SERIES: THE CRUNCH FITNESS FIASCO

CRUNCH FITNESS TIPPING POINT AND A PERSONAL ANECDOTE

By David Arthur Walters THE MIAMI MIRROR June 15, 2011 MIAMI BEACH The new Crunch Fitness had planned all along to jack up monthly membership fees, but it did not receive the quantity and quality of membership it had paid for when it took over 25 clubs from insolvent Bally Fitness. First of all, the number of members turned over to AGT Crunch Acquisition LLC were 17,350 or 18% shy of the 97,538 promised, leaving Crunch with a monthly revenue shortfall of roughly $1 million. As for quality, much to the surprise and consternation of the purchasers the rates had been locked in on many of the membership contracts it bought. Database mining disclosed that 81,000 of the memberships on the original list had contracts that restricted raising fees. Of those, 40,391 contracts were lifetime memberships where fees could not be raised at all. Many of the memberships had special riders or side-agreements attached, but AGT Crunch was not able to obtain copies of those riders nor were copies of the original contracts themselves forthcoming. The monthly value of the shortfall created by the diminished quality has not been disclosed. To make matters much worse, a great deal of erroneous data was provided, resulting in countless billing errors. Crunch sued Bally Fitness for at least $10 million, but a lot of good that would do since the defendant was heading for bankruptcy. Not only did Crunch blame Ballys lies for the fiasco, it blamed the economy as well; to wit, the extraordinarily high rents it was paying at the peak of the real estate market, and the inability to grow the membership during the downturn. It did not blame its own financial and operating mismanagement. Angelo, Gordon & Company, for example, did not come forward and confess that its financial experts had made bad financial decisions with its investors money. Nor did it confess how it had blundered by elbowing partner and CEO Marc Tascher out after a mere four months, converting him from their golden boy to pariah. He wanted to invest the needed time, from five to seven years, in building up the clubs and adding to brand value with good service; whereas the Angelo Gordon money men were only interested in immediate acceleration of sales transaction numbers. Tascher, whose resignation as CEO was announced on August 14, 2006, stayed on until April 16, 2009, as a director, apparently to protect his 20% equity interest and interest in the balance due on his management contract, and that naturally included giving advice that he thought would help Crunch survive and thrive. Maybe he hoped that Angelo Gordon would realize its blunder and bring him back into the fold. The migration fiasco, the transfer of Ballys data to the Crunch system, was the tipping point. The new Crunch had proceeded with operations in January 2006. Angelo Gordon brought in Alvarez & Marsal, to deal with the database issue; the invasion of its consultants began in May 2006. Tascher was marginalized, and resigned as CEO in August 2006. Jeff Feinberg, Alvarez

& Marsals premier management expert, who knew nothing about fitness clubs, was appointed interim CEO of Crunch. Feinbergs tenure, like the Roman dictators of old, was brief. His tactics were crude if not brutal; he was good at centralizing authority in himself, at being curt and taking decisive, abrupt action, whether or not that action was reasonable or not rumor has it that Feinberg amused the staff until things got nasty. He was succeeded in July 2007 as CEO by Tim Miller, a Morgans Group Hotel branding man with no fitness industry experience at all. When Angelo Gordon got wise to their mistake, realizing they needed an experienced fitness club man on board, they brought in no less than the veritable icon of the fitness industry from the wings, Mark Mastrov, as ringmaster. When the deal was announced in September 2009, Mastrov effused that he looked forward to working with Miller, and Miller said the sale would allow Crunch to emerge as a strong playerwhere entertainment meets fitness. Miller had already resigned on August 31, 2009; he was replaced on the next day by Mastrovs old sidekick, Jim Rowley. Of course Mastrov had already bought in to the old mix in contemplation of the impending bankruptcy and his subsequent takeover of the management; naturally he is listed in the bankruptcy documents as a director or officer of debtor AGT Crunch Acquisition LLC. We believe that Fitness industry titans Tascher and Mastrov would have been good partners if their destiny had put them together, for they represent the two strengths needed for a thriving fitness industry operation or any other kind business for that matter: Mastrovs strength is sales; Taschers is Service. We can see from the record that Mastrov is great when it comes to aggressive sales and collections of revenue; the overemphasis of that virtue in 24 Hour Fitness has led to the companys reputation, despite the PR to the contrary, churning and burning, euphemistically known as seduction and abandonment. Tascher, who likes to build models, has a reputation among his peers for obtaining excellent results through continuous improvements in service that lead to the retention of members sold. I happened to be a member of the Crunch situated on South Miami Beachs Washington Avenue shortly after Crunch was purchased from Bally. I noticed that Crunch general managers are a dime a dozen and have little or no say so on how to run the local club. A general manager might know the right and wrong way of doing things, but that knowledge was not capitalized on at the Crunch I saw. Being a general manager of Crunch meant following orders handed down from the New York office. Tascher must have shared their disheartenment when he discovered that he was not really the chief executive officer of AGT Crunch; he was just another general manager expected to do what he was told to do by the transaction-oriented owners, none of whom had any fitness club experience. A few of the trainers, dissatisfied with the new pay arrangement, left the South Beach Crunch when the operation was taken over from Ballys, and the old general manager wound up at Equinox; however, the staff did not change that much on the whole. The club got new paint on the walls; the colors were somewhat deeper, similarly as outrageous in hue as the original colors associated with the Crunch brand. The smallish locker rooms were spruced up the waterless, energy-saving urinals in the Mens Room were a novel attraction, appreciated for their splatter-

safe design but depreciated for their odor-enhancement. The latest versions of fitness equipment were installed. Many members rued the loss of much of the older equipment; they disagreed with the latest scientific advances in ergonomics that keep the fitness equipment industry employed. All in all, the improvements at South Beach Crunch were deemed to be a superficial facelift, and no one could figure out why $30 million would be invested, as announced, in such renovations members were notified that fees would be increased due to the marvelous improvements. Suggestions from members, including suggestions to rid the club of deafening music programming, fell on deaf ears because everything including the music formula was dictated from New York. Indeed, the members as well as the staff soon learned that making any suggestions at all was an exercise in futility; the suggestion box was removed. Another Crunch was opened a few blocks away, on Alton Road, although the ranks were thinning on Washington Avenue, and there was talk of opening another one. Still, the club was as fun as ever; there was a variety of exciting classes and plenty of eye candy to go around regardless of gender preferences. The women especially liked the boxing ring. There were a few real musclemen around. There was too much socializing around the machines as far as I was concerned, and the slamming of weights and yelling on cell phones was disturbing, but one must be tolerant at Crunch because of its No Judgment philosophy. The membership did not change much, and the change of managers and trainers did not create much of a stir as the new ones were affable and as helpful as they could be within the constraints of the dictated policies. In sum, there was lots to like and little to dislike, so the membership was relatively loyal, just as Tascher had expected right off the bat. "We are excited about working with the strong Crunch team of dedicated employees to take the brand to the next level," Mr. Tascher said when the deal with Bally was done. "We intend to build upon the strong foundation that is already in place, including improved operational infrastructure, great people, dynamic programming, superior locations and a loyal membership base." But there was a serious problem, one that the fitness club industry at large is notorious for: disputes were mounting over cancellation and overbilling. Hundreds of complaints about Crunch were posted on consumer complaints boards, alleging that members had been billed for several months at once, that former members were billed after they had cancelled their membership several months prior, that people who had not even belonged to a Crunch were billed for past due memberships, and so on. One lady, who made the common mistake of giving Crunch her debit card instead of her credit card, had her bank account overdrawn by the Crunch charges; as a result, her rent check bounced and she was evicted from her apartment. Brand new members were also complaining. I had signed onto a special deal with a $5 initiation fee, and I paid that and first months fee in advance, yet I was dunned for my first month, with a statement the fee was past due; when I complained that I was in effect being charged for two months for my first months dues, I was told that I had been charged for a previous months dues although I was not a member for the previous month. The idiocy seemed endless as I was referred back and forth between the New York office and the local club. I went through hell to get the matter resolved, and there was no apology. Further, I was told that my membership fee under the annual contract would be locked

in indefinitely it was not the annual memberships would be changed to month-to-month upon termination of the annual period, allowing the management to increase fees at will before I knew it, I was paying $72 including tax, up from $48 per month. Since my billing snafu was eventually resolved albeit without an admission of error or an apology, I moved on, and enjoyed working out at the club. But then members were telling me horror stories about their overcharges however, one lady told me she had not been billed for many months; she was quite pleased with her free membership. An Argentinean intellectual, who was working at minimum wage at a local book store I frequented, broke down and wept as she told me how Crunch had wiped out her checking account, was running her around the bush, and had refused to return the overcharge. She knew I was a writer, and pleaded with me to use my English skills to help her and other victims of the overbilling. So I wrote an article about the situation, and I addressed Crunchs headquarters in New York, suggesting that the entire membership be warned, by email and by notices posted in all the clubs, of the overbilling problems, advising them to carefully check their accounts, and that refunds be duly made with apologies and a free months membership be given out for each month overcharged. My suggestions were ignored, which was par for the Crunch course. I noticed that, whenever there was a controversy over billing, Crunch gave the benefit of the doubt to itself, not to the member. I naturally blamed the guy with the biggest title and mistakenly concluded that CEO Tascher cared too little for the members and too much for the money. Yet I did not imagine that Crunch executives were crooks, for I knew that Crunch had inherited the problem from Bally Total Fitness, which had disintegrated the Crunch club billing system after it bought Crunch, throwing the Crunch clubs in with its other clubs. I was not aware at the time that Taschers equity partners had already elbowed him aside and that the data migration fiasco was being addressed by Feinberg, the temporary CEO brought in by Angelo Gordon. Many of the complaints about the policies of fitness clubs are due to the fact that people signing up, including lawyers, do not bother to read the adhesion (take it or leave it) contracts offered to them. The sales staff is disinclined to point out the cancellation clause and have them initial it, less the prospect be distracted and become disinclined to sign. Still, there is a great deal of abuse including fraud in the industry in respect to membership cancellations. Part of the eventual cure at Crunch would be the Crunch conversion to monthly memberships, although some old-timers complained that the lack of annual commitment vulgarized the membership. Too many consumers have discovered that commitment mainly serves the interest of the producer who requires it. An advantage to a Florida fitness club or health salon that has only monthly contracts is that it does not have to put up a bond with the state regulatory agency, the Department of Agriculture, which does little to regulate the industry anyway Republicans in the state legislature are currently working to deregulate the industry. As Michael Jacobs, then current President and Chief Financial Officer of AGT Crunch Acquisition LLC, explained it in a bankruptcy filing, Following the Acquisition, the Debtors also experienced significant billing and collections difficulties with respect to the transfer of member information from Bally. Consequently, the Debtors retained Alvarez & Marsal to

provide interim management services throughout 2007 until the Debtors could recruit a permanent management team. Feinberg would return to Alvarez & Marsal after his stint at Crunch: a release from Alvarez & Marsal states, Alvarez & Marsal (A&M), one of the leading independent global professional services firms specializing in performance improvement, turnaround management and business advisory services. Jeff Feinberg has rejoined the firm as a managing director and national practice leader after most recently serving as a managing director and operating partner at Angelo Gordon, a major private investment firm. Based in New York, Mr. Feinberg was formerly a member of A&M's turnaround and restructuring group for eight years. Little did I know when I first encountered the billing snafu that Feinberg even existed, that he was fully aware of the billing problems, and that in fact he had been brought in to deal with the messy data migration. Eventually, my query to the network infrastructure provider who was publicly bragging about the great job it had done for Crunch was forwarded to him. I had sent a copy of the query to Angelo Gordon. At the time I contacted the infrastructure provider, I was unaware that the problem was with the data and not with the operating system. Feinberg, evidently unaware of my many futile calls and messages to multiple persons at his New York office during my effort to have the members protected, was livid. You have successfully prevented anyone at Crunch from wanting to help you, Mr. Feinberg wrote. Why you contacted a service provider of ours and not the VP of Membership Services (or me, for that matter) for the life of me, I do not understand. I can't even contemplate what you wanted to accomplish by cc'ing John Angelo on an email to a Crunch service provider it certainly didn't make your cause look all that strong. I responded under the heading, Crunch Stakeholders Are Always Wrong, noting that he had obviously not studied the history of my case, and had assumed that I was entirely in the wrong, an attitude that is prevalent throughout the organization towards its members. In fact, I had made numerous calls, personal visits, and email contacts with all sorts of Crunch staff. I asked him for an apology or a refund of all moneys paid, for any true gentleman aware of his mistake would be glad to offer one or the other. Feinberg advised me that only a small percent of a percent of the membership had complained: You are one of over 100,000 members in our system. You have had a bad experience with us; it happens... less than .01% of the time. If you have this much time on your hands and are so upset about what we have done to you, then merely quit. As can be readily see from the later bankruptcy filings, the membership was not over 100,000, but far less; this management expert for Angelo Gordon had to know that. If I had applied his one-hundredth of a percent to the 80,188 or less members the organization actually had, I would have been one of about only eight members involved in what was truly a migration disaster. The fact of the matter was that many hundreds of complaints were being lodged, and he knew that very well since he had been brought in to deal with it he later told me he had brought in a large staff to deal with it. I myself had printed out over two-hundred pages of complaints to file

with the Florida regulatory agency, and with the Federal Reserve Bank to check into the possibility of consumer credit card fraud. As far as I was concerned, the interim Crunch CEO, Jeff Feinberg, was showing utter contempt for the membership at large as well as their families, friends, associates and acquaintances, the network upon which the enterprises success ultimately depends. I did understand how a person with such a great reputation for management could have behaved in such a dismissive and unprofessional manner. Even if there had been only 50 complaints, they should have been effectively and efficiently dealt with. Each member with a grievance will tell his or her story to a dozen people, who will in turn spread the word, and so on, and then there are the complaints boards on the Internet viewed by tens of thousands of people there is a lot of money to be made from listening to complaints, because there is an ideal on the other side of every grievance; yet it appears that fitness club executives ignore them because there is no end to the complaints. I was not about to take Feinbergs advice to quit. I loved the South Beach Crunch gym and the brand but I was not in love with the New York office after months of pleading with it as well as with the local gym manager and sales staff and the Crunch partners to resolve the overbilling problems, all to no avail. On March 6, 2007, I cited his advice to quit and threw Crunchs official philosophy back in his face: At the heart of Crunch's core, stands a tremendously experienced and energetic staff dedicated to creating an environment where everyone feels accepted - a truly unique place. (Crunch Philosophy) "You have had a bad experience with us; it happens... less than .01% of the time. If you have this much time on your hands and are so upset about what we have done to you, then merely quit." (Jeff N. Feinberg, C.E.O. Crunch Fitness) His reply came immediately: You really do have a lot of time on your hands too bad you don't read all that well. Your membership has been terminated, effective immediately. It would behoove gym operators to know their members, and to know that the flip side of a complaint is an unrealized ideal. I loved the brand so much and was so indignant over being terminated that I fought for the reinstatement of my membership, and I decided to wage a campaign to expose the managements several faults to the general public, the local regulatory agency, the attorneys general of several states, my bank, and the Federal Reserve Bank. Mr. Feinberg had my membership reinstated just as I was planning on filing a suit against AGT Crunch Acquisition, based on adhesion contract theory and a probably untenable unique theory of membership rights I had conceived while perusing rather boring contract law books. I was told that a free months membership had been couriered to me but had apparently been lost since the envelope was left under a plant at my address I have no plants around my door. I never got the apology, but I did receive a month free. Eventually AGT Crunch fixed the back-office billing problem inherited from Bally, but its reputation was ruined as far as many thousands of people were concerned. I still loved the brand so much so that I wrote a fine review published by several Internet sites including a popular Miami Beach site. I estimate that I influenced at least a hundred people to

join out of the hundred thousand people that have clicked on the article so far. It was just too bad that Crunchs reputation was besmirched by the migration and the reaction to it it was just assumed, as a matter of policy, that members who complained were wrong; and of course some of them were. Little did I know by the upbeat mood among members at the gym that my beloved Crunch was bleeding badly, was about to go belly up and be ravished in bankruptcy court. Many millions in losses had been incurred, and defaults on loans were imminent. The bankruptcy petition was filed on March 6, 2009. -To Be Continued-