<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, 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 August 10, 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 JUNE 30, 2000
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1999 2000
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 53,060 $ 28,114
Short term investments 24,436 14,734
Accounts receivable, net of allowance for doubtful accounts
of $342 and $324 at December 31, 1999 and June 30, 2000 2,149 2,779
Inventories 1,355 1,713
Other current assets 2,341 1,627
--------- ---------
Total current assets 83,341 48,967
Property and equipment, at cost, net of accumulated depreciation and
amortization of $12,873 and $15,238 at December 31, 1999 and June 30, 2000 118,959 151,116
Costs in excess of net assets acquired, less accumulated amortization
of $1,588 and $1,813 at December 31, 1999 and June 30, 2000 13,890 13,665
Other assets, at cost, net 7,363 10,179
--------- ---------
$ 223,553 $ 223,927
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and equipment
financing loans $ 3,520 $ 4,179
Accounts payable 2,052 1,033
Accrued liabilities 8,549 8,003
Deferred membership revenues 9,712 10,766
--------- ---------
Total current liabilities 23,833 23,981
Notes payable and equipment financing loans,
less current installments 100,367 102,590
Deferred lease obligations 1,066 2,617
Minority interest 600 600
--------- ---------
Total liabilities 125,866 129,788
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 June 30, 2000, respectively 209 209
Additional paid-in capital 102,403 102,464
Retained earnings 10,966 7,208
Less: Treasury stock, at cost, 3,194,536 and 3,156,074 shares at
December 31, 1999 and June 30, 2000, respectively (15,891) (15,742)
--------- ---------
Total shareholders' equity 97,687 94,139
--------- ---------
$ 223,553 $ 223,927
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months Ended Six Months Ended
June 30, June 30,
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 22,203 $ 18,279 $ 44,037 $ 35,126
Operating expenses:
Direct 15,222 14,161 30,366 26,191
Selling, general and administrative 2,416 2,281 4,658 4,503
Depreciation and amortization 1,558 1,447 3,088 2,591
Pre-opening expenses 460 1,642 708 4,132
-------- -------- -------- --------
Total operating expenses 19,656 19,531 38,820 37,417
-------- -------- -------- --------
Income (loss) from operations 2,547 (1,252) 5,217 (2,291)
Other income (expense):
Net interest expense (2,197) (1,282) (2,437) (2,288)
Minority interests (37) (37) (75) (75)
Equity interest in net income of unconsolidated subsidiary 263 -- 526 --
Non-recurring charge (17) -- (205) (1,476)
-------- -------- -------- --------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 559 (2,571) 3,026 (6,130)
Income tax provision (benefit) 260 (988) 1,277 (2,371)
-------- -------- -------- --------
Income (loss) before cumulative effect of
change in accounting principle 299 (1,583) 1,749 (3,759)
Cumulative effect of change in accounting principle,
net of income tax benefit of $600 -- -- 899 --
-------- -------- -------- --------
Net income (loss) $ 299 $ (1,583) $ 850 $ (3,759)
======== ======== ======== ========
Income (loss) per share before cumulative effect of change
In accounting principle:
Basic $ 0.02 $ (0.09) $ 0.09 $ (0.21)
======== ======== ======== ========
Diluted $ 0.02 $ (0.09) $ 0.09 $ (0.21)
======== ======== ======== ========
Effect of cumulative effect of change in accounting principle:
Basic $ -- $ -- $ (0.04) $ --
======== ======== ======== ========
Diluted $ -- $ -- $ (0.04) $ --
======== ======== ======== ========
Net income (loss) per share:
Basic $ 0.02 $ (0.09) $ 0.05 $ (0.21)
======== ======== ======== ========
Diluted $ 0.02 $ (0.09) $ 0.05 $ (0.21)
======== ======== ======== ========
Weighted average shares outstanding:
Basic 18,016 17,776 18,530 17,748
======== ======== ======== ========
Diluted 18,180 17,776 18,696 17,748
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 4
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30,
1999 2000
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 850 $ (3,759)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Cumulative effect of change in accounting principle 899 --
Depreciation and amortization 3,088 2,591
Equity interest in net income of unconsolidated subsidiary (526) --
Distributions from unconsolidated subsidiary 691 --
Stock issued for employee benefit plan 153 149
(Increase) decrease in:
Accounts receivable, net 488 (630)
Inventories (121) (358)
Other current assets (164) 1,238
Due from affiliates (29) 130
Increase (decrease) in:
Accounts payable (389) (1,019)
Accrued liabilities 3,357 (3,704)
Deferred membership revenues 1,119 1,054
Deferred lease obligations 512 1,551
-------- --------
Net cash provided by (used in) operating activities 9,928 (2,757)
Cash flows from investing activities:
Capital expenditures (19,908) (34,834)
Acquisition of membership base (902) --
Proceeds from sale of Spectrum Club - Santa Ana 5,613 --
Sale of short term investments -- 9,702
Stock re-purchase (8,357) --
-------- --------
Net cash used in investing activities (23,554) (25,132)
Cash flows from financing activities:
Exercise of employee stock options -- 61
Proceeds from Senior Secured Notes - net of costs and discount 93,713 --
Proceeds from notes payable and equipment financing loans 25,613 3,298
Repayments of notes payable and equipment financing loans (51,047) (416)
-------- --------
Net cash provided by financing activities 68,279 2,943
-------- --------
Net increase (decrease) in cash and cash equivalents 54,653 (24,946)
Cash and cash equivalents at beginning of period 2,233 53,060
-------- --------
Cash and cash equivalents at end of period $ 56,886 $ 28,114
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,033 $ 5,751
======== ========
Cash paid for income taxes $ 1,512 $ 921
======== ========
Capital expenditures financed $ 800 $ 3,298
======== ========
</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 JUNE 30, 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 that, 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 and six-month periods
ended June 30, 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 June 30, 2000,
cash and cash equivalents were $28.1 million, of which $12.9 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
June 30, 2000, short term investments were $14.7 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, JUNE 30,
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 4,102
--------- ---------
103,887 106,769
Less current installments................................. 3,520 4,179
--------- ---------
$ 100,367 $ 102,590
========= =========
</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 June 30, 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 two equal principle payments in April 1999 and April 2000. 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
four or five years with effective interest rates between 9% and 10%.
5
<PAGE> 7
5. BANK CREDIT FACILITY
At June 30, 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 June 30, 2000, no borrowings were
outstanding under this credit facility but $4.0 million was utilized in the form
of a letter of credit, leaving $11.0 million available for future borrowings.
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, Interest Coverage, Total Liabilities to Tangible Net Worth
and Current Ratio covenants. At March 31, 2000, the Company was not in
compliance with all required covenants. The bank waived these defaults. The
Company has entered into an amended loan agreement with the Bank that revised
the various financial ratios. At September 30, 2000, the Company is in
compliance with the new covenants.
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 six months ended June 30, 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 June 30, 2000, there were 904,719
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 of 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 and six months ended June 30, 1999
and accompanying notes include the operating results of the Spectrum Clubs.
Pro-forma consolidated operating results for the three months ended and six
months ended June 30,1999 are presented below. The pro-forma statements present
the unaudited results of operations as if all of the Spectrum Clubs had been
sold on January 1, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1999
---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues ............................................... $ 15,550 $ 30,825
Operating expenses ..................................... 13,628 26,777
-------- --------
Income from operations .............................. 1,922 4,048
Other income (expense) ................................. (1,287) (471)
-------- --------
Income before income taxes and
cumulative effect of change in accounting principle.. 635 3,577
Income tax provision ................................... 293 1,517
-------- --------
Income before cumulative
effect of change in accounting principle ............ 342 2,060
Cumulative effect of change in accounting principle,
net of tax .......................................... -- 221
-------- --------
Net income ............................................. $ 342 $ 1,839
======== ========
Net income per share:
Basic ............................................... $ 0.02 $ 0.10
======== ========
Diluted ............................................. $ 0.02 $ 0.10
======== ========
Weighted average shares outstanding:
Basic ............................................... 18,016 18,530
======== ========
Diluted ............................................. 18,180 18,696
======== ========
</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 level of
pre-opening expenses incurred for The Sports Club/LA at Rockefeller Center, The
Sports Club/LA at 61st & 1st in New York and The Sports Club/LA in Washington
D.C., results for the three months and six months ended June 30, 2000 and June
30, 1999, are not indicative of results in future periods.
RESULTS OF OPERATIONS
Comparison of Three Months Ended June 30, 2000 to Three Months Ended June 30,
1999.
Our revenues for the three months ended June 30, 2000, were $18.3 million,
compared to $22.2 million in 1999, a decrease of $3.9 million or 17.6%. Revenue
decreased by $6.5 million as a result of the sale of the Spectrum Clubs in
December 1999 and revenue increased by $1.3 million as a result of the opening
of The Sports Club/LA at Rockefeller Center in February 2000. Revenue increased
by $1.3 million at our existing Sports Clubs due to increases in membership
dues, ancillary services and to the maturation of the membership base at Reebok
Sports Club/NY.
Our direct operating expenses decreased by $1.0 million to $14.2 million in
the three months ended June 30, 2000, versus $15.2 million for the same period
in 1999. Direct operating expenses decreased by $4.7 million as a result of the
sale of the Spectrum Clubs in December 1999 and increased by $2.9 million as a
result of the opening of The Sports Club/LA at Rockefeller Center in February
2000. Direct operating expenses increased by $780,000 at our existing Sports
Clubs primarily due to variable expenses associated with the revenue increase at
these Clubs.
Our selling, general and administrative expenses were $2.3 million in the
three months ended June 30, 2000, versus $2.4 million for the same period in
1999. Selling costs decreased by $230,000 and our general and administrative
costs increased by $95,000. There was a $375,000 decrease in selling, general
and administrative expenses as a result of the sale of the Spectrum Clubs in
December 1999. This decrease was partially offset by a $240,000 increase in
selling, general and administrative expenses 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.
Our depreciation and amortization expenses were $1.4 million for the three
months ended June 30, 2000, versus $1.6 million for the same period in 1999. A
decrease of $588,000 resulted
8
<PAGE> 10
from the sale of the Spectrum Clubs in December 1999 and an increase of $375,000
resulted from the opening of The Sports Club/LA at Rockefeller Center in
February 2000. An increase of $102,000 occurred at our other Sports Clubs as a
result of capital additions made at these Clubs in 1999 and 2000.
Pre-opening expenses were $1.6 million for the three months ended June 30,
2000, versus $460,000 for the same period in 1999. Pre-opening expenses by Club
during the three months ended June 30, 2000 were $268,000 at The Sports Club/LA
at Rockefeller Center, $771,000 at The Sports Club/LA at 61st & 1st in New York,
$506,000 at The Sports Club/LA in Washington D.C. and $97,000 at other Sports
Clubs in the pre-development stage.
We incurred net interest expense of $1.3 million in the three months ended
June 30, 2000, versus $2.2 million for the same period in 1999, a decrease of
$915,000. Net interest expense decreased by $536,000 due to increased interest
capitalization on Sports Clubs under development and by $379,000 due to the
retirement of debt with the proceeds from the Senior Secured Notes issued in
April 1999 and the proceeds from the sale of the Spectrum Clubs in December
1999.
Equity interest in net income of unconsolidated subsidiary was $263,000 in
the three months ended June 30, 1999. This amount was associated with our
investment in the Spectrum Club-Manhattan Beach, which was sold in December
1999.
The non-recurring charge of $17,000 in the three months ended June 30, 1999
relates to the disposition of the Spectrum Club - Fountain Valley in January
1999.
Our estimated federal and state income tax rate is 40% for the three months
ended June 30, 2000 and 1999, resulting in a net loss of $1.6 million for the
three months ended June 30, 2000, and in net income of $299,000 for the same
period in 1999.
Comparison of Six Months Ended June 30, 2000 to Six Months Ended June 30, 1999.
Our revenues for the six months ended June 30, 2000, were $35.1 million,
compared to $44.0 million in 1999, a decrease of $8.9 million or 20.2%. Revenue
decreased by $13.1 million as a result of the sale of the Spectrum Clubs in
December 1999 and revenue increased by $1.7 million as a result of the opening
of The Sports Club/LA at Rockefeller Center in February 2000. Revenue increased
by $2.5 million at our existing Sports Clubs due to increases in membership
dues, ancillary services and to the maturation of the membership base at Reebok
Sports Club/NY.
Our direct operating expenses decreased by $4.2 million to $26.2 million in
the six months ended June 30, 2000, versus $30.4 million for the same period in
1999. Direct operating expenses decreased by $9.7 million as a result of the
sale of the Spectrum Clubs in December 1999 and increased by $3.9 million as a
result of the opening of The Sports Club/LA at Rockefeller Center in February
2000. Direct operating expenses increased by $1.6 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 $4.5 million in the
six months ended June 30, 2000, versus $4.7 million for the same period in 1999.
Selling costs decreased by $347,000 and our general and administrative costs
increased by $192,000. There was a $666,000 decrease in selling, general and
administrative expenses as a result of the sale of the Spectrum Clubs in
December 1999. This decrease was partially offset by a $511,000 increase in
selling, general and administrative expenses associated with the opening of The
Sports Club/LA at
9
<PAGE> 11
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.
Our depreciation and amortization expenses were $2.6 million for the six
months ended June 30, 2000, versus $3.1 million for the same period in 1999. A
decrease of $1.2 million resulted from the sale of the Spectrum Clubs in
December 1999 and an increase of $474,000 resulted from the opening of The
Sports Club/LA at Rockefeller Center in February 2000. An increase of $203,000
occurred at our other Sports Clubs as a result of capital additions made at
these Clubs in 1999 and 2000.
Pre-opening expenses were $4.1 million for the six months ended June 30,
2000, versus $708,000 for the same period in 1999. Pre-opening expenses by Club
during the six months ended June 30, 2000 were $1.8 million at The Sports
Club/LA at Rockefeller Center, $1.4 million at The Sports Club/LA at 61st & 1st
in New York, $796,000 at The Sports Club/LA in Washington D.C. and $112,000 at
other Sports Clubs in the pre-development phase.
We incurred net interest expense of $2.3 million in the six months ended
June 30, 2000, versus $2.4 million for the same period in 1999, a decrease of
$149,000. Net interest expense increased by $3.1 million as a result of the
issuance of $100.0 million of Senior Secured Notes on April 1, 1999. Net
interest expense decreased by $1.4 million due to increased interest
capitalization on Sports Clubs under development and by $908,000 due to
increased interest income earned on the net proceeds from the $100.0 million of
Senior Secured Notes issued in April 1999 and the net proceeds from the sale of
the Spectrum Clubs in December 1999. Net interest expense also decreased by
$953,000 due to the retirement of debt with a portion of the proceeds from the
issuance of the Senior Secured Notes in April 1999 and a portion of the proceeds
from the sale of the Spectrum Clubs in December 1999.
Equity interest in net income of unconsolidated subsidiary was $526,000 in
the six months ended June 30, 1999. This amount was 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 six months ended
June 30, 2000, versus $205,000 for the same period in 1999. The non-recurring
charge in the six months ended June 30, 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, Item1. Legal Proceedings). The non-recurring charge in the six months
ended June 30, 1999 relates to the disposition of the Spectrum Club - Fountain
Valley in January 1999.
In the six months ended June 30, 1999, we incurred a charge from a
cumulative effect of change in accounting principle, net of applicable taxes, of
$899,000. 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 six months
ended June 30, 2000 and 1999, resulting in a net loss of $3.8 million for the
six months ended June 30, 2000, and in net income of $850,000 for the same
period in 1999.
10
<PAGE> 12
Comparison of Three and Six Months Ended June 30, 2000 to Pro Forma Three and
Six Months Ended June 30, 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 and six months ended June 30, 2000, versus the un-audited pro forma
results of operations for the three and six months ended June 30, 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 and six months ended June 30,
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 and
six months ended June 30, 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 and six months ended June 30, 1999, does
not purport to be a projection of our 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 and six months ended June 30, 2000, were
$18.3 million and $35.1 million, respectively, compared to pro forma revenues of
$15.6 million and $30.8 million for the same periods in 1999, an increase of
$2.7 million and $4.3 million, respectively. Revenue for the three months and
six months ended June 30, 2000 increased by $1.3 million and $1.7 million,
respectively, due to the opening of The Sports Club/LA at Rockefeller Center in
February 2000. The remaining increase in revenue for both the three and six
months ended June 30, 2000 is 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 Reebok Sports Club/NY.
Operating expenses for the three months and six months ended June 30, 2000,
were $19.5 million and $37.4 million, respectively, compared to pro forma
operating expenses of $13.6 million and $26.8 million for the same periods in
1999, an increase of $5.9 million and $10.6 million, respectively. Operating
expenses for the three and six months ended June 30, 2000 increased by $3.4
million and $4.6 million, respectively, due to the opening of The Sports Club/LA
at Rockefeller Center in February 2000, $1.4 million and $3.9 million,
respectively, due to the recognition of pre-opening expenses at the Sports
Clubs/LA under development, $780,000 and $1.6 million, respectively, due to
increased direct expenses associated with our increased revenues at existing
Sports Clubs, and $240,000 and $511,000, respectively, 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 necessary 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 and six months ended June 30, 2000,
were $1.3 million and $3.8 million, respectively, compared to pro forma three
and six months ended June 30, 1999 other expense of $1.3 million and $471,000,
respectively. The increase in other expense for the six month period was
primarily due to increased net interest expense of $1.8
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million, mainly 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 and six months ended June 30, 2000 was
$1.6 million and $3.8 million, respectively, or $.09 and $.21, respectively, per
diluted share, compared to pro forma three and six months ended June 30, 1999
net income of $342,000 and $1.8 million, respectively, or $.02 and $.10,
respectively, per diluted share. In 1999, we incurred a pro forma charge from a
cumulative effect of change in accounting principle, net of applicable taxes, of
$221,000. 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 $27.6 million
segregated into a disbursement 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 as of June 30, 2000, restrict our
ability to: (i) incur additional indebtedness; (ii) pay dividends or other
distributions, repurchase capital stock or other equity interest or subordinated
indebtedness and (iii) make investments. The Indenture also limits our ability
to: (i) enter into transactions with affiliates; (ii) create liens or sell
certain assets and (iii) enter into mergers and consolidations.
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 June 30,
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.
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 $5.9 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.
On June 30, 2000, our balance of cash and short-term investments was $42.8
million. Of this amount, $27.6 million has been segregated into a disbursement
escrow account and is specifically restricted for the development of new Clubs.
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Operating Cash Flow. For the six months ended June 30, 2000, we used $2.8
million of cash for operating activities. During the six months ended June 30,
2000, we made our semi-annual interest payment of $5.6 million and used $4.1
million of cash for the payment of pre-opening expenses at The Sports Club/LA
properties.
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 $4.0 million letter of credit to the landlord to secure our
performance under the lease agreement.
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 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 against the seller relating to the purchase of the property
which offset the money owed on the note and we are currently in litigation
regarding this matter. At June 30, 2000, we anticipate incurring an additional
$17.6 million to complete the construction and equipping of this Club and we had
that amount deposited in our disbursement escrow account. We currently expect to
open this Club in September 2000.
We have entered into lease agreements with Millennium Entertainment
Partners and/or their affiliates (collectively "Millennium") with respect to the
development of The Sports Club/LA in Washington D.C., San Francisco and Boston.
Millennium and its affiliates own approximately 28% of our outstanding Common
Stock. 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 $21.9 million. Equipping these Clubs will require
an additional $10.5 million. The construction disbursement account has $9.0
million reserved for the Washington D.C. and Boston sites and we anticipate $3.0
million of equipment financing will be available for these Clubs. The remaining
$20.4 million to complete these Clubs will be funded by cash and short-term
investments currently on hand and utilization of our bank credit facility. The
Sports Club/LA in Washington D.C. is scheduled to open in October 2000 and The
Sports Club/LA in Boston and San Francisco are expected to open in mid 2001.
In June 1998, we acquired undeveloped land in Texas, for approximately $3.1
million, on which we intend to develop The Sports Club/LA - Houston. We will not
start construction at this location until The Sports Club/LA 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 The Sports
Club/LA in Houston.
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Excess Proceeds Offer. Our net proceeds from the sale of the Spectrum Clubs
were approximately $38.0 million. To the extent the net proceeds are not
reinvested in assets related to our business before December 3, 2000, the
Indenture 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, $14.9 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. We anticipate that
additional amounts needed to complete the construction of The Sports Club/LA in
Washington D.C., Boston and San Francisco will reduce the excess proceeds below
$10.0 million and we will not be required to make an excess proceeds offer.
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. 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 $3.2 million during the next 24 months to upgrade our management
information systems.
To fund currently anticipated operating losses and complete the development
projects currently under construction, we expect to use our cash and short-term
investment balances, available equipment financing and a significant portion of
our bank credit facility. We anticipate that increased cash flow from recently
opened Clubs and Clubs under development will in the future enable us to fund
our continuing operations. However, if costs at our Clubs under development
exceed our construction budgets, operating losses exceed current estimates, we
are unable to renew our bank credit facility, or there are other adverse
developments, we may seek to restructure or limit our current development plans
and/or raise additional funds. Additional funds would also be required to
undertake future acquisitions or developments. Subject to the restrictions in
the Indenture, we may seek to raise funds through an offering of equity
securities, asset sales or other means (as described above, the Indenture
substantially restricts our ability to borrow additional funds). We may also
consider entering into joint venture and partnership agreements for the purpose
of developing new Clubs. 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 Year 2000 issues that impacted us. Utilizing
internal resources, we defined, assessed and converted, or replaced,
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various programs, hardware and instrumentation systems to make them Year 2000
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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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. 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. On May 1, 2000, the parties
entered into a settlement agreement that would dispose of all claims. The court
has given the settlement preliminary approval and notice of the proposed
settlement has been sent to all potential class members. A hearing on final
approval of the settlement is scheduled during October 2000. Under the
settlement agreement, we will provide a stipulated class of certain current and
former 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 best interest.
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 site for The Sports
Club/LA - Upper East Side in New York City (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
discovery phase of the litigation and intend to vigorously pursue our defenses
and cross-claims. Further, the parties have begun preliminary settlement
discussions. However, 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
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an action to recover brokerage commissions in the Supreme Court of the State of
New York, against Hirschfeld Realty Club Corporation and 328 E. 61 Corp.
(collectively referred to as "Owner"). Under the Original Complaint, Plaintiff
sought 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 and adding additional claims against us and Elie
Hirschfeld. Under the Amended Complaint, Plaintiff seeks damages from us in
excess of $3,625,000 for tortuous interference with contract and conspiracy.
Currently, all parties to this action are involved in settlement negotiations.
In the event this case does not settle we are prepared to file a motion to
dismiss both of Plaintiff's causes of action against us. We plan to vigorously
contest all aspects of this case. We are unable at this time to estimate the
likelihood that the Plaintiff will prevail in this matter.
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.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
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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 10, 2000 by /s/ Rex A. Licklider
-------------------------------
Rex A. Licklider
Vice Chairman of the Board
And Co-Chief Executive Officer
(Principal Executive Officer)
Date: August 10, 2000 by /s/ Timothy M. O'Brien
-------------------------------
Timothy M. O'Brien
Chief Financial Officer
(Principal Financial and Accounting
Officer)
