Fitness financial: Bally looking to sell or merge amid flurry of restatement disclosures

Deluging inboxes everywhere with notices of SEC filings (20 last week alone), Bally Total Fitness (NYSE: BFT) finally released all of its back financial statements for fiscal 2004 and 2005 and restated earnings going back to 2000, as well as held its first earnings call in nearly 18 months.

“It’s been a nightmare we’ve finally awakened from,” CFO Carl Landeck said in the call about the restatements and analysis.

The besieged company also announced — not surprising anyone — that it had retained J.P. Morgan Securities to explore “strategic alternatives,” including a sale or merger of the company “to boost shareholder value,” per CEO Paul Toback in the Dec. 1 earnings call with shareholders, analysts and media. With the Nov. 30 filings, Bally is now current with its federal securities filing and bond indenture requirements.

But being current doesn’t mean questions are totally answered. When pressed in the call about the timing of the vaguely named strategic alternatives, Toback declined to set any timeframe or share additional information.

“I’m excited we’re moving into this phase,” he said, “and I don’t have any notions as to how it will go.”

According to a press release, “alternatives may include, but are not limited to, a recapitalization, the sale of securities or assets of the company or the sale or merger of Bally Total Fitness with another entity or strategic partner.” The planning will be done in collaboration with The Blackstone Group, which has been advising Bally for the past 10 months.

During a conference call Dec. 1 to discuss third-quarter results and restated earnings back to 2000, Toback said the company hasn’t received any formal buyout offers. After news that Bally had hired J.P. Morgan Securities, its shares rose dramatically by $0.71, or 10 percent, to close at $7.72 — its 52-week high — on the New York Stock Exchange on a volume of 1,946,700. But the next day it plunged 12.44 percent on profit-taking, closing for the week at $6.76 on a volume of 2,811,700. It is still substantially up from its 52-week low from August 2005 of $2.84.

Analysts noted later that it will likely be a private equity firm making a play for the company, as most of Bally’s rivals are smaller and privately held, such as Gold’s Gym and 24 Hour Fitness. Life Time Fitness is publicly traded, and its stock has performed exceptionally well over the past year, but it is too small to make a serious run at Bally, it was reported in other news sources.

Bally also slipped in that the proposed sale of its Crunch fitness centers has hit a snag, saying it is having difficulty removing itself from lease obligations for the Crunch sites, a condition to closing the sales. Toback said the company is “hopeful we can close the Crunch transaction” and is talking to landlords and working with the potential buyer to remove some conditions.

The long-delayed earnings reports have played a key role in the battle to control the company, as SNEWS® has reported, with three shareholders owning more than 10 percent (Pardus, 14 percent; Liberation, 12 percent; and Wattles’ Hollywood Entertainment, 10 percent) asking for meetings, demanding representation on boards, filing lawsuits and otherwise busily demanding Bally undertake actions it has not agreed with or cooperated with. (Click here for an Oct. 31, 2005, SNEWS® story, “Major shareholders Liberation and Pardus continue to spar with Bally.”)

Even the media and investors have been hammering the company about its lack of communication and other actions perceived as missteps. Click here for a Sept. 19, 2005, SNEWS® story, “Bally takes beating by media, enters agreement to sell Crunch.”)

As of Nov. 30, Bally has $40 million of borrowings and $13.9 million in letters of credit against its $100 million credit facility. The company said that credit facility should provide enough cash for operations for at least 12 months. However, it added that $300 million in senior subordinated notes are due in 2007 and it doesn’t know if its “cash flow and availability under the revolving credit facility will be sufficient to meet our needs in 2007.”

For the first nine months of 2005, net revenues were up 2.3 percent to $807.5 million, compared with $789.3 million for the same period in 2004. Bally said the increase was driven by a 2 percent increase in average monthly revenue recognized per member to $19.70 in the 2005 period. A 4 percent increase in personal training revenue also contributed to the improvement in revenues.

Net income was $1.8 million, or $0.05 per share, for the nine months in 2005 versus net losses of $13.3 million and $19.6 million, or a loss of $0.40 and $0.60 per share, for 2004 and 2003, respectively.

Operating income for the nine-month period grew 70 percent to $61.7 million compared with the 2004 period operating income of $36.4 million. For same period, operating expenses as a percentage of revenues were down 3 percent, primarily at the club level, compared with 2004. New joining members were up 4.4 percent compared to the prior year period.

For the third quarter ended Sept. 30, 2005, net revenues were $261.8 million, down slightly from $264.8 million a year ago. Bally said the decline was primarily a result of a 2 percent decline in membership revenue based on a 1 percent decrease in the average number of members in the 2005 quarter, as well as a 1 percent decrease in average revenue per member. This was offset, in part, by continued growth in personal training revenue, up 6 percent in the quarter, versus the same period a year ago, it added.

The company reported a net loss for the quarter of $1.6 million, or a loss of $0.05 per share, compared with net income of $6.8 million, or $0.21 per share in 2004.

Operating income for the third quarter was $18.8 million versus $23.0 million in 2004, primarily reflecting write-downs of retail inventory increased, information technology expenses, and an increase of $3.0 million in costs incurred in connection with the restatements and related investigations and litigation. Membership services expense continued on a positive trend, down 1.5 percent from 2004.

Looking at restated financials results for 2004 versus 2003, fiscal 2004 net revenues, were $1,048.0 million, up 4.5 percent, compared with restated net revenues of $1,002.9 million in 2003. Also, in 2004 operating income before non-cash impairment charges of $15.2 million was $53.4 million, up 52 percent compared with the prior year. The Company reported a lower net loss of $30.3 million, or $0.92 per share, for the year-end 2004 compared with a restated 2003 net loss of $106.0 million, or $3.24 per share. Operating income in 2004 was $38.2 million, up $77.1 million from a 2003 restated operating loss of $38.9 million.

SNEWS® View: All in all, it’s been quite a year for Bally. Actually, it’s been quite the last two years, maybe even three, since that’s how long Toback has been in charge and in turnaround mode. Bally has come under fire from major shareholders, with Liberation Investment Group calling for the ouster of Toback, and Pardus Capital launching a proxy battle for five independent candidates to be named to Bally’s board. Also, several top Bally executives — including its chief financial officer, controller, treasurer, public relations director, and vice president of marketing — have been replaced, and the board has seen a revolving door in members. Plus, the company hasn’t conducted regular earnings conference calls or shareholder meetings since spring 2004, an action that naturally can raise suspicions since that has left the interested world wondering what’s going on behind closed doors. In the call, by the way, Toback said with all this behind the company, he will now be more available. The company also is under investigation by the Securities and Exchange Commission and the Justice Department related to accounting issues. Whoa, and now it’s looking to sell or merge? We bet the next meeting of shareholders on Jan. 26, 2006, is going to be a doozy.