Bally Total Fitness (BTF) has over 420 facilities located in 29 states, Mexico, Canada, Korea, China and the Caribbean.
They operate under the Bally Total Fitness, Bally Sports Clubs and Sports Clubs of Canada brands. BTF clubs in Ontario currently include 9 clubs still operating as the Sports Clubs of Canada and 7 clubs operating as Bally Total Fitness.

Bally shares lost more than half their value after the company announced on March 15 that they might file for bankruptcy if they are not able to restructure their debt. Shares have fallen more than 90 percent in the past year as Bally has been struggling to attract new members. Bally put itself up for sale in 2005 but was unable to find a buyer. Latest financial reports have referred to $827 million in outstanding debt which includes $300 million coming due in October, and $45 million in cash. The last quarterly report filed was the third quarter of 2006.

There are signs of sale activity. As reported by Rick Caro below, Extreme Fitness in Toronto may be interested in 6 of the Canadian clubs. Contacts at Falconhead Capital, the new owners of Extreme, have declined comment at this time. GoodLife is also reported as being interested in 10 of the Canadian, Bally clubs. Bally still has 420 health clubs worldwide which are highly valued for their real estate and membership lists. The company hopes to avoid filing bankruptcy.

Matt Messinger from Bally head office provided the latest financial figures used above. The following is excerpted from the BTF investor update which referenced their form 8-k filed 3/16/07. You may access further details from this update by going to the Investor Information section of the Bally Total Fitness website. The remarks are by Barry Elston, Acting CEO.

“..since taking on our respective leadership roles at Bally’s 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. 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, we remain fundamentally optimistic about the long-term prospects for turning the Company’s performance around, once its underlying capital structure problems are resolved. After all, we are a billion dollar company, our operations generate positive cash flow, and we are still the best known fitness brand in a sector that has been growing at a reasonable rate in recent years. We also have high caliber employees throughout the organization who have continued to demonstrate a strong dedication to both the Company and the category during these last several challenging years. Our personal trainers, for example, and our group exercise instructors, in particular, are simply the best in the business.

Bally’s fundamental strategic challenge, as almost all of you have figured out by now, continues to be the need to reduce our debt burden and rationalize the Company’s capital structure and excessive leverage, so that we can invest more CapEx dollars in the Clubs to more successfully compete.”

MICHAEL LEVY ON BALLY

We asked Michael Levy, President of the Sports Clubs of Canada prior to the sale of SCC to Bally. if he would comment on the Bally situation. Michael, now Chairman of the IHRSA Board of Directors, has replied strictly on a personal basis, not representing any of his other business associations.

While I have, obviously little knowledge beyond what I read, my thoughts, and they are only my thoughts, are as follows:

The levels of debt are not sustainable and have been that way for a number of years. The reasons are both complex and convoluted, but in the end a restructuring seems, at least to me, to be the only means of getting out from under so much debt. This will mean, of course that the debt holders will probably end up with the company as the equity becomes totally diluted.

On the operational side, Bally is beset by a number of factors all leading from their inability to provide funding to keep up with the competition in the industry. LA Fitness, 24 Hour Fitness, Anytime Fitness, Town Sports and Lifetime Fitness are but a few of the competitive Fitness businesses that have put Bally on the defensive over the past number of years. With Bally having little or no capital to refurbish and replenish their capital base, it makes membership at Bally difficult as the competition has newer, brighter and better equipped facilities at competitive pricing.

Bally has, until very recently, resisted the change necessary in their membership model to compete in the industry. The three year membership is a recipe for failure in that the hook that the membership offers, a very low renewal after the original three year term, ensures that the economic model of every club is necessarily a declining revenue picture as memberships mature and renewal fees represent the majority of membership revenue. It is difficult to understand the logic of selling a membership that has a three year pattern of approximately $60 per month and then a renewal at rates approximating $15 per month.

Therefore, I believe that the inevitable restructuring must occur to enable Bally to get out from under debt, inexpensive e-memberships and leases that are too costly to maintain. While this will be a difficult time, the end will be a more successful company that can compete. However, as an IHRSA Board member, I also understand that when 4 million members face losing their club, it will be difficult for the industry and that is my real concern. IHRSA needs to be proactive in the determination of messages and working with the major club groups to ensure that existing Bally members are protected in some manner if Bally does go bankrupt. Hopefully, that will not occur and the restructuring will enable Bally to be successful.

Michael Levy is President of Casaral Inc. (www.casaral.com), health/fitness industry consultants.

JOHN FRITTENBURG ON BALLY

Michael Levy is right on! His analysis is very useful in understanding not only how Bally ended up in financial difficulties but how these factors can apply to other clubs today.

The current mark of successful club operations is better than average member retention, active program participation and frequent facility usage. Where an average member visited his or her club 1.5 times per week in the 90’s, today the ratio is 1.8 visits per week or more. Members are staying longer and using the club more frequently. Members today want full value or they are gone, even if the renewal fee is relatively inexpensive.

The Bally formula may have worked when there was a long line of potential members at their front doors and relatively few competitors - plus existing members willing to maintain their membership in spite of low usage. But today, competition is fierce and members are much less likely to remain as a member if they are not using the club. And. operators with low retention rates must vigorously pursue new members, which is more and more difficult in an increasingly competitive market place.

What can we learn from this? Clubs that focus most of their energies on new membership sales at the expense of an attentive retention strategy – which seems to be the case with Bally – will eventually have problems. A priority on glitz, glitter and sales at any cost is not recommended where members are seeking personal attention and measured results for their membership dollars. Positive and consistently enjoyable club experiences leading to a member’s decisions to stay, is the key to success in today’s highly competitive membership sales environment.

Investment in staff training focused on providing personal attention as well as vigilant facility care and maintenance, creative program design and periodic renovations add up to demonstrate a dynamic and member centered management style that is characteristic of the most successful health/fitness clubs.

John Frittenburg is President of the JF Group, health/fitness industry consultants in Canada.

RICK CARO ON BALLY TOTAL FITNESS

Bally TF has not filed for a Chapter 11 Reorganization so it is premature to speculate. It is selling off 16 clubs in Ontario (6 to Extreme Fitness & 10 to Goodlife). It may do some other things prior to a Chapter 11.

If they do file, it may be better for members, staff and the public. It may lead to closing or selling off the losers. It may create some renegotiation of real estate leases. Clearly, it will need to address its $300 million of senior subordinated debt due October, 2007. And they will have to pay all bills timely going forward.

Rick Caro is a 30-year veteran of the club industry and was the Founder, Past President and Director of IHRSA. He is now President of Management Vision Inc,. one of the leading health/fitness consultant services.

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