Bally May File for Chapter 11

CHICAGO – Bally Total Fitness may file for Chapter 11 bankruptcy protection if it is unable to restructure its debt, the company announced yesterday.

Bally also said that it informed the U.S. Securities and Exchange Commission that it is unable to file its annual report for 2006, which is due today. The company is not sure when it will file the report. In a separate filing with the SEC, Bally said that it has identified errors in its membership numbers that could negatively affect revenue for 2006.

Bally disclosed that it had about $827 million in outstanding debt as of Wednesday. Bally interim Chairman Don Kornstein said in a conference call yesterday that the company’s debt has more than doubled in recent years. Bally also has interest payments due in April, July and October.

“Our intent is to implement a substantive fix, not just perpetuate the status quo,” Kornstein said. “However, if we are unable to obtain accommodations from our creditors, Bally may be forced to take other significant actions, which could include a restructuring.”

Bally hasn’t had a profitable year since 2001. The company expects to post a loss from continuing operations in 2006, with membership revenue falling 3 percent, or more than $25 million less than 2005. That year, Bally, which has also been struggling to attract new members, put itself on the block but was unable to find a buyer.

Chief Executive Barry Elson said on the conference call yesterday that membership collections have continued to fall through the first 11 weeks of this year, a trend Elson said would continue through 2008.

“Since taking on our respective leadership roles late last August, we’ve obviously learned a great deal about Bally’s history, past management approaches, how it goes to market and the value drivers for the business,” Elson said in the teleconference. “We’ve also come to understand that many of the substantive and seemingly intractable issues that our company is wrestling with today are the legacy of decisions made over the course of many years, and they will not be resolved overnight, despite the significant progress we have made on many fronts since last fall.”

“That being said,” Elson continued, “we remain fundamentally optimistic about the long-term prospects for turning the company’s performance around once its underlined capital structure problems are resolved. After all, we are a billion-dollar company. Our operations generate positive cash flow. And we still are the best-known fitness brand in a sector that has been growing at a reasonable rate in recent years.”

Elson added that in order to ease the company’s financial woes, Bally will make layoffs, renegotiate rents and close underperforming clubs.

Neither Kornstein nor Elson took questions during the teleconference. When asked today what the news means for Bally club owners and members, Bally spokesperson Matt Messinger said, “It will mean very little. Our clubs will be open for business as usual. We’re continuing the normal course of business.”

As for the possibility of clubs being sold, Messinger said, “We’re always looking at our footprint and evaluating what’s working and what’s not working. I don’t think it necessarily changes based on yesterday’s news.”

Bally’s stock has plummeted nearly 95 percent in the last year. Yesterday, the stock closed at $1.99 on the New York Stock Exchange. Today, the stock went as low as 52 cents before closing at 75 cents.

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