By Stuart Goldman (stuart.goldman@penton.com)

Bally Total Fitness, Chicago

• Shareholders attempt to overthrow the CEO, who is eventually fired.

• The Securities and Exchange Commission (SEC) investigates the company’s practices.

• The company files for bankruptcy—twice.

• A new CEO is hired, but a rival company sues over the hiring.

As eventful as the decade has been, the 2000s began on a somber note for Bally when Chairman Arthur Goldberg died in late 2000. Lee Hillman, who had been Bally’s CEO and president since 1996, added the chairman’s title to his name.

Bally spent the early part of the decade adding to its portfolio. In mid-2000, Bally bought 13 Gold’s Gyms in Portland, OR, a move that produced litigation on Gold’s behalf but ended in a settlement. Over the next two years, Bally bought Crunch Fitness and its 20 clubs for $90 million and later took over seven clubs operated by Planet Fitness. Bally also went outside North America for the first time by opening up clubs in The Bahamas.

During this time, Bally accepted an invitation to join the International Health, Racquet and Sportsclub Association (IHRSA). Bally was first asked to join IHRSA in 1987, but an outcry from IHRSA members, who questioned Bally’s ethical standards, put an end to the courtship at that time.

It wasn’t long before Bally’s business methods were put to the test again. Soon after Paul Toback took over for Hillman as CEO in 2002, Bally settled with then-New York Attorney General Eliot Spitzer, whose office investigated Bally after hundreds of consumers complained of deceptive advertising and high-pressure sales techniques. Bally agreed to reform its practices.

More troubles started popping up in the mid-2000s. Emanuel Pearlman, head of Liberation Investment Group LLC and a major stockholder of Bally’s, proposed efforts to separate Toback’s duties as CEO and chairman of the board. Later, an internal investigation by the Audit Committee of Bally Total Fitness blamed some of the company’s multiple accounting errors on Hillman and John Dwyer, who was Bally’s CFO from 1996 to 2004. The SEC also began its investigation into Bally for its accounting methods.

Financial troubles continued, forcing Bally to sell its Crunch clubs in 2005 to a private equity firm for $45 million, or about half of what Bally paid for Crunch earlier in the decade. The next year, Bally actively pursued a buyer, with Richard Branson’s Virgin Active among the potential buyers. Bally was more than $700 million in debt.

In early 2006, the power struggle at Bally came to a head at a shareholders’ meeting in Chicago, at which shareholders elected three new members to the Bally board: Barry Elson, Don Kornstein and Charles Burdick. All three were nominated by Pardus Capital Management, Bally’s largest shareholder at the time.

A majority of shareholders also voted on Liberation Investment’s proposal to oust Toback, but the measure did not receive the necessary 75 percent of the votes. A few months later, Toback was fired anyway. Elson was appointed acting CEO, and Kornstein was named interim chairman. During this time, Bally was working with its fourth different CFO in two years.

Before Toback’s ouster, a federal court dismissed a lawsuit against Bally, accusing the company of violating federal securities laws. Also, the New York Stock Exchange delisted Bally’s stock, relegating it to the Pink Sheets.

In May 2007, Elson resigned as acting CEO, and Kornstein was named chief restructuring officer as Bally prepared to enter bankruptcy. An equity group hinted that two potential buyers might be Town Sports International and Life Time Fitness, but as with the Virgin Active report, no transaction transpired.

In July 2007, Bally filed for Chapter 11 bankruptcy, listing assets of $397 million and debt of $761 million. Yet two months later, Bally emerged from bankruptcy after Harbinger Capital Partners, a New York-based private equity firm and one of Bally’s shareholders, bought the company for $233.6 million and became its new owner. Although club closings were predicted during bankruptcy, few were reported. A few months later, in February 2008, Bally reached a settlement with the SEC on the same day the SEC sued Bally on fraud charges relating to its financial statements.

In the summer of 2008, Bally looked to one of its main competitors, 24 Hour Fitness, and hired 24 Hour Chief Operating Officer Michael Sheehan as its new CEO. The move was quickly met by lawsuits filed by 24 Hour, claiming Sheehan took trade secrets with him to Bally. Two versions of this suit were dismissed in court. A third lawsuit is still pending.

Late in 2008, Bally again filed for bankruptcy, reporting $1.4 billion in assets and $1.5 billion in debt. This time, at least 20 Bally clubs closed, although Bally officials said the closings were not related to the filing.

“The burden of 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, leaving Bally with no alternative other than the actions announced,” Sheehan said in a statement.

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