NEW YORK -- U.S. Bankruptcy Judge Robert Gerber approved Crunch’s request to fund operations with $1 million on an interim basis after the New York-based chain filed for Chapter 11 bankruptcy Wednesday in U.S. Bankruptcy Court in Manhattan.
Crunch had requested a $6 million debtor-in-possession loan while it carries through its bankruptcy and sale plans to New Evolution Fitness Company (NEFC) and certain investing affiliates of Angelo, Gordon & Co.
Crunch, which has more than 20 gyms in six U.S. cities and 73,000 members, is seeking to sell its assets through an auction under court protection to the two companies, who are its senior secured lenders. NEFC was founded by Mark Mastrov and Jim Rowley. Angelo, Gordon & Co. is the private equity firm that bought Crunch in 2005.
Upon completion of the sale, Mastrov, the founder of 24 Hour Fitness, and Rowley, a former 24 Hour co-president, will serve as chairman and vice chairman of the board of directors of Crunch, respectively, overseeing the existing senior management team of Crunch, which will remain with the company.
The sale permits other interested parties to make competing offers. Subject to the approval of the bankruptcy court and other customary conditions, the sale is expected to close in approximately 60 days.
“This process of reorganization, along with the ongoing involvement of NEFC, will allow Crunch to emerge as a strong player focused on what we have become famous for: being the place where entertainment meets fitness,” Tim Miller, CEO of Crunch, said in a statement. “This transaction will allow us to restructure our balance sheet and close several unprofitable locations. Mark Mastrov and Jim Rowley strongly believe in Crunch, and I am confident their industry expertise, vision and leadership will prove to be invaluable as we execute our business plan going forward.”
Crunch, which has 1,716 employees, listed $102.4 million in both assets and debts on its March 31 balance sheet, Bloomberg.com reported. In a court filing, Crunch listed 2008 sales of $84.5 million with operating losses of $11.2 million. Crunch also listed $2.8 million in losses since the beginning of the year.
Crunch Chief Financial Officer Michael Jacobs blamed the losses on “deficient membership sales and the inability of the debtors to divest themselves of certain unprofitable club locations that are saddled with overpriced long-term leases,” according to court documents.
CH Fitness, a joint venture of entities formed by Angelo, Gordon, bought out all of Crunch’s first lien debt from Goldman Sachs Credit Partners for $46.2 million in December and committed to fund up to an additional $17 million for working capital, according to court documents. Crunch owes money to more than 50,000 creditors, Crain’s New York Business reported.
Crunch said each of its locations will remain open, other than two Manhattan clubs that closed immediately. The company said it has secured sufficient capital to fund operations through its reorganization.
In addition to New York, Crunch has clubs in Miami, Chicago, Los Angeles, Atlanta and San Francisco.
“The NEFC team is excited to be part of the new ownership group of Crunch,” Mastrov said in a statement. “I have always considered Crunch to be one of the most innovative and cutting edge brands in the health and fitness industry since its inception in 1989. I look forward to working with Tim Miller and the entire Crunch management team in growing the Crunch brand, while continuing to deliver the fitness industry’s most unique offerings to our members.”
In January, NEFC announced a partnership with the Ultimate Fighting Championship (UFC), a mixed martial arts organization, to launch a network of UFC gyms.
Angelo, Gordon bought Crunch from Bally Total Fitness for $45 million in 2005, much less than the $90 million that Bally had purchased Crunch for in 2001.