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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 MARCH 31, 1998
COMMISSION FILE # 1-13290
THE SPORTS CLUB COMPANY, INC.
A DELAWARE CORPORATION - I.R.S. NO. 95-4479735
11100 SANTA MONICA BLVD., SUITE 300, LOS ANGELES, CA 90025
(310) 479-5200
Indicate by check mark whether the company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, during the preceding 12 months (or for such shorter period that the
company was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Shares
Outstanding at
Class April 30, 1998
- ---------------------------------- ------------------------------------
<S> <C>
Common stock, $.01 par value 20,738,138
</TABLE>
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THE SPORTS CLUB COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND MARCH 31, 1998
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, 1997,
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 periods set forth herein. All such adjustments are of a normal and
recurring nature. The results for the three-month period ended March 31, 1998,
are not necessarily indicative of the results for the entire fiscal year ending
December 31, 1998.
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>
Three months ended
March 31,
--------------------------
1997 1998
---------- ----------
(Amounts in thousands)
<S> <C> <C>
Revenues................................................ $ 1,589 $ 1,693
Net income.............................................. 379 423
December 31, March 31,
1997 1998
---------- ----------
(Amounts in thousands)
Current assets.......................................... $ 615 $ 832
Non-current assets...................................... 2,769 2,826
---------- ----------
Total assets........................................ $ 3,384 $ 3,658
========== ==========
Current liabilities..................................... $ 1,281 $ 1,609
Non-current liabilities................................. 444 417
---------- ----------
Total liabilities................................... 1,725 2,026
Partners' capital....................................... 1,659 1,632
---------- ----------
$ 3,384 $ 3,658
========== ==========
</TABLE>
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3. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
Notes payable and capitalized lease obligations are summarized as
follows:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
---------- ----------
(Amounts in thousands)
<S> <C> <C>
The Sports Club/LA note (1).............................. $ 22,378 $ 22,184
The Sports Club/Irvine note.............................. 4,875 4,750
The Spectrum Club/Agoura Hills note...................... 2,533 2,527
Spectrum Clubs Fullerton and Santa Ana lease obligations. 10,000 9,937
Equipment financing and
capitalized lease obligations......................... 5,602 5,286
Other notes payable...................................... 410 410
---------- ----------
45,798 45,094
Less current installments................................ 2,975 3,027
---------- ----------
$ 42,823 $ 42,067
========== ==========
</TABLE>
- --------
(1) This amount was repaid from the net proceeds of the sale of common stock in
April 1998 (See Note 7).
4. BANK CREDIT FACILITY
At March 31, 1998, the Company had a $15.0 million bank credit facility
("Credit Facility"). As of that date, $11.4 million had been utilized. Upon
completion of the sale of shares of common stock in April 1998 (See Note 7), the
Company repaid the entire outstanding amount. As of April 30, 1998, the Company
has no amounts outstanding and $5.0 million available under the Credit Facility.
This Credit Facility expires on June 6, 1998. The Company is currently
negotiating with the bank to renew and expand the overall Credit Facility.
5. NET INCOME PER SHARE
Basic earnings per share represents net earnings divided by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share represent net earnings divided by the weighted-average number
of shares outstanding inclusive of the dilutive impact of common stock
equivalents. During the quarters ended March 31, 1997 and 1998, there were no
differences between basic and diluted earnings 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.
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7. SUBSEQUENT EVENTS
On April 7, 1998, the Company completed an offering of 6,000,000 shares
of common stock at a price of $8.00 per share. On April 27, 1998, the
underwriters exercised the over-allotment option granted as part of the offering
and an additional 500,000 shares were sold at a price of $8.00 per share. Net
proceeds from the offering of $49.4 million were used to repay indebtedness and
provide funds for developments and/or acquisitions and for general corporate
purposes.
On April 16, 1998, the Company announced it had acquired a 120,000
square foot fitness and tennis club located in New York City. The lease rights
and club operation were acquired for approximately $4.0 million, however, a
significant investment is anticipated in connection with development of the
Club.
In March 1998, the Company entered into an agreement to acquire
undeveloped land in Houston, Texas, for approximately $3.1 million, on which the
Company intends to develop a Sports Club. The Company has entered into an
agreement with an affiliate of Millennium Entertainment Partners, MDP Ventures
II LLC (along with its affiliates "Millennium") pursuant to which, at the
Company's election, Millennium will acquire the land and negotiate with the
Company to develop this Club. In addition, the Company will have the right, for
a period of six months, to reacquire the property from Millennium. The total
cost of acquiring and developing this property is currently estimated to be
approximately $17.3 million.
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for the reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general purpose financial statements. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Management has determined that there are no components of comprehensive income
that are not disclosed in the statements of operations, accordingly, there is no
difference between net earnings and net comprehensive income.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for public
business enterprises to report information about operating segments in annual
financial statements and selected information in the notes thereto. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997. In the initial year of application, comparative information for earlier
years is to be restated. SFAS No. 131 need not be applied to interim financial
statements in the year of adoption, but comparative information is required in
the second year of application. The Company has not yet determined whether the
adoption of SFAS No. 131 will have a material impact upon the Company's
financial reporting.
In April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-up
Activities." SOP 98-5 requires that costs of start-up activities, including
organization costs and club openings, be expensed as incurred. SOP 98-5 is
effective for financial statements for fiscal years beginning after December 15,
1998. Restatement of previously issued financial statements is not permitted. In
the fiscal year SOP 98-5 is first adopted, the application should be reported as
a cumulative effect of a change in
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accounting principle. The Company has not yet determined whether the application
of SOP 98-5 will have a material impact upon the Company's financial position or
results of operations.
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 The SportsMed
Company, Inc. ("SportsMed"). The Spectrum Club/Manhattan Beach is accounted for
under the equity method of accounting.
In July 1997, the Company opened the Spectrum Club/Valencia and, in
August 1997, acquired a Club located in Henderson, Nevada which is operated as
The Sports Club/Las Vegas in a transaction accounted for as a purchase. On
December 31, 1997, the Company acquired four Clubs from Racquetball World in a
transaction accounted for as a purchase; these Clubs are located in Southern
California and are now operated as Spectrum Clubs. Seasonal factors have not had
a significant effect on the Company's operating results.
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1998 to Three Months Ended March 31,
1997
Revenues for the three months ended March 31, 1998, were $19.6 million,
compared to $13.9 million in 1997, an increase of $5.7 million or 41.0%. An
increase of $2.2 million resulted from revenue at the four new Spectrum Clubs
acquired from Racquetball World on December 31, 1997. An increase of $1.3
million resulted from The Sports Club/Las Vegas and an increase of $1.0 million
resulted from the Spectrum Club/Valencia. Revenue growth of $900,000 from the
remaining Clubs and $300,000 from SportsMed also contributed to the overall
increase.
Direct operating expenses increased to $13.9 million in the three months
ended March 31, 1998, versus $10.0 million in 1997. The increase resulted
primarily from the acquisition of the four new Spectrum Clubs as well as costs
incurred at The Sports Club/Las Vegas and Spectrum Club/Valencia. Direct
operating expenses as a percentage of revenues decreased to 70.7% in 1998
compared to 71.9% in 1997. Operating margins improved at SportsMed and Reebok
Sports Club/NY as these two businesses continued to mature. Partially offsetting
these increases were lower operating margins at recently acquired clubs.
Selling, general and administrative expenses were $2.0 million in the
three months ended March 31, 1998, versus $1.6 million in 1997. Selling costs
increased approximately $170,000 due to the acquisition of the four new Spectrum
Clubs and The Sports Club/Las Vegas as well as the opening of the Spectrum
Club/Valencia. General and administrative costs increased by approximately
$300,000 as additional corporate overhead was added to support the six new clubs
and growth of SportsMed. Selling, general and administrative costs decreased as
a percentage of revenue from 11.3% in 1997 to 10.4% in 1998. The Company
believes these costs should decrease as a percentage of future revenues as the
Company expands and achieves economies of scale. There is no assurance however,
that said expansion or economies of scale will be achieved.
Depreciation and amortization expenses were $1.2 million for the three
months ended March 31, 1998, versus $912,000 in 1997. The increase is due
primarily to the addition of
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depreciation and amortization at the four new Spectrum Clubs, the Sports
Club/Las Vegas and the Spectrum Club/Valencia. Interest expense was $931,000 in
the three months ended March 31, 1998, versus $801,000 in 1997. Interest expense
increased due to the additional interest associated with financing two of the
new Spectrum Clubs acquired on December 31, 1997.
Equity interest in net income of unconsolidated subsidiary was $180,000
for the three months ended March 31, 1998 versus $161,000 in 1997. These amounts
are associated with the Spectrum Club/Manhattan Beach operations.
The Company's net income before income taxes was $1.7 million for the
three months ended March 31, 1998 versus $818,000 in 1997. The Company's
estimated income tax rate is 40% and 38%, respectively, resulting in net income
of $1.0 million for the three months ended March 31, 1998, versus net income of
$507,000 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1997, and the three months ended
March 31, 1998, the Company generated $4.5 million and $2.2 million of cash from
operating activities, respectively. At March 31, 1998, the Company had a cash
balance of $2.0 million of which $1.2 million was held by the Reebok-Sports
Club/NY Partnership. The remaining $800,000 was available for general corporate
purposes.
In April 1998, the Company completed the sale of 6,500,000 shares of
common stock ("Offering") and realized net proceeds of $49.4 million. The
Company used such proceeds to repay $11.4 million of its bank credit facility,
$25.0 million for the Sports Club/LA note and $1.3 million to complete the
acquisition of a Club in New York City. The Company may repay additional
indebtedness upon replacing the existing bank credit facility. The remaining
proceeds will be used to provide funds for future developments and/or
acquisitions and for general corporate purposes.
The Company anticipates its cash balance on hand plus cash generated
from operations, the remaining proceeds from the Offering and the amount
available under credit facilities will be adequate to fund the Company's current
operating activities, debt service, recurring capital expenditures and
developmental capital requirements for the next twelve months.
The Company currently owns a 60% interest in the Reebok-Sports Club/NY
partnership. At March 31, 1998, the Reebok-Sports Club/NY partnership had
outstanding notes payable of $2.5 million to a third party under a loan secured
by equipment and $3.0 million to the Company, which note is eliminated when
presenting the Company's consolidated balance sheet. The Reebok-Sports Club/NY
partnership 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 there can be no assurance when, if ever, such increases may occur). At
March 31, 1998 the Partnership had a cash balance of $1.2 million. The
Reebok-Sports Club/NY partnership is making monthly payments of $75,000 to repay
the equipment loan and $167,000 to Millennium Entertainment Partners, L.P. or
one of its affiliates (collectively "Millennium") as rent. Available cash flows
of the Reebok-Sports Club/NY partnership will then be used as follows: (i) $3.0
million per year will be used to pay to Millennium a priority distribution,
which is accounted for by the Company as additional rent expense; and (ii)
remaining cash will be distributed to the Company to satisfy the note payable,
accrued management fees and certain additional priority distributions, which at
March 31, 1998, aggregated $15.3 million. After these amounts plus interest
thereon are paid, the Company is entitled to 60% of future cash distributions.
The Company anticipates that the Partnership cash
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balance on December 31, 1998 will allow for the $3.0 million priority payment to
Millennium for 1998 and that the Company will receive its priority distributions
to the extent additional funds are available.
In August 1997, the Company acquired a Club located in Henderson, Nevada
which is now operated as The Sports Club/Las Vegas. The Company expects to
invest approximately $600,000 over the next twelve months to complete
improvements to this Club.
In December 1997, the Company acquired four Clubs from Racquetball World
which are now operated as Spectrum Clubs. The purchase agreement calls for up to
159,081 shares of Common Stock to be issued to the selling entities on December
31, 1998, subject to reduction if certain liabilities of the Clubs exceed
agreed-upon amounts. Millennium acquired properties underlying two of the Clubs
for $10.0 million and is leasing these properties to the Company under a
financing lease agreement which is reflected as a capital lease obligation in
the Company's consolidated balance sheet. The lease has a term of twenty years
and provides for aggregate annual payments of $1.0 million for the first ten
years and $1.2 million per year thereafter. At any time during the first three
years of the lease, the Company may purchase the leased property from Millennium
for a purchase price (currently estimated to be approximately $10.1 million)
equal to $10.0 million plus all costs incurred by Millennium in connection with
the acquisition of such property, plus an amount sufficient to provide to
Millennium a 12% compound return on its total investment. Millennium has the
right to require the Company to acquire its interest in the property at such
price if (i) the Company receives private debt financing in excess of $95.0
million; (ii) the Company receives public equity financing in excess of $20.0
million; (iii) a default (as defined in the lease) occurs; or (iv) a major
casualty occurs with respect to either property. The Company expects to spend
approximately $3.6 million over the next twelve months in order to complete the
renovations and equipment purchases at these Clubs.
In December 1997, the Company acquired real property and a vacant
building in Thousand Oaks, California which is being redeveloped as a Spectrum
Club. The Company expects to invest an additional $4.2 million in development
costs over the next nine months to complete construction of this Club. In March
1998, the Company entered into a lease with respect to a Club to be built in
Puente Hills, California. The Company expects to expend approximately $500,000
over the next twelve months in connection with the development of this Club.
In February 1998, the Company signed a lease with respect to the
development of a Sports Club at Rockefeller Center in New York City. The Company
will begin renovation of the existing space later this year and expects to
commence pre-sale activities in June 1999. The Company deposited $4.0 million
with the landlord to secure its performance under the lease agreement and
expects to spend approximately $10.8 million over the next eighteen months to
complete development of this Club.
In March 1998, the Company entered into an agreement to acquire
undeveloped land in Houston, Texas, for approximately $3.1 million, on which the
Company intends to develop a Sports Club. The Company has entered into an
agreement with Millennium pursuant to which, at the Company's election,
Millennium will acquire the land and negotiate with the Company to develop this
Club. In addition, the Company will have the right, for a period of six months,
to reacquire the property from Millennium. The total cost of acquiring and
developing this property is currently estimated to be approximately $17.3
million.
In April 1998, the Company acquired the Vertical Club, a 120,000 square
foot fitness and tennis club in New York City. The Company paid the prior owner
$1.3 million in cash and issued a note for $2.7 million to be paid in two equal
annual installments. The Company currently
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anticipates incurring approximately $11.5 million in costs to renovate the
existing club over the next fifteen months.
The Company has entered into lease agreements with respect to the
development of Sports Clubs in Washington, D.C. and San Francisco, California
and announced its intention to develop a Sports Club in Boston, Massachusetts.
These projects are scheduled to begin construction in early 1998. The Company's
portion of the development costs for these Clubs is currently estimated to be
approximately $9.0 million and is expected to be invested over a twelve-month
period beginning in 2000.
In addition to the items described above, the Company expects to spend
approximately $1.1 million during the next twelve months to upgrade its
management information systems. The Company generally expects to spend
approximately 4% of revenues on facility and equipment upgrades and
replacements. The Company has available lease finance commitments aggregating
approximately $5.6 million to finance new equipment. Equipping new Clubs will
require expenditures above this level.
In May 1998, the Company's Board of Directors authorized the repurchase
of up to $3.8 million of its common stock. The repurchase will be funded by the
net proceeds received upon the underwriters exercise of the over-allotment
option granted to them in connection with the Offering. The purchases will be
made from time to time in the open market or directly from shareholders at
prevailing market prices.
At March 31, 1998, the Company had a $15.0 million bank credit facility
("Credit Facility"). As of that date, $11.4 million had been utilized. Upon
completion of the Offering in April 1998, the Company repaid the entire
outstanding amount. As of April 30, 1998, the Company has no amounts outstanding
and $5.0 million available under the Credit Facility. Advances under the
facility bear interest at a variable rate equal to LIBOR plus 2 1/2% or the
lender's prime rate plus 1/2%. At March 31, 1998, the advances accrued interest
at the weighted-average rate of 8.28% per annum. The Credit Facility expires on
June 6, 1998. The Company is currently negotiating to renew, extend or replace
the Credit Facility; however, there can be no assurance that any such extension,
renewal or replacement will occur or will occur on terms favorable to the
Company.
The Company's long-term capital needs are to provide funds for the
developments described above, additional development and acquisition projects
and general corporate purposes. The Company estimates that its capital
expenditures for the next twelve months on the projects currently under
development will be approximately $40.0 million, which will be financed through
the net proceeds of the Offering and amounts anticipated to be available under
credit facilities, lease financings, sale/lease back arrangements and other
financing arrangements. The Company's strategy of opportunistically acquiring
and developing additional Clubs is expected to require additional capital. The
Company believes there are a number of financing alternatives available,
including commercial credit facilities, equipment financing, mortgage financing,
and public and private debt and equity offerings. The Company will also consider
entering into joint venture and partnership agreements for the purpose of
developing new Clubs. The Company believes that the net proceeds of the
Offering, together with operating cash flows and available financings, will be
sufficient for the Company's working capital and capital expenditure needs for
the next twelve months. However, there can be no assurance that financing will
be available on commercially reasonable terms, if at all. To the extent that the
Company is unable to obtain additional financing on acceptable terms, the
Company will be forced to delay or limit its development and acquisition plans.
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NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for the reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general purpose financial statements. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Management has determined that there are no components of comprehensive income
that are not disclosed in the statements of operations, accordingly, there is no
difference between net earnings and net comprehensive income.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for public
business enterprises to report information about operating segments in annual
financial statements and selected information in the notes thereto. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997. In the initial year of application, comparative information for earlier
years is to be restated. SFAS No. 131 need not be applied to interim financial
statements in the year of adoption, but comparative information is required in
the second year of application. The Company has not yet determined whether the
adoption of SFAS No. 131 will have a material impact upon the Company's
financial reporting.
In April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-up
Activities." SOP 98-5 requires that costs of start-up activities, including
organization costs and club openings, be expensed as incurred. SOP 98-5 is
effective for financial statements for fiscal years beginning after December 15,
1998. Restatement of previously issued financial statements is not permitted. In
the fiscal year SOP 98-5 is first adopted, the application should be reported as
a cumulative effect of a change in accounting principle. The Company has not yet
determined whether the application of SOP 98-5 will have a material impact upon
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 1, 1998, the Company agreed to pay ST Institute of California
("STI") approximately $660,000 to settle litigation relating to performance
payments under an asset purchase agreement with SportsMed. The settlement
relates to a suit filed by STI against the Company alleging damages for breach
of contract, conversion, fraud, negligent misrepresentation and civil
conspiracy. STI had claimed damages in excess of $4.0 million.
The settlement was completed with payment made on April 3, 1998.
On or about April 29, 1998, Bally Total Fitness Holding Corporation
("Bally") sued the Company in the Supreme Court of New York, County of New York,
No. 98/602003, in connection with the acquisition by the Company of the Vertical
Club in New York City. As part of the acquisition, the Company was assigned the
seller's rights under a Management Agreement pursuant to which Bally provided
management services to such Club. The Company terminated the Management
Agreement on April 29, 1998. Bally alleges that the Company failed to obtain
Bally's consent to the transfer of the Management Agreement and has no right to
terminate the agreement. Bally has asserted claims for tortious interference
with contract, license and economic advantage, fraud and unjust enrichment.
Bally seeks compensatory damages of $4.0 million and punitive damages of $1.0
million.
The Company has answered the complaint, denying Bally's allegations,
seeking a declaration that the Management Agreement has been terminated and
asserting counterclaims (including breach of contract, tortious interference
with contract and breach of fiduciary duty). The court has issued a preliminary
injunction allowing Bally to continue to manage the Club and ordered further
submissions on the issue of whether the Management Agreement has been
terminated.
The Company intends to continue to seek a declaration that the
Management Agreement has been terminated and to pursue its other affirmative
claims; to seek an expedited trial of all issues; and to contest vigorously all
of Bally's claims, which the Company believes are without merit.
For information concerning other legal proceedings, see Item 3 of the
Company's December 31, 1997 Form 10-K (SEC File Number 1-13290).
ITEM 2. CHANGES IN SECURITIES
The Company's Registration Statement on Form S-2, File No. 333-46973
registering 6,900,000 shares of the Company's common stock under the Securities
Act was declared effective by the Securities and Exchange Commission on April 1,
1998 and a public offering of those shares commenced thereafter. 6,800,000
shares were registered on behalf of the Company and 100,000 shares were
registered on behalf of certain selling stockholders. The underwriters included
Schroder & Co. as lead manager and Prudential Securities Incorporated and Sutro
& Co. Incorporated as co-managers. The Company sold 6,500,000 shares of common
stock in the offering with an aggregate offering price of $52.0 million
including 500,000 shares of common stock sold upon the exercise of the
underwriters' over allotment option, and certain stockholders of the Company
sold 100,000 shares of common stock with an aggregate offering price of $800,000
upon exercise of the underwriter's over allotment option. The aggregate offering
price of all shares sold was $52.8 million. If all of the shares which were
registered were sold, the aggregate offering price would have been $55.2
million.
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The proceeds received by the Company from the offering were $49.1
million after deducting aggregate estimated expenses paid by the Company of $2.9
million consisting of $2.6 million for underwriting discounts and commission and
estimated expenses of $300,000 for legal, accounting, printing and other filing
related fees and costs. Approximately $36.9 million of the net proceeds have
been used to repay indebtedness, approximately $1.5 million have been used for
business acquisitions and approximately $1.4 million have been used for
construction and equipment; the balance is available to provide funds for future
development and/or acquisitions and for general corporate purposes. Of the net
proceeds used for business acquisitions, $1.0 million was paid to RM Sports
Club, Inc., a corporation owned and controlled by D. Michael Talla, Chairman and
Chief Executive Officer of the Company, and Rex Licklider, Vice Chairman of the
Company, which as of April 1, 1998, entered into an agreement to purchase the
Vertical Club in New York and had funded a $1.0 million deposit in connection
therewith. On April 15, 1998, RM Sports Club, Inc. transferred its rights under
such agreement to the Company for $1.0 million and the Company acquired the
Vertical Club. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation - Liquidity and Capital Resources."
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
The following reports were filed on Form 8-K since January 1, 1998.
On February 2, 1998, the Company filed a report on Form 8-K in regards
to the termination of negotiations of the Acquisition of the Los Caballeros
Racquet & Sports Club.
On March 10, 1998, the Company filed a report on Form 8-K in regards to
signing a lease for an 89,000 square foot Sports Club at the International
Building in Rockefeller Center.
On April 30, 1998, the Company filed a report on Form 8-K in regards to
(i) the acquisition of the Vertical Club, a 120,000 square foot fitness and
tennis club located in New York City, from Hilton Hotels Corp., (ii) an
agreement to acquire real property in Houston, Texas on which it will develop a
85,000 square foot Sports Club and (iii) the sale of 500,000 shares of common
stock in connection with the underwriters exercise of the over-allotment option
granted as part of the Company's recent public stock offering.
13
<PAGE> 12
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: May 13, 1998 by /s/ David Michael Talla
---------------------------------
David Michael Talla
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 1998 by /s/ Timothy M. O'Brien
---------------------------------
Timothy M. O'Brien
Chief Financial Officer
(Principal Financial and
Accounting Officer)
14
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