UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 10-K/A
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTON 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
For the transition period from ___________to __________
Commission File Number: 1-13290
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The Sports Club Company, Inc.
(Exact name of registrant as specified in its charter)
Delaware 95-4479735
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11100 Santa Monica Blvd., Suite 300
Los Angeles, California 90025
(Address of registrant's principal (Zip Code)
executive offices)
Registrant's telephone number,
including area code:
(310) 479-5200
Securities registered pursuant to
Section 12(b) of the Act: Name of each exchange on which
Title of each class registered
Common Stock $.01 par value American Stock Exchange
Securities registered pursuant to
Section 12(g) of the Act: None
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Indicate by check mark whether registrant (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
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant on June 28, 2002, the last business day of the registrants most
recently completed second fiscal quarter was $9,960,000. The aggregate market
value of the voting stock held by non-affiliates of the registrant on June 18,
2003 was $11,068,403. The number of shares of the Common Stock, par value $ .01
per share, outstanding (the only class of Common Stock of the registrant
outstanding) was 18,369,649 on June 18, 2003. Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes
|_| No |X|
===============================================================================
This Form 10-K/A is being filed to restate our financial statements.
Subsequent to filing our Form 10-K on March 31, 2003, we determined that
adjustments are required to correct errors in the previously issued financial
statements. The adjustments consist of several items. The principle adjustment
is a correction of the methodology used to recognize private training revenues.
We had been recognizing private training revenues on a cash basis rather than
when the private training session was given, as required by generally accepted
accounting principles. The other adjustments to our pre-tax loss made as part of
this restatement were not significant individually or in total (for further
detail see Note 19 to our consolidated financial statements contained elsewhere
in this Form 10-K/A). The restatement primarily changed Items 6, 7 and 8 of the
Form 10-K. Cash flows from operating, investing and financing activities did not
change as a result of this restatement.
PART I
ITEM 1. BUSINESS
General
We were organized in 1994 to consolidate the ownership of several sports
and fitness clubs. We currently own and operate six Clubs under "The Sports
Club/LA" name in Los Angeles, Washington D.C., Boston, San Francisco and at
Rockefeller Center and the Upper East Side in New York City. We also own and
operate The Sports Club/Irvine and operate and own a majority interest in Reebok
Sports Club/NY. Our Clubs offer a wide range of fitness and recreation options
and amenities, and are marketed to affluent, health conscious individuals who
desire a service-oriented, state-of-the-art club. Our Clubs are widely
recognized as being among the finest sports and fitness clubs in the country.
Our Clubs (hereinafter referred to as "Clubs" or "The Sports Club/LA") are
conveniently located and are spacious, modern facilities that typically include
spas, restaurants, fitness centers, swimming pools and basketball courts. The
Sports Club/LA sites are designed as "urban country clubs," ranging in size from
90,000 to 140,000 square feet. Initiation fees and monthly membership dues at
The Sports Club/LA are higher than those charged by most other sports and
fitness clubs. Income from ancillary services and products, including private
training, food and beverage and spa services, also constitute a significant
portion of our revenues. Our subsidiary, The SportsMed Company ("SportsMed"),
operates physical therapy facilities in some Clubs and at other locations.
Our strategy is to expand The Sports Club/LA brand in major metropolitan
markets and to increase revenues and profitability at existing Clubs through
regular increases in monthly membership dues, increases in membership levels and
expanded ancillary services and products. We will continue to investigate other
sites for new The Sports Club/LA developments.
According to the International Health, Racquet & Sportsclub Association
("IHRSA"), the industry's leading trade organization, it is estimated that 33.8
million Americans were members of more than 17,000 sports and fitness clubs in
2001. Revenues generated by the United States sports and fitness club industry
increased at a compound annual rate of 8.2% from $6.5 billion in 1993 to $12.2
billion in 2001. The industry has benefited from the general public's increasing
awareness of the importance of physical exercise. Among other groups, we target
members age 35 and older who, according to IHRSA, represent 59% of all
memberships and are the fastest growing segment of the industry.
Recent Events
On December 10, 2002 our Board of Directors formed a special Committee of
the Board comprised of the independent directors to explore strategic
alternatives, including a possible "going private" transaction in which certain
of our principal shareholders may participate. We have also engaged a Los
Angeles based investment banking firm to assist us in raising up to $50.0
million in private equity to establish separate joint ventures for the
development of smaller luxury sports and fitness complexes under The Sports
Club/LA brand.
2
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 new loan is
evidenced by a promissory note that bears interest at a fixed interest rate of
7.25% per annum; 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 may be
prepaid at any time without penalty and requires a final principal payment of
$18.3 million on July 1, 2008.
The Sports Club/LA
The Sports Club/LA is typically a 90,000 to 140,000 square foot
multi-purpose facility, that generally includes the following features:
o large, fully equipped gyms with state-of-the-art fitness equipment,
including weight training, cardio- vascular equipment, flexibility
centers and functional performance areas,
o basketball, volleyball, racquetball, squash, tennis and paddle tennis
courts,
o group exercise studios featuring classes throughout the day and
evening, seven days a week, including aerobics, yoga, dance, muscle
conditioning, boxing, martial arts, pilates and bodymind,
o group cycling studios,
o rock climbing walls,
o boxing studios,
o swimming pools, sundecks, golf practice nets and running tracks,
o destination city spa offering massage, facials and full body
treatments,
o men's and women's locker rooms featuring wood lockers,
o steam rooms, saunas and jacuzzis,
o restaurants, sports bars, private dining/conference rooms and media
centers,
o valet parking, pro shops, hair salons and childcare services,
o sports medicine and physical therapy facilities,
o personal trainers to develop and supervise members' exercise routines,
o registered dietitians for nutritional consultations,
o FitLab assessment centers,
o PTS Private Trainer System nutritional programs and products,
o interactive children's' classes, as well as supervised age-specific
junior recreation rooms and junior programs such as gymnastics,
martial arts and dance,
o instruction in racquet sports, golf, swimming, boxing, martial arts
and rock climbing,
3
o full-time activities directors responsible for social and media events
for members, including organizing trips, lectures and charity events,
o sports instructors who present sports tournaments, leagues and
classes, and
o wellness protocols such as exercise regimens designed for specific
groups of members.
We currently have eight Sports Clubs in operation. The original Sports
Club/LA opened in 1987 in west Los Angeles, California, near the affluent
communities of Santa Monica, Brentwood, Beverly Hills, Bel Air, Westwood and
Century City. The Sports Club/Irvine opened in 1990 near Newport Beach in Orange
County, California. Reebok Sports Club/NY opened in 1995 on Manhattan's upper
west side, and was developed in partnership with a subsidiary of Reebok
International, Ltd. ("Reebok") and Lincoln Metrocenter Partners, L.P.
(collectively with its affiliates "Millennium"). We manage the operations and
own a 60% interest in the partnership that owns this Club. Reebok and Millennium
have each retained an interest in the partnership.
We opened The Sports Club/LA at two locations in New York City in 2000. The
Sports Club/LA - New York at Rockefeller Center was opened in February 2000.
This Club was designed to service the executive business community in midtown
Manhattan. The Sports Club/LA - New York in New York City's Upper East Side was
opened in September 2000. This site is the location of the former Vertical Club,
which was closed in February 1999 for major renovation and conversion to The
Sports Club/LA and serves the affluent residential Upper East Side area of New
York City.
We also recently opened The Sports Club/LA at three sites developed by
Millennium. The Sports Club/LA - Washington D.C. opened in October 2000. This
100,000 square foot Club is located at 22nd and M Streets between Washington
D.C.'s business district and Georgetown. The Sports Club/LA - Boston opened in
September 2001. This Club overlooks the historic Boston Common and is located a
short distance from the city's financial district. Both of these Clubs are
co-located with a Ritz Carlton Hotel. Our newest Club, The Sports Club/LA - San
Francisco, has been open since October 2001. This Club is located in the Four
Seasons Hotel and Residences in the emerging South of Market Area in San
Francisco.
The SportsMed Company, Inc.
Our SportsMed subsidiary operates physical therapy facilities within The
Sports Club/LA in Los Angeles, The Sports Club/Irvine, the Spectrum Club -
Valencia and the Spectrum Club - Thousand Oaks. SportsMed also operates in a
stand-alone facility in Calabasas, California. The clinics are staffed by
exercise physiologists, physical therapists and registered dietitians who
provide services to members and others. We believe that SportsMed provides
valuable services, which are complementary to the other services provided by the
Clubs, and are considering placing physical therapy facilities in other Clubs in
the future.
4
Development of New Clubs
Recent New Club Developments. In 2000 and 2001, we completed the
development of five new The Sports Club/LA sites. Two of these Clubs are located
in New York City and, when combined with our Reebok Sports Club/NY site, form a
trio of Clubs located in residential areas on the East and West sides and the
central midtown business district. Three of the new The Sports Club/LA sites
were developed with Millennium, with whom we developed Reebok Sports Club/NY.
Millennium is a developer of premier multi-use projects and is funded by Quantum
Realty Fund, a member of the Quantum Group of Funds, which are off-shore
investment funds managed by Soros Fund Management, a management firm headed by
George Soros; Goldman Sachs' Whitehall Street Real Estate Limited Partnerships;
and Millennium Entertainment Partners L.P., a consortium of German insurance
companies. These Clubs are located in projects developed by Millennium in prime,
metropolitan locations that, like Reebok Sports Club/NY, include commercial,
retail, entertainment and residential space. In addition, each of these
developments include either a Ritz Carlton or Four Seasons hotel. These Clubs
are approximately 100,000 square feet and offer services typically found at
other The Sports Club/LA sites. We believe that such projects offer ideal
locations for The Sports Club/LA and would consider developing The Sports
Club/LA with Millennium or other developers in other major metropolitan areas.
Performance of Newly Developed and Acquired Clubs. Based on our experience,
a newly developed Club tends to achieve significant increases in revenues until
a mature membership level is reached. In the past, recently opened Clubs which
have not yet achieved mature membership levels have operated at a negative cash
flow or only a slight positive cash flow during the first two years of operation
as a result of fixed expenses that, together with variable operating expenses,
approximate or exceed membership fees and other revenues. This trend continued
at The Sports Club/LA sites we opened in 2000 and 2001. Three of these Clubs are
now operating at a positive cash flow level while two Clubs are still building
the membership base necessary to achieve this level. We believe that our
revenues from these Clubs will significantly increase as membership levels
mature.
Future New Club Developments
The completion of The Sports Club/LA at five new sites has required
significant financial resources. In addition, our current financing arrangements
and level of operating cash flow make it difficult to secure the required
financing to develop additional new sites. Therefore, our primary focus is now
on improving the operating performance of our five new Clubs. We are pursuing
The Sports Club/LA developments at new sites that are financially structured in
a way that will not require us to make a significant capital investment. We
would consider entering into joint ventures, partnership agreements or
management agreements for the purpose of developing new Clubs.
We have two new sites that we are currently developing. We have signed a
lease to develop The Sports Club/LA - Beverly Hills. This Club will be located
in the heart of the business and retail district in Beverly Hills, California.
It will service that market place as well as the surrounding neighborhoods and
allow us to further penetrate areas east of Beverly Hills. We are currently
demolishing the existing interior building space and constructing our pre-sales
office and expect to start pre-sale activities in April 2003. Our objective is
to locate a joint venture partner to provide the financing to complete the
construction of this Club. If we are unable to do so, we would need to either
delay the construction or secure additional equity capital or debt financing.
We are also negotiating with Millennium regarding The Sports Club/LA -
Miami. Millennium will be the owner of this Club. They will be responsible for
providing all funds necessary to construct, equip and operate the Club. We will
manage the Club operations for which we expect to receive a management fee based
upon both the gross revenues and net cash flow of the Club. We will also license
The Sports Club/LA name to Millennium. This structure allows us to expand our
brand and receive an immediate earnings stream, with the potential for
additional profits, without making any capital investment.
5
Sales and Marketing
Strategy. The Sports Club/LA is marketed as an "urban country club"
offering personalized attention and multiple amenities and services. We believe
that the image of The Sports Club/LA as the leader in the sports and fitness
industry justifies charging a premium. Our members include professionals, sports
and entertainment personalities and business people. The Sports Club/LA
emphasize personalized service and instruction and the creation of an "urban
country club" atmosphere in which members can relax and socialize. Our marketing
efforts at The Sports Club/LA emphasize retaining existing members, replacing
members who leave with new members and increasing ancillary revenues from
services such as private training and spa services. Our focus at the newer The
Sports Club/LA locations is on attracting additional members.
Referrals, Endorsements and Advertising. Word-of-mouth referrals and
endorsements by existing members are The Sports Club/LA's most important source
of new members. In addition, The Sports Club/LA utilizes targeted marketing
programs which include advertisements, promotions, public relations and
community events. The principal marketing media for the Clubs are direct mail
and print advertisements. Special events and special membership programs
supplement the print advertisements. The Sports Club/LA hosts corporate parties
and charity benefits and often donates free or discounted memberships to
charitable organizations. We also conduct periodic membership drives whereby
referring members are entitled to receive special gifts and other incentives. We
believe that we will be able to continue to utilize these marketing strategies.
Targeted Members. The largest segment of the membership base for The Sports
Club/LA consists of health-conscious individuals. We target four other groups in
order to expand membership: corporate members, medical referrals, families, and
seniors. Each of these groups requires specialized exercise/fitness programs and
we have developed specific programs to attract members of these groups.
Corporate Programs. We believe the corporate market is a significant source
of new members, due to the proximity of The Sports Club/LA to business centers
and the use of the Clubs to conduct business and to develop and maintain
business contacts. We employ several Corporate Membership Directors whose
principal responsibilities are to solicit corporate memberships from businesses
operating in the vicinity of the Clubs. The Sports Club/LA offers corporate
group-discounted initiation fees depending upon the number of new members
involved. Our SportsMed subsidiary has developed several corporate wellness
programs to fit the needs of this particular market. We believe that
corporations are favorably disposed to The Sports Club/LA and The SportsMed
programs because of the positive impact regular exercise and overall fitness can
have on employee absenteeism, morale and productivity.
Medical Referrals. We target members from the medical referral market
through our SportsMed subsidiary by offering specific rehabilitation and
exercise protocols to complement other forms of physical therapy recommended by
a physician or medical group. We also offer a "next-step" program for SportsMed
patients who complete their physical therapy programs and are looking for an
option to complete their rehabilitation by becoming members at The Sports
Club/LA.
Family Programs. We believe that the family market has considerable
potential, as younger members grow older, marry and have children and seek
recreational activities in which the entire family can participate. To attract
the family market, we have implemented "Fun-N-Fit" programs that offer programs
to children between the ages of 6 months and 15 years and involve youth sports
camps and clinics, fitness programs, art classes and birthday parties. The
Sports Club/LA's weight-training, basketball and swimming pool facilities are
made available to children and their parents during Family Day, and
specially-designed movement classes utilizing a variety of fitness equipment are
offered to younger children. The Sports Club/LA provides individualized sports
instruction and offers multiple fitness activities such as gymnastics, martial
arts and dance that are age appropriate.
6
Senior Programs. We anticipate that as the current core membership group
ages, we will meet the changing fitness needs of seniors and attract additional
members from the senior population. We maintain training and exercise protocol
manuals for the senior market (that we generally define as members who are over
60 years old) that include a description of exercise and fitness programs
specifically designed for seniors. These manuals also contain discussions of the
biological, psychological and medical aspects of aging and the benefits of
regular exercise. We believe this market will expand as the "baby boomers"
mature.
Employee Training
We believe that a key component of our operating strategy is a well-trained
and knowledgeable staff. We have comprehensive training programs to enhance the
effectiveness of our personnel. All newly hired employees are required to attend
an orientation seminar, that is led by members of our management staff and a
personnel instructor. Topics include our history and philosophy, The Sports
Club/LA policies and procedures, member service, interaction skills and product
knowledge. These orientation seminars are held weekly.
To aid in the development and continuing education of our management staff,
we offer a workshop entitled "Introduction to Management" for newly hired
management personnel and other employees demonstrating management skills. The
workshop is intended to educate managers in the areas of instilling our Company
philosophy, policies and procedures, safety, workers' compensation, managing
people, communication, group problem solving, training, coaching, motivation,
feedback, recognition, counseling, evaluations, as well as time and stress
management. Topics are added periodically to reflect new management techniques
or operating issues. These seminars, generally consisting of three eight-hour
sessions, are held six times a year or as needed for new employees.
Additionally, our management personnel are required to participate in our
Manager on Duty Program and other management and sales seminars to maintain and
develop their skills.
We provide additional seminars specifically designed for targeted employee
groups. Seminars providing specialized instruction for program directors,
private trainers, group exercise instructors and sales/marketing personnel are
offered at various times during the year, for which attendance on the part of
newly-hired personnel is mandatory. We place particular emphasis on our
sales/marketing training seminars, that are given once every two months by a
personnel instructor. In these seminars, all new membership directors complete
20 hours of participation and all other membership directors are expected to
complete four hours of participation every two months. Our fitness instructors
are trained to assist in the sales function and to implement fitness testing and
individually-tailored exercise programs. Most instructors are college-educated
and all trainers are required to be certified by the National Academy of Sports
Medicine. Our group exercise instructors hold nationally recognized
certifications and must have at least one year of teaching experience before
they are permitted to teach at The Sports Club/LA. They are also required to
participate in ongoing training and periodic re-evaluation.
Lastly, all line staff can voluntarily participate in quarterly workshops
that are offered through our human resources department. Workshop topics include
conflict resolution, communication and member service; however, topics vary
depending on the Club's current training needs.
Membership Programs
Membership at The Sports Club/LA requires an initiation fee plus monthly
membership dues. Initiation fees are required to be paid upfront or during the
member's first year. Members are currently required to pay their dues on a
monthly basis by electronic funds transfer, by which each member is
automatically debited each month for dues either through a checking account or
credit card. At established Clubs, the average life of a membership is four to
five years.
7
The Sports Club/LA offers three types of memberships: executive, health and
racquet sports. The Sports Club/LA's initiation fees and monthly membership dues
vary depending on the location of the Club. The Sports Clubs' initiation fees
range from $400 to $2,900 and monthly membership dues range from $102 to $300.
Corporate, bicoastal and spousal memberships are also available. We offer the
following membership options:
Executive Membership. Executive membership offers the greatest number of
amenities and services, including unlimited use of all facilities, racquet
sports privileges, personal locker assignments within an executive locker room,
laundry service, free valet parking and charge privileges for dining and other
Club services. Executive membership entitles a member to use all The Sports
Club/LA locations.
Health Membership. Health membership is the basic membership offering
unlimited use of the facility excluding those privileges associated with a
racquet membership; courts are available to holders of health memberships for an
additional fee. We also offer a bi-coastal membership that entitles a member to
use all The Sports Club/LA locations throughout the country and both an Access
West and Access East membership that allows a member the ability to use all of
our Clubs located on either the west coast or east coast.
Racquet Sports Membership. Racquet sports memberships are currently offered
at The Sports Club/Irvine, The Sports Club/LA - Boston and The Sports Club/LA -
Washington D.C. In addition to use of the Club's facilities, this membership
includes unlimited use of racquetball, squash, paddle tennis and tennis courts,
depending upon the individual Club's facilities.
Competition
Although the sports and fitness industry is still fragmented, the industry
has experienced significant consolidation in recent years and certain of our
competitors are significantly larger and have greater financial and operating
resources than we do. In addition, a number of individual and regional operators
compete with us in our existing markets. Many of these sports and fitness clubs
attract the same types of members we target. We also compete with recreational
facilities established by governments and businesses, the YMCA and YWCA, country
clubs and weight-reducing salons, as well as products and services that can be
used in the home. As the general public becomes increasingly aware of the
benefits of regular exercise, we expect that additional sports and fitness
businesses will emerge. We believe that there will continue to exist a market
for The Sports Club/LA and that our operating experience, our highly visible
image, the professionalism of our staff and our state-of-the-art equipment and
exercise facilities afford us an advantage over our competitors. However, we may
be unable to maintain our membership fees or membership levels in areas where
another sports and fitness club offers competitive facilities and services at a
lower cost.
Trademarks and Trade names
We have registered our "flying lady" logo as a stand-alone design and in
combination with "The Sports Club/LA" and "The Sports Club/Irvine" names under
federal trademark laws. Internationally, we have registered "The Sports Club/LA"
name and logo in Japan, Australia and throughout Europe under a joint "European
Community" trademark.
We have also obtained federal protection for our food and nutritional
products that are marketed under the trade names of Private Trainer System and
PTS.
Additionally, we have received trademark approval for several of our
fitness programs, including BodyArt, REV and others. We have not been able to
obtain full protection under Federal trademark laws for our SportsMed subsidiary
name, Splash, the name of our spas, and For Kids Only, our child care and
children's fitness program; however, each of these have been granted "allowed"
status.
8
Government Regulation
Our operations and business practices are subject to regulation at the
federal, state and, in some cases, local levels. State and local consumer
protection laws and regulations govern our advertising, sales and other trade
practices.
Statutes and regulations affecting the fitness industry have been enacted
or proposed in California and New York. Many other states into which we may
expand have or likely will adopt similar legislation. Typically, these statutes
and regulations prescribe certain forms and provisions of membership contracts,
limit the amount of prepaid revenues we can collect, afford members the right to
cancel the contract within a specified time period after signing, require an
escrow of funds received from pre-opening sales or the posting of a bond or
proof of financial responsibility and may impose numerous limitations on the
terms of membership contracts. In addition, we are subject to numerous other
types of federal and state regulations governing the sale of memberships. These
laws and regulations are subject to varying interpretations by a number of state
and federal enforcement agencies and courts. We maintain internal review
procedures in order to comply with these requirements and believe that our
activities are in substantial compliance with all applicable statutes, rules and
decisions.
Under so-called state "cooling-off" statutes, a member has the right to
cancel his or her membership for a period of three to ten days (depending on the
applicable state law) and, in such event, is entitled to a refund of any down
payment. In addition, our membership contracts provide that a member may cancel
his or her membership at any time upon death, disability or relocation beyond a
certain distance from our nearest Club. The specific procedures for cancellation
in these circumstances vary due to differing state laws. In each instance, the
canceling member is entitled to a refund of prepaid amounts only. Furthermore,
where permitted by law, a cancellation fee is due to us upon cancellation and we
may offset such amount against any refunds owed.
Employees
At March 1, 2003, we had 2,223 employees, most of whom are employed on a
part-time basis in Club operating activities such as aerobics, private training
and food and beverage services. At March 1, 2003, we employed 868 full-time
employees, 798 of whom were involved in The Sports Club/LA operations such as
sales, management, private training or support staff, and 70 of whom were in
general and administrative functions. We are not a party to any collective
bargaining agreement with our employees. Although we experience high turnover of
non-management personnel, we have never experienced any labor shortages nor had
any difficulty in obtaining adequate replacements for departing employees. We
consider our relations with our employees to be good.
Available Information
Quarterly and annual reports on Form 10-Q and Form 10-K can be accessed
through the SEC website at http://www.sec.gov/edgar/searchedgar/webusers.htm.
9
ITEM 2. PROPERTIES
We own the real estate at The Sports Club/Irvine and The Sports Club/LA
- Los Angeles (subject to a minority interest held by our Co-Chief Executive
Officer D. Michael Talla). All other premises on which the Clubs are located are
leased.
The following table provides certain information concerning our Clubs:
Approximate Open Date Own or Lease
Club Square Feet (1) Expiration Date Renewal Option
---- ------------ --------- --------------- --------------
The Sports Club/LA - Los Angeles (2)....... 100,000 1994 A Own N/A
The Sports Club/Irvine..................... 130,000 1994 A Own N/A
Reebok Sports Club/NY(3)................... 140,000 1995 O 4/17/15 Three 14-year options
The Sports Club/LA - Rockefeller Center.... 90,000 2000 O 1/31/13 Two 5-year options
The Sports Club/LA - Upper East Side....... 140,000 2000 O 12/31/20 Two 5-year options
The Sports Club/LA - Washington D.C.(4) 100,000 2000 O 10/31/20 Three 14-year options
The Sports Club/LA - Boston(4)............. 100,000 2001 O 8/31/21 Three 14-year options
The Sports Club/LA - San Francisco(5)...... 90,000 2001 O 9/30/21 Three 14-year options
The Sports Club/LA - Beverly Hills......... 40,000 2003 E 4/30/18 One 10-year option
-------------
(1) Date of acquisition ("A"), opening ("O") or anticipated open date ("E").
(2) D. Michael Talla, our Chairman and Co-CEO, has the right to 49.9% of the
first $300,000 of annual operating income from the partnership which owns
The Sports Club/LA - Los Angeles.
(3) We have entered into a lease agreement with Millennium with respect to this
property. We are entitled to certain priority distributions from the
partnership that owns this Club. After payment of such priority
distributions, we are entitled to 60% of all additional profits.
(4) We have entered into a lease agreement with Millennium for this Club. The
lease provides that Millennium is to receive 25% of cash flows as
additional rent after we earn certain priority distributions.
(5) We have entered into a lease agreement with Millennium for this Club. The
lease provides that Millennium is to receive 60% of cash flows as
additional rent after we earn certain priority distributions.
We remain obligated under lease agreements for seven of our former Spectrum
Club locations. We have subleased each of these properties to the buyer of these
Clubs under sublease agreements that provide for all operating costs of these
facilities be assumed by the new owners.
All of the Clubs maintain comprehensive casualty, liability and business
interruption insurance. In March 2003, we secured insurance against acts of
terrorism. Clubs located in California maintain a blanket $35.0 million
earthquake insurance policy. We believe that our insurance coverage is in
accordance with or above industry standards. There are, however, certain types
of losses that may be either uninsurable or not economically insurable, and
insurance proceeds may not adequately compensate us for all economic
consequences of any loss. Should a loss occur, we could lose both our invested
capital and our anticipated profits from the affected Clubs. Any such event
could have a material adverse effect on our operations.
10
ITEM 3. LEGAL PROCEEDINGS
We are 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
Our Common Stock is traded on the American Stock Exchange ("AMEX") under
the symbol "SCY". The following table sets forth the quarterly high and low sale
prices for the Common Stock for the periods indicated, as reported by the AMEX.
Price Range of Common Stock
---------------------------
Calendar Quarter High Low
---------------- ---- ---
Year Ended December 31, 2001:
First Quarter ............................................. $ 3.19 $ 2.55
Second Quarter............................................. 3.30 2.86
Third Quarter.............................................. 4.00 3.12
Fourth Quarter............................................. 3.35 2.35
Year Ended December 31, 2002:
First Quarter ............................................. 2.90 2.45
Second Quarter............................................. 2.60 2.10
Third Quarter.............................................. 2.45 1.00
Fourth Quarter............................................. 3.45 1.72
Year Ended December 31, 2003:
First Quarter.............................................. 2.50 2.15
Second Quarter (through June 18th)......................... 2.87 2.40
As of June 18, 2003 we had 62 stockholders of record and approximately 600
beneficial owners. The closing price of our Common Stock as reported by the AMEX
on June 18, 2003, was $2.80.
Dividend Policy
We have never declared or paid any dividends on our Common Stock and we do
not anticipate doing so in the foreseeable future. It is our present policy to
retain earnings for use in our operations and the expansion of our business. In
addition, our ability to pay cash dividends is limited by our current financing
agreements and may be similarly limited by future financing agreements.
12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents our summary financial and operating data for
the fiscal years ended December 31, 1998 through 2002 and has been derived from
our consolidated financial statements. Such consolidated financial statements
and summary financial and operating data have been restated as described in Note
19 to the consolidated financial statements. The summary financial and operating
data should be read in conjunction with, and is qualified in its entirety by
reference to, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the notes
thereto appearing elsewhere in this Form 10-K/A.
Fiscal Year Ended December 31,
------------------------------
1998 1999 2000 2001 2002
--------- --------- --------- --------- ----
(Restated) (Restated) (Restated) (Restated) (Restated)
(Dollars in thousands, except per share data)
Statement of Operations Data:
Revenues.......................................... $ 81,229 $ 86,787 $ 75,217 $100,165 $120,853
Operating expenses:
Direct.......................................... 56,352 60,065 58,575 87,560 100,973
General and administrative...................... 6,131 6,810 7,326 8,468 7,414
Selling......................................... 2,538 2,608 2,915 3,880 4,907
Depreciation and amortization................... 5,282 6,147 7,428 11,883 11,909
Pre-opening expenses............................ -- 3,090 9,589 5,884 130
Impairment charge............................... -- -- -- 5,044 --
--------- --------- --------- --------- ---------
Total operating expenses................... 70,303 78,720 85,833 122,719 125,333
-------- -------- -------- -------- --------
Income (loss) from operations.............. 10,926 8,067 (10,616) (22,554) (4,480)
Other income (expense):
Interest........................................ (1,629) (5,991) (6,478) (13,001) (13,420)
Minority interests.............................. (150) (150) (150) (150) (150)
Equity interest in net income of unconsolidated
subsidiary.................................... 880 931 -- -- --
Non-recurring items............................. (314) 768 (3,242) 397 127
-------- -------- --------- -------- --------
Total other income (expense)............... (1,213) (4,442) (9,870) (12,754) (13,443)
-------- -------- -------- --------- ---------
Income (loss) before income taxes,
extraordinary charge and cumulative
effect of change in accounting
principle................................ 9,713 3,625 (20,486) (35,308) (17,923)
Provision (benefit) for income taxes.............. 3,806 2,021 (7,982) 5,370 (310)
--------- --------- ---------- --------- ---------
Income (loss) before extraordinary charge and
cumulative effect of change in accounting
principle................................ 5,907 1,604 (12,504) (40,678) (17,613)
Extraordinary charge from early extinguishment of
debt, net of income tax benefit of $1,331....... 2,173 -- -- -- --
Cumulative effect of change in accounting principle,
net of income tax benefit of $600............... -- 899 -- -- --
--------- --------- --------- --------- ---------
Net income (loss).......................... 3,734 705 (12,504) (40,678) (17,613)
Dividends on Preferred Stock...................... -- -- -- -- 888
--------- --------- --------- --------- ---------
Net income (loss) attributable to common
shareholders................................. $ 3,734 $ 705 $ (12,504) $ (40,678) $ (18,501)
========= ========= ========== ========== ==========
Net income (loss) per share:
Basic and Diluted............................... $ 0.20 $ 0.04 $ (0.70) $ (2.27) $ (1.02)
======== ======== ========= ========== ========
Weighted average number of common shares outstanding:
Basic........................................... 18,603 18,114 17,773 17,939 18,080
======== ======== ======== ======== ========
Diluted......................................... 18,829 18,290 17,773 17,939 18,080
======== ======== ======== ======== ========
At December 31,
---------------
1998 1999 2000 2001 2002
-------- --------- --------- --------- ----
(Restated) (Restated) (Restated) (Restated) (Restated)
(Dollars in thousands)
Balance Sheet Data:
Cash and cash equivalents.......................... $ 2,233 $ 36,107 $ 11,059 $ 1,482 $ 3,185
Current assets..................................... 7,043 41,952 20,819 8,281 9,453
Restricted cash.................................... -- 41,389 6,996 -- 227
Property and equipment, net........................ 135,269 118,959 169,907 170,799 156,630
Total assets....................................... 165,274 225,088 223,773 197,114 186,386
Deferred membership revenue........................ 13,406 13,025 16,214 19,026 18,231
Current liabilities................................ 29,992 28,249 32,484 44,938 35,591
Long-term debt including current installments...... 37,441 103,887 110,331 115,491 104,040
Stockholders' equity............................... 102,263 94,806 82,793 42,469 29,279
13
ITEM 7. 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 is based upon our consolidated financial statements and
notes thereto appearing elsewhere herein, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
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.
The following discussion and analysis of financial condition and results of
operations (Item 7) has been updated to correspond with our restated financial
statements (See Note 19 to consolidated financial statements).
The Sports Club/LA - Rockefeller Center, The Sports Club/LA - Upper East
Side, The Sports Club/LA - Washington D.C., The Sports Club/LA - Boston and The
Sports Club/LA - San Francisco opened in February 2000, September 2000, October
2000, September 2001 and October 2001, respectively. In July 2001, we closed our
SportsMed Agoura Hills location and by December 31, 2001, we had finished the
transfer of our retail business to outside third party vendors. On January 31,
2002, we sold The Sports Club/Las Vegas. As a result of these Club openings, the
high level of pre-opening expenses incurred at these new Clubs, the closing of
our SportsMed Agoura Hills location, our transfer of the retail business and the
sale of The Sports Club/Las Vegas, results for the years ended December 31,
2002, 2001 and 2000 are not indicative of expected results in future periods.
Neither seasonal factors nor the relatively moderate inflation rate has had a
significant effect on our operating results.
Results of Operations
Fiscal 2002 compared to Fiscal 2001
Our revenues for the year ended December 31, 2002, were $120.9 million,
compared to $100.2 million in 2001, an increase of $20.7 million or 20.7%.
Revenue increased by $21.1 million, due to the opening of The Sports Club/LA -
Boston in September of 2001 and The Sports Club/LA - San Francisco in October of
2001 and revenue increased by $6.2 million as a result of membership growth at
the three Sports Club/LA Clubs opened in 2000. Revenue decreased by $5.4 million
as a result of the sale of The Sports Club/Las Vegas on January 31, 2002, and by
$2.2 million due to the transfer of our retail operations to outside third party
vendors. Revenue increased by $1.0 million at our other Sports Clubs and our
SportsMed subsidiary primarily due to an increase in private training and
monthly dues revenues at the Sports Clubs, partially offset by a decrease in
SportsMed revenues primarily due to the closing of The SportsMed Agoura Hills
location.
Our direct expenses increased by $13.4 million to $101.0 million for the
year ended December 31, 2002, versus $87.6 million in 2001. Direct expenses
increased by $20.8 million, due to the opening of The Sports Club/LA - Boston in
September of 2001 and The Sports Club/LA - San Francisco in October of 2001 and
by $1.8 million as a result of an increase in expenses associated with the
membership growth at the three Sports Club/LA Clubs opened in 2000. Direct
expenses decreased by $5.4 million due to the sale of The Sports Club/Las Vegas
on January 31, 2002, by $2.5 million due to the transfer of our retail
operations to outside third party vendors and by $1.3 million at our other
Sports Clubs and our SportsMed subsidiary primarily as a result of cost cutting
measures we implemented at these Clubs and the closing of
14
The SportsMed Agoura Hills location. Direct expenses as a percent of revenue for
the year ended December 31, 2002, decreased to 83.6% from 87.4% in 2001. As
membership levels and therefore revenues increase at The Sports Club/LA Clubs
opened in 2000 and 2001, the direct expense percentage should continue to
decrease. There is no assurance, however, that said expansion or economies of
scale will be achieved.
Our general and administrative expenses were $7.4 million for the year
ended December 31, 2002, versus $8.5 million in 2001, a decrease of $1.1 million
or 12.4%. Our general and administrative expenses decreased by $1.0 million due
to lower legal fees resulting from the settlement or dismissal of certain legal
matters in which we were involved. General and administrative expenses decreased
by $ 519,000 as a result of expense cutting measures that have reduced our
payroll and payroll related expenses. General and administrative expenses
increased by $419,000 primarily as a result of higher corporate office rent,
increased insurance premiums and a reduction in corporate costs capitalized on
certain development and information systems projects. General and administrative
expenses decreased as a percentage of revenue to 6.1% for the year ended
December 31, 2002, from 8.5% in 2001. We believe that general and administrative
expenses should continue to 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 were $4.9 million for the year ended December 31,
2002, versus $3.9 million in 2001, an increase of $1.0 million or 26.5%. The
increase in selling expenses was the result of expanded advertising and
promotion efforts at the five Sports Club/LA Clubs opened in 2000 and 2001 with
the majority of this increase attributable to our two most recently opened
Clubs. We also placed special emphasis on membership growth at The Sports
Club/LA - Rockefeller Center. Selling expenses for the year ended December 31,
2002 at these five most recently opened Clubs increased by $1.2 million as
compared to 2001. Selling expenses decreased by $432,000 as a result of the sale
of The Sports Club/Las Vegas on January 31, 2002 and selling expenses declined
by $63,000 at our other Sports Club/LA Clubs and our SportsMed subsidiary.
Selling expenses as a percentage of revenue for the year ended December 31,
2002, were 4.1% versus 3.9% in 2001.
Our depreciation and amortization expenses stayed flat at $11.9 million for
the years ended December 31, 2002 and 2001. Depreciation and amortization
expenses increased by $610,000 as a result of the opening of The Sports Club/LA
- Boston in September 2001 and The Sports Club/LA - San Francisco in October of
2001 and by $709,000 at our corporate headquarters, primarily due to the start
of amortization of our recently installed membership accounting software.
Depreciation and amortization expenses decreased by $344,000 as a result of the
sale of The Sports Club/Las Vegas on January 31, 2002 and by $455,000 at our
other Sports Club/LA Clubs primarily due to assets becoming fully depreciated.
Depreciation and amortization expense also decreased by $494,000 due to the
adoption of Statement of Financial Accounting Standards No. 142, effective
January 1, 2002, that requires goodwill and other indefinite lived intangibles
no longer be amortized.
Pre-opening expenses were $130,000 for the year ended December 31, 2002,
versus $5.9 million in 2001. Pre-opening expenses for the year ended December
31, 2002, consisted of legal fees incurred related to a possible club site on
Long Island in New York. We have since terminated our interest in this site.
Pre-opening expenses by Club for the year ended December 31, 2001, were $2.6
million at The Sports Club/LA - Boston, $2.9 million at The Sports Club/LA - San
Francisco and $405,000 at the possible club site on Long Island in New York.
We incurred impairment charges during the year ended December 31, 2001, of
$5.0 million. These impairment charges consisted of a $3.2 million impairment
charge related to the write down of fixed assets at The Sports Club/Las Vegas
and a $1.8 million impairment charge related to the write down of goodwill at
our SportsMed subsidiary.
We incurred net interest expense of $13.4 million for the year ended
December 31, 2002, versus $13.0 million in 2001, an increase of $419,000. Net
interest expense increased by $496,000 due to our discontinuance of capitalizing
interest costs on Sports Clubs under development after the last Sports
15
Club/LA Club was opened in October 2001. Net interest expense increased by
$323,000, due to a reduction in interest income earned on invested cash
balances. There was a $162,000 decrease in net interest expense due to
reductions of equipment financing loans and a $238,000 decrease resulting from
interest incurred in 2001 related to a sales tax audit at one of our Clubs.
We recorded a non-recurring gain of $97,000, related to the sale of the
undeveloped land in Houston, Texas and a $30,000 non-recurring gain, related to
the sale of The Sports Club/Las Vegas during the year ended December 31, 2002.
The Houston, Texas site was sold on August 30, 2002 and The Sports Club/Las
Vegas was sold on January 31, 2002. We recorded a non-recurring gain of $397,000
during the year ended December 31, 2001. The non-recurring gain in 2001 was the
result of the reversal of accrued interest expense related to the settlement of
litigation. As part of the settlement we were no longer required to pay the
accrued interest due on the note in question.
The tax benefit recorded for the year ended December 31, 2002, is comprised
of a $900,000 federal income tax refund we received as a result of tax law
changes that allowed us to carry-back our 2001 loss to prior tax years,
partially offset by New York State and City income taxes incurred at Reebok
Sports Club/NY. We did not record any deferred tax benefit related to our loss
incurred for the year ended December 31, 2002. After the tax benefit and the
Preferred Stock dividends of $888,000, our loss attributable to common
shareholders for the year ended December 31, 2002, was $18.5 million or $1.02
per basic and diluted share. The income tax provision of $5.4 million for 2001
is related to the establishment of a valuation allowance against our deferred
tax assets that were recorded prior to January 1, 2001 and an accrual for any
current state income taxes due. We did not record any deferred tax benefit
related to our loss incurred in 2001. After the 2001 income tax provision of
$5.4 million, our net loss attributable to common shareholders was $40.7 million
or $2.27 per basic and diluted share. We did not record any deferred tax assets
related to the losses incurred in 2002 and 2001 based on our analysis of current
and projected operating results and our determination that it is more likely
than not that future taxable income will be insufficient to utilize any deferred
tax assets.
Fiscal 2001 compared to fiscal 2000
Our revenues for the year ended December 31, 2001, were $100.2 million,
compared to $75.2 million in 2000, an increase of $25.0 million or 33.2%.
Revenue increased by $4.9 million as a result of the opening of The Sports
Club/LA - Boston in September 2001 and The Sports Club/LA - San Francisco in
October 2001. Revenue increased by $20.3 million as a result of membership
growth and a full twelve months of operating activities at the three new Sports
Clubs opened in 2000. Revenue decreased by a net $233,000 at our existing Sports
Clubs and SportsMed subsidiary. This net revenue decrease at our existing Sports
Clubs and SportsMed subsidiary was the result of a $1.0 million decrease in our
retail product sales offset by higher membership revenues from rate increases.
During 2001 we decided to exit the retail business and have now sublet these
spaces to outside operators. We also experienced a decrease in our food and
beverage revenues due to curtailing the restaurant operating hours at Reebok
Sports Club/NY.
Our direct operating expenses increased by $29.0 million to $87.6 million
in the year ended December 31, 2001, versus $58.6 million for the year ended
December 31, 2000. Direct operating expenses increased by $6.4 million, due to
the opening of The Sports Club/LA - Boston and The Sports Club/LA - San
Francisco, by $21.6 million as a result of membership growth and a full twelve
months of operating activities at the three new Sports Club/LA Clubs opened in
2000 and by $1.0 million at our existing Sports Clubs and SportsMed. The
increase in direct expenses at our existing Sports Clubs and SportsMed was due
to increased payroll and payroll related expenses of $1.0 million, increased
utility expenses of $254,000 and a decrease in other operating expenses of
$263,000. Direct operating expenses as a percent of revenue for the year ended
December 31, 2001 increased to 87.4% from 77.9% for the year ended December 31,
2000. The increase in the direct operating expense percentage was due to the
impact of significant fixed costs at our five new Clubs opened in 2000 and 2001.
Our general and administrative expenses were $8.5 million for the year
ended December 31, 2001, compared to $7.3 million for the year ended December
31, 2000, an increase of $1.2 million or 15.6%. Our general and administrative
costs increased by $1.0 million due to increased legal fees incurred
16
regarding various legal matters we were involved in during 2001. General and
administrative costs increased by $1.4 million due to a decrease in support
service reimbursements we received in 2000 for managing the Spectrum Clubs and
lower capitalization of salaries and wages on Clubs under development. General
and administrative costs decreased by $1.0 million due to a decrease in
corporate office salaries, bonuses and payroll related costs and by $254,000 due
to a decrease in travel costs. General and administrative costs increased by
$238,000 due to an increase in our corporate office rent and decreased by
$183,000 primarily due to decreases in our supplies and outside service costs.
General and administrative costs decreased as a percentage of revenue to 8.5% in
2001 from 9.7% in 2000.
Our selling costs were $3.9 million in the year ended December 31, 2001,
compared to $2.9 million in the year ended December 31, 2000, an increase of
$1.0 million or 33.1%. The increase in selling costs was the result of increased
advertising and promotion efforts at the five new Clubs opened in 2000 and 2001.
Selling costs as a percentage of revenue stayed flat at 3.9% in 2000 and 2001.
Our depreciation and amortization expenses were $11.9 million for the year
ended December 31, 2001, versus $7.4 million for the year ended December 31,
2000. Depreciation and amortization increased by $3.5 million, at the three
Sports Clubs opened in 2000, primarily due to a full twelve months of operating
activity at these new Clubs in 2001. Depreciation and amortization increased by
$276,000 as a result of the opening of The Sports Club/LA - Boston and The
Sports Club/LA - San Francisco in 2001. Depreciation increased by $209,000 at
our existing Sports Clubs and SportsMed as a result of capital additions made at
these facilities in 2000 and 2001 and by $512,000 due to the start of
depreciation related to our recently installed membership accounting software.
Pre-opening expenses were $5.9 million for the year ended December 31,
2001, versus $9.6 million for the year ended December 31, 2000. Pre-opening
expenses by Club during the year ended December 31, 2001 were $2.9 million at
The Sports Club/LA - San Francisco, $2.6 million at The Sports Club/LA - Boston
and $400,000 related to a potential Club site on Long Island in New York.
Pre-opening expenses by Club during the year ended December 31, 2000 were $3.6
million at The Sports Club/LA - Upper East Side, $3.2 million at The Sports
Club/LA - Washington D.C., $1.8 million at The Sports Club/LA - Rockefeller
Center, $725,000 at The Sports Club/LA - Boston, $155,000 at The Sports Club/LA
- San Francisco and $125,000 at other possible Sports Clubs in the
pre-development stage.
We incurred impairment charges in 2001 of $5.0 million. These charges
consisted of a $3.2 million impairment charge related to the write down of fixed
assets at The Sports Club/Las Vegas and a $1.8 million impairment charge related
to the write down of goodwill at our SportsMed subsidiary.
We incurred net interest expense of $13.0 million in the year ended
December 31, 2001, versus $6.5 million in the year ended December 31, 2000, an
increase of $6.5 million. Net interest expense increased by $3.3 million due to
a reduction in interest capitalized on Sports Clubs under development, by $2.3
million due to a reduction in interest earned on invested cash balances, by
$362,000 due to increased interest expense on new equipment financing loans, by
$254,000 due to interest expense incurred on prior years' sales tax audits and
by $279,000 due to increased interest expense related to advances on our bank
credit facility.
We had non-recurring income of $397,000 in the year ended December 31,
2001, versus non-recurring charges of $3.2 million for the year ended December
31, 2000. The non-recurring income in 2001 is the result of the reversal of
accrued interest expense related to the settlement of litigation. As part of the
settlement we are no longer required to pay the accrued interest due on the note
payable in question. The non-recurring charges in 2000 consisted of a $1.5
million charge for attorney's fees and settlement costs related to a class
action lawsuit against The Sports Club/LA - Los Angeles, a $1.0 million charge
to reflect the loss on the sale of real estate in Fountain Valley, California
and a $749,000 charge to adjust the carrying value of our real estate located in
Houston, Texas.
We did not to record any income tax benefit in 2001. The income tax
provision of $5.4 million in 2001 is related to the establishment of a valuation
allowance against our deferred tax assets that were recorded prior to January 1,
2001 and an accrual for any current state income taxes due. After the 2001
17
income tax provision of $5.4 million, our net loss attributable to common
shareholders was $40.7 million or $2.27 per basic and diluted share. Our
effective federal and state income tax rate was 39.0% for the year ended
December 31, 2000, resulting in a net tax benefit of $8.0 million and in a net
loss attributable to common shareholders of $12.5 million or $0.70 per basic and
diluted share. In the fourth quarter of 2001, we determined that it is more
likely than not that future taxable income will be insufficient to utilize our
deferred tax assets. As a result of this determination, we ceased recording any
deferred tax benefit related to our taxable losses and, in the fourth quarter of
2001, we recorded a valuation allowance of $19.6 million to offset our net
deferred tax assets.
Liquidity and Capital Resources
Capital Requirements - Existing Operation
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 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 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 December 31, 2002, we had $4.0 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.
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, such as The Sports Club/Las Vegas and our real estate
in Houston, the proceeds from those sales would be subject to the excess
proceeds provision of the Indenture. We were not required to make such an offer
as a result of the sale of The Sports Club/Las Vegas or the Houston real estate
because the net proceeds were below the $10.0 million level.
18
Other than our normal operating activities and capital expenditures, our
total cash requirements for our existing operations through December 31, 2003
are estimated to be as follows (amounts in thousands):
Indenture interest........................................ $ 11,375
Information system upgrades............................... 700
Payments on long-term debt................................ 2,158
------------------
$ 14,233
==================
Contractual Obligations
The following schedule lists known contractual obligations (amounts in
thousands):
Payments Due By Period
----------------------
More
Less Than Than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
----------------------- ----- ------ --------- --------- -------
Senior secured notes (1)........ $ 100,000 $ -- $ -- $ 100,000 $ --
Equipment financing loans (2)... 4,040 2,158 1,882 -- --
Operating leases (3)............ 359,990 22,820 45,171 44,762 247,237
Minority interest (4)........... 600 -- -- -- 600
Redeemable Preferred Stock (5).. -- -- -- -- 10,500
---------- ------------ ------------ ------------ -----------
Total $ 464,630 $ 24,978 $ 47,053 $ 144,762 $ 258,337
========== ============ ============ ============ ===========
-------------
(1) On April 1, 1999, we issued in a private placement $100.0 million of 11 3/8%
Senior Secured Notes due in March 2006 with interest due semi-annually.
(2) 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%.
(3) We lease certain facilities pursuant to various operating lease agreements.
Club facility leases are generally long-term and noncancelable triple-net leases
(requiring us to pay all real estate taxes, insurance and maintenance expenses),
and have an average remaining term of 44.17 years, including renewal options
which are included in the lease term, with the earliest Sports Club lease
expiration date of January 31, 2013. We are also obligated under lease
agreements for seven of our former Spectrum Club locations. We have subleased
each of these properties to the buyer of these Clubs under sublease agreements
which provide that all operating costs of these facilities be assumed by the new
owners.
(4) We own a 50.1% interest in the partnership that owns The Sports Club/LA -
Los Angeles, and D. Michael Talla, our Co-CEO, beneficially owns the remaining
49.9%. Under certain circumstances, we have an option to purchase Mr. Talla's
interest in the partnership for $600,000. We have not included the annual
minority interest payment of $149,700 to Mr. Talla in the above table.
(5) On March 18, 2002, the Company issued 10,500 shares of Series B Preferred
Stock. The stock is redeemable by the stockholders on March 18, 2009.
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. Due to our limited financial resources, we have
been searching for a joint venture partner or alternative financing (subject to
the restrictions in the Indenture) to finance this project. However, we have not
been able to find a party willing to participate on
19
terms that we find acceptable. Therefore, it now appears that we will need to
complete the development of this Club with our own funds.
Cash and Credit Availability
Our December 31, 2002 cash balance was $3.2 million.
During 2002 our operating activities generated $7.5 million before we made
interest payments of $11.9 million resulting in a net use of cash from operating
activities of $4.4 million. We believe we will continue to generate positive
cash flow from operations, before pre-opening expenses, capital expenditures and
debt service and that such amount will increase as our new Clubs continue to
mature.
The Indenture allows us to incur up to $10.0 million of equipment financing
obligations. At December 31, 2002, we had $4.0 million of equipment financing
obligations outstanding and would be allowed to finance an additional $6.0
million with our equipment serving as collateral.
On June 12, 2003, we replaced our 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. 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 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.
Summary
Our cash balances at December 31, 2002, 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 interest payments due during 2003. 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.
20
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of the assets
and liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. We base these estimates and assumptions upon
historical experience and existing known circumstances. Actual results could
differ from those estimates. Specifically, we must make estimates in the
following areas:
Revenue Recognition. We receive initiation fees and monthly membership dues
from our members. Substantially all of our members join on a month-to-month
basis and can therefore cancel their membership at any time. Initiation fees and
related direct expenses, primarily sales commissions, are deferred and
recognized, on a straight line basis, over a period of three years. Dues that
are received in advance are recognized on a pro-rated basis over the periods in
which services are to be provided. In addition, payments of last months dues are
deferred. Revenues for services including private training, spa treatments and
physical therapy sessions are recorded when such services are performed. Amounts
received in advance are recorded as deferred revenues. Revenues from the
Company's SportsMed subsidiary are recognized based upon the estimated amount to
be collected.
Allowance for doubtful accounts. We provide a reserve against our
receivables for estimated losses that may result from our customers' inability
to pay. We determine the amount of the reserve by analyzing known uncollectible
accounts, economic conditions and historical losses and our customers'
creditworthiness. The likelihood of a material loss from this area is minimal
due to our limited exposure to credit risk.
Valuation of long-lived assets. We periodically assess the impairment of
our long-lived assets which require us to make assumptions and judgments
regarding the carrying value of these assets. The assets are considered to be
impaired if we determine that the carrying value may not be recoverable based
upon our assessment of the following events or changes in circumstances:
|X| A significant decrease in the market price of a long-lived asset or asset
group,
|X| A significant adverse change in the extent or manner in which a long-lived
asset or asset group is being used or in its physical condition,
|X| A significant adverse change in legal factors or in the business climate
that could affect the value of a long-lived asset or asset group, including
an adverse action or assessment by a regulator,
|X| An accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of a long-lived asset or asset
group,
|X| A current-period operating or cash flow loss combined with a history of
operating or cash flow losses or a projection or forecast that demonstrates
continuing losses associated with the use of a long-lived asset or asset
group, or
|X| A current expectation that, more likely than not, a long-lived asset or
asset group will be sold or otherwise disposed of significantly before the
end of its previously estimated useful life.
If the projected cash flows to be generated by long-lived assets do not
exceed the carrying value of the long-lived assets the long-lived asset would be
considered to be impaired. The impairment we would recognize is the amount by
which the carrying value of the assets exceeds the fair value of the assets. In
addition, we base the useful lives and related amortization or depreciation
expense on our estimate of the period that the assets will generate revenues or
otherwise be used by us. If a change were to occur in any of the above mentioned
factors or estimates, the likelihood of a material change in our reported
results would increase.
21
Valuation of goodwill. Prior to January 1, 2002, we amortized goodwill,
which represents the excess of the purchase price over the net assets acquired
in business acquisitions, over 40 years. In January 2002, we adopted SFAS No.
142, Goodwill and Other Intangible Assets, and as a result have ceased to
amortize goodwill. Instead, we were required to perform a transitional
impairment review of our goodwill as of January 1, 2002. We evaluated the impact
of the adoption of SFAS No. 142 and determined that no impairment charge was
required upon adoption of this standard. The impairment test was performed
through comparison of our fair value (determined primarily by our market
capitalization) with the net carrying value of our assets. We are also required
to evaluate goodwill on an annual basis. We performed the analysis as of
December 31, 2002 and determined that no impairment was necessary.
Litigation reserves. In the ordinary course of business, we are involved in
a variety of legal matters. We record contingent liabilities resulting from
claims against us when it is probable that a liability has been incurred and the
amount of the loss is reasonably estimable. We disclose contingent liabilities
when there is a reasonable possibility that the ultimate loss will exceed the
recorded liability. Estimating probable losses requires analysis of multiple
factors, in some cases including judgment about the potential actions of third
party claimants and courts. Therefore, actual losses in any future period are
inherently uncertain. Currently, we do not believe that any of our pending legal
proceedings or claims will have a material impact on our financial position,
cash flows or results of operations. However, if actual or estimated probable
future losses exceed our recorded liability for such claims, we would record
additional charges during the period in which the actual loss or change in
estimate occurred.
Valuation of deferred income taxes. Valuation allowances are established to
reduce deferred tax assets to the amount expected to be realized. The likelihood
of material change in our expected realization of these assets depends on future
taxable income, our ability to deduct tax loss carry forwards against future
taxable income, the effectiveness of our tax planning and strategies among the
various tax jurisdictions in which we operate and any significant changes in the
tax laws.
Off-balance sheet transactions. We have not entered into any off-balance
sheet transactions.
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,
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,
22
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are 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
December 31, 2002, we had Senior Secured Notes totaling $100.0 million due in
March 2006 bearing an interest rate of 11.375%. Annual interest of $11.4 million
is payable semi-annually in March and September. At December 31, 2002, the fair
value of the Senior Secured Notes is approximately $90.0 million. We also have a
$20.0 million loan with a fixed 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.
23
ITEM 8. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements (Restated)
PAGE
----
Independent Auditors' Report.......................................................................... F-1
Consolidated Balance Sheets as of December 31, 2001 and 2002.......................................... F-2
Consolidated Statements of Operations for each of the Years in the Three-Year Period
ended December 31, 2002............................................................................... F-3
Consolidated Statements of Stockholders' Equity for each of the Years in the Three-Year Period
ended December 31, 2002................................................................................ F-4
Consolidated Statements of Cash Flows for each of the Years in the Three-Year Period
ended December 31, 2002................................................................................ F-5
Notes to Consolidated Financial Statements............................................................. F-6
Consolidated Financial Statement Schedule
Valuation and Qualifying Accounts...................................................................... F-28
All other schedules are omitted because they are not applicable or the
required information is shown in our consolidated financial statements or notes
thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
The Sports Club Company, Inc.:
We have audited the accompanying consolidated financial statements of The
Sports Club Company, Inc. and subsidiaries (the Company) as listed in the
accompanying index. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Sports
Club Company, Inc. and subsidiaries as of December 31, 2001 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the
Company has restated its 2001 balance sheet and adjusted its accumulated deficit
as of January 1, 2000 and December 31, 2000 to properly record certain deferred
membership revenues.
As discussed in Note 19 to the consolidated financial statements, the
Company has restated its financial statements. This restatement includes
adjustments to properly record deferred revenues for advanced payments received
for private training services, certain operating expenses and the tax impacts of
the Company's restatements.
As discussed in Note 3 to the consolidated financial statements, effective
January 1, 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets.
KPMG LLP
Los Angeles, California
February 21, 2003, except for Note 19, which is as of June 12, 2003.
F-1
THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2002
(in thousands, except share amounts)
ASSETS
2001 2002
---- ----
(Restated) (Restated)
Current assets:
Cash and cash equivalents.......................................................... $ 1,482 $ 3,185
Accounts receivable, net of allowance for doubtful accounts of $318 and $534 at
December 31, 2001 and 2002, respectively......................................... 4,840 3,951
Inventories........................................................................ 1,225 1,169
Other current assets............................................................... 734 1,148
----------- -----------
Total current assets.......................................................... 8,281 9,453
Property and equipment, net............................................................ 170,799 156,630
Goodwill, less accumulated amortization of
$2,531 at December 31, 2001 and 2002............................................... 12,794 12,794
Other assets........................................................................... 5,240 7,509
----------- -----------
$ 197,114 $ 186,386
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and equipment financing loans................ $ 11,449 $ 2,158
Accounts payable................................................................... 3,028 2,545
Accrued liabilities................................................................ 11,435 12,657
Deferred revenues.................................................................. 19,026 18,231
----------- -----------
Total current liabilities..................................................... 44,938 35,591
Notes payable and equipment financing loans, less current installments................. 104,042 101,882
Deferred lease obligations............................................................. 5,065 8,307
Minority interest...................................................................... 600 600
----------- -----------
Total liabilities............................................................. 154,645 146,380
Commitments and contingencies
Redeemable Preferred Stock, $.01 par value, 10,500 shares authorized; 10,500
shares issued and outstanding at December 31, 2002 (liquidation
preference of $11,248 at December 31, 2002)...................................... -- 10,727
Stockholders' equity:
Preferred Stock, $.01 par value, 1,000,000 shares and 984,500 shares
authorized at December 31, 2001 and 2002, respectively;
no shares issued or outstanding................................................ -- --
Preferred Stock, $.01 par value, 5,000 shares authorized; 5,000 shares issued and
outstanding at December 31, 2002 (liquidation preference of $5,140
at December 31, 2002).......................................................... -- 5,000
Common Stock, $.01 par value, 40,000,000 shares authorized;
21,060,717 and 21,068,717 shares issued at
December 31, 2001 and 2002, respectively....................................... 211 211
Additional paid-in capital......................................................... 102,764 101,961
Accumulated deficit................................................................ (45,096) (62,709)
Treasury Stock, at cost, 3,045,360 and 2,964,764 shares at
December 31, 2001 and 2002, respectively......................................... (15,410) (15,184)
----------- ------------
Net stockholders' equity...................................................... 42,469 29,279
----------- -----------
$ 197,114 $ 186,386
=========== ===========
See accompanying notes to consolidated
financial statements.
F-2
THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Year Period ended December 31, 2002
(in thousands, except per share amounts)
2000 2001 2002
---- ---- ----
(Restated) (Restated) (Restated)
Revenues................................................................ $ 75,217 $ 100,165 $ 120,853
Operating expenses:
Direct.............................................................. 58,575 87,560 100,973
General and administrative.......................................... 7,326 8,468 7,414
Selling............................................................. 2,915 3,880 4,907
Depreciation and amortization....................................... 7,428 11,883 11,909
Pre-opening expenses................................................ 9,589 5,884 130
Impairment charges.................................................. -- 5,044 --
---------- ---------- ------------
Total operating expenses....................................... 85,833 122,719 125,333
---------- ---------- ------------
Income (loss) from operations.............................. (10,616) (22,554) (4,480)
Other income (expense):
Interest, net....................................................... (6,478) (13,001) (13,420)
Minority interests.................................................. (150) (150) (150)
Non-recurring items................................................. (3,242) 397 127
----------- ---------- ------------
Income (loss) before income taxes............................ (20,486) (35,308) (17,923)
Provision (benefit) for income taxes.................................... (7,982) 5,370 (310)
----------- ---------- -------------
Net income (loss)............................................ (12,504) (40,678) (17,613)
Dividends on Preferred Stock............................................ -- -- 888
---------- ---------- ------------
Net income (loss) attributable to common shareholders........ $ (12,504) $ (40,678) $ (18,501)
=========== =========== =============
Net income (loss) per share:
Basic and diluted................................................... $ (0.70) $ (2.27) $ (1.02)
=========== =========== =============
Weighted average number of common shares outstanding:
Basic and diluted................................................... 17,773 17,939 18,080
========== ========== ============
See accompanying notes to consolidated
financial statements.
F-3
THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three-Year Period ended December 31, 2002
(in thousands)
Retained
Additional Earnings
Preferred Stock Common Stock Paid-in (Accum.) Treasury Stock
Shares Amount Shares Amount Capital (Deficit) Shares Amount
------ ------ ------ ------ ------- ------- ------ ------
Balance, January 1, 2000, as previously reported. -- -- 20,907 $ 209 $ 102,403 $ 8,709 3,195 $(15,891)
Prior period adjustment (Note 19)........... -- -- -- -- -- (624) -- --
------- ------- ------- ------- --------- ---------- -------- --------
Balance, January 1, 2000, as restated -- -- 20,907 209 102,403 8,085 3,195 (15,891)
Net loss, as restated....................... -- -- -- -- -- (12,504) -- --
Reissuance of Treasury Stock
for employee stock plans.................. -- -- -- -- -- -- (39) 149
Exercise of employee stock options.......... -- -- 25 -- 61 -- -- --
Issuance of Common Stock to outside directors -- -- 6 -- 20 -- -- --
Issuance of Common Stock for 1997
business acquisition...................... -- -- 115 2 259 -- -- --
------- ------- ------- ------- --------- --------- -------- --------
Balance, December 31, 2000, as restated.......... -- -- 21,053 211 102,743 (4,419) 3,156 (15,742)
Net loss, as restated....................... -- -- -- -- -- (40,678) -- --
Reissuance of Treasury Stock
for employee stock plans.................. -- -- -- -- -- 1 (65) 181
Reissuance of Treasury Stock
for loan guarantee fee.................... -- -- -- -- -- -- (46) 151
Exercise of employee stock options.......... -- -- 2 -- 5 -- -- --
Issuance of Common Stock to outside directors -- -- 6 -- 16 -- -- --
------- ------- ------- ------- --------- --------- -------- --------
Balance, December 31, 2001, as restated.......... -- -- 21,061 211 102,764 (45,096) 3,045 (15,410)
Net loss, as restated....................... -- -- -- -- -- (17,613) -- --
Issuance of series C Preferred Stock........ 5 5,000 -- -- -- -- -- --
Issuance of Common Stock to outside directors -- -- 8 -- 15 -- -- --
Reissuance of Treasury Stock for employee
stock plans............................... -- -- -- -- -- -- (80) 226
Accretion of dividends on series B Preferred
Stock..................................... -- -- -- -- (748) -- -- --
Accretion of issuance costs on series B
Preferred Stock........................... -- -- -- -- (70) -- -- --
------- ------- ------- ------- ---------- ---------- -------- --------
Balance, December 31, 2002, as restated.......... 5 $ 5,000 21,069 $ 211 $ 101,961 $ (62,709) 2,965 $(15,184)
======= ======= ======= ======= ========= ========== ======== =========
See accompanying notes to consolidated
financial statements.
F-4
THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-year Period ended December 31, 2002
(in thousands)
2000 2001 2002
---- ---- ----
(Restated) (Restated) (Restated)
Cash flows from operating activities:
Net income (loss).................................................... $(12,504) $(40,678) $ (17,613)
Adjustments to reconcile net income (loss) to cash provided from
(used in) operations:
(Gain) loss on disposition of real estate....................... 1,766 282 (97)
Impairment charges.............................................. -- 5,044 (30)
Depreciation and amortization................................... 7,428 11,883 11,909
Deferred taxes.................................................. (2,990) 4,524 --
(Increase) decrease in:
Accounts receivable, net.................................... (1,476) (1,215) 725
Inventories................................................. (1,499) 1,629 (50)
Other current assets........................................ (1,088) 2,547 (439)
Other assets, net........................................... (1,647) 1,164 (2,283)
Increase (decrease) in:
Accounts payable............................................ (126) 1,102 (233)
Accrued liabilities......................................... 395 2,183 920
Deferred revenues........................................... 3,189 2,812 (439)
Deferred lease obligations.................................. 1,038 2,758 3,242
-------- -------- ---------
Net cash (used in) operations............................... (7,514) (5,965) (4,388)
Cash flows provided from (used in) investing activities:
Capital expenditures................................................. (62,173) (16,122) (6,653)
Distributions from unconsolidated subsidiary......................... -- 32 --
Decrease in due from affiliates...................................... 148 -- --
Decrease in restricted cash.......................................... 34,393 6,996 --
Proceeds from sale of Spectrum Clubs................................. 3,593 -- --
Proceeds from sale of The Sports Club/Las Vegas - net of costs....... -- -- 6,154
Proceeds from sale of Houston real estate - net of costs............. -- -- 3,133
-------- -------- ---------
Net cash provided from (used in) investing activities....... (24,039) (9,094) 2,634
Cash flows provided from (used in) financing activities:
Proceeds from issuance of Preferred Stock - net of costs............. -- -- 14,908
Exercise of employee stock options................................... 61 5 --
Proceeds from notes payable and equipment financing loans............ 7,681 24,588 21,725
Repayments of notes payable and equipment financing loans............ (1,237) (19,111) (33,176)
--------- --------- ----------
Net cash provided from financing activities................. 6,505 5,482 3,457
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents....... (25,048) (9,577) 1,703
Cash and cash equivalents at beginning of year........................... 36,107 11,059 1,482
-------- -------- ---------
Cash and cash equivalents at end of year................................. $ 11,059 $ 1,482 $ 3,185
======== ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest............................... $ 11,605 $ 12,118 $ 11,902
======== ======== =========
Cash paid during the year for income taxes........................... $ 977 $ 533 $ 242
======== ======== =========
See accompanying notes to consolidated
financial statements.
F-5
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 2001 and 2002
1. Organization
The Sports Club Company, Inc. (the "Company") operates sports and fitness
Clubs ("Clubs"), primarily under the "The Sports Club/LA" name. The Sports
Club/LA sites are developed as "urban country clubs" offering a full range of
services including numerous fitness and recreation options, diverse facilities
and other amenities. The Sports Club/LA is marketed to affluent, health
conscious individuals who desire a premier Club.
2. Restatement
The Company has determined that certain revenues relating to the payment of
last month dues under certain membership agreements at three of our Clubs should
have been deferred at the time the memberships were initiated. Accordingly, the
Company has restated its deferred revenues and retained earnings by $2,257,000,
effective January 1, 2000, to reflect this adjustment. The restatement had no
impact on the results of operations or cash flows for the periods presented and
had the following impact on the consolidated balance sheet. In addition, we have
adjusted our deferred tax asset and net operating loss carryforward as described
in Note 12. Also see Note 19.
December 31, 2001
-----------------
(in thousands)
As Originally As Previously
Reported Restated
-------- --------
Deferred revenues...................... $ 13,670 $ 15,927
================ ===============
Current liabilities.................... $ 39,500 $ 41,757
================ ===============
Total Liabilities...................... $ 149,124 $ 151,381
================ ===============
Accumulative deficit................... $ (39,481) $ (41,738)
================ ===============
Net Stockholders' Equity............... $ 48,084 $ 45,827
================ ===============
3. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its majority owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Revenue Recognition
The Company receives initiation fees and monthly membership dues from its
members. Substantially all of the Company's members join on a month-to-month
basis and can therefore cancel their membership at any time. Initiation fees and
related direct expenses, primarily sales commissions, are deferred and
recognized, on a straight-line basis, over an estimated membership period of
three years. Dues that are received in advance are recognized on a pro-rata
basis over the periods in which services are to be provided. In addition,
payments of last month dues are deferred. Revenues for services including
private training, spa treatments and physical therapy sessions are recorded when
such services are
F-6
performed. Amounts received in advance are recorded as deferred revenues.
Revenues from the Company's SportsMed subsidiary are recognized based upon the
estimated amount to be collected.
Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 2001
and 2002, cash and cash equivalents were $1.5 million and $3.2 million,
respectively.
The Company considers cash, cash equivalents and other short-term
investments that are required to be held as deposits to satisfy certain
regulatory requirements related to the operation of the Company's Clubs as
restricted cash. At December 31, 2002, the Company had $227,000 of restricted
cash which was included in "Other Assets" (long-term) on the Company's
consolidated balance sheet.
Inventories
Inventories are stated at the lower of cost or market using the average
cost method. Inventories consist of retail merchandise sold at spas, nutritional
products, food and beverage products, uniforms and supplies.
Advertising Costs
Amounts incurred for advertising costs with third parties are expensed as
incurred. Advertising expense totaled approximately $822,000, $1.2 million and
$1.5 million for the years ended December 31, 2000, 2001 and 2002, respectively.
Loan Costs
Loan costs and the debt discount on the Senior Notes are amortized over the
terms of the related loans.
Start-up Costs
The Company adopted Statement of Position 98-5, Accounting for Start-Up
Costs ("SOP 98-5") effective January 1, 1999. SOP 98-5 provides that all costs
related to the development of new sports and fitness clubs, except for real
estate related costs, be expensed as incurred.
Long-Lived Assets
Property and equipment are recorded at cost.
Depreciation is computed primarily using the straight-line method over the
estimated useful lives of the assets, ranging from five to seven years for
equipment and forty years for buildings. Leasehold improvements are amortized
using the straight-line method over the shorter of the lease term (including
option periods in which the Company will incur a penalty for non-renewal) or the
estimated useful life of the improvements.
The Financial Accounting Standards Board ("FASB") recently issued Statement
of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of, it retains many of the
fundamental provisions of that statement. The standard is effective for fiscal
years beginning after December 15, 2001. The adoption of SFAS No. 144, on
January 1, 2002, did not have a material impact on the Company's financial
position or results of operations.
F-7
The Company evaluates its long-lived assets on a club-by-club basis with
the exception of the three New York Clubs, which are evaluated on a combined
basis due to the nature of the operations of the New York Clubs.
The Company reviews its long-lived assets and certain identifiable
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net undiscounted operating cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
In December 2001, the Company recorded an impairment loss of $1,801,000
related to its SportsMed subsidiary.
Goodwill
During July 2001, the FASB issued SFAS No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method be used for all business combinations initiated after June 30,
2001. SFAS No. 142 requires that goodwill and certain intangibles no longer be
amortized against earnings, but instead be reviewed for impairment on an annual
basis. The amortization of goodwill and certain intangibles ceases upon adoption
of SFAS No. 142, which is effective for fiscal years starting after December 15,
2001. The Company adopted SFAS No. 141 and SFAS No. 142 effective January 1,
2002. The Company has goodwill recorded which will no longer be amortized
subsequent to the adoption of SFAS No. 142. The Company completed the
transitional impairment test, which did not result in the impairment of recorded
goodwill. In addition, the Company was not required to reclassify any portion of
goodwill as a result of the adoption of SFAS No. 142.
Through December 31, 2001, costs in excess of net assets of acquired
businesses were being amortized on a straight-line basis over forty years. SFAS
No. 142 requires that, effective January 1, 2002, goodwill no longer be
amortized to earnings, but instead be reviewed for impairment on an annual
basis.
The adoption of SFAS No. 142 had the following effect on the Company's
reported net income (loss) attributable to common shareholders and net income
(loss) per share for the years ended December 31, 2000, 2001 and 2002 (in
thousands, except per share amounts):
Years Ended
December 31,
------------
2000 2001 2002
---- ---- ----
Reported net income (loss) attributable to
common shareholders.......................... $ (12,504) $ (40,678) $ (18,501)
Add back: Goodwill amortization, net of tax..... 288 494 --
---------- ---------- ----------
Adjusted net income (loss) attributable to
common shareholders.......................... $ (12,216) $ (40,184) $ (18,501)
=========== =========== ===========
Reported basic and diluted
income (loss) per share...................... $ (0.70) $ (2.27) $ (1.02)
=========== =========== ===========
Adjusted basic and diluted
income (loss) per share...................... $ (0.69) $ (2.24) $ (1.02)
=========== =========== ===========
F-8
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and net operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to be applied to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date.
In the fourth quarter of 2001, the Company determined, based on year to
date operating results and projections for the next three years, that it is more
likely than not that future taxable income will be insufficient to utilize its
deferred tax assets. As a result of this determination, the Company ceased
recording any deferred tax benefit related to its taxable losses incurred in
2001 and 2002, and in the fourth quarter of 2001, the Company recorded a
valuation allowance of $19,627,000 to offset its net deferred tax asset recorded
through that date (See Note 12 - Income Taxes). The Company will continue to
evaluate its projected future taxable operating income and reconsider its
current determination when appropriate.
Earnings per Share
The Company presents Basic and Diluted earnings per share. Basic earnings
reflects the actual weighted average shares of Common Stock outstanding during
the period. Diluted earnings per share includes the effects of all dilutive
options, warrants and other securities and utilizes the treasury stock method.
The securities whose conversion would result in an incremental number of
shares that would be included in determining the weighted average shares
outstanding for diluted earnings per share if their effect was not antidilutive
are as follows:
o December 31, 2002 - the common stock equivalent effect of 1,785,333
stock options, 10,500 shares of Series B mandatorily redeemable
convertible Preferred Stock and, 5,000 shares of Series C convertible
Preferred Stock.
o December 31, 2001 - the common stock equivalent effect of 1,850,275
stock options.
o December 31, 2000 - the common stock equivalent effect of 1,533,832
stock options.
Stock Based Compensation
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:
F-9
Year ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
(in thousands, except per share data)
Net income (loss) attributable to common sharehholders:
As reported................................. $ (12,504) $ (40,678) $ (18,501)
Pro forma................................... $ (13,552) $ (42,218) $ (19,740)
Basic and Diluted income (loss) per share:
As reported................................. $ (0.70) $ (2.27) $ (1.02)
Pro forma................................... $ (0.76) $ (2.35) $ (1.09)
The fair value of all option grants for the Company's plan are estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for all option grants in 2000 and
2001 respectively: dividend yield of 0% and 0%; expected volatility of 111.6%
and 118.9%; risk-free interest rates of 6.25% and 4.48% and expected economic
lives of 6.0 years and 6.0 years. There were no options granted in 2002.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions. These affect the reporting
of assets and liabilities, the disclosure of any contingent assets and
liabilities and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
Fair Value of Financial Instruments
The carrying amounts related to cash equivalents, short-term investments,
accounts receivable, other current assets and accounts payable approximate fair
value due to the relatively short maturity of such instruments. The fair value
of long-term debt is estimated by discounting the future cash flows of each
instrument at rates currently available to the Company for similar debt
instruments of comparable maturities by the Company's bankers. The fair value of
long-term debt was estimated to be $90 million.
Redeemable Preferred Stock
Mandatorily redeemable convertible Preferred Stock is stated at redemption
value, less the unamortized discount. The discount is accreted into the carrying
value of the mandatorily redeemable convertible Preferred Stock through the date
at which the Preferred Stock is redeemable at the option of the holder with a
charge to accumulated deficit using the effective-interest method. Due to the
inherent uncertainties regarding the ability and ultimate timing of either the
redemption or conversion of these preferred shares and the accretion method
used, it is not practicable for management to determine their fair value.
Segment Reporting
Management has determined that the Company has one reporting segment.
Impact of Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("SFAS 145"). SFAS 145 rescinds SFAS 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. Upon adoption of SFAS 145,
the
F-10
Company will be required to apply the criteria in APB Opinion No. 30, Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, in determining the classification of gains and losses resulting
from the extinguishment of debt. Additionally, SFAS 145 amends SFAS 13 to
require that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. SFAS 145 will be effective for fiscal years
beginning after May 15, 2002 with early adoption of the provisions related to
the rescission of SFAS 4 encouraged. Upon adoption, companies must reclassify
prior period items that do not meet the extraordinary item classification
criteria in APB Opinion No. 30. The adoption of SFAS 145 for long-lived assets
held for use did not have a material impact on our consolidated financial
statements because the impairment assessment under SFAS 144 is largely unchanged
from SFAS 121
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure ("SFAS 148"), which amends
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 148
amends the disclosure requirements in SFAS 123 for stock-based compensation for
annual periods ending after December 15, 2002 and for interim periods beginning
after December 15, 2002. The disclosure requirements apply to all companies,
including those that continue to recognize stock-based compensation under APB
Opinion No. 25, Accounting for Stock Issued to Employees. Effective for
financial statements for fiscal years ending after December 15, 2002, SFAS 148
also provides three alternative transition methods for companies that choose to
adopt the fair value measurement provisions of SFAS 123. The Company has chosen
not to adopt the fair value measurement provisions of SFAS 123.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"), which addresses the disclosure
to be made by a guarantor in its interim and annual financial statements about
its obligations under guarantees. The disclosure requirements are effective for
interim and annual financial statements ending after December 15, 2002.
FIN 45 also requires the recognition of a liability by a guarantor at the
inception of certain guarantees. FIN 45 requires the guarantor to recognize a
liability for the non-contingent component of a guarantee, which is the
obligation to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability is the
fair value of the guarantee at inception. The recognition of the liability is
required even if it is not probable that payments will be required under the
guarantee or if the guarantee was issued with a premium payment or as part of a
transaction with multiple elements. The initial recognition and measurement
provisions are effective for all guarantees within the scope of FIN 45 issued or
modified after December 31, 2002.
The Company has adopted the disclosure requirements of FIN 45 and will
apply the recognition and measurement provisions for all guarantees entered into
or modified after December 31, 2002. The Company does not have any guarantees
that require disclosure under FIN 45.
In February 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), which addresses the consolidation by
business enterprises of variable interest entities, which have one or both of
the following characteristics: (1) the equity investment at risk is not
sufficient to permit the entity to finance its activities without additional
financial support from other parties, or (2) the equity investors lack one or
more of the following essential characteristics of a controlling financial
interest: (a) the direct or indirect ability to make decisions about the
entity's activities through voting or similar rights, (b) the obligation to
absorb the expected losses of the entity if they occur, or (c) the right to
receive the expected residual returns of the entity if they occur. FIN 46 will
have a significant effect on existing practice because it requires existing
variable interest entities to be consolidated if those entities do not
effectively disburse risks among parties involved. In addition, FIN 46 contains
detailed disclosure requirements. FIN 46 applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. This Interpretation may be
F-11
applied prospectively with a cumulative-effect adjustment as of the date on
which it is first applied or by restating previously issued financial statements
for one or more years with a cumulative-effect adjustment as of the beginning of
the first year restated.
In November 2002, the FASB's Emerging Issues Task Force (EITF) issued EITF
00-21 Revenue Arrangements with Multiple Deliverables ("EITF 00-21). EITF 00-21
addresses certain aspects of the accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities. Specifically, EITF
00-21 addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting. In applying EITF 00-21,
separate contracts with the same entity or related parties that are entered into
at or near the same time are presumed to have been negotiated as a package and
should, therefore, be evaluated as a single arrangement in considering whether
there are one or more units of accounting. That presumption may be overcome if
there is sufficient evidence to the contrary. EITF 00-21 also addresses how
arrangement consideration should be measured and allocated to the separate units
of accounting in the arrangement. The guidance in this Issue is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. Alternatively, companies may elect to report the change in accounting as a
cumulative-effect adjustment. Early application of this consensus is permitted.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This statement is effective for the Company beginning
January 1, 2003. Management does not expect that adoption of this standard will
have a material impact on the Company's financial statements.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146
supersedes previous accounting guidance, principally Emerging Issues Task Force
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires that the liability for costs associated
with an exit or disposal activity be initially measured at fair value and
recognized when the liability is incurred. The provisions of SFAS No. 146 are
required to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The adoption of SFAS No. 146 is not expected to have a
material impact on the Company's financial statements.
4. Dispositions
Disposition of Real Estate
On December 28, 2000, the Company completed the sale of real estate in
Fountain Valley, California for $3,700,000 in cash. In December 2000, the
Company recorded a pre-tax loss of approximately $1,017,000 related to the sale
of the Fountain Valley property (See Note 13).
In June 1998, the Company acquired undeveloped land in Houston, Texas with
the intention of developing a Club on the site. In 2000, the Company decided not
to develop this site and to dispose of the property. An impairment loss of
$749,000 was recorded in December 2000 to reduce the carrying value of the asset
to its estimated fair value less costs to sell. The Houston site was sold on
August 30, 2002 and a non-recurring gain of $97,000 was recorded (See Note 13).
Disposition of Club
In January 2002, the Company sold The Sports Club/Las Vegas to another club
operator. An impairment loss of $3,243,000 was recorded in December 2001 to
reduce the carrying value of The Sports Club/LasVegas to its fair value less
costs to sell. A gain of $30,000, related to the sale of The Sports Club/Las
Vegas was recorded in January 2002. The gain was based upon the actual proceeds
received from the sale of this Club.
F-12
5. Property and Equipment
Property and equipment is carried at cost, less accumulated depreciation
and amortization, which is summarized as follows:
At December 31,
---------------
2001 2002
---- ----
(in thousands)
Land.............................................. $ 16,082 $ 10,621
Building and improvements......................... 145,735 146,814
Furniture, fixtures and equipment................ 39,635 40,314
----------- -----------
201,452 197,749
Less accumulated depreciation and amortization.... 30,653 41,119
----------- -----------
Net property and equipment........................ $ 170,799 $ 156,630
=========== ===========
Equipment secured by equipment financing loans was $8,219,000 and
$8,151,000 and related accumulated amortization was $2,196,000 and $4,111,000 at
December 31, 2001 and 2002, respectively.
6. Notes Payable and Capitalized Lease Obligations
Notes payable and capitalized lease obligations are summarized as follows:
At December 31,
---------------
2001 2002
---- ----
(in thousands)
Senior secured notes (a)......................... $ 100,000 $ 100,000
Equipment financing loans (b).................... 6,023 4,040
Other note payable (c)........................... 963 --
Bank credit facility (See Note 7)................ 8,505 --
----------- ------------
115,491 104,040
Less current installments........................ 11,449 2,158
----------- ------------
$ 104,042 $ 101,882
=========== ============
(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 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 that restrict the Company's
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 the Company's 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. 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. At December 31, 2002, the
Company was in compliance with the terms of the Indenture. At December 31, 2002,
the estimated fair value of the Senior Secured Notes was $90 million.
(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%.
F-13
(c) This note was issued in connection with the acquisition of The Sports
Club/LA - Upper East Side. Final payment was made during 2002.
Future minimum annual principal payments at December 31, 2002, are as
follows (in thousands):
2003................................................ $ 2,158
2004................................................ 1,784
2005................................................ 98
2006................................................ 100,000
-----------
$ 104,040
===========
7. Bank Credit Facility
In October 2002, we extended our credit facility with Comerica
Bank-California. The $10.0 million credit facility matures on November 1, 2003.
The credit facility bears interest at a variable rate of LIBOR plus 2 1/4% or
the Bank's prime rate (4 1/4% at December 31, 2002). The credit facility is
secured by all the assets of The Sports Club/Irvine and is guaranteed by our
three major shareholders. The credit facility requires us to maintain certain
Tangible Net Worth, Total Liabilities to Tangible Net Worth and EBITDA
covenants. At December 31, 2002, we were not in compliance with one of these
convenants. The Bank has waived this default as of December 31, 2002. At
December 31, 2002, there were no cash advances outstanding, but $5.2 million was
utilized in the form of letters of credit leaving $4.8 million available for
future borrowings.
The new credit facility has added KASCY, L.P., an affiliate of Kayne
Anderson Capital Advisors, L.P. as a lending participant in the credit facility.
Kayne Anderson Capital Advisors, L.P. and certain of its affiliates own all of
the Company's Series B Redeemable Preferred Stock (See Note 9). The credit
facility increases from $10.0 million to $15.0 million once KASCY, L.P.
satisfies certain regulatory requirements.
8. Commitments and Contingencies
Lease Commitments
The Company leases certain facilities pursuant to various operating lease
agreements. Club facility leases are generally long-term and noncancelable
triple-net leases (requiring the Company to pay all real estate taxes, insurance
and maintenance expenses), and have an average remaining term of 44.17 years,
including renewal options which are included in the lease term, with the
earliest Sports Club lease expiration date of January 31, 2013. The Company is
also obligated under lease agreements for seven of its former Spectrum Club
locations. The Company has subleased each of these properties to the buyer of
these Clubs under sublease agreements which provide that all operating costs of
these facilities be assumed by the new owners. Future minimum noncancelable
operating lease payments as of December 31, 2002 are as follows (in thousands):
Net
Sublease Rental
Commitments Rentals Commitments
----------- ------- -----------
Year ending December 31:
2003.............................. $ 29,211 $ 6,391 $ 22,820
2004.............................. 29,878 7,050 22,828
2005.............................. 29,638 7,295 22,343
2006.............................. 29,717 7,336 22,381
2007.............................. 29,832 7,451 22,381
Thereafter........................ 300,894 53,657 247,237
----------- ---------- -----------
Total minimum lease payments. $ 449,170 $ 89,180 $ 359,990
=========== ========== ===========
F-14
Rent expense for facilities and equipment, including minimum lease payments
recorded on a straight-line basis over the lease term, aggregated $10,675,000,
$18,662,000 and $23,278,000 for the years ended December 31, 2000, 2001 and
2002, respectively.
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.
Employment Agreements
At December 31, 2002, the Company did not have any employment agreements
with any employees.
9. 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. 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, the Series B Preferred
carrying value consisted of the following (in thousands):
Initial fair value, sale price of $10,500
less costs to issue of $592...................... $ 9,908
Redemption value accretion............................. 71
Accrued and unpaid dividends accretion................. 748
---------------------
Total carrying value $ 10,727
=====================
F-15
10. Preferred Stock
On September 6, 2002, the Company completed a $5.0 million private
placement of a newly created series of Convertible Preferred Stock. The Company
received $5.0 million in cash and issued 5,000 shares of Series C Convertible
Preferred Stock, $.01 par value ("Series C Convertible Preferred"), at a price
of $1,000 per share. Dividends are earned at an annual rate of $90.00 per share.
Dividends are payable when and as declared by the Board of Directors. Such
dividends are cumulative, but do not accrue interest and at the Company's
option, may be paid in cash or additional shares of Series C Convertible
Preferred. The Series C Convertible 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 1,666,667 shares of Common Stock if 100% of the
Series C Convertible Preferred is converted at that price). Upon conversion, any
earned and unpaid dividends would become payable. 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. At the option of the Company the Series C Convertible Preferred Stock
may be redeemed in whole or in part by paying in cash the sum of $1,000 per
share plus any earned and unpaid dividends. In the event the Series C
Convertible Preferred is redeemed before September 6, 2005, the holders will
receive a warrant to purchase shares of Common Stock at a price of $3.00 per
share, exercisable before September 6, 2007. In the event of liquidation, the
Series C Convertible Preferred holders are entitled to receive, prior and in
preference to any distribution to common shareholders, and pari passu with
holders of the Series B Preferred, an amount equal to $1,000 for each share of
Series C Convertible Preferred then outstanding, plus earned and unpaid
dividends.
11. Income (Loss) per Share
The following is a reconciliation of the basic and diluted income (loss)
per share computations for the years 2000, 2001 and 2002:
Year ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
(in thousands, except per share data)
Net income (loss) attributable to common shareholders
used for basic and diluted income (loss) per share.... $ (12,504) $ (40,678) $ (18,501)
=========== ============ ============
Shares of Common Stock and
Common Stock equivalents:
Weighted average shares used
in basic computation........................ 17,773 17,939 18,080
=========== =========== ===========
Weighted average shares used in
dilutive computation........................ 17,773 17,939 18,080
=========== =========== ===========
Income (loss) per share:
Basic and Diluted................................... $ (0.70) $ (2.27) $ (1.02)
=========== ============ ============
F-16
12. Income Taxes
The provision for income taxes consists of the following:
Year ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
(in thousands)
Current:
Federal.................... $ (2,280) $ 89 $ (930)
State...................... 1,182 757 620
---------- ------------ -----------
(1,098) 846 (310)
Deferred:
Federal.................... (3,776) 3,486 --
State...................... (3,108) 1,038 --
----------- ------------ -----------
(6,884) 4,524 --
----------- ------------ -----------
Income tax provision (benefit)... $ (7,982) $ 5,370 $ (310)
=========== ============ ============
Income tax expense (benefit) as computed differs from the statutory rate as
applied to pre-tax net income (loss) as follows:
Year ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
(in thousands)
Computed "expected" tax expense (benefit)..$ (6,965) $ (12,005) $ (6,093)
Increase (decrease) in tax resulting from:
State taxes - net of federal benefit.... (1,272) (2,091) (998)
Meals and entertainment................ 65 63 75
Change in valuation allowance......... -- 19,627 7,198
Other.................................. 190 (224) (492)
--------- ----------- -----------
Income tax provision (benefit).............$ (7,982) $ 5,370 $ (310)
========== ========== ===========
The effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities are presented as follows.
At December 31,
---------------
2001 2002
---- ----
Deferred tax assets: (in thousands)
Deferred revenues..................... $ 2,153 $ 1,368
Operating loss carry forwards......... 19,910 24,198
Accrued vacation...................... 223 257
Bad debt.............................. 121 193
State taxes........................... 624 315
Other................................. 669 1,837
--------------- ----------------
Gross deferred tax assets...... 23,700 28,168
Deferred tax liabilities:
Depreciation and amortization......... (4,073) (1,343)
Other................................. -- --
--------------- ----------------
Gross deferred tax liabilities. (4,073) (1,343)
---------------- -----------------
Net deferred tax asset..................... 19,627 26,825
Valuation allowance........................ (19,627) (26,825)
---------------- -----------------
Net deferred tax asset..................... $ -- $ --
=============== ================
F-17
The Company has determined, based on year to date operating results and
projections for the next three years that it is more likely than not that future
taxable income will be insufficient to utilize its deferred tax assets. As a
result of this determination, the Company ceased recording any deferred tax
benefit related to its taxable losses and recorded valuation allowances of
$19,627,000 and $7,198,000 in 2001 and 2002, respectively to offset the
Company's net deferred tax assets.
In March 2002, changes in existing tax laws resulted in a tax benefit of
approximately $900,000. The tax benefit arises from the Company's ability to
carryback net operating losses incurred during 2001, to the 1995, 1996 and 1997
tax years in which the Company had taxable income. This benefit was recorded in
the first quarter of 2002 consistent with the provisions of Statement of
Financial Accounting Standards Board No. 109, Accounting for Income Taxes.
As of December 31, 2002, the Company had federal and state net operating
loss carryforwards of $43,685,000 and $76,571,000 respectively, beginning
expiration in 2020 and 2005, respectively.
13. Non-Recurring Items
The Company recorded the following income (expense) as non-recurring items
in each of the years in the three-year period ended December 31, 2002:
Year ending December 31,
------------------------
2000 2001 2002
---- ---- ----
(in thousands)
Class action litigation settlement.............................. $ (1,476) $ -- $ --
Loss on sale of Fountain Valley real estate (See Note 4)........ (1,017) -- --
Impairment of Houston real estate (See Note 4).................. (749) -- --
Gain on sale of Houston real estate (See Note 4)................ -- -- 97
Gain on sale of The Sports Club/Las Vegas (See Note 4).......... -- -- 30
Interest reversal on litigation settlement...................... -- 397 --
-------- ----------- ----------
$ (3,242) $ 397 $ 127
========= =========== ==========
14. Stock Plans
Stock Incentive Plans
The Company's shareholders reserved 1,800,000 shares of Common Stock under
the Company's Amended and Restated 1994 Stock Incentive Plan, which authorized
the issuance of various stock incentives to directors, officers, employees and
consultants including options, stock appreciation rights and purchase rights. On
December 31, 2000, the 1994 Stock Incentive Plan expired and in May 2001, the
Company's shareholders adopted the 2001 Stock Incentive Plan (the "Plan"). The
2001 Stock Incentive Plan reserves 2.5 million shares of Common Stock, expires
in May 2011 and also authorizes stock appreciation rights and purchase rights.
Options allow for the purchase of Common Stock at prices determined by the
Company's Compensation Committee. Incentive stock options must be granted at a
price equal to or greater than the fair value of a share of Common Stock on the
date the option is granted. Non-statutory options must have an exercise price
equal to at least 85% of the fair value of the Company's Common Stock at the
date of grant. Options granted under the Plans may, at the election of the
Compensation Committee, become exercisable in installments. Except for the
options granted to D. Michael Talla, Co-Chief Executive Officer, which expire on
the fifth anniversary of the grant date, all options expire on the tenth
anniversary of the grant date.
F-18
A summary of the status of the Company's stock option plans as of December
31, 2000, 2001 and 2002 and changes during the years then ended are presented
below:
Weighted
Average Exercise
Shares Price
------ -----
Outstanding at January 1, 2000....................................... 1,169,832 $ 5.01
Granted.............................................................. 744,499 6.50
Canceled............................................................. (355,499) 6.67
Exercised............................................................ (25,000) 2.96
---------
Outstanding at December 31, 2000..................................... 1,533,832 5.94
=========
Options exercisable at December 31, 2000............................. 559,675 5.36
=========
Weighted-average per share fair value of options
granted during year ended December 31, 2000.......................... 4.25
Outstanding at January 1, 2001....................................... 1,533,832 5.94
Granted.............................................................. 411,915 3.09
Canceled............................................................. (93,472) 2.23
Exercised............................................................ (2,000) 2.56
---------
Outstanding at December 31, 2001..................................... 1,850,275 5.37
=========
Options exercisable at December 31, 2001............................. 915,284 5.83
=========
Weighted-average per share fair value of options
granted during year ended December 31, 2001....................... 3.09
Outstanding at January 1, 2002....................................... 1,850,275 5.37
Granted.............................................................. -- --
Canceled............................................................. (64,942) 5.20
Exercised............................................................ -- --
---------
Outstanding at December 31, 2002..................................... 1,785,333 5.38
=========
Options exercisable at December 31, 2002............................. 1,296,448 5.61
=========
The following table summarizes information about stock options outstanding
at December 31, 2002:
Weighted
Average
Remaining
Exercise Number Contractual Options
Prices Outstanding Life (Years) Exercisable
------ ----------- ------------ -----------
$2.5625 24,333 3.41 24,334
2.6875 70,000 3.11 70,000
2.7500 26,000 3.84 26,000
3.0100 283,656 8.39 94,552
3.3110 115,000 3.39 38,333
3.9375 210,000 6.10 210,000
4.2500 219,344 7.85 146,229
4.3750 60,000 4.22 60,000
5.2500 42,000 2.24 42,000
5.3750 32,000 4.50 32,000
8.0000 211,000 5.29 211,000
8.0000 450,000 7.11 300,000
8.2500 28,000 .32 28,000
8.3750 14,000 4.85 14,000
------------- -------------
1,785,333 1,296,448
============= =============
F-19
Stock appreciation rights ("SAR's") may be granted in combination with
options or on a stand-alone basis. SAR's permit the holder to receive shares of
stock, cash or a combination of shares and cash based upon by the difference
between the option price and the fair value of the Common Stock on the date of
exercise. Upon exercise of a SAR granted in combination with an option, the
related option is canceled. At December 31, 2002, no SAR's had been granted.
Rights to purchase shares of Common Stock to be offered for direct sale
under the Plan must be at a purchase price equal to not less than 85% of the
fair value of the shares on the day preceding the date of grant. Purchase rights
are generally exercisable for a period of thirty days following the date of
grant. At December 31, 2002, no purchase rights had been granted.
1994 Stock Compensation Plan
In July 1994, the Company instituted its 1994 Stock Compensation Plan (that
was amended by the Company's shareholders in July 1999) for the purpose of
compensating outside directors by issuing them shares of the Company's Common
Stock as part of their directors' fees. A total of 50,000 shares are reserved
for issuance pursuant to this plan. A total of 44,000 shares have been issued to
outside directors under the plan. During the years ended December 31, 2000, 2001
and 2002, the Company issued 6,000, 6,000 and 8,000 shares of Common Stock as
director compensation for aggregates consideration of $20,000, $16,000 and
$15,000, respectively.
15. Related Party Transactions
Millennium Partners LLC (collectively with its affiliate "Millennium") is a
significant shareholder of the Company and has jointly developed Clubs with the
Company. A representative of Millennium sits on the Company's Board of
Directors. The Reebok Sports Club/NY pays rent to Millennium in the amount of
$2.0 million per year and the partnership agreement provides for a first
priority annual distribution of $3.0 million to Millennium.
The Company pays rent to Millennium for The Sports Club/LA - Washington
D.C., The Sports Club/LA - Boston and The Sports Club/LA - San Francisco and in
2000, 2001 and 2002 a total of $500,000, $4.8 million and $9.5 million,
respectively, was paid to Millennium for rent on these three Clubs. All such
payments are reflected as rent expense in the Company's consolidated statement
of operations. In addition, after the Company receives a management fee equal to
6% of all revenues, an amount equal to its investment in the Club and a 10% -
11% annual return on the investment, Millennium is entitled to receive a
percentage of all additional cash flows from each Club as additional rent.
Millennium's percentage of the excess cash flow, as defined, is 25% for the
Washington and Boston Clubs and 60% for the San Francisco Club. Millennium has
not received any payments to date under these provisions.
The Company has a 50.1% interest in the partnership that owns The Sports
Club/LA - Los Angeles, and Mr. Talla beneficially owns the remaining 49.9%. The
Company includes The Sports Club/LA - Los Angeles in its consolidated financial
statements. The partnership agreement provides that, on an annual basis, the
partners will share in the first $300,000 of the Club's net cash flow in
proportion to their percentage interests. The next $35.0 million of net cash
flow will be distributed to the Company. All distributions of net cash flow
thereafter, if any, will be made to the partners in proportion to their
percentage interests. Under certain circumstances, the Company has an option to
purchase Mr. Talla's interest in the partnership for an amount equal to four
times the amount of his most recent annual distribution from the partnership.
This amount is reflected as a minority interest liability on the consolidated
balance sheet.
As of May 4, 2001, the Company entered into a ten-year sublease for space
located within The Sports Club/LA - Upper East Side. The sublease provides for
two five-year renewal options, an initial monthly rent of $125,000, and rental
increases of 10% at the end of each five-year period. The subtenant for this
lease is Club at 60th Street, Inc., a New York corporation owned by Mr. Talla.
F-20
In September 1999, the Company sold the property on which the Spectrum Club
- Thousand Oaks is located for a sales price of $12.0 million. The Company
entered into a sale and leaseback agreement for the property under a long-term
lease with an initial annual base rent of $1.3 million. The Thousand Oaks
property consists of the Spectrum Club - Thousand Oaks, a SportsMed facility,
unimproved office space, and a parking ramp. The Company is currently subleasing
the Spectrum Club space to another club operator. Mr. Licklider owns an
approximate 4.6% interest in the purchaser of the property, and trusts for the
benefit of Mr. Talla's minor children own an approximately 5.2% interest in the
purchaser of the property.
In consideration of executing a guaranty in favor of Comerica Bank -
California (the "Bank") in connection with the Bank's renewal of the Company's
$15.0 million credit facility (the "Credit Facility"), Messrs. Licklider and
Talla and MDP Ventures II, LLC, an affiliate of Millennium, entered into
agreements with the Company as of July 3, 2001, pursuant to which the Company is
obligated to pay an annual commitment fee to each of the guarantors. At the
Company's discretion the 2001 fee was paid in restricted shares of Common Stock
with each guarantor receiving 15,384 shares. In addition to the commitment fee
the Company is also obligated to pay each guarantor a usage fee equal to 2% of
such guarantor's pro rata portion of outstanding letters of credit and amounts
advanced under the Credit Facility. On November 8, 2002, the Company amended the
loan agreement with the Bank, effective as of October 31, 2002. The amended
agreement extends the maturity date of the Credit Facility until November 1,
2003. The Credit Facility continues to be guaranteed by Messrs. Licklider and
Talla and MDP Ventures II, LLC. The Company continues to be obligated to pay
fees to compensate the guarantors.
On September 6, 2002, the Company sold an aggregate of 5,000 shares of
Series C Convertible Preferred Stock to three of its major shareholders, D.
Michael Talla, Rex Licklider and MDP Ventures II, LLC, an affiliate of
Millennium, for aggregate offering proceeds of $5,000,000.
16. Concentration of Credit Risk
The Company markets its products principally to customers in Southern
California, New York City, Washington D.C., Boston and San Francisco. Management
performs regular evaluations concerning the ability of its customers to satisfy
their obligations and records a provision for doubtful accounts based upon these
evaluations. The Company's credit losses for the periods presented are
insignificant and have not exceeded managements' estimates.
17. Liquidity
At December 31, 2002, the Company was not in compliance with one of the
covenants required under its loan agreement. Comerica Bank - California has
waived this default. The Bank's waiver only covered the quarter ended December
31, 2002 and therefore it is likely that the Company may incur a similar default
for the various reporting quarters during 2003. If this occurs, the Bank will
have the option of terminating the credit agreement or continuing to waive any
new defaults. If the Bank terminates the credit agreement two of the Company's
major shareholders, who now guarantee the bank credit line, have committed to
providing the Company with sufficient financial support to continue its
operations.
F-21
18. Quarterly Summary of Information (Unaudited)
The following unaudited condensed quarterly financial data has been
restated as described in Note 19:
2002
------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(in thousands, except per share amounts)
Revenue:
As reported............................. $ 29,546 $ 30,495 $ 30,272 $ 32,175
=========== ============ ============ ============
As restated............................. $ 29,968 $ 29,946 $ 30,195 $ 30,744
=========== ============ ============ ============
Net income (loss) attributable to Common shareholders:
As reported............................. $ (4,970) $ (4,876) $ (4,020) $ (3,812)
============ ============= ============= =============
As restated............................. $ (4,312) $ (5,239) $ (3,882) $ (5,068)
============ ============= ============= =============
Net income (loss) per share basic and diluted:
As reported............................. $ (0.28) $ (0.27) $ (0.22) $ (0.21)
============ ============= ============= =============
As restated............................. $ (0.24) $ (0.29) $ (0.21) $ (0.28)
============ ============= ============= =============
2001
------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(in thousands, except per share amounts)
Revenue:
As reported............................. $ 23,546 $ 25,076 $ 24,041 $ 29,381
=========== ============ ============ ============
As restated............................. $ 23,875 $ 24,573 $ 24,011 $ 27,706
=========== ============ ============ ============
Net income (loss) attributable to common shareholders:
As reported............................. $ (4,642) $ (3,849) $ (4,683) $ (24,886)
============ ============= ============= =============
As restated............................. $ (4,302) $ (3,993) $ (4,555) $ (27,828)
============ ============= ============= =============
Net income (loss) per share basic and diluted:
As reported............................. $ (0.26) $ (0.21) $ (0.26) $ (1.39)
============ ============= ============= =============
As restated............................. $ (0.24) $ (0.22) $ (0.25) $ (1.55)
============ ============= ============= =============
In the fourth quarter of 2001, the Company recorded the following
significant adjustments:
|X| An impairment loss of $3,243,000 related to the disposal of The Sports
Club/Las Vegas.
|X| An impairment loss of $1,801,000 to write-down the goodwill of the Company's
SportsMed subsidiary.
|X| A valuation allowance on the net deferred tax assets of $19,627,000.
F-22
19. Subsequent restatement
On March 31, 2003, the Company filed its annual report on Form 10-K which
included its consolidated financial statements covering fiscal years 2000, 2001
and 2002 that had been restated to correct the methodology used to recognize
last months dues revenues (see Note 2 to consolidated financial statements in
this Form 10-K/A). Subsequent to the restatement the Company determined that
additional adjustments are required to correct other errors in the previously
issued financial statements. The adjustments consist of several items. The
principle adjustment is a correction of the methodology used to recognize
private training revenues. The Company had been recognizing private training
revenues on a cash basis rather than when the private training session was
given, as required by GAAP. The other adjustments made as part of this
restatement include adjustments to properly record deferred revenue; record a
reserve on SportsMed's receivables which was originally recorded as an
adjustment to goodwill ($205,740 in 2000); reduce revenue ($1,086,871, $718,742
and $563,747 for the years ending December 31, 2002, 2001 and 2000,
respectively) with corresponding reductions in direct expenses to correct an
improper gross up of revenues and expenses relating to employee meals and
discounts; adjust general and administrative expenses to increase (decrease)
management bonus expense in the years earned ($129,305, ($469,664) and $28,360
for the years ending December 31, 2002, 2001 and 2000, respectively); reduce the
impairment charge in 2001 as a result of the adjustment to the SportsMed revenue
discussed above; increase depreciation expense and rent expense (recorded as
direct expenses) to reflect properly the lease term and useful lives of certain
assets; increase "Other Income" in 2002 as a result of the impact of certain
deferred revenue on the gain on the sale of the Company's Las Vegas Club; and
record adjustments relating to the income tax effects of the Company's
restatement. Cash flows from operating, investing and financing activities did
not change as a result of this restatement.
As a result of this restatement the Company incurred additional defaults of
the covenants contained in its Bank Credit Agreement with Comerica Bank -
California. On June 12, 2003, the Company replaced its bank agreement with a new
$20.0 million secured loan payable to Orange County's Credit Union. 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 may be
prepaid at any time without penalty and requires a final principal payment of
$18.3 million on July 1, 2008.
The following summarizes the adjustments that are a part of the current
restatement (amounts are in thousands):
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Loss before income taxes, as reported...................... $ (19,327) $ (34,690) $ (17,099)
Private training revenue adjustment..................... (1,094) (1,409) (466)
Other adjustments....................................... (65) 791 (358)
----------- ---------- ----------
Loss before income taxes, as restated...................... (20,486) (35,308) (17,923)
Income taxes, as restated............................... (7,982) 5,370 (310)
----------- ---------- ----------
Net loss before dividends on preferred stock, as restated.. $ (12,504) $ (40,678) $ (17,613)
=========== =========== ==========
Restated balance sheets at December 31, 2002 and 2001 and restated
statements of operations for the years ended December 31, 2002, 2001 and 2000
are presented below. The amounts are in thousands, except per share amounts:
F-23
At December 31, 2002
Private
As Training Other As
Reported Adjustment Adjustments Restated
-------- ---------- ----------- --------
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 3,185 $ -- $ -- $ 3,185
Accounts Receivable, net of allowance for doubtful accounts... 3,951 -- -- 3,951
Inventories................................................... 1,169 -- -- 1,169
Other current assets.......................................... 1,148 -- -- 1,148
----------- ----------- ----------- -----------
Total current assets........................................ 9,453 -- -- 9,453
Property and equipment, net....................................... 156,798 -- (168) 156,630
Goodwill, less accumulated amortization........................... 12,794 -- -- 12,794
Other assets...................................................... 7,509 -- -- 7,509
----------- ----------- ----------- -----------
$ 186,554 $ -- $ (168) $ 186,386
=========== =========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and equipment financing
Loans...................................................... $ 2,158 $ -- $ -- $ 2,158
Accounts payable.............................................. 2,545 -- -- 2,545
Accrued liabilities........................................... 12,445 -- 212 12,657
Deferred membership revenues.................................. 14,615 4,474 (858) 18,231
----------- ----------- ------------ -----------
Total current liabilities................................... 31,763 4,474 (646) 35,591
Notes payable and equipment financing loans, less current
installments............................................... 101,882 -- -- 101,882
Deferred lease obligations........................................ 8,122 -- 185 8,307
Minority interest................................................. 600 -- -- 600
----------- ----------- ----------- -----------
Total liabilities........................................... 142,367 4,474 (461) 146,380
Commitments and contingencies
Redeemable Preferred Stock........................................ 10,727 -- -- 10,727
Stockholders' equity:
Preferred Stock............................................... 5,000 -- -- 5,000
Common Stock.................................................. 211 -- -- 211
Additional paid in capital.................................... 101,961 -- -- 101,961
Accumulated deficit........................................... (58,528) (4,474) 293 (62,709)
Treasury Stock, at cost....................................... (15,184) -- -- (15,184)
----------- ---------- ----------- ------------
Net stockholders' equity.................................... 33,460 (4,474) 293 29,279
----------- ----------- ----------- -----------
$ 186,554 $ -- $ (168) $ 186,386
=========== ========== =========== ==========
F-24
At December 31, 2001
Private
As Training Other As
Reported Adjustment Adjustments Restated
-------- ---------- ----------- --------
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 1,482 $ -- $ -- $ 1,482
Accounts Receivable, net of allowance for doubtful accounts.. 4,840 -- -- 4,840
Inventories.................................................. 1,225 -- -- 1,225
Other current assets......................................... 734 -- -- 734
----------- ---------- ----------- ----------
Total current assets....................................... 8,281 -- -- 8,281
Property and equipment, net...................................... 170,893 -- (94) 170,799
Goodwill, less accumulated amortization.......................... 12,794 -- -- 12,794
Other assets..................................................... 5,240 -- -- 5,240
----------- ---------- ----------- ----------
$ 197,208 $ -- $ (94) $ 197,114
=========== ========== ============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and equipment financing
Loans...................................................... $ 11,449 $ -- $ -- $ 11,449
Accounts payable............................................. 3,028 -- -- 3,028
Accrued liabilities.......................................... 11,353 -- 82 11,435
Deferred membership revenues................................. 15,927 4,008 (909) 19,026
----------- ---------- ------------ ----------
Total current liabilities.................................. 41,757 4,008 (827) 44,938
Notes payable and equipment financing loans, less current
installments............................................... 104,042 -- -- 104,042
Deferred lease obligations....................................... 4,982 -- 83 5,065
Minority interest................................................ 600 -- -- 600
----------- ---------- ----------- ----------
Total liabilities.......................................... 151,381 4,008 (744) 154,645
Commitments and contingencies
Redeemable Preferred Stock....................................... -- -- -- --
Stockholders' equity:
Common Stock................................................. 211 -- -- 211
Additional paid in capital................................... 102,764 -- -- 102,764
Accumulated deficit.......................................... (41,738) (4,008) 650 (45,096)
Treasury Stock, at cost...................................... (15,410) -- -- (15,410)
----------- ---------- ---------- -----------
Net stockholders' equity................................... 45,827 (4,008) 650 42,469
----------- ----------- ---------- ----------
$ 197,208 $ -- $ (94) $ 197,114
=========== ========== =========== ==========
F-25
Year Ended December 31, 2002
Private
As Training Other As
Reported Adjustment Adjustments Restated
-------- ---------- ----------- --------
Revenues.......................................................... $ 122,488 $ (466) $ (1,169) $ 120,853
Operating expenses:
Direct........................................................ 101,957 -- (984) 100,973
General and administrative.................................... 7,285 -- 129 7,414
Selling....................................................... 4,907 -- -- 4,907
Depreciation and amortization................................. 11,835 -- 74 11,909
Pre-opening expenses.......................................... 130 -- -- 130
----------- ----------- ----------- -----------
Total operating expenses.................................... 126,114 -- (781) 125,333
----------- ----------- ----------- -----------
Income (loss) from operations............................. (3,626) (466) (388) (4,480)
Other income (expense):
Interest, net................................................. (13,420) -- -- (13,420)
Minority interests............................................ (150) -- -- (150)
Non-recurring items........................................... 97 -- 30 127
----------- ----------- ----------- -----------
Income (loss) before income taxes........................ (17,099) (466) (358) (17,923)
Provision (benefit) for income taxes.............................. (309) -- (1) (310)
----------- ------------ ------------ ------------
Net income (loss)......................................... (16,790) (466) (357) (17,613)
Dividends on preferred stock...................................... 888 -- -- 888
----------- ----------- ----------- -----------
Net income (loss) attributable to common shareholders..... $ (17,678) $ (466) $ (357) $ (18,501)
=========== ============ ============ ============
Net income (loss) per share:
Basic and diluted............................................. $ (0.98) $ (0.02) $ (0.02) $ (1.02)
Weighted average number of common shares outstanding:
Basic and diluted............................................. 18,080 -- -- 18,080
F-26
Year Ended December 31, 2001
Private
As Training Other As
Reported Adjustment Adjustments Restated
-------- ---------- ----------- --------
Revenues.......................................................... $ 102,044 $ (1,409) $ (470) $ 100,165
Operating expenses:
Direct........................................................ 88,219 -- (659) 87,560
General and administrative.................................... 8,938 -- (470) 8,468
Selling....................................................... 3,880 -- -- 3,880
Depreciation and amortization.................................. 11,809 -- 74 11,883
Pre-opening expenses........................................... 5,884 -- -- 5,884
Impairment charges............................................. 5,250 -- (206) 5,044
----------- ----------- ------------ -----------
Total operating expenses..................................... 123,980 -- (1,261) 122,719
----------- ----------- ------------ -----------
Income (loss) from operations.............................. (21,936) (1,409) 791 (22,554)
Other income (expense):
Interest, net.................................................. (13,001) -- -- (13,001)
Minority interests............................................. (150) -- -- (150)
Non-recurring items............................................ 397 -- -- 397
----------- ----------- ----------- -----------
Income (loss) before income taxes.......................... (34,690) (1,409) 791 (35,308)
Provision (benefit) for income taxes............................... 3,370 -- 2,000 5,370
----------- ----------- ----------- -----------
Net income (loss).......................................... $ (38,060) $ (1,409) $ (1,209) $ (40,678)
============ ============ ============ ============
Net income (loss) per share:
Basic and diluted.............................................. $ (2.12) $ (0.08) $ (0.07) $ (2.27)
Weighted average number of common shares outstanding:
Basic and diluted.............................................. 17,939 -- -- 17,939
Year Ended December 31, 2000
Private
As Training Other As
Reported Adjustment Adjustments Restated
-------- ---------- ----------- --------
Revenues........................................................... $ 76,869 $ (1,094) $ (558) $ 75,217
Operating expenses:
Direct......................................................... 59,116 -- (541) 58,575
General and administrative..................................... 7,298 -- 28 7,326
Selling........................................................ 2,915 -- -- 2,915
Depreciation and amortization.................................. 7,408 -- 20 7,428
Pre-opening expenses........................................... 9,589 -- -- 9,589
----------- ----------- ---------- -----------
Total operating expenses..................................... 86,326 -- (493) 85,833
----------- ----------- ----------- -----------
Income (loss) from operations.............................. (9,457) (1,094) (65) (10,616)
Other income (expense):
Interest, net.................................................. (6,478) -- -- (6,478)
Minority interests............................................. (150) -- -- (150)
Non-recurring items............................................ (3,242) -- -- (3,242)
----------- ----------- ---------- ------------
Income (loss) before income taxes......................... (19,327) (1,094) (65) (20,486)
Provision (benefit) for income taxes............................... (6,940) -- (1,042) (7,982)
----------- ----------- ----------- ------------
Net income (loss).......................................... $ (12,387) $ (1,094) $ 977 $ (12,504)
=========== ============ ========== ============
Net income (loss) per share:
Basic and diluted.............................................. $ (0.70) $ -- $ -- $ (0.70)
Weighted average number of common shares outstanding:
Basic and diluted.............................................. 17,773 -- -- 17,773
F-27
THE SPORTS CLUB COMPANY, INC.
VALUATION AND QUALIFYING ACCOUNTS
Three-year period ended December 31, 2002
(in thousands)
Balance at
beginning of Balance at end
Description period Additions Deletions of period
------------------------------------------ -------------- -------------- ------------- ----------------
Year ended December 31, 2000:
Allowance for doubtful accounts $ 342,000 $ 985,000 $ 656,000 $ 671,000
=========== =========== =========== ===========
Year ended December 31, 2001:
Allowance for doubtful accounts $ 671,000 $ 782,000 $ 1,135,000 $ 318,000
=========== =========== =========== ===========
Year ended December 31, 2002:
Allowance for doubtful accounts $ 318,000 $ 798,000 $ 582,000 $ 534,000
=========== =========== =========== ===========
F-28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and directors and their ages as of March 1, 2003 are
as follows:
Name Age Position
---- --- --------
D. Michael Talla......... 56 Chairman of the Board and Co-Chief Executive
Officer
Rex A. Licklider......... 59 Vice Chairman of the Board and Co-Chief
Executive Officer
Nanette Pattee Francini.. 54 Executive Vice President and Director
Timothy M. O'Brien....... 51 Chief Financial Officer and Assistant Secretary
Philip J. Swain.......... 45 Senior Vice President of Operations
Mark S. Spino............ 48 Senior Vice President of Development
Brian J. Collins......... 42 Director
Andrew L. Turner......... 56 Director
George J. Vasilakos...... 65 Director
Charles A. Norris........ 56 Director
The following information summarizes the business experience during at
least the past five years of each of our executive officers and directors.
D. Michael Talla began developing sports and fitness clubs in 1977 when he
co-founded our predecessor non-public company. He has served as Chairman of the
Board since the inception of our public company in 1994, and served until July
1999 as our Chief Executive Officer. Mr. Talla assumed the position of Co-Chief
Executive Officer with Mr. Licklider in February 2000.
Rex A. Licklider has served as Vice Chairman of the Board since 1994 and
was appointed Co-Chief Executive Officer in February 2000. Previously, Mr.
Licklider served as a consultant to us for strategic and financial planning. He
founded Com Systems, Inc., a publicly traded long-distance telecommunications
company, and at various times between 1975 and April 1992 served as its
Chairman, President and Chief Executive Officer. Since January 1993, Mr.
Licklider has been a member of the Pentium Group, an entity investing, and often
taking a management role, in early stage and turn around/growth businesses. He
is a director of The Learning Network, Inc., and Deckers Outdoor Corporation. He
also serves on the Board of Directors of The Children's Bureau of Southern
California and The Achievable Foundation.
Nanette Pattee Francini began developing sports and fitness clubs in 1977
when she co-founded our predecessor non-public company. She has served as one of
our directors, our Executive Vice President and has been principally responsible
for overseeing all marketing activities since the inception of our public
company in 1994. Ms. Francini founded and serves on the Board of the For Kids
Only Foundation, a charity serving the needs of children.
Timothy M. O'Brien has been our Chief Financial Officer since February 1995
and since June 1995 has also served as Assistant Secretary. Mr. O'Brien is a
Certified Public Accountant.
Philip J. Swain was appointed Senior Vice President of Operations in
February 2000, having served as Vice President of Operations since our inception
as a public company in 1994.
Mark S. Spino was appointed Senior Vice President of Development in
February 2000, having served as Vice President of Development since our
inception as a public company in 1994.
24
Brian J. Collins has been one of our directors since 1997. From December
1996 to May 1999, Mr. Collins served as Vice President and Chief Financial
Officer of Millennium Partners Management LLC, an affiliate of Millennium
Entertainment Partners L.P., which is a real estate developer of mixed-use urban
entertainment projects. In June 1997 he became a principal of Millennium
Partners Management LLC and in June 1999 was named Chief Operating Officer. From
March 1993 to November 1996, Mr. Collins was Senior Vice President at Carol
Management Corp., an owner and operator of real estate and hotel properties. For
so long as Millennium maintains at least a 12% interest in our equity
securities, we and certain of our stockholders have agreed with Millennium to
cause a nominee of Millennium to be appointed or elected to our Board of
Directors. Mr. Collins is currently serving as Millennium's nominee pursuant to
this agreement.
Andrew L. Turner has been a director since 1994. Mr. Turner currently
serves as Chairman of the Board for both Code Blue Staffing Solutions and
Enduracare Rehabilitation Services. He also serves on the Board of Directors of
Watson Pharmaceuticals, Inc., a publicly traded pharmaceutical manufacturing
company. From 1989 until August 2000, Mr. Turner served as Chairman of the Board
and Chief Executive Officer of Sun Healthcare Group, Inc., a publicly traded
health care services provider. In October 1999, Sun Healthcare Group, Inc. filed
voluntary petitions with the U.S. Bankruptcy Court to reorganize under Chapter
11 of the Federal Bankruptcy Code.
George J. Vasilakos has been a director since June 2002. Since January
1993, Mr. Vasilakos has been a member of the Pentium Group, an entity investing,
and often taking a management role, in early stage and turn around/growth
businesses. He is a principal and served as the Chief Executive Officer of
Golden Tel, the largest payphone provider in Nevada. Currently, Mr. Vasilakos
serves as Chief Executive Officer for The Learning Network, Inc., an e-learning
company, and DiTronics, LLC, a provider of Automated Teller Machine services. He
has served as a member of the Board of Directors and Executive Committee for the
long distance industry trade association, COMPTEL, and on the advisory
committees for the masters programs in telecommunications at Colorado University
and Golden Gate University.
Charles A. Norris was elected to the Board of Directors in August 2002. Mr.
Norris currently serves as Chairman of the Board of Directors of Glacier Water
Services, Inc. and Day Runner, Inc. Previously, Mr. Norris was President of
McKesson Water Products Company and a Senior Vice President of McKesson
Corporation. From 1981 to 1990, Mr. Norris operated Deer Park Spring Water
Company. He is past President and served on the Board of Directors and Executive
Committee of the International Bottled Water Association, and was a trustee of
the Drinking Water Research Foundation. As part of the sale of the Series B
Convertible Preferred Shares to Kayne Anderson, we agreed that for so long as
Kayne Anderson maintains a 12% interest in our equity securities (on an
"as-converted basis") they will have the right to designate one member to our
Board of Directors. Mr. Norris is currently serving as Kayne Anderson's nominee
pursuant to this agreement.
Effective August 26, 2002, the Board approved the following compensation
for our non-employee directors: (i) an annual directorship retainer of $12,000,
(ii) an annual committee chairman retainer of $4,000, (iii) reimbursement of
expenses for attending Board and committee meetings, (iv) annual award of 2,000
shares of our Common Stock pursuant to our amended and Restated 1994 Stock
Compensation Plan, and (v) annual option award of 2,000 shares under our 2001
Incentive Stock Plan.
Additionally, in December 2002, the Board created a special committee and
in recognition of the added responsibilities and demands of the work to be
performed by this committee, its members will receive additional compensation
of: (i) $1,000 for each meeting of the special committee attended in person,
(ii) $500 for each telephonic meeting, and (iii) $1,000 per day for each day
committee members devote a material portion of their business day on the affairs
of the committee.
Our directors are divided into three classes having terms expiring at the
annual stockholders' meetings in 2003 (Messrs. Talla and Licklider), 2004
(Messrs. Turner and Collins) and 2005 (Ms. Francini and Messrs. Vasilakos and
Norris), or such other dates as their successors are elected. At each annual
meeting of stockholders, successors to the class of directors whose term expires
at such meeting will be elected to serve three-year terms and until their
successors are elected.
25
Officers serve at the pleasure of the Board of Directors.
The Board has created three permanent committees: Audit, Compensation and
Nominating and Governance. The Audit Committee, composed of Messrs. Vasilakos,
Turner and Norris, is charged with reviewing our annual audit and meeting with
our independent auditors and reviewing our internal controls and financial
management practices. The Compensation Committee, composed of Messrs. Turner,
Collins, Vasilakos and Norris (Mr. Norris being appointed to the committee
effective February 25, 2003), recommends to the Board of Directors compensation
for key employees and administers our Stock Incentive Plans. The Nominating and
Governance Committee, comprised of Messrs. Norris, Vasilakos and Turner, insures
that the Board of Directors is appropriately constituted to meet its fiduciary
responsibilities to our stockholders and that we are in full compliance with
standard governance policies and procedures.
Certain Transactions
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our officers and directors and persons who own more than ten percent of a
registered class of our equity securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission and to furnish
us with copies of such reports. Based on our review of the copies of those
reports and written representations that we have received, we believe that with
the exception of a filing by MDP Ventures II, LLC made on March 28, 2003, to
report various transactions occurring in 2001 and 2002, all such filings
required to be made during calendar 2002 have been made.
Code of Ethics
We presently rely on the written policies in our Employee Handbook, as well
as informal policies and procedures, our directors' awareness of their fiduciary
duties and our executive officers' understanding of their responsibilities to
the Company and our shareholders to fulfill our duties as a public company.
These policies may not adequately protect us from all conflict of interest
situations, so in 2003, we intend to adopt a formal written code of ethics that
applies to our directors, principal executive officers, principal financial
officer, principal accounting officer and other persons performing similar
functions. This code of standards will fulfill the requirements recently imposed
by the Securities and Exchange Commission and will cover such topics as conflict
of interest, confidentiality, compliance with legal requirements and other
business ethics subjects. We intend to post the code of ethics on our website
www.thesportsclubla.com in connection with our investor relations materials. We
further intend to promptly disclose on our website (i) the nature of any
amendment to our code of ethics that applies to our directors and executives
officers and (ii) the nature of any waiver, including an implicit waiver, from a
provision of our code of ethics that is granted to one of these specified
officers, the name of such person who is granted the waiver and the date of the
waiver.
To demonstrate our commitment to operating fairly and ethically, we require
that each employee acknowledge receipt of our Employee Handbook, which sets
forth, among other things, our professional standards requiring proper business
conduct and confidentiality of proprietary information.
26
ITEM 11. EXECUTIVE COMPENSATION
The table below shows, for the last three fiscal years, the amount of
compensation earned by the Co-Chief Executive Officers and the next four most
highly-compensated executive officers (the "Named Executive Officers"). The
current salaries of such executive officers are described below under
"Employment Agreements."
Long-Term
Compensation
Annual Compensation Shares All Other
------------------- Underlying Compensation
Name & Position Year Salary($) Bonus($)(c) Options Awards ($)(a)
--------------- ----- --------------- --------------- ----------------- -------------
D. Michael Talla.......... 2002 200,000(b) -- -- 17,814
Co-Chief Executive Officer 2001 240,000(b) -- 115,000 17,979
and Chairman of the Board 2000 243,875(b) 75,000 250,000 14,245
Rex A. Licklider.......... 2002 200,000 -- -- 14,184
Co-Chief Executive Officer 2001 240,000 -- 115,000 14,613
and Vice Chairman of
the Board............... 2000 156,050 75,000 -- 10,879
Nanette Pattee Francini... 2002 160,000 20,000 -- 11,906
Executive Vice President 2001 200,000 -- 21,733 12,195
and Director............ 2000 198,325 60,000 78,267 9,617
Mark S. Spino............. 2002 160,000 20,000 -- 13,962
Senior Vice President of 2001 200,000 -- 21,733 17,913
Development 2000 197,916 60,000 78,267 14,145
Philip J. Swain........... 2002 160,000 20,000 -- 17,385
Senior Vice President of 2001 200,000 -- 21,733 16,932
Operations 2000 198,325 60,000 78,267 12,704
Timothy M. O'Brien........ 2002 160,000 20,000 -- 15,953
Chief Financial Officer 2001 200,000 -- 21,733 17,913
and Assistant Secretary 2000 197,916 60,000 78,267 4,716
----------
(a) Represents value of (i) amounts paid by us on behalf of the Named Executive
Officer and dependents for medical and life insurance and (ii) our Common
Stock contributed for the benefit of the Named Executive Officer under the
401K Profit Sharing Plan, based upon the December 31 closing market price
each year of our Common Stock, on the American Stock Exchange.
(b) Mr. Talla also receives, on an annual basis, 49.9% of the first $300,000 of
The Sports Club/LA - Los Angeles' net cash flow. This amount is not
included in Mr. Talla's compensation. See "Certain Relationships and
Related Transactions."
(c) Amounts earned in 2000 will not be paid to the Named Executive Officers
until such time as the Company's quarterly EBITDA, as defined, exceeds its
debt service and capital expenditures.
Option Grants, Exercises and Year-End Values
There were no option grants made to any Named Executive Officer during the
last fiscal year.
27
Unexercised Stock Options and Fiscal Year-End Option Values
None of the Named Executive Officers exercised stock options during the
last fiscal year. The following table provides information with respect to
unexercised stock options outstanding as of December 31, 2002.
Number of Shares Underlying Value of In-the-Money
Unexercised Options at Fiscal Unexercised Options at Fiscal
Year-End(a) Year-End(b)
------------------------------ --------------------------------
Exercisable Unexercisable Exercisable Unexercisable
Name (#) (#) ($) ($)
---- --------------- --------------- --------------- ----------------
D. Michael Talla........ 235,001 159,999 -0- -0-
Rex A. Licklider........ 38,334 76,666 -0- -0-
Nanette Pattee Francini. 169,424 40,576 -0- -0-
Mark S. Spino........... 169,424 40,576 -0- -0-
Philip J. Swain......... 179,424 40,576 -0- -0-
Timothy M. O'Brien...... 199,424 40,576 -0- -0-
----------
(a) All options were granted pursuant to one of our two Stock Incentive Plans.
(b) The in-the-money options had exercise prices of less than $2.30, the
closing price of our Common Stock on the American Stock Exchange on
December 31, 2002. The calculations of value assume a fair market value of
our Common Stock on December 31, 2002 at the price of $2.30 per share.
Employment Agreements
The Company has no written employment agreements. Currently, our executive
officers receive the following salaries:
D. Michael Talla Co-Chief Executive Officer $200,000
Rex A. Licklider Co-Chief Executive Officer 200,000
Nanette Pattee Francini Executive Vice President 160,000
Mark S. Spino Senior Vice President 160,000
Philip J. Swain Senior Vice President 160,000
Timothy M. O'Brien Chief Financial Officer 160,000
Compensation of Directors
Effective as of August 26, 2002, Directors' fees, paid only to directors
who are not employees of the Company, are as follows:
o Annual retainer fee of $12,000,
o Annual retainer fee of $4,000 for each committee chair,
o $1,000 for each Board and committee meeting attended,
o Reimbursement of expenses for attending Board and committee meetings, and
o Automatic annual award of 2,000 shares of our Common Stock granted under
the Amended and Restated 1994 Stock Compensation Plan each November 15th.
o Annual option award of 2,000 shares under our 2001 Incentive Stock Plan
(timing of such grant is at the discretion of the Board, and as of March
15, 2003 no option awards have been granted).
Messrs. Collins, Turner, Vasilakos and Norris currently serve on the Board
as non-employee directors. Because of his position as an executive with
Millennium, Mr. Collins waived receipt of his monetary fees in 2001 and 2002.
Mr. Licklider received amounts due non-employee directors until his appointment
to Co-Chief Executive Officer in February 2000; and until his resignation in
June 2002, Mr. Dennison T. Veru also received amounts due non-employee
directors. All directors receive reimbursement of reasonable out-of-pocket
expenses incurred in connection with meetings of the Board.
28
In December 2002, Messrs. Turner and Vasilakos were appointed to a special
committee, and in recognition of the added responsibilities and demands of the
work to be performed by them, Messrs. Turner and Vasilakos are to receive the
following additional compensation: $1,000 for each meeting of the special
committee attended in person, $500 for each telephonic meeting and $1,000 per
day on which they devote a material portion of their business day on the affairs
of the committee.
Following are the amounts paid to all directors for each of the last three
years:
Year Amount
---- ------
2000 $ 71,500
2001 56,863
2002 68,502
Under the Amended and Restated 1994 Stock Compensation Plan an aggregate of
44,000 shares of Common Stock was issued to non-employee directors through
December 31, 2002.
Compensation of Committee Interlocks and Insider Participation
The Compensation Committee of the Board (the "Committee") administers
executive compensation. Mr. Turner has been a member of the Committee since
September 13, 1994, and became its Chairman on February 27, 1995. Mr. Collins
was appointed to the Committee on April 10, 1998. Mr. Vasilakos was appointed on
August 2, 2002 following the resignation of Dennison Veru. Mr. Norris was
appointed to the Committee on February 25, 2003 to serve as a fourth Committee
member. None of these individuals has ever been an officer or employee.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table shows the shares of our Common Stock beneficially owned
as of March 24, 2003 by our directors and Named Executive Officers. It also
shows other individuals or entities that beneficially owned more than 5% of our
Common Stock.
Shares Issuable
upon Conversion
of Preferred
Stock or Total and Percent of
Shares exercise Shares Held Stock Outstanding
Name and Address Owned of options Under -----------------------
of Beneficial Owner(a) Directly(b) within 60 days(c) 401-K Plan(d) Number Percent
---------------------- ----------- ---------------- ------------- ----------------------
D. Michael Talla (e).................. 4,503,886 690,000 5,938 5,199,824 32.558
Nanette Pattee Francini (e)........... 256,107 193,334 2,992 452,433 32.558
Mark S. Spino (e)..................... 227,969 193,334 4,389 425,692 32.558
Philip J. Swain (e)................... 112,164 203,334 4,033 319,531 32.558
Voting Trust (e)...................... 5,100,126 1,280,002 17,352 6,397,480 32.558
Timothy O'Brien....................... 3,000 223,334 4,273 230,607 1.240
The Licklider Living Trust
Dated May 2, 1986................... 1,929,999 743,333 -- 2,673,332 13.987
Andrew L. Turner...................... 6,000 -- -- 6,000 *
Charles A. Norris(f).................. 2,000 166,667 -- 168,667 19.633
Brian J. Collins (g).................. 57,601 -- -- 57,601 36.366
George J, Vasilakos................... 325,900 -- -- 325,900 1.774
All Directors and Executive Officers as
a Group (10 persons).................. 7,424,626 2,413,336 21,625 9,859,587 47.441
Millennium (g)........................ 6,198,394 666,666 -- 6,865,060 36.366
Kayne Anderson Capital Advisors, L.P.(f) 793,628 3,500,000 -- 4,293,628 19.633
----------
* Less than 1%
29
(a) The address of all directors and executive officers is c/o The Sports Club
Company, Inc., at 11100 Santa Monica Blvd., Suite 300, Los Angeles,
California 90025.
(b) Includes shares for which the named person is considered the owner because:
1. the named person has sole voting and investment power,
2. the named persons' spouse has voting and investment power, or
3. the shares are held by other members of the named persons' immediate
family.
(c) Includes shares that can be acquired upon conversion of Preferred Stock and
shares that can be acquired through stock option exercises through May 23,
2003.
(d) Includes shares issued pursuant to our 401(k) Profit Sharing Plan's
discretionary match as of March 24, 2003.
(e) Named persons share voting power pursuant to a voting agreement that
requires each party to vote his or her shares in the manner determined by a
majority of all holders. The agreement is effective until October 20, 2004,
or until terminated by persons holding 66 2/3% of the shares of our Common
Stock subject to the agreement. Each of the parties to the voting agreement
effectively controls the voting of all shares held by the parties to the
agreement, and, under SEC rules, are deemed beneficial owners of the shares
subject to the agreement. The total number of shares of our Common Stock
held by the parties without giving effect to beneficial ownership resulting
from the voting agreement is:
Shares
Held Total Shares
Named Person Directly Held
------------ ------------ ----
D. Michael Talla:
Individually.............................. 4,332,905
Spouse.................................... 30,953
Trusts for two minor children............. 140,028
------------
Total.............................................. 4,503,886
Nanette Pattee Francini.................................... 256,107
Mark S. Spino.............................................. 227,969
Philip J. Swain............................................ 112,164
----------------
All Parties to Voting Agreement....................... 5,100,126
(f) Effective March 18, 2002, we completed a private placement of a newly
created class of Preferred Stock to Kayne Anderson Capital Advisors, L.P.
and several of their affiliates. The new class of Series B Preferred Stock
carries voting rights and is convertible into 3,500,000 shares of our
Common Stock. Kayne Anderson is deemed to be the beneficial owner of the
shares subject to conversion. Kayne Anderson Capital Advisors, L.P. is
located at 1800 Avenue of the Stars, Second Floor, Los Angeles, CA 90067.
The Kayne Anderson Capital Advisors, L.P. shares issuable upon conversion
of Preferred Stock are held by the following affiliates:
Shares Held
-----------
Kayne Anderson Capital Advisors, L.P...... 2,958,334
Ric Kayne................................. 333,333
Charles Norris............................ 166,667
Howard Zelikow............................ 33,333
David Shladovsky.......................... 8,333
----------
Total 3,500,000
For purposes of the table, Mr. Norris' shares are listed separately so that
they may be included in the total number of shares held by Directors and
Executive Officers. Mr. Norris' shares are included in determining the
percentage of shares held by Kayne Anderson.
30
(g) The Millennium shares are held by the following affiliates:
Shares Held
-----------
Brian J. Collins........................................ 57,601
Millennium Partners LLC................................. 2,253,863
Millennium Development Partners L.P..................... 978,900
MDP Ventures I LLC...................................... 72,100
MDP Ventures II LLC..................................... 2,268,531
Millennium Entertainment Partners L.P................... 625,000
-------------
Total 6,198,394
For purposes of the table, Mr. Collins' shares are listed separately so
that they may be included in the total number of shares held by Directors
and Executive Officers. Mr. Collins' shares are included in determining the
percentage of shares beneficially held by Millennium.
The address of all such entities is c/o Millennium Partners Management LLC,
1995 Broadway, New York, New York, 10023.
31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time we have entered into transactions with our officers,
directors and stockholders. We believe that each of the following transactions
has been on terms no less favorable to us than could have been obtained from
unaffiliated third parties. All transactions between us and any of our directors
or officers are subject to the approval of the disinterested directors.
Mr. Talla. We have a 50.1% interest in the partnership that owns The Sports
Club/LA - Los Angeles and Mr. Talla beneficially owns the remaining 49.9%. The
partnership agreement provides that, on an annual basis, the partners will share
in the first $300,000 of the Club's net cash flow in proportion to their
percentage interests. The next $35.0 million of net cash flow will be
distributed to us. All distributions of net cash flow thereafter, if any, will
be made to the partners in proportion to their percentage interests. Under
certain circumstances, we have an option to purchase Mr. Talla's interest in the
partnership for an amount equal to four times the amount of his most recent
annual distribution from the partnership.
As of May 4, 2001, we entered into a ten-year sublease for space located
within the building including The Sports Club/LA - Upper East Side. The sublease
provides for two five-year renewal options, an initial monthly rent of $125,000,
and rental increases of 10% at the end of each five-year period. The subtenant
for this lease is Club at 60th Street, Inc., a New York corporation owned by Mr.
Talla.
Messrs. Talla and Licklider. In September 1999, we sold the property on
which the Spectrum Club - Thousand Oaks is located for a sales price of $12.0
million. We entered into a sale and leaseback agreement for the property under a
long-term lease with an initial annual base rent of $1.3 million. The Thousand
Oaks property consists of the Spectrum Club - Thousand Oaks, a SportsMed
facility, unimproved office space, and a parking ramp. We are currently
subleasing the Spectrum Club space to another club operator. Mr. Licklider owns
an approximate 4.6% interest in the purchaser of the property, and trusts for
the benefit of Mr. Talla's minor children own an approximately 5.2% interest in
the purchaser of the property.
Millennium. Millennium is a partner in the Reebok-Sports Club/NY
partnership as well as the landlord of the building in which Reebok Sports
Club/NY is located. Reebok-Sports Club/NY partnership pays rent to Millennium in
the amount of $2.0 million per year, and the partnership agreement provides for
a first priority annual distribution of $3.0 million to Millennium. We are
entitled to certain additional priority distributions and 60% of the remaining
cash flow. Millennium's partnership interest entitles them to 20% of such
remaining cash flow.
In June 1997, we issued to Millennium 2,105,263 shares of our Common Stock
in exchange for $10.0 million. In December 1997, we sold 625,000 shares of
Common Stock to Millennium for $5.0 million. We also granted to Millennium
certain registration and preemptive rights regarding its shares. In addition,
for so long as Millennium maintains at least a 12% interest in our equity
securities, we and certain of our stockholders have agreed to cause a nominee of
Millennium to be appointed or elected to the Board of Directors. Pursuant to
this agreement Brian J. Collins, an officer of Millennium, is currently serving
as a member of our Board of Directors.
We have entered into leases with Millennium relating to The Sports Club/LA
- San Francisco, The Sports Club/LA - Washington, D.C. and The Sports Club/LA -
Boston. On March 27, 2001, the leases were amended with Millennium's landlord
contribution increasing by $16.5 million in exchange for additional rent
payments. In addition, after we receive a management fee equal to 6% of all
revenues, an amount equal to our investment in the Club and a 10% - 11% annual
return on the investment, Millennium is entitled to receive a percentage of all
additional cash flows from each Club as additional rent. Millennium's percentage
of the excess cash flow, as defined, previously was 20% for each of these Clubs.
Under the amended lease agreements, their percentage increases to 25% for the
Washington and Boston Clubs and 60% for the San Francisco Club. Millennium has
not received any payments to date under these provisions.
32
We have reached an agreement in principle with Millennium to develop The
Sports Club/LA - Miami as part of the exclusive new Four Seasons Hotel and
Tower. We are currently negotiating the terms of definitive management and
license agreements, pursuant to which we will manage the Club and be provided
with 6% of gross revenues and a participation in the Club's net cash flow. It is
anticipated that the Club will encompass 45,000 square feet and open in the
fourth quarter of 2003.
Kayne Anderson. On March 18, 2002, we sold an aggregate of 10,500 shares of
Series B Convertible Preferred Stock to Kayne Anderson Capital Advisors and four
affiliates thereof for aggregate offering proceeds of $10,500,000. The shares of
Series B Preferred may, at the option of the holder, be converted into shares of
our Common Stock at a rate of $3.00 per share; entitle each holder to one vote
for each share of Common Stock into which such Series B Preferred could then be
converted; and provide for the payment of dividends at an annual rate of $90.00
per share. Dividends are cumulative, do not accrue interest and, at our
discretion, may be paid in additional shares of Series B Preferred. As part of
the sale of the Series B Preferred to Kayne Anderson, we agreed that for so long
as Kayne Anderson beneficially owns at least 12% of our equity securities (on an
"as-converted basis") they will have the right to designate one member to our
Board of Directors. Mr. Charles A. Norris is currently serving on the Board as
the nominee of Kayne Anderson.
Messrs. Talla and Licklider and Millennium. In consideration of executing a
guaranty in favor of Comerica Bank - California (the "Bank") in connection with
the Bank's renewal of our $15.0 million credit facility (the "Credit Facility"),
Messrs. Licklider and Talla and MDP Ventures II, LLC, an affiliate of
Millennium, entered into agreements with us as of July 3, 2001, pursuant to
which we were obligated to pay an annual commitment fee to each of the
guarantors. At our discretion the 2001 fee was paid in restricted shares of
Common Stock with each guarantor receiving 15,384 shares. In addition to the
commitment fee we were also obligated to pay each guarantor a usage fee equal to
2% of such guarantor's pro rata portion of outstanding letters of credit and
amounts advanced to us under the Credit Facility. In April 2003, we issued each
guarantor 54,653 shares of common stock representing their 2% usage fee for the
period from July 2001 through October 2002 and their 1% commitment fee for the
most recent loan renewal. We remain obligated to pay the usage fee incurred
after October 2002. In June 2003 we terminated the Credit Facility and entered
into a new promissory note with another financial institution. The new note is
for $20.0 million and is guaranteed by Messrs. Talla and Licklider. We have
agreed to use commercially reasonable efforts to negotiate an agreement whereby
we would indemnify Messrs. Talla and Licklider and pay a fee to them for the
guarantee, provided that such fee is fair to us as determined by an authorized
committee of our Board of Directors and is consistent with the requirements of
our Indenture.
On September 6, 2002, we sold an aggregate of 5,000 shares of Series C
Convertible Preferred Stock to three of our major shareholders, D. Michael
Talla, Rex Licklider and MDP Ventures II, LLC, an affiliate of Millennium, for
aggregate offering proceeds of $5,000,000. The shares of Series C Preferred may,
at the option of the holder, be converted into shares of our Common Stock at a
rate of $3.00 per share; entitle each holder to one vote for each share of
Common Stock into which such Series C Preferred could then be converted; and
provide for the payment of dividends at an annual rate of $90.00 per share.
Dividends are cumulative, do not accrue interest and, at our discretion, may be
paid in additional shares of Series C Preferred.
33
PART IV
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our management, including our Co-Chief Executive Officers and our Chief
Financial Officer, have conducted an evaluation of the effectiveness of the our
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, our disclosure controls and procedures were effective in
ensuring that all material information required to be filed in this annual
report has been made known to them in a timely manner.
(b) Changes in internal controls.
There have been no significant changes made in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the Evaluation Date.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements filed as part of this Report are listed in Item
8 of this Report.
(2) No other financial schedules have been included because they are not
applicable, not required or because required information is included
in the consolidated financial statements or notes thereto.
(3) The following exhibits are filed as part of this Report.
Exhibit Incorporated by Reference Filed
----------------------------------------------
Number Exhibit Description Form File No. Filing Date Herewith
----------- --------------------------------------- ------------- ----------- -------------- ----------
3.1 Restated Certificate of Incorporation S-1 33-79552 10/13/94
of the Registrant.
3.2 Bylaws of the Registrant. S-1 33-79552 10/13/94
3.3 Amendment to Bylaws dated February 1, 10-K/A 1-13290 10/14/97
1995.
3.4 Certificate of Designation of Series 8-K 1-13290 03/26/02
B Convertible Preferred Stock of the
Registrant.
3.5 Corrected Certificate of Designation 8-K 1-13290 09/09/02
of Series B Convertible Preferred
Stock of the Registrant.
3.6 Certificate of Designation of Series 8-K 1-13290 09/09/02
C Convertible Preferred Stock of the
Registrant.
3.7 Amendment No. 2 to Bylaws dated July 10-K 1-13290 03/31/03
21, 1999.
34
Exhibit Incorporated by Reference Filed
----------------------------------------------
Number Exhibit Description Form File No. Filing Date Herewith
----------- --------------------------------------- ------------- ----------- -------------- ----------
4.1 Specimen Common Stock Certificate. S-1 33-79552 10/13/94
4.2 Rights Agreement by and between the 8-K 1-13290 10/06/98
Registrant and American Stock Transfer &
Trust dated as of October 6, 1998.
4.3 First Amendment to Rights Agreement 8-K 1-13290 03/15/99
by and between the Registrant and American
Stock Transfer & Trust entered into as of
February 18, 1999.
4.4 Indenture by and among Registrant, 8-K 1-13290 04/14/99
U.S. Bank Trust National Association
and the Subsidiary Guarantors
referred to therein, dated as of
April 1, 1999.
4.5 Registration Rights Agreement by and 8-K 1-13290 04/14/99
among the Registrant, Jeffries &
Company, Inc. and CIBC Oppenheimer
Corp., dated as of April 1, 1999.
4.6 Purchase Agreement by and among the 8-K 1-13290 04/14/99
Registrant, Jeffries & Company, Inc.
and CIBC Oppenheimer Corp., dated
March 29, 1999.
4.7 Second Amendment to Rights Agreement 10-K 1-13290 03/28/00
by and between the Registrant and American
Stock Transfer & Trust entered into as of
the second day of July 1999.
4.8 Third Amendment to Rights Agreement 10-K 1-13290 03/30/01
by and between the Registrant and American
Stock Transfer & Trust made and entered into
as of April 27, 2000.
4.9 Fourth Amendment to Rights Agreement 8-K 1-13290 07/17/01
by and between the Registrant and American
Stock Transfer & Trust entered into as of
June 27, 2001.
4.10 Fifth Amendment to Rights Agreement 8-K 1-13290 09/9/02
by and between the Registrant and
American Stock Transfer & Trust
entered into as of September 6, 2002
35
Exhibit Incorporated by Reference Filed
----------------------------------------------
Number Exhibit Description Form File No. Filing Date Herewith
----------- --------------------------------------- ------------- ----------- -------------- ----------
4.11 Sixth Amendment to Rights Agreement 10-K 1-13290 03/31/03
by and between the Registrant and American Stock Transfer &
Trust entered into as of March 5, 2003.
9.1 Voting Agreement among D. Michael S-1 33-79552 10/13/94
Talla, Nanette Pattee Francini, Mark
S. Spino, Peter Feinstein, Philip J.
Swain and FP II.
10.1 1994 Stock Incentive Plan. # S-1 33-79552 10/13/94
10.2 Form of Stock Option Agreement. # S-1 33-79552 10/13/94
10.3 Form of Stock Purchase Agreement. # S-1 33-79552 10/13/94
10.4 1994 Stock Compensation Plan. # S-1 33-79552 10/13/94
10.5 Form of Indemnification Agreement S-1 33-79552 10/13/94
between the Registrant and its
directors and certain officers.
10.6 Indemnification Agreement between the S-1 33-79552 10/13/94
Registrant and D. Michael Talla.
10.7 Indemnification Agreement between S-1 33-79552 10/13/94
Registrant and Rex A. Licklider.
10.8 Lease of premises for Reebok Sports S-1 33-79552 10/13/94
Club/NY located at 160 Columbus
Avenue, New York 10023 dated June 3,
1992.
10.9 Management Agreement effective as of S-1 33-79552 10/13/94
June 3, 1992, between R-SC/NY, Ltd.
and Pontius Realty, Inc.
10.10 License Agreement between Reebok S-1 33-79552 10/13/94
Fitness Centers, Inc. and R-SC/NY,
Ltd. dated June 3, 1992.
10.11 Letter Agreement regarding R-SC/NY S-1 33-79552 10/13/94
dated June 3, 1992.
10.12 Memorandum of Agreement between S-1 33-79552 10/13/94
Reebok Fitness Centers, Inc. and the
Company dated as of June 3, 1992.
36
Exhibit Incorporated by Reference Filed
----------------------------------------------
Number Exhibit Description Form File No. Filing Date Herewith
----------- --------------------------------------- ------------- ----------- -------------- ----------
10.13 Seventh Amendment and Restated S-1 33-79552 10/13/94
Agreement of Limited Partnership of
L.A./Irvine Sports Club, Ltd., a
California Limited Partnership, dated
as of October 12, 1994.
10.14 First Amendment to Seventh Amended S-1 33-79552 10/13/94
and Restated Agreement of Limited
Partnership of L.A./Irvine Sports
Club, Ltd., a California Limited
Partnership, dated as of October 12,
1994.
10.15 Form of Option Agreement by and S-1 33-79552 10/13/94
between D. Michael Talla, an
individual, TTO Partners, a
California Limited Partnership, and
Sports Club, Ltd., a California
Corporation, relating to L.A./Irvine
Sports Club, Ltd., a California
Limited Partnership.
10.16 Amended and Restated Agreement of S-1 33-79552 10/13/94
Limited Partnership of TTO Partners,
a California Limited Partnership,
dated June 30, 1992, as amended
January 1, 1993, January 4, 1993 and
February 12, 1994 and as assigned
January 1, 1993.
10.17 First Amended and Restated Agreement S-1 33-79552 10/13/94
of Limited Partnership of
Reebok-Sports Club/NY, Ltd. Dated as
of October 12, 1994.
10.18 Letter Agreement by and between S-1 33-79552 10/13/94
Reebok Fitness Centers, Inc. and the
Company dated October 12, 1994.
10.19 Amendment to First Amended and S-1 33-79552 10/13/94
Restated Agreement of Limited
Partnership of Reebok-Sports Club/NY,
Ltd. dated as of October 12, 1994.
10.20 Letter Agreement by and between S-1 33-79552 10/13/94
Reebok Fitness Centers, Inc. and the
Company, which became effective on
October 29, 1994.
37
Exhibit Incorporated by Reference Filed
----------------------------------------------
Number Exhibit Description Form File No. Filing Date Herewith
----------- --------------------------------------- ------------- ----------- -------------- ----------
10.21 License Agreement by and between S-1 33-79552 10/13/94
Reebok Fitness Centers, Inc. and the
Company, which became effective on
October 20, 1994.
10.22 Agreement by and among Reebok-Sports 10-K/A 1-13290 10/14/97
Club/NY Ltd., Talla New York, Inc.,
RFC, Inc., LMP Health Club Co.,
Millennium Entertainment Partners,
L.P. and Registrant dated as of
December 30, 1996.
10.23 Letter Agreement between Millennium 10-K/A 1-13290 10/14/97
Entertainment Partners, L.P. and the
Registrant dated as of March 13, 1997.
10.24 First Amendment to Option Agreement 10-K 1-13290 02/26/98
between D. Michael Talla and TTO
Partners dated May 27, 1997.
10.25 Amendment of Lease between Lincoln 10-K 1-13290 02/26/98
Metrocenter Partners, L.P. and
Reebok-Sports Club/NY Ltd. as of
January 31, 1998.
10.26 Lease Agreement between RCPI Trust 10-K 1-13290 03/25/99
and the Registrant as of February 27,
1998.
10.27 Amended and Restated Net Operating 10-K 1-13290 03/25/99
Lease among Hirschfeld Realty Club
Corporation and 328 E. 61 Corp., and
Vertical Fitness and Racquet Club,
Ltd., dated March 26, 1985.
10.28 Lease Modification Agreement by and 10-K 1-13290 03/25/99
among Hirschfeld Realty Corporation
and 328 E. 61 Corp., and Vertical
Fitness and Racquet Club, Ltd., dated
July 1, 1990.
10.29 Assignment and Assumption of Lease by 10-K 1-13290 03/25/99
and between Vertical Fitness and
Racquet Club, Ltd., and Bally
Entertainment Corporation dated
January 8, 1996.
38
Exhibit Incorporated by Reference Filed
----------------------------------------------
Number Exhibit Description Form File No. Filing Date Herewith
----------- --------------------------------------- ------------- ----------- -------------- ----------
10.30 Assignment of Lease executed by 10-K 1-13290 03/25/99
Hilton Hotels Corporation, as successor
to tenant, and agreed to and accepted by
the Registrant, dated April 15, 1998.
10.31 Second Amendment to Amended and 10-K 1-13290 03/25/99
Restated Net Operating Lease by and
among Hirschfeld Realty Club
Corporation and 328 E. 61 Corp., and
the Registrant dated April 15, 1998.
10.32 Note Payable issued by the Registrant 10-K 1-13290 03/25/99
to Hilton Hotels Corporation dated
April 15, 1998.
10.33 Amended and Restated 1994 Stock 10-K 1-13290 03/25/99
Incentive Plan as of June 2, 1998. #
10.34 Letter Agreement between the 10-K 1-13290 03/25/99
Registrant and Millennium Partners
LLC dated as of October 27, 1998.
10.35 First Amendment to Lease between RCPI 10-K 1-13290 03/25/99
Trust and the Registrant dated
October 30,1998.
10.36 Second Amendment to Lease between 10-K 1-13290 03/25/99
RCPI Trust and the Registrant dated
March 4, 1999.
10.37 Lease between CB-1 Entertainment 10-K 1-13290 03/25/99
Partners LP and S.F. Sports Club,
Inc. dated June 1, 1997.
10.38 Lease between 2200 M Street LLC and 10-K 1-13290 03/25/99
Washington D.C. Sports Club, Inc.
dated March 1999.
10.39 Fourth Amended and Restated Loan 8-K 1-13290 04/14/99
Agreement by and among the Registrant,
certain of its subsidiaries and Comerica
Bank-California, dated April 1, 1999.
10.40 Intercreditor Agreement by and among 8-K 1-13290 04/14/99
the Registrant, certain of its
subsidiaries, Comerica
Bank-California and U.S. Bank Trust
National Association, dated April 1, 1999.
39
Exhibit Incorporated by Reference Filed
----------------------------------------------
Number Exhibit Description Form File No. Filing Date Herewith
----------- --------------------------------------- ------------- ----------- -------------- ----------
10.41 Disbursement Agreement between U.S. 8-K 1-13290 04/14/99
Bank Trust National Association and
the Registrant and certain of its
subsidiaries dated as of April 1,
1999.
10.42 Amended and Restated 1994 Stock 10-K 1-13290 03/28/00
Compensation Plan. #
10.43 Lease Agreement as of September 24, 10-K 1-13290 03/28/00
1999 between The Spectrum Club
Company, Inc. and West Hollywood
Property Limited Partnership and 2400
Willow Lane Associates Limited
Partnership.
10.44 Lease Agreement as of November 5, 10-K 1-13290 03/28/00
1999 by and between New Commonwealth
Center Limited Partnership and
Washington D.C. Sports Club, Inc.
10.45 Separation from Employment Agreement 10-K 1-13290 03/28/00
made as of February 11, 2000 by and
between the Registrant and John M.
Gibbons. #
10.46 Letter Agreement dated March 11, 1999 10-K 1-13290 03/28/00
amending the October 27, 1998 Letter
Agreement between the Registrant and
Millennium Partners, LLC.
10.47 Amendment adopted November 4, 1999 to 10-K 1-13290 03/28/00
the Registrant's 1994 Stock Incentive
Plan. #
10.48 Certificate representing Series B 10-K 1-13290 03/28/00
Senior Secured Notes.
10.49 First Amendment to Fourth Amended and 10-K 1-13290 03/28/00
Restated Loan Agreement among the
Registrant and certain of its
subsidiaries and Comerica Bank -
California as of December 3, 1999.
10.50 Form of The Sports Club Membership 10-K 1-13290 03/28/00
Agreements.
40
Exhibit Incorporated by Reference Filed
----------------------------------------------
Number Exhibit Description Form File No. Filing Date Herewith
----------- --------------------------------------- ------------- ----------- -------------- ----------
10.51 Second Amendment to Fourth Amended 10-K 1-13290 03/30/01
and Restated Loan Agreement among the
Registrant and certain of its subsidiaries
and Comerica Bank-California as of August 10,
2000.
10.52 Reaffirmation of Intercreditor and 10-K 1-13290 03/30/01
Subordination Agreement dated as of
August 10, 2000 among the Registrant
and certain of its subsidiaries and
U.S. Bank Trust, National Association.
10.53 First Supplemental Agreement of Lease 10-K 1-13290 03/30/01
made as of the 27th day of March,
2001 between CB-1 Entertainment
Partners, LP and S.F. Sports Club,
Inc.
10.54 First Supplemental Agreement of Lease 10-K 1-13290 03/30/01
made as of the 27th day of March 2001
between New Commonwealth Center
Limited Partnership and Washington
D.C. Sports Club, Inc.
10.55 First Supplemental Agreement of Lease 10-K 1-13290 03/30/01
made as of the 27th day of March 2001
between 2200 M Street LLC and
Washington D.C. Sports Club, Inc.
10.56 Third Amendment to Fourth Amended and 8-K 1-13290 07/17/01
Restated Loan Agreement entered into
as of June 1, 2001 by and among
Registrant and various of its
subsidiaries and Comerica Bank -
California.
10.57 Indemnification and Contribution 8-K 1-13290 07/17/01
Agreement entered into as of July 3,
2001 by and among the Registrant.,
Rex A. Licklider, D. Michael Talla
and MDP Ventures II LLC.
10.58 The Sports Club Company, Inc. 2001 10-K 1-13290 03/29/02
Stock Incentive Plan. #
41
Exhibit Incorporated by Reference Filed
----------------------------------------------
Number Exhibit Description Form File No. Filing Date Herewith
----------- --------------------------------------- ------------- ----------- -------------- ----------
10.59 Preferred Stock Purchase Agreement 8-K 1-13290 03/26/02
made as of March 18, 2002 by and among
Registrant and the holders of the Series B
Convertible Preferred Stock.
10.60 Investor Rights Agreement made as of 8-K 1-13290 03/26/02
the 18th day of March 2002 by and
between the Registrant and the
holders of the Series B Convertible
Preferred Stock.
10.61 Asset Purchase Agreement dated as of 10-K 1-13290 03/29/02
January 25, 2002, by and between SCC
Nevada, Inc. and LSI-Nevada, LLC.
10.62 Standard Form Lease between the 10-K 1-13290 03/29/02
Registrant and Club at 60th St., Inc.
for space located at 333 East 60th
Street, New York, dated May 4, 2001.
10.63 First Amendment to Lease by and among 10-K 1-13290 03/29/02
Registrant and Club at 60th St., Inc.
dated as of March 1, 2002.
10.64 Waiver of Covenant Compliance Letter 10-K 1-13290 03/29/02
Agreement between the Registrant and
Comerica Bank - California dated
March 14, 2002.
10.65 Fourth Amendment to Fourth Amended 8-K 1-13290 06/04/02
and Restated Loan Agreement and First
Amendment to Amended and Restated
Revolving Loan between the Registrant
and certain of its Subsidiaries and
Comerica Bank - California dated May
31, 2002.
10.66 Fifth Amendment to Fourth Amended and 8-K 1-13290 09/04/02
Restated Loan Agreement between the
Registrant and certain of its
Subsidiaries and Comerica Bank -
California dated August 30, 2002.
42
Exhibit Incorporated by Reference Filed
----------------------------------------------
Number Exhibit Description Form File No. Filing Date Herewith
----------- --------------------------------------- ------------- ----------- -------------- ----------
10.67 Reaffirmation of Intercreditor and 8-K 1-13290 09/04/02
Subordination Agreement dated as of
August 30, 2002 among the Registrant
and certain of its Subsidiaries and
U.S. Bank Trust, National Association.
10.68 Investors' Rights Agreement made as 8-K 1-13290 09/09/02
of September 6, 2002 by and between
the Registrant and the holders of the
Series C Convertible Preferred Stock.
10.69 Preferred Stock Purchase Agreement 8-K 1-13290 09/09/02
made as of September 6, 2002 by and
among the Registrant and the holders
of the Series C Convertible Preferred
Stock.
10.70 Sixth Amendment to Fourth Amended and 8-K 1-13290 11/12/02
Restated Loan Agreement by and among
the Registrant and certain of its
Subsidiaries, Comerica Bank -
California and KASCY, L.P. dated
October 31, 2002.
10.71 Consent and Reaffirmation of 8-K 1-13290 11/12/02
Intercreditor and Subordination
Agreement dated as of October 31,
2002 among the Registrant and certain
of its Subsidiaries, Comerica Bank -
California and U.S. Bank Trust,
National Association.
10.72 Waiver of Covenant Compliance Letter 10-K 1-13290 03/31/03
from Comerica Bank - California dated
March 26, 2003.
21.1 Subsidiaries of the Registrant. 10-K 1-13290 03/31/03
23.1 Consent of KPMG LLP. X
99.1 Certification Pursuant to 18 U.S.C. 10-K 1-13290 03/31/03
Section 1350, as adopted Pursuant to
Section 906 of the Sarbanes - Oxley
Act of 2002.
------------------
# Compensation agreement or plan.
43
(b) Reports on Form 8-K
The following reports on Form 8-K were filed from October 1, 2002 through
March 31, 2003:
o On November 12, 2002, we filed a report on Form 8-K stating that we amended
our loan agreement with Comerica Bank - California to extend the maturity
date to November 1, 2003 and to add KASCY, L.P., an affiliate of Kayne
Anderson Capital Advisors, L.P. as a lending participant in the credit
facility.
o On December 12, 2002, we filed a report on Form 8-K announcing that our
Board of Directors had approved the formation of a special committee
comprised of its independent directors to explore strategic alternatives,
including a possible "going private" transaction in which certain of our
principal shareholders may participate.
o On December 13, 2002, we filed a report on Form 8-K/A to also disclose that
we engaged Hankin & Company, a Los Angeles based investment banking firm,
to assist us in raising up to $50.0 million in private equity to establish
separate joint ventures for the development of smaller luxury sports and
fitness complexes under The Sports Club/LA brand.
o On December 19, 2002, we filed a report on Form 8-K to announce we reached
an agreement in principle with Millennium to develop an approximately
45,000 square foot sports and fitness Club under our brand name The Sports
Club/LA as part of Millennium's mixed use project in Miami, Florida. We
expect to manage the new Club pursuant to a management and license
agreement that will provide us with 6% of gross revenues and a
participation in net profits.
(c) Exhibits
Index to Exhibits of Form 10-K/A
Exhibit
Number Exhibit
------ -------
23.1 Consent of KPMG LLP.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act
of 1934, the Registrant has duly caused this Annual Report on Form 10-K/A to be
signed on its behalf by the undersigned, thereunto duly authorized, on the 25th
day of June 2003.
THE SPORTS CLUB COMPANY, INC.
/s/ D. Michael Talla
-------------------------------------
D. Michael Talla
Co-Chief Executive Officer
/s/ Rex A. Licklider
-------------------------------------
Rex A. Licklider
Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K/A has been signed below by the following persons on behalf
of the Registrant, in the capacities and on the date indicated.
Signature Title Date
---------------------------- --------------------------------------- ---------
/s/ D. Michael Talla Chairman of the Board June 26, 2003
----------------------------
D. Michael Talla and Co-Chief Executive Officer
/s/ Rex A. Licklider Vice Chairman of the Board June 26, 2003
----------------------------
Rex A. Licklider and Co-Chief Executive Officer
/s/ Timothy O'Brien Chief Financial Officer June 26, 2003
----------------------------
Timothy M. O'Brien (Principal Financial and Accounting
Officer)
/s/ Brian J. Collins Director June 26, 2003
----------------------------
Brian J. Collins
/s/ Nanette Pattee Francini Director June 26, 2003
----------------------------
Nanette Pattee Francini
/s/ Andrew L. Turner Director June 26, 2003
----------------------------
Andrew L. Turner
/s/ George Vasilakos Director June 26, 2003
----------------------------
George Vasilakos
/s/ Charles Norris Director June 26, 2003
----------------------------
Charles Norris
45
CERTIFICATIONS
I, D. Michael Talla, certify that:
1. I have reviewed this annual report on Form 10-K/A of The Sports Club
Company, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual 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 annual report (the "Evaluation Date"); and
(c) Presented in this annual 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
(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
annual report whether 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.
Dated, June 26, 2003
/s/ D. Michael Talla
--------------------------------------
D. Michael Talla
Co-Chief Executive Officer
46
CERTIFICATIONS
I, Rex A. Licklider, certify that:
1. I have reviewed this annual report on Form 10-K/A of The Sports Club
Company, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual 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 annual report (the "Evaluation Date"); and
(c) Presented in this annual 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
(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
annual report whether 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.
Dated, June 26, 2003
/s/ Rex A. Licklider
--------------------------------------
Rex A. Licklider
Co-Chief Executive Officer
47
CERTIFICATIONS
I, Timothy O'Brien, certify that:
1. I have reviewed this annual report on Form 10-K/A of The Sports Club
Company, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual 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 annual report (the "Evaluation Date"); and
(c) Presented in this annual 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
(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
annual report whether 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.
Dated, June 26, 2003
/s/ Timothy O'Brien
--------------------------------------
Timothy O'Brien
Chief Financial Officer
48
EXHIBIT 23.1
Independent Auditors' Consent
The Board of Directors
The Sports Club Company, Inc.
We consent to incorporation by reference in the Registration Statement (No.
333-26421) on Form S-8 and the Registration Statement (No. 333-38459) on Form
S-3 of The Sports Club Company, Inc. of our report dated February 21, 2003,
except for note 19, which is as of June 12, 2003, relating to the consolidated
balance sheets of The Sports Club Company, Inc as of December 31, 2002 and 2001,
and the related consolidated statements of operations, stockholders' equity and
the related financial statement schedule, and cash flows for each of the years
in the three-year period ended December 31, 2002, which report appears in the
December 31, 2002 annual report on Form 10-K/A of The Sports Club Company, Inc.
Our report refers to a restatement of the 2001 balance sheet and an adjustment
to accumulated deficit as of January 1, 2000 and December 31, 2000 to properly
record certain deferred membership revenues. Our report also refers to a
restatement of the consolidated financial statements including adjustments to
properly record deferred revenues for advanced payments received for private
training services, certain operating expenses and the tax impacts of the
Company's restatements. Finally, our report refers to a change in the method of
accounting for goodwill and other intangible assets as a result of the adoption
of Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," on January 1, 2002.
KPMG LLP
Los Angeles, California
June 26, 2003
49