<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 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 August 8, 1997
- ---------------------------------- ------------------------------------
Common stock, $.01 par value 13,463,263
<PAGE> 2
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1996 1997
------------ ----------
(Restated) (Restated)
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,146 $ 6,736
Accounts receivable, net of allowance for doubtful accounts
of $57 and $189 at December 31, 1996 and June 30, 1997 1,376 1,745
Inventories 395 567
Other current assets 381 385
Due from affiliates 1,043 966
--------- ---------
Total current assets 7,341 10,399
Property and equipment, at cost, net of accumulated depreciation and
amortization of $4,700 and $6,207 at December 31, 1996 and June 30, 1997 72,736 74,255
Equity interest in unconsolidated subsidiary 642 708
Costs in excess of net assets acquired, less accumulated amortization
of $454 and $631 at December 31, 1996 and June 30, 1997 13,552 15,590
Other assets, at cost, net 1,426 1,688
--------- ---------
$ 95,697 $ 102,640
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and capitalized
lease obligations $ 2,470 $ 2,279
Accounts payable 1,431 933
Accrued liabilities 2,777 3,801
Deferred membership revenues 7,481 8,598
--------- ---------
Total current liabilities 14,159 15,611
Notes payable and capitalized lease obligations,
less current installments 36,027 32,844
Deferred lease obligations 3,309 2,930
Minority interest 1,000 600
--------- ---------
Total liabilities 54,495 51,985
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 13,463,263 shares issued and outstanding at
December 31, 1996 and June 30, 1997 114 135
Additional paid-in capital 36,935 46,914
Retained earnings 4,153 3,919
Less: Treasury stock, at cost, 68,587 shares -- (313)
--------- ---------
Total shareholders' equity 41,202 50,655
--------- ---------
$ 95,697 $ 102,640
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1997 1996 1997
---------- ---------- ---------- ----------
(Restated) (Restated) (Restated) (Restated)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 9,193 $ 14,192 $ 18,547 $ 28,056
Operating expenses:
Direct 5,755 10,285 11,533 20,257
Selling, general and administrative 1,539 1,527 2,991 3,088
Depreciation and amortization 604 922 1,220 1,834
-------- -------- -------- --------
Total operating expenses 7,898 12,734 15,744 25,179
-------- -------- -------- --------
Income from operations 1,295 1,458 2,803 2,877
Other income (expense):
Interest (706) (797) (1,363) (1,598)
Minority interests (37) 15 (75) 53
Equity interest in net income of unconsolidated subsidiary 175 182 256 343
Litigation settlement -- (2,025) -- (2,025)
-------- -------- -------- --------
Income (loss) before income taxes 727 (1,167) 1,621 (350)
Income tax expense (benefit) 298 (443) 665 (133)
-------- -------- -------- --------
Net income (loss) $ 429 $ (724) $ 956 $ (217)
======== ======== ======== ========
Net income (loss) per share $ 0.04 $ (0.06) $ 0.08 $ (0.02)
======== ======== ======== ========
Weighted average number of common
shares outstanding 11,355 11,545 11,355 11,447
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 4
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30,
1996 1997
---------- ----------
(Restated) (Restated)
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 956 $ (217)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,220 1,834
Accrued management fees (406) --
Equity interest in net income of unconsolidated subsidiary (256) (343)
Distributions from unconsolidated subsidiary 437 270
Minority interest in Reebok-Sports Club/NY -- (128)
(Increase) decrease in:
Accounts receivable, net 65 (369)
Inventories 138 (172)
Other current assets (218) (412)
Increase (decrease) in:
Accounts payable (903) (499)
Accrued liabilities 1 1,047
Deferred membership revenues (1,013) 1,117
Deferred lease obligations 157 (379)
-------- --------
Net cash provided by operating activities 178 1,749
Cash flows from investing activities:
Capital expenditures (809) (2,581)
Cash received from sale of common stock -- 5,000
Stock re-purchase -- (330)
-------- --------
Net cash provided by (used for) investing activities (809) 2,089
Cash flows from financing activities:
Decrease in due from affiliates 714 77
Proceeds from notes payable and capital lease obligations 23,029 --
Repayments of notes payable and capital lease obligations (22,756) (1,325)
-------- --------
Net cash provided by (used for) financing activities 987 (1,248)
-------- --------
Net increase in cash and cash equivalents 356 2,590
Cash and cash equivalents at beginning of period 1,545 4,146
-------- --------
Cash and cash equivalents at end of period $ 1,901 $ 6,736
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,505 $ 1,679
======== ========
Cash paid for income taxes $ 559 $ 492
======== ========
Capital expenditures financed $ -- $ 451
======== ========
Stock issued in exchange for interest in Reebok-Sports Club/NY $ -- $ 5,000
======== ========
</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 JUNE 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 period set forth herein. All such adjustments are of a normal and
recurring nature. The results for the six-month period ended June 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>
Six months ended June 30,
------------------------
1996 1997
-------- --------
(Amounts in thousands)
<S> <C> <C>
Revenues ..................... $2,760 $3,182
Net income ................... 577 744
December 31, June 30,
1996 1997
-------- --------
(Amounts in thousands)
Current assets ............... $ 522 $ 668
Non-current assets ........... 2,653 2,752
------ ------
Total assets ............. $3,175 $3,420
====== ======
Current liabilities .......... $1,444 $1,595
Non-current liabilities ...... 539 493
------ ------
Total liabilities ........ 1,983 2,088
Partners' capital ............ 1,192 1,332
------ ------
$3,175 $3,420
====== ======
</TABLE>
4
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3. RELATED PARTY TRANSACTIONS
Due from affiliates are summarized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
---- ----
(Amounts in thousands)
<S> <C> <C>
Notes receivable from the Company's CEO,
with interest payable at 5.9%, due on
April 3, 1998. Secured by a pledge of
300,000 shares of the Company's
common stock............................ $ 624 $ 641
Advances to affiliates made in the normal
course of business, payable on demand .. 419 325
------ ------
$1,043 $ 966
====== ======
</TABLE>
The Company manages the operation of the Spectrum Club/Manhattan Beach,
of which it owns a 46.1% interest. The Company receives a fee of $33,332 per
month plus 4.5% of the Club's gross revenues for managing this Club.
4. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
Notes payable and capitalized lease obligations are summarized as
follows:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
---- ----
(Amounts in thousands)
<S> <C> <C>
The Sports Club/LA note .................. $23,070 $22,724
The Sports Club/Irvine note .............. 5,375 5,125
The Spectrum Club/Agoura Hills note ...... 2,550 2,545
Secured bank notes and other notes payable 3,199 454
Equipment financing and capitalized
lease obligations....................... 4,303 4,275
------- -------
38,497 35,123
Less current installments ................ 2,470 2,279
------- -------
$36,027 $32,844
======= =======
</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. No amounts are outstanding under these
agreements.
5
<PAGE> 7
5. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of
common and common equivalent shares outstanding. Fully diluted net income (loss)
per share is not presented as it does not differ materially from primary net
income (loss) 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. 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.
8. 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 jointly
develop a Sports Club in Boston, Massachusetts on property currently under
development by an affiliate of MEP.
In July 1997, the Company acquired the assets of SportsTherapy Systems,
Inc. ("STS"), a physical therapy and rehab clinic located in Calabasas,
California for approximately $472,000 in cash plus the assumption of various
liabilities. STS will be 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 will
manage the operations of HFA. The acquisition will be accounted for as a
purchase. Accordingly, the operations of STS will be included in the Company's
statement of operations from the date of acquisition.
In August 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 will
6
<PAGE> 8
be accounted for as a purchase. Accordingly, the operations of GVAC will be
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.
9. RECENT DEVELOPMENTS
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.
10. 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, on a straight-line basis, in operations 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 recently adopted and in accordance with certain provisions
of Accounting Principles Board Opinion No. 20, Accounting Changes, operating
results for the six months ended June 30, 1996 and 1997 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 months and six months ended June 30, 1996 and 1997
financial statements are as follows (in thousands, except per share amounts):
7
<PAGE> 9
<TABLE>
<CAPTION>
As Reported As Restated
--------------------------------------------- --------------------------------------------
3 months 6 months 3 months 6 months
-------------------- -------------------- -------------------- --------------------
1996 1997 1996 1997 1996 1997 1996 1997
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 9,366 $ 14,546 $ 18,672 $ 28,602 $ 9,193 $ 14,192 $ 18,547 $ 28,056
Net income (loss) 453 (555) 862 28 429 (724) 956 (217)
Earnings (loss)
per share 0.04 (0.05) 0.08 0.00 0.04 (0.06) 0.08 (0.02)
</TABLE>
<TABLE>
<CAPTION>
As reported As Restated
-------------------- --------------------
June 30, June 30, June 30, June 30,
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total assets $ 82,571 $102,523 $ 82,632 $102,640
======== ======== ======== ========
Total liabilities $ 41,735 $ 51,139 $ 42,183 $ 51,985
Total equity 40,836 51,384 40,449 50,655
-------- -------- -------- --------
Total liabilities
and equity $ 82,571 $102,523 $ 82,632 $102,640
======== ======== ======== ========
</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/A. The Company's consolidated financial statements
reflect the operations of The Sports Clubs, The Spectrum Clubs and 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.
The comparability of the Company's operating results, financial
condition and capital requirements is impacted by the transaction 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.
RESULTS OF OPERATIONS
Comparison of Three Months Ended June 30, 1997 to Three Months Ended June 30,
1996
Revenues for the three months ended June 30, 1997, were $14.2 million,
compared to $9.2 million in 1996, an increase of $5.0 million or 54.4%. An
increase of $4.3 million resulted from revenue from Reebok Sports Club/NY, which
was consolidated into the Company following the acquisition of a controlling
interest in the Club on December 30, 1996. Revenue growth of
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<PAGE> 10
$300,000 from the remaining Clubs as well growth of $400,000 from HFA also
contributed to the overall increase.
Direct operating expenses increased to $10.3 million in the three months
ended June 30, 1997, versus $5.8 million in 1996. The increase resulted
primarily from the consolidation of operating expenses at Reebok Sports Club/NY.
Direct operating expenses as a percentage of revenues increased to 72.5% in 1997
compared to 62.6% in 1996 due to lower margins at Reebok Sports Club/NY. Newer
Clubs historically operate at lower margins until the membership base reaches a
mature level.
Selling, general and administrative expenses were $1.5 million in the
three months ended June 30, 1997, versus $1.5 million in 1996. These costs
decreased as a percentage of revenue from 16.7% in 1996 to 10.8% in 1997. The
Company was managing Reebok Sports Club/NY in 1996 and therefore, the revenue
growth which resulted from consolidating this Club was not accompanied by an
increase in general and administrative expenses.
Depreciation and amortization expenses were $922,000 in the three months
ended June 30, 1997, versus $604,000 in 1996. The increase is due primarily to
the addition of depreciation and amortization at Reebok Sports Club/NY. Interest
expense was $797,000 in the three months ended June 30, 1997, versus $706,000 in
1996. Interest expense of $185,000 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 $182,000
in the three months ended June 30, 1997 versus $175,000 in 1996. The 1996 and
1997 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 three months ended
June 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.
The Company's net loss before income taxes was $1.2 million for the
three months ended June 1997. The Company's net income before income taxes and
before the settlement of the Century City litigation was $858,000 in the three
months ended June 30, 1997 versus $727,000 in 1996. The Company's estimated
income tax rate is 38% for the three months ended June 30, 1997, and 41% for
1996, resulting in a net loss of $724,000 for the three months ended June 30,
1997, versus net income of $429,000 in 1996. The lower tax rate in 1997 results
from the reduction of valuation allowances on certain deferred income tax
assets.
Comparison of Six Months Ended June 30, 1997 to Six Months Ended June 30, 1996
Revenues for the six months ended June 30, 1997, were $28.1 million,
compared to $18.5 million in 1996, an increase of $9.6 million or 51.3%. An
increase of $8.4 million resulted from revenue from Reebok Sports Club/NY, which
was consolidated into the Company following the acquisition of a controlling
interest in the Club on December 30, 1996. Revenue growth of $700,000 from the
remaining Clubs as well as growth of $600,000 from HFA also contributed to the
overall increase.
9
<PAGE> 11
Direct operating expenses increased to $20.3 million in the six months
ended June 30, 1997, versus $11.5 million in 1996. The increase resulted
primarily from the addition of operating expenses at Reebok Sports Club/NY.
Direct operating expenses as a percentage of revenues increased to 72.2% in 1997
compared to 62.2% in 1996 due to lower margins at Reebok Sports Club/NY. Newer
Clubs historically operate at lower margins until the membership base reaches a
mature level.
Selling, general and administrative expenses were $3.1 million in the
six months ended June 30, 1997 versus $3.0 million in 1996. The increase was due
to the consolidation of direct selling expenses incurred at Reebok Sports
Club/NY. These costs decreased as a percentage of revenue from 16.1% in 1996 to
11.0% in 1997. The Company was managing Reebok Sports Club/NY in 1996 and
therefore, the revenue growth which resulted from consolidating this Club was
not accompanied by an increase in general and administrative expenses.
Depreciation and amortization expenses were $1.8 million in the six
months ended June 30, 1997 versus $1.2 million in 1996. The increase is due
primarily to the consolidation of depreciation and amortization at Reebok Sports
Club/NY. Interest expense was $1.6 million in the six months ended June 30,
1997, versus $1.4 million in 1996. Interest expense of $372,000 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 $343,000
in the six months ended June 30, 1997 versus $256,000 in 1996. The 1996 and 1997
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 six months ended
June 30, 1997. There were no similar costs for the same period in 1996.
The Company's net loss before income taxes was $350,000 for the six
months ended June 30, 1997. The Company's net income before income taxes and
before the settlement of the Century City litigation was $1.7 million in the six
months ended June 30, 1997 versus $1.6 million in 1996. The Company's estimated
income tax rate is 38% for the six months ended June 30, 1997, and 41% for 1996,
resulting in a net loss of $217,000 for the six months ended June 30, 1997,
versus net income of $956,000 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 six months ended June
30, 1997, the Company generated $3.6 million and $1.7 million of cash from
operating activities. At June 30, 1997, the Company had a cash balance of $6.7
million of which $619,000 is held by the Reebok-Sports Club/NY Partnership. The
remaining $6.1 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 facility will be adequate to fund the
Company's current operating activities, debt service and recurring capital
expenditures for the next twelve months.
10
<PAGE> 12
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 has made a claim for approximately
$687,000 in 1997 relating to the 1996 shortfall.
In June 1997, the Company sold 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 June 30, 1997, the Partnership owed $2.9 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 June 30, 1997 consolidated balance sheet.) The Reebok
Sports Club/NY achieved a positive 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 statement, 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 June 30, 1997, these amounts total $14.9 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. The settlement will be
made with quarterly payments of $500,000 which began in May 1997 with the final
payment due in February 1998.
In July 1997, the Company acquired SportsTherapy Systems, Inc., a
physical therapy and rehab clinic located in Calabasas, California for
approximately $472,000 in cash plus the assumption of various liabilities. 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 $700,000 and the issuance of $1.7
million of shares of the Company's common stock.
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 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 with several financial institutions regarding
the possibility of securing a credit facility that would be used (i) to retire
existing debt (ii) for the acquisition of existing or development of new clubs
and (iii) to provide working capital.
11
<PAGE> 13
In the first quarter of 1996, the Company began development of a 57,000
square foot Spectrum Club in Valencia, California. This Club opened on July 1,
1997. The Company owns and manages the Club operations in a building that is
leased from The Newhall Land and Farming Company. The Company anticipates that
it will be able to fund its remaining portion of this development, estimated to
be approximately $300,000, from operating cash flows. In August 1996, the
Company announced plans to develop a Sports Club in Houston, Texas. The
Company's portion of development costs for this Club is estimated to be $3.6
million and will be funded starting in early 1998. In 1997, the Company
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 $15.0 million.
Operating cash flows and the $5.0 million 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 yet have a formal commitment to provide this financing.
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. In 1996, the Company invested approximately $1.6 million in
capital expenditures other than those related to new club development. In the
six months ended June 30, 1997, capital expenditures, other than those related
to new club development, were $1.1 million. In 1996, the Company secured a
$500,000 lease facility to be used to finance capital expenditures. As of June
30, 1997, the Company had utilized approximately $305,000 of this facility. The
remaining $200,000 will be used for equipment at the Spectrum Club in Valencia.
In 1997, the Company secured an additional $500,000 lease facility to be used to
finance capital expenditures. As of June 30, 1997, no amounts had been utilized
under this facility. 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.
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.
12
<PAGE> 14
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.
13
<PAGE> 15
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).
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
On May 22, 1997, the Company filed a report on Form 8-K in regards to
the Century City litigation settlement. See Part II, Item 1.
14
<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: October 14, 1997 by /s/ DAVID MICHAEL TALLA
---------------------------------
David Michael Talla
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: October 14, 1997 by /s/ TIMOTHY M. O'BRIEN
---------------------------------
Timothy M. O'Brien
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
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