<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 JUNE 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.
Shares
Outstanding at
Class August 9, 1996
---------------------------- ----------------------------------
Common stock, $.01 par value 11,355,000
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THE SPORTS CLUB COMPANY, INC.
-----------------------------
INDEX
-----
<TABLE>
<CAPTION>
Part I. Financial Information Page
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - 3
December 31, 1995 and June 30, 1996
Condensed Consolidated Statements of Operations - 4
Three and Six Months ended June 30, 1995 and 1996
Condensed Consolidated Statements of Cash Flows - 5
Six Months ended June 30, 1995 and 1996
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II. Other Information 14
Signatures 15
</TABLE>
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THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND JUNE 30, 1996
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1995 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,545 $ 1,901
Accounts receivable, net of allowance for doubtful accounts
of $39 and $38 at December 31, 1995 and June 30, 1996 1,323 1,258
Inventories 401 263
Other current assets 370 435
Due from affiliates 3,508 3,200
------- -------
Total current assets 7,147 7,057
Property and equipment, at cost, net of accumulated depreciation and
amortization of $2,750 and $3,710 at December 31, 1995 and June 30, 1996 59,956 59,802
Equity interest in unconsolidated subsidiaries 4,478 4,291
Costs in excess of net assets acquired, less accumulated amortization
of $215 and $345 at December 31, 1995 and June 30, 1996 10,136 10,063
Other assets, at cost, net 1,389 1,358
------- -------
$83,106 $82,571
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and capitalized
lease obligations $ 1,890 $ 2,056
Accounts payable 2,021 1,117
Accrued liabilities 2,165 2,100
Deferred membership revenues 4,742 3,884
------- -------
Total current liabilities 10,818 9,157
Notes payable and capitalized lease obligations,
less current installments 31,023 31,130
Deferred lease obligations 691 848
Minority interest 600 600
------- -------
Total liabilities 43,132 41,735
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 June 30, 1996 114 114
Additional paid-in capital 37,044 37,044
Retained earnings 2,816 3,678
------- -------
Total shareholders' equity 39,974 40,836
------- -------
$83,106 $82,571
======= =======
</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 SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 9,055 $ 9,366 $ 17,944 $ 18,672
Operating expenses:
Direct 5,746 5,872 11,370 11,813
Selling, general and administrative 1,185 1,539 2,327 2,991
Depreciation and amortization 657 604 1,210 1,220
-------- -------- -------- --------
Total operating expenses 7,588 8,015 14,907 16,024
-------- -------- -------- --------
Income from operations 1,467 1,351 3,037 2,648
Other income (expense):
Interest (674) (706) (1,334) (1,363)
Minority interests (37) (37) (75) (75)
Equity interest in net income of unconsolidated subsidiaries 384 159 631 250
-------- -------- -------- --------
Income before income taxes 1,140 767 2,259 1,460
Provision for income taxes 467 314 926 598
-------- -------- -------- --------
Net income $ 673 $ 453 $ 1,333 $ 862
======== ======== ======== ========
Net income per share $ 0.06 $ 0.04 $ 0.12 $ 0.08
======== ======== ======== ========
Weighted average number of common shares outstanding 11,353 11,355 11,352 11,355
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,333 $ 862
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,210 1,220
Equity interest in net income of unconsolidated subsidiaries (631) (250)
Stock issued as directors' fees 21 --
Accrued management fees (205) (406)
Equity interest distributions 320 437
(Increase) decrease in:
Accounts receivable, net 709 65
Inventories 61 138
Other assets (66) (161)
Increase (decrease) in:
Accounts payable 875 (904)
Accrued liabilities (466) (65)
Deferred membership revenues (843) (858)
Deferred lease obligations 38 157
-------- --------
Net cash provided by operating activities 2,356 235
Cash flows from investing activities:
Capital expenditures (974) (809)
Purchase of other assets (781) (57)
(Increase) decrease in due from affiliates (693) 714
Redemptions of partnership interests (30) --
-------- --------
Net cash used for investing activities (2,478) (152)
Cash flows from financing activities:
Proceeds from notes payable and capital lease obligations -- 23,029
Repayments of notes payable and capital lease obligations (1,119) (22,756)
-------- --------
Net cash provided by (used for) financing activities (1,119) 273
-------- --------
Net increase (decrease) in cash and cash equivalents (1,241) 356
Cash and cash equivalents at beginning of period 5,042 1,545
-------- --------
Cash and cash equivalents at end of period $ 3,801 $ 1,901
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,621 $ 1,505
======== ========
Cash paid for income taxes $ 1,062 $ 559
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE SPORTS CLUB COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND JUNE 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 six month period ended June 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, 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 and Tennis
Corporation ("Bally's").
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 unconsolidated subsidiaries is as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------------
1995 1996
---- ----
(Amounts in thousands)
<S> <C> <C>
Revenues ................... $ 10,961 $ 15,430
Net income (loss) .......... (284) 403
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
---- ----
(Amounts in thousands)
<S> <C> <C>
Current assets .................. $ 1,214 $ 1,156
Non-current assets .............. 18,658 18,272
------- -------
Total assets .................. $19,872 $19,428
======= =======
Current liabilities ............. $ 4,153 $ 4,287
Non-current liabilities ......... 7,422 7,189
------- -------
Total liabilities ............. 11,575 11,476
Partners' capital ............... 8,297 7,952
------- -------
$19,872 $19,428
======= =======
</TABLE>
3. RELATED PARTY TRANSACTIONS
Due from affiliates are summarized as follows:
<TABLE>
<CAPTION>
December 31, June 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 $ 608
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...... 502 908
Advances to unconsolidated subsidiaries made in the normal
course of business, payable on demand.............................. 875 184
------ ------
$3,508 $3,200
====== ======
</TABLE>
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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, June 30,
1995 1996
---- ----
(Amounts in thousands)
<S> <C> <C>
The Sports Club/LA note..................... $ 22,104 $ 22,877
The Sports Club/Irvine note................. 5,500 5,500
The Spectrum Club/Agoura Hills note......... 2,550 2,550
Secured bank notes.......................... 629 427
Capitalized lease obligations............... 1,494 1,265
Other notes payable......................... 636 567
-------- ---------
32,913 33,186
Less current installments................... 1,890 2,056
-------- -------
$ 31,023 $ 31,130
======== ========
</TABLE>
The Reebok-Sports Club/NY has a loan outstanding to finance personal
property. The Company is a guarantor of this financing. As of June 30, 1996, the
unpaid principal outstanding was $3,544,000.
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
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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 has 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.
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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 and The Spectrum Clubs. The Reebok Sports
Club/NY, which was opened in April 1995, is 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 June 30, 1996 to Three Months Ended June 30,
1995
Revenues for the three months ended June 30, 1996 were $9.4 million,
compared to $9.1 million in 1995, an increase of $300,000 or 3.4%. The increase
resulted from additional membership dues as well as increased ancillary
revenues.
Direct operating expenses increased to $5.9 million in the three months
ended June 30, 1996 versus $5.7 million in 1995. The increase was due to the
acquisition of HealthFitness Organization of America, Inc. ("HFA"). Club
operating expenses alone decreased $61,000. Direct operating expenses as a
percentage of revenues decreased to 62.7% in 1996 compared to 63.5% 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 June 30, 1996 versus $1.2 million in 1995. This increase in
expense was incurred primarily as a result of the operations of HFA. There were
no comparable costs for HFA in 1995.
Depreciation and amortization expenses were $604,000 in the three months
ended June 30, 1996 versus $657,000 in 1995. Interest expense was $706,000 in
the three months ended June 30, 1996 versus $674,000 in 1995.
Equity interest in net income of unconsolidated subsidiaries was $159,000
in the three months ended June 30, 1996 versus $384,000 in 1995. The Company did
not record any income from the Sports Connections for the three months ended
June 30, 1996 versus $287,000 in 1995. The 1996 amounts are associated with the
Spectrum Club/Manhattan Beach's operations.
The Company's net income before income taxes was $767,000 for the three
months ended June 30, 1996 verses $1.1 million in 1995. The results for 1996
include pre-tax loss of $295,000 from the operations of HFA. The Company's
estimated income tax rate has remained at 41%, resulting in a net income of
$453,000 for the three months ended June 30, 1996 versus net income of $673,000
in 1995, a decrease of 33%.
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Comparison of Six Months Ended June 30, 1996 to Six Months Ended June 30, 1995
Revenues for the six months ended June 30, 1996 were $18.7 million,
compared to $17.9 million in 1995, an increase of $800,000 or 4.1 %. The
increase resulted from additional membership dues as well as increased ancillary
revenues. Additionally, revenues increased as a result of management fees earned
from the Reebok Sports Club/NY, which opened in April 1995.
Direct operating expenses increased to $11.9 million in the six months
ended June 30, 1996 versus $11.4 million in 1995. Over 50% of the increase was
due to the acquisition of HFA with the remaining $139,000 increase due to
increased club operating expenses. Direct operating expenses as a percentage of
revenues remained virtually constant at 63.3% in 1996 compared to 63.4% in 1995.
The increased cost associated with the HFA operation were offset by increased
operating margins at the clubs.
Selling, general and administrative expenses were $3.0 million in the six
months ended June 30, 1996 versus $2.3 million in 1995. Over 50% 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 $1.2 million in the six months
ended June 30, 1996 versus $1.2 million in 1995. Interest expense was $1.4
million in the six months ended June 30, 1996 versus $1.3 million in 1995.
Equity interest in net income of unconsolidated subsidiaries was $250,000
in the six months ended June 30, 1996 versus $631,000 in 1995. The Company did
not record any income from the Sports Connections for the six months ended June
30, 1996 versus $437,000 in 1995. The 1996 amounts are associated with the
Spectrum Club/Manhattan Beach's operations.
The Company's net income before income taxes was $1.5 million for the six
months ended June 30, 1996 verses $2.3 million in 1995. The results for 1996
include pre-tax loss of $623,000 from the operations of HFA. The Company's
estimated income tax rate has remained at 41%, resulting in a net income of
$862,000 for the six months ended June 30, 1996 versus net income of $1.3
million in 1995, a decrease of 35%.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1995 and the six months ended June 30,
1996 the Company generated $8.8 million and $4.1 million of earnings before
interest, depreciation, amortization and income taxes, respectively. At June 30,
1996 the Company had a cash balance of $1.9 million of which $903,000 is in a
special construction account for the development of a Spectrum Club in Santa
Clarita, California. The remaining $1.0 million is available for general
corporate purposes. The Company's net income for the six months ended June 30,
1996 reflects a net loss of $367,000 from the operations of HFA. The Company
expects HFA to improve its operating performance in the third quarter, but to
continue to operate at a loss and have its operations funded out of the
Company's cash flow. Overall, 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 and 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 at December
31, 1995, bearing interest at 10%, secured by the land, building and equipment
of The Sports Club/LA. This note required a balloon payment of approximately
$22.0 million on December 31, 1996. 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 $256,421, compared with monthly payments of
$264,163 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.
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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 anticipates collecting approximately
$700,000 related to the 1995 shortfall.
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. The initial capital
contribution of the partners' and the proceeds from a $4.0 million lease
financing facility have been expended on the development of the Club. In
December 1995, the partners made additional contributions of $3.0 million, with
the Company's contribution being $1.5 million in the form of a note receivable
from the partnership. As of June 30, 1996, the Company has a receivable of
$908,000 from the partnership for accrued management fees. The Reebok Sports
Club/NY achieved a positive cash flow in September 1995, and is expected to
continue 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 is eligible to receive a priority distribution of up to
$250,000 per month from the operating profits of the Sports Connections which
are managed by Bally's. The Company did not record any earnings from the Sports
Connections in the six months ended June 30, 1996, and no cash was paid to the
Company. The Company cannot predict the amount of any such earnings or if any
portion thereof will be distributed to the Company. In the event the Sports
Connections experience cash shortfalls, the Company is required to contribute
50% to certain operating expenses including lease payments, salaries and
benefits (but not Bally's overhead expenses). The Sports Connections currently
have a $500,000 working capital reserve which would first be available to
support any such cash shortfalls.
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 also
had discussions with several banking institutions regarding the possibility of
securing a revolving credit facility which could be used for the acquisition of
existing or development of new clubs, or for working capital purposes. In the
first quarter of 1996, the Company began development of the 52,000 square foot
Spectrum Club in Santa Clarita, California. The Company will own and manage the
club operations in a facility which will be leased from The Newhall Land and
Farming Company. The Company will be required to advance approximately $1.3
million for the construction in 1996 and an additional $900,000 in 1997. Through
June 30, 1996, $1.0 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 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. 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. In the six months ended June 30, 1996, capital expenditures were
$809,000. The
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Company is currently seeking an additional $500,000 lease facility to be used to
finance 1996 capital expenditures. 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.
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 has 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 rent as of December
31, 1995. 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.
The Company believes that the closure of the Club and the
resolution of this matter will not have a material adverse
impact on its operations or financial position. However, there
can be no assurance that the landlord will not prevail in its
claim for past and future rent from 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.
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
14
<PAGE> 15
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: August 9, 1996 by /s/ David Michael Talla
-----------------------------------
David Michael Talla
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: August 9, 1996 by /s/ Timothy M. O'Brien
-----------------------------------
Timothy M. O'Brien
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
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