<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
COMMISSION FILE # 1-13290
THE SPORTS CLUB COMPANY, INC.
A DELAWARE CORPORATION - I.R.S. NO. 95-4479735
11100 SANTA MONICA BLVD., SUITE 300, LOS ANGELES, CA 90025
(310) 479-5200
Indicate by check mark whether the company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, during the preceding 12 months (or for such shorter period that the
company was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- --------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Shares
Outstanding at
Class November 12, 1996
----- -----------------
<S> <C>
Common stock, $.01 par value 11,355,000
</TABLE>
<PAGE> 2
THE SPORTS CLUB COMPANY, INC.
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets - 3
December 31, 1995 and September 30, 1996
Condensed Consolidated Statements of Operations - 4
Three and Nine Months ended September 30, 1995 and 1996
Condensed Consolidated Statements of Cash Flows - 5
Nine Months ended September 30, 1995 and 1996
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 10
OPERATIONS
PART II. OTHER INFORMATION 14
SIGNATURES 16
</TABLE>
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THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1995 1996
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,545 $2,878
Accounts receivable, net of allowance for doubtful accounts
of $39 and $36 at December 31, 1995 and September 30, 1996 1,323 530
Inventories 401 226
Other current assets 370 225
Due from affiliates 3,508 3,447
------- -------
Total current assets 7,147 7,306
Property and equipment, at cost, net of accumulated depreciation and
amortization of $2,750 and $4,201 at December 31, 1995 and September 30, 1996 59,956 60,086
Equity interest in unconsolidated subsidiaries 4,478 4,349
Costs in excess of net assets acquired, less accumulated amortization
of $215 and $583 at December 31, 1995 and September 30, 1996 10,136 10,140
Other assets, at cost, net 1,389 1,339
------- -------
$83,106 $83,220
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and capitalized
lease obligations $1,890 $2,040
Accounts payable 2,021 900
Accrued liabilities 2,165 2,689
Deferred membership revenues 4,742 4,038
------- -------
Total current liabilities 10,818 9,667
Notes payable and capitalized lease obligations,
less current installments 31,023 30,735
Deferred lease obligations 691 910
Minority interest 600 600
------- -------
Total liabilities 43,132 41,912
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized;
no shares issued or outstanding - -
Common stock, $.01 par value, 40,000,000 shares authorized;
11,355,000 shares issued and outstanding
at December 31, 1995 and September 30, 1996 114 114
Additional paid-in capital 37,044 37,044
Retained earnings 2,816 4,150
------- -------
Total shareholders' equity 39,974 41,308
------- -------
$83,106 $83,220
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------- ------------------
1995 1996 1995 1996
------ ------ ------- -------
<S> <C> <C> <C> <C>
Revenues $9,096 $9,390 $27,040 $28,062
Operating expenses:
Direct 5,912 5,811 17,282 17,624
Selling, general and administrative 1,522 1,550 3,849 4,541
Depreciation and amortization 852 649 2,062 1,869
------ ------ ------- -------
Total operating expenses 8,286 8,010 23,193 24,034
------ ------ ------- -------
Income from operations 810 1,380 3,847 4,028
Other income (expense):
Interest (647) (693) (1,981) (2,056)
Minority interests (37) (37) (112) (112)
Equity interest in net income of unconsolidated subsidiaries 84 151 715 401
------ ------ ------- -------
Income before income taxes 210 801 2,469 2,261
Provision for income taxes 86 329 1,012 927
------ ------ ------- -------
Net income $124 $472 $1,457 $1,334
====== ====== ======= =======
Net income per share $0.01 $0.04 $0.13 $0.12
====== ====== ======= =======
Weighted average number of common shares outstanding 11,353 11,355 11,352 11,355
====== ====== ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1995 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,457 $1,334
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,062 1,869
Equity interest in net income of unconsolidated subsidiaries (715) (401)
Stock issued as directors' fees 21 0
Accrued management fees (335) (620)
Equity interest distributions from unconsolidated subsidiaries 320 530
(Increase) decrease in:
Accounts receivable, net 669 793
Inventories 43 175
Other current assets (26) 112
Increase (decrease) in:
Accounts payable 861 (1,121)
Accrued liabilities (780) 524
Deferred membership revenues (699) (704)
Deferred lease obligations 135 219
------ -------
Net cash provided by operating activities 3,013 2,710
Cash flows from investing activities:
Capital expenditures (1,647) (1,579)
Purchase of other assets (1,569) (346)
(Increase) decrease in due from affiliates (2,005) 681
------ -------
Net cash used for investing activities (5,221) (1,244)
Cash flows from financing activities:
Proceeds from notes payable and capital lease obligations 531 23,029
Repayments of notes payable and capital lease obligations (1,594) (23,162)
------ -------
Net cash used for financing activities (1,063) (133)
------ -------
Net increase (decrease) in cash and cash equivalents (3,271) 1,333
Cash and cash equivalents at beginning of period 5,042 1,545
------ -------
Cash and cash equivalents at end of period $1,771 $2,878
====== =======
Supplemental disclosure of cash flow information:
Cash paid for interest $2,347 $2,285
====== =======
Cash paid for income taxes $1,473 $571
====== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
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THE SPORTS CLUB COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). The condensed consolidated
financial statements should be read in conjunction with the Company's December
31, 1995, consolidated financial statements and notes thereto, included on Form
10-K (SEC File Number 1-13290). Certain information and footnote disclosures
which are normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to SEC rules and regulations. The Company believes that the
disclosures made are adequate to make the information presented not misleading.
The information reflects all adjustments which, in the opinion of Management,
are necessary for a fair presentation of the financial position and results of
operations for the interim period set forth herein. All such adjustments are of
a normal and recurring nature. The results for the nine month period ended
September 30, 1996, are not necessarily indicative of the results for the
entire fiscal year ending December 31, 1996. Certain reclassifications have
been made to the 1995 financial statements to conform to the presentation used
in 1996.
2. EQUITY INTEREST IN UNCONSOLIDATED SUBSIDIARIES
Equity interest in unconsolidated subsidiaries consists of a 40%
interest in the Reebok-Sports Club/NY and a 46.1% interest in a Spectrum Club
located in Manhattan Beach, California and an interest in The Sports
Connections included in a joint venture agreement with Bally's Health & Tennis
Corporation ("Bally's"). In November 1996, the Company sold its interest in
certain Sports Connections to Fitness Holdings, Inc. d/b/a 24 Hour Fitness.
The Company received approximately $3,750,000 in cash proceeds from the sale
and will incur an estimated net loss of $300,000 on the transaction in the
fourth quarter.
The Company allocates profits and losses on a basis defined in its
various partnership and joint venture agreements relating to its unconsolidated
subsidiaries. Operating losses in the Reebok-Sports Club/NY are allocated 99%
to Reebok and 1% to the Company. Any future operating profits will first be
allocated to the partners to recoup any operating losses. Next, the
partnership agreement calls for a $3.0 million annual priority distribution to
a limited partner and the return of various capital contributions with interest
to the partners. After the allocation of a one time $2.5 million distribution
(of which the Company is entitled to $1.25 million), the Company is entitled to
40% of future operating income.
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Summary financial information of the Reebok-Sports Club/NY and the Spectrum
Club/Manhattan Beach is as follows:
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1995 1996
---- ----
(Amounts in thousands)
<S> <C> <C>
Revenues............................... $ 14,750 $15,649
Net income (loss).................. (1,178) 748
December 31, September 30,
1995 1996
---- ----
(Amounts in thousands)
Current assets........................ $ 1,214 $ 1,580
Non-current assets................. 15,223 14,765
------ ------
Total assets.......................... $ 16,437 $16,345
======= =======
Current liabilities.................. $ 6,240 $ 6,698
Non-current liabilities........... 7,302 6,954
-------- -------
Total liabilities.................... 13,542 13,652
Partners' capital.................... 2,895 2,693
-------- -------
$ 16,437 $16,345
======== =======
</TABLE>
3. RELATED PARTY TRANSACTIONS
Due from affiliates are summarized as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
---- ----
(Amounts in thousands)
<S> <C> <C>
Note receivable from the Company's CEO, including interest at
5.3%, due on April 3, 1997. Secured by a pledge of
384,000 shares of the Company's common stock.......................... $ 631 $ 616
Note receivable from the Reebok-Sports Club/NY, interest
at 10% payable quarterly; principal repayable as net cash flow
of the partnership is available ...................................... 1,500 1,500
Accrued management fees from the Reebok-Sports Club/NY,
interest at 10%, payable as net cash flow of the partnership
is available ......................................................... 502 1,134
Advances to unconsolidated subsidiaries made in the normal course of
business, payable on demand........................................... 875 197
---------- --------
$ 3,508 $ 3,447
========== ========
</TABLE>
7
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The Company manages the operation of the Spectrum Club/Manhattan
Beach, 53.9% of which is owned by outside investors. The Company receives a
fee of $27,447 per month plus 4.5% of the Club's gross revenues for managing
this Club.
The Company also manages the operations of the Reebok Sports Club/NY
for a fee of approximately 5% of the gross monthly collections, as defined.
The Company has invested $50,000 in the capital of the Reebok-Sports Club/NY.
Under the arrangement, the Company may be required to fund additional costs of
the partnership.
4. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
Notes payable and capitalized lease obligations are summarized as
follows:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
---- ----
(Amounts in thousands)
<S> <C> <C>
The Sports Club/LA note . . . . . . . . . . $ 22,104 $ 22,728
The Sports Club/Irvine note . . . . . . . . 5,500 5,500
The Spectrum Club/Agoura Hills note . . . . 2,550
Secured bank notes . . . . . . . . . . . . . 629 336
Capitalized lease obligations . . . . . . . 1,494 1,135
Other notes payable . . . . . . . . . . . . 636 526
-------- --------
32,913 32,775
Less current installments . . . . . . . . . 1,890 2,040
-------- --------
$ 31,023 $ 30,735
======== ========
</TABLE>
The Reebok-Sports Club/NY has a loan outstanding to finance personal
property. The Company is a guarantor of this financing. As of September 30,
1996, the unpaid principal outstanding was $3,400,000.
5. NET INCOME PER SHARE
Net income per share is based on the weighted average number of common
and common equivalent shares outstanding. Fully diluted net income per share
is not presented as it does not differ materially from primary net income per
share.
6. INCOME TAXES
Income taxes were computed using the effective tax rate estimated to
be applicable for the full fiscal year, which is subject to ongoing review and
evaluation by management.
7. RECENT DEVELOPMENTS
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of " ("Statement No. 121"), effective for fiscal years
beginning after December 31, 1995. Statement No. 121 establishes accounting
standards for the recognition and measurement of impairment of long-lived
assets, certain identifiable intangibles, and goodwill either to be held or
disposed of. The Company's policy is to
8
<PAGE> 9
account for goodwill and all other intangible assets at the lower of amortized
cost or fair value. As part of an ongoing review of the valuation and
amortization of intangible assets, management assesses the carrying value of
the Company's intangible assets if facts and circumstances suggest that it may
be impaired. If this review indicates that the intangibles will not be
recoverable, as determined by an undiscounted cash flow analysis over the
remaining amortization period, the carrying value of the Company's intangibles
will be reduced to its estimated fair market value. The Company adopted the
provisions of Statement No. 121 effective January 1, 1996. Management believes
that Statement No. 121 will not have a material impact on the consolidated
financial statements.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("Statement No. 123"), issued in October 1995 and
effective for fiscal years beginning after December 15, 1995, permits but does
not require, a fair value based method of accounting for employee stock options
or similar equity instruments. Statement No. 123 allows an entity to elect to
continue to measure compensation cost under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APBO No. 25"), but
requires pro forma disclosures of net earnings and earnings per share as if the
fair value based method of accounting had been applied. The Company adopted
Statement No. 123 in 1996 and will continue to measure compensation cost under
APBO No. 25, and comply with the pro forma disclosure requirements. Statement
No. 123 will have no impact on the Company's consolidated financial position or
results of operations other than the inclusion of the pro forma disclosures.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto appearing elsewhere in this
Form 10-Q. The Company's consolidated financial statements reflect the
operations of The Sports Clubs, The Spectrum Clubs and HealthFitness
Organization of America, Inc. ("HFA") which was acquired on November 30, 1995.
The Reebok Sports Club/NY, which was opened in April 1995, and the Spectrum
Club/Manhattan Beach are accounted for under the equity method of accounting.
The comparability of the Company's operating results, financial condition
and capital requirements is impacted by the number of clubs which the Company
operates. Seasonal factors have not had a significant effect on the Company's
operating results.
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1996 to Three Months Ended
September 30, 1995
Revenues for the three months ended September 30, 1996 were $9.4 million,
compared to $9.1 million in 1995, an increase of $300,000 or 3.2%. The increase
resulted from additional membership dues as well as increased ancillary
revenues.
Direct operating expenses decreased to $5.8 million in the three months
ended September 30, 1996 versus $5.9 million in 1995. The decrease was due to
club operating expenses decreasing $210,000 while operating expenses of HFA,
acquired in the fourth quarter of 1995, were $109,000. Direct operating
expenses as a percentage of revenues decreased to 61.9% in 1996 compared to
65.0% in 1995 due to the decrease of direct club expenses along with an
increase in revenues.
Selling, general and administrative expenses were $1.5 million in the
three months ended September 30, 1996 versus $1.5 million in 1995. Additional
costs associated with HFA were offset by other administrative cost reductions.
Depreciation and amortization expenses were $649,000 in the three months
ended September 30, 1996 versus $852,000 in 1995. The 1995 depreciation expense
included a special charge of $175,000 due to the closure of the Spectrum
Club/Century City and the write off of certain assets. Interest expense was
$693,000 in the three months ended September 30, 1996 versus $647,000 in 1995.
Equity interest in net income of unconsolidated subsidiaries was $151,000
in the three months ended September 30, 1996 versus $84,000 in 1995. The
Company did not record any income from Reebok Sports Club/NY or the Sports
Connections for the three months ended September 30, 1996 or September 30,
1995. The 1995 and 1996 amounts are associated with the Spectrum
Club/Manhattan Beach's operations.
The Company's net income before income taxes was $801,000 for the three
months ended September 30, 1996 versus $210,000 in 1995. The results for 1996
include a pre-tax loss of $291,000 from the operations of HFA. The results
for 1995 include a pre-tax charges of $375,000 related to the Company's closure
of the Spectrum Club/Century City. The Company's estimated income tax rate has
remained at 41%, resulting in a net income of $472,000 for the three months
ended September 30, 1996 versus net income of $124,000 in 1995.
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Comparison of Nine Months Ended September 30, 1996 to Nine Months Ended
September 30, 1995
Revenues for the nine months ended September 30, 1996 were $28.1 million,
compared to $27.0 million in 1995, an increase of $1.1 million or 3.8 %. The
increase resulted from additional membership dues as well as increased
ancillary revenues. Additionally, revenues increased by $229,000 as a result
of greater management fees earned from the Reebok Sports Club/NY, which opened
in April 1995, and revenues of $287,000 from the operations of HFA.
Direct operating expenses increased to $17.6 million in the nine months
ended September 30, 1996 versus $17.3 million in 1995. HFA was responsible for
an increase of direct costs of $329,000 while the club operating expenses
remained virtually the same. Direct operating expenses as a percentage of
revenues decreased to 62.8% in 1996 compared to 63.9% in 1995. Direct
operating costs without those costs associated with HFA were 62.0% of revenue
for the nine months ended September 30, 1996.
Selling, general and administrative expenses were $4.5 million in the
nine months ended September 30, 1996 versus $3.8 million in 1995. Over 72% of
the increase in expense was incurred as a result of the operations of HFA.
There were no comparable costs for HFA in 1995.
Depreciation and amortization expenses were $1.9 million in the nine
months ended September 30, 1996 versus $2.1 million in 1995. Interest expense
was $2.1 million in the nine months ended September 30, 1996 versus $2.0
million in 1995.
Equity interest in net income of unconsolidated subsidiaries was $401,000
in the nine months ended September 30, 1996 versus $715,000 in 1995. The
Company did not record any income from the Sports Connections for the nine
months ended September 30, 1996 versus $437,000 in 1995. The 1996 amounts and
$278,000 in 1995 is associated with the Spectrum Club/Manhattan Beach's
operations.
The Company's net income before income taxes was $2.3 million for the
nine months ended September 30, 1996 verses $2.5 million in 1995. The results
for 1996 include pre-tax loss of $914,000 from the operations of HFA. 1995
results include $437,000 of pre-tax income from the Sports Connections and a
$375,000 pre-tax loss on the closure of The Century City Spectrum. The
Company's estimated income tax rate has remained at 41%, resulting in a net
income of $1.3 million for the nine months ended September 30, 1996 versus net
income of $1.5 million in 1995, a decrease of 8.4%.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1995 and the nine months ended
September 30, 1996 the Company generated $8.8 million and $6.2 million of
earnings before interest, depreciation, amortization and income taxes,
respectively. At September 30, 1996 the Company had a cash balance of $2.9
million of which $929,000 is in a special construction account for the
development of a Spectrum Club in Valencia, California. The remaining $2.0
million is available for general corporate purposes. The Company anticipates
its cash balance on hand plus cash generated from operations will be adequate
to fund the Company's current operating activities, debt service,
developmental capital requirements, and recurring capital expenditures for the
next twelve months.
In March, 1996, the Company refinanced The Sports Club/LA property, which
had an outstanding promissory note in the amount of $22.1 million. The new
$23.0 million loan bears interest at a fixed interest rate of 10.63%. The
Company is required to make monthly principal and interest payments of
$256,000, compared with monthly payments of $264,000 under the old note. The
note matures in March 2003 but, if certain conditions exist, the Company may
extend the term of the note by an additional five years. All assets of The
Sports Club/LA have been pledged to secure this loan. This note replaces a note
with interest at 10%, secured by the land, building and equipment of The Sports
Club/LA. This old note required a balloon payment of approximately $22.0
million on December 31, 1996.
11
<PAGE> 12
In connection with the acquisition of The Sports Club/Irvine, MKDG
Partners agreed to pay the Company for each of the years ending December 31,
1994, 1995 and 1996, the lesser of approximately $1.0 million or the amount by
which The Sports Club/Irvine's earnings before depreciation and the Company's
administrative overhead relating to the Club for such year is less than
approximately $2.9 million. The Company collected $687,000 related to the 1995
shortfall in the third quarter of 1996.
The Company is the manager and holds a 40% general partnership interest
in the partnership operating the Reebok Sports Club/NY. An affiliate of Reebok
owns a 40% general partnership interest and the remaining 20% limited
partnership interest is owned by Millennium Partners, an affiliate of the
landlord of the building in which the Reebok Sports Club/NY is located. As of
September 30, 1996, the Company has a receivable of $1.1 million from the
partnership for accrued management fees and a note receivable in the amount of
$1.5 million as part of a $3.0 million partner loan used to complete
development of the club. The Reebok Sports Club/NY achieved a positive cash
flow in September 1995, and has continued to improve its operating results as
membership levels increase. The cash flows of the partnership will first be
used to satisfy the principal and interest requirements of the lease financing
facility. Additional cash flows will then be used to first concurrently repay
the Company's $1.5 million loan and a similar $1.5 million loan from Reebok.
Next, the partnership agreement calls for a $3.0 million annual priority
distribution to the limited partner and the return of various capital
contributions with interest to the partners. After a one time distribution of
$2.5 million (to be split equally between Reebok and the Company), the Company
would be entitled to a 40% interest in future cash distributions.
The Company sold its interest in certain Sports Connection Clubs to
Fitness Holding, Inc. d/b/a 24 Hour Fitness in November, 1996. The Company
received cash proceeds of approximately $3.7 million and the sale converts
non-earning assets into cash which can be used for expansion opportunities and
other corporate purposes.
The Company's long term capital needs are to provide funds for the
retirement of existing long-term debt and to secure funds for the acquisition
of existing clubs and development of new clubs. The Company intends to
continue its efforts to pursue joint venture arrangements with strategic
partners as a means of financing the acquisition and development of new clubs.
The Company has agreed upon the principal terms of a $5.0 million credit
facility with Sumitomo Bank of California which is subject to the completion of
mutually acceptable terms and loan documentation which is expected to be
finalized in November, 1996. Borrowing under the credit facility will
fluctuate at a rate of LIBOR plus 2.75%. The credit facility will be available
to provide funds for the acquisition and development of new clubs and for
general corporate purposes. In the first quarter of 1996, the Company began
development of the 52,000 square foot Spectrum Club in Valencia, California.
The Company will own and manage the club operations in a facility which will be
leased from The Newhall Land and Farming Company. Through September 30, 1996,
$1.5 million has been paid into a special construction escrow account. The
Company anticipates that it will be able to fund the remaining portion of this
development, estimated to be approximately $350,000, from operating cash flows.
In August 1996, the Company announced plans to develop a Sports Club in
Houston, Texas. The Company's portion of this development is estimated to be
$3.6 million and will be funded starting in 1997. Operating cash flow along
with the proposed revolving credit facility would be utilized to finance the
Company's portion of this development.
Other than as described above and for normal replacement of fitness
equipment and remodeling of clubs, the Company has no commitments for capital
expenditures. Equipment has generally been available under capital lease
arrangements. In 1995, the Company invested approximately $1.9 million in
capital expenditures of which $1.0 million was financed under capital lease
agreements. In the nine months ended September 30, 1996, capital expenditures,
other than those related to new club development, were $940,000. The Company
has secured an additional $500,000 lease facility to be used to finance capital
expenditures over the next twelve months. While capital expenditures may
fluctuate from time to time, generally the Company expects to spend
approximately 4% of revenues on facility and equipment upgrades and
replacements. Expansion of the Company's operations beyond existing clubs will
require expenditures above this level.
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FORWARD LOOKING STATEMENTS
The foregoing discussion contains forward-looking statements relating to
the future operations of the Company, including The Reebok Sports Club/NY and
HFA, the adequacy of the Company's cash for its anticipated requirements, and
other matters. These forward-looking statements are based on a series of
projections and assumptions regarding the economy, other statements which are
not historical facts, the Company's operations and the sports and fitness
industry in general. These projections and assumptions involve certain risks
and uncertainties that could cause actual results to differ materially from
those included in the forward-looking statements. Furthermore, actual results
may differ from projected results as a result of unforeseen developments
relating to demand for the Company's services and competitive pricing trends in
the health and fitness market; increased expenses; the success of planned
advertising, marketing and promotional campaigns; changes in personnel or
compensation; business interruptions resulting from earthquakes, landlord
disputes or other causes; general market acceptance of new and existing clubs
operated by the Company; changes in membership growth patterns; the success of
new products; and regulatory or legal proceedings and rulings which might
adversely affect the Company. Investors are also directed to consider other
risk and uncertainties discussed in all documents filed by the Company with the
SEC. The Company expressly disclaims any obligation to update any
forward-looking statements as a result of developments after the date hereof.
RECENT DEVELOPMENTS
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of " ("Statement No. 121"), effective for fiscal years
beginning after December 31, 1995. Statement No. 121 establishes accounting
standards for the recognition and measurement of impairment of long-lived
assets, certain identifiable intangibles, and goodwill either to be held or
disposed of. The Company's policy is to account for goodwill and all other
intangible assets at the lower of amortized cost or fair value. As part of an
ongoing review of the valuation and amortization of intangible assets,
management assesses the carrying value of the Company's intangible assets if
facts and circumstances suggest that it may be impaired. If this review
indicates that the intangibles will not be recoverable, as determined by an
undiscounted cash flow analysis over the remaining amortization period, the
carrying value of the Company's intangibles will be reduced to its estimated
fair market value. The Company adopted the provisions of Statement No. 121
effective January 1, 1996. Management believes that Statement No. 121 will not
have a material impact on the consolidated financial statements.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("Statement No. 123"), issued in October 1995 and
effective for fiscal years beginning after December 15, 1995, permits but does
not require, a fair value based method of accounting for employee stock options
or similar equity instruments. Statement No. 123 allows an entity to elect to
continue to measure compensation cost under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APBO No. 25"), but
requires pro forma disclosures of net earnings and earnings per share as if the
fair value based method of accounting had been applied. The Company adopted
Statement No. 123 in 1996 and will continue to measure compensation cost under
APBO No. 25, and comply with the pro forma disclosure requirements. Statement
No. 123 will have no impact on the Company's consolidated financial position or
results of operations other than the inclusion of the pro forma disclosures.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently involved in a dispute with the
landlord of the facility previously used for the Spectrum
Club/Century City. The landlord has claimed that the Company
owes approximately $800,000 in past due rents as of December
31, 1995. Under the terms of the lease, the current monthly
Club charges would be approximately $39,000. The Company
denies it owes any past due rent, due to the landlord's breach
of several provisions of the lease. Thus, the Company believes
that it has the right to terminate the lease and abandon the
property.
The Company has filed suit against the landlord seeking a
judicial declaration that the landlord's breach of the lease
has relieved the Company of the obligation to pay the alleged
past due rent. Alternately, the Company seeks to recover
damages resulting from the landlord's breach. The landlord has
countersued the Company for the past due rent. On July 15,
1995, the Company closed the Spectrum Club/Century City.
On October 10, 1996, the trial court granted the Landlord's
demurrer to the Company's First Amended Complaint without
leave to amend. The trial court concluded that, as a matter
of law, the Landlord has no responsibility for the breaches of
lease alleged by the Company.
Because the claims alleged by the Company in the First Amended
Complaint constitute a major aspect of the Company's defense
to the Landlord's Cross-Complaint for rent, the Company will
request that a Writ of Mandate be issued by the Court of
Appeal, compelling the trial court to vacate and set aside its
ruling on the Landlord's demurrer and ordering the Landlord to
respond to the Company's First Amended Complaint.
The Company intends to vigorously pursue its claim and its
defense of the Landlord's Cross-Complaint; however, there can
be no assurance that the Company will prevail in this
litigation, and a judgment in the Landlord's favor could have
a material adverse effect on the Company.
The Company is also involved in various claims and lawsuits
incidental to its business, including claims arising from
accidents and disputes with landlords. However, in the
opinion of management, the Company is adequately insured
against such claims and lawsuits involving personal injuries,
and any ultimate liability arising out of any such proceedings
will not have a material adverse effect on the financial
condition, cash flow or operations of the Company.
14
<PAGE> 15
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SPORTS CLUB COMPANY, INC.
Date: November 12, 1996 by /s/ David Michael Talla
---------------------------------
David Michael Talla
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1996 by /s/ Timothy M. O'Brien
---------------------------------
Timothy M. O'Brien
Chief Financial Officer
(Principal Financial and
Accounting Officer)
16
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