<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, 1997
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 October 29, 1997
- ---------------------------- ----------------
Common stock, $.01 par value 13,753,621
<PAGE> 2
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,146 $ 2,570
Accounts receivable, net of allowance for doubtful accounts
of $57 and $323 at December 31, 1996 and September 30, 1997 1,376 2,464
Inventories 395 633
Other current assets 381 240
Due from affiliates 1,043 125
--------- ---------
Total current assets 7,341 6,032
Property and equipment, at cost, net of accumulated depreciation and
amortization of $4,700 and $7,063 at December 31, 1996 and September 30, 1997 72,736 81,597
Equity interest in unconsolidated subsidiary 642 821
Costs in excess of net assets acquired, less accumulated amortization
of $454 and $718 at December 31, 1996 and September 30, 1997 13,552 16,091
Other assets, at cost, net 1,426 2,084
--------- ---------
$ 95,697 $ 106,625
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and capitalized
lease obligations $ 2,470 $ 2,457
Accounts payable 1,431 898
Accrued liabilities 2,777 4,714
Deferred membership revenues 7,481 9,177
--------- ---------
Total current liabilities 14,159 17,246
Notes payable and capitalized lease obligations,
less current installments 36,027 32,607
Deferred lease obligations 3,309 3,651
Minority interest 1,000 600
--------- ---------
Total liabilities 54,495 54,104
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;
11,358,000 and 13,753,621 shares issued and outstanding at
December 31, 1996 and September 30, 1997 114 138
Additional paid-in capital 36,935 48,586
Retained earnings 4,153 4,759
Less: Treasury stock, at cost, 165,753 shares -- (962)
--------- ---------
Total shareholders' equity 41,202 52,521
--------- ---------
$ 95,697 $ 106,625
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 3
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
September 30, September 30,
1996 1997 1996 1997
-------- -------- -------- --------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenues $ 9,160 $ 16,227 $ 27,707 $ 44,284
Operating expenses:
Direct 5,698 11,414 17,231 31,671
Selling, general and administrative 1,550 1,789 4,541 4,877
Depreciation and amortization 649 1,025 1,869 2,859
-------- -------- -------- --------
Total operating expenses 7,897 14,228 23,641 39,407
-------- -------- -------- --------
Income from operations 1,263 1,999 4,066 4,877
Other income (expense):
Interest (693) (768) (2,055) (2,368)
Minority interests (37) (37) (113) 16
Equity interest in net income of unconsolidated subsidiary 180 159 436 502
Litigation settlement -- -- -- (2,025)
-------- -------- -------- --------
Income before income taxes 713 1,353 2,334 1,002
Income tax expense 292 513 957 380
-------- -------- -------- --------
Net income $ 421 $ 840 $ 1,377 $ 622
======== ======== ======== ========
Net income per share $ 0.04 $ 0.06 $ 0.12 $ 0.05
======== ======== ======== ========
Weighted average number of common shares outstanding 11,355 13,568 11,355 12,162
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 4
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30,
-----------------------
1996 1997
-------- --------
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,377 $ 622
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,869 2,859
Accrued management fees (620) --
Equity interest in net income of unconsolidated subsidiary (436) (502)
Distributions from unconsolidated subsidiary 530 316
Minority interest in Reebok-Sports Club/NY -- (128)
(Increase) decrease in:
Accounts receivable, net 793 (1,029)
Inventories 175 (228)
Other current assets (234) (750)
Increase (decrease) in:
Accounts payable (1,121) (543)
Accrued liabilities 555 1,943
Deferred membership revenues (743) 1,696
Deferred lease obligations 219 342
-------- --------
Net cash provided by operating activities 2,364 4,598
Cash flows from investing activities:
Capital expenditures (1,579) (3,267)
Acquistion of SportsTherapy Systems, Inc. -- (485)
Acquistion of Green Valley Athletic Club -- (5,288)
Stock re-purchase -- (979)
-------- --------
Net cash provided by (used for) investing activities (1,579) (10,019)
Cash flows from financing activities:
Proceeds from sale of common stock in connection
with the acquistion of interests in Reebok-Sports Club/NY -- 5,000
Decrease in due from affiliates 681 918
Proceeds from notes payable and capital lease obligations 23,029 500
Repayments of notes payable and capital lease obligations (23,162) (2,573)
-------- --------
Net cash provided by financing activities 548 3,845
-------- --------
Net increase (decrease) in cash and cash equivalents 1,333 (1,576)
Cash and cash equivalents at beginning of period 1,545 4,146
-------- --------
Cash and cash equivalents at end of period $ 2,878 $ 2,570
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,285 $ 2,635
======== ========
Cash paid for income taxes $ 571 $ 492
======== ========
Capital expenditures financed $ -- $ 898
======== ========
Stock issued in exchange for interest in Reebok-Sports Club/NY $ -- $ 5,000
======== ========
Stock issued as partial consideration for Green Valley Athletic Club $ -- $ 1,675
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 5
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
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, 1996,
consolidated financial statements and notes thereto, included on Form 10-K/A
(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 periods set forth herein. All such adjustments are of a normal and
recurring nature. The results for the three-month and nine-month period ended
September 30, 1997, are not necessarily indicative of the results for the entire
fiscal year ending December 31, 1997.
2. EQUITY INTEREST IN UNCONSOLIDATED SUBSIDIARY
Equity interest in unconsolidated subsidiary consists of a 46.1%
interest in a Spectrum Club located in Manhattan Beach, California. The Company
allocates profits and losses on a basis defined in its joint venture agreement
relating to this unconsolidated subsidiary. Summary financial information of the
Spectrum Club/Manhattan Beach is as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------
1996 1997
------ ------
(Amounts in thousands)
<S> <C> <C>
Revenues .................................. $4,150 $4,745
Net income ................................ 870 1,081
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------ ------
(Amounts in thousands)
<S> <C> <C>
Current assets ............................ $ 522 $ 599
Non-current assets ........................ 2,653 2,756
------ ------
Total assets .......................... $3,175 $3,355
====== ======
Current liabilities ....................... $1,444 $1,312
Non-current liabilities ................... 539 470
------ ------
Total liabilities ..................... 1,983 1,782
Partners' capital ......................... 1,192 1,573
------ ------
$3,175 $3,355
====== ======
</TABLE>
4
<PAGE> 6
3. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
Notes payable and capitalized lease obligations are summarized as
follows:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---- ----
(Amounts in thousands)
<S> <C> <C>
The Sports Club/LA note............................ $ 23,070 $ 22,553
The Sports Club/Irvine note........................ 5,375 5,000
The Spectrum Club/Agoura Hills note................ 2,550 2,539
Secured bank notes and other notes payable......... 3,199 410
Equipment financing and
Capitalized lease obligations................... 4,303 4,562
--------- ---------
38,497 35,064
Less current installments.......................... 2,470 2,457
--------- ---------
$ 36,027 $ 32,607
========= =========
</TABLE>
The Company also has a $3.0 million revolving line of credit for working
capital and new club development and a $2.0 million non-revolving line for
funding mergers and acquisitions. As of September 30, 1997, no amounts are
outstanding under these agreements.
4. 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.
5. 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.
6. LITIGATION SETTLEMENT
On May 22, 1997, the Company announced that it had agreed to pay Century
Entertainment Center, L.P. ("Century") approximately $2.0 million to settle
litigation relating to the Century City Spectrum Club which was closed in July
1995. The settlement relates to a suit filed by Century City Spectrum ("CCS"), a
subsidiary of the Company, against Century alleging breach of the lease by the
prior landlord. Century had acquired the rights under the lease in connection
with the bankruptcy of the prior landlord. Century filed a cross-complaint
against CCS for rent due and against the Company as a guarantor of CCS's
obligations under the lease. The cross-complaint had sought approximately $3.2
million in rent due under the full term of the lease plus attorney's fees and
interest. The settlement will be made with quarterly payments of $500,000, which
began in May 1997 with the final payment due in February 1998.
5
<PAGE> 7
7. BUSINESS ACQUISITIONS
On June 23, 1997, the Company completed the sale of 2,105,263 shares of
its common stock to Millennium Entertainment Partners, L.P., ("MEP"). The
Company received $5.0 million cash, MEP's 9.9% Partnership interest in The
Reebok-Sports Club/NY Partnership, a $2.5 million note due from the Partnership
and MEP's rights to certain accrued management fees due from the Partnership in
exchange for the newly issued shares. The Company also signed definitive leases
with an affiliate of MEP to jointly develop Sports Clubs in Washington D.C. and
San Francisco, California on properties currently under development by an
affiliate of MEP. The Company has also signed a letter of intent to develop a
Sports Club in Boston, Massachusetts on property currently under development by
an affiliate of MEP.
On July 1, 1997, the Company acquired the assets of SportsTherapy
Systems, Inc. ("STS"), a physical therapy and rehab clinic located in Calabasas,
California for approximately $485,000 in cash plus the assumption of various
liabilities in the amount of $187,000. STS has been merged into the Company's
HealthFitness Organization of America, Inc. ("HFA") subsidiary. In addition, the
Company entered into an employment agreement with the seller of STS pursuant to
which the seller is managing the operations of HFA. The acquisition was
accounted for as a purchase. Accordingly, the operations of STS are included in
the Company's statement of operations from the date of acquisition.
On August 1, 1997, the Company acquired the Green Valley Athletic Club
("GVAC") located in Henderson, Nevada. The purchase price of approximately $6.7
million consisted of $5.0 million in cash and $1.7 million in shares of the
Company's common stock. The acquisition was accounted for as a purchase.
Accordingly, the operations of GVAC are included in the Company's statement of
operations from the date of acquisition.
Pro forma financial data giving effect to the SportsTherapy Systems,
Inc. and Green Valley Athletic Club acquisitions is not presented as their
effect on the consolidated financial statements is not material.
8. RECENT DEVELOPMENTS
The Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" (FAS 128), in February 1997 which is effective for both
interim and annual periods ending after December 15, 1997. The Company will
adopt FAS 128 in the fourth quarter of 1997. FAS 128 requires the presentation
of "Basic" earnings per share which represents income available to common
stockholders divided by the weighted average number of common shares outstanding
for the period. A dual presentation of "Diluted" earnings per share will also be
required. The Diluted presentation is similar to the current presentation of
fully diluted earnings per share. FAS 128 requires restatement of all
prior-period earnings per share data presented. Management believes the adoption
of FAS 128 will not have a material impact on the Company's financial position
or results of operations.
6
<PAGE> 8
9. CHANGE IN ACCOUNTING FOR INITIATION FEES
The Company receives a one-time non-refundable initiation fee and
monthly dues from its members. Substantially all of the Company's members join
on a month-to-month basis and can therefore cancel their membership at any time.
Initiation fees and related direct expenses, primarily sales commissions, are
deferred and recognized in operations, on a straight-line basis, over an
estimated membership period of between two and one half and three years. Dues
that are received in advance are recognized on a pro-rata basis over the periods
in which services are to be provided.
The Company's current accounting policy for one-time non-refundable
initiation fees was adopted on October 3, 1997 and in accordance with certain
provisions of Accounting Principles Board Opinion No. 20, Accounting Changes,
operating results for the nine months ended September 30, 1996 have been
restated retroactively to reflect the current policy. Such change was made to:
(i) better match revenues with related costs over an estimated period of
membership; (ii) conform with the current practices of others in the industry;
and (iii) comply with recently communicated guidance from the Securities and
Exchange Commission. The impact on the three month and nine months ended
September 30, 1996 financial statements are as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
As Reported As Restated
3 months 9 months 3 months 9 months
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ................... $ 9,390 $28,062 $ 9,160 $27,707
Net income ................. 472 1,334 421 1,377
Earnings per share ......... 0.04 0.12 0.04 0.12
</TABLE>
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"). The Reebok-Sports Club/NY was accounted
for under the equity method of accounting until December 30, 1996, at which time
the Company acquired a majority ownership position and the operations of
Reebok-Sports Club/NY were consolidated with and into the Company. The Spectrum
Club/Manhattan Beach is accounted for under the equity method of accounting.
In July 1997 the Company opened the Valencia Spectrum Club and in August
1997 acquired the Green Valley Athletic Club. The comparability of the Company's
operating results, financial condition and capital requirements is impacted by
the transactions described above and the number of clubs which the Company
operates. Seasonal factors have not had a significant effect on the Company's
operating results.
7
<PAGE> 9
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1997 to Three Months Ended
September 30, 1996
Revenues for the three months ended September 30, 1997, were $16.2
million, compared to $9.2 million in 1996, an increase of $7.0 million or 76.1%.
An increase of $4.4 million resulted from revenue at Reebok Sports Club/NY,
which was consolidated into the Company following the acquisition of a
controlling interest in the Club on December 30, 1996. An increase of $900,000
resulted from the opening of the Valencia Spectrum Club and an increase of
$900,000 resulted from the acquisition of the Green Valley Athletic Club.
Revenue growth of $254,000 from the remaining Clubs and $546,000 from HFA also
contributed to the overall increase.
Direct operating expenses increased to $11.4 million in the three months
ended September 30, 1997, versus $5.7 million in 1996. The increase resulted
primarily from the consolidation of operating expenses at Reebok Sports Club/NY
as well as costs incurred at the Valencia Spectrum Club and the Green Valley
Athletic Club. Direct operating expenses as a percentage of revenues increased
to 70.4% in 1997 compared to 62.0% in 1996 due to lower margins at Reebok Sports
Club/NY and the Valencia Spectrum Club. Newer Clubs historically operate at
lower margins until the membership base reaches a mature level.
Selling, general and administrative expenses were $1.8 million in the
three months ended September 30, 1997, versus $1.6 million in 1996. Selling
costs increased approximately $140,000 due to the consolidation of Reebok Sports
Club/New York. General and administrative costs increased primarily due to the
acquisition of SportsTherapy Systems, Inc. Selling, general and administrative
costs decreased as a percentage of revenue from 17.4% in 1996 to 11.1% in 1997.
The revenue growth which resulted from the consolidation of the Reebok Sports
Club/New York as well as the opening of the Valencia Spectrum Club and the
acquisition of the Green Valley Athletic Club was not accompanied by a
significant growth in general and administrative costs.
Depreciation and amortization expenses were $1.0 million in the three
months ended September 30, 1997, versus $649,000 in 1996. The increase is due
primarily to the addition of depreciation and amortization at Reebok Sports
Club/NY, the Valencia Spectrum Club and the Green Valley Athletic Club. Interest
expense was $768,000 in the three months ended September 30, 1997, versus
$693,000 in 1996. Interest expense of $173,000 at Reebok Sports Club/NY was
offset by increased interest income due to more available cash for investment
and lower interest expense as indebtedness matured and was repaid.
Equity interest in net income of unconsolidated subsidiary was $159,000
in the three months ended September 30, 1997 versus $180,000 in 1996. These
amounts are associated with the Spectrum Club/Manhattan Beach's operations.
The Company's net income before income taxes was $1.4 million for the
three months ended September 30, 1997 versus $713,000 in 1996. The Company's
estimated income tax rate is 38% for the three months ended September 30, 1997,
and 41% for 1996, resulting in net income of $840,000 for the three months ended
September 30, 1997, versus net income of $421,000 in 1996. The lower tax rate in
1997 results from the reduction of valuation allowances on certain deferred
income tax assets.
8
<PAGE> 10
Comparison of Nine Months Ended September 30, 1997 to Nine Months Ended
September 30, 1996
Revenues for the nine months ended September 30, 1997, were $44.3
million, compared to $27.7 million in 1996, an increase of $16.6 million or
60.0%. An increase of $13.3 million resulted from revenue at Reebok Sports
Club/NY, which was consolidated into the Company following the acquisition of a
controlling interest in the Club on December 30, 1996. An increase of $900,000
resulted from the opening of the Valencia Spectrum Club and an increase of
$900,000 resulted from the acquisition of the Green Valley Athletic Club.
Revenue growth of $400,000 from the remaining Clubs and $1.1 million from HFA
also contributed to the overall increase.
Direct operating expenses increased to $31.6 million in the nine months
ended September 30, 1997, versus $17.2 million in 1996. The increase resulted
primarily from the addition of operating expenses at Reebok Sports Club/NY as
well as the Valencia Spectrum Club and the Green Valley Athletic Club. Direct
operating expenses as a percentage of revenues increased to 71.3% in 1997
compared to 62.1% in 1996 due to lower margins at Reebok Sports Club/NY and the
Valencia Spectrum Club. Newer Clubs historically operate at lower margins until
the membership base reaches a mature level.
Selling, general and administrative expenses were $4.9 million in the
nine months ended September 30, 1997, versus $4.5 million in 1996. Selling costs
increased approximately $230,000 due to the consolidation of direct selling
expenses incurred at Reebok Sports Club/NY, the Valencia Spectrum Club and the
Green Valley Athletic Club. General and administrative costs increased by
approximately $100,000 due to increases in corporate overhead. Selling, general
and administrative costs decreased as a percentage of revenue from 16.2% in 1996
to 11.1% in 1997. The revenue growth which resulted from the consolidation of
the Reebok Sports Club/New York as well as the opening of the Valencia Spectrum
Club and the acquisition of the Green Valley Athletic Club was not accompanied
by a significant growth in general and administrative costs.
Depreciation and amortization expenses were $2.9 million in the nine
months ended September 30, 1997, versus $1.9 million in 1996. The increase is
due primarily to the consolidation of depreciation and amortization at Reebok
Sports Club/NY, the Valencia Spectrum Club and the Green Valley Athletic Club.
Interest expense was $2.4 million in the nine months ended September 30, 1997,
versus $2.1 million in 1996. Interest expense of $545,000 at Reebok Sports
Club/NY was offset by increased interest income due to more available cash for
investment and lower interest expenses as indebtedness matured.
Equity interest in net income of unconsolidated subsidiary was $502,000
in the nine months ended September 30, 1997 versus $436,000 in 1996. These
amounts are associated with the Spectrum Club/Manhattan Beach's operations and
the increase reflects the Company's share of the improved profitability at that
Club.
Litigation settlement costs were $2.0 million in the nine months ended
September 30, 1997. There were no similar costs for the same period in 1996. The
Company has agreed to pay Century Entertainment Center, L.P. ("Century"),
approximately $2.0 million to settle litigation relating to the Century City
Spectrum Club which was closed in July 1995. The settlement will be made with
quarterly payments of $500,000 which began in May 1997 with the final payment
due in February 1998.
9
<PAGE> 11
The Company's net income before income taxes was $1.0 million for the
nine months ended September 30, 1997. The Company's net income before income
taxes and before the settlement of the Century City litigation was $3.0 million
in the nine months ended September 30, 1997 versus $2.3 million in 1996. The
Company's estimated income tax rate is 38% for the nine months ended September
30, 1997, and 41% for 1996, resulting in net income of $622,000 for the nine
months ended September 30, 1997, versus net income of $1.4 million in 1996. The
lower tax rate in 1997 results from the reduction of valuation allowances on
certain deferred income tax assets.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1996, and the nine months ended
September 30, 1997, the Company generated $3.6 million and $4.6 million of cash
from operating activities. At September 30, 1997, the Company had a cash balance
of $2.6 million of which $1.6 million was held by the Reebok-Sports Club/NY
Partnership. The remaining $1.0 million is available for general corporate
purposes. The Company anticipates its cash balance on hand plus cash generated
from operations and the amount available under the credit facilities will be
adequate to fund the Company's current operating activities, debt service and
recurring capital expenditures for the next twelve months.
In connection with the 1994 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 receiving approximately
$500,000 in 1997 relating to the 1996 shortfall.
In June 1997, the Company issued 2,105,263 shares of its common stock in
exchange for $5.0 million in cash and certain assets including a 9.9% ownership
interest in and a $2.5 million note receivable from the Reebok-Sports Club/NY
Partnership. The Company currently owns a 60.0% interest in the Reebok-Sports
Club/NY Partnership. At September 30, 1997, the Partnership owed $2.8 million
under a loan secured by equipment and owed $4.0 million to the Company in the
form of notes payable. (The $4.0 million note payable to the Company is
eliminated when presenting the Company's September 30, 1997 consolidated balance
sheet). The Reebok Sports Club/NY achieved a positive operating cash flow in
September 1995 and has improved its operations since that date. The Club is
expected to continue to improve its operating results in the future as
membership levels increase (although no assurance as to such future increases
can be given). The future cash flows of the Partnership will first be used to
satisfy the principal and interest requirements of the equipment loan in the
amount of $75,000 per month. Additional cash flows will be used to pay a
priority distribution, which is considered to be rent expense in the
consolidated financial statements, of $2.1 million in 1997 and $3.0 million per
year thereafter to another partner. The remaining future cash flows will be
distributed to the Company to satisfy the notes payable, accrued management fees
and certain additional priority distributions. At September 30, 1997, these
amounts total $15.4 million. After these amounts plus interest thereon are paid,
the Company will be entitled to 60.0% of future cash distributions.
The Company has agreed to pay Century Entertainment Center, L.P.
("Century"), approximately $2.0 million to settle litigation relating to the
Century City Spectrum Club which was closed in July 1995. Two quarterly payments
of $500,000 have been paid with the remaining payments due in November 1997 and
February 1998.
10
<PAGE> 12
In July 1997, the Company acquired SportsTherapy Systems, Inc., a
physical therapy and rehab clinic located in Calabasas, California for
approximately $485,000 in cash plus the assumption of various liabilities in the
amount of $187,000. This purchase was funded from cash balances on hand. In
August 1997, the Company acquired the Green Valley Athletic Club, a health and
fitness club located in Henderson, Nevada. This acquisition was completed with
approximately $4.3 million of cash, equipment financing of $750,000 and the
issuance of shares of the Company's common stock with a value of $1.7 million.
On July 1, 1997, the Company opened a 57,000 square foot Spectrum Club
in Valencia, California. The Company will fund its remaining portion of this
development, estimated to be approximately $170,000, from operating cash flows.
The Company has also announced its intent to develop Sports Clubs in Washington
D.C., San Francisco, California and Boston, Massachusetts. These projects are
scheduled to begin construction in early 1998. The Company's portion of the
development costs for these Clubs is preliminarily estimated to be approximately
$10.0 million. In October 1997, the Company announced that it will acquire a
parcel of real property and develop, own and manage a Spectrum Club in Thousand
Oaks, California at a total estimated cost of $9.8 million. Operating cash flows
and the revolving credit facility will be utilized to finance a portion of the
Company's cost of these four developments. The Company will need to secure
additional financing to complete these developments. Preliminary discussions
have been held with several institutions regarding the possibility of securing
additional long-term debt. At this time the Company does not have a formal
commitment to provide this financing.
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 development of
new clubs and the acquisition of existing clubs. The Company intends to continue
its efforts to pursue joint venture arrangements with strategic partners as a
means of financing the development of new clubs or enter into lease agreements
for such facilities. The Company has secured a $5.0 million credit facility with
a commercial bank. The bank has agreed to increase the facility to $10.0 million
subject to the completion of final documentation. The credit facility is
available to provide funds for the development and acquisition of new clubs and
for general corporate purposes. The Company has also had discussions regarding
the possibility of securing additional debt that would be used to (i) retire
existing debt (ii) acquire existing or develop new clubs and (iii) provide
working capital. However, there can be no assurance that such financing will be
available, or, if available, will be on terms favorable to the Company. To the
extent that the Company is unable to obtain financing on acceptable terms, fund
development costs from operating cash flows or negotiate for its development
partners to fund the costs of developing additional Clubs, the Company will have
to delay or terminate its development plans.
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 financing has generally been available under capital
lease arrangements. During 1996 and 1997, the Company obtained lease financing
commitments aggregating approximately $3.0 million which were used to finance
new equipment at the Valencia Spectrum Club, purchased equipment at the Green
Valley Athletic Club and finance normal capital expenditures at existing clubs.
At September 30, 1997, $911,000 was still available under these facilities.
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. In 1996, the Company invested approximately $1.6
million in capital expenditures other than those related to new club
development. In the nine months ended September 30, 1997, capital expenditures,
other than those related to new club development, were $1.5 million. Expansion
of the Company's operations will require expenditures above this level.
11
<PAGE> 13
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement No.
128, "Earnings Per Share" (FAS 128), in February 1997 which is effective for
both interim and annual periods ending after December 15, 1997. The Company will
adopt FAS 128 in the fourth quarter of 1997. FAS 128 requires the presentation
of "Basic" earnings per share which represents income available to common
stockholders divided by the weighted average number of common shares outstanding
for the period. A dual presentation of "Diluted" earnings per share will also be
required. The Diluted presentation is similar to the current presentation of
fully diluted earnings per share. FAS 128 requires restatement of all
prior-period earnings per share data presented. Management believes the adoption
of FAS 128 will not have a material impact on the Company's financial position
or results of operations.
FORWARD LOOKING STATEMENTS
The foregoing discussion contains forward-looking statements relating to
the future operations of the Company, including Reebok Sports Club/NY, estimated
development expenses for new clubs, 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 that 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 due to 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.
12
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 22, 1997, the Company announced that it had agreed to pay Century
Entertainment Center, L.P. ("Century") approximately $2.0 million to settle
litigation relating to the Century City Spectrum Club which was closed in July
1995. The settlement relates to a suit filed by Century City Spectrum ("CCS"), a
subsidiary of the Company, against Century alleging breach of the lease by the
prior landlord. Century had acquired the rights under the lease in connection
with the bankruptcy of the prior landlord. Century filed a cross-complaint
against CCS for rent due and against the Company as a guarantor of CCS's
obligations under the lease. The cross-complaint had sought approximately $3.2
million in rent due under the full term of the lease plus attorney's fees and
interest. The settlement will be made with quarterly payments of $500,000, which
began in May 1997 with the final payment due in February 1998.
For information concerning other legal proceedings, see Item 3 of the
Company's December 31, 1996 Form 10-K/A (SEC File Number 1-13290).
<TABLE>
<S> <C>
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
</TABLE>
No reports on Form 8-K were filed in the three months ended September
30, 1997.
13
<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: October 29, 1997 by /s/ David Michael Talla
-----------------------------------
David Michael Talla
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: October 29, 1997 by /s/ Timothy M. O'Brien
-----------------------------------
Timothy M. O'Brien
Chief Financial Officer
(Principal Financial and
Accounting Officer)
14
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