<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 SEPTEMBER 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.
<TABLE>
<CAPTION>
Shares
Outstanding at
Class November 13, 2000
------------------------------------ ------------------------------------
<S> <C>
Common Stock, 17,776,215
par value $.01 per share
</TABLE>
<PAGE> 2
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 53,060 $ 13,121
Short term investments 24,436 8,037
Accounts receivable, net of allowance for doubtful accounts
of $342 and $364 at December 31, 1999 and September 30, 2000 2,149 3,337
Inventories 1,355 2,299
Other current assets 2,341 1,310
--------- ---------
Total current assets 83,341 28,104
Property and equipment, at cost, net of accumulated depreciation
and amortization of $12,873 and $16,658 at December 31, 1999
and September 30, 2000 118,959 167,783
Costs in excess of net assets acquired, less accumulated
amortization of $1,588 and $1,925 at December 31, 1999 and
September 30, 2000 13,890 13,553
Other assets, at cost, net 7,363 10,896
--------- ---------
$ 223,553 $ 220,336
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and equipment
financing loans $ 3,520 $ 3,982
Accounts payable 2,052 1,554
Accrued liabilities 8,549 5,954
Deferred membership revenues 9,712 11,957
--------- ---------
Total current liabilities 23,833 23,447
Notes payable and equipment financing loans,
less current installments 100,367 102,355
Deferred lease obligations 1,066 2,009
Minority interest 600 600
--------- ---------
Total liabilities 125,866 128,411
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 September 30, 2000, respectively 209 209
Additional paid-in capital 102,403 102,464
Retained earnings 10,966 4,994
Less: Treasury stock, at cost, 3,194,536 and 3,156,074 shares at
December 31, 1999 and September 30, 2000, respectively (15,891) (15,742)
--------- ---------
Total shareholders' equity 97,687 91,925
--------- ---------
$ 223,553 $ 220,336
========= =========
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
1
<PAGE> 3
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 22,664 $ 18,596 $ 66,701 $ 53,722
Operating expenses:
Direct 15,796 14,064 46,162 40,255
Selling, general and administrative 2,259 2,615 6,917 7,118
Depreciation and amortization 1,629 1,536 4,717 4,127
Pre-opening expenses 894 2,700 1,602 6,832
-------- -------- -------- --------
Total operating expenses 20,578 20,915 59,398 58,332
-------- -------- -------- --------
Income (loss) from operations 2,086 (2,319) 7,303 (4,610)
Other income (expense):
Net interest expense (1,998) (1,267) (4,435) (3,555)
Minority interests (38) (38) (113) (113)
Equity interest in net income of unconsolidated subsidiary 260 -- 786 --
Non-recurring charge -- -- (205) (1,476)
-------- -------- -------- --------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 310 (3,624) 3,336 (9,754)
Income tax provision (benefit) 157 (1,410) 1,434 (3,781)
-------- -------- -------- --------
Income (loss) before cumulative effect of
change in accounting principle 153 (2,214) 1,902 (5,973)
Cumulative effect of change in accounting principle,
net of income tax benefit of $600 -- -- 899 --
-------- -------- -------- --------
Net income (loss) $ 153 $ (2,214) $ 1,003 $ (5,973)
======== ======== ======== ========
Income (loss) per share before cumulative effect of change in accounting
principle:
Basic $ 0.01 $ (0.12) $ 0.10 $ (0.34)
======== ======== ======== ========
Diluted $ 0.01 $ (0.12) $ 0.10 $ (0.34)
======== ======== ======== ========
Cumulative effect of change in accounting principle:
Basic $ -- $ -- $ (0.05) $ --
======== ======== ======== ========
Diluted $ -- $ -- $ (0.05) $ --
======== ======== ======== ========
Net income (loss) per share:
Basic $ 0.01 $ (0.12) $ 0.05 $ (0.34)
======== ======== ======== ========
Diluted $ 0.01 $ (0.12) $ 0.05 $ (0.34)
======== ======== ======== ========
Weighted average shares outstanding:
Basic 17,702 17,776 18,251 17,758
======== ======== ======== ========
Diluted 17,912 17,776 18,431 17,758
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
2
<PAGE> 4
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30,
1999 2000
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,003 $ (5,973)
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 4,717 4,127
Equity interest in net income of unconsolidated subsidiary (786) --
Distributions from unconsolidated subsidiary 1,094 --
Stock issued for employee benefit plan 154 149
(Increase) decrease in:
Accounts receivable, net 241 (1,187)
Inventories 3 (944)
Other assets (219) 1,557
Due from affiliates (19) 128
Increase (decrease) in:
Accounts payable 2,052 (499)
Accrued liabilities 363 (7,234)
Deferred membership revenues 476 2,245
Deferred lease obligations 431 943
-------- --------
Net cash provided by (used in) operating activities 10,409 (6,688)
Cash flows from investing activities:
Capital expenditures (30,298) (52,161)
Acquisition of membership base (902) --
Proceeds from sale of Spectrum Clubs 17,613 --
Sale of short term investments -- 16,399
Stock re-purchase (8,357) --
-------- --------
Net cash used in investing activities (21,944) (35,762)
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 37,263 3,298
Repayments of notes payable and equipment financing loans (66,301) (848)
-------- --------
Net cash provided by financing activities 64,675 2,511
-------- --------
Net increase (decrease) in cash and cash equivalents 53,140 (39,939)
Cash and cash equivalents at beginning of period 2,233 53,060
-------- --------
Cash and cash equivalents at end of period $ 55,373 $ 13,121
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 6,266 $ 11,511
======== ========
Cash paid for income taxes $ 1,785 $ 921
======== ========
</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 SEPTEMBER 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
nine-month periods ended September 30, 2000, are not necessarily indicative of
the results anticipated 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 September 30,
2000, cash and cash equivalents were $13.1 million, of which $4.5 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 September 30, 2000, short-term investments were $8.0 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, SEPTEMBER 30,
1999 2000
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Senior Secured Notes(a)......................... $ 100,000 $ 100,000
Equipment financing loans(b).................... 1,220 3,670
Note payable(c)................................. 2,667 2,667
---------- ----------
103,887 106,337
Less current installments....................... 3,520 3,982
---------- ----------
$ 100,367 $ 102,355
========== ==========
</TABLE>
----------
(a) 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 Notes") with
interest due semi-annually. In May 1999, we exchanged the Senior Notes
for registered Series B Senior Secured Notes (the "Senior Secured
Notes").
The Senior Secured Notes are secured by substantially all of our assets,
other than certain excluded assets. In connection with the issuance of
the Senior Secured Notes, we entered into an indenture dated as of April
1, 1999 (the "Indenture") which includes certain covenants which as of
September 30, 2000, restrict our ability, subject to certain exceptions,
to: (i) incur additional indebtedness; (ii) pay dividends or other
distributions, or repurchase capital stock or other equity interests or
subordinated indebtedness and; (iii) make certain 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. 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
principal 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) 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%.
(c) This note was issued in connection with the acquisition of The Sports
Club/LA site in Manhattan's Upper East Side. The note agreement provided
for two equal principal payments in April 1999 and April 2000. The
Company is currently in default on this entire note payable and is in
litigation regarding its obligation under it. 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).
5
<PAGE> 7
5. BANK CREDIT FACILITY
At September 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 1/4% or the bank's prime rate. At September 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 September 30,
2000, the Company did not meet the required Interest Coverage ratio. The bank
has waived the Interest Coverage ratio for the quarter ended September 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 nine months ended September 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 September 30, 2000, there were
943,136 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.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements of all public registrants. Any
change in the Company's revenue recognition policy resulting from the
implementation of SAB 101 would be reported as a change in accounting principle.
In June 2000, the SEC issued SAB 101B which delays the implementation date of
SAB 101 until the fourth fiscal quarter of fiscal years beginning after December
15, 1999. The Company does not expect the adoption of SAB 101 to have a material
impact on its financial position or results of operations.
6
<PAGE> 8
9. SALE OF SPECTRUM CLUBS
In September 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 and nine months ended September 30, 1999
and accompanying notes include the operating results of the Spectrum Clubs.
Pro-forma consolidated operating results for the three months and nine months
ended September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1999
-------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues ............................................................. $ 15,457 $ 46,282
Operating expenses ................................................... 13,979 40,756
-------- --------
Income from operations ............................................. 1,478 5,526
Other expense ........................................................ (1,185) (1,656)
-------- --------
Income before income taxes and
cumulative effect of change in accounting principle ................ 293 3,870
Income tax provision ................................................. 150 1,667
-------- --------
Income before cumulative
effect of change in accounting principle ........................... 143 2,203
Cumulative effect of change in accounting principle,
net of tax ......................................................... -- 221
-------- --------
Net income ........................................................... $ 143 $ 1,982
======== ========
Net income per share:
Basic .............................................................. $ 0.01 $ 0.11
======== ========
Diluted ............................................................ $ 0.01 $ 0.11
======== ========
Weighted average shares outstanding:
Basic .............................................................. 17,702 18,251
======== ========
Diluted ............................................................ 17,912 18,431
======== ========
</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 and The Sports Club/LA in Manhattan's Upper
East Side opened in February 2000 and September 2000, respectively. Seasonal
factors have not had a significant effect on our operating results.
As a result of the sale of the Spectrum Clubs in 1999, the opening of
The Sports Club/LA at Rockefeller Center in February 2000, the opening of The
Sports Club/LA in Manhattan's Upper East Side in September 2000, and the high
level of pre-opening expenses incurred for The Sports Clubs/LA opened this year
and currently being developed, results for the three months and nine months
ended September 30, 2000 and September 30, 1999, are not indicative of results
in future periods.
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 2000 to Three Months Ended
September 30, 1999.
Our revenues for the three months ended September 30, 2000, were $18.6
million, compared to $22.7 million in 1999, a decrease of $4.1 million or 17.9%.
Revenue decreased by $7.2 million as a result of the sale of the Spectrum Clubs,
and revenue increased by $1.7 million as a result of the opening of The Sports
Club/LA at Rockefeller Center and The Sports Club/LA in Manhattan's Upper East
Side. Revenue increased by $1.4 million at our existing Sports Clubs and
SportsMed due to increases in membership dues and ancillary services, and to the
maturation of the membership base at Reebok Sports Club/NY.
Our direct operating expenses decreased by $1.7 million to $14.1 million
in the three months ended September 30, 2000, versus $15.8 million for the same
period in 1999. Direct operating expenses decreased by $5.4 million as a result
of the sale of the Spectrum Clubs and increased by $2.9 million as a result of
the opening of The Sports Club/LA at Rockefeller Center and The Sports Club/LA
in Manhattan's Upper East Side. Direct operating expenses increased by $800,000
at our existing Sports Clubs and SportsMed primarily due to variable expenses
associated with the revenue increase at these Clubs.
Our selling, general and administrative expenses were $2.6 million in
the three months ended September 30, 2000, versus $2.3 million for the same
period in 1999. Selling costs increased by $153,000 and our general and
administrative costs increased by $203,000. There was a $346,000 decrease in
selling, general and administrative expenses as a result of the sale of the
Spectrum Clubs. This was offset by a $702,000 increase in selling, general and
administrative expenses associated with the opening of The Sports Club/LA at
Rockefeller Center and The Sports
8
<PAGE> 10
Club/LA in Manhattan's Upper East Side, and 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 $1.5 million for the
three months ended September 30, 2000, versus $1.6 million for the same period
in 1999. A decrease of $582,000 resulted from the sale of the Spectrum Clubs and
an increase of $437,000 resulted from the opening of The Sports Club/LA at
Rockefeller Center and the opening of The Sports Club/LA in Manhattan's Upper
East Side. An increase of $53,000 occurred at our other Sports Clubs and
SportsMed as a result of capital additions made at these Clubs in 1999 and 2000.
Pre-opening expenses were $2.7 million for the three months ended
September 30, 2000, versus $894,000 for the same period in 1999. Pre-opening
expenses by Club during the three months ended September 30, 2000 were $1.6
million at The Sports Club/LA in Manhattan's Upper East Side, $1.0 million at
The Sports Club/LA in Washington D.C., and $100,000 at other Sports Clubs in the
pre-opening stage. Pre-opening expenses by Club during the three months ended
September 30, 1999 were $378,000 at The Sports Club/LA in Manhattan's Upper East
Side, $282,000 at The Sports Club/LA at Rockefeller Center, $216,000 at the
Spectrum Club-Puente Hills, and $18,000 at other Clubs in the pre-opening stage.
We incurred net interest expense of $1.3 million in the three months
ended September 30, 2000, versus $2.0 million for the same period in 1999, a
decrease of $700,000. Net interest expense decreased by $780,000 due to interest
capitalized on Sports Clubs under development. Net interest expense for the
quarter ended September 30, 2000 increased by $80,000 due to a decrease in
interest earned on reduced invested cash balances.
Equity interest in net income of unconsolidated subsidiary was $260,000
in the three months ended September 30, 1999. This amount reflected our
investment in the Spectrum Club-Manhattan Beach, which was sold in December
1999.
Our estimated federal and state income tax rate was 40% for the three
months ended September 30, 2000 and 1999, resulting in a net loss of $2.2
million for the three months ended September 30, 2000, and in net income of
$153,000 for the same period in 1999.
Comparison of Nine Months Ended September 30, 2000 to Nine Months Ended
September 30, 1999.
Our revenues for the nine months ended September 30, 2000, were $53.7
million, compared to $66.7 million in 1999, a decrease of $13.0 million or
19.5%. Revenue decreased by $20.4 million as a result of the sale of the
Spectrum Clubs and increased by $3.4 million as a result of the opening of The
Sports Club/LA at Rockefeller Center and The Sports Club/LA in Manhattan's Upper
East Side. Revenue increased by $4.0 million at our existing Sports Clubs and
SportsMed due to increases in membership dues and ancillary services, and to the
maturation of the membership base at Reebok Sports Club/NY.
Our direct operating expenses decreased by $5.9 million to $40.3 million
in the nine months ended September 30, 2000, versus $46.2 million for the same
period in 1999. Direct operating expenses decreased by $14.9 million as a result
of the sale of the Spectrum Clubs and increased by $6.5 million as a result of
the opening of The Sports Club/LA at Rockefeller Center and The Sports Club/LA
in Manhattan's Upper East Side. Direct operating expenses increased by $2.5
million at our existing Sports Clubs and SportsMed primarily due to variable
expenses associated with the revenue increase at these Clubs and our SportsMed
subsidiary.
9
<PAGE> 11
Our selling, general and administrative expenses were $7.1 million in
the nine months ended September 30, 2000, versus $6.9 million for the same
period in 1999. Selling costs decreased by $194,000 and our general and
administrative costs increased by $395,000. There was a $1.0 million decrease in
selling, general and administrative expenses as a result of the sale of the
Spectrum Clubs. This was offset by a $1.2 million increase in selling, general
and administrative expenses associated with the opening of The Sports Club/LA at
Rockefeller Center and in Manhattan's Upper East Side, 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 $4.1 million for the
nine months ended September 30, 2000, versus $4.7 million for the same period in
1999. A decrease of $1.7 million resulted from the sale of the Spectrum Clubs
and an increase of $911,000 resulted from the opening of The Sports Club/LA at
Rockefeller Center and The Sports Club/LA in Manhattan's Upper East Side. An
increase of $166,000 occurred at our other Sports Clubs and SportsMed as a
result of capital additions made at these Clubs in 1999 and 2000.
Pre-opening expenses were $6.8 million for the nine months ended
September 30, 2000, versus $1.6 million for the same period in 1999. Pre-opening
expenses by Club during the nine months ended September 30, 2000 were $1.8
million at The Sports Club/LA at Rockefeller Center, $3.0 million at The Sports
Club/LA in Manhattan's Upper East Side, $1.8 million at The Sports Club/LA in
Washington D.C., and $200,000 at other Sports Clubs in the pre-opening stage.
Pre-opening expenses by Club during the nine months ended September 30, 1999
were $578,000 at the Spectrum Club-Puente Hills, $513,000 at The Sports Club/LA
in Manhattan's Upper East Side, $359,000 at The Sports Club/LA at Rockefeller
Center, and $150,000 at other Sports Clubs in the pre-opening stage.
We incurred net interest expense of $3.6 million in the nine months
ended September 30, 2000, versus $4.4 million for the same period in 1999, a
decrease of $880,000. 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 $1.9 million due to interest capitalized on Sports
Clubs under development and by $1.1 million due to interest earned on cash
balances. Net interest expense also decreased by $1.0 million due to the
retirement of debt with a portion of the proceeds from the issuance of the
Senior Secured Notes and the sale of the Spectrum Clubs.
Equity interest in net income of unconsolidated subsidiary was $786,000
in the nine months ended September 30, 1999. This amount reflected 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 nine months
ended September 30, 2000, versus $205,000 for the same period in 1999. The
non-recurring charge in 2000 is for attorney's fees, settlement and
administrative costs related to a settlement of a class action lawsuit against
The Sports Club/LA in Los Angeles (see Part II, Item 1. Legal Proceedings). The
non-recurring charge in 1999 relates to the disposition of the Spectrum Club -
Fountain Valley.
In the nine months ended September 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.
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Our estimated federal and state income tax rate was 40% for the nine
months ended September 30, 2000 and 1999, resulting in a net loss of $6.0
million for the nine months ended September 30, 2000, and in net income of $1.0
million for the same period in 1999.
Comparison of Three and Nine Months Ended September 30, 2000 to Pro Forma Three
and Nine Months Ended September 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 unaudited results of operations for
the three and nine months ended September 30, 2000, versus the unaudited pro
forma results of operations for the three and nine months ended September 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 nine months
ended September 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 nine months ended September 30, 1999, does not purport to and
does not represent what our actual results of operations would 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 nine months
ended September 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 nine months ended September 30,
2000, were $18.6 million and $53.7 million, respectively, compared to pro forma
revenues of $15.4 million and $46.3 million for the same periods in 1999, an
increase of $3.2 million and $7.4 million, respectively. Revenue for the three
months and nine months ended September 30, 2000 increased by $1.7 million and
$3.4 million, respectively, due to the opening of The Sports Club/LA at
Rockefeller Center in February 2000, and The Sports Club/LA in Manhattan's Upper
East Side in September 2000. The remaining increase in revenue for both the
three and nine months ended September 30, 2000 is due to increases in membership
dues and ancillary services at the other Sports Clubs and SportsMed, and the
final maturation of the membership base at Reebok Sports Club/NY.
Operating expenses for the three months and nine months ended September
30, 2000, were $20.9 million and $58.3 million, respectively, compared to pro
forma operating expenses of $14.0 million and $40.8 million for the same periods
in 1999, an increase of $6.9 million and $17.5 million, respectively. Operating
expenses for the three and nine months ended September 30, 2000 increased by
$3.6 million and $8.0 million, respectively, due to the opening of The Sports
Club/LA at Rockefeller Center in February 2000 and the opening of The Sports
Club/LA in Manhattan's Upper East Side in September 2000; $2.0 million and $5.9
million, respectively, due to the recognition of pre-opening expenses at The
Sports Club/LA Clubs under development at several locations; $987,000 and $3.0
million, respectively, due to increased operating expenses associated with our
increased revenues at existing Sports Clubs and SportsMed; and $300,000 and
$600,000, respectively, as a result of increased selling, general and
administrative
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expenses associated with the necessary increase in our corporate infrastructure
related to our planned development of additional The Sports Club/LA Clubs in
2000 and 2001.
Other expenses for the three months and nine months ended September 30,
2000, were $1.3 million and $5.1 million, respectively, compared to pro forma
other expenses of $1.2 million and $1.7 million for the three and nine months
ended September 30, 1999. The increase in other expense for the nine month
period was primarily due to increased net interest expense of $1.9 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 against The Sports Club/LA in Los Angeles.
In the nine months ended September 30, 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. Our net
loss for the three months and nine months ended September 30, 2000 was $2.2
million and $6.0 million, respectively, or $.12 and $.34, respectively, per
diluted share, compared to pro forma net income of $143,000 and $2.0 million,
respectively, or $.01 and $.11, respectively, per diluted share for the three
and nine months ended September 30, 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 $12.5 million
segregated into a disbursement escrow account which is specifically restricted
to funding 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 September 30, 2000, restrict
our ability to: (i) incur additional indebtedness; (ii) pay dividends or other
distributions, or repurchase capital stock or other equity interests or
subordinated indebtedness and (iii) make certain 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 1/4% or the bank's prime rate. At September
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 $6.3
million in equipment financing debt.
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On September 30, 2000, our balance of cash and short-term investments
was $21.1 million. Of this amount, $12.5 million has been segregated into a
disbursement escrow account and is specifically restricted to funding the
development of new Clubs.
We currently own real estate in Houston, Texas and Fountain Valley,
California. The Houston property was acquired in 1998 with intentions of
building The Sports Club/LA-Houston on the site. The Fountain Valley site is
currently leased to another club operator. We have decided to sell these
properties and expect to realize $3.8 million from the sale of the Fountain
Valley property and an undetermined amount from the sale of the Houston site.
Operating Cash Flow. For the nine months ended September 30, 2000, we
used $6.7 million of cash for operating activities. During the nine months ended
September 30, 2000, we made our semi-annual interest payments that aggregated
$11.4 million and used $6.8 million of cash for the payment of pre-opening
expenses at several The Sports Club/LA 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 2000 we completed construction of The Sports
Club/LA at Rockerfeller Center, Manhattan's Upper East Side and Washington D.C.
These three Clubs opened in February, September and October of this year. As of
September 30, 2000, approximately $13.0 million of construction and equipment
costs remain unpaid on these projects.
In connection with our acquisition of the rights to develop The Sports
Club/LA in Manhattan's Upper East Side, 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.
We have entered into lease agreements with Millennium Entertainment
Partners and/or its affiliates (collectively "Millennium") with respect to the
development of The Sports Club/LA in San Francisco and Boston. Millennium owns
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 $11.7 million.
Equipping these Clubs will require an additional $6.1 million. The Sports
Club/LA in Boston and San Francisco are expected to open in the third quarter of
2001.
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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 and apply the unused net
proceeds to retire Senior Secured Notes, unless the remaining net proceeds are
less than $10.0 million. At October 31, 2000, the remaining excess proceeds are
below the $10.0 million threshold and therefore no excess proceeds offer is
required or will be made.
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 $1.7 million in the remainder of 2000 and all of 2001 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 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 are able to renew it but on
terms and conditions less favorable to us than presently exist), or there are
other adverse developments, we may be required to restructure or limit our
current development plans and/or raise additional funds. Additional funds will
also be required to undertake future acquisitions or the development of new
Clubs. 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 or
partnership agreements (subject to the restrictions of the Indenture) for the
purpose of developing new Clubs. There can be no assurance that we will be able
to raise additional funds through an equity offering or other transaction, 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 were 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, various
programs, hardware and instrumentation systems to make them
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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 generally appear 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:
- the availability and adequacy of our cash flow and financing
facilities for our requirements, including payment of the Senior
Secured Notes,
- 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,
- our ability to successfully develop new sports and fitness
clubs,
- disputes or other problems arising with our development partners
or landlords,
- 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,
- competition,
- changes in personnel or compensation, and
- 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; L.A./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 parties reached a settlement agreement on
May 1, 2000, and the Court gave final approval of the settlement on October 11,
2000. The charge of $1,476,000 that we recorded in the first quarter of 2000 is
adequate to cover the costs of defending and settling this action.
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. The trial date for this matter has been set for April 23,
2001. The parties have begun 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 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 tortious
interference with contract and conspiracy. Currently, all parties to this action
are involved in
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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.
336 Spa Park Inv. v. Abraham Hirschfeld, Hirschfeld Realty Club Corp.,
328 E. 61 Club Corp. and The Sports Club Company, Inc., Index No. 602609/00 (New
York Supreme Court, County of New York). On June 20, 2000, 336 Spa Park Inc.
("Plaintiff") filed a Summons and Complaint ("Complaint") commencing an action
against us for tortious interference with a contract for the lease of parking
facilities entered into between Plaintiff and Hirschfeld Realty Club Corp. and
328 E. 61 Club Corp. The Plaintiff is seeking damages against us in an amount to
be determined at trial, but not less than $100,000. We intend to contest this
action vigorously. On October 18, 2000, we filed a motion to dismiss the cause
of action against us. The motion is still pending before the Court. As a result,
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
The 2000 Annual Meeting of Stockholders of the Company was held on
August 9, 2000. The following matter was submitted to stockholders for a vote:
1. The election of D. Michael Talla and Rex A. Licklider as Class
III directors to serve for three years.
Shares Voted
<TABLE>
<CAPTION>
For Against Abstained
--- ------- ---------
<S> <C> <C>
16,042,752 15,560 0
</TABLE>
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: November 13, 2000 by /s/ Rex A. Licklider
--------------------------------------
Rex A. Licklider
Vice Chairman of the Board
And Co-Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2000 by /s/ Timothy M. O'Brien
--------------------------------------
Timothy M. O'Brien
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
