Dec. 3 (Bloomberg) -- Bally Total Fitness Holding Corp., the operator of 349 gyms in the U.S., filed for bankruptcy little more than a year after emerging from court protection with financing from hedge fund firm Harbinger Capital Partners.

Bally and 42 affiliates sought Chapter 11 protection today in U.S. Bankruptcy Court in New York, reporting $1.4 billion in assets and $1.5 billion in debt. Bally, which claims 3.1 million members, exited bankruptcy in 2007 with $233.6 million from investors led by New York-based Harbinger.

It’s the second bankruptcy filing in three days involving a private equity firm-owned company. Hawaiian Telcom Communications Inc., a provider of local and long-distance telephone service, sought court protection Dec. 1 in Wilmington, Delaware. Carlyle Group, a Washington-based private-equity firm, owns Hawaiian Telcom through a subsidiary.

Bally, citing a drop in new member sign-ups and increased expenses, said it plans to reduce debt through court-supervised reorganization or a sale. The gym operator said it’s involved in “advanced negotiations” with some lenders over a possible sale, which would need court approval.

“Bally’s long-term indebtedness, coupled with the lack of refinancing options in today’s constrained credit markets, have limited our ability to restructure using out-of-court vehicles,” Michael Sheehan, Bally’s chief executive officer, said in a statement.

Existing Cash

Bally, which reported more than 100,000 creditors, said it owes $247 million in unsecured debt to U.S. Bancorp and $231 million to HSBC Holdings Plc.

Bally’s debt includes $291 million owed to first-lien lenders on a term loan, revolving credit and letters of credit. Second- lien debt is $247 million, and $221 is owed on subordinated notes.

The company said it will use existing cash reserves to fund its operations. If it’s able to negotiate a sale with the lenders, they would provide additional cash through debtor-in- possession financing, according to the statement.

Bally operates fitness centers under the Bally Total Fitness and Bally Sports Clubs brands in 26 U.S. states. Its operations outside the U.S., including 39 gyms in the Caribbean, Mexico and Asia, aren’t affected by the filing, said Larry Larsen, a company spokesman.

Bally has 6,820 full-time and 7,750 part-time employees, it said in court papers. Net revenue for the nine months ended Sept. 30 was $479.5 million, the company said.

Settlements With U.S.

In February, Chicago-based Bally settled a U.S. Securities and Exchange Commission lawsuit that accused it of overstating shareholder equity and understating losses. As part of the accord, the company agreed to comply with federal securities laws. The U.S. Justice Department also ended a separate criminal probe without taking action, Bally said at the time.

Bally’s financial statements were affected by more than two dozen accounting improprieties from 1997 to 2003, according to the SEC complaint, filed Feb. 28 in U.S. District Court in Washington. The regulator said Bally overstated its year-end 2001 shareholders’ equity by almost $1.8 billion, and understated net losses in 2002 and 2003 by a total of $183.2 million.

Bally last year won dismissal of a shareholder lawsuit accusing executives including former Chief Financial Officer John Dwyer of making misleading statements about finances. The company said in April 2004 that Dwyer had quit and the SEC was investigating its bookkeeping.

Bally hired Kramer Levin Naftalis & Frankel as its bankruptcy counsel and Houlihan Lokey Howard & Zukin as financial advisers, the company said today.

In its July 2007 bankruptcy filing, Bally listed assets of $397 million and debt of $761 million.

The case is assigned to Judge Burton R. Lifland, who is still overseeing the final stages of Bally’s 2007 bankruptcy.

The case is In re Bally Total Fitness Holding Corp., 08- 14821, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net.

Last Updated: December 3, 2008 15:03 EST