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SEC FILE NUMBER |
CUSIP NUMBER |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 12b-25
NOTIFICATION OF LATE FILING
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(Check one)
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þ Form 10-K
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o Form 20-F
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o Form 11-K
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o Form 10-Q |
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o Form 10-D
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o Form N-SAR
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o Form N-CSR |
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For Period Ended:
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December 31, 2006 |
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Nothing in this form shall be construed to imply that the Securities and Exchange Commission
has verified any information contained herein.
PART I REGISTRANT INFORMATION
BALLY TOTAL FITNESS HOLDING CORPORATION
Full Name of Registrant
NOT APPLICABLE
Former Name if Applicable
8700 WEST BRYN MAWR
Address of Principal Executive Office (Street and Number)
CHICAGO, ILLINOIS 60631
City, State and Zip Code
PART II RULES 12b-25(b) AND (c)
If the subject report could not be filed without unreasonable effort or expense and the
registrant seeks relief pursuant to Rule 12b-25(b), the following should be completed. (Check box
if appropriate)
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(a)
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The reason described in reasonable detail in Part
III of this form could not be eliminated without
unreasonable effort or expense |
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(b)
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The subject annual report, semi-annual report,
transition report on Form 10-K, Form 20-F, Form
11-K, Form N-SAR or Form N-CSR, or portion thereof,
will be filed on or before the fifteenth calendar
day following the prescribed due date; or the
subject quarterly report or transition report on
Form 10-Q or subject distribution report on Form
10-D, or portion thereof, will be filed on or before
the fifth calendar day following the prescribed due
date; and |
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(c)
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The accountants statement or other exhibit required
by Rule 12b-25(c) has been attached if applicable. |
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PART III NARRATIVE
Bally Total Fitness Holding Corporation (the Company) has determined that it is unable to
file its Annual Report on Form 10-K for the year ended December 31, 2006 (2006 Form 10-K) by
March 16, 2007 without unreasonable effort and expense because it has not yet completed the
preparation of its financial statements for the year ended December 31, 2006, as discussed below. The Company at this time is unable to determine when it will file its 2006 Form 10-K.
In determining the amount of its liability for deferred revenue, the Company estimates
membership life for its members at the time that members enter into membership agreements based on
historical trends of actual attrition. The Company has identified certain errors in its historical
member data used to create its estimates of membership life for those members whose memberships are
expected to extend beyond seven years. The Company is also evaluating the assumptions it uses in
updating these attrition estimates throughout the memberships terms. The Company is evaluating
the impact that these data errors and the assumptions relating to attrition estimates will have on
its estimates of membership life and its estimate of deferred revenue on previously reported annual
and interim consolidated financial statements as well as interim consolidated financial statements
and interim consolidated financial information for 2006.
In accordance with Section 404 of the Sarbanes-Oxley Act of 2002, the Companys management is
assessing the effectiveness of its internal control over financial reporting as of December 31,
2006. The portion of the assessment completed to date has led management to conclude that there
were material weaknesses in the internal control over financial reporting as of December 31, 2006.
After management completes its assessment, the Company will include the assessment in the 2006 Form
10-K. The assessment will discuss the material weaknesses that management has identified and the
actions that have been and will be taken to remediate these material weaknesses. The Companys
independent registered public accounting firm, KPMG LLP (KPMG), has informed the Companys Audit
Committee that its report on the Companys internal control over financial reporting is expected to
include an adverse opinion indicating that its controls were not effective as of December 31, 2006.
The work associated with the foregoing matters has delayed the Companys completion of the
financial and other information to be included in the 2006 Form 10-K. The Company is completing
preparation of its financial statements for the year ended December 31, 2006, including an evaluation of the
impact of the errors described herein on financial statements for prior periods. In addition, the
Company is working to provide KPMG the information necessary to complete the audit of the Companys
consolidated financial statements and internal control over financial reporting. KPMG has informed
the Companys Audit Committee that, in the absence of further information in support of the
Companys ability to meet its obligations as they become due, comply with certain debt covenants and
timely file its financial statements, its auditors report on the Companys consolidated financial statements
will include an explanatory paragraph indicating that substantial doubt exists as to the Companys
ability to continue as a going concern.
3
Forward-Looking Statements
Forward-looking statements in this notification and the attached explanation, including,
without limitation, statements relating to (i) the Companys plans, strategies, objectives,
expectations, intentions, and adequacy of resources, (ii) the Companys expectation that its
strategies will enable it to create economic value, (iii) the determination by management of the Companys deferred revenue
liability at December 31, 2006 and whether or not restatement of prior periods is required, (iv) the completion by the
Companys independent auditor of the audit of the Companys financial statements, (v) the potential effect
of any adjustments identified during the audit process and (vi) the anticipated future performance
of the Companys business are made pursuant to the safe harbor provisions of Section 21E of the
Securities Exchange Act of 1934.
Statements that are not historical facts, including statements about the Companys beliefs and
expectations, are forward-looking statements. These statements are based on beliefs and
assumptions by the Companys management, and on information currently available to management.
Forward-looking statements speak only as of the date they are made, and the Company undertakes no
obligation to update publicly any of them in light of new information or future events. In
addition, these forward-looking statements involve known and unknown risks, uncertainties and other
factors that may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements expressed or implied by
such forward-looking statements.
A number of factors could cause actual results to differ materially from those contained in
any forward-looking statement. These factors include, among others:
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the ability to satisfy debt and debt-related obligations as interest becomes
payable or principal becomes due, including the substantial interest payable on the
Companys 9-7/8% Senior Subordinated Notes due 2007 (the Senior Subordinated Notes) on
April 16, 2007 and the Companys 10-1/2% Senior Notes due 2011 (the Senior Notes and,
together with the Senior Subordinated Notes, the Notes) on July 15, 2007; the $300
million aggregate principal amount payable at maturity of the Senior Subordinated Notes on
October 15, 2007; and the approximately $282 million in
obligations
under the Companys Amended and Restated Credit Agreement (the New Facility) on October
1, 2007, which will terminate if the Senior Subordinated Notes are not refinanced or
restructured by that date; |
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a determination by the Company not to make interest payments due in 2007 in respect of either or both classes of the Notes; |
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the ability to maintain existing or obtain new sources of debt or equity
financing, on acceptable terms or at all, to satisfy the Companys cash needs and
obligations, and the outcome of the Companys exploration of restructuring and refinancing
alternatives; |
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the response of creditors, customers and suppliers, including financial
intermediaries such as credit card payment processors, to the filing of this notification and the matters discussed therein, particularly as those matters relate to liquidity, the uncertain timing of the filing by the Company of its 2006 Form 10-K and
the presence of an explanatory paragraph in the audit report on the Companys consolidated
financial statements indicating that substantial doubt exists as to the Companys ability
to continue as a going concern and other actions the Company may take to restructure or
reorganize its obligations, including a reorganization of its operations under Chapter 11
of the U.S. Bankruptcy Code (Chapter 11); |
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the ability to comply with, or obtain waivers under, the
Companys loan agreements and indentures; |
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the effect of material weaknesses in internal control over financial reporting
on the Companys ability to prepare financial statements and file timely reports with the
Securities and Exchange Commission (the SEC); |
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the success of operating initiatives, advertising and promotional efforts to
attract and retain members; |
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competition, including the ongoing effect of increased competition from
well-financed competitors and the Companys limited ability to invest in capital
improvements due to its constrained liquidity and overall financial condition; |
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the acceptance of the Companys product and service offerings; |
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changes in business strategy or plans; |
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the refusal of the Companys suppliers to provide key products and services,
or any requirement by suppliers that the Company change the terms and conditions associated
with these products and services; |
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the outcome of SEC and Department of Justice investigations; |
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the existence of adverse publicity or litigation (including stockholder
litigation and insurance rescission actions), the outcome thereof and the costs and
expenses associated therewith; |
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the changes in, or the failure to comply with, government regulations; |
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the ability to attract, retain and motivate highly skilled employees,
including a permanent Chief Executive Officer; |
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the business abilities and judgment of personnel; |
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general economic and business conditions; and |
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other factors described in this notification, including the risk factors
identified in the periodic reports that the Company has previously filed with the SEC. |
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PART IV OTHER INFORMATION
(1) Name and telephone number of person to contact in regard to this notification.
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MARC D. BASSEWITZ,
SENIOR VICE PRESIDENT, SECRETARY AND
GENERAL COUNSEL
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399-7606 |
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(Name)
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(Area Code)
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(Telephone Number) |
(2) Have all other periodic reports required under Section 13 or 15(d) of the Securities
Exchange Act of 1934 or Section 30 of the Investment Company Act of 1940 during the preceding 12
months or for such shorter period that the registrant was required to file such report(s) been
filed ? If answer is no, identify report(s).
Yes þ No o
(3) Is it anticipated that any significant change in results of operations from the
corresponding period for the last fiscal year will be reflected by the earnings statements to be
included in the subject report or portion thereof?
Yes þ No o
If so, attach an explanation of the anticipated change, both narratively and quantitatively,
and, if appropriate, state the reasons why a reasonable estimate of the results cannot be made.
Please see attached explanation.
BALLY TOTAL FITNESS HOLDING CORPORATION has caused this notification to be signed on its
behalf by the undersigned hereunto duly authorized.
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Date: March 15, 2007 |
By: |
/s/ Marc D. Bassewitz
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Marc D. Bassewitz |
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Senior Vice President, Secretary and
General Counsel |
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Explanation Referred to in Part IV, Item (3) of Form 12b-25 |
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Introduction |
As discussed in this notification, the Company will
be unable to file the 2006 Form 10-K by March 16, 2007. As a consequence, it will be in default under its reporting obligations under the
indenture governing its Senior Subordinated Notes (the "Senior Subordinated Notes Indenture") and the indenture governing its Senior Notes
(the "Senior Notes Indenture" and, together with the Senior Subordinated Notes Indenture, the "Indentures") at March 16, 2007. A default will
also occur under the New Facility if the Company cannot deliver audited financial statements to the lenders thereunder by April 2, 2007 or
deliver the 2006 Form 10-K to the trustee under the applicable indenture within 28 days after such trustee delivers a notice of default to
the Company for failure to file the 2006 Form 10-K when due. The Company at this time is unable to determine when it will file its 2006
Form 10-K.
In addition, on April 16, 2007, the Company is required to make an interest payment of $14.8
million on its Senior Subordinated Notes. On February 14, 2007, the Company drew $20.5 million of
the revolving credit line (the Revolver) under the New Facility, the full amount available at
that date, and on March 12, 2007, the Company drew $19.0 million under the delayed draw term loan
(the Delayed Draw Term Loan) under the New Facility. As of March 14, 2007, the Companys
liquidity was approximately $45 million, including approximately $1.1 million available pursuant to the Delayed
Draw Term Loan, subject to the absence of any default or event of default under the New Facility. As discussed
below, if the Company determines not to make the April 2007 interest payment on the Senior Subordinated Notes or the July 2007 interest
payment on the Senior Notes, it
would be in default under the applicable indenture and, as a result of cross-default
provisions, under the other indenture and the New Facility. The Company could determine not to make
interest payments under one or both classes of Notes when due.
Subject to certain notice provisions described in this notification, events of default
resulting from the Companys failure to (i) file and deliver the 2006 Form 10-K within the required
period under the Indentures, (ii) deliver audited financial statements to the lenders under the New
Facility by April 2, 2007 or deliver the 2006 Form 10-K to the trustees under each Indenture within
the required period after receiving a notice of default from such trustee or (iii) make the
interest payment under its Senior Subordinated Notes on April 16, 2007, could permit the trustee
under the applicable Indenture (or the requisite holders of Notes) and the lenders under the New
Facility to declare the respective obligations immediately due and payable and to exercise any
other available rights and remedies. See Outstanding Indebtedness.
If any of these scenarios were to develop adversely for the Company, there is a substantial
possibility that the Company would seek or could be forced to reorganize its operations under
Chapter 11. Such a reorganization could cause the Companys common stock to be delisted from the
New York Stock Exchange (the NYSE), substantially curtail the trading market for the Companys
common stock, materially impair or eliminate the value of the Companys common stock and result in certain
additional adverse effects on the Companys financial condition and results of operations, as
described in this notification.
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Significant
Changes in Results of Operations
The Company is required by Part IV, Item (3) of Form 12b-25 to provide as part of this filing
an explanation regarding whether the results of operations expected to be reported for the year
ended December 31, 2006 will reflect significant changes from its results of operations for the
year ended December 31, 2005 (as restated for both periods to reflect the operating results of
Crunch Fitness as a discontinued operation). The results of operations that the Company will
include in the 2006 Form 10-K are still being finalized by management and audited by KPMG, and are
subject to the issues discussed in Part III of this notification. Except as described in this
notification, the Company believes it is premature to provide an estimate of those results at this
time.
Cash collections of membership revenues in 2006 are expected to be approximately 3%, or more
than $25 million, lower than cash collections in 2005. This downward trend in cash collections of
membership revenue has continued in the first eleven weeks of 2007 and is expected to continue for
at least the remainder of 2007. These unfavorable comparisons and trends reflect shortfalls in new
member additions. More importantly, the comparisons and trends
also reflect the continuing effects on cash collections associated
with the Companys 2005 transition to
its Build Your Own Membership (BYOM) model, related changes in the Companys sales approach and
club operating model and competition in the Companys key markets (see The
Companys BusinessBusiness, below). While the changes implemented to the BYOM model since the third
quarter of 2006 have led to some improvement in certain key operating parameters, this progress has
not been sufficient to offset the impact of lower cash collections from BYOM members added in 2005 and early 2006.
The Company currently expects higher expenses in 2006 when compared to 2005, attributable
primarily to:
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Reduction in Carrying Value of Long-Lived Assets The Company expects to record an
adjustment (impairment charge) of approximately $35 to $37 million to reduce the carrying
values of certain of its long-lived assets, primarily leasehold improvements to certain of the Companys fitness clubs, to the lower of their respective carrying or
fair values. This adjustment reflects the Companys current estimate of the future cash
flows associated with the utilization of these assets, including relevant data such as
recent, lower estimates of operating cash contribution, increasing cost of capital, and
updated projections regarding the deployment of capital into the business in the form of
future capital expenditures, reflecting the Companys fitness club footprint analysis. The
Company has not reached a final conclusion as to the amount of the impairment described above
and there can be no assurance that the final impairment charge will not differ from this
estimate by a material amount. Accordingly, the above information on impairment of assets
is preliminary until the Companys financial statements for the year ended December 31,
2006 are finalized. |
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Increase in Interest Expense The Companys interest expense increased approximately
20% (or approximately $16 million) in 2006 compared to 2005, due primarily to the
amortization of deferred financing costs incurred in 2005 and 2006 in connection with the
solicitation of consents under the Indentures. An increase in |
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variable interest rates, applied to approximately $400 million of average outstanding
variable rate debt (including the effect of fixed-to-floating interest rate swaps), also
contributed to the increased expense. |
Presented below is a discussion of the Companys business and certain accounting and other
matters that may significantly impact the results of operations that the Company ultimately reports
as of and for the year ended December 31, 2006.
The Companys Business
Business
The Company is among the largest full-service commercial operators of fitness centers in North
America in terms of members, revenues and square footage of its facilities. Bally became
a public company in 1996 and has raised capital used to acquire new clubs, remodel existing clubs
and purchase additional or replacement equipment. Between 1997 and 2002, the Company focused on
growth through the acquisition and internal development of new clubs. During that period, the
Company bought or opened 152 new fitness centers. Since 2002, the Company has acquired or opened
23 clubs and sold or closed 58 clubs, including 44 clubs in 2006 (eight of which were the subject
of three sale/leaseback transactions in the fourth quarter of 2006 and continue to be operated by the Company).
Beginning in 2003, the Company changed its focus and business plan, scaling back
club expansion plans and focusing on improving operating margins and cash flows from existing
fitness centers. The first phase of that business plan focused on operating efficiencies,
enrolling more new members by expanding membership offerings to include month-to-month memberships
and improving the retention of new members during their critical first 30 days of membership, as
well as increasing the training for employees consistent with the changes in the Companys focus
and business plans. The second phase of the business plan centered around implementation of the
Companys new club operating model, which calls for each fitness center to be run by a general
manager accountable for the profitability of his or her fitness center and for cross-training
employees to serve in a variety of positions in fitness centers to achieve optimal staffing
profiles. These changes to the Companys business model, when combined with competitive conditions
in key markets where well financed competitors have expanded their operations, have adversely
affected the Companys operating results and cash collections. The third phase of the business
plan, currently being pursued, is focused on addressing the Companys capital structure in order to
reduce leverage and debt service requirements and improve liquidity, which would allow the Company
to invest more of its operating cash flow in fitness equipment and improvements to fitness centers.
The Company has begun divesting non-core assets by means that included, but are not limited to,
the sale of fitness centers. In connection with this strategy, in January 2006, the Company
completed the sale of Crunch Fitness and four other high-end fitness centers in San Francisco,
including the Gorilla Sports brand. In the fourth quarter of 2006, the Company entered into three
sale/leaseback transactions involving eight fitness centers.
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Certain Accounting and Other Matters
Liquidity
The Company has reported operating losses from continuing operations for the years 2001
through 2005. The Company expects to continue to be affected by increased competition from
well-financed competitors and its own limited ability to invest in capital improvements, including
new fitness equipment, due to its constrained liquidity and overall financial condition.
The Company requires substantial cash flows to fund capital spending and working capital
requirements. Although the Companys liquidity (cash, the unused portions of the Delayed Draw Term
Loan and the Revolver) increased by $21 million, from $69 million to $90 million, during 2006, the
increased liquidity at December 31, 2006 was primarily due to the $29.1 million unused Delayed Draw
Term Loan, which was available at that date to fund capital expenditures and certain improvements. Excluding the
effect of the Delayed Draw Term Loan, the Companys liquidity declined $13.3 million in 2006,
despite the net proceeds resulting from the sale of certain clubs and the sale/leaseback
transactions in 2006, all of which contributed net proceeds of approximately $67 million to the
Company. Furthermore, the Company drew $20.5 million under the Revolver on February 14, 2007 and
$19.0 million under the Delayed Draw Term Loan on March 12, 2007, a portion of which funds will be
used to finance an equipment purchase of approximately $15.0 million. As of March 14, 2007, less
than $1 million remains available for borrowing under the Revolver, and approximately $1.1 million
remains available for draw under the Delayed Draw Term Loan, subject to the absence of default or any event of
default under the New Facility.
The Company maintains a substantial amount of debt, the terms of which require significant
interest payments each year. In 2007, the Company has substantial interest payments due on its
Senior Subordinated Notes in April and October and on the Senior Notes in July, and is considering whether or not to make such payments in light of its current financial position Moreover,
additional access to the liquidity that might subsequently become available under the New Facility
may be limited if future decreased revenues or increased expenses limit the Companys ability to
comply with the financial covenants under the New Facility, which the Company is required to meet
monthly, as described under Other Indebtedness, below. In turn, any such events could negatively
impact the Company, including the Companys relations with members, vendors, and suppliers with
whom the Company conducts or may seek to conduct business. At March 14, 2007, the Companys
liquidity was approximately $45 million, including approximately $1.1 million available under the Delayed Draw
Term Loan. Liquidity at March 14, 2007 reflects the January interest payment of $12.3 million on
the Companys Senior Notes as well as the draws on the Revolver and Delayed Draw Term Loan
described above.
The Companys cash flows and liquidity may also be negatively affected by various items,
including declines in membership revenues, which result in reduced levels of cash collections;
changes in terms or other requirements by vendors, including the Companys credit card payment
processor; regulatory fines; penalties, settlements or adverse results in securities or other
litigations; future consent payments to lenders or noteholders, if required; and unexpected capital
requirements. The Company may be required to provide additional letters of credit, or cash
deposits to support vendors, credit card payment processing, and insurance programs, which would
reduce available liquidity. Although management believes that the Company has
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adequate liquidity to pay its ordinary course trade and employee obligations,
there can be no assurances that it will have sufficient liquidity to meet its debt or other obligations as and
when they become due in the presence of the unfavorable scenarios described in this notification or it could determine not to make interest payments due in 2007 on the Notes.
If revenue decreases compared to 2006 get larger, expenses increase or a default occurs under the New Facility (whether
directly or as a result of a cross-default to other indebtedness) and the Company does not have or
cannot obtain sufficient liquidity to address any such scenario, the Company would be unable to
continue operating its business. Furthermore, pursuant to the New Facility, the Companys
depository accounts are subject to control agreements that give the lenders the right to dominion
over the Companys cash on deposit in control accounts if an event of default under the New
Facility occurs and is continuing.
Assets
The value of the Companys consolidated assets of as of December 31, 2006 is expected to be
substantially less than the amount of its consolidated assets as of December 31, 2005, reflecting
in part the sales of Crunch Fitness and four other high-end fitness centers in San Francisco and the sale/leaseback transactions in the fourth quarter of 2006, as well as the impairment charge
discussed above. The sale of the Crunch Fitness business in January 2006 resulted in a decrease of
$40 million in assets held for sale, and $32 million of the proceeds of the sale of such assets
were used to make a mandatory repayment under the Companys former senior credit agreement. In
addition, because of the Companys liquidity position, history of losses from continuing operations
and high levels of debt, its access to capital has been limited, constraining capital expenditures
on its clubs and contributing to the decrease in assets.
Outstanding Indebtedness
As of March 15, 2007, the Company has $235 million of outstanding Senior Notes;
$300 million of outstanding Senior Subordinated Notes; and $282.2 million in obligations outstanding under
the New Facility, including $205.9 million under the term loan portion of the New Facility, $43.3
million under the Revolver (including $18.8 million in letter of credit utilization), and $33 million under the Delayed Draw Term Loan.
The Senior Subordinated Notes mature on October 15, 2007. The New Facility will terminate on
October 1, 2007 in the event that the Senior Subordinated Notes have not been refinanced on or
before October 1, 2007. Further, the Company has substantial interest payments due on the Senior
Subordinated Notes in April 2007 and on the Senior Notes in July 2007.
In order to effect a refinancing of the Senior Subordinated Notes, the Company will need to
raise additional funds through public or private equity or debt financings. The Company will not
have sufficient liquidity in the event it is unable to refinance or restructure the Senior
Subordinated Notes and the New Facility terminates on October 1, 2007 as a result. If this occurs,
the Company will not have access to cash through the Revolver and the Delayed Draw Term Loan, and
amounts outstanding under the New Facility will become immediately due and payable. If the lenders
do not extend the maturity of the New Facility or the Company is unable to obtain additional
liquidity, the Company will not have sufficient liquidity to operate its business and will be
unable to satisfy the obligations under the New Facility when due. If such
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events were to occur, the trustee under the applicable Indenture or the requisite holders of
Notes could accelerate the related obligations and exercise any other available rights and
remedies, and the Company would be unable to satisfy those obligations. In addition, the
Company could determine not to make interest payments under one or both classes of Notes when due,
and the resulting default would trigger cross-defaults under the other class of Notes as well as
under the New Facility. If such a default were to occur, the lenders under the New Facility and
the trustee under the applicable Indenture or the requisite holders of Notes could accelerate the
related obligations and exercise any other available rights and remedies, and the Company could be
unable to satisfy those obligations. As described above, other events, such as reduced levels of
cash collections, changes in vendor terms, penalties, or unexpected capital requirements, could
also affect the Companys ability to meet its obligations and continue operating its business.
The New Facility also requires the Company to meet certain minimum cash EBITDA and minimum
liquidity tests on a monthly basis, as such tests are defined in the New Facility. If the Company
is unable to comply with these covenants, a default would occur under the New Facility, which, if
the indebtedness thereunder is accelerated, could also result in a cross-default under the
Indentures. Upon a default under the New Facility, the Company would not have access to the
Revolver and the Delayed Draw Term Loan, and the lenders would be entitled to exercise any
available rights and remedies, including their right to exercise dominion over the Companys cash
on deposit in control accounts.
In addition, the New Facility and the Indentures contain covenants that include, among other
things, timely financial reporting requirements and restrictions on incurring, making or entering
into additional indebtedness, liens, certain types of payments (including common stock dividends
and redemptions and payments on existing indebtedness), capital expenditures, investments, and sale
and leaseback transactions. The Company failed to comply with its reporting covenants during 2004,
2005, and the first two quarters of 2006. However, it obtained waivers of the reporting covenants
for those periods and filed the required reports within the agreed extended period. Pursuant to
the New Facility, the cross-default period is 28 days from any financial reporting default notices
received under the Indentures. There can be no assurances that it will be able to
comply with the reporting covenants under the New Facility and the Indentures. If the Company is
unable to file its periodic reports on a timely basis and cannot obtain additional consents from
its noteholders and lenders and such a cross-default or an event of default occurs under the
Indentures, the lenders under the New Facility, the trustee under the applicable Indenture or the
requisite holders of Notes could accelerate the related obligations and exercise any other
available rights and remedies. In such an event, the Company could be unable or determine not to satisfy those
obligations.
As the Company will be unable to file the 2006 Form 10-K by March 16, 2007, it will be in default under the reporting obligations under the Indentures at March 16, 2007. As a result, either
the trustee under the Indentures or the holders of at least 25% of the outstanding principal amount
of each of the Senior Notes or Senior Subordinated Notes may provide a notice of default to the
Company. If the Company fails to file its 2006 Form 10-K within 30 days after the date of such
notice, the principal and interest outstanding under the Notes could be accelerated immediately and
any of the applicable trustee or the requisite holders of Notes could
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exercise any other available rights and remedies. As described above, a cross-default under
the New Facility will occur 28 days after any such notice of default is given under the Indentures,
absent a waiver. In addition, a default will occur if the Company cannot deliver audited financial
statements to the lenders under the New Facility by April 2, 2007. The existence of a default
under the New Facility or the Indentures will permit the lenders under the New Facility or the
trustee under the Senior Notes Indenture to prevent the Company from making the next scheduled
interest payment on the Senior Subordinated Notes, which is due in April 2007, the possible
consequences of which are described above.
Restructuring of Existing Obligations
In light of the Companys current financial condition and pending debt requirements, it is
essential that the Company restructure or otherwise address its obligations under the Senior
Subordinated Notes in advance of their maturity. A restructuring that would satisfy the Companys
objectives would require a substantial increase in the Companys equity capital and a substantial
decrease in the outstanding principal amount of the Senior Subordinated Notes. The Company may
seek to achieve such a restructuring by securing an infusion of cash, negotiating a consensual
exchange of the Senior Subordinated Notes for shares of the Companys common stock, or a
combination of the foregoing, among other means. Any such consensual restructuring would be likely
to result in the issuance of a substantial number of shares of common stock of the Company or
securities convertible into or exchangeable for common stock of the Company. The issuance of
equity for cash or in exchange for indebtedness could be at actual or implied prices that could
substantially dilute the Companys existing common stockholders and adversely affect the value of the Companys common stock. In addition, the issuance of a large
number of common stock to an individual investor or group of investors acting in concert could lead
to a change in the Companys management and Board of Directors and a change of control under
certain of the Companys agreements, including the Indentures and the New Facility. The Company
anticipates engaging in discussions with certain of its noteholders for the purpose of
restructuring its obligations under the Notes and expects to enter or has entered into
confidentiality agreements with such noteholders in order to provide information necessary to
enable such discussions. The Company does not intend to make any further public comment regarding
these discussions unless the parties enter into a definitive agreement. There can be no assurance
that these discussions will result in any agreement favorable to the Company.
Other Impact on the Company
The Company expects the persisting increase in competition from well-financed competitors to
continue to have an adverse effect on its business, liquidity, financial condition and results of
operations. In addition, the constraints on the Companys liquidity have limited its ability to
invest its operating cash flow in improvements to its fitness centers and address the aging of its
facilities, which may affect the Companys ability to compete. Public perception of the Companys
declining liquidity, financial condition and results of operations, in particular with regard to
the Companys potential failure to meet its debt obligations, may result in additional decreases in
cash membership revenues (particularly those associated with longer term membership contracts) and
increases in member attrition. In addition, if liquidity problems persist, the Companys suppliers
could refuse to provide key products and services in the future. Continuing liquidity concerns
could also negatively affect the Companys relationship with its
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employees by decreasing productivity and increasing turnover. If any of the scenarios
described in this notification develops adversely for the Company, there is a substantial
possibility that the Company would seek to or could be forced to reorganize its operations under
Chapter 11. Such a reorganization could cause the Companys common stock to be delisted from the NYSE, substantially curtail the trading market for the
Companys common stock, materially impair or eliminate the value of the Companys common stock and result in certain additional adverse effects on the
Companys financial condition and results of operations, as described in this notification.
NYSE Continued Listing Standards and Trading Halt Rules
Continued listing of the Companys common shares on the NYSE requires that the Company file
periodic reports with the SEC on time. The NYSE may initiate suspension and delisting proceedings
when a listed company such as Bally fails to file an annual report on Form 10-K in a timely manner.
The NYSE generally will begin suspension and delisting procedures if a company has not filed its
Form 10-K by the end of the twelve-month period following the due date for the report. In
determining whether to allow trading in a companys securities to continue, the NYSE will consider,
among other things, a companys financial health and compliance with the NYSEs qualitative and
quantitative listing standards, as well as whether there is a reasonable expectation that the
company will be able to resume timely filings in the future.
Continued listing of the Companys common stock on the NYSE is also conditioned upon the
Companys ability to maintain an average market capitalization in consecutive 30 trading-day
periods of at least $75 million. The Companys market capitalization has historically been
volatile due to fluctuations in the price of its common stock. Any sustained downward trend in the
price of the Companys common stock could cause the Companys 30-day average market capitalization
to fall below $75 million, in which case the NYSE could initiate delisting proceedings. As part of
such proceedings, the NYSE would consider any plan by the Company to regain compliance with
continued listing standards within a maximum of 18 months.
If the Company were to seek to reorganize its operations under Chapter 11, the NYSE could, in
its discretion, initiate delisting proceedings. The NYSE could alternatively elect to continue
listing the Companys common stock if it were to conclude that the Company is in sound financial
health despite having filed for Chapter 11 protection. However, if the Company becomes subject to
Chapter 11 proceedings, and the Companys average market capitalization falls below $75 million,
the Companys common stock would be subject to immediate suspension and delisting by the NYSE.
In addition, under an NYSE rule that became effective on March 5, 2007, the NYSE will
automatically halt trading in the Companys common stock if a trade is reported at a price of $1.05
or less, or if the common stock would open on the NYSE at a price of $1.05 or less. Once so
halted, trading cannot be resumed on the NYSE until the Companys common stock has traded on
another market for at least one entire trading day at a price at or above $1.10. While the
Companys common stock could trade on another market (such as NYSE Arca) pursuant to unlisted
trading privileges, there can be no assurances with respect to the ability to trade or the prices
of the Companys common stock on such markets.
In the event that the Companys common stock is delisted, or trading therein is halted as described above, the trading market for its common
stock would be substantially curtailed, and the ability of its stockholders to buy and sell common
stock would be materially impaired. In addition, a delisting or halt in trading of the Companys common stock could
adversely affect the Companys ability to enter into future equity financing transactions or use
its common stock in a consensual restructuring of the Senior Subordinated Notes.
Net Operating Loss Deductions
Under federal income tax law, a corporation is generally permitted to deduct from taxable
income in any year net operating losses carried forward from prior years. On September 28, 2005,
the Company underwent an ownership change (a Section 382 Ownership Change) for purposes of
Section 382 of the Internal Revenue Code of 1986, as amended
(Section 382).
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As a
result of a Section 382 Ownership Change in 2005, the use of the Companys federal tax loss
carryforwards from periods preceding the 2005 Section 382 Ownership
Change is subject to a significant annual limitation under Section 382. The
Company has net operating loss carryforwards of approximately
$784 million as of December 31, 2006, approximately $128
million of which are not currently subject to any annual limitation
under Section 382.
The Companys ability to deduct net operating loss carryforwards could be subject to further
limitation if it were to undergo an additional Section 382 Ownership Change. There can be no
assurances that future restructuring actions by the Company (including through a reorganization
under Chapter 11) or actions by third parties, including dispositions of existing shareholdings,
will not trigger a Section 382 Ownership Change resulting in a significant limitation on the
Companys ability to deduct net operating loss carryforwards in the future.
In connection with existing confidentiality agreements between the Company and each of
Liberation Investment Group, LLC and Pardus European Special Opportunities Master Fund LP, the
Company has provided each such shareholder with certain certifications, which the Company expects
will enable trading in the Companys securities by such shareholders as of the close of business on
March 15, 2007. Any significant trading activity in the Companys common stock by these
shareholders could trigger a Section 382 Ownership Change.
Retention of Jefferies & Company, Inc.
The
Company has engaged Jefferies & Company, Inc. as its financial advisor effective as
of February 24, 2007.
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