Factory Fitness leaves creditors empty-handed in shutdown

Retailer Factory Fitness, nearly complete in its shutdown and liquidation of the last two months, will leave most of its fitness equipment creditors with unpaid receivables.

Suppliers who were unsecured and have confirmed to SNEWS® they are owed money include Diamondback, Landice, PowerBlock and newcomer Bladez, whose fitness division ironically is now led by a Factory Fitness co-founder, Kris Reibel. Sources confirm the total amount owed to unsecured fitness equipment creditors by Factory Fitness is close to $120,000.

Life Fitness, a 49-percent owner since 2000 of the seven-store chain in Kentucky and Indiana, purchased a money security interest in its inventory in the stores to secure its investment, store liquidator and consultant Ted Mullett told SNEWS®. The company also advanced money to the retail business and took a secured interest in the company assets, he said.

Life Fitness declined comment about the liquidation: “We are not in a position to discuss the matter,” the company said through a spokeswoman.

The remaining 51 percent is owned by the company Factory Holdings Inc. That company includes the Derrickson family, a local venture investment group, which has 50 percent of the remaining 51 percent; co-founder Reibel, who still had 20-percent ownership of the remaining portion; and two other partners with smaller portions.

Mullett said the Factory Fitness company “made a decision to liquidate after they determined it was futile to make a go of it.”

He said the company’s choices were to get someone else to run the company or get someone else to buy it. Neither panned out, he said. Mullett said he talked to several companies about a purchase, but none came to fruition. He speculated that since the company would have had to maintain the business relationship with Life Fitness — likely a competitor — and carry Life Fitness products, any possible buyer may have decided not to follow up.

“We pursued this,” said Mullett, who has also been a member of the store’s board for about three years. “It is ludicrous that anyone would say I was not interested in selling. Why would I not be interested in selling when not selling means there is nothing for the investors, and the creditors end up getting stiffed? I would have been more than happy to sell the company if anyone had come forward.”

He added that Life Fitness did have half the votes (two of four) on the board of managers, so a disagreement between the two blocks of votes — the other being Factory Holdings — could mean a stand-off. In addition, he said Life Fitness had veto power over certain transactions as a part of its alliance agreement with Factory Fitness.

In an April 28 letter from Factory Fitness addressed to “valued suppliers,” of which SNEWS obtained a copy, the company wrote:

“This is to update you about Factory Fitness.com LLC. As you may know, the company has been operating in an environment of financial distress for some time. Since late 2003, several alternatives have been pursued, including looking for a buyer or other investor. However, there has been no success in these searches and the company’s board of managers has directed the company to liquidate and discontinue operations….

“It is now apparent that no creditor will be paid in full, and there will be no monies available for unsecured creditors.”

The letter said an unaudited balanced sheet from April 27, 2004, shows secured obligations of approximately $1.268 million, with assets valued at about $689,000. Creditors told SNEWS® that the liquidation came on suddenly and without warning.

“There were no flags flying for us,” said Lance Goodemann, national sales manager for PowerBlock. “They just stopped paying.”

Goodemann said his company is owed $16,000, which for PowerBlock is “a serious amount of money.” He said the company is “weighing its options.”

A Bladez credit manager confirmed it is owed $37,000, and some sources said Factory Fitness reassured Bladez it was going to be paid. Mullett denied ever promising anyone payment.

Landice COO Dave Rainis said Landice was surprised by the lack of payment “given the ownership arrangement.”

“There are some pretty angry people out there,” Rainis said. “I would think you can’t just close your doors and say, ‘I’m closing and I can’t pay you.'”

Several of the suppliers who talked to SNEWS® said they had been contacted by Bladez to explore the possibility of some kind of joint legal action. Bladez would neither confirm nor deny any discussions.

However, a Bladez spokesman confirmed his company has hired an attorney to look at options.

“We can’t collect it, and the attorney is working on collecting it for us,” the Bladez spokesman said.

The only Factory Fitness store remaining is the Indianapolis outlet, which is now basically a hub of clearance operations, Mullett said; for all intents and purposes, Factory Fitness doesn’t exist anymore. In the last few weeks, equipment has been selling for about cost, he said, with some at less than cost.

“One of the things that killed off the store was their strategy to expand the product line into the lower-priced market since there were new competitors, especially in that lower end, that began to undermine those sales efforts,” Mullett said. “The correct strategy would have been to be clear that if a customer is really serious about fitness, they come to Factory Fitness to get the best.”

SNEWS® View: As we said in our April 12, 2004, story about the closure, it seems that a continued inability to agree on how to operate the store and what its direction should be were perhaps the failing of the chain. One source said there was “friction” between members of the board; Reibel himself said he was frustrated with constant “head-butting” on strategic issues (see our story on his move to Bladez, Feb. 20, 2004), which partly prompted him to take the Bladez job at the end of 2003. No, the sum owed creditors isn’t huge — not like the amounts that were owed so many suppliers after the original Busy Body went belly up a few years ago. But as the economy begins to recover, a supplier that is suddenly out $20,000 or $40,000 will still suffer. We also find it odd and frustrating that Life Fitness won’t make some statement. With its ownership position, there are a lot of suppliers — both those burned and those lucky enough not to be — who are pointing fingers, calling out a moral obligation, and saying, “Hey, you’re hurting the industry.”