defa14a
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Attached
hereto is a transcript, as corrected, of a Proxy Talk teleconference held by Glass Lewis & Co. on
January 20, 2006 in which Paul Toback, Chairman and CEO, Adam Metz, Director, and Marc Bassewitz,
Senior Vice President and General Counsel participated.
Important Additional Information Filed with the SEC
Bally filed a definitive proxy statement with the SEC on December 27, 2005, as amended on January
9, 2006 and January 13, 2006. The proxy statement was mailed to Bally stockholders on December 28,
2005. INVESTORS AND STOCKHOLDERS ARE URGED TO READ THE PROXY STATEMENT CAREFULLY BECAUSE IT
CONTAINS IMPORTANT INFORMATION ABOUT BALLY. Investors and stockholders are able to obtain free
copies of the Proxy Statement and other documents filed with the Securities and Exchange Commission
(the SEC) by Bally through the web site maintained by the SEC at www.sec.gov. In
addition, investors and stockholders are able to obtain free copies of the Proxy Statement and
other documents filed with the SEC by Bally by directing a request to Bally Total Fitness Holding
Corporation, 8700 West Bryn Mawr Avenue, Chicago, Illinois 60631, Attention: Investor Relations:
Proxy Request.
LISTING OF PERSONS WHO MAY BE DEEMED PARTICIPANTS IN THE SOLICITATION AND CERTAIN INFORMATION
CONCERNING SUCH PERSONS IS SET FORTH IN THE COMPANYS DEFINITIVE PROXY STATEMENT DATED DECEMBER 27,
2005, AS AMENDED ON JANUARY 9, 2006 AND JANUARY 13, 2006, WHICH MAY BE OBTAINED THROUGH THE WEB
SITE MAINTAINED BY THE SEC AT www.sec.gov.
GLASS, LEWIS & COMPANY
January 20, 2006
3:00 p.m. EST
OPERATOR: Good day ladies and gentlemen and welcome to the Glass Lewis Proxy Talk conference
call. All lines have been placed on a listen-only mode for this call. Institutional investors
that would like to ask questions of the participants may do so by e-mailing them to
proxytalk@glasslewis.com.
Before we get started, I would like to remind everyone that our conference call series and this
call in particular should not be considered a solicitation of proxies by Glass, Lewis and Company.
Glass Lewis has not sought permission to do so from Securities and Exchange Commission, nor will
it. This call is for information purposes only and should not be construed as providing investment
advice. In addition, Glass Lewis makes no representation regarding the accuracy, completeness of
reliability of any statement, information, opinion or view presented by its guest speakers. As a
reminder, this conference call is being recorded.
At this time, it is my pleasure to turn the floor over to your host, Kevin Cameron, President of
Glass, Lewis and Company.
KEVIN CAMERON, PRESIDENT, GLASS, LEWIS AND COMPANY: Thanks everyone for joining us today, and
welcome to Proxy Talk. Today were going to be speaking with Bally Total Fitness Holding Corps
Chairman and CEO, Paul Toback, Director Adam Metz, as well as Ballys General Counsel, Marc
Bassewitz.
The subject of todays call, obviously, is the numerous proxy filings in light of Ballys upcoming
annual meeting scheduled for January 26th. As most of you probably know, Liberation (ph), a hedge
fund which holds approximately 11 percent of Ballys stock, is looking to amend Ballys bylaws to
give shareholders the authority to remove the companys CEO, and in addition, to give shareholders
certain powers with respect to removing officers of the company. Finally, Liberation (ph) is
seeking that shareholders approve the removal of Mr. Toback, the companys CEO.
In addition to that, somewhat confusingly, another hedge fund holding, slightly greater stake in
the company, Pardus (ph), has also filed a proxy in the same, for the same annual meeting. And in
that proxy has proposed three nominees and has also recommended that shareholders vote against the
companys equity compensation plan.
Thank you, Mr. Toback, Mr. Metz, Mr. Bassewitz for joining us today. And in light of the rather, I
must say, multiplicity of proxy cards floating around, I think it would be very helpful for all of
us if you could give us some background, and then we can delve into some more specific questions.
So Mr. Toback, the floor is yours.
PAUL TOBACK, CHAIRMAN & CEO, BALLY TOTAL FITNESS HOLDING CORP: Well thanks very much Kevin, and
thanks to Glass Lewis for providing todays forum as an opportunity for us to get the facts out
about Bally Total Fitness so that shareholders can really make an informed decision regarding how
to vote their proxy. And more importantly, on the turnaround that were accomplishing here at
Bally.
First, Id like to address three key priorities that I established for the company when I became
CEO three years ago. These included fixing the operations, installing a culture of compliance,
transparency and credibility to Ballys finances, and finally, addressing the significant amount of
debt that we inherited.
When I took this job, it was apparent to me that our company was in trouble and our business model,
at the time, was broken. Numbers of sales had been declining for three years, and investors were
wondering whether we could ever turn that trend positive. Our contracts were complex and difficult
to understand. Our staff wasnt properly trained or incentivized. Little focus was placed on
member retention, and our facilities were starting to look old and outdated. In addition, there
was little focus on controlling operating costs.
To that end, and following a comprehensive and strategic analysis of the business, based on
thorough customer research and our new management team in consultation with expert outside
advisors, developed and launched a
radical overhaul of the entire model, eliminating the high
pressure sales tactics that we had been known for historically. Weve redefined and simplified our
sales process for members to let them define the type of membership, amenities and pricing
structure they prefer. Weve offered members a choice of how to join by adding pay as you go
memberships to our portfolio of plans.
Weve also introduced a new club design, offering higher end amenities and a more contemporary look
and feel over our traditional clubs. This model was developed based on new research and customer
usage trends, and has now been introduced in some of our clubs to great success.
Weve continued to grow our product and service offerings with a special emphasis on personal
training. Weve also launched an online nutrition and weight management program. Weve expanded
our private martial arts training programs and are now the nations largest provider of martial
arts.
Were continuing also to build on our successful nutritional line of products that are now
available not only in Bally but at 7,000 retail outlets nationally, including Wal-Mart.
Weve also continued to expand through franchising, and believe that for the future, franchising
will be a very cost effect way for Bally to grow. We are the largest brand health club now in
China, and just announced a new club this week in South Korea. Given our strong brand, we believe
that franchising can also be an excellent way for us to grow domestically, especially in smaller
markets without a capital investment by the company.
Most importantly, we are a service business, and since I took over, weve taken service as
seriously as weve taken sales historically at Bally. Weve created a culture of accountability
with a focus on profitability rather than just on sales. Now employees are incentivized to care
more and to do more.
Our new advertising campaign is also being well received. Rather than the same old focus on hard
bodies and celebrities, which our research showed intimidated people, especially women, our new
campaign emphasizes wellness across all aspects of life and real people achieving real results at
Bally. Our research shows that this kind of authenticity is resonating with consumers who may be
contemplating a Bally membership.
In terms of restoring credibility to our financial statements, our second initiative, this
initiative included investing in the systems, people and processes necessary to manage and report
our financials in accordance with GAAP. At the same time, we had to comb through literally
thousands of financial entries to uncover and restate more than two dozen accounting errors from
prior years.
Today at Bally much of the financial organization and finance team are new. And as you know, we
recently completed the successful restatement of five years of financials to ensure that investors
that investors can now accurately gauge the companys financial health and progress going forward.
As you may recall, we reported a 52 percent increase in 2004 versus 2003 operating income before
impairment charges, and a 70 percent increase in operating income before impairment charges for the
first nine months of 2005 over 2004 to 61.7 million. We also reported for the first nine months of
2005 a net profit of 1.8 million.
Finally, recognizing that Ballys capital structure also needs to be overhauled for long-term
success, our board has engaged JP Morgan Securities and The Blackstone Group to evaluate strategic
alternatives that may include a recapitalization sale or some other type of arrangement that brings
fresh capital to the organization so that we can reinvest in this business and more it forward.
Now turning to the criticisms of management by our opponents, our financial restatements did take
longer than anticipated. Initially we believed we were dealing with only a change in revenue
recognition. We then found dozens of errors and had to fire our treasurer and controller and bring
in an almost entirely new senior financial team. While we, like you, wish we could have filed our
statements sooner, in our view, given what we were up against at the time, we did everything we
could to complete this enormous task quickly and accurately, including weekends, holidays and all
kinds of overtime and extra people.
Some of our critics have also questioned our decision to put in place a shareholder rights plan
this fall. As we all know, rights plans can be helpful in protecting shareholders from letting a
holder or a few holders accumulate controlling interest in a company without paying anywhere near
the premium it deserves. In our view, a rights plan became necessary to keep partisan Liberation
(ph) from seizing a controlling interest in the company on the cheap, which could have happened
given the pace at which they were accumulating shares while we were still in a quiet period.
Also, its important to note that our rights plan is scheduled to expire in July unless approved by
the shareholders, which we believe is an appropriate timeframe to enable our strategic process to
proceed in a fair, open and transparent fashion.
Its
interesting to note that neither Liberation (ph) or Pardus (ph) has ever responded in a
positive way when asked to participate in this process like anyone else. Instead, they prefer to
launch their campaign of diversion to pressure Ballys board to invite them into a process that
they want to control.
Finally, though much has been made about management stock sales, and especially my own decision to
sell a portion of my Bally holdings. As Ive said previously, this decision was made for personal
and family reasons following many years of accumulating Bally stock and never selling more than a
few shares. I reiterate today that I am as much, if not more, optimistic about Ballys future than
I was on the December earnings call. And nobody should mistakenly interpret my decision to reduce
my own Bally holdings to anything other than a personal decision.
The old saying goes, you know, that the proof of the pudding is in the tasting. So how do our
results taste? Well weve moved the company from losses to profitability. Weve demonstrated that
our new model is resonating with potential members through growth in new memberships, and weve
instilled a culture of accountability thats resulting in a permanently lower cost structure. We
better align the interest of employees with those shareholders by incenting value creating
behavior, and were in the process of addressing our capital structure.
The bottom line decision that you, the investors, have to make in the next few days is whether you
agree with the progress and the strategic direction that this management and board are pursuing for
Bally. We believe weve clearly outlined the challenges we inherited, discussed our progress in
addressing them, and defined a number of strategic alternatives were evaluating that will
ultimately result in a strong, well capitalized company thats poised for profitable growth and
shareholder value creation.
We also question the agenda and merits of the oppositions arguments. These are people who have
publicly acknowledged that our financial performance has exceeded Wall Street expectations. They
have no operating experience, no plans to turn around Ballys operations, and no suggestions for
how to lead this company.
Now let me turn the discussion over to Adam Metz. Adams the co-founding partner of Polaris
Capital and a member of our board of directors. Adam will briefly address our strategic process as
well as make a strong case for our board nominee, Eric Langshur, the Chair of our Audit Committee.
Thank you. Adam.
ADAM METZ, DIRECTOR, BALLY TOTAL FITNESS HOLDING CORP: Thanks Paul. Thank you, Kevin.
While the board believes Bally is on the right path in turning around operations, we also recognize
how imperative it is to address the challenge that our current capital structure poses. As Paul
mentioned, to that end, the board retained JP Morgan Securities and The Blackstone Group, two
highly qualified advisors to explore a range of alternatives to enhance value for all our
shareholders.
Let me reiterate and emphasize a few key points on the process. First, the board has established a
special committee comprised of independent directors, which will be led by our lead director, John
Rogers, to manage the process with our financial advisors.
Second, the board is committed to running an independent process, a process that is fair, open and
transparent and that we believe will generate the most value for Bally shareholders.
And finally, as we have stated, Ballys management will not align itself in any way with any bidder
during the process for the sale and refinancing of the company until a winning bidder has been
chosen.
We are committed to the integrity of the process. This special committee will work directly with
our financial advisors to move the process forward, and we look forward to communicating key
developments as the process progresses.
Turning now to Ballys director nominee, Eric Langshur, we continue to urge you to support him in
the upcoming election. Eric is an independent director who currently serves as the Chair of
Ballys Audit Committee. My impression of Eric is that he is hardworking, competent, smart,
independent and very engaged. Eric is currently leading the team in the 2005 audit. Given Erics
knowledge of the company and successful leadership during such a critical period for Bally, we
firmly, and I personally, as a member of the audit committee, believe he is really the right choice
to continue to serve on Ballys board.
Thank you very much. Kevin.
KEVIN CAMERON: Thank you, Adam, and thank you, obviously, Paul. And I think at this point it
would actually be a good, good for many of the people on the call to understand exactly what the
situation is with your proxy vis-à-vis that of Pardus (ph). My sense is that there is significant
confusion, especially in light of the recent press releases on the 12th and 13th regarding exactly
what agreement, if any, there is between you and Pardus (ph) with respect to nominees. My
understanding in looking at your most recent press release is that the company has agreed to expand
the size of the board to 10 and allocate three of those slots to
Pardus (ph) nominees. Am I
correct?
PAUL TOBACK: Well Kevin I understand theres a little bit of confusion. Certainly from our
perspective we think an easy way to solve the confusion is to vote the white card. With that said,
let me try and clarify some of the actual differences. There isnt really an agreement, so to
speak. What weve done, from the board perspective, is agree to nominate two of the people in
Charles Burdick (ph) and Barry Elson (ph) that Pardus (ph) has proposed. And I think that the
documents you are referring to are we made public the proposed settlement that we had offered
Pardus (ph) so that shareholders would understand that not only did we voluntarily, on our own,
agree to, you know, put two of their directors on our slate with no conditions, no questions, no
strings attached, but that even in private discussions, we had gone further, agreeing to or hoping
to get an agreement to expand the board to 10 so that Eric Langshur, as Adam eloquently stated,
whos done a fantastic job on the audit committee, would stay on the board and that we would then
agree to take all three of the nominees Pardus (ph) put forward.
That was rejected by Pardus (ph).
I mean I think from our position we believe we offered Pardus (ph) the chance to get more than
they would ever get if they had a successful victory, I guess, on next Thursdays meeting. And
they turned that down. So it certainly makes us question what they, what they really wanted. But
in the end, were supporting two of their nominees, and we believe that Eric Langshur is the best
third nominee given his experience and his vital role to the company.
ADAM METZ: Good. And maybe Ill add something as well, which perhaps added to the confusion. The
board took some steps, which was I guess a couple of weeks ago, which we think enhances the process
and enhances the governance. We appointed a lead director, independent director John Rogers who is
head of Ariel Capital (ph), a very highly regarded firm. We appointed a special committee,
established a special committee thats going to work directly with the financial advisors on the
strategic process. We got an agreement from that management will no longer have any ability to
work with any bidder on, as part of the process, which management actually volunteered and agreed
to.
These things were done because the board thought they were good things to do in and of themselves,
but they are also things that were part of the settlement discussions
with Pardus (ph), but we
agreed to do them just because we thought in and of themselves they were the right things to do.
KEVIN CAMERON: So just to be crystal clear for every, the benefit of everyone on the call. The
lay of the land, as we sit here today, is that the company and Pardus (ph) had been engaging in
these discussions. As part of that the company had proposed that
Pardus (ph) be allowed to
nominate, or the company would support three of Pardus (ph) nominees, the board would be expanded
to 10, Mr. Langshur would become, appoint, would be appointed to a class two director slot, but
that as we sit here today, there is no agreement on the table unless the companys position is to
vote, in fact, the white card for Mr. Langshur and the two Pardus (ph) nominees.
PAUL TOBACK: Thats right I guess. And also just to go back to what Adam said, some of the things
that we had been discussing with Pardus (ph), we as the board and the members of the independent
board believed were the smart, right things to do. And so we just agreed to do them voluntarily
even though they were subject of the negotiations with Pardus (ph).
And they were things Pardus
(ph) had asked for us, so really when it comes down to it, we, you know, we dont, I think there
had been some reference by Mr. Pearlman (ph) to the fact that, you know, this is costing a lot of
time and money. We agree with that, and so we dont understand why a settlement wasnt forthcoming
sooner and why, you know, all this distraction needs to continue to take place.
KEVIN CAMERON: I guess there is significant confusion still, and maybe its not a question you can
answer. Maybe its a question that only Pardus (ph) can answer. Why wouldnt they accept a deal
where under they would get, in fact, three nominees out of 10? Is it an aversion to Mr. Langshur
continuing to sit on the board as a class two director? Or was it there were other points within
the agreement that you couldnt come to some mutual understanding on.
PAUL TOBACK: You know, Kevin, I think thats really a great question, probably one better directed
to Pardus (ph). We really have tried very hard because we understand that the distraction and the
noise makes shareholders nervous. We worked diligently, we have thought, for months now to try and
come to an amicable agreement. And as I said earlier, I think the key part of the settlement
discussions is that Pardus (ph) would have, under the settlement we proposed, got not only what
they could get next Thursday, but more than that. And we thought that was a fair way to approach it
given that it was in everybodys interest to compromise and move on and get about the business of
making this companys turnaround a reality.
KEVIN
CAMERON: And of the three Pardus (ph) nominees, obviously youve essentially endorsed two.
Why those two rather than the third, Mr. Kornstein (ph)?
PAUL TOBACK: Well I think it really goes the other way, and that is we believe that Mr. Langshur
is extremely valuable. You know, he is a relatively new board member having been appointed in
December of 2004, so his perspective is fresh. His energy is enormous. His interest has been, you
know, very acute. Hes been very diligent in really learning about the company. And his
contribution when our former audit committee chairman got seriously ill, to step in and really see
the process through to completion, which was no small task, I think speaks volumes not only about
his character but about his abilities.
KEVIN CAMERON: And so, again, just to hammer the point home, the companys recommendation is to
vote the white card in accordingly nominee Langshur and the two Pardus (ph) nominees, correct?
PAUL TOBACK: Thats right. And again, we believe that that certainly we want shareholders to
understand that we are listening. We understand the viewpoint that there should be fresh
perspectives, smart people on the board with different backgrounds. We also believe that was
accomplished by the two very recent appointments that the nominating committee suggested to the
board, that the nominating committee was aided by Russell Reynolds (ph) in conducting an
independent search. And Adam Metz and Steve Rogers (ph) are those two new directors. You know,
Adam obviously comes with a great background having been CFO and CEO of a public company, serving
on another public board. And Steve Rogers, I believe, serves on two or three other public boards
and is an extremely well respected professor at Kellogg Business School here at Northwestern in
Chicago. So were really pleased that, you know, no matter how this comes out next week, there
will be at least four directors of a nine person board who will be new within the last 45 days.
KEVIN CAMERON: Question for you on somewhat of a related but somewhat tangential topic, which is
you mentioned earlier the appointment of a lead director, Mr. Rogers, and the question obviously is
having concluded that the creation of a lead director slot made sense, why didnt the company take
the obvious next step, which in fact is becoming increasingly common and separate the chair and CEO
and create Mr. Rogers as chair?
PAUL TOBACK: Yes, I believe that the right answer to that is, you know, every board seeks the
right way in which to make sure that its got the most effective governance and the most, you know,
open processes possible. And I think John winds up being an ideal candidate for the lead director,
and I think the board felt at that, at this time that that was the right move to make. Certainly,
I think one element of that came out of the boards interest in making
sure that there was
continued confidence, you know, in the management and the board as we went into this process where
we would be speaking to investors about the status of the company, the credibility of our financial
statements. Adam can probably speak to that as well.
ADAM METZ: Yes, and maybe its just a matter of semantics, Kevin. I think, you know, we think
especially with the strategic process its good governance and makes good sense to have a lead
director. Having said that, given the kind of circumstances, we believe that the company is on the
right track and doing the right things operationally, addressing the capital structure, its all
the right things to do. And we didnt want to, at the same time, undermine the senior management
team here. You know, I think it comes down to maybe semantics. I think well have, you know, as
with all boards, you know, we have a lot of meetings of the independent directors separate from
management, and John is really taking the lead in doing the things in terms of organizing that,
working directly with management in between managements. There are a lot of meetings. And then
also, you know, working on things like the agenda for all the board meetings to make sure were
addressing what the independent board wants to address.
KEVIN CAMERON: (INAUDIBLE) ...
PAUL TOBACK: ... Kevin, I should just add one last thing. That is the truth of it is, again, as
Adam said, since so much of this is, in fact, semantics, John has really been acting in that role
for some time anyway. It was just a formalization of what has been an evolving process in the
boardroom.
KEVIN CAMERON: And Mr. Rogers obviously also chairs the special committee youve set up to book
(ph) it (ph) out (ph) or recapitalization or some potential strategic transaction in the company,
correct?
PAUL TOBACK (?): Thats right.
KEVIN
CAMERON: And, you know, going back to the earlier discussion about
discussions with Pardus
(ph). I think theres significant confusion out there as to who the members of the independent
committee are. Can you give us any insight into that?
ADAM METZ: Yes, Kevin, I think following next weeks board meeting, well be in a position to
announce whos going to be members of that.
KEVIN CAMERON: OK, so at the the confusion I think stems in part from the fact that at least one
release, and it was perhaps the proposed settlement, suggested that
the Pardus (ph) nominees would
be definitely part of that special committee. It sounds like no decision has been made by the
board as to who, other than Mr. Rogers, is going to be on the committee.
ADAM METZ: Yes, having, I would say that thats something that the board is amenable too and
something that were going to consider depending on, you know, the results of the, you know, the
elections next week. But its certainly something that we think is, were amenable to.
KEVIN CAMERON: Well lets move on to a separate topic, which is obviously of significant interest
to all on the call, which is, as you pointed out, theres been a it took significantly longer to
get the restatement done than I suspect anyone anticipated, both you and the investment committee.
And coming out from that, obviously, significantly more internal weaknesses, internal control
weaknesses and a, probably a significantly greater restatement than anyone anticipated. Whats the
plan to get these internal controls under control, if I may use the term.
PAUL TOBACK: Sure. I mean thats a good question. I think thats right that the process was
longer than anybody anticipated, and the amount and volume of work that was needed to get the
restatements done was much more difficult, made more difficult by antiquated systems. Also made
more difficult by the fact that we had to make some personnel changes in the senior financial team
ranks after the audit committee concluded its investigation at the beginning of this year. So I
think all those things hampered our ability to finish in the earlier announced timeframe, but I
think, again, the most significant thing that hurt our ability to get done in that timeframe was
the fact that the number of errors that were uncovered were much greater than we had ever
anticipated when we initially
went in. And I think, you know, if you just like take a step back
and look at some context around the timeframe, even though we didnt technically restate five years
of financial statements, we did recast five years under the new methodology. And you know, a
typical year-end audit takes two to two and a half months, and we did five years worth of numbers
in 11 months. So again, the volume of work was large, and we did, we are, we are very, lets put
it this way, were very sympathetic to shareholders and other investors hoping that the restatement
would have been done sooner. We ourselves were anxious to get it done. It inhibited our ability
to talk to investors about the numbers. It inhibited our ability to tell the real operational
story. And so we were as frustrated as anybody, but I think the real important thing to know here
is that they did get done and we are now able to go out and talk and people are able to assess the
results.
ADAM METZ: One other, I will say this this is Adam Metz speaking. As a member of the audit
committee, clearly things arent working here the way they should work. Thats the material
weaknesses. And weve got a commitment from management that theyre going to get it fixed. Now
obviously it cant be done overnight. Its a big, its a big issue, but its going to get done.
And you know, management will be held accountable to make sure it gets done.
KEVIN CAMERON: One question that obviously this brings to mind is you anticipate giving
shareholders regular, perhaps quarterly, updates on the progress in fixing the internal control
weaknesses?
PAUL TOBACK (?): Well Im sure discussions of internal controls will occur on the quarterly
conference calls. And it ...
ADAM METZ (?): Its a 10-Q disclosure as well, Kevin.
PAUL TOBACK: So yes. We, you know, we anticipate giving updates and working quickly to try and
address them.
KEVIN CAMERON: And moving from that to obviously some of the more larger issues facing the
company, namely whats admittedly a heavy load of debt which needs, I believe, the senior notes
need to be refinanced by late 07, the nine and three quarter notes. Whats the plan there?
PAUL TOBACK: Well I think the plan that, you know, again, if you go back to, go back a couple of
years, our plan has always been a three step plan, which was the operational turnaround, restoring
credibility to the financial statements and the accounting methodology, and then addressing the
capital structure. In many respects they had to be done in some sequencing because we needed to
get ourselves in a position where we had audited financial statements on file as well as we needed
traction on our operating plan. But now were, it really is the right time and were well
positioned to go out and look at our refinancing alternatives, which is exactly why the board has
set up this special committee and hired Blackstone and the JP Morgan people to go into the
marketplace and assess what alternatives are available to us and which ones will be the most value
enhancing for shareholders.
KEVIN CAMERON: Speaking of traction on the operational plan, obviously we hosted the call with
Manny Pearlman (ph) of Liberation (ph) earlier today, and one concern he raised is that the
operational traction might stem actually from the change in revenue recognition policy adopted
post-restatement rather than a fundamental improvement in the operations of the company. Is he
right?
PAUL TOBACK: I guess Id say hes not right. And Id say it in two different ways. The first is
we have recast numbers under this current methodology, which is the GAAP methodology for the past
five years as well as given the first nine months of 05 numbers. And those are all being done on
the same methodology. So if you look you can see, you know, the statistics moving in the right
directions. Revenues are up. Operating income before impairment charges, , you know, up 52
percent 04 versus 03 and up 70 percent in 05 versus 04. But even if you want to look to the
second piece, I would say, which is past the financial statements, you can see some of the other
key metrics for the business are up as well. For example, we grew the number of new joining
members by 21 percent in 04 versus 03, and then grew it again in 05 versus 04 by 4.4 percent.
You can see that the average revenue per member has grown from 15 67 in 2000 to $19.70 in the first
nine months of 2005. So theres a number of operating statistics you can look to. And theres a
number of the financial metrics you can look to, and I think they both tell the same story, which
is the turnaround plan is beginning to work. I mean, look, we, none of us should
be deluded into
thinking that its all done or that it is or has been easy. Its been a very difficult change for
a company thats 40 years old that requires not only a complete overhaul of its operating,
basically, philosophy, but also a change in its culture. Those things dont happen easily, but we
believe were well on our way and that the results are showing that the turnaround ...
UNKNOWN MALE #1: ... new club model is (INAUDIBLE).
PAUL TOBACK: Yes, and you know the other things we can talk specifically about a lot of the
initiatives, but you know, the build your own membership initiative for example really went after
the core vulnerability we believe we had of the company, and that was people were worried or
believed that the company had aggressive sales tactics that were turning off a lot of customers.
And they were also causing our short-term cancels to go up. In effect, the biggest area of
cancellations we have from a membership standpoint is in the first 30 days. They wind up being in
the 23 percent range. That means 23 percent of the people who sign up for a membership leave us
within 30 days. And thats a significant area of concern, but its also, I believe, a significant
opportunity. And so build your own membership was designed specifically to address that concern by
making customers able to have one clear choice available on one page between two different
membership types. And when you look at the results in that arena, we have been able to reduce by
about four and a half percent, percentage points that is, the 23 percent failure were seeing in
initial term failure. Thats a significant reduction and we believe important.
At the same time, we then couple that with our new club model, and what our new club model does is
it basically eliminates multiple silos in the club and posturing employees so that everybody,
everybody has a knowledge about fitness and customer service so that we are not a, just a sales
organization. People dont come to us because they want to be sold. They come to us because they
want health and fitness benefits. They want nutrition counseling. They want exercise information,
and thats what were holding ourselves out to be. We need to continue to reinforce that with our
own employees so that we continue to be the experts. And, you know, the great thing about how
these two programs work together is once our, we have a work force of cross-trained employees, we
can keep our cost lower. All of our people will be well versed in fitness and customer service,
and with a simpler membership presentation, theyll all be able to sell health club memberships.
So we like the way these initiatives fit together, and we also believe that the company is on the
right track. If raising revenues, reducing costs and improving service are the right things to do
for a service business, which we believe they are, then we think were on the right path and the
results show it.
KEVIN CAMERON: Let me move you on to another topic. And first let me remind everyone on the call
that if you have questions youd like to ask, please send them to proxytalk@glasslewis.com and
well address them.
Weve gotten a few here that revolve around, I think, an issue that you brought up earlier, which
is theres been a lot of noise made about insider selling towards the latter part of 05, and the
questions seem to really revolve around two concerns. One is, obviously there were a couple of
hedge funds buying increasing stakes in the company in the fall, the summer and fall of 05, and
that led the company to put in a pill (ph). And then simultaneously it feels like youre seeing the
fruits of the turnaround effort come home to roost, and the concern people have is that with those
two things in the offing, a turnaround that seems to be working and the company
exploring a potential sale or recapitalization, its a little odd to see significant amounts of
insider selling. Can you give us some sense of why it is that those sales occurred at what seems
to be a somewhat unlikely time?
PAUL TOBACK: Absolutely. And you know, first let me say that both management and the board are
extremely cognizant of the fact that it was an unusual signal to send. And you know, from my
perspective, I can say personally, you know, it was not without a lot of personal angst with which
I made my decision in terms of what I needed to do. But I will tell you this, my decision to sell
was based on, I guess, a couple of factors. Number one, over the last nine years almost that Ive
been with this company, you know, many of us in the senior management ranks, me particularly, had
restricted stock. That restricted stock vested when we removed our prior poison pill which was set
at 10 percent. And Manny Pearlman (ph) and Liberation (ph) crossed the 10 percent threshold, and
it was subsequently crossed again by Pardus (ph). That vested restricted stock that was held by
management. For all buy two of us there was a tax liability created in, for the 05 calendar year.
Many people had six figure tax liability and felt that they needed to basically sell some stock in
order to fulfill that tax liability. That was one factor.
The other factor was our window in terms of our ability to trade in Bally stock had been closed for
18 months. It opened December 1st when we filed our financial statements, and it closed December
16th, which by our policy is two weeks before the end of the quarter. Next time this window opens
is possibly sometime in May. So really the window would have been closed for two years other than
that two week period. And many of us have had a substantial portion of our net worth tied up in
this company for a long period of time. And so if there was any opportunity for diversification,
we had to take it then.
Me personally, my decision to sell did not have anything to do with a lack of confidence in the
company, although I know that people are trying to use the sale to say that. Instead its quite
the opposite. I remain extremely committed to this company and extremely optimistic that theres a
great opportunity here, but I had personal circumstances, which I have not discussed with anyone,
nor do I intend to, that relate to my family and family circumstances, and I had to make those
decisions based on personal reasons.
KEVIN CAMERON: Let me move us on to another arena, which I think is almost as confusing to the
investor community potentially as the multiplicity of proxy cards floating around, and thats the
multiplicity of litigation. And obviously there are three or four cases pending. And I think if
you wouldnt mind, it would be extremely helpful to all on the phone to have a quick snapshot of
each of those and where they stand so the people understand exactly where the companys litigation
posture is going into the new year?
PAUL TOBACK: Sure Kevin. For that Im going to let Marc Bassewitz our General Counsel describe
those for you. Marc.
MARC BASSEWITZ, GENERAL COUNSEL, BALLY TOTAL FITNESS HOLDING CORP: Let me see if I can do this in
as simple a way as possible.
KEVIN CAMERON: Please have mercy on the layman.
MARC BASSEWITZ: Right, I know. Let me see what I can do here. There are three cases that are
pending that ought to be discussed very briefly. The first is a case that was brought in Delaware
Chancery Court by Bally against Liberation (ph) shortly after we received the proposal thats
currently on the ballot in November. That case was commenced in early December, and it challenges
the validity of the Liberation (ph) proposal under both the Delaware corporate law and our charter.
And what happened in that case is that the Chancellor in the Delaware Chancery Court determined
that he wasnt going to take action before the meeting, that he was going to wait and see if the
proposal passed. If it did pass, then he believed he could take whatever action might be necessary
as the case proceeded after the meeting. And if the proposal didnt pass with the requisite 75
percent vote, then the Chancellor wouldnt have to face anything further.
So that
case is sitting in Delaware Chancery Court and is pending, but nothing is going to happen
until the results of next weeks election are known.
KEVIN CAMERON: So the takeaway from that then for all of us on the call is that, if in fact, the
Liberation (ph) proposals dont pass then the case is essentially mute, I guess from want of a
better word. And therefore the Chancellor doesnt have to actually rule on anything.
MARC BASSEWITZ: Thats exactly right, Kevin. Thats exactly right.
The second case was a case that we filed at the same time in Federal Court under the Federal proxy
rules arguing that the disclosure by Liberation (ph) in its preliminary proxy materials was
inadequate and did not sufficiently relay various facts that were required to be disclosed under
the proxy rules. In response to that case, the judge indicated that he would be prepared to hold a
preliminary injunction hearing in early December. Im sorry, in early January after some discovery
had taken place. But he also indicated that sometimes what happens in these cases is that the
party whose disclosure is challenged files new disclosures and tries to mute the proceeding.
Liberation (ph) filed a revised preliminary proxy statement in response to that case, set forth
certain disclosures, which we continue to believe were not adequate. However, the judge in that
case, right before Christmas, decided not to hold the preliminary injunction hearing and viewed the
request for preliminary injunction as mute in light of the new disclosures. That case continues to
be pending in Delaware. We believe that that decision by the judge was
incorrect and, in fact,
took an appeal to the third circuit. We were unable to get expedited proceedings in the third
circuit, so nothing is going to happen in that case before the meeting. We believe that the
disclosures that were made in the preliminary proxy material, as revised by Liberation (ph), would
never have been made without the lawsuit. So we feel as if we were, we accomplished something at
least by getting those fact out into the public. We continue to believe that the law is and that
the better view of the law is that those materials, that the corrective disclosure that we still
believe is required should be put out before the meeting, but unfortunately at this point we have
not been able to convince a court to order that. So thats where
that case sits at the moment.
KEVIN CAMERON: OK.
MARC BASSEWITZ: The third case was a case commenced by Liberation (ph) about a week after we
commenced our cases, and it was a challenge to the poison pill, the short-term stockholder rights
plan that we had put in place in October, arguing that one of the provisions of the pill was
invalid under Delaware law. That particular provision seeks to, the provision which has actually
been until since the 1980s and upheld in various Delaware cases. It basically seeks to keep
shareholders from acting together as a group to accomplish what they could not accomplish
individually. And Liberation (ph) sought to challenge that provision. We had had discussions with
Liberation (ph) before that suit was filed, told them that the mere suggestion of the name of a
nominee would not be sufficient to trigger the pill, but if there were an arrangement between
holders with respect to voting or with respect to buying or selling securities among holders who
had more than the 15 percent trigger, that in our view that could trigger the pill.
In contrast to whats been said publicly, we have not threatened the pill. We have not threatened
to trigger the pill. In fact, what we did in the Delaware case was file a counter claim in which
the board is effectively asking the court to judicially determine, on the basis of discovery and
fact finding, whether or not the pill has been triggered.
Similarly to the other case in Delaware Chancery, the Chancellor did not want to expedite that
proceeding, and in fact ruled that anything that he needed to do he could in fact do after the
meeting was over. And so that case is still pending and will still be pending after the case,
after the meeting is over.
KEVIN CAMERON: The question that obviously comes to mind is if the pill, in fact, has been
triggered, does the board have the power to revoke it?
MARC BASSEWITZ: Im sorry Kevin?
KEVIN CAMERON: The question that obviously comes to mind is presuming for a minute that the pill
has in fact been triggered, the 15 percent threshold has been crossed by two groups acting in
concert that the board, in fact, retain the authority to revoke the pill prior to it being quote
triggered unquote?
MARC BASSEWITZ: Thats an interesting question. What the board has said is that it will
effectively ask the Delaware court to determine whether or not the pill has been triggered.
Whether or not that case goes forward, at least at this point is a question of whether the board
wishes to push forward on the counter claim. So I dont know that we have to face that question
quite yet. And I think thats probably the best answer I can give you at the moment.
One other litigation point I guess Id just like to make, and I heard that, and theres been public
press that indicated that the only reason that Bally is holding this annual meeting next week is
because Liberation (ph) filed its lawsuit. The fact is that this company was always intending to
hold an annual meeting as soon as it possibly could. The issue it has is an inner-play between the
Delaware law and the SEC rules. And in order to be able to solicit proxies, we had to complete the
restatement of our financials. And this company had always intended to schedule its annual meeting
as soon as it could after that process was done. Liberation (ph) sought to seek a 211 before we
had an opportunity to complete that process and announce our meeting.
KEVIN CAMERON: Another question that seems, and I think thank you for those responses, and we
will let you off the hook at this point.
I think another area in terms of status check that people are interested in is the status of the
crunch sale, which to my understanding the deal required that certain operational targets be meet,
unclear at least from the outside whether they have and thus whether the sale is actually going to
close. And my understanding is that there was a January 17th drop dead date. Is that sale
progressing as planned?
PAUL TOBACK (?): Well Kevin thats a great question, and let me clarify. We announced that we had
extended the formal agreement through January 17th in order to get done what was primarily some
removal of Bally as a guarantor on leases and getting some of the paperwork done associated with
transferring leases. That has been a process, as weve already said publicly, has taken longer
than we anticipated, but we still remain hopeful and optimistic that we can get the crunch sale
closed, and in fact, are making progress on it and, you know, believe that very shortly we will
have an update for the public market.
KEVIN CAMERON: Thank you. I think the last question really that people have raised is one that
goes back some time and goes to the appointment of some independent directors in 05, and those
directors served for surprisingly short periods of time on the board. People have pointed to that
with some concern and are trying to figure out why did those directors resign so soon after they
joined the board?
PAUL TOBACK (?): Sure, let me, let me address that. Two directors were appointed to the board.
One was Dr. Marilyn Seymann (ph). Dr. Seymann (ph) is a corporate governance expert and she joined
the board having informed us that she had, she definitely wanted to help us and was very intrigued
by the company and its issues, but had a very full plate I guess is the best way to describe it.
Since, in the intermediate (ph) time between the time she accepted our appointment and then
subsequent time she resigned she actually started a new job as a dean of, I believe, it was Arizona
State Law School, and she was finding that that job was taking more time and not allow, and
understanding the complicated level of issues we were dealing with, and did, in what she said to
us, believe she could devote the necessary time to really make the contributions she wanted to
make. And while we regretted that she wasnt able to do that, we respected her wishes. I think
she was also, to be perfectly frank, a little surprised at how personal and intense some of the
shareholder activists had been both at the directors and at the company, and I think that probably
played a little part in it too from a personal standpoint.
As to David Wilhelm (ph), you know, David Wilhelm (ph) joined Ford and immediately after he joined
was brought to our attention that he had an investment in his Im sorry, his fund that he founded
had an investment in the company of one of the directors, and while according to the lawyers there
were absolutely no violations of the law, nor did it constitute any conflict of interest under any
corporate governance guidelines, we were concerned that there could be an appearance of impropriety
even though we didnt think there was any actual impropriety. And so in order to avoid any
appearance of conflict, David (ph) immediately resigned and that chapter came quickly to a close.
KEVIN CAMERON: Thats very helpful. One last final question that just came in is, in light of the
fact that theres still some unknowns as to who the members of the independent committee are going
to be until you make the announcement post the meeting, what reassurances can you give shareholders
that, in fact, you are going to, if you go down a sale path, obtain the maximum return for
shareholders as a whole?
ADAM METZ (?): Well I will tell you that the guidelines for directors are very clear. Directors
have personal liability. All the directors take their fiduciary responsibilities very seriously.
You know, I dont know what incentive we have not to try to maximize value for the Bally
shareholders. Thats the job weve undertaken and thats, you know, what we intend to do.
KEVIN CAMERON: I ...
ADAM METZ (?): What other assurance are they looking for, Kevin? And I understand that, you know,
people could be skeptical I guess, but thats our job. Thats what we intend to do. My impression
as a new member of the board is that we are in a fishbowl. We have people looking at us very, very
closely and what are actions are very, very closely. And people have no intention of doing anything
but, you know, maximizing value for shareholders. Were going to be highly scrutinized whatever we
do and, you know, we have to make sure that everything we do does stand up to the scrutiny.
PAUL TOBACK (?): And Kevin, I would also add, thats one of the reasons that weve been, as a
board, careful to choose world class advisors like the Blackstone Group and JP Morgan as well as
world class lawyers, all of whom come with fine reputations, not only for doing excellent jobs but
for independence. And the fact that JP Morgan will be taking the lead in that process under the
auspices of this new committee I think should give people, and the fact that management has
voluntarily agreed not to participate in, or affiliate with any group interested in purchasing or
recapitalizing the company should give people the requisite comfort that in fact the process will
be run fairly, openly, with no agenda other than to maximize value for shareholders.
ADAM METZ (?): Maybe one thing I could give you a little comfort on too Kevin. The special
committee will be communicating directly with the advisors. Its not going to be something that
was only communicated through senior management. Theyre going to communicate directly with the
financial advisors, be involved in any give and take and any understanding of, you know, what the
process is going on. Having said that, the full board is not
abdicating its responsibility either
as to looking over the process. So I think hopefully were going
to have belts (ph) and suspenders
(ph) here and I think, you know, youll have people asking the right questions and the tough
questions that are involved. Were not going to pre-judge the process into what we think is the
right answer, and were looking forward to seeing, you know, what options are available to the
company.
KEVIN CAMERON: Well Id like to, with that, thank all of you for joining us today. Of course, Id
like to most of all thank you Mr. Toback, Mr. Metz, Mr. Bassewitz. And then before signing off,
Id just like to remind everyone that we host these talks regularly, and our next scheduled talk is
for January 26th at 4:00 Eastern when were going to be providing an update on the coming proxy
season and significant issues to be addressed and proxy voting policies. Obviously for all of you
on the phone, if you think theres an annual or special meeting coming up that warrants attention,
please send us an e-mail at proxytalk.com. The feedback is always appreciated, and any feedback
you give will certainly be taken into account as we structure our future calls. Again, thank you to
all who participated and have a wonderful weekend.
Operator: Thank you. This does conclude todays teleconference. We thank you for your
participation. You may disconnect your lines at this time and have a great day.
END