Keys Backyard, the 3-year-old company that was formed when Keys Fitness acquired Image Spa from Icon Fitness in early 2005, is wrapped up in an involuntary Ch.7 bankruptcy liquidation, forced by several creditors.
The case, originally filed in late February in the U.S. Bankruptcy Court, Northern District of Texas, is awaiting a hearing on April 3 on a motion to suspend the proceedings filed by Keys Backyard LP.
Keys Fitness sold the assets of the Keys Backyard division to another company, Infinity Spas, in December 2007 for approximately $4 million, court documents filed by Keys on March 24 stated. Keys had purchased Image Spa for $6.6 million from Icon and, according to the court documents, had never made a profit due to higher-than-anticipated warranty claims from spas sold by the previous owner.
Bank of America, the company's secured creditor, in December 2007 had shut down Keys Backyard's line of credit so it could not pay creditors, the court filing by Keys stated. In addition, the documents said, the bank held a first lien not only on Keys Backyard assets but also on Keys Fitness assets, with the total amount combined as cited in the filing that was owed by Keys Backyard and Keys Fitness reaching $18 million.
Keys court papers said the company informed its vendors in January 2008 that all assets had been sold to another company but that the company has not made timely payments. The assets were collateral for the Bank of America loan, which in January was taken over by private equity firm Jacobson Partners, which is now the company's primary secured lender.
According to Keys' court statements, Jacobson agreed to make some funds available to pay vendors, and Keys proposed to pay each creditor 10 percent of its debt. Keys claimed that that involuntary bankruptcy proceeding was filed before the end of the period for creditors to respond to the workout offer. The company also disputed in court documents the amount claimed to be owed by the filing creditors.
Keys Fitness senior vice president Steven Overgaard was not available for comment by deadline but he had told SNEWS® in January that Keys Fitness was not going away despite rumors of management changes and of a pending bankruptcy. (Click here to see a Jan. 7, 2008, story, "Keys Fitness 'not going away,' re-strategizing underway.")
"We are in the process of reorganizing the management team," Overgaard, who has been at Keys since July, told SNEWS® in January. "Contrary to vicious rumors, we continue to operate."
Likely not an assist in the company's situation was a large settlement it paid in late summer 2007 to Victor Proudian, owner and CEO of The Treadmill Factory specialty retailer in Canada. That payment was made to resolve a court case brought against Keys by Proudian nearly a decade earlier charging price fixing and breach of contract. At the time of the settlement, Proudian said in a statement, "We are in a great position going into the 2008 season. It is sweet justice to know that most of my containers coming in are paid for by Keys as a result of the lawsuit."
The terms of the pre-trial settlement in the Proudian case, which originally asked for damages of $4 million, were not disclosed.
The move into spas was intended to be the backbone of a broader "backyard" and leisure business that, Keys told SNEWS® in early 2005, would help increase the entire company's business and revenues. Click here to see a Feb. 11, 2005 SNEWS® story, "Keys Fitness taking big steps to grow business, says to expect more."