Fitness financials: Bally stockholder Pearlman says CEO and chairman jobs should be split, plus Amer Group, Nautilus, Dick's, Athlete's Foot

Bally stockholder Pearlman says CEO and chairman
jobs should be split
Liberation Investments General Manager Emanual Pearlman, one of the most vocal stockholders this year about Bally Total Fitness Holding Corp.’s (NYSE: BFT) financial quagmire, on Dec. 13 filed a Schedule 13D with the Securities and Exchange Commission, in it pointing out the need for the company to take the positions of chairman of the board and chief executive officer out of the hands of one person.

“The reporting persons believe that to be effective this board of directors must be led by a Chairman who is independent of management and that separating the roles of Chairman and Chief Executive Officer will strengthen and improve corporate governance at the Company,” the statement by Pearlman’s Liberation group read. Liberation owns nearly $12.3 million of Bally stock or, in aggregate, 9.01 percent of Bally common stock.

Pearlman also said he intends to evaluate the company’s financial position, discuss it with management and to also discuss “potential extraordinary transactions” such as a merger, liquidation, reorganization, recapitalization or sale of all or substantially of all the company’s assets.

Pearlman’s statement comes as the Chicago-based gym operator continues to struggle to regain its balance and investor confidence as an SEC accounting investigation after shifts in the company’s accounting procedures continues, and a class-action lawsuit against it simmers.

In addition, Bally has received and accepted consents from the majority of its bondholders, meaning it can take more time to put its financial house in order without being in default of its bond covenants. In the agreement, the majority of the holders of its 10-1/2 percent Senior Notes due 2011 and 9-7/8 percent notes waived their rights to see official financial statements, giving the club chain until July 31, 2005 to file statements without being in default. The lenders under Bally’s new $275 million secured credit facility dated Oct. 14, 2004, have foregone receipt from the company of financial statements filed with the SEC. Previously, Bally doubled the initial fee it was willing to pay bondholders for the default waiver, to 0.5 percent, or $5.00 for every $1,000 in principal amount of notes. The total fee will increase from 0.75 percent to 1.0 percent if Bally takes until July 31 to file its audited statements.

Also, Standard & Poor’s Ratings Services has raised its corporate credit rating on Bally to ‘B-‘ from ‘CCC+’ and removed it from CreditWatch, where it was placed on Aug. 17. The decision was based on it obtaining a limited waiver from a majority of noteholders, to avoid possible default. The outlook is now developing. The company’s total debt outstanding at Sept. 30, 2004, was $747.7 million. “The ratings reflect Bally’s high financial risk from substantial club expansion, a heavy debt and operating lease burden, and minimal positive discretionary cash flow,” said Standard & Poor’s credit analyst Andy Liu. “These factors are only partially offset by the company’s geographic diversity and large club base.”

Shareholders approve Amer Group proposals
At the close of Amer Group’s recent Extraordinary General Meeting of Shareholders on Dec. 12, participating shareholders agreed to approve the board of directors’ proposals concerning a bonus issue, as well as amendments to articles 3, 4 and 13. The company’s share capital will be tripled as a result of the bonus issue from its current Euro 95,226,480 (USD $125,813,225) to Euro 285,679,440 (USD $377,439,676). Shareholders will be entitled to receive two new shares for each old share held, without payment. The record date for the bonus issue is Dec. 16. The bonus shares will be entered on book-entry accounts on Dec. 17 if the share capital increase has been entered in the trade register. Amer Group is the parent company of Precor.

(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 Dec. 13.)

S&P changes Nautilus’ status, new board member elected
Standard & Poor’s will make its semi-annual changes to the S&P SmallCap 600 Companies on Dec. 17, affecting the status of The Nautilus Group (NYSE: NLS). Nautilus will be transferred from value to growth. It will be involved in the U.S. index restructuring and added to the new S&P/Barra and parent S&P indices at its half-float market capitalization weights. A stock’s categorization as either “growth” or “value” is determined by its book-to-price ratio, according to S&P. Using this measure, each U.S. index is split into two mutually exclusive sets, each of which comprises roughly half of the index’s total market capitalization.

In other news, Nautilus has named Diane Neal to its board of directors and K.C. Aly, a long-time business advisor to entrepreneurial companies, has retired from the board after eight years of service. Neal has more than 24 years of consumer retail experience, and recently joined the Gap Outlet as senior vice president of merchandising. She has held positions with Mervyn’s, Target Corp., Mainstream Outfitters and Marshall Fields.

Dick’s commences solicitation of consents
Dick’s Sporting Goods (NYSE: DKS) has commenced a solicitation of consents to an amendment related to its 2.375 percent Senior Convertible Notes due 2024 (CUSIP Nos. 253393AA0 and 253393 AB 8). The indenture for the notes currently prohibits Dick’s from paying cash upon a conversion of the notes if an event of default has occurred and is continuing at that time. The company is seeking consents from holders of the notes to amend the indenture to eliminate this prohibition. The record date for the consent solicitation is Dec. 9 and will expire Dec. 22, unless extended. Dick’s is offering a consent fee of $1.69 per $1,000 original principal amount at maturity of the note to each holder of record. Dick’s is obligated to accept consents and payment of the consent fee is conditioned on the receipt of consents from holders of at least a majority in original principal amount at maturity of the outstanding notes.

Athlete’s Foot files for bankruptcy protection
On Dec. 9, Athlete’s Foot Stores LLC filed a voluntary Chapter 11 petition in the U.S. Bankruptcy Court in Manhattan. The Kennesaw, Ga.-based, sports shoe retailer listed assets of $33.6 million and liabilities of $39.4 million. Its largest unsecured creditors are New Balance Athletic Shoe Inc., which holds a trade claim of $1.4 million, and K-Swiss Inc., with a trade claim of $1.3 million. The retailer recently obtained a $20 million secured revolving credit agreement from GMAC Commercial Finance LLC, but it exceeded the loan formula and triggered an over advance. The company said these events left it without available cash and unable to repay GMAC. As a result, Athlete’s Foot couldn’t get products to its stores, reduced inventory and increased markdowns on merchandise. On Nov. 30, GMAC told Athlete’s Foot it would no longer extend credit under its prior financing deal. The company said its cash crisis, combined with its inability to meet ongoing operations, spurred its decision to seek bankruptcy protection. It is working on a preliminary business plan to sell off its inventory, and will seek a buyer for its other properties such as furnishings, fixtures and leases. Court papers said any leases that cannot be sold will be rejected. It will continue to operate while it liquidates assets. At the time of its bankruptcy filing, Athlete’s Foot said it operated about 125 athletic footwear specialty retail stores in 25 states.

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