In my view, the factors leading Bally to flatline overpower those favoring a revival. Here are the investment negatives:

• Debt. In September 2006, Bally executives warned Bally could miss the $275 million payment on its 9.875% senior subordinated note due by April 15, 2007. In total, Bally has $543 million in long-term debt and $685 million in deferred revenues -- cash received from members but not yet earned. At the end of 2005, Bally forecast -- no doubt with some trepidation -- a huge cash call in 2007. Specifically, Bally owed on its long-term debt and capital leases $15 million in 2005, $512 million in 2007, $4 million in both 2008 and 2009, and $235 million thereafter.
• Accounting weaknesses. Bally has significant problems with its accounting systems which cast doubt on the reliability of its financial statements. For example, Bally identified 11 material weaknesses in its internal control over financial reporting at the end of 2005. In 2004, Bally restated its 2003 and 2002 results and is now the subject of shareholder lawsuits. Furthermore, Bally is being investigated by the SEC and the US Attorney's office.
• Covenant violations. Bally violated terms of its lending contracts with holders of Senior Notes and Senior Subordinated Notes. Specifically, Bally failed to comply with its financial reporting covenants during 2004, 2005 and 2006. While it obtained waivers from its creditors on these violations, Bally still must meet interest coverage and leverage tests and if it violates them, it will likely will not have adequate liquidity to meet its operating needs.
• Negative net worth. As noted before, Bally has a negative book value of $1.4 billion which indicates Bally would have more liabilities to pay than the money it would get from its assets, should it liquidate immediately -- leaving no security for bondholders.
• Negative cash flow. Bally generated operating income of almost $76 million last December, and yet had interest payments of about $85 million. This trend continued during the first half of 2006, when its operating income of $42 million was $7 million less than its $49 million worth of interest payments.

The positive factors include:

• JP Morgan loan. Bally escaped default recently only after creditors offered it a new $284 million loan to refinance the debt Bally was scheduled to repay in April 2007. The crisis was averted when Bally signed a new credit pact arranged by J.P. Morgan Securities that includes a $34.1 million facility to fund capital expenditures. This pushed back the payment date on the debt to October 15, 2007.
• Stock ownership by big hedge funds. Big hedge funds are betting that Bally's stock can rise. Pardus Capital Management is Bally's largest shareholder with 13.6%, Liberation Investment Group holds 11.1%, Dimensional Fund Advisors owns 7.7% and SAC Capital Advisors owns 6.9% of Bally.
• New management. Thanks to a push from these hedge funds, new management under interim Chairman Don R. Kornstein -- who spent 18 years as an investment banker with The Bear Stearns Companies (NYSE: BSC) -- and interim Chief Executive Barry Elson -- who previously ran the New York Nets, the New York Islanders and the Colorado Rockies -- is in place after Pardus & Co. forced Paul Toback to resign as chairman and CEO in August. It remains to be seen whether these managers can fix Bally but perhaps they'll stop the bleeding and take it private with the help of Blackstone Group.
• Short-term cash raising initiatives. Bally recently announced that it agreed to a sale and leaseback of four owned Bally Total Fitness clubs. The deal will provide $10 million of net proceeds. Bally owned 46 clubs and leased 363 at the end of 2005. Perhaps it could raise more cash through sale-leaseback transactions related to some of these other owned clubs.
• Potential operating improvements. Andy Liu, a credit analyst at Standard & Poor's, believes that Bally must boost membership, however, in his view, the sharp rise in new members is still "insufficient to meet the [October 2007] maturity." If Liu is right, Bally will need to make a more fundamental change to stay out of bankruptcy.
• Potential change in control or restructuring. Ultimately, Bally could be forced into an outright sale or merger. Barbara Cappaert, an analyst at KDP Investment Advisors, thinks the best strategy for Bally would be to negotiate some sort of debt restructuring -- e.g., an out-of-court partial debt-to-equity swap for the senior subordinated notes due in October 2007 could be an attractive option.

Bally's new management has less than a year to come up with enough cash to pay its creditors. If its members' physical health was as lousy as Bally's fiscal condition, I'd say they should run -- not walk -- to a healthier health club and so should Bally's shareholders.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, and a Professor of Management at Babson College. He has no financial interest in the securities of Bally, Bear Stearns, or JPMorgan Chase.