<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 MARCH 31, 2000
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 May 15, 2000
------------------------------- --------------------------
Common Stock, 17,776,215
par value $.01 per share
<PAGE> 2
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND MARCH 31, 2000
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1999 2000
------------ ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 53,060 $ 41,698
Short term investments 24,436 14,635
Accounts receivable, net of allowance for doubtful accounts
of $342 and $343 at December 31, 1999 and March 31, 2000 2,149 2,297
Inventories 1,355 1,701
Other current assets 2,341 1,611
-------- --------
Total current assets 83,341 61,942
Property and equipment, at cost, net of accumulated depreciation
and
amortization of $12,873 and $13,905 at December 31, 1999 and 118,959 134,203
March 31, 2000
Costs in excess of net assets acquired, less accumulated
amortization
of $1,588 and $1,700 at December 31, 1999 and March 31, 2000 13,890 13,778
Other assets, at cost, net 7,363 7,487
-------- --------
$223,553 $217,410
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and equipment
financing loans $ 3,520 $ 3,508
Accounts payable 2,052 1,084
Accrued liabilities 8,549 4,649
Deferred membership revenues 9,712 9,748
-------- --------
Total current liabilities 23,833 18,989
Notes payable and equipment financing loans,
less current installments 100,367 100,475
Deferred lease obligations 1,066 1,774
Minority interest 600 600
-------- --------
Total liabilities 125,866 121,838
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;
20,907,289 and 20,932,289 shares issued and outstanding at
December 31, 1999 and March 31, 2000, respectively 209 209
Additional paid-in capital 102,403 102,464
Retained earnings 10,966 8,790
Less: Treasury stock, at cost, 3,194,536 shares at
December 31, 1999 and March 31, 2000 (15,891) (15,891)
-------- --------
Total shareholders' equity 97,687 95,572
-------- --------
$223,553 $217,410
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 3
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 2000
------- --------
<S> <C> <C>
Revenues $21,834 $ 16,847
Operating expenses:
Direct 15,144 12,030
Selling, general and administrative 2,242 2,222
Depreciation and amortization 1,530 1,144
Pre-opening expenses 248 2,490
------- --------
Total operating expenses 19,164 17,886
------- --------
Income (loss) from operations 2,670 (1,039)
Other income (expense):
Net interest expense (240) (1,006)
Minority interests (38) (38)
Equity interest in net income of unconsolidated subsidiary 263 --
Non-recurring charge (188) (1,476)
------- --------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 2,467 (3,559)
Income tax provision (benefit) 1,017 (1,383)
------- --------
Income (loss) before cumulative effect of
change in accounting principle 1,450 (2,176)
Cumulative effect of change in accounting principle,
net of income tax benefit of $600 899 --
Net income (loss) $ 551 $ (2,176)
======= ========
Income (loss) per share before cumulative effect of
change in accounting principle:
Basic $ 0.08 $ (0.12)
======= ========
Diluted $ 0.08 $ (0.12)
======= ========
Effect of cumulative effect of change in accounting principle:
Basic $ (0.05) $ --
======= ========
Diluted $ (0.05) $ --
======= ========
Net income (loss) per share:
Basic $ 0.03 $ (0.12)
======= ========
Diluted $ 0.03 $ (0.12)
======= ========
Weighted average shares outstanding:
Basic 19,050 17,720
======= ========
Diluted 19,213 17,720
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 4
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31,
---------------------
1999 2000
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 551 $ (2,176)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Cumulative effect of change in accounting principle 1,499 --
Depreciation and amortization 1,530 1,144
Equity interest in net income of unconsolidated subsidiary (263) --
Distributions from unconsolidated subsidiary 460 --
(Increase) decrease in:
Accounts receivable, net 237 (148)
Inventories (51) (346)
Other current assets 593
(88)
Due from affiliates (112) 137
Increase (decrease) in:
Accounts payable 917 (968)
Accrued liabilities 352 (3,900)
Deferred membership revenues 1,383 36
Deferred lease obligations 639 708
-------- --------
Net cash provided by (used in) operating activities 7,054 (4,920)
Cash flows from investing activities:
Capital expenditures (12,054) (16,400)
Sale of short term investments -- 9,801
Stock re-purchase (3,765) --
-------- --------
Net cash used in investing activities (15,819) (6,599)
Cash flows from financing activities:
Exercise of employee stock options -- 61
Proceeds from notes payable and equipment financing loans 15,713 298
Repayments of notes payable and equipment financing loans (6,164) (202)
-------- --------
Net cash provided by financing activities 9,549 157
-------- --------
Net increase (decrease) in cash and cash equivalents 784 (11,362)
Cash and cash equivalents at beginning of period 2,233 53,060
-------- --------
Cash and cash equivalents at end of period $ 3,017 $ 41,698
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 695 $ 5,714
======== ========
Cash paid for income taxes $ 857 $ 423
======== ========
</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, 1999 AND MARCH 31, 2000
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, 1999,
consolidated financial statements and notes thereto included in the Company's
Annual Report 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, 2000, are not necessarily indicative of the
results for the fiscal year ending December 31, 2000.
2. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. On March 31, 2000,
cash and cash equivalents were $41.7 million, of which $20.6 million has been
segregated into a disbursement escrow account and is restricted and specifically
designated for the development of new Clubs.
3. SHORT TERM INVESTMENTS
The Company considers investments with original maturities of greater
than three months and less than or equal to one year to be short term
investments. At March 31, 2000, short term investments were $14.6 million, all
of which have been segregated into a disbursement escrow account and are
restricted and specifically designated for the development of new Clubs. The
Company's short term investments consist of high-grade commercial paper and
United States government agency discount notes.
4
<PAGE> 6
4. NOTES PAYABLE AND EQUIPMENT FINANCING LOANS
Notes payable and equipment financing loans are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Senior Secured Notes (a)........................ $100,000 $100,000
Note payable (b)................................ 2,667 2,667
Equipment financing loans (c)................... 1,220 1,316
-------- --------
103,887 103,983
Less current installments....................... 3,520 3,508
-------- --------
$100,367 $100,475
======== ========
</TABLE>
- ----------------------
(a) On April 1, 1999, the Company issued in a private placement $100.0 million
of Senior Secured Notes (the "Senior Secured Notes") with interest due
semi-annually. The Senior Secured Notes bear interest at an annual rate of
11 3/8% and are due in March 2006. In May 1999, the Company exchanged the
Senior Secured Notes for registered Series B Senior Secured Notes.
The Senior Secured Notes are secured by substantially all of the Company's
assets, other than certain excluded assets. In connection with the issuance
of the Senior Secured Notes, the Company entered into an indenture dated as
of April 1, 1999 (the "Indenture") which includes certain covenants which
restrict the Company's ability, subject to certain exceptions, to: (i)
incur additional indebtedness; (ii) pay dividends or other distributions,
repurchase capital stock or other equity interest or subordinated
indebtedness; (iii) enter into transactions with affiliates; (iv) make
investments; (v) create liens or sell certain assets and (vi) enter into
mergers and consolidations. At March 31, 2000, the Indenture's covenants
would prevent the Company from engaging in the restricted actions.
Under the terms of the Indenture, after March 15, 2003, the Company may, at
its option, redeem all or some of the Senior Secured Notes at a redemption
price that will decrease over time from 105.688% to 100% of their face
amount, plus interest. Prior to March 15, 2002, if the Company publicly
offers certain equity securities the Company may, at its option, apply
certain of the net proceeds from those transactions to the redemption of up
to 35% of the principle amount of the Senior Secured Notes at 111.375% of
their face amount, plus interest. If the Company undergoes a change in
control, as defined in the Indenture, it must give holders of the Senior
Secured Notes the opportunity to sell their Senior Secured Notes to the
Company at 101% of their face amount, plus interest.
(b) This note was issued in connection with the acquisition of The Sports
Club/LA site at 61st and 1st Street in New York. The note agreement
provided for payments in installments of $1,334,000 and 1,333,000 due in
April 1999 and April 2000, respectively. The Company is currently in
default on this entire note payable and in litigation regarding this Note.
The Company believes that it has various claims against the seller in
connection with the repair and refurbishing of the Club, which offset the
money owed on the Note (see Part II, Item 1. Legal Proceedings).
(c) The equipment financing loans are secured by furniture, fixtures and
equipment. The amounts are generally repayable in monthly payments over
five years with effective interest rates between 9% and 10%.
5
<PAGE> 7
5. BANK CREDIT FACILITY
At March 31, 2000, the Company had a $15.0 million bank credit facility.
The facility matures on May 31, 2001 and bears interest at a variable rate of
LIBOR plus 2 1/2% or the bank's prime rate. At March 31, 2000, no borrowings
were outstanding under this credit facility but $4.0 million was utilized in the
form of a letter of credit. The loans are secured by all the assets of The
Sports Club/Irvine and The Sports Club/Las Vegas. The agreement also requires
the Company to maintain certain Tangible Net Worth, Debt Service Coverage and
Senior Liabilities to Tangible Net Worth ratio requirements. At March 31, 2000,
the Company was not in compliance with the Debt Service Coverage ratio. The bank
has waived this default. The Company and the bank are currently reviewing the
loan covenants in connection with the annual renewal of the credit facility and
the Company anticipates having a revised bank credit facility in place by June
30, 2000.
6. NET INCOME PER SHARE
Basic earnings per share represents net earnings divided by the
weighted-average number of shares of Common Stock outstanding for the period.
Diluted earnings 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 months ended March 31, 1999 and
2000, there were no material differences between basic and diluted earnings per
share. The difference between the weighted average number of shares outstanding
used in the calculation of basic and diluted earnings per share was attributable
to the dilutive effect of stock options. At March 31, 2000, there were 419,580
anti-dilutive common stock equivalents.
7. INCOME TAXES
Income taxes are 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.
8. NEW ACCOUNTING PRONOUNCEMENTS
On March 31, 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25 (FIN 44). This
interpretation provides guidance for issues that have arisen in applying APB
Opinion No. 25, Accounting for Stock Issued to Employees. FIN 44 applies
prospectively to new awards, exchanges of awards in a business combination,
modifications to outstanding awards, and changes in grantee status that occur on
or after July 1, 2000, except for the provisions related to repricings and the
definition of an employee which apply to awards issued after December 15, 1998.
The provisions related to modifications to fixed stock option awards to add a
reload feature are effective for awards modified after January 12, 2000. The new
interpretation is not expected to have a material impact upon the financial
statements.
6
<PAGE> 8
9. SALE OF SPECTRUM CLUBS
In September of 1999, the Company completed the sale and leaseback of
the real estate at the Spectrum Club - Thousand Oaks for approximately $12.0
million. On December 3, 1999, the Company completed the sale of the Spectrum
Clubs, a group of ten sports and fitness clubs located in Southern California,
to an investment group for approximately $48.4 million. The consolidated
financial statements for the quarter ended March 31, 1999 and accompanying notes
include the operating results of the Spectrum Clubs. Pro-forma consolidated
operating results for the three months ended March 31, 1999 are presented below.
The pro-forma statements present the un-audited results of operations as if the
Spectrum Clubs had been sold on January 1, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999
-------------------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C>
Revenues........................................................ $ 15,275
Operating expenses.............................................. 13,149
--------
Income from operations........................................ 2,126
Other income ................................................... 816
--------
Income before income taxes and
cumulative effect of change in accounting principle........... 2,942
Income tax provision............................................ 1,224
--------
Income before cumulative
effect of change in accounting principle...................... 1,718
Cumulative effect of change in accounting principle,
net of tax.................................................... 221
--------
Net income...................................................... $ 1,497
========
Net income per share:
Basic......................................................... $ 0.08
========
Diluted....................................................... $ 0.08
========
Weighted average shares outstanding:
Basic......................................................... 19,050
========
Diluted....................................................... 19,213
========
</TABLE>
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with our
condensed consolidated financial statements and notes thereto appearing
elsewhere in this Form 10-Q. The Spectrum Club - Manhattan Beach was accounted
for under the equity method of accounting until December 1999 at which time we
sold all of our Spectrum Clubs.
In January 1999 the Spectrum Club - Fountain Valley was leased to
another health and fitness operator and in April 1999 the Spectrum Club - Santa
Ana was sold. The remaining Spectrum Clubs were sold in December 1999. The
Sports Club/LA at Rockefeller Center opened in February 2000. Seasonal factors
have not had a significant effect on our operating results.
As a result of the sale of the Spectrum Clubs in December 1999, the
opening of The Sports Club/LA at Rockefeller Center in February 2000 and the
high level of pre-opening expenses incurred for the opening of The Sports
Club/LA at Rockefeller Center, results for the three months ended March 31, 2000
and March 31, 1999, are not indicative of results in future periods.
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 2000 to Three Months Ended March 31,
1999.
Our revenues for the three months ended March 31, 2000, were $16.8
million, compared to $21.8 million in 1999, a decrease of $5.0 million or 22.8%.
Revenue decreased by $6.4 million as a result of the sale of the Spectrum Clubs
in December 1999 and revenue increased by $0.4 million as a result of the
opening of The Sports Club/LA at Rockefeller Center in February 2000. Revenue
increased by $1.0 million at the existing Sports Clubs due to increases in
membership dues and ancillary services dues and to the maturation of the
membership base at The Reebok Sports Club/NY.
Our direct operating expenses decreased by $3.1 million to $12.0 million
in the three months ended March 31, 2000, versus $15.1 million for the same
period in 1999. Direct operating expenses decreased by $4.8 million as a result
of the sale of the Spectrum Clubs in December 1999 and increased by $0.9 million
as a result of the opening of The Sports Club/LA at Rockefeller Center in
February 2000. Direct operating expenses increased by $0.8 million at our
existing Sports Clubs primarily due to expenses associated with the revenue
increase at these Clubs.
Our selling, general and administrative expenses were $2.2 million in
the three months ended March 31, 2000, versus $2.2 million for the same period
in 1999. Selling costs decreased by $0.1 million and our general and
administrative costs increased by $0.1 million. There was a $0.3 million
decrease in selling, general and administrative expenses as a result of the sale
of the Spectrum Clubs in December 1999. This decrease was offset by a
corresponding increase in selling, general and administrative expenses at The
Sports Clubs and the corporate office. The increase in general and
administrative expenses was primarily associated with the opening of The Sports
Club/LA at Rockefeller Center in February 2000 and to increases in our corporate
infrastructure related to our planned expansion of The Sports Clubs/LA in 2000
and in 2001.
8
<PAGE> 10
Our depreciation and amortization expenses were $1.1 million for the
three months ended March 31, 2000, versus $1.5 million for the same period in
1999. A decrease of $0.5 million resulted from the sale of the Spectrum Clubs in
December 1999 and an increase of $0.1 million resulted from the opening of The
Sports Club/LA at Rockefeller Center in February 2000.
Pre-opening expenses were $2.5 million for the three months ended March
31, 2000, versus $0.2 million for the same period in 1999. Pre-opening expenses
by Club during the three months ended March 31, 2000 were $1.5 million at The
Sports Club/LA at Rockefeller Center, $0.7 million at The Sports Club/LA at 61st
& 1st in New York and $0.3 million at The Sports Club/LA in Washington D.C.
We incurred net interest expense of $1.0 million in the three months
ended March 31, 2000, versus $0.2 million for the same period in 1999. Net
interest expense increased substantially as a result of the issuance of $100.0
million of Senior Secured Notes on April 1, 1999. The Notes bear interest at an
annual rate of 11 3/8%.
Equity interest in net income of unconsolidated subsidiary was $0.3
million in 1999. These amounts were associated with our investment in the
Spectrum Club-Manhattan Beach, which was sold in December 1999.
We incurred a non-recurring charge of $1.5 million in the three months
ended March 31, 2000, versus $0.2 million for the same period in 1999. The
non-recurring charge in the first quarter of 2000 is for attorney's fees,
settlement and administrative costs related to a settlement (which is subject to
court approval) of a class action lawsuit at The Sports Club/LA in Los Angeles
(see Part II, Item 1. Legal Proceedings). The non-recurring charge in the first
quarter of 1999 relates to the disposition of the Spectrum Club - Fountain
Valley in January 1999.
In the first quarter of 1999, we incurred a charge from a cumulative
effect of change in accounting principle, net of applicable taxes, of $0.9
million. This charge is associated with the write off of pre-opening expenses
incurred and capitalized prior to January 1, 1999.
Our estimated federal and state income tax rate is 40% for the three
months ended March 31, 2000 and 1999, resulting in a net loss of $2.2 million
for the three months ended March 31, 2000, and in net income of $0.6 million for
the same period in 1999.
Comparison of Three Months Ended March 31, 2000 to Pro Forma Three Months Ended
March 31, 1999.
During the fiscal year ended December 31, 1999, we sold or disposed of
all of our Spectrum Clubs (see Note 9 to consolidated condensed financial
statements). Below is a discussion of the un-audited results of operations for
the three months ended March 31, 2000, versus the un-audited pro forma results
of operations for the three months ended March 31, 1999, assuming the sale of
the Spectrum Clubs occurred on January 1, 1999. The purpose of the pro forma
consolidated condensed statement of operations is to present what our operating
results might have been for the three months ended March 31, 1999, had the sale
of the Spectrum Clubs occurred on January 1, 1999. However, the pro forma
consolidated condensed statement of operations for the three months ended March
31, 1999, does not purport to and does not represent what our actual results of
operations might have been had the Spectrum Club sale been completed on January
1, 1999. Moreover, the pro forma consolidated condensed statement of operations
for the three months ended March 31, 1999, does not purport to be a projection
of our
9
<PAGE> 11
results of operations either for the current period or for any future periods
and therefore should not be relied upon to project future operating results.
Operating results can be affected by a number of circumstances the nature and
effect of which cannot be predicted.
Our revenues for the three months ended March 31, 2000, were $16.8
million, compared to pro forma revenues of $15.3 million for the same period in
1999, an increase of $1.5 million or 10.3%. Revenue increased by $0.4 million
due to the opening of The Sports Club/LA at Rockefeller Center in February 2000
and by $1.1 million due to increases in membership dues and ancillary services
at the other Sports Clubs and due to the final maturation of the membership
base at the Reebok Sports Club/NY.
Operating expenses for the three months ended March 31, 2000, were $17.9
million, compared to pro forma operating expenses of $13.1 million for the same
period in 1999, an increase of $4.8 million or 36.0%. Operating expenses
increased by $1.1 million due to the opening of The Sports Club/LA at
Rockefeller Center in February 2000, $2.4 million due to the recognition of
pre-opening expenses at the Sports Clubs/LA under development, $0.8 million due
to increased direct expenses associated with our increased revenues at existing
Sports Clubs, and $0.5 million as a result of increased selling, general and
administrative expenses associated with the opening of The Sports Club/LA at
Rockefeller Center and to the increase in our corporate infrastructure related
to our planned expansion of The Sports Clubs/LA in 2000 and 2001.
Other expenses for the three months ended March 31, 2000, were $2.5
million, compared to pro forma other income of $0.8 million for the same period
in 1999. The change in other income and expense is primarily due to increased
net interest expense of $1.8 million, primarily associated with our $100.0
million Senior Secured Notes issued in April 1999, and to a non-recurring charge
of $1.5 million associated with the settlement of a class action lawsuit at The
Sports Club/LA in Los Angeles.
Our net loss for the three months ended March 31, 2000 was $2.2 million
or $0.12 per basic and diluted share, compared to pro forma net income of $1.5
million in 1999 or $0.08 per basic and diluted share. In 1999, we incurred a pro
forma charge from a cumulative effect of change in accounting principle, net of
applicable taxes, of $0.2 million. This charge is associated with the write off
of pre-opening expenses incurred and capitalized prior to January 1, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Credit Availability. On April 1, 1999, we issued in a private
placement $100.0 million of 11 3/8% Senior Secured Notes due in March 2006 (the
"Senior Secured Notes") with interest due semi-annually. We used $37.6 million
of the proceeds to repay existing indebtedness. The balance is being used to
develop new Clubs and for general corporate purposes. Pursuant to the terms of
the indenture dated April 1, 1999 (the "Indenture") entered into in connection
with the issuance of the Senior Secured Notes, there is currently $35.2 million
segregated into a disbursment escrow account which is specifically restricted
for the development of new Clubs. The Senior Secured Notes are secured by
substantially all of our assets, other than certain excluded assets. The
Indenture includes certain covenants which restrict our ability, subject to
certain exceptions, to: (i) incur additional indebtedness; (ii) pay dividends
10
<PAGE> 12
or other distributions, repurchase capital stock or other equity interest or
subordinated indebtedness; (iii) enter into transactions with affiliates; (iv)
make investments; (v) create liens or sell certain assets and (vi) enter into
mergers and consolidations. At March 31, 2000, the Indenture's covenants would
prevent us from engaging in the restricted actions.
Our bank credit facility provides us $15.0 million of financing with a
maturity date of May 31, 2001. Advances under our credit facility bear interest
at a variable rate of LIBOR plus 2 1/2% or the bank's prime rate. At March 31,
2000, no borrowings were outstanding under the credit facility but $4.0 million
was utilized in the form of a letter of credit, leaving $11.0 million available
for future borrowings. For the quarter ended March 31, 2000, we were not in
compliance with the Debt Service Coverage ratio as required by our bank credit
facility agreement. The bank has waived this covenant with respect to the first
quarter. We are currently reviewing the loan covenants with the bank in
connection with the annual renewal of the credit facility and we anticipate
having a revised bank credit facility in place by June 30, 2000. There can be no
assurance that the credit facility will be renewed, or if renewed that it will
be renewed on terms comparable to those contained in the current credit
facility.
Under the terms of the Indenture, we are currently allowed to increase
our existing bank facility by $5.0 million and to incur an additional $8.7
million in equipment financing.
As part of a strategy to focus on The Sports Club/LA line of Clubs, in
December 1999, we sold our Spectrum Clubs to an investment group. With the sale
proceeds we retired equipment financing obligations, paid transaction fees and
expenses, completed various construction projects at several of the Spectrum
Clubs and resolved litigation related to the Spectrum Clubs. Our net proceeds
from the December sale were approximately $38.0 million.
Operating Cash Flow. During the year ended December 31, 1999, we
generated $8.3 million of cash from operating activities. For the three months
ended March 31, 2000, we used $4.9 million of cash for operating activities.
During the three months ended March 31, 2000, we made our semi-annual interest
payment of $5.6 million and used $2.5 million of cash for the payment of
pre-opening expenses at our three new Sports Club/LA properties. On March 31,
2000, our balance of cash and short term investments was $56.3 million. Of this
amount, $35.2 million has been segregated into a disbursement escrow account and
is specifically restricted for the development of new Clubs.
All our mature Sports Clubs are profitable and generate positive cash
flow from operations. Newly developed Clubs tend to achieve significant
increases in revenues until a mature membership level is reached. In the past,
recently opened Clubs that have not yet achieved mature membership levels, have
operated at a loss or at only a slight profit as a result of fixed expenses
that, together with variable operating expenses, approximate or exceed
membership fees and other revenue. We expect this trend to continue at the five
Clubs we have opened or will open in 2000 and 2001. Our ability to generate
positive cash flow from operating activities is dependent upon reaching mature
membership levels at our new Clubs.
New Club Development. In February 1998, we signed a lease with respect
to the development of The Sports Club/LA at Rockefeller Center in New York City.
We commenced pre-sale activities in October 1999 and opened the Club in
February, 2000. We delivered a
11
<PAGE> 13
$4.0 million letter of credit to the landlord to secure our performance under
the lease agreement. As of March 31, 2000 we expect to spend an additional $4.4
million from the disbursement escrow account for constructing and equipping this
Club.
In April 1998, we acquired rights to develop The Sports Club/LA at 61st
and 1st Streets on the Upper East Side in New York City. We issued a
non-interest bearing note for $2.7 million to the seller. The note required two
equal principal payments in April 1999 and April 2000. We have not made these
payments because we believe that we have various claims in connection with the
repairs and refurbishing of the Club, which offset the money owed on the note.
As of the date of this filing we are in default on the note payable and we are
currently in litigation regarding this matter. At March 31, 2000, we had $21.1
million in our disbursement escrow account for constructing and equipping
this Club. We currently expect to open this Club in the third quarter of 2000.
We have entered into lease agreements with Millennium Entertainment
Partners and/or their affiliates (collectively "Millennium") with respect to the
development of Sports Club/LA's in Washington D.C., San Francisco and Boston.
Millennium began construction on each of these projects in 1998. Our portion of
the aggregate development costs for these Clubs is currently estimated to be
approximately $16.5 million. The construction disbursement account has $9.0
million reserved for the Washington D.C. and Boston sites. Millennium and its
affiliates own approximately 28% of our outstanding Common Stock. The Sports
Club/LA in Washington D.C. is scheduled to open in September 2000 and The Sports
Club/LA in Boston and San Francisco are expected to open in the second quarter
of 2001.
In June 1998, we acquired undeveloped land in Houston, Texas, for
approximately $3.1 million, on which we intend to develop a Sports Club/LA. We
will not start construction at this location until the two new Sports Club/LA's
Clubs in New York City are open and operating to our satisfaction. Based on
preliminary estimates, we would spend approximately $20.0 million to complete
development of this Club.
Excess Proceeds Offer. Our net proceeds from the sale of the Spectrum
Clubs was approximately $38.0 million. To the extent the net proceeds are not
reinvested in assets related to our business before December 3, 2000, the
Indeture requires us to make an excess proceeds offer to apply the unused net
proceeds to retire Senior Secured Notes, unless the remaining net proceeds are
less than $10.0 million. Currently, $25.1 million of the net proceeds have not
been reinvested.
We will invest a portion of the remaining net proceeds in normal
on-going capital expenditures at our existing Clubs. In addition, our
construction budgets for The Sports Clubs/LA in Washington D.C., Boston and San
Francisco, are $7.5 million greater than the amounts currently deposited in the
disbursement escrow account. Some of the remaining net proceeds may be used for
these projects. If we make sufficient investments to reduce the net proceeds
below $10.0 million we would not be required to make an excess proceeds offer.
However, such investment depends upon successful negotiations with our landlords
and others in connection with our new Club developments, and there can be no
assurance that such investment will be made.
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<PAGE> 14
Future Capital Requirements. In addition to the development projects
described above, we incur capital expenditures for normal replacement of fitness
equipment and remodeling of Clubs. Equipment financing and operating cash flow
have funded these expenditures. Amounts borrowed pursuant to equipment financing
arrangements are generally repayable in monthly installments over five years,
with effective interest rates between 9% and 10% per annum. While capital
expenditures may fluctuate from time to time, we generally expect to spend
approximately 4% of revenues on facility and equipment upgrades and
replacements. We also expect to spend approximately $3.8 million during the next
24 months to upgrade our management information systems. The terms of the
Indenture currently allow us to borrow an additional $8.7 million for equipment
financing which we intend to utilize within the next year for the new Clubs
under development.
Our long-term capital needs are to provide funds for the developments
described above, for additional development and acquisition projects, to pay
interest on the Senior Secured Notes and for general corporate purposes. Future
acquisitions and developments will also require additional capital. Pursuant to
the terms of the Indenture, we may borrow up to $20.0 million under our credit
facility and up to $10.0 million through equipment financing. In addition, if
certain conditions are met, the terms of the Indenture and our credit facility
permit us to incur additional indebtedness. We may also consider entering into
joint venture and partnership agreements for the purpose of developing new
Clubs, subject to the terms of the Indenture and our credit facility.
We estimate that the cash in the disbursement escrow account, our cash
and short term investment balances, and credit available under our credit
facility and equipment financing will be sufficient to fund our capital
expenditures in fiscal 2000 and 2001 on the projects currently under
development, as well as to fund any excess proceeds offer required by the
Indenture. If we are unable to renew our credit facility, and are required to
make an excess proceeds offer, we may seek to raise funds through an offering of
equity securities (as described above, the Indenture substantially restricts our
ability to borrow additional funds), or we may need to restructure or limit our
current development plans. There can be no assurance that we would be able to
raise additional funds through an equity offering, or that restructuring or
limiting our current development plans would not have a material adverse effect
on us.
YEAR 2000 DISCLOSURE
Until recently, computer programs were written to store only two digits
of date-related information in order to more efficiently handle and store data,
and thus are unable to distinguish between the year 1900 and the year 2000. This
problem is frequently referred to as the "Year 2000 Problem." We initiated a
Year 2000 Project to bring all of our information technology ("IT") systems and
non-IT systems into Year 2000 compliance. During 1999, we contacted our material
suppliers, service providers and contractors to determine the extent of our
vulnerability to those third parties' failure to remedy their own Year 2000
issues. To our knowledge, these suppliers, service providers and contractors
have incurred no problems with their own Year 2000 issues that impacted us.
Utilizing internal resources, we defined, assessed and converted, or replaced,
various programs, hardware and instrumentation systems to make them Year 2000
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<PAGE> 15
compliant. We successfully completed our Year 2000 planning, replacements and or
conversions and have had no Year 2000 related problems.
We have developed a contingency plan to handle any unexpected Year 2000
problems that may occur in the future.
FORWARD LOOKING STATEMENTS
From time to time we make "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements include the words "may,"
"will," "estimate," "continue," "believe," "expect" or "anticipate" and other
similar words. The forward-looking statements are generally located in the
material set forth under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" but may be found in other
locations as well. Forward-looking statements may also be found in our other
reports filed with the Securities and Exchange Commission and in our press
releases and other statements. These forward-looking statements generally relate
to our plans and objectives for future operations and are based upon
management's reasonable estimates of future results or trends. Although we
believe that our plans and objectives reflected in or suggested by such
forward-looking statements are reasonable, such plans or objectives may not be
achieved. Actual results may differ from projected results due to unforeseen
developments including developments relating to the following:
o the availability and adequacy of our cash flow and financing
facilities for our requirements, including payment of the Senior
Secured Notes,
o our ability to attract and retain members, which depends on
competition, market acceptance of new and existing sports and fitness
clubs and services, demand for sports and fitness club services
generally and competitive pricing trends in the sports and fitness
market,
o our ability to successfully develop new sports and fitness clubs,
o disputes or other problems arising with our development partners or
landlords,
o changes in economic, competitive, demographic and other conditions in
the geographic areas in which we operate, including business
interruptions resulting from earthquakes or other causes,
o competition,
o changes in personnel or compensation, and
o changes in statutes and regulations or legal proceedings and rulings.
We will not update forward-looking statements even though our situation will
change in the future.
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<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Randy Pinkerton and Nick Thedes, individually and as Partners of Think
Physical Therapy v. SCC California, Inc. (Orange County Superior Court). On
April 23, 1999 Randy Pinkerton and Nick Theders, individually and as partners of
Think Physical Therapy (collectively, "Think Therapy") filed an action against
SCC California, Inc., ("Spectrum"), our wholly-owned subsidiary, alleging among
other things, breach of contract and interference with economic relationships.
The contract which Think Therapy alleges was breached relates to a lease at the
former Spectrum Club - Santa Ana facility ("Santa Ana Club") which facility was
acquired by Spectrum in December 1997 and sold in April 1999 as commercial
property unrelated to the sports and fitness business. We believe that Think
Therapy was on a month-to-month lease and in connection with the sale of the
Santa Ana Club we terminated their tenancy by serving a thirty-day Notice to
Quit in March 1999. This matter was set for a mandatory settlement conference on
April 28, 2000. At the conference, Plaintiff's asserted that they had been
damaged in an estimated amount of $500,000, but indicated their willingness to
settle for $150,000. We countered the demand with an offer to settle for $25,000
based on our assumption of the costs of defense at trial and possible appellate
litigation. Plaintiffs accepted our offer on May 1, 2000 and the matter has been
resolved.
Lyudmirsky and those similarly situated v. Sports Club, Inc. of
California; LA/Irvine Sports Club, Ltd. (Los Angeles Superior Court). On June
25, 1999, Ilya Lyudmirsky ("Lyudmirsky") filed a class action lawsuit against
Sports Club, Inc. of California and LA/Irvine Sports Club, Ltd. (collectively,
the "Company") alleging, among other things, violations of California Civil Code
Section 1812.80 et seq., claiming our membership fee structure and membership
contracts for The Sports Club/LA in Los Angeles violate certain provisions of
the Health Studio Services Act (the "HSS Act"). Lyudmirsky further alleged
violations of the Unruh Act and the Consumer Legal Remedies Act, claiming we
give unlawful, preferential discounts to attractive women and advertise
membership fees that are higher than fees actually charged to some members. The
complaint seeks equitable relief, (including a temporary and permanent
injunction), unspecified compensatory damages, punitive damages and attorneys'
fees. We stipulated to a preliminary injunction, which prohibits us from
violating the HSS Act, effective as of November 29, 1999. On October 22, 1999,
the Court ruled that Lyudmirsky's membership contract violated the HSS Act and
is void. Under the HSS Act, a claimant may recover an amount up to three times
the actual damages suffered plus attorneys' fees. The amount of actual damages
is measured by the amount paid less the reasonable value of services. We believe
our initiation fees and monthly dues are reasonable, and therefore our members
have not suffered actual damages as a result of any violation of the HSS Act. On
May 1, 2000, the parties entered into a settlement agreement that would dispose
of all claims. The Agreement is subject to court approval and there can be no
assurance that such approval will be obtained. The settlement agreement provides
that we will provide a stipulated class of certain Sports Club/LA members with
one to two months of free membership as well as a number of guest passes. We
have recorded a charge of $1,476,000 in the first quarter of 2000 to reflect the
anticipated costs of defending and settling this action. Particularly in light
of the costs of defending the lawsuit, the settlement is believed to be in
our interest.
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<PAGE> 17
Park Place Entertainment Corporation v. The Sports Club Company, Inc.
(Los Angeles Superior Court). On December 23, 1999, Park Place Entertainment
Corporation ("Park Place") filed an action against us for money due on a
promissory note. Park Place is the current holder of a purchase money promissory
note in the amount of $2,666,666 (the "Note") given to Hilton Hotels Corporation
("Hilton") in connection with our 1998 acquisition of the Vertical Club - a
sports and fitness club located in New York (the "Club"). We believe that we
have various claims in connection with the repair and refurbishing of the Club
which offset the money owed on the Note. Park Place alleges that no basis exists
which excuses us from the timely payment of installments on the Note and is
seeking damages in the amount of $2,666,666 plus interest, attorneys' fees and
costs of the suit. On February 25, 2000, we filed an answer raising offsets and
a cross-complaint against Hilton seeking damages in the amount of $14,415,000
for alleged breach of contract, fraud and negligent misrepresentation, plus
interest, attorneys' fees and costs of suit. Hilton has answered the cross-claim
with a general denial and three generic, affirmative defenses. We are in the
early phases of discovery and intend to vigorously pursue our defenses and
cross-claims. We are unable at this time to estimate the likelihood that Park
Place will prevail in its claims against us, or that we will prevail in our
claims against Hilton.
Garrick-Aug Associates Store Leasing, Inc. v. Hirschfeld Realty Club
Corporation, 328 E. 61 Corp., The Sports Club Company, Inc. and Elie Hirschfeld,
Index No. 601276/99 (New York Supreme Court, County of New York). On March 15,
1999, Garrick-Aug Associates Store Leasing, Inc. ("Plaintiff") filed a Summons
and Complaint ("Original Complaint") commencing an action to recover brokerage
commissions in the Supreme Court of the State of New York, County of New York
before Judge Cahn, against Hirschfeld Realty Club Corporation and 328 E. 61
Corp. (collectively referred to as "Owner"). The Original Complaint seeks
damages in excess of $3,625,000 for breach of contract, declaratory relief,
quantum meruit and unjust enrichment. On February 1, 2000, Plaintiff filed and
served an Amended Complaint containing the same causes of action in the Original
Complaint, but adding additional complaints against us and Elie Hirschfeld. The
Amended Complaint seeks damages from us in excess of $3,625,000 for tortious
interference with contract and conspiracy with the other defendants to
tortiously interfere with contract. Currently, we are in the process of
preparing a motion to dismiss both of Plaintiff's causes of action against us
for failure to state a cause of action. While we are unable at this time to
estimate the likelihood that the Plaintiff will prevail in its claims against
us, we believe the claims are without merit and we are vigorously contesting the
action.
Other Matters. We are also involved in various claims and lawsuits
incidental to our business, including claims arising from accidents. However, in
the opinion of management, we are adequately insured against such claims and
lawsuits involving personal injuries, and any ultimate liability arising out of
any such proceedings will not have a material adverse effect on our financial
condition, cash flow or operations.
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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
On April 24, 2000 our Board of Directors approved an amendment to our
Stockholder Rights Plan adopted on September 29, 1998. The Amendment provides
that (a) the Rights will not be triggered as a result of the acquisition by
Millennium Entertainment Partners L.P. and its affiliates ("Millennium") of
additional shares of our Common Stock with a purchase price not in excess of
$2,000,000, and (b) the Rights will not be triggered as a result of the
acquisition by our Co-Chief Executive Officer, D. Michael Talla, of additional
shares of our Common Stock with a purchase price not in excess of $2,000,000. In
addition, we entered into a voting agreement with each of Millennium and Mr.
Talla limiting their ability to vote the shares described above in connection
with a proposal to remove directors of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following reports on Form 8-K have been filed since December 31,
1999:
On February 11, 2000, we filed a report on Form 8-K/A amending a report
on Form 8-K filed on December 16, 1999. The Form 8-K/A presented pro forma
financial statements related to the sale of the Spectrum Clubs as required by
Article 11 of Regulation S-X.
On February 23, 2000, we filed a report on Form 8-K announcing the
resignation of John M. Gibbons as President, Chief Executive Officer and a
director of the Company and named D. Michael Talla and Rex A. Licklider as
interim Co-Chief Executive Officers. We also announced the opening of The Sports
Club/LA at Rockefeller Center in New York.
(b) Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<S> <C>
4.1 Third Amendment to Rights Agreement, made and entered into as of
the 27th day of April, 2000, by and between The Sports Club
Company, Inc., and American Stock Transfer & Company.
4.2 Voting Agreement, dated as of April 27, 2000, by and
among The Sports Club Company, Inc., and Millennium
Partners LLC, Millennium Entertainment Partners LP,
Millennium Development Partners LP, MDP Ventures I
LLC, MDP Ventures II LLC and their respective
Affiliates.
</TABLE>
17
<PAGE> 19
<TABLE>
<S> <C>
4.3 Voting Agreement, dated as of April 27, 2000, by and among The
Sports Club Company, Inc., and D. Michael Talla.
</TABLE>
18
<PAGE> 20
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 15, 2000 by /s/ Rex A. Licklider
---------------------------------
Rex A. Licklider
Vice Chairman of the Board
And Co-Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2000 by /s/ Timothy M. O'Brien
---------------------------------
Timothy M. O'Brien
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
<PAGE> 1
EXHIBIT 4.1
THIRD AMENDMENT TO RIGHTS AGREEMENT
This Third Amendment to Rights Agreement is made and entered into as of the
27th day of April, 2000, and amends that certain agreement entered into by and
between The Sports Club Company, Inc., a Delaware corporation (the "Company"),
and American Stock Transfer & Company, a New York corporation (the "Rights
Agent"), dated as of October 6, 1998, as amended by the First Amendment to
Rights Agreement dated as of February 18, 1999 and the Second Amendment to
Rights Agreement dated as of July 2, 1999 (as so amended, the "Rights
Agreement"). Capitalized terms used but not defined herein shall have the
meanings ascribed to such terms in the Rights Agreement.
R E C I T A L S
WHEREAS, the Board of Directors of the Company (the "Board") on September
29, 1998 authorized and declared a dividend of one preferred share purchase
right for each Common Share of the Company outstanding on October 6, 1998, each
Right representing the right to purchase one five-hundredth of a Preferred Share
upon the terms and subject to the conditions set forth in the Rights Agreement,
and further authorized and directed the issuance of one Right with respect to
each Common Share that shall become outstanding between the Record Date and the
earliest of the Distribution Date, the Redemption Date or the Expiration Date;
WHEREAS, the Company and the Rights Agent entered into the Rights Agreement
as of October 6, 1998;
WHEREAS, the Rights Agreement was amended by the First Amendment to Rights
Agreement as of February 18, 1999;
WHEREAS, the Rights Agreement was amended by the Second Amendment to Rights
Agreement as of July 2, 1999;
WHEREAS, it has been proposed that the Company amend the Rights Agreement
as set forth herein; and
WHEREAS, the Board has determined that it is in the best interests of the
Company and its stockholders to amend the Rights Agreement as set forth herein;
<PAGE> 2
A G R E E M E N T
NOW, THEREFORE, in consideration of the premises and the mutual agreements
set forth herein, the parties hereto hereby agree as follows:
1. The definitions of "Beneficial Owner" and "Beneficially Own" set forth
in Section 1 of the Rights Agreement are hereby amended by adding the following
as the last paragraph thereof:
"Notwithstanding anything to the contrary in this Agreement:
(A) in no event shall any Voting Shares that are Beneficially Owned by
Millennium be deemed to be Beneficially Owned by Talla as a result of
the transactions contemplated by the Loan and Stock Pledge Agreements;
(B) in no event shall any Voting Shares that are Beneficially Owned by
Talla be deemed to be Beneficially Owned by Millennium as a result of
the transactions contemplated by the Loan and Stock Pledge Agreements;
(C) in no event shall Talla be deemed to be the Beneficial Owner of any
Voting Shares of which Millennium is the Beneficial Owner as a result
of the transactions contemplated by the Loan and Stock Pledge
Agreements;
(D) in no event shall Millennium be deemed to be the Beneficial Owner of
any Voting Shares of which Talla is the Beneficial Owner as a result
of the transactions contemplated by the Loan and Stock Pledge
Agreements;
(E) in no event shall Talla be deemed to be an Affiliate or Associate of
Millennium as a result of the transactions contemplated by the Loan
and Stock Pledge Agreements;
(F) in no event shall Millennium be deemed to be an Affiliate or Associate
of Talla as a result of the transactions contemplated by the Loan and
Stock Pledge Agreements; and
(G) in no event shall Talla and Millennium be deemed together to
constitute a "Person" (as defined herein) or a "group" (as such term
is used in Rule 13d-5 promulgated under the Exchange Act) as a result
of the transactions contemplated by the Loan and Stock Pledge
Agreements."
2. The definition of "Excluded Shares" set forth in Section 1 of the Rights
Agreement is hereby deleted and replaced in its entirety with the following:
""Excluded Shares" shall mean the following Voting Shares:
2
<PAGE> 3
(i) with respect to all Stockholders, Common Shares acquired:
(A) by a bona fide gift;
(B) as the result of the death of a Person, pursuant to a will or the
laws of descent; or
(C) upon the exercise of any stock option granted by the Company to
an employee, officer or director of the Company;
(ii) with respect to Talla, that number of Common Shares purchased by Talla
after April 27, 2000 for an aggregate purchase price not exceeding
$2,000,000; and
(iii) with respect to Millennium:
(A) all Common Shares pledged to Millennium pursuant to the Loan and
Stock Pledge Agreements,
(B) all Common Shares acquired by Millennium pursuant to the Loan and
Stock Pledge Agreements or upon exercise of any remedies
available under the Loan and Stock Pledge Agreements or by
exercise of statutory rights, and
(C) that number of Common Shares purchased by Millennium after April
27, 2000 for an aggregate purchase price not exceeding
$2,000,000."
3. The definition of "Millennium" set forth in Section 1 of the Rights
Agreement is hereby deleted and replaced in its entirety with the following:
""Millennium" shall mean Millennium Partners LLC, Millennium Entertainment
Partners LP, Millennium Development Partners LP, MDP Ventures I LLC and MDP
Ventures II LLC and their respective Affiliates, Associates, directors and
officers."
4. The definition of "Pledge Agreement" set forth in Section 1 of the
Rights Agreement is hereby deleted and replaced in its entirety with the
following:
""Loan and Stock Pledge Agreements" shall mean (i) the Amended and Restated
Loan and Stock Pledge Agreement, dated as of December 30, 1997, by and
between Talla and MDP Ventures II LLC, as such agreement may be amended or
modified from time to time, and (ii) the Loan and Stock Pledge Agreement,
dated as of May 12, 2000, by and between Talla and MDP Ventures II LLC, as
such agreement may be amended or modified from time to time; provided that
the aggregate number of Common Shares pledged under such agreements shall
not exceed two million shares (excluding any Common Shares issued in
respect
3
<PAGE> 4
of such Common Shares as a result of a stock split, stock dividend,
recapitalization or other reorganization affecting the Common Shares)."
5. The definition of "28% Stockholder" set forth in Section 1 of the Rights
Agreement is hereby amended by adding the following as the last paragraph
thereof:
"Anything in this Agreement to the contrary notwithstanding, for purposes
of this Agreement, the Excluded Shares shall not be considered to be Voting
Shares Beneficially Owned by a Person."
6. Except as amended hereby, the Rights Agreement remains in full force and
effect.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
THE SPORTS CLUB COMPANY, INC.
Attest:
By /s/ Lois Barberio By /s/ D. Michael Talla
------------------------------------ ------------------------------
Name: Lois Barberio Name: D. Michael Talla
Title: Secretary Title: Co-Chief Executive Officer
AMERICAN STOCK TRANSFER &
TRUST COMPANY
Attest:
By /s/ Susan Silber By /s/ Herbert J. Lemmer
------------------------------------- -----------------------------
Name: Susan Silber Name: Herbert J. Lemmer
Title: Assistant Secretary Title: Vice President
5
<PAGE> 1
EXHIBIT 4.2
VOTING AGREEMENT, dated as of April 27, 2000, by and among The Sports
Club Company, Inc., a Delaware corporation, and the Millennium Entities (as
defined herein).
PRELIMINARY STATEMENT
The Millennium Entities currently own Shares and may from time to time
hereafter acquire additional Shares. As a condition to the agreement by the
Company to amend the Rights Agreement to permit the acquisition of a limited
number of additional Shares by the Millennium Entities, the Company has required
the Millennium Entities to agree, and the Millennium Entities are willing to
agree, that they will vote any Shares owned by them in excess of the Threshold
Number in accordance with the requirements of section 2 of this agreement.
Accordingly, the parties hereto agree as follows.
1. DEFINITIONS.
a. "AFFILIATE" means, with respect to any person, any other person
that, directly or indirectly, controls, is controlled by or is under
common control with such person.
b. "BOARD OF DIRECTORS" means the Company's Board of Directors.
c. "COMPANY" means The Sports Club Company, Inc., a Delaware
corporation.
d. "LOAN AND STOCK PLEDGE AGREEMENT" means the Amended and Restated
Loan and Stock Pledge Agreement, dated as of December 30, 1997, by
and between David M. Talla and MDP Ventures II LLC, as such
agreement may be amended or modified from time to time.
e. "MILLENNIUM ENTITIES" means Millennium Partners LLC, Millennium
Entertainment Partners LP, Millennium Development Partners LP, MDP
Ventures I LLC, MDP Ventures II LLC and their respective Affiliates.
f. "NON-RESTRICTED SHARES" means all outstanding Shares other than the
Restricted Shares.
g. "RESTRICTED SHARES" means, as of any date, the Shares owned by the
Millennium Entities on such date in excess of the Threshold Number.
h. "RIGHTS AGREEMENT" means the Rights Agreement, dated as of October
6, 1998, between the Company and American Stock Transfer & Trust
Company, as such agreement may be amended from time to time.
<PAGE> 2
i. "SHARES" means shares of the Company's common stock, par value $.01
per share.
j. "TALLA VOTING AGREEMENT" means the Voting Agreement, dated as of
April 27, 2000, between D. Michael Talla and the Company.
k. "TERMINATION DATE" means the earlier of: (i) the date on which the
Rights Agreement is terminated, (ii) the date on which Rights
Certificates (as such term is defined in the Rights Agreement) are
distributed pursuant to the Rights Agreement, and (iii) the date on
which the parties hereto enter into a written agreement to terminate
this agreement.
l. "THRESHOLD NUMBER" means, as of any date, the greater of:
i. the sum of:
(1) 4,964,890 Shares and
(2) the number of Shares acquired as of such date by the
Millennium Entities pursuant to the Loan and Stock
Pledge Agreement or upon exercise of any remedy
available under the Loan and Stock Pledge Agreement or
by exercise of statutory rights, and
ii. a number of Shares equal to 28% of all Shares outstanding as
of such date.
2. VOTING RESTRICTIONS.
a. The Millennium Entities agree that, from the date hereof until the
Termination Date, they will, on each occasion at which the
stockholders of the Company are entitled to vote on any matter
(whether at an annual or special meeting or by written consent),
vote, and cause the other Millennium Entities to vote, all
Restricted Shares in the same proportions that all Non-restricted
Shares that are voted in connection with such matter are voted.
b. Anything in section 2(a) hereof to the contrary notwithstanding, the
restriction set forth in section 2(a) hereof shall not apply to the
extent specifically waived in writing by the Board of Directors.
c. If the Talla Voting Agreement is amended or modified, or any
provision thereof is waived, the Company shall notify the Millennium
Entities
2
<PAGE> 3
promptly of any such amendment, modification or waiver. If any such
amendment, modification or waiver reduces or eliminates the
restrictions contained in the Talla Voting Agreement, the Millennium
Entities shall automatically receive the benefit of such reduced or
eliminated restrictions and this agreement shall be appropriately
modified.
3. MISCELLANEOUS.
a. GOVERNING LAW. This agreement will be governed by and construed and
enforced in accordance with the internal laws of the State of
Delaware, without giving effect to the conflict of laws principles
thereof.
b. ENFORCEMENT.
i. The Millennium Entities acknowledge and agree that
irreparable damage would occur if any of the provisions of
this agreement were not performed in accordance with their
specific terms or were otherwise breached. Accordingly, the
Company will be entitled to an injunction or injunctions to
prevent breaches of this agreement by the Millennium Entities
and to enforce specifically its provisions, this being in
addition to any other remedy to which the Company may be
entitled at law or in equity.
ii. Each of the Millennium Entities and the Company irrevocably
agrees that any legal action or proceeding against it with
respect to this agreement and any transaction contemplated by
this agreement may be brought in the courts of the State of
Delaware or in the United States District Court for the
District of Delaware, and by execution and delivery of this
agreement each of the Millennium Entities and the Company
irrevocably submits to the jurisdiction of each such court.
c. ENTIRE AGREEMENT. This agreement constitutes the entire
understanding of the parties hereto with respect to the transactions
contemplated by it.
d. SEVERABILITY. If any provision of this agreement is held by a court
of competent jurisdiction to be unenforceable, the remaining
provisions shall remain in full force and effect. It is declared to
be the intention of the parties hereto that they would have executed
the remaining provisions without including any that may be declared
unenforceable.
e. HEADINGS. The headings in this agreement are solely for convenience
of reference and shall be given no effect in the construction or
interpretation of any provision of this agreement.
3
<PAGE> 4
f. NOTICES. All notices and other communications hereunder shall be in
writing and shall be delivered personally against receipt thereof,
or trans mitted by facsimile (with a confirming copy sent by mail)
or by registered or certified mail (postage prepaid, return receipt
requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
if to the Company, to:
The Sports Club Company, Inc.
11100 Santa Monic Boulevard, Suite 300
Los Angeles, California 90025
Attention: Chief Executive Officer
Facsimile No.: (310) 479-8350
with a copy to:
Kinsella Boesch Fujikawa & Towle LLP
1901 Avenue of the Stars
Los Angeles, California 90067
Attention: Joseph P. Bartlett, Esq.
Facsimile No.: (310) 284-6018
if to the Millennium Entities, to:
Millennium Partners
1995 Broadway
New York, New York 10023
Attention: Mr. Christopher M. Jeffries
Facsimile No.: (212) 595-1831
with a copy to:
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Attention: Thomas E. Kruger, Esq.
Facsimile No: (212) 856-7815
Any notice shall be deemed to have been given on the date of receipt
if delivered personally or by overnight courier, the date of
transmission with confirmation back if transmitted by facsimile, or
the third day following posting if transmitted by mail.
4
<PAGE> 5
g. SUCCESSORS AND ASSIGNS. This agreement shall bind and inure to the
benefit of the successors of the parties hereto. None of the parties
hereto may assign its rights or interests in or obligations under
this agreement without the prior written consent of the other
parties hereto.
h. THIRD PARTY BENEFICIARIES. No party not expressly a party hereto
shall have or acquire any rights or interests under this agreement,
whether as a third party beneficiary or otherwise, and none of the
parties hereto shall have any liability hereunder with respect to
any such other party
i. AMENDMENTS; WAIVERS. This agreement may not be amended, or any of
its provisions waived, except by a writing signed by each of the
parties hereto.
j. COUNTERPARTS. This agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together
shall constitute one and the same instrument.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have cause this agreement to
be executed as of the date first written above.
THE SPORTS CLUB COMPANY, INC. MILLENNIUM PARTNERS LLC
By: /s/ Rex Licklider By: Millennium Partners Management
--------------------------------- LLC, its managing member
Rex Licklider, Co-Chief Executive
Officer
By: Millennium Manager I, Inc.,
its manager
By: /s/ Brian J. Collins
------------------------
Brian J. Collins
Vice President
MILLENNIUM DEVELOPMENT
PARTNERS LP
By: Millennium Development Associates
LP, its general partner
By: Millennium Development
Corp., its general partner
By: /s/ Brian J. Collins
------------------------
Brian J. Collins
Vice President
MILLENNIUM ENTERTAINMENT
PARTNERS, LP
By: Millennium Entertainment
Associates, LP, its general partner
By: Millennium Entertainment
Corp., its general partner
By: /s/ Brian J. Collins
------------------------
Brian J. Collins
Vice President
6
<PAGE> 7
MDP VENTURES I LLC
By: Millennium Development Partners
LP, its managing member
By: Millennium Development
Associates LP, its general
partner
By: Millennium Development
Corp., its general partner
By: /s/ Brian J. Collins
------------------------
Brian J. Collins,
Vice President
MDP VENTURES II LLC
By: Millennium Development Partners II
LLC, its managing member
By: /s/ Brian J. Collins
------------------------
Brian J. Collins,
Vice President
7
<PAGE> 1
EXHIBIT 4.3
VOTING AGREEMENT, dated as of April 27, 2000, by and among The Sports Club
Company, Inc., a Delaware corporation, and D. Michael Talla ("Talla").
PRELIMINARY STATEMENT
Talla currently owns Shares and may from time to time hereafter acquire
additional Shares. As a condition to the agreement by the Company to amend the
Rights Agreement to permit the acquisition of a limited number of additional
Shares by Talla, the Company has required Talla to agree, and Talla is willing
to agree, that he will vote any Shares owned by him in excess of the Threshold
Number in accordance with the requirements of section 2 of this agreement.
Accordingly, the parties hereto agree as follows.
1. DEFINITIONS.
a. "AFFILIATE" means, with respect to any person, any other person
that, directly or indirectly, controls, is controlled by or is under
common control with such person.
b. "BOARD OF DIRECTORS" means the Company's Board of Directors.
c. "COMPANY" means The Sports Club Company, Inc., a Delaware
corporation.
d. "NON-RESTRICTED SHARES" means all outstanding Shares other than the
Restricted Shares.
e. "RESTRICTED SHARES" means, as of any date, the Shares owned by Talla
on such date in excess of the Threshold Number.
f. "RIGHTS AGREEMENT" means the Rights Agreement, dated as of October
6, 1998, between the Company and American Stock Transfer & Trust
Company, as such agreement may be amended from time to time.
g. "SHARES" means shares of the Company's common stock, par value $.01
per share.
h. "MILLENNIUM VOTING AGREEMENT" means the Voting Agreement, dated as
of April 27, 2000, between the Company and Millennium Partners, LLC,
and its affiliates.
i. "TERMINATION DATE" means the earlier of: (i) the date on which the
Rights Agreement is terminated, (ii) the date on which Rights
Certificates (as such term is
<PAGE> 2
defined in the Rights Agreement) are distributed pursuant to the
Rights Agreement, and (iii) the date on which the parties hereto
enter into a written agreement to terminate this agreement.
j. "THRESHOLD NUMBER" means, as of any date, the greater of:
i. 4,964,890 Shares and
ii. a number of Shares equal to 28% of all Shares outstanding as
of such date.
2. VOTING RESTRICTIONS.
a. Talla agrees that, from the date hereof until the Termination Date,
he will, on each occasion at which the stockholders of the Company
are entitled to vote on any matter (whether at an annual or special
meeting or by written consent), vote all Restricted Shares in the
same proportions that all Non-restricted Shares that are voted in
connection with such matter are voted.
b. Anything in section 2(a) hereof to the contrary notwithstanding, the
restriction set forth in section 2(a) hereof shall not apply to the
extent specifically waived in writing by the Board of Directors.
c. If the Millennium Voting Agreement is amended or modified, or any
provision thereof is waived, the Company shall notify Talla promptly
of any such amendment, modification or waiver. If any such
amendment, modification or waiver reduces or eliminates the
restrictions contained in the Millennium Voting Agreement, Talla
shall automatically receive the benefit of such reduced or
eliminated restrictions and this agreement shall be appropriately
modified.
3. MISCELLANEOUS.
a. GOVERNING LAW. This agreement will be governed by and construed and
enforced in accordance with the internal laws of the State of
Delaware, without giving effect to the conflict of laws principles
thereof.
b. ENFORCEMENT.
i. Talla acknowledges and agrees that irreparable damage would
occur if any of the provisions of this agreement were not
performed
2
<PAGE> 3
in accordance with their specific terms or were otherwise
breached. Accordingly, the Company will be entitled to an
injunction or injunctions to prevent breaches of this
agreement by Talla and to enforce specifically its
provisions, this being in addition to any other remedy to
which the Company may be entitled at law or in equity.
ii. Each of Talla and the Company irrevocably agrees that any
legal action or proceeding against it with respect to this
agreement and any transaction contemplated by this agreement
may be brought in the courts of the State of Delaware or in
the United States District Court for the District of
Delaware, and by execution and delivery of this agreement
each of Talla and the Company irrevocably submits to the
jurisdiction of each such court.
c. ENTIRE AGREEMENT. This agreement constitutes the entire
understanding of the parties hereto with respect to the transactions
contemplated by it.
d. SEVERABILITY. If any provision of this agreement is held by a court
of competent jurisdiction to be unenforceable, the remaining
provisions shall remain in full force and effect. It is declared to
be the intention of the parties hereto that they would have executed
the remaining provisions without including any that may be declared
unenforceable.
e. HEADINGS. The headings in this agreement are solely for convenience
of reference and shall be given no effect in the construction or
interpretation of any provision of this agreement.
f. NOTICES. All notices and other communications hereunder shall be in
writing and shall be delivered personally against receipt thereof,
or trans mitted by facsimile (with a confirming copy sent by mail)
or by registered or certified mail (postage prepaid, return receipt
requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
if to the Company, to:
The Sports Club Company, Inc.
11100 Santa Monica Boulevard, Suite 300
Los Angeles, California 90025
Attention: Chief Executive Officer
Facsimile No.: (310) 479-8350
3
<PAGE> 4
with a copy to:
Kinsella Boesch Fujikawa & Towle LLP
1901 Avenue of the Stars
Los Angeles, California 90067
Attention: Joseph P. Bartlett, Esq.
Facsimile No.: (310) 284-6018
if to Talla, to:
D. Michael Talla
11100 Santa Monica Boulevard, Suite 300
Los Angeles, California 90025
Attention: Chief Executive Officer
Facsimile No.: (310) 479-8350
with a copy to:
Resch, Polster, Alpert & Berger, LLP
10390 Santa Monica Boulevard, 4th Floor
Los Angeles, California 90025
Attention: Ronald M. Resch, Esq.
Facsimile No.: (310) 552-3209
Any notice shall be deemed to have been given on the date of receipt
if delivered personally or by overnight courier, the date of
transmission with confirmation back if transmitted by facsimile, or
the third day following posting if transmitted by mail.
g. SUCCESSORS AND ASSIGNS. This agreement shall bind and inure to the
benefit of the successors of the parties hereto. None of the parties
hereto may assign its rights or interests in or obligations under
this agreement without the prior written consent of the other
parties hereto.
h. THIRD PARTY BENEFICIARIES. No party not expressly a party hereto
shall have or acquire any rights or interests under this agreement,
whether as a third party beneficiary or otherwise, and none of the
parties hereto shall have any liability hereunder with respect to
any such other party
i. AMENDMENTS; WAIVERS. This agreement may not be amended, or any of
its provisions waived, except by a writing signed by each of the
parties hereto.
4
<PAGE> 5
j. COUNTERPARTS. This agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have cause this agreement to
be executed as of the date first written above.
THE SPORTS CLUB COMPANY, INC. D. MICHAEL TALLA
By: /s/ Rex Licklider /s/ D.MichaelTalla
-------------------------------- --------------------------------
Name: Rex Licklider D. Michael Talla
Title: Co-Chief Executive Officer
5
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
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