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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2003
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 June 26, 2003
- ------------------------------------- -----------------------------------
Common Stock, 18,369,649
par value $.01 per share
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2002 and March 31, 2003
(Amounts in thousands, except share data)
(Unaudited)
December 31, March 31,
ASSETS 2002 2003
---- ----
(Restated)
Current assets:
Cash and cash equivalents $ 3,185 $ 803
Accounts receivable, net of allowance for doubtful accounts
of $534 and $538 at December 31, 2002 and March 31, 2003, respectively 3,951 3,378
Inventories 1,169 1,248
Other current assets 1,148 903
----------- -----------
Total current assets 9,453 6,332
Property and equipment, at cost, net of accumulated depreciation and
amortization of $41,119 and $44,076 at December 31, 2002 and
March 31, 2003, respectively 156,630 154,897
Costs in excess of net assets acquired, less accumulated amortization
of $2,531 at December 31, 2002 and March 31, 2003 12,794 12,794
Other assets 7,509 8,131
--------- --------
$ 186,386 $182,154
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and equipment
financing loans $ 2,158 $ 5,857
Accounts payable 2,545 2,177
Accrued liabilities 12,657 9,361
Deferred revenues 18,231 17,276
----------- -----------
Total current liabilities 35,591 34,671
Notes payable and equipment financing loans,
less current installments 101,882 101,311
Deferred lease obligations 8,307 9,229
Minority interest 600 600
--------- --------
Total liabilities 146,380 145,811
Commitments and contingencies
Redeemable preferred stock, $.01 par value, 10,500 shares authorized;
10,500 shares issued and outstanding (liquidation preference of $11,248 and
$11,485 at December 31, 2002 and March 31, 2003, respectively) 10,727 10,985
Shareholders' equity:
Preferred stock, $.01 par value, 984,500 shares authorized;
no shares issued or outstanding -- --
Preferred stock, $.01 par value, 5,000 shares authorized; 5,000 shares issued and
outstanding (liquidation preference of $5,140 and $5,251 at December 31, 2002
and March 31, 2003, respectively) 5,000 5,000
Common stock, $.01 par value, 40,000,000 shares authorized;
21,068,717 shares issued 211 211
Additional paid-in capital 101,961 101,702
Accumulated deficit (62,709) (66,604)
Treasury stock, at cost, 2,964,764 and 2,863,027 shares at
December 31, 2002 and March 31, 2003, respectively (15,184) (14,951)
------------ ------------
Shareholders' equity 29,279 25,358
----------- -----------
$ 186,386 $ 182,154
=========== ===========
See accompanying notes to condensed consolidated
financial statements.
1
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months ended March 31, 2002 and 2003
(Amounts in thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
2002 2003
---- ----
(Restated)
Revenues $ 29,968 $ 32,403
Operating expenses:
Direct 25,095 26,349
General and administrative 1,925 1,973
Selling 1,433 1,367
Depreciation and amortization 3,105 2,960
Pre-opening expenses 130 139
----------- -----------
Total operating expenses 31,688 32,788
----------- -----------
Loss from operations (1,720) (385)
Other expenses:
Interest expense 3,384 3,280
Minority interests 38 38
Non-recurring items (30) --
------------ -----------
Loss before income taxes (5,112) (3,703)
Income tax expense (benefit) (836) 192
------------ -----------
Net loss (4,276) (3,895)
Dividends on preferred stock 36 348
----------- -----------
Net loss attributable to common shareholders $ (4,312) $ (4,243)
============ ============
Net loss per share:
Basic and diluted $ (0.24) $ (0.23)
============ ============
Weighted average shares outstanding:
Basic and diluted 18,027 18,160
=========== ===========
See accompanying notes to condensed consolidated
financial statements.
2
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months ended March 31, 2002 and 2003
(Amounts in thousands)
(Unaudited)
Three Months Ended
March 31,
2002 2003
---- ----
(Restated)
Cash flows used in operating activities:
Net loss $ (4,276) $ (3,895)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,104 2,960
(Increase) decrease in:
Accounts receivable, net 185 573
Inventories (7) (79)
Other current assets (940) 244
Other assets (1,108) (621)
Increase (decrease) in:
Accounts payable 1,281 (368)
Accrued liabilities (2,212) (3,065)
Deferred revenues (6) (955)
Deferred lease obligations 1,676 923
------------ ------------
Net cash used in operating activities (2,303) (4,283)
Cash flows provided by (used in) investing activities:
Capital expenditures (3,235) (1,227)
Proceeds from sale of The Sports Club/Las Vegas-net of costs 6,158 --
------------ ------------
Net cash provided by (used in) investing activities 2,923 (1,227)
Cash flows provided by financing activities:
Proceeds from issuance of Preferred Stock, net of costs 10,000 --
Proceeds from notes payable and equipment financing loans 11,800 3,650
Repayments of notes payable and equipment financing loans (21,136) (522)
------------- -------------
Net cash provided by financing activities 664 3,128
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,284 (2,382)
Cash and cash equivalents at beginning of period 1,482 3,185
------------ ------------
Cash and cash equivalents at end of period $ 2,766 $ 803
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 5,861 $ 5,780
============ ============
Cash paid for income taxes $ -- $ 11
============ ============
See accompanying notes to condensed consolidated
financial statements.
3
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and March 31, 2003
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, 2002, consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K/A (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-month period ended
March 31, 2003, are not necessarily indicative of the
results for the fiscal year ending December 31, 2003.
2. Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. On March 31, 2003,
cash and cash equivalents were $803,000.
3. Notes Payable and Equipment Financing Loans
Notes payable and equipment financing loans are summarized as follows:
December 31, March 31,
2002 2003
---- ----
(Amounts in thousands)
Senior Secured Notes (a)......................... $ 100,000 $ 100,000
Equipment financing loans (b).................... 4,040 3,518
Credit Line (Note 4 Bank Credit Facility)........ -- 3,650
-------------- --------------
104,040 107,168
Less current installments........................ 2,158 5,857
-------------- --------------
$ 101,882 $ 101,311
============== ==============
- ---------
(a) On April 1, 1999, the Company 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, the Senior Notes were exchanged for registered Series B
Senior Secured Notes (the "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 as of March 31, 2003,
restrict the Company's ability, subject to certain exceptions,
4
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 the Company's ability to:
(i) enter into transactions with affiliates, (ii) create liens on
or sell certain assets, and (iii) enter into mergers and
consolidations. Except as set forth in Section 3.7(b), the Senior
Secured Notes are not redeemable at the Company's option prior to
March 15, 2003. Thereafter, the Senior Secured Notes will be
subject to redemption at the option of the Company, in whole or
in part, at the redemption prices (expressed as percentages of
principal amount) set forth below, plus accrued and unpaid
interest thereon, if any, to the applicable redemption date, if
redeemed during the twelve month period beginning on March 15th
of the years indicated below:
Year Percentage
---- ----------
2003 105.688%
2004 102.844%
2005 and thereafter 100.000%
At any time or from time to time prior to March 15, 2002, the
Company may, at its option, redeem up to 35% of the original
principal amount of the Senior Secured Notes issued on or after
the Issue Date, at a redemption price of 111.375% of the
principal amount thereof, plus accrued and unpaid interest, if
any, through the applicable redemption date, with the net cash
proceeds of one or more Public Equity Offerings: provided that
(i) such redemption shall occur within sixty days of the date of
closing of such Public Equity Offering and (ii) at least 65% of
the aggregate principal amount of Senior Secured Notes issued on
or after the Issue Date remains outstanding immediately after
giving effect to each such redemption.
(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 8.5% and 10.5%.
4. Credit Facility
At March 31, 2003, the Company had a $10.0 million credit facility from a
commercial bank. At that date, $3.7 million was outstanding and $5.2 million was
utilized in the form of letters of credit. On June 12, 2003, the Company
obtained alternative financing in the form of a secured five-year promissory
loan in the amount of $20.0 million. Amounts outstanding under the previous bank
credit facility were repaid with some of the proceeds of the new loan.
The new loan is evidenced by a promissory note that bears interest at a
fixed interest rate of 7.25%; requires monthly principal and interest payments
of $144,561; is secured by the common stock and all the assets of Irvine Sports
Club, Inc., the Company's wholly owned subsidiary that owns The Sports
Club/Irvine; and is guaranteed by the Company's two Co-Chief Executive Officers.
The note requires The Sports Club/Irvine to maintain a minimum operating income,
as defined, or the Company will be required to establish a payment reserve
account of up to $607,000. The note may be prepaid at any time without penalty
and requires a final principal payment of $18.3 million on July 1, 2008.
5. Net Loss per Share
Basic loss per share represents the net loss less an accrual for Preferred
Stock dividends divided by the weighted-average number of shares of Common Stock
outstanding for the period. Diluted loss per share excludes the dilutive effect
of common stock equivalents. For the three months ended March 31, 2003, there
were 2,438,782 anti-dilutive
5
common stock equivalents. For the three months ended March 31, 2002, there were
1,973,179 anti-dilutive common stock equivalents.
6. Income Tax Benefit
The income tax benefit recorded for the three months ended March 31, 2002,
was the result of a federal income tax refund the Company received as a result
of changes in existing tax laws offset by an accrual for state income taxes. The
federal income tax benefit arises from the Company's ability to carry back net
operating losses incurred during 2001 to prior tax years in which the Company
had taxable income. The benefit recorded is consistent with the provisions of
statement of Financial Accounting Standards Board No. 109, Accounting for Income
Taxes.
7. Redeemable Preferred Stock
On March 18, 2002, the Company completed a $10.5 million private placement
of a newly created series of its Convertible Preferred Stock. The Company
received $9.9 million in cash, after issuance costs, and issued 10,500 shares of
Series B Preferred Stock, $.01 par value ("Series B Preferred"), at a price of
$1,000 per share. The Company has the obligation to redeem any outstanding
shares of Series B Preferred on March 18, 2009 at a price of $1,000 per share
plus accrued but unpaid dividends. Dividends accrue at the annual rate of $90.00
per share. Such dividends are cumulative but do not accrue interest and at the
Company's option, may be paid in cash or in additional shares of Series B
Preferred. The Series B Preferred may, at the option of the holder, be converted
into shares of Common Stock at the rate of $3.00 per share (resulting in the
issuance of 3,500,000 shares of Common Stock if 100% of the Series B Preferred
is converted at that price). The conversion price will be adjusted downward in
the event the Company issues additional shares of Common Stock at a price below
$3.00 per share, subject to certain exceptions; and any such downward adjustment
is subject to the prior approval of the American Stock Exchange ("AMEX"). In the
event the Series B Preferred is redeemed before March 18, 2005, the holders will
receive a warrant to purchase shares of Common Stock at a price of $3.00 per
share, exercisable before March 18, 2007. In the event of liquidation, the
Series B Preferred holders are entitled to receive, prior and in preference to
any distribution to common shareholders and pari passu with holders of the
Series C Preferred Stock, an amount equal to $1,000 for each share of Series B
Preferred then outstanding.
The initial carrying value of the Series B Preferred was recorded at its
"fair value" (sale price less costs to issue) on the date of issuance. The
carrying value of the Series B Preferred will be periodically adjusted so that
the carrying value equals the redemption value on the redemption date. The
carrying value of the Series B Preferred will also be periodically adjusted for
any accrued and unpaid dividends. At December 31, 2002 and March 31, 2003, the
Series B Preferred carrying value consisted of the following ($ in thousands):
December 31, March 31,
2002 2003
---- ----
Initial fair value, sale price of $10,500
less costs to issue of $592..................................$ 9,908 $ 9,908
Redemption value accretion......................................... 71 92
Accrued and unpaid dividends accretion............................. 748 985
------------- ----------------
Total carrying value $ 10,727 $ 10,985
============== ================
6
8. Litigation
The Company is involved in various claims and lawsuits incidental to its
business, including claims arising from accidents. However, in the opinion of
management, the Company is adequately insured against such claims and lawsuits
involving personal injuries, and any ultimate liability arising out of any such
proceedings will not have an material adverse effect on the Company's financial
condition, cash flow or results of operations.
9. New Accounting Pronouncements
The Company has elected to account for stock options granted to employees
and directors under the provisions of APB Opinion No. 25, using the intrinsic
value method. Entities electing to continue using the accounting prescribed by
APB Opinion No. 25 must make pro forma disclosures of net income and income per
share, as if the fair value based method of accounting defined in SFAS No. 123
had been applied. In accordance with APB Opinion No. 25, no compensation cost
has been recognized as the fair value of the Company's stock was equal to the
exercise price of the options at the date of grant. Had compensation cost for
the Company's plan been determined consistent with SFAS No. 123, the Company's
net income (loss) attributable to common shareholders and income (loss) per
share would have been reduced to the pro-forma amounts indicated below:
Three Months Ended March 31,
----------------------------
2002 2003
---- ----
(in thousands, except per share
data)
Net income (loss) attributable to common shareholders, as reported.. $ (4,312) $ (4,243)
Stock-based employee compensation expense
included in reported net loss.................................. -- --
Stock-based employee compensation expense
determined under fair value based method for
all awards..................................................... (310) (164)
------------- ---------------
Adjusted net income (loss) attributable to commons shareholders..... $ (4,622) $ (4,407)
============= ===============
Net loss per share as reported basic and diluted.................... $ (0.24) $ (0.23)
============= ===============
Adjusted basic and diluted..................................... $ (0.26) $ (0.24)
============= ===============
10. Restatement
On June 26, 2003, the Company filed a Form 10-K/A with the Securities and
Exchange Commission to restate its previously issued financial statements. The
adjustments consisted of several items; however, the principal adjustment is a
correction of the methodology used to recognize private training revenues. The
Company had been recognizing private training on a cash basis rather than when
the private training session was given, as required by GAAP. The other
adjustments made as part of the restatement were not significant individually or
in total. Accordingly, the operating results for the quarter ended March 31,
2002, have been restated from those originally presented in the Company's March
31, 2002 Form 10-Q.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The following discussion and analysis of our financial condition and
results of operations are based upon our condensed consolidated financial
statements and notes thereto, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to principles of
consolidation, revenue recognition, inventories, depreciation and amortization,
start up costs, impairment of long-lived assets and long-lived assets to be
disposed of, fair value of financial instruments and segment reporting. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Results of Operations
Comparison of Three Months Ended March 31, 2003 to Three Months Ended March 31,
2002.
Our revenues for the three months ended March 31, 2003, were $32.4 million,
compared to $30.0 million for the same period in 2002, an increase of $2.4
million or 8.1%. Revenue increased by $2.9 million primarily as a result of an
8.4% growth in membership, from March 31, 2002 through March 31, 2003, and to
annual rate increases for monthly dues and other ancillary services. Revenue
growth was the strongest at our five most recently opened Clubs, which accounted
for $2.8 million of the $2.9 million dollar increase. Revenue decreased by
$548,000 as a result of the sale of The Sports Club/Las Vegas on January 31,
2002.
Our direct expenses increased by $1.2 million (5.0%) to $26.3 million for
the three months ended March 31, 2003, versus $25.1 million for the same period
in 2002. Direct expenses increased by $1.7 million primarily as a result of an
increase in variable direct expenses associated with the 8.4% membership growth
and due to increased workers compensation, property and liability insurance
costs. Direct expenses decreased by $507,000 due to the sale of The Sports
Club/Las Vegas on January 31, 2002. Direct expenses as a percent of revenue for
the three months ended March 31, 2003, decreased to 81.3% from 83.7% for the
same period in 2002. As membership levels and therefore revenues increase at the
five Sports Club/LA Clubs opened in 2000 and 2001, the direct expense percentage
should continue to decrease. There is no assurance, however, that such
membership or revenue growth will occur.
Our general and administrative expenses were $2.0 million for the three
months ended March 31, 2003, versus $1.9 million for the same period in 2002, an
increase of $48,000 or 2.5%. The increase in our general and administrative
expenses was primarily the result of increased workers' compensation insurance
costs, increased group medical and property/liability insurance costs. General
and administrative expenses decreased as a percentage of revenue to 6.1% for the
three months ended March 31, 2003, from 6.4% for the same period in 2002. We
believe that general and administrative expenses should continue to
8
decrease as a percentage of future revenues as we expand and achieve economies
of scale. There is no assurance, however, that said expansion or economies of
scale will be achieved.
Our selling expenses remained at $1.4 million for both the three months
ended March 31, 2003 and for the three months ended March 31, 2002. We continue
to concentrate our advertising and promotion efforts at the five Sports Club/LA
Clubs opened in 2000 and 2001. Selling expenses decreased as a percentage of
revenue to 4.2% for the three months ended March 31, 2003, from 4.8% for the
same period in 2002.
Our depreciation and amortization expenses were $3.0 million for the three
months ended March 31, 2003, versus $3.1 million for the same period in 2002, a
decrease of $145,000 or 4.7%. The decrease in depreciation and amortization
expenses was primarily the result of assets at the Reebok Sports Club/New York
becoming fully depreciated. There was also a decrease of $32,000 due to the sale
of The Sports Club/Las Vegas on January 31, 2002.
Pre-opening expenses were $139,000 for the three months ended March 31,
2003, versus $130,000 for the same period in 2002. Pre-opening expenses for the
three months ended March 31, 2003, consisted of expenses related to The Sports
Club/LA-Beverly Hills, which is scheduled to open later this year. The
pre-opening expenses for the three months ended March 31, 2002, consisted of
expenses related to a possible Club site on Long Island in New York. We have
since decided not to develop the Long Island site.
We incurred interest expense of $3.3 million for the three months ended
March 31, 2003, versus $3.4 million for the same period in 2002, a decrease of
$104,000 or 3.1%. Interest expense decreased by $60,000 due to decreased usage
of our bank credit facility and by $44,000 due to a reduction of equipment
financing loans.
We recorded a non-recurring gain of $30,000, related to the sale of The
Sports Club/Las Vegas on January 31, 2002.
The tax provision recorded for the three months ended March 31, 2003, is
comprised of New York City and New York State income taxes incurred on pre-tax
earnings at our Reebok Sports Club/New York. We did not record any federal or
state deferred tax benefit related to our consolidated pre-tax loss incurred for
the three months ended March 31, 2003. After the New York City and New York
State income taxes, our consolidated net loss attributable to common
shareholders for the three months ended March 31, 2003, was $4.2 million or
$0.23 per basic and diluted share. The tax benefit recorded for the three months
ended March 31, 2002, was the result of an estimated $900,000 federal income tax
refund we received due to tax law changes that allowed us to carry-back our 2001
loss to prior tax years offset by New York City and New York State income taxes
of $64,000 incurred at our Reebok Sports Club/New York. We did not record any
federal or state deferred tax benefit related to our consolidated pre-tax loss
incurred for the three months ended March 31, 2002. After the tax benefit, our
consolidated net loss attributable to common shareholders for the three months
ended March 31, 2002, was $4.3 million or $0.24 per basic and diluted share.
Liquidity and Capital Resources
Capital Requirements - Existing Operations
On April 1, 1999, we issued in a private placement $100.0 million of 11
3/8% Senior Secured Notes (the "Senior Secured Notes") due in March 2006, with
interest due semi-annually. The Senior Secured Notes were issued pursuant to the
terms of an indenture
9
agreement dated April 1, 1999 (the "Indenture"). The Senior Secured Notes are
secured by substantially all of our assets, other than certain excluded assets.
The Indenture includes certain covenants that 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 on or sell
certain assets; and (iii) enter into mergers and consolidations. The Indenture
requires us to make semi-annual interest payments of $5.7 million on March 15th
and September 15th of each year.
We incur capital expenditures for normal replacement of fitness equipment
and updating Clubs. Our Clubs are upscale and capital improvements are regularly
needed to retain the upscale nature and presentation of the Clubs. A
deterioration of the quality of the Clubs can lead to reduction in membership
levels and lower revenues. We estimate that expenditures of between 3% and 4% of
revenues, depending on the age of the Club, will be necessary to maintain the
quality of the Clubs to our satisfaction. We also expect to spend approximately
$700,000 during the next year to upgrade our management information systems and
enhance our disaster recovery capabilities.
All our mature Sports Clubs (Clubs open at least five years) currently
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. The time period necessary to
achieve positive cash flows is dependent upon the membership levels and amount
of fixed costs. Three of our new Clubs now generate positive cash flows while
two of the new Clubs require cash to fund their operating activities. Our
consolidated cash flows from operations for each of the last three years and for
the first quarter of 2003 were negative. We expect this trend to continue until
the newly opened Clubs generate sufficient positive cash flows. Our ability to
generate positive cash flow from operating activities is dependent upon
increasing membership levels at these Clubs and we cannot offer any assurance
that we will be successful in these efforts.
At March 31, 2003, we had $3.5 million of outstanding equipment financing
loans. We make monthly principal and interest payments on this debt. These
monthly payments are currently $203,000 and they will continue until December
2004, when a significant portion of the debt will be repaid. On June 12, 2003,
we entered into a new loan to replace our prior bank credit facility. This loan
requires us to make monthly principal and interest payments of $144,561 through
June 2008.
The Indenture requires us to make an offer to retire Senior Secured Notes
if the net proceeds of any asset sale are not reinvested in assets related to
our business, unless the remaining net proceeds are less than $10.0 million. To
the extent we sell assets, the proceeds from those sales would be subject to the
excess proceeds provision of the Indenture. We are currently not required to
make such an offer as a result of the sale of any of our assets.
10
Other than our normal operating activities and capital expenditures, our
total cash requirements for our existing operations through March 31, 2004 are
estimated to be as follows (amounts in thousands):
Indenture interest...................................... $ 11,375
Information system upgrades............................. 700
Payments on long-term debt.............................. 3,503
-----------------
$ 15,578
=================
Capital Requirements - New Clubs
On April 22, 2002, we signed a lease to develop The Sports Club/LA -
Beverly Hills. The new Sports Club/LA, which will be approximately 40,000 square
feet, will be located at 9601 Wilshire Boulevard in the heart of the Beverly
Hill's retail and commercial district. Anticipated development costs and working
capital requirements are approximately $9.0 million. We view the Beverly Hills
market as an excellent location for The Sports Club/LA brand and this Club may
serve as a prototype for smaller sized Clubs to be built in locations near
existing Sports Club/LA sites. We have been searching for a joint venture
partner to contribute to the development costs necessary to complete this Club.
However, we have not been able to find a party willing to participate on terms
that we find acceptable. Therefore, it now appears that we will need to complete
the development of this Club with our own funds. As of March 31, 2003 we have
spent approximately $1.5 million on this development and we anticipate spending
another $7.5 million by December 31, 2003.
We also anticipate entering into a management service agreement with
Terrimark Brickell II Ltd., an affiliate of Millennium Partners LLC, to manage
The Sports Club/LA - Miami. Millennium Partners LLC and its affiliates
("Millennium") collectively owns approximately 36.6% of our common stock. Under
the terms of the agreement, Millennium will provide all the capital required to
develop this facility and Millennium will retain a 100% ownership in the Club.
We will be entitled to a management fee based upon the Club's revenues and can
also earn a profit participation based upon the facility's net operating income,
as defined. We will not be required to invest any of our capital into this
development.
Cash and Credit Availability
During the first quarter of 2003 our operating activities generated $1.5
million before we made interest payments of $5.8 million resulting in a net use
of cash from operating activities of $4.3 million. We believe we will continue
to generate positive cash flow from operating activities before interest
payments and that such amount will increase as our new Clubs continue to mature.
On June 12, 2003, we replaced our existing bank credit facility with a new
$20.0 million loan. We used $8.3 million of those proceeds to repay our prior
bank credit facility. After the payment of various closing costs, the remaining
$10.9 million will be added to our cash balances. The prior bank credit facility
has now been terminated. We expect to use most of these funds to complete the
development of The Sports Club/LA-Beverly Hills.
On April 4, 2003, we announced that we received a "going private" proposal
from a group consisting of four of our principal stockholders and a private
equity fund to purchase all the outstanding shares of our common stock not owned
by these and certain other stockholders for a cash price of $3.00 per share. The
offer was submitted to a Special Committee of our Board of Directors, which
together with its legal and financial advisors will evaluate the offer
11
on behalf of the public stockholders. The transaction, as currently structured,
would result in a capital infusion of approximately $8.5 million to the Company.
Those funds would be available for general working capital purposes. The
ultimate completion of the transaction is still subject to many conditions and
therefore its completion and the resulting capital infusion are not assured.
The Indenture allows us to incur up to $10.0 million of equipment financing
obligations. At March 31, 2003, we had $3.5 million of equipment financing
obligations outstanding and would be allowed to finance an additional $6.5
million with our equipment serving as collateral.
Summary
Our cash balances at March 31, 2003, plus amounts generated from our
operations and our refinancing of the Bank credit agreement, provides us with
the funds required to complete the development of The Sports Club/LA-Beverly
Hills and to make our September 15th, 2003 interest payment. In order to make
our interest payment due on March 15, 2004 we will need to complete the "going
private" transaction that will generate an estimated $8.5 million of new capital
for the Company or we would be required to sell additional assets, offer
additional equity securities or increase our cash flow from operations to meet
our cash flow needs. There can be no assurance that we will be able to complete
the "going private" transaction or raise additional capital by selling assets or
by offering additional equity securities. However, two of our major
shareholders, who now guarantee our new $20.0 million loan, have committed to
providing us with sufficient financial support to continue our operations.
Additional funds will be required to undertake any future acquisitions or
the development of additional new Clubs. We would consider entering into joint
ventures, partnership agreements or management agreements (subject to the
restrictions and limitations on such transactions in the Indenture) for the
purpose of developing new Clubs, but only if such arrangements would generate
additional cash flow or further enhance The Sports Club/LA brand name in the
market place.
Forward Looking Statements
From time to time we make "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 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
public disclosures. These forward-looking statements generally relate to our
plans and objectives for future operations and are based upon managements'
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,
12
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 may
change in the future.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are also exposed to risk from a change in interest rates to the extent
we are required to refinance existing fixed rate indebtedness at rates higher
than those prevailing at the time the existing indebtedness was incurred. As of
March 31, 2003, we had Senior Secured Notes totaling $100.0 million due in March
2006. Annual interest of $11.4 million is payable semi-annually in March and
September. At March 31, 2003, the fair value of the Senior Secured Notes is
approximately $90.0 million. We also have a $20.0 million loan with a fixed
interest rate of 7.25% that matures and requires a final principal payment of
$18.3 million on July 1, 2008. A change in interest rates of 1% would impact our
interest expense by approximately $1.2 million per year.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The management of the Company, including the Co-Chief Executive Officers
and Chief Financial Officer, have conducted an evaluation of the effectiveness
of the Company's disclosure controls and procedures pursuant to Rule 13a-14
under the Securities Exchange Act of 1934 as of a date (the "Evaluation Date")
within 90 days prior to the filing date of this report. Based upon that
evaluation, the Co-Chief Executive Officers and Chief Financial Officer
concluded that, as of the Evaluation Date, the Company's disclosure controls and
procedures were effective in ensuring that all material information relating to
the Company required to be filed in this quarterly report has been made known to
them in a timely manner.
(b) Changes in internal controls.
There have been no significant changes made in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the Evaluation Date.
14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is 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 results of 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
a) Exhibits
99.1 Certification of D. Michael Talla pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Rex A. Licklider pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
99.3 Certification of Timothy O'Brien pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
99.4 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
b) The following reports on Form 8-K have been filed since December 31, 2002:
On April 4, 2003, we filed a report on Form 8-K announcing that on March
31, 2003, Millennium Partners LLC and its affiliates, Rex Licklider, D. Michael
Talla and Kayne Anderson Capital Advisors L.P. executed a term sheet with
Palisade Concentrated Equity Partnership, L.P., which was amended and restated
on April 9, 2003. The Term Sheet sets forth a non-binding commitment on the part
of the Principal Shareholders and Palisade to consummate a "going private"
transaction with the Company.
15
On April 18 2003, we filed a report on Form 8-K announcing that on
April 4, 2003, The Sports Cub Company, Inc. received a "going private"
proposal from a group consisting of four of its principal stockholders and
a private equity fund to purchase all outstanding shares of the Company's
common stock not owned by these and certain other stockholders.
Additionally, on April 14, 2003, The Company's Board of Directors appointed
Philip J. Swain to the office of President and Chief Operating Officer, an
office that has been vacant since the resignation of John Gibbons in
February 2000. Also, on April 14, 2003, the Special Committee approved an
amendment to the Company's Rights Agreement adopted on September 29, 1998.
The Amendment provides that until May 31, 2003, the Rights Plan will not be
triggered as a result of any non-binding "going private" negotiations or
understandings between and among the Principal Shareholders.
On June 2, 2003, we filed a report on Form 8-K announcing that on May
23, 2003, that the Company had not filed its first quarter financial
statements on a timely basis with the Securities and Exchange Commission
and that it will restate its financial statements for prior periods.
Additionally, on May 27, 2003, the Special Committee approved an amendment
to the Company's Rights Agreement adopted on September 29, 1998. The
Amendment provides that until July 31, 2003, the Rights Plan will not be
triggered as a result of any non-binding "going private" negotiations or
understandings between and among the Principal Shareholders.
On June 18, 2003, we filed a report on Form 8-K announcing that on
June 12, 2003, we replaced our Bank Credit Agreement with a new $20.0
million secured loan from Orange County's Credit Union. The loan is
evidenced by a promissory note that bears interest at a fixed interest rate
of 7.25%; requires monthly principal and interest payments of $144,561; is
secured by the common stock and all the assets of Irvine Sports Club, Inc,
our wholly owned subsidiary that owns The Sports Club/Irvine; and is
guaranteed by our two Co-Chief Executive Officers. The note may be prepaid
at any time without penalty and requires a final principal payment of $18.3
million on July 1, 2008.
16
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: June 26, 2003 by /s/ Rex A. Licklider
-------------------------------------
Rex A. Licklider
Vice Chairman of the Board
And Co-Chief Executive Officer
(Principal Executive Officer)
Date: June 26, 2003 by /s/ Michael Talla
-------------------------------------
D. Michael Talla
Chairman of the Board
And Co-Chief Executive Officer
(Principal Executive Officer)
Date: June 26, 2003 by /s/ Timothy M. O'Brien
-------------------------------------
Timothy M. O'Brien
Chief Financial Officer
(Principal Financial and Accounting
Officer)
17
EXHIBIT 99.1
CERTIFICATION
I, D. Michael Talla, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Sports Club
Company, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others within the registrant, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
18
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ D. Michael Talla
------------------------------------
D. Michael Talla
Co-Chief Executive Officer
Date: June 26, 2003
19
EXHIBIT 99.2
CERTIFICATION
I, Rex A. Licklider, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Sports Club
Company, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others within the registrant, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
20
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Rex A. Licklider
---------------------------------
Rex A. Licklider
Co-Chief Executive Officer
Date: June 26, 2003
21
EXHIBIT 99.3
CERTIFICATION
I, Timothy M. O'Brien, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Sports Club
Company, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others within the registrant, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
22
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Timothy M. O'Brien
---------------------------------
Timothy M. O'Brien
Chief Financial Officer
Date: June 26, 2003
23
EXHIBIT 99.4
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned herby certifies, in his capacity as an officer of
The Sports Club Company, Inc. (the "Company"), for purposes of 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
to the best of his knowledge:
o The Quarterly Report of the Company on Form 10-Q for the period ended
March 31, 2003 fully complies with the requirements of Section 13(a)
of the Securities Exchange Act of 1934; and
o The information contained in such report fairly represents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: June 26, 2003
/s/ D. Michael Talla
- ---------------------------------------------
D. Michael Talla
Co-Chief Executive Officer
/s/ Rex A. Licklider
- ---------------------------------------------
Rex A. Licklider
Co-Chief Executive Officer
/s/ Timothy O'Brien
- ---------------------------------------------
Timothy O'Brien
Chief Financial Officer
24