In what must seem like déjà-vu for long-timers in the fitness industry, Fitness Holdings International filed for Chapter 11 bankruptcy reorganization Oct. 20 for its entire group of retail holdings, east and west, a little more than seven years after the Busy Body Home Fitness chain rose from the ashes of the former Texas-based Busy Body’s bankruptcy.
Not necessarily a surprise action – many in the industry had been awaiting the shoe to drop for a few months after its formerly largest supplier Life Fitness pulled from most stores and rumors of credit holds by others began to swirl – the action nevertheless left the industry and FHI employees reeling. This is the third major bankruptcy filing for the fitness industry this year. Delaware-based Leisure Fitness suddenly shuttered its 19 stores on Sept. 19 (click here to read story), and Connecticut-based Total Fitness folded its nine-store operation in May (click here to read story).
At the time of the filing, FHI, owned by investment fund Hancock Park Associates, had 111 stores in 14 states between the Omni Fitness outlets in the east and the Busy Body Home Fitness doors in the Western region. In a flurry of court documents filed late in the day Oct. 20 with the U.S. Bankruptcy Court, Central District of California, Los Angeles, the Delaware corporation claimed 270 employees and more than 600 creditors and other interested parties.
Assets in court filings signed by Kenton Van Harten, president, were named at between $10 million and $50 million and liabilities were pegged at between $50 million and $100 million for the Long Beach, Calif.-based corporation.
Notice by email
A sampling of stores around the country showed they continued to operate business-as-usual with no outward signs of distress. All employees and stores had received an email from Van Harten on the morning of Oct. 21:
Dear FHI Family,
It is with a heavy heart that I share with you that yesterday, FHI, Inc., has filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code for (the) purpose of restructuring the company. This was a very difficult decision for the company to make, but we are certain it is an appropriate one.
Several months ago, our bank issued to us a demand notice to pay off our debt prior to its maturity. We worked with the bank for four months to make them more comfortable with the company’s performance, by applying for refinancing with outside lenders and executing expense reductions and restructuring when possible. Despite our attempts to work through this tough economic time with the bank, several days ago, they issued a final demand notice and froze our bank accounts. Upon consultation with financial advisors, the only action left for us to take was to file bankruptcy protection.
Through the Chapter 11 procedure, FHI is permitted to propose a company restructure. Part of the restructure proposal is a request for the court to permit continued pay and benefits for employees, as well as other expenses that will allow us to continue operations. We expect the court to rule favorably. At this time, FHI’s doors will remain open and all employees are expected to report for duty as normal. We expect all employees to continue to conduct themselves in a manner fitting according to company policy. Please know your corporate team is working to gain quickly the court’s approval for our restructure proposal.
Following the filing for Chapter 11 reorganization, the company also filed for an extension of 30 days from a court-set Nov. 4 deadline to a proposed Dec. 4 to file its statement of affairs, financial schedules and other court-mandated documents.
That was per the request “due to urgent matters facing the debtor and its accounting personnel” and “to continue operations and avoid irreparable harm to the estate.” That includes paying employees and leases. An objection to that extension was filed Oct. 21 by the court trustee, noting the procedure outlined in the debtor’s motion lacks sufficient backup for the request. A hearing on that extension request will be Oct. 23.
The document also stated that FHI plans to sell the stores in multiple parts at a sale or multiple sales as “going concerns,” i.e. on-going operations rather than as so-called “gone-concerns” or liquidated business, since it can maximize the value in that way, and noted it anticipated moving forward quickly with such a sale.
Van Harten was not available for comment by deadline.
Among unsecured creditors, Life Fitness tops the list with its debt listed as $1.3 million, Aerobics Inc. is next with nearly $1.1 million, and Precor is third listing an amount due the company as $749,304. In the cases of both Total and Leisure Fitness, Precor had been their largest supplier. None responded by deadline to requests for comment.
This time ‘round
This iteration of Busy Body – the second go-around for Hancock Park (HP) -- began after the former Busy Body, based in Carrollton, Texas, declared Ch. 11 bankruptcy in May 2001 in the U.S. Bankruptcy Court, Southern District of Texas (click here to read our Oct. 29, 2001 SNEWS story, "Busy Body no more"). It had been sold by HP (www.hpcap.com) to the current ownership, Rice Capital, in 1998. When the 2001 bankruptcy was filed, Busy Body had 83 stores, up from about 30 stores when it was acquired from HP.
As a part of that reorganization, the company owed the cumulative fitness industry about $17.8 million, with Precor’s debt weighing in at about $6.6 million. Aerobics Inc. was owed $2.1 million in that case. The chain had grown both organically and through acquisitions, for example by purchasing American Exercise and Gym, Fitness Source, Fit-Tech, Sound Fitness Systems and Total Fitness Solutions. The 2001 sale pieced apart the chain with parts going to Fitness Warehouse, Leisure Fitness, Total Fitness, The Fitness Experience, Eclat in Houston, Fitcorp in Dallas, Gyms to Go, Scott Egbert, as well as to Hancock Park in Los Angeles, San Francisco and Denver markets for 16 stores. The only entities of that group that haven’t gone out-of-business or been acquired are Florida-based Gyms to Go, owned by Carlos Vazquez and Jon Larkin, Houston-focused Eclat Inc. (Fitness Unlimited et al, owned by Stan Terry Jr.), Egbert's "Home Fitness" stores and Dallas-centric Fitcorp owned by Trevor Glanger.
Since Busy Body rose again in 2001, it started acquiring other retail chains, the first being three Fun and Fitness stores in Arizona in summer 2002. Then the real spree began: In late 2003, it bought Fitness Warehouse (nine stores) based in San Diego, Calif., and Omni Fitness stores in the Western states (17). Van Harten told SNEWS® at that time its goal was to be “the dominant dealer on the West Coast."
In 2004, it acquired All About Fitness’ nine retail locations in the Denver area and Exercise Equipment of Nevada’s three stores, followed by Advanced Exercise Equipment, also based in Denver, in August 2004, bringing its total to 58. In November 2004, it took all 46 of the Omni Fitness stores in the East Coast, operating them independently until the two divisions were merged under one umbrella in mid-2008. It then took over The Fitness Store in May 2005 (six) and then tied up the acquisitions in August 2005 with LA Gym Equipment’s 13 stores. That took its total store numbers to its historical peak of 120, in the process eliminating small regional operations.
SNEWS® View: This is a huge blow for the cumulative fitness industry and nobody should be rejoicing, no matter how you feel about the players involved. Although the company said in initial court documents it plans to sell operating stores, the question of course is, in this depressed economy – especially for fitness – who will step up to buy them? Particularly considering the plight of Leisure Fitness’ involuntary Chapter 7 liquidation in September and Total Fitness going dark in May, not to mention the rumors circulating about others now also in peril. There are just a lot of stores and inventory waiting for somebody to step up and there aren’t a lot of retailers or even investment groups willing at this time to do that. While the current credit crisis affecting the global economy certainly hasn’t helped matters and may have sped them along in this case, FHI can’t simply point to the economy as the reason it is now in the mess it is. Suppliers might want to look in the mirror here and reevaluate how they are pressuring retailers.
At least in some regions, we have been told that warehouse inventory is low, the store floor is looking sparse, and customers are being sold product that is not available, forcing waits of many weeks. On top of that, staff members have told SNEWS that they weren’t being informed about what the status of the company was with one telling us recently, “Nobody is telling us anything.” The email letter sent to its employees today, of course, asked them all to continue to operate as usual and to conduct themselves “in a manner fitting.” With the dark cloud that has descended, that could be difficult for many. We will see what happens with morale, especially as the busy holiday season approaches. If paychecks and commission checks continue to come in, employees may respond – if they have product to sell. But if they don’t get paid? Or don’t have product to actually deliver? Time will tell.
The fitness specialty industry is going to be a different market by the time 2009 rolls around. We fully expect this action will create a ripple that could affect some suppliers, some of whom have laid a majority of their business at FHI’s doors. As the specialty retail market thins out, there won’t be a lot of other places for those suppliers to peddle their wares. We suspect a few may shut their own doors, others may look to commercial venues, while still others may look to the potential at sporting goods stores.