<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 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>
<S> <C>
Shares
Outstanding at
Class July 31, 1998
- ------------------------------------ --------------------
Common stock, $.01 par value 20,889,956
</TABLE>
<PAGE> 2
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND JUNE 30, 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1997 1998
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,581 $ 6,856
Accounts receivable, net of allowance for doubtful accounts
of $385 and $347 at December 31, 1997 and June 30, 1998 2,072 2,442
Inventories 813 1,315
Other current assets 354 646
Due from affiliates 106 85
--------- ---------
Total current assets 4,926 11,344
Property and equipment, at cost, net of accumulated depreciation and
amortization of $7,943 and $10,031 at December 31, 1997 and June 30, 1998 106,791 116,871
Equity interest in unconsolidated subsidiary 862 808
Costs in excess of net assets acquired, less accumulated amortization
of $822 and $1,056 at December 31, 1997 and June 30, 1998 15,917 15,683
Other assets, at cost, net 3,065 9,217
--------- ---------
$ 131,561 $ 153,923
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and capitalized
lease obligations $ 2,975 $ 3,661
Notes payable to bank 5,000 --
Accounts payable 948 1,987
Accrued liabilities 7,985 4,055
Deferred membership revenues 9,936 11,126
--------- ---------
Total current liabilities 26,844 20,829
Notes payable and capitalized lease obligations,
less current installments 42,823 22,260
Deferred lease obligations 2,817 4,290
Minority interest 600 600
--------- ---------
Total liabilities 73,084 47,979
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;
14,382,621 and 20,889,956 shares issued and outstanding at
December 31, 1997 and June 30, 1998 144 209
Additional paid-in capital 53,613 102,402
Retained earnings 5,674 6,242
Less: Treasury stock, at cost, 163,976 and 423,435 shares at
December 31, 1997 and June 30, 1998 (954) (2,909)
--------- ---------
Total shareholders' equity 58,477 105,944
--------- ---------
$ 131,561 $ 153,923
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 14,192 $ 20,346 $ 28,056 $ 39,963
Operating expenses:
Direct 10,285 14,127 20,257 28,015
Selling, general and administrative 1,527 2,057 3,088 4,089
Depreciation and amortization 922 1,236 1,834 2,439
-------- -------- -------- --------
Total operating expenses 12,734 17,420 25,179 34,543
-------- -------- -------- --------
Income from operations 1,458 2,926 2,877 5,420
Other income (expense):
Interest (797) (296) (1,598) (1,228)
Minority interests 15 (38) 53 (75)
Equity interest in net income of unconsolidated subsidiary 182 212 343 392
Litigation settlement (2,025) -- (2,025) --
-------- -------- -------- --------
Income (loss) before income taxes and extraordinary item (1,167) 2,804 (350) 4,509
Provision for income tax expense (benefit) (443) 1,093 (133) 1,768
-------- -------- -------- --------
Net Income (loss) before extraordinary item (724) 1,711 (217) 2,741
Extraordinary loss from early extinguishment of debt,
net of income tax benefit of $1,331 -- 2,173 -- 2,173
-------- -------- -------- --------
Net Income (loss) $ (724) $ (462) $ (217) $ 568
======== ======== ======== ========
Net income (loss) per share before extraordinary items:
Basic $ (0.06) $ 0.08 $ (0.02) $ 0.16
======== ======== ======== ========
Diluted $ (0.06) $ 0.08 $ (0.02) $ 0.16
======== ======== ======== ========
Net income (loss) per share:
Basic $ (0.06) $ (0.02) $ (0.02) $ 0.03
======== ======== ======== ========
Diluted $ (0.06) $ (0.02) $ (0.02) $ 0.03
======== ======== ======== ========
Weighted average number of common shares outstanding:
Basic 11,545 20,448 11,447 17,351
======== ======== ======== ========
Diluted 11,545 20,448 11,447 17,641
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30,
1997 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (217) $ 568
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss on early extinguishment of debt, net of tax -- 2,173
Depreciation and amortization 1,834 2,439
Equity interest in net income of unconsolidated subsidiary (343) (392)
Distributions from unconsolidated subsidiary 270 446
Minority interest in Reebok-Sports Club/NY (128) --
(Increase) decrease in:
Accounts receivable, net (369) (370)
Inventories (172) (502)
Other assets (412) 990
Increase (decrease) in:
Accounts payable (499) 1,039
Accrued liabilities 1,047 (2,487)
Deferred membership revenues 1,117 1,190
Deferred lease obligations (379) 1,473
-------- --------
Net cash provided by operating activities 1,749 6,567
Cash flows from investing activities:
Capital expenditures (696) (5,008)
Expenditures on new club developments (1,885) (10,761)
Stock re-purchase (330) (2,023)
-------- --------
Net cash used in investing activities (2,911) (17,792)
Cash flows from financing activities:
Exercise of employee stock options -- 36
Net proceeds from issuance of common stock 5,000 48,774
Decrease in due from affiliates 77 21
Repayments of notes payable and capital lease obligations (1,325) (32,331)
-------- --------
Net cash provided by financing activities 3,752 16,500
-------- --------
Net increase in cash and cash equivalents 2,590 5,275
Cash and cash equivalents at beginning of period 4,146 1,581
-------- --------
Cash and cash equivalents at end of period $ 6,736 $ 6,856
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,679 $ 1,641
======== ========
Cash paid for income taxes $ 492 $ 2,265
======== ========
Capital expenditures financed $ 451 $ 3,950
======== ========
Stock issued in exchange for interest in Reebok-Sports Club/NY $ 5,000 $ --
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE SPORTS CLUB COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND JUNE 30, 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 six-month period ended June 30, 1998, are
not necessarily indicative of the results for the entire fiscal year ending
December 31, 1998.
2. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
Notes payable and capitalized lease obligations are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
The Sports Club/LA note (1) $22,378 $ --
The Sports Club/Irvine note 4,875 4,625
Vertical Club note (2) -- 2,667
Spectrum Club-Agoura Hills note 2,533 2,519
Spectrum Clubs Fullerton and Santa Ana
lease obligations 10,000 9,873
Equipment financing and
capitalized lease obligations 5,602 6,237
Other notes payable 410 --
------- -------
45,798 25,921
Less current installments 2,975 3,661
------- -------
$42,823 $22,260
======= =======
</TABLE>
(1) This amount was repaid from the net proceeds of the sale of common
stock in April 1998 (See Note 7).
(2) This note is in connection with the acquisition of the Vertical Club in
New York and is payable in two equal installments in April of 1999 and
2000.
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3. BANK CREDIT FACILITY
In June 1998, the Company increased its bank credit facility
("Credit Facility") to $30.0 million. The Credit Facility expires on May 31,
2000. The Credit Facility is unsecured, however, the Company is prohibited from
pledging any of its assets except for normal furniture, fixture and equipment
financing. The agreement also requires the Company to maintain certain Tangible
Net Worth, Debt Coverage Ratios and Senior Liabilities to Tangible Net Worth
Ratios. At June 30, 1998, the Company was in compliance with its covenants and
no amounts were outstanding under the Credit Facility.
4. NET INCOME (LOSS) PER SHARE
Basic earnings (loss) per share represents net earnings (loss)
divided by the weighted-average number of common shares outstanding for the
period. Diluted earnings (loss) per share represents net earnings divided by the
weighted-average number of shares outstanding inclusive of the dilutive impact
of common stock equivalents. During the three and six months ended June 30, 1997
and 1998, there were no material differences between basic and diluted earnings
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. SALE OF COMMON STOCK
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 $48.8 million were used to repay indebtedness and
provide funds for developments and/or acquisitions and for general corporate
purposes.
7. ACQUISITIONS
On April 16, 1998, the Company 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.
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.
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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 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.
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 June 30, 1998 to Three Months Ended June 30,
1997
Revenues for the three months ended June 30, 1998, were $20.3
million, compared to $14.2 million in 1997, an increase of $6.1 million or
43.0%. An increase of $2.3 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
$906,000 resulted from the Spectrum Club-Valencia. Revenue growth of $1.6
million from the remaining Clubs and SportsMed also contributed to the overall
increase.
Direct operating expenses increased by $3.8 million to $14.1 million
in the three months ended June 30, 1998, versus $10.3 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
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<PAGE> 8
and Spectrum Club-Valencia. Direct operating expenses as a percentage of
revenues decreased to 69.4% in 1998 compared to 72.5% in 1997. Operating margins
continued to improve at Reebok Sports Club/NY as this Club continued to mature.
Partially offsetting this increase were lower operating margins at the recently
acquired Clubs and the Spectrum Club-Valencia.
Selling, general and administrative expenses were $2.1 million in
the three months ended June 30, 1998, versus $1.5 million in 1997. Selling costs
increased approximately $239,000 primarily due to the additional six Clubs.
General and administrative costs increased by approximately $291,000 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 10.8% in 1997 to 10.1% 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 June 30, 1998, versus $922,000 in 1997. The increase is due
primarily to the addition of depreciation and amortization at the four new
Spectrum Clubs, The Sports Club/Las Vegas and the Spectrum Club-Valencia.
Interest expense was $296,000 in the three months ended June 30, 1998, versus
$797,000 in 1997. Interest expense decreased due to the payoff of the note
secured by The Sports Club/LA in April 1998 with the proceeds of a stock
offering.
Equity interest in net income of unconsolidated subsidiary was
$212,000 for the three months ended June 30, 1998 versus $182,000 in 1997. These
amounts are associated with the Spectrum Club-Manhattan Beach operations.
The Company's income before income taxes, extraordinary items and a
1997 litigation settlement was $2.8 million for the three months ended June 30,
1998, versus $858,000 in 1997. In the period ended June 30, 1998, the Company
incurred a pre-tax loss from early extinguishment of debt, net of applicable
taxes, of $2.2 million. In the period ended June 30, 1997, the Company incurred
a charge of $2.0 million to settle certain litigation. The Company's estimated
income tax rate is 40% and 38% for the three months ended June 30, 1998 and
1997, resulting in a net loss of $462,000 for the three months ended June 30,
1998, and a net loss of $724,000 for the same period in 1997.
Comparison of Six Months Ended June 30, 1998 to Six Months Ended June 30, 1997
Revenues for the six months ended June 30, 1998, were $40.0 million,
compared to $28.1 million in 1997, an increase of $11.9 million or 42.3%. An
increase of $4.5 million resulted from revenue at the four new Spectrum Clubs
acquired from Racquetball World on December 31, 1997. An increase of $2.6
million resulted from The Sports Club/Las Vegas and an increase of $1.9 million
resulted from the Spectrum Club-Valencia. Revenue growth of $2.9 million from
the remaining Clubs and SportsMed also contributed to the overall increase.
Direct operating expenses increased by $7.7 million to $28.0 million
in the six months ended June 30, 1998, versus $20.3 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 70.1% in 1998 compared to 72.2% 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 and the Spectrum Club-Valencia.
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Selling, general and administrative expenses were $4.1 million in
the six months ended June 30, 1998, versus $3.1 million in 1997. Selling costs
increased approximately $407,000 primarily 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 $593,000 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 11.0% in 1997 to 10.2% 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 $2.4 million for the six
months ended June 30, 1998, versus $1.8 million in 1997. The increase is due
primarily to the addition of depreciation and amortization at the four new
Spectrum Clubs, The Sports Club/Las Vegas and the Spectrum Club-Valencia.
Interest expense was $1.2 million in the six months ended June 30, 1998, versus
$1.6 million in 1997. Interest expense decreased due to the payoff of the note
secured by The Sports Club/LA in April 1998 with the proceeds of a common stock
offering.
Equity interest in net income of unconsolidated subsidiary was
$392,000 for the six months ended June 30, 1998 versus $343,000 in 1997. These
amounts are associated with the Spectrum Club-Manhattan Beach operations.
The Company's income before income taxes, extraordinary items and
a 1997 litigation settlement was $4.5 million for the six months ended June 30,
1998 versus $1.7 million in 1997. In the period ended June 30, 1998 the Company
incurred a pre-tax loss from early extinguishment of debt, net of applicable
taxes, of $2.2 million. In the period ended June 30, 1997, the Company incurred
a pre-tax charge of $2.0 million to settle certain litigation. The Company's
estimated income tax rate is 40% and 38% for the six months ended June 30, 1998
and 1997, resulting in net income of $568,000 for the six months ended June 30,
1998 and a net loss of $217,000 for the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1997, and the six months ended
June 30, 1998, the Company generated $4.5 million and $6.6 million of cash from
operating activities, respectively. At June 30, 1998, the Company had a cash
balance of $6.9 million of which $3.3 million was held by the Reebok-Sports
Club/NY Partnership. The remaining $3.6 million 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 $48.8 million.
Approximately $36.9 million of the net proceeds have been used to repay
indebtedness, approximately $3.8 million has been used for the Company's common
stock repurchase and the balance is available to provide funds for future
development and/or acquisitions and for general corporate purposes.
The Company currently owns a 60% interest in the Reebok-Sports
Club/NY partnership. At June 30, 1998, the Reebok-Sports Club/NY partnership had
outstanding notes payable of $2.3 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
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increases may occur). At June 30, 1998 the Partnership had a cash balance of
$3.3 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 June 30, 1998, aggregated $15.8 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 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 $350,000 over the next six 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 has started a
capital improvement program at these four Clubs and expects to spend
approximately $4.3 million over the next nine 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 $3.9 million in development
costs over the next six months to complete construction of this Club. In 1998,
the Company entered into lease agreements with respect to Spectrum Clubs to be
built in Puente Hills, Anaheim and Northridge, California. The Company expects
to expend approximately $2.9 million over the next twelve months in connection
with the development of these three Clubs.
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 $12.2 million over the next fifteen months to
complete development of this Club.
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In June 1998, the Company acquired undeveloped land in Houston,
Texas, for approximately $3.1 million, on which the Company intends to develop a
Sports Club. The total additional cost of developing this property is currently
estimated to be approximately $17.1 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 anticipates incurring
approximately $14.2 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 late 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 $1.0 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 $4.3 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. In August, the Board of
Directors increased the authorized amount by $3.0 million. The purchases have
been made from time to time in the open market or directly from shareholders at
prevailing market prices. As of August 10, 1998, the Company had repurchased
$5.1 million of its common stock.
At June 30, 1998, the Company had a $30.0 million bank credit
facility ("Credit Facility"). Currently, no amounts are outstanding under this
facility. Advances under the facility bear interest at a variable rate equal to
LIBOR plus 1-1/2% or the lender's prime rate.
The Company believes that the cash balance on hand plus operating
cash flows and available financings will be sufficient for the Company's working
capital debt service and capital expenditure needs for the next twelve
months. 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 $41.1 million, which will be financed through
amounts believed to be available under credit facilities, lease financings,
sale/lease back arrangements and other financing arrangements. The Company's
development activities beyond twelve months from the date hereof, as well as the
Company's strategy of opportunistically acquiring and developing additional
Clubs are 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. However,
there can be no assurance that financing will be available on commercially
reasonable terms, if at all. To the extent that the
10
<PAGE> 12
Company is unable to obtain additional financing on acceptable terms, the
Company will be forced to delay or limit its development and acquisition plans.
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 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 and acquisition costs for new and acquired 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
11
<PAGE> 13
any obligation to update any forward-looking statements as a result of
developments after the date hereof.
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 May 4, 1998, Bally Total Fitness Holding Corporation
("Bally") commenced an action against the Company in New York state court
seeking injunctive relief and damages in connection with the management
agreement between Bally and Hilton, the Company's predecessor as owner of the
Vertical Club in New York City. Shortly thereafter, the court entered an
injunction preventing the Company from terminating the management agreement or
acting pursuant to the management agreement. On May 22, the Company applied for
clarification of the injunction and the court issued an order providing that the
injunction was issued to maintain the status quo during the pendency of the
suit. Bally is seeking damages arising out of the assignment of the management
agreement from Hilton to the Company in connection with the purchase of the
Vertical Club. The Company has filed an appeal, which is scheduled to be heard
in September. Discovery has not commenced in the action.
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
12
<PAGE> 14
$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.
The proceeds received by the Company from the offering were $48.8
million after deducting aggregate estimated expenses paid by the Company of $3.2
million consisting of $2.6 million for underwriting discounts and commission and
estimated expenses of $600,000 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 $3.8 million has been used for
the Company's common stock repurchase and 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 on Form 8-K have been filed since April 1,
1998:
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> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
THE SPORTS CLUB COMPANY, INC.
Date: August 11, 1998 by /s/ David Michael Talla
--------------------------------------
David Michael Talla
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: August 11, 1998 by /s/ Timothy M. O'Brien
--------------------------------------
Timothy M. O'Brien
Chief Financial Officer
(Principal Financial and Accounting
Officer)
14
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