private equity firms, including several who had interest in the past but did not act, with action reportedly possible before Bally declares bankruptcy.

SNEW® View: SNEWS® thought a timeline of the saga would serve our readers well, but promises an investigative look in the coming weeks. It’s not as if this wasn’t expected – In fact, it has been expected by many for at least a year.