Fitness financials: Bally commences solicitation for pre-packaged Ch. 11 plan, files delayed 2006 10-K; plus Everlast, Nike, Stride Rite, Puma, GSI Commerce, Finish Line
Bally commenced solicitation of approvals for pre-packaged Ch. 11 plan and reported results of delayed 2006 10-K. Also, Everlast found itself at the center of a takeover fight, Nike profits jumped 32 percent in Q4, Stride Rite's Q2 profit fell, Puma got closer to being part of PPR's portfolio, GSI maintained its Q2 '07 guidance and Finish Line posted a Q1 loss.
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Bally commences solicitation of approvals for pre-packaged Ch. 11 plan, reports results of delayed 2006 10-K
On June 27, Bally Total Fitness (Pink Sheets: BFTH) said it has started the formal process of soliciting approvals for a prepackaged Chapter 11 plan of reorganization from holders of the company’s 10-1/2 percent Senior Notes due 2011 and 9-7/8 percent Senior Subordinated Notes due 2007.
The voting agent must receive votes on the plan no later than July 27, unless the deadline is extended. Bally said if it does not receive the necessary votes during the solicitation period, it will need to evaluate other options, including filing a traditional, non-prepackaged Chapter 11 case.
The company said it plans to continue normal club operations during the solicitation period and throughout the anticipated bankruptcy case.
Bally’s plan sets out the terms of the reorganization in the Restructuring Support Agreement previously announced on June 18. Holders of 63 percent of the senior notes and more than 80 percent of the senior subordinated notes signed the RSA, which requires that they vote in favor of the plan following receipt of the solicitation materials.
Implementation of the plan is conditioned upon, among other things, receipt of signed consents from 66-2/3 percent in principal amount and a majority in number of the holders of senior notes and of the holders of senior subordinated notes who vote on the plan. Bally said if it receives the requisite noteholder approvals, it will implement the plan by “promptly” filing a voluntary prepackaged petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
The company added that it has entered into a Backstop Purchase Agreement with holders of more than 80 percent of the principal amount of the senior subordinated notes. These noteholders have agreed to subscribe to the plan for a pro rata share of $90 million in principal amount of new senior subordinated notes. They have also agreed to purchase their respective pro rata shares of any rights offering senior subordinated notes not subscribed for by other noteholders.
No offering of the rights offering senior subordinated notes will be made through the solicitation, Bally said, adding that any such offering will be made only to the terms of the plan, if approved by the bankruptcy court.
Don Kornstein, Bally’s interim chairman and chief restructuring officer, said in a statement, “We are pleased that so many of our noteholders have expressed support for the plan and look forward to executing it and emerging promptly from Chapter 11 protection. The restructuring process laid out in the plan will allow us to maximize our resources and enhance our capital structure, better enabling us to invest in our clubs to meet the needs of our members and thereby facilitate operating performance improvements.”
Copies of the plan and the Bally’s solicitation materials are available at www.kccllc.net/bally.
In other company news: Bally reported on June 29 that it has filed its 2006 Annual Report on Form 10-K with the Securities and Exchange Commission and released financial results for the year ended Dec. 31, 2006. The issues related to accounting for deferred revenue and certain errors in prior year member data have been resolved, it said. No restatements of prior year financial statements were required.
In resolving issues relating to deferred revenue estimates, the company’s 2006 year-end evaluation of estimates of membership term effected in the fourth quarter resulted in an increase to membership revenue and a reduction in deferred revenue of $71.0 million.
Consolidated net revenues for the year ended Dec. 31, 2006, increased 6 percent to $1.059 billion, as compared to $1.003 billion in 2005. Increases in membership services revenue of approximately $60.7 million reflected the fourth quarter adjustment discussed above.
The company’s total membership cash collections continued to decline in each quarter of 2006 when compared to the prior year levels. Total 2006 membership cash collections were $757.6 million, down $25.4 million from 2005 collections of $783.0 million. Approximately $10.9 million, or 43 percent, of the year-over-year decline in total membership cash collections occurred in the fourth quarter of 2006. The 2006 quarterly trend has continued through the first half of 2007; total membership cash collections in the first quarter of 2007 were $12 million, or 6 percent, below the first quarter of 2006.
The average number of members during 2006 declined 2 percent to 3.559 million, from 3.622 million in the prior year. The average monthly cash received per member also declined 2 percent to $17.74, down from $18.02 in 2005. The total number of members at Dec. 31, 2006, was 3.485 million, down 1 percent from the prior year.
Operating costs and expenses in 2006 increased $20.7 million to $944.9 million, up 2 percent from $924.2 million in 2005. This increase resulted partly from a $4.6 million, or 9 percent, increase in marketing and advertising expenses due to increases in media spending and television production costs. The rise in operating costs and expenses were also due to a $7.5 million, or 12 percent, increase in general and administrative expenses for the year and a $28.4 million increase in impairment charges related to long-lived assets and other intangible assets. These factors reflect lower estimates of future operating cash flows for the company’s health clubs when compared to estimates at 2005 year end.
Operating results for 2005 have been reclassified to exclude Crunch Fitness, sold Jan. 20, 2006, which is presented as a discontinued operation.
Everlast center of a takeover fight
On June 29, Everlast Worldwide (Nasdaq: EVST) was in the middle of a $127 million takeover fight after a rival offer topped an offer agreed upon a day earlier.
Previously, Everlast on June 1 had agreed to be bought by investment group Hidary Group Acquisitions for more than $146 million in cash, or $26.50 per share — a 14.5 percent premium over the May 31 closing price.
Privately held Brands Holdings Ltd., a unit of Sports Direct International PLC, entered the fray with a $168 million cash offer, which Everlast accepted on June 28 — even paying a $3 million termination fee to Hidary. Under the agreement with the British company, Everlast shareholders would get $30 per share, or a 47.2 percent premium to the company’s average closing price over the last month.
Hidary Group countered on June 29, raising its cash bid to purchase Everlast to $175 million in a move to top rival Brands Holdings’ offer. Hidary’s newest offer — $31.25 per share — represents a 35 percent premium to the stock’s May 31 closing price. The group also said that Everlast shareholders have the option of rolling up to 50 percent of their shares into the deal to become investors in the new entity.
Hidary said Burlingame, Everlast’s largest independent shareholder, as well as another major shareholder, have committed to this option. Everlast shareholders holding about 17.7 percent of the company’s outstanding stock have already agreed to participate in this plan, Hidary said.
Furthermore, Hidary said that if the termination fee agreed to by Everlast in connection with the Brands Holding transaction is invalidated, Hidary would consider further raising its bid.
Nike profits jump 32 percent in Q4
Nike (NYSE: NKE) said its fiscal fourth-quarter net income jumped 32 percent due to strong gains in overseas markets, subsidiary business and future orders.
For the quarter ended May 31, net income reached $437.9 million, or $0.86 per share, up from $332.8 million, or $0.64 per share, for the same period of the prior year. Revenue for the quarter increased 9 percent to $4.4 billion, up from $4 billion a year ago. Currency-exchange rate changes helped boost sales by 2 percentage points for the year and the quarter, the company said.
For the fiscal year, net income was $1.5 billion, or $2.93 per share, up from $1.4 billion, or $2.64 per share in the prior year. Sales were $16.3 billion for the year, up 9 percent from last year.
Future orders worldwide, which are scheduled to be delivered from June through November, grew 12 percent for the quarter.
Overall, the company’s overseas markets grew most quickly in Europe, where revenues increased 12 percent for the quarter, due in part to favorable currency exchanges. Nike said it saw stabilizing markets in France and the United Kingdom, where it has struggled for some time.
Nike saw revenue growth of 7 percent in Asia, largely because of growth in China, which the company says is poised to become its second-largest market in a few years. Revenues were flat in the Americas.
The company reported that U.S. revenues increased 10 percent to $1.6 billion for the quarter. The United States is Nike’s largest market, but it has been in limbo because of economic challenges facing many of the nation’s large retailers.
Nike also significantly improved its inventory levels, reducing their growth from the double digits of several past quarters to just 2 percent growth.
The company said it is ideally positioned for growth and on target to meet its goal to reach $23 billion in sales by 2011.
Stride Rite Q2 profit falls
The Stride Rite Corp. (NYSE: SRR), which includes the Saucony and Hind brands, said fiscal second-quarter profit fell 16 percent as wholesale sales in its children’s group fell. The company is being bought by Payless ShoeSource (NYSE: PSS) for about $800 million, in a deal announced in May.
Net income for the quarter dropped to $14.2 million, or $0.38 per share, from $16.9 million, or $0.45 per share in the year-ago quarter.
The company said results were hurt by $0.09 per share by a higher tax rate. Results also include $800,000 in pretax expenses related to Robeez integration costs and the company’s pending acquisition by Payless ShoeSource Inc. Excluding acquisition and integration costs, net income would have been $0.39 per share, it added.
Revenue rose 8 percent to $209.2 million from $194 million last year.
Children’s Group wholesale sales fell 16 percent to $15.4 million, while retail sales rose 4 percent to $58 million. Other wholesale sales, including Keds, Sperry Top-Sider, Saucony and Hind rose 8 percent to $117.2 million.
The company reaffirmed earnings guidance between $1.10 and $1.15 per share for fiscal 2007. It expects revenue to grow 5 percent to 8 percent for the year, excluding integration and acquisition costs.
Puma gets closer to being part of PPR’s portfolio
Three months after French retailer PPR began its bid to take over German-based Puma, PPR has announced it now has a 33.2 percent stake in the company, which gives it majority voting rights on the board. PPR’s current stake will allow it to fully consolidate Puma in its accounts.
PPR, the parent of Gucci, Yves Saint Laurent and other luxury lines, acquired a 27.1 percent stake in Puma in April and launched its current offer of EUR 330 (USD $443.52) per share in mid-May. Under German regulatory law, the company is required to extend its offer to shareholders until July 11, and will announce the final result on July 17.
However, there are likely to be few takers, as the current share price of EUR 330.65 (USD $444.37) is 0.02 percent above PPR’s offer of EUR 330 (USD $443.52). Despite analyst speculation that Puma investors had been slow to take up the offer because they were holding out for a higher price, PPR said it would not raise its offer, which was 5.0 percent above the closing price on the day before the offer was launched, when it was EUR 314.25 (USD $422.36).
The PPR offer values Puma at EUR 5.3 billion (USD $7.1 billion), 5.6 percent above the company’s market capitalization of EUR 5.02 billion (USD $6.75 billion) on the day before the offer was launched. The offer is 14.9 times Puma’s 2006 earnings.
The PPR offer has received the backing of Puma’s board, which said it “unanimously believes that PPR’s engagement is in the best interests of the company.”
Puma had a disappointing year in 2006, when net income fell 7.4 percent, to EUR 374 million (USD $502.57 million), from EUR 404 million (USD $542.88 million) in 2005, despite a 33.2 percent increase in sales.
(Conversion of Euros into U.S. dollars is for information only, is not necessarily relative to earnings, and is based on the currency rate as of June 27.)
GSI maintains Q2 ’07 guidance
GSI Commerce (Nasdaq: GSIC), an e-commerce website creator and operator, said it still anticipates posting a second-quarter loss of $6.5 million to $7.5 million, or $5 million to $6 million on an adjusted basis.
It also reiterated its expectation of reporting sales of between $125 million and $135 million for the quarter. The company maintained its earlier 2007 guidance, saying it still expects net income of $38 million to $41 million for the year, or $12 million to $15 million on an adjusted basis. The company expects 2007 revenue of $710 million to $760 million.
Additionally, GSI said it’s planning a private offering of $100 million in unsecured convertible senior notes due 2027. It also plans to offer up to an additional $25 million in notes to cover over-allotments.
The company said it will use proceeds from the offering for working capital and general corporate purposes, including possible acquisitions.
Finish Line swings to Q1 loss
Finish Line (Nasdaq: FINL) posted a first-quarter loss on sluggish sales and rising expenses. The company reported a net loss of $3.9 million, or $0.08 per share, for the three months ended June 2, compared with a profit of $4.4 million, or $0.09 per share, in the year-ago period.
Revenue slipped to $288.3 million from $289 million last year, while selling, general and administrative expenses rose to $82.5 million from $79.6 million.
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