Bickerin’ at Bally’s as Liberation Group looks for changes at the top

The announcement by Bally Total Fitness that it was seeking an extension for filing its financial statements for 2002 to 2004 has led to a war of words between the Bally’s board of directors and members of Liberation Investment Group LLC, which owns a 12 percent stake in the chain.
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The announcement by Bally Total Fitness that it was seeking an extension for filing its financial statements for 2002 to 2004 has led to a war of words between the Bally's board of directors and members of Liberation Investment Group LLC, which owns a 12 percent stake in the chain.

While back-biting, power struggles and board room bravado are fairly commonplace in corporate America, often these skirmishes are quietly—although often heatedly—played out behind closed doors. But in this case, both Liberation and Bally have decided to take a far more public route through dueling letters and press releases, as well as SEC filings.

The running dialog began on July 18 when Liberation Chairman and CEO Emanuel R. Pearlman and its President Gregg Frankel sent a letter to Bally's board in which they said they “were surprised and disappointed by the company's July 13, 2005, press release reporting management's inability to meet generous self-imposed deadline accepted by the public debt holders for financial reporting.” (See SNEWS® story, July 14, 2005, "Fitness financials: Bally seeks another extension on financial statements.)

The letter then went on to hold the company's management accountable for the many problems facing it, even going so far as using the term “flounder” when describing the management teams efforts to right the shop and improve shareholder value.

Liberation's suggestions for speeding the process of fixing the mess at Bally was to call on the board to look for a new CEO to replace Paul Toback and also to appoint Pearlman as a member of the board.

When questioned about the letter, Pearlman told SNEWS® that he had no further comments beyond the SEC filings.

Acting unusually quickly for Bally—at least more quickly than it has in releasing its restated financials--it only took a day for the board to reject both of Liberation's suggestions in a press-released letter of its own on July 19.

In fact beyond giving its “unanimous and unqualified” support for Toback and unanimously rejecting Pearlman's attempt to join the board it instead implicated him in many of the company's current problems.

“Given your past involvement with the company as a financial advisor to former Bally CEO Lee Hillman during the years that we are now in the process of restating, we are surprised by your lack of understanding of the time and resources required to remedy the accounting so we can resume normal reporting,” the letter from the board stated. “Bally paid you millions in fees and the stock price, during 2002 alone, fell from a high in the mid 20s to a low of 6. You had years of opportunity to contribute to making Bally a successful company. Instead, you and your colleagues rewarded Bally shareholders with unprecedented levels of new debt and expensive acquisitions, without an operating plan or a capital market plan to increase shareholder value.”

Expectedly, Liberation—in the form of yet another letter on July 21, this time from Frankel alone—took exception to much of Bally's response going so far as to say that parts were “laced with innuendo and factual misstatements.”

“Mr. Pearlman served only as an outside advisor to the company on a limited number of specific transactions, not as the chief executive. To attribute the decline in Bally stock to him is ludicrous. In addition, the acquisitions to which you allude were considered good deals at the time, were fully vetted by management and each transaction was approved by the board,” wrote Frankel in the letter. “Liberation continues to believe that the capital markets have lost confidence in the current CEO, and we do not find this surprising in light of the fact that for two of the years for which you are restating financials Mr. Toback served as the CEO of the company and personally signed and certified those financial statements under Sarbanes-Oxley.”

Perhaps the public airing of the dirty laundry between Bally and Liberation Investment Group will come to an end with the board's latest, and seemingly last, letter to Pearlman on July 25.

In this letter the company's board of directors in one short paragraph succinctly reiterated its support for Toback, saying he and his team are “executing our turnaround plan and moving Bally forward to maximize shareholder value.” Additionally the board said that it was standing by its decision not to appoint Pearlman to the board. Finally, the board said it was not going "to engage in ongoing correspondence by again addressing specifics.”

While Bally may not be engaging in ongoing correspondence -- management did not return calls from SNEWS® for comment by deadline -- it is perhaps because its board members are waiting by the mailbox for the next installment of this war of the words.

SNEWS® View: With the tough times Bally has had the past couple of years it seems reasonable that some would be clamoring for a management change – and perhaps a change could be the answer. Still, one has to wonder why a large investor such as Liberation Investment Group continues to go after the management team and bad mouth the direction of the company all while increasing its stake in the company and trying to join the board. One also has to wonder why a publicly traded company the likes of Bally would stoop to such childish goings-on. Then one must question what affect all this bickering will have not only on Bally's stock price going forward, but also on its overall direction as a company. Some club insiders also wonder what this will do to those on the Street as companies look for increased capital and public offerings to fuel their growth. Orwellian this war of the words somehow seems.

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