SERIES CRUNCH FITNESS FIASCO
By David Arthur Walters
The Miami Mirror
June 16, 2011
MIAMI BEACH – Conspiracy theorists will recognize a familiar pattern in what transpired. A venue of vultures, sometimes referred to as a committee, appears lovely as its members circle overhead with wings swept back, but their hairless heads, much suited to the purpose, are not pretty when seen on the ground with ghouls feeding on a corpse. Prior to the arrival of the esteemed scavengers, a brood of bats in conventicle had nearly had its fill of the lifeblood of the hapless beast.
The brood of professional bloodsuckers nested in a network of cooperating companies usually has an innocent figurehead available for their darksome conniving, a highly respected man of an industry, they care not which, whose appearance will reassure investors needed for the transfusion. This victim will be lauded by the predators before he is drained and tossed aside nearly lifeless. Trustworthy men are much too trusting. He himself may have approached the predators with his great idea, pointing at what would become so much plunder to the vampire colony. The colony notes well that the floundering organization contemplated will have ready cash flow to feast on for a few months at least. A shyster from a prestigious law firm is brought in to sanction the sanguinary process – naturally the same firm will continue to feed until the corpus is ready to sing the courtly blues, and then, shifting its shape into that of a turkey vulture at the courthouse, move for further fees during the bankruptcy proceedings.
Ironically, some of the most intelligent people are most easily conned, and the unpresuming mark, who had founded and grown one of the largest businesses in the industry, throws much of his hard earned fortune into the deal with the carnivores after he is promised equity and a management contract. Soon after the deal is made with him and the other investors, the foregone crisis is taken up by the crisis management team; he is shoved aside and the vampires suck the lifeblood out of the corporation, bleeding it almost to death with fees. When drained nearly dry, the pallid organization is tossed to the vultures for reorganization. In Crunch’s gruesome case, the choicest meat will emerge in the mouth of the stalker hidden among them, to be dragged away and converted into a franchise operation.
The sharpers are so sharp that their chumps barely feel the knife. The thoughtful man has lost his shirt along with his dream, but he is so considerate and naïve that he does not realize a dastardly deed has been done unto him by the manicured mobsters that infiltrated the equity firm, the capital advisor, the law firm, and the crisis management firm. Let us not blame him or call him stupid for his credulity, for the society is at fault: money is considered to be the mark of genius, and the more one has of it the better a man supposedly is; how could highly respected people making millions of dollars of year off billions of dollars of investments be bad?
Historical examples demonstrate that our conspiracy theory is not as preposterous as it may seem. We do not want to paint everyone concerned black, but playing paintball is in order here, and we shall recognize some of the same highly respected players that appear in the Crunch fiasco:
‘NEW YORK – November 17, 2006 – The competition between National Paintball Supply, Inc. (“NPS”) and Pursuit Marketing, Inc. (“PMI”) has turned to cooperation, as the two paintball industry pioneers have announced a business combination.
‘NPS and PMI today announced they have closed separate transactions which have the effect of combining their operations. Angelo, Gordon & Co., a $10 billion alternative asset management firm, with advice from Sagent Advisors Inc., an investment banking firm in New York, provided the equity capital to facilitate the transactions….
‘The history of the companies goes back decades. In the spring of 1982, Jeff Perlmutter and David Freeman visited a “Survival Game” location located a couple of hours from Chicago. They both had a great time and came up with a great idea. Their concept was to develop and sell a line of high-quality products that could be used in this game that they enjoyed so much. Over the next 24 years, the two entrepreneurs introduced such brands as R.P., Pure Energy, Piranha and Evil and they grew their idea into PMI, which is now one of the best known and most respected suppliers in the world of paintball.
‘While Freeman and Perlmutter were traveling the country to compete in various paintball tournaments and growing the game from their Chicago headquarters, an 18-year-old from a small town in South Jersey played his first game of paintball and was immediately hooked. Over the next few years, Gino Postorivo set up a sales counter in the back of his father’s restaurant. Through brands including 32 Degrees, Diablo, Halo and Empire, he grew this business into what is now known as NPS, also among the best known and most respected suppliers in the world’s most exciting extreme sport.
‘The combined company expects to continue to maintain a world-class paintball manufacturing facility in Tampa as well as to enhance its North American distribution network to reach over 90 percent of the North American population via next day ground service. The company expects to continue to operate a division in the U.K., servicing the growing international market.
‘Overseeing the combination of business operations is Chief Executive Officer, Ray Dombrowski, currently a managing director at management firm Alvarez & Marsal, LLC, along with Chief Financial Officer, Scott Thompson, also of Alvarez & Marsal. The senior executive team reporting to Mr. Dombrowski will be Gino Postorivo, founder of NPS, who will be the President of the new company; Dave Freeman, a co-founder of PMI, who will be Chief Integration Officer; and George Eurick, Chief Operating Officer of PMI, who will be the Chief Operating Officer….
‘Brent Leffel, a Managing Director at Angelo Gordon commented, “We believe that paintball is a dynamic, $1 billion segment of the extreme sports industry, which is poised for growth after undergoing a period of rationalization and structural change. NPS and PMI have pioneered the industry with strong brands and a diverse product portfolio. On a combined basis, the company will be the largest in the industry and the only player offering a full complement of products….’
‘NEW YORK – September 19, 2005 – Crunch Fitness ("Crunch"), one of the premier health club chains in the U.S. and a leading brand in the fitness industry, is being acquired by Marc Tascher, a leading entrepreneur and club industry veteran, in partnership with the private equity group of Angelo, Gordon & Co. ("Angelo Gordon"), an alternative asset investment management firm with approximately $9 billion in capital under management….
‘Mr. Tascher has over 30 years of experience in the health club industry, having co-founded and then served as Chairman and Chief Executive Officer of Town Sports International, Inc. ("TSI"), the parent company of New York Sports Clubs. During his tenure at TSI, the company grew rapidly to become the largest and most profitable regional chain in the Northeast. Mr. Tascher is currently the Chairman and Chief Executive Officer of Sports & Fitness Ventures, LLC ("SFV"), which owns and operates eight health clubs in the New York City and Washington, D.C. markets. Post-closing, Mr. Tascher will serve as the Chairman and Chief Executive Officer of the combined company, to be called Crunch Fitness….
‘Mr. Tascher is partnering on this transaction with the private equity group of Angelo Gordon. Angelo Gordon was founded in 1988 and currently has over 50 investment professionals managing approximately $9 billion in capital across multiple investment strategies. The private equity group currently manages over $500 million in existing and committed capital.
‘"In our view, the health club industry is an attractive sector for investment given its strong growth characteristics and positive demographics," said Brent Leffel, a Director in the private equity group of Angelo Gordon. "We believe Crunch is uniquely positioned for growth in its core urban markets as well as in new markets given its tremendous brand name recognition and loyal membership base."
‘"We are very excited about working with the Crunch team in partnership with Marc Tascher, who is a seasoned executive with a proven track record of successfully building and operating health club businesses," said David Roberts, a Managing Director of Angelo Gordon and head of the firm's private equity group. "We believe the combination of our significant capital base and Marc's demonstrated vision and leadership will allow us to realize the significant potential of Crunch."
‘Sagent Advisors Inc. initiated the partnership between Angelo Gordon and Marc Tascher on this transaction and acted as the exclusive financial advisor to Angelo Gordon.’
Now conspiracy theorists are quick to recognize the same players, whether corporate or individual, in the fitness and paintball deals; in brief:
Angelo, Gordon & Company: founded in 1988, this equity firm has at least $10 billion under management. The firm’s investment activities encompass distressed debt and leveraged loans, real estate, private equity and special situations, and a number of credit oriented hedge fund strategies. It is a vulture investment firm inasmuch as it often seeks to purchase financially distressed businesses at significantly reduced values compared to non-distressed businesses, then quickly pump up their value and dump them for a high return.
Brent Leffel: Leffel is a Managing Director of Angelo Gordon, Private Equity and Situations Group. He joined Angelo Gordon in 2005. He led Angelo Gordon's January 2006 acquisition of Crunch Fitness from Bally's Total Fitness and the April 2006 acquisition of Kings Supermarkets from Marks & Spencer PLC. Prior to joining Angelo Gordon, he was a Vice President of Bear Stearns Merchant Banking, the private equity affiliate of Bear Stearns. Previously, he was an Associate of Quad-C Management, a Virginia based private equity partnership, and was a Financial Analyst and Associate in the Financial Sponsor and Leveraged Finance groups of NationsBanc Montgomery Securities (now Banc of America Securities). While attending business school, he worked as a Senior Associate of The Carlyle Group, where he worked with the Special Situations team. He holds an MBA from the Wharton School of the University of Pennsylvania and a BS in Finance from Ithaca College.
Sagent Advisors: Sagent Advisors is an independent, privately-owned investment bank that provides financial advisory and capital raising solutions to clients in connection with mergers, acquisitions, structuring, and other strategic financial transactions. It advertises that it has completed over 100 transactions for its clients with an aggregate value of $50 billion.
Alvarez & Marsal: this is one of the leading independent global professional services firms specializing in performance improvement, turnaround management and business advisory services…. “Whether serving in interim management or advisory roles, the firm draws on a deep operational heritage and hands-on approach to deliver comprehensive services across the investment lifecycle including due diligence/acquisition support, performance improvement and business advisory services, portfolio management, turnaround management and exit support, among others.” The company is an expert at inserting its consultants into companies during crises, as they did in the case of Crunch Fitness, where they draw many millions of dollars in compensation. For example, we see from an April 22, 2010, Quarterly Compensation Report filed with the bankruptcy court in the case of Chemtura Corporation, that Alvarez & Marsal Managing Director Ray Dombrowski, a lawyer who specializes in assisting corporations in developing and implementing financial turnaround strategies, drew compensation of $450,000 in one quarter; together with other Alvarez & Marsal employees, the draw was $1,461, 930. To better understand what is going on here, we quote this note from Chemtura’s Form 10-Q filed with the SEC:
“On April 29, 2009, Raymond E. Dombrowski, Jr. was appointed Chief Restructuring Officer. In connection with this appointment, the Company (CHEMTURA) entered into an agreement with Alvarez & Marsal North America, LLC (“A&M”) to compensate A&M for Mr. Dombrowski’s services as Chief Restructuring Officer on a monthly basis at a rate of $150 thousand per month and incentive compensation in the amount of $3 million payable upon the earlier of (a) the consummation of a Chapter 11 plan of reorganization or (b) the sale, transfer, or other disposition of all or a substantial portion of the assets or equity of the Company. Mr. Dombrowski is independently compensated pursuant to arrangements with A&M, a financial advisory and consulting firm specializing in corporate restructuring. Mr. Dombrowski will not receive any compensation directly from the Company and will not participate in any of the Company’s employee benefit plans. The Chapter 11 cases were filed to gain liquidity for continuing operations while the Debtors restructure their balance sheets to allow the Company to continue as a viable going concern. While the Company believes it will be able to achieve these objectives through the Chapter 11 reorganization process, there can be no certainty that it will be successful in doing so.’
Dechert, LLP: this prestigious New York law firm has done considerable business with Angelo, Gordon & Company. The esteemed Dechert lawyer Charles I. Weissman represented the buyers in the purchase of the Bally and Tascher clubs. When the Crunch venture failed, Dechert applied to the court to represent AGT Crunch Acquisition in the bankruptcy, and Weissman represented the buyers of the bankrupted Crunch. Dechert reveals that its history is “long and impressive.” That history began in 1875, one of its founding partners even served a President James Garfield’s attorney general, and another founding partner wrote a book entitled Principles of Equity. Today Dechert is a leading international law firm with 21 offices in the United States, Europe and Asia. Needless to say, its lawyers are internationally acclaimed, some of its lawyers have become judges, and the firm represents headline-making players on the global economic scene. Its most important core values are client service, honesty and integrity, and becoming a stronger firm
It is a wonder that some or all of the above have not been sued by the Crunch investors and creditors who got crunched, including the hapless Tascher, whose sudden transition from Golden Squash Man to Outcast Pariah at Crunch Fitness we have discussed elsewhere. But the so-called Paintball Guy did sue them; witness the case of Eugene Postorivo v. AG Paintball Holdings, Inc. (C.A. No. 2991 – VCP) in Delaware’s Court of Chancery.
Eugenio Postorivo, head of National Paintball Supply, inc., during 17 years devoted to the industry, popularized the paintball sport. He was known as “the Paintball Guy,” the creator of Empire, a marquis brand, and the Diablo and PT Paintball brands among others. His “one-stop shopping” paintball sport supply distribution company generated $110 million revenue and had an estimated 25% of the paintball market.
Postorivo was indeed the most respected and trusted businessman in the industry, and enjoyed the most loyal employees and customers a business could desire. But there was a market downturn, and a continuing problem with a supplier from which there had been a significant litigation recovery. Postorivo proceeded to pitch the increased value of his assets if merged with those of his competitor Pursuit Marketing, Inc. to equity investors.
Defendants Brent Leffel and Raymond E. Dombrowski, styled the Director Defendants in the suit brought against them and others, persuaded Postorivo to do a deal in which KEE Action Inc., set up for the purpose, would acquire the assets of National Paintball Supply and Pursuit Marketing. Leffel, a director of Angelo, Gordon & Company, the turnaround equity firm backing the deal, had been inserted as chairman and director of the acquisition company, KEE Action Inc. Dombrowski, a trained lawyer and director of Alvarez and Marsal, the management firm consulting on the deal, was inserted as managing director of KEE Action Inc. We note in passing that, in the AGT Crunch bankruptcy case, the law firm Dechert LLC revealed that it had represented Angelo Gordon in KEE Action corporate matters.
Postorivo was promised that he would run the new company as its president, having an employment agreement for five years with a salary of $400,000 along with up to 125% bonuses on that amount annually, and the agreement provided him with 10% of the common stock and $5 million in junior preferred shares. The new company would assume no more than $19 million of the debt of National Paintball Supply and Postorivo, a debt which was then simply refinanced. No sooner than Postorivo had been seduced into the deal and been made President and CEO, he was abandoned, i.e. frozen out of the KEE. Dombrowski, acting as and then appointed CEO, shoved Postorivo aside, stripping him of authority in front of employees, carrying on crucial business without him, insulating him from operation and marketing processes, and refusing to provide him with information. Again, it was alleged that, from the first day after the deal, Leffel and Dombrowski had engaged in a "systematic pattern of conduct intended to freeze Postorivo completely out of the management and operations of KEE Action, Inc.... and "completely sterilized Postorivo of all his powers."
Worst of all: “Defendants took from Postorivo perhaps his most important contribution to the business: they made him invisible. Postorivo went from being ‘the Paintball Guy,’ the face of the company he built, to being locked away in an office without any public persona.”
And then the defendants “deflated the value of the business in order to manufacture an indemnification claim against Postorivo.” For instance, the defendants abandoned certain brands and aggressively wrote down the inventory to liquidation fire-sale prices. Dombrowski allegedly had some of the inventory dumped at less than far market value in order to satisfy certain benchmarks under his own compensation agreement. The defendants, particularly Dombrowski, who supervised the due diligence had themselves conducted due diligence prior to the merger, but now they had changed their mind. Not only did they want Postorivo’s stock in the company, thus converting his property to their own uses, they were using the indemnification clause of the agreement in an effort to squeeze money out of him. Postorivo naturally countersued. A settlement was had in 2008, the terms of which are undisclosed. Discussions of that settlement appearing on paintball industry sites have apparently been deleted, no doubt because the persons involved want to move forward.
In a related claim, over rights to litigation proceeds in a case pursued by Postorivo before the KEE deal was made, where an arbitration award of $9.6 million had been obtained, it was asserted that the defendants, who had a right to purchase the settlement, were trying to independently negotiate a settlement for themselves; in that matter, the court held that the defendants’ attorneys had violated the rules of professional conduct by raiding his attorney’s files for privileged information
Conspiracy theorists are quick to recognize the standard ploy and we could provide many more examples of its employment hidden behind innocuous business news reports.[i] The victims are not so quick. But that does not mean they are slow-witted. As every confidence man and woman knows, intelligent people, if they have not yet been badly burned, are easily duped by attractive illusions.
-To Be Continued-
[i] For example, “Jim Strupp and John Mazzuto bought the G. Heileman Brewery for $10.5 million and reopened it as the City Brewing Co. – it original name when founded by Gottlieb Heileman and John Gund in 1858 – but they ran into financial trouble, stopped production and laid off workers. Last fall, a group of local investors purchased City Brewing and have been ramping up production.”