CHICAGO — It could be July before the industry knows the true financial state of Bally Total Fitness, but the company's $800 million debt, the continued postponement of financial statements and an investigation by the Securities and Exchange Commission (SEC) show a company in trouble, some experts say.

Last month, Bally Total Fitness Holding Corp. announced it would be July 2005 before the company would release audited and restated financial statements for the first quarter 2000 through the first quarter 2004. All of this signals that the problems the company hinted at before are bigger than originally stated, said Rick Caro of Management Vision.

“Between the SEC investigation and delays in reporting, you had to assume something like this was afoot,” said Caro. “For them to go back this far, it will take some time. There's no question the accounting was not consistent with proper accounting…They still have huge debt and the business clearly is in danger.”

Because of the restatements, financial statements and other communications related to the periods in question should no longer be relied upon, said Bally. In addition, until the completion of the multi-year audits of the periods in question, Bally will be releasing unaudited operating and cash flow data on a quarterly basis.

The fact that Bally is not reporting its financials can create pressure from creditors to pay off their debts, said Caro. Bally has two interest-bearing notes on which it must make substantial quarterly coupon payments, a November 15th report from Banc of America Securities' analyst Gary Cooper stated. The report noted concerns about Bally's ability to meet its debt obligations in the future and suggested that restructuring would be best for the company. Bally has announced it is seeking consents to waivers of defaults from holders of its two senior notes.

Bally is in a bit of a fix with its $800 million debt. The company does not generate a lot of free cash flow, said Cooper's report, which also noted that Bally's capital expenditures have exceeded its operations cash flow in the past few years. Reviewing Bally's risk factors, Cooper noted, “With an inferior customer offering and leveraged balance sheet, we believe Bally Total Fitness has no real growth prospects.”

The report went on to state “unless Bally sells its portfolio of receivables, we believe the company may have difficulty meeting its debt and interest payments in the future.”

In a conference call with investors and analysts in November, Paul Toback, CEO of Bally, said that the company has been approached by several parties to purchase portions of the company, but none of the offers has been serious enough to take to the board. However, he said that the company is open to strategic divestitures, particularly if those divestitures will help the company focus on its core business of running clubs.

Toback told investors that the plan the management team laid out to improve the company is working, but “it takes time.”

Bally's restatements relate to how the company recognized membership initiation fees during the periods in question and how the company recognized, prior to the second quarter of 2003, recoveries of unpaid dues on inactive member contracts.

The company will also be revising its method of accounting for revenues in 2003 and the first quarter of 2004. The Audit Committee also determined that the company's allowance for doubtful accounts was inadequate for years prior to 2003.

In addition, Bally expects to restate prior periods to record a liability related to repayment obligations of approximately $22 million due in 2015 or later on membership contracts sold by a subsidiary before Bally acquired it in the late 1980s.

More accounting issues could come to light before year end when Bally's Audit Committee is expected to complete its investigation.