Fitness Business Pro

Tug of War.

Byline: Lawrence Meyers, contributing writer, and Amy Florence Fischbach, managing editor

Given the current health craze, one would expect Bally Total Fitness to be the category-killer of the fitness industry. Yet despite sporting 440 clubs, 3.6 million members and $1 billion in annual sales, the company has been saddled with accounting problems and massive debt since its 1996 IPO. For the past three years, Bally has been led by Chairman and CEO Paul Toback - and for the past several months, some Bally shareholders have demanded the ouster of Toback, leading to a proxy contest to do just that at the annual shareholder meeting on Jan. 26.

Bally recently announced that revenues are up, costs are down and the company is turning itself around, so why is Liberation Investments, Bally's second largest shareholder, trying to push Toback out as CEO? As the CEO of Bally, Toback has presided over a 60 percent stock decline, failed (until recently) to file financial reports since early 2004, been unable to stem membership attrition, hasn't yet steered the company to an annual profit, lost several key personnel and managed a company facing investigations by the Securities and Exchange Commission (SEC) and Justice Department.

Toback had another explanation for the calls for his departure. He alleged that Emanuel Pearlman, managing director of Liberation Investments, was a close personal friend of Lee Hillman, former CEO of Bally, and that Hillman invested in Pearlman's Liberation Investments.

"This is an incestuous group of angry, disgruntled employees who are trying to take us back to the failed practices of the past," he said. "Shareholders can make the choice to move the company forward on a positive track or go back to more debt, deals that have no value to the company or no operational plan in place."

Pearlman denied that he and Hillman were working together to take over Bally. He said Hillman invested $100,000 in his $60 million fund and was a personal friend, but said his fund was not started just to buy Bally stock.

"That has been a lot of noise the company wants to make to hide behind the realization that shareholders are not satisfied with current management," he said.

Figuring It Out

Shareholders may have a reason to be upset with Bally's past performance. Since 2001, the fitness chain has had 900,000 people join annually, yet the company has lost an equal number over the same period. Complaints of poor club maintenance and allegedly deceptive sales practices stretch back a decade. Despite reprimands for these practices by the Federal Trade Commission, the New York Attorney General and Oregon's Justice Department, those complaints continue under Toback.

This inability to retain members has only deepened Bally's financial crisis, one driven by more than $743 million in debt, requiring $70 million in annual interest payments. In a July 13 press release, Bally provided results from the first five months of 2005, a time frame that does not permit a comparison with the standard six-month reporting periods that Bally had released in the past. The five-month period results showed positive free cash flow ($6. …

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