UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2003
Commission File # 1-13290
THE SPORTS CLUB COMPANY, INC.
A Delaware corporation - I.R.S. No. 95-4479735
11100 Santa Monica Blvd., Suite 300, Los Angeles, CA 90025
(310) 479-5200
Indicate by check mark whether the company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, during the preceding 12 months (or for such shorter period that the
company was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- ----------
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
Shares
Outstanding at
Class November 12, 2003
-------------------------------- ----------------------------------
Common Stock, 18,418,714
par value $.01 per share
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2002 and September 30, 2003
(Amounts in thousands, except share data)
(Unaudited)
December 31, September 30,
ASSETS 2002 2003
---- ----
Current assets:
Cash and cash equivalents $ 3,185 $ 2,507
Accounts receivable, net of allowance for doubtful accounts
of $534 and $561 at December 31, 2002 and September 30, 2003, respectively 3,951 3,434
Inventories 1,169 1,182
Other current assets 1,148 1,012
----------- -----------
Total current assets 9,453 8,135
Property and equipment, at cost, net of accumulated depreciation and
amortization of $41,119 and $50,028 at December 31, 2002 and
September 30, 2003, respectively 156,630 156,246
Costs in excess of net assets acquired, less accumulated amortization
of $2,531 at December 31, 2002 and September 30, 2003 12,794 12,794
Restricted cash 227 4,427
Other assets 7,282 8,368
----------- -----------
$ 186,386 $ 189,970
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and equipment
financing loans $ 2,158 $ 2,297
Accounts payable 2,545 3,066
Accrued liabilities 12,657 9,935
Deferred revenues 18,231 18,227
----------- -----------
Total current liabilities 35,591 33,525
Notes payable and equipment financing loans,
less current installments 101,882 120,169
Deferred lease obligations 8,307 8,686
Minority interest 600 600
----------- -----------
Total liabilities 146,380 162,980
Commitments and contingencies
Redeemable preferred stock, $.01 par value, 10,500 shares authorized;
10,500 shares issued and outstanding (liquidation preference of $11,248 and
$11,960 at December 31, 2002 and September 30, 2003, respectively) 10,727 11,503
Shareholders' equity:
Preferred stock, $.01 par value, 984,500 shares authorized;
no shares issued or outstanding -- --
Preferred stock, $.01 par value, 5,000 shares authorized, issued and
outstanding (liquidation preference of $5,140 and $5,476 at December 31, 2002
and September 30, 2003, respectively) 5,000 5,000
Common stock, $.01 par value, 40,000,000 shares authorized;
21,068,717 shares issued 211 211
Additional paid-in capital 101,961 101,185
Accumulated deficit (62,709) (76,343)
Treasury stock, at cost, 2,964,764 and 2,699,068 shares at
December 31, 2002 and September 30, 2003, respectively (15,184) (14,566)
------------ ------------
Shareholders' equity 29,279 15,487
----------- -----------
$ 186,386 $ 189,970
=========== ===========
See accompanying notes to condensed consolidated financial statements.
1
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three And Nine Months Ended September 30, 2002 and 2003
(Amounts in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2003 2002 2003
---- ---- ---- ----
(Restated) (Restated)
Revenues $ 30,195 $ 31,727 $ 90,109 $ 96,311
Operating expenses:
Direct 24,524 26,491 74,935 79,198
General and administrative 1,944 1,950 5,755 5,919
Selling 1,086 1,066 3,667 3,666
Depreciation and amortization 2,937 2,991 8,945 8,920
Pre-opening expenses -- 901 130 1,677
----------- ----------- ----------- -----------
Total operating expenses 30,491 33,399 93,432 99,380
----------- ----------- ----------- -----------
Loss from operations (296) (1,672) (3,323) (3,069)
Other expenses (income):
Interest expense 3,305 3,502 10,032 10,037
Minority interests 38 38 113 113
Non-recurring items (97) -- (127) --
----------- ----------- ----------- -----------
Loss before income taxes (3,542) (5,212) (13,341) (13,219)
Income tax expense (benefit) 76 55 (445) 415
----------- ----------- ----------- -----------
Net loss (3,618) (5,267) (12,896) (13,634)
Dividends on preferred stock 264 351 537 1,049
----------- ----------- ----------- -----------
Net loss attributable to common shareholders $ (3,882) $ (5,618) $ (13,433) $ (14,683)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted $ (0.21) $ (0.31) $ (0.74) $ (0.80)
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic and diluted 18,096 18,370 18,073 18,286
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
2
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2002 and 2003
(Amounts in thousands)
(Unaudited)
Nine Months Ended
September 30,
2002 2003
---- ----
(Restated)
Cash flows used in operating activities:
Net loss $ (12,896) $ (13,634)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 8,945 8,920
(Increase) decrease in:
Accounts receivable, net 941 517
Inventories (69) (13)
Other current assets (823) 136
Other assets (2,052) (327)
Increase (decrease) in:
Accounts payable (527) 521
Accrued liabilities (1,674) (2,104)
Deferred revenues (1,229) (4)
Deferred lease obligations 3,766 379
------------ -----------
Net cash used in operating activities (5,618) (5,609)
Cash flows provided by (used in) investing activities:
Capital expenditures (5,859) (8,536)
Increase in restricted cash -- (4,200)
Increase in due from affiliates (13) --
Proceeds from sale of Houston real estate-net of costs 3,036 --
Proceeds from sale of The Sports Club/Las Vegas-net of costs 6,154 --
------------ -----------
Net cash provided by (used in) investing activities 3,318 (12,736)
Cash flows provided by financing activities:
Proceeds from issuance of Preferred Stock, net of costs 14,908 --
Proceeds from notes payable and equipment financing loans 21,725 30,741
Repayments of notes payable and equipment financing loans (32,666) (13,074)
------------ -------------
Net cash provided by financing activities 3,967 17,667
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,667 (678)
Cash and cash equivalents at beginning of period 1,482 3,185
------------ ------------
Cash and cash equivalents at end of period $ 3,149 $ 2,507
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 11,803 $ 12,075
============ ============
Cash paid for income taxes $ 242 $ 386
============ ============
See accompanying notes to condensed consolidated financial statements.
3
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and September 30, 2003
1. Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). The condensed consolidated financial statements
should be read in conjunction with the Company's December 31, 2002, consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K/A (SEC File Number 1-13290). Certain information and footnote
disclosures which are normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to SEC rules and regulations. The Company believes that the
disclosures made are adequate to make the information presented not misleading.
The information reflects all adjustments that, in the opinion of management, are
necessary for a fair presentation of the financial position and results of
operations for the interim periods set forth herein. All such adjustments are of
a normal and recurring nature. The results for the three-month and nine-month
periods ended September 30, 2003, are not necessarily indicative of the results
for the fiscal year ending December 31, 2003.
2. Restatement
On June 26, 2003, the Company filed a Form 10-K/A with the Securities and
Exchange Commission to restate its previously issued financial statements for
the years ended on and prior to December 31, 2002. The adjustments consisted of
several items; however, the principal adjustment was a correction of the
methodology used to recognize private training revenues. The Company had been
recognizing private training on a cash basis rather than when the private
training session was given, as required by GAAP. The other adjustments made as
part of the restatement were not significant individually or in total.
Accordingly, the Condensed Consolidated Statement of Operations for the quarter
and nine months ended September 30, 2002 and the Condensed Consolidated
Statement of Cash Flows for the nine months ended September 30, 2002, have been
restated from those originally presented in the Company's September 30, 2002
Form 10-Q.
The following table presents consolidated summary financial data for the
three months and nine months ended September 30, 2002, on an "as reported" and
"as restated" basis.
Three Months Nine Months
Ended Ended
September 30, 2002 September 30, 2002
------------------ ------------------
(Amounts in thousands)
Revenue:
As reported....................................... $ 30,272 $ 90,313
===================== =====================
As restated....................................... $ 30,195 $ 90,109
===================== =====================
Net loss attributable to common shareholders:
As reported....................................... $ (4,020) $ (13,866)
====================== ======================
As restated....................................... $ (3,882) $ (13,433)
====================== ======================
Net loss per share - basic and diluted:
As reported....................................... $ (0.22) $ (0.77)
====================== ======================
As restated....................................... $ (0.21) $ (0.74)
====================== ======================
4
3. Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. On September 30,
2003, cash and cash equivalents were $2,507,000. Restricted cash at September
30, 2003, consisted of a $4.2 million deposit to secure two letters of credit
and $227,000 of certificates of deposit to satisfy various regulatory
requirements.
4. Notes Payable and Equipment Financing Loans
Notes payable and equipment financing loans are summarized as follows:
December 31, September 30,
2002 2003
---- ----
(Amounts in thousands)
Senior Secured Notes (a)......... $ 100,000 $ 100,000
Mortgage note (b)................ -- 19,928
Equipment financing loans (c).... 4,040 2,538
-------------- --------------
104,040 122,466
Less current installments........ 2,158 2,297
-------------- --------------
$ 101,882 $ 120,169
============== ==============
---------
(a) On April 1, 1999, the Company issued in a private placement $100.0
million of 11 3/8% Senior Secured Notes due in March 2006 (the "Senior
Notes") with interest due semi-annually. In May 1999, the Senior Notes were
exchanged for registered Series B Senior Secured Notes (the "Senior Secured
Notes"). The Senior Secured Notes are secured by substantially all of the
Company's assets, other than certain excluded assets. In connection with
the issuance of the Senior Secured Notes, the Company entered into an
indenture dated as of April 1, 1999 (the "Indenture") that includes certain
covenants, which as of September 30, 2003, 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 on or sell certain
assets, and (iii) enter into mergers and consolidations. The Senior Notes
are subject to redemption at the option of the Company, in whole or in
part, at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest thereon:
Period Percentage
------ ----------
Prior to March 15, 2004................. 105.688%
Prior to March 15, 2005................. 102.844%
Thereafter.............................. 100.000%
(b) Prior to June 12, 2003, the Company had a $10.0 million credit facility
from a commercial bank. On June 12, 2003, the Company obtained alternative
financing in the form of a secured five-year promissory loan in the amount
of $20.0 million. Amounts outstanding under the previous bank credit
facility were repaid with a portion of the proceeds of the new loan. The
new loan is evidenced by a promissory note that bears interest at a fixed
interest rate of 7.25%; requires monthly principal and interest payments of
$144,561; is secured by the common stock and all the assets of Irvine
Sports Club, Inc.,
5
the Company's wholly owned subsidiary that owns The Sports Club/Irvine; and
is guaranteed by the Company's two Co-Chief Executive Officers. The note
requires The Sports Club/Irvine to maintain a minimum operating income, as
defined, or the Company will be required to establish a payment reserve
account of up to $607,000. As of September 30, 2003, the Company has
maintained the minimum operating income. The note may be prepaid at any
time without penalty and requires a final principal payment of $18.3
million on July 1, 2008.
(c) The equipment financing loans are secured by furniture, fixtures and
equipment. The amounts are generally repayable in monthly payments over
four or five years with effective interest rates between 7.1% and 13.3%.
5. Net Loss per Share
Basic loss per share represents the net loss less an accrual for Preferred
Stock dividends divided by the weighted-average number of shares of Common Stock
outstanding for the period. Diluted loss per share excludes the dilutive effect
of common stock equivalents. For the quarter and nine months ended September 30,
2003, there were 1,694,768 and 1,886,998 anti-dilutive common stock equivalents,
respectively. For the quarter and nine months ended September 30, 2002, there
were 3,220,038 and 2,374,827 anti-dilutive common stock equivalents,
respectively.
6. Income Tax Benefit
The income tax benefit recorded for the nine months ended September 30,
2002, was the result of a federal income tax refund the Company received due to
changes in existing tax laws offset by an accrual for state income taxes. The
federal income tax benefit arises from the Company's ability to carry back net
operating losses incurred during 2001 to prior tax years in which the Company
had taxable income. The benefit recorded is consistent with the provisions of
statement of Financial Accounting Standards Board No. 109, Accounting for Income
Taxes.
7. Redeemable Preferred Stock
On March 18, 2002, the Company completed a $10.5 million private placement
of a newly created series of its Convertible Preferred Stock. The Company
received $9.9 million in cash, after issuance costs, and issued 10,500 shares of
Series B Preferred Stock, $.01 par value ("Series B Preferred"), at a price of
$1,000 per share. The Company has the obligation to redeem any outstanding
shares of Series B Preferred on March 18, 2009 at a price of $1,000 per share
plus accrued but unpaid dividends. Dividends accrue at the annual rate of $90.00
per share. Such dividends are cumulative but do not accrue interest and at the
Company's option, may be paid in cash or in additional shares of Series B
Preferred. The Series B Preferred may, at the option of the holder, be converted
into shares of Common Stock at the rate of $3.00 per share (resulting in the
issuance of 3,500,000 shares of Common Stock if 100% of the Series B Preferred
is converted at that price). The conversion price will be adjusted downward in
the event the Company issues additional shares of Common Stock at a price below
$3.00 per share, subject to certain exceptions; and any such downward adjustment
is subject to the prior approval of the American Stock Exchange ("AMEX"). In the
event the Series B Preferred is redeemed before March 18, 2005, the holders will
receive a warrant to purchase shares of Common Stock at a price of $3.00 per
share, exercisable before March 18, 2007. In the event of liquidation, the
Series B Preferred holders are entitled to receive, prior and in preference to
any distribution to common shareholders and pari passu with holders of the
Series C
6
Convertible Preferred Stock (See Note 8), an amount equal to $1,000 for each
share of Series B Preferred then outstanding.
The initial carrying value of the Series B Preferred was recorded at its
"fair value" (sale price less costs to issue) on the date of issuance. The
carrying value of the Series B Preferred will be periodically adjusted so that
the carrying value equals the redemption value on the redemption date. The
carrying value of the Series B Preferred will also be periodically adjusted for
any accrued and unpaid dividends. At December 31, 2002 and September 30, 2003,
the Series B Preferred carrying value consisted of the following ($ in
thousands):
December 31, September 30,
2002 2003
---- ----
Initial fair value, sale price of $10,500
Less costs to issue of $592.............. $ 9,908 $ 9,908
Redemption value accretion.................... 71 135
Accrued and unpaid dividends accretion........ 748 1,460
------------ --------------
Total carrying value...................... $ 10,727 $ 11,503
============ ==============
8. 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.
9. 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 a material adverse effect on the Company's financial
condition, cash flow or results of operations.
7
10. Accounting for 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:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2003 2002 2003
---- ---- ---- ----
(in thousand, except per share data)
Net loss attributable to common
shareholders, as reported................... $ (3,882) $ (5,618) $ (13,433) $ (14,683)
Stock-based employee compensation expense
included in reported net loss............... -- -- -- --
Stock-based employee compensation expense
determined under fair value based method
for all awards.............................. (310) (164) (929) (491)
----------- ----------- ----------- ------------
Adjusted net loss attributable to
common shareholders......................... $ (4,192) $ (5,782) $ (14,362) $ (15,174)
=========== =========== =========== ============
Net loss per share as reported basic and
Diluted..................................... $ (0.21) $ (0.31) $ (0.74) $ (0.80)
=========== =========== =========== ============
Adjusted net loss per share basic and diluted.. $ (0.23) $ (0.31) $ (0.79) $ (0.83)
=========== =========== =========== ============
11. New Accounting Pronouncements
Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. Statement No. 146 nullifies
Emerging Issues Task Force ("EITF") issue 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). Under EITF issue 94-3, a
liability for an exit cost is recognized at the date of an entity's commitment
to an exit plan. Under Statement No. 146, the liabilities associated with an
exit or disposal activity will be measured at fair value and recognized when the
liability is incurred and meets the definition of a liability in the FASB's
conceptual framework. This Statement is effective prospectively for exit or
disposal activities initiated after December 31, 2002. The adoption of Statement
No. 146 did not have any impact on the Company's consolidated financial
statements.
8
Accounting for Stock-Based Compensation
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. Management has chosen
not to adopt the fair value measurement provisions of SFAS 123. The Company has
included the disclosure requirements in Note 10 to the accompanying unaudited
condensed consolidated financial statements.
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others
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. The
Company does not have any guarantees that require disclosure under FIN 45.
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.
As noted above 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. To date, the Company has not
entered into or modified any guarantees requiring the recognition of a liability
pursuant to the provisions of FIN 45.
Revenue Arrangements with Multiple Deliverables
In November 2002, the 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
9
evidence to the contrary. EITF 00-21 also addresses how consideration should be
measured and allocated to the separate units of accounting in the arrangement.
The guidance in EITF 00-21 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. The
Company adopted EITF 00-21 effective July 1, 2003 and has started classifying
revenues generated from new membership sales in accordance with the statement.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), which addressed 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
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 December 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The Company has no "Variable Interest Entities" and therefore the application of
this interpretation will not have an effect on the Company's consolidated
financial statements.
Amendment of Statement 133 on Derivative Instruments and Hedging Activities
On April 30, 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. This Statement is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The Company has no "Derivative Instruments" and is not involved in any
"Hedging Activities" and therefore the adoption of SFAS 149 did not have any
impact on the Company's consolidated financial statements.
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS 150"),
which addresses how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument as a liability if it embodies an obligation for the issuer such as a
mandatorily redeemable financial instrument. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise shall be
effective for the first interim period beginning after June 15, 2003. The
application of SFAS 150 did not have any effect on the Company's consolidated
financial statements and it did not change the presentation of any liability or
equity items in its consolidated balance sheets.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The following discussion and analysis of our financial condition and
results of operations are based upon our condensed consolidated financial
statements and notes thereto, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to principles of
consolidation, revenue recognition, inventories, depreciation and amortization,
start up costs, impairment of long-lived assets and long-lived assets to be
disposed of, fair value of financial instruments and segment reporting. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Results of Operations
Comparison of Three Months Ended September 30, 2003 to Three Months Ended
September 30, 2002.
Our revenues for the three months ended September 30, 2003, were $31.7
million, compared to $30.2 million for the same period in 2002, an increase of
$1.5 million or 5.1%. Revenue increased by $1.5 million at our five most
recently opened Sports Club/LA Clubs primarily as a result of a 11.2% increase
in membership at these Sports Club/LA Clubs, from September 30, 2002 through
September 30, 2003, and to annual rate increases for monthly dues and other
ancillary services. Revenue decreased by $23,000 at our three mature Clubs
primarily due to a decrease in membership at Reebok Sports Club/NY. Revenue
increased by $84,000 at our SportsMed subsidiary primarily due to increased
patient visits.
Our direct expenses increased by $2.0 million (8.0%) to $26.5 million for
the three months ended September 30, 2003, versus $24.5 million for the same
period in 2002. Direct expenses increased by $1.3 million at our five most
recently opened Sports Club/LA Clubs primarily as a result of an increase in
variable direct expenses associated with the 11.2% membership increase and
resulting revenue growth that occurred at these five Sports Club/LA Clubs
between September 30, 2002 and September 30, 2003 and to increases in workers
compensation, group medical and property/liability insurance rates. Direct
expenses increased by $646,000 at our three mature Clubs primarily due to
increased payroll, utility and property tax costs and to increases in workers
compensation, group medical and property/liability insurance rates. Direct
expenses as a percent of revenue for the three months ended September 30, 2003,
increased to 83.5% from 81.2% for the same period in 2002. As membership levels
and therefore revenues increase at the five Sports Club/LA Clubs opened in 2000
and 2001, the direct expense percentage should decrease. There is no assurance,
however, that such membership or revenue growth will occur.
11
Our general and administrative expenses remained flat at $2.0 million for
both the three months ended September 30, 2003 and the three months ended
September 30, 2002. Legal expenses for the three months ended September 30, 2003
decreased by $40,000 but were offset by minor increases in various other general
and administrative expense categories. General and administrative expenses
decreased as a percentage of revenue to 6.1% for the three months ended
September 30, 2003, from 6.4% for the same period in 2002. 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 remained flat at $1.1 million for both the three
months ended September 30, 2003 and the three months ended September 30, 2002.
We continue to concentrate our advertising and promotion efforts at the five
Sports Club/LA Clubs opened in 2000 and 2001. Selling expenses as a percentage
of revenue decreased to 3.4% for the three months ended September 30, 2003, from
3.6% for the same period in 2002.
Our depreciation and amortization expenses were $3.0 million for the three
months ended September 30, 2003, versus $2.9 million for the same period in
2002, an increase of $54,000 or 1.8%. The increase in depreciation expense is
primarily due to capital additions made at our Sports Club/LA Clubs during the
past twelve months.
Pre-opening expenses of $901,000, for the three months ended September 30,
2003, consisted of expenses related to The Sports Club/LA-Beverly Hills, which
opened on October 7, 2003.
Our net interest expense increased by $197,000 (6.0%) to $3.5 million for
the three months ended September 30, 2003, versus $3.3 million for the same
period in 2002. Interest expense decreased by $195,000 due to the capitalization
of interest on our construction costs for The Sports Club/LA-Beverly Hills
during the construction period and interest expense decreased by $47,000 due to
a reduction of equipment financing loans. Net interest expense increased by
$439,000 as a result of interest incurred on our new five-year mortgage loan
secured by The Sport Club/Irvine.
We recorded a non-recurring gain of $97,000, related to the sale of the
potential Houston, Texas site on August 30, 2002.
The tax provisions recorded for the three months ended September 30, 2003
and three months ended September 30, 2002 are comprised of New York City and New
York State income taxes incurred on pre-tax earnings at Reebok Sports Club/NY.
We did not record any federal or state deferred tax benefit related to our
consolidated pre-tax losses incurred for the three months ended September 30,
2003 and three months ended September 30, 2002. After the tax provisions and
dividends on preferred stock of $351,000 in 2003 and $264,000 in 2002, our
consolidated net loss attributable to common shareholders, was $5.6 million or
$0.31 per basic and diluted share for the three months ended September 30, 2003
versus a loss of $3.9 million or $0.21 per basic and diluted share for the three
months ended September 30, 2002.
12
Comparison of Nine Months Ended September 30, 2003 to Nine Months Ended
September 30, 2002.
Our revenues for the nine months ended September 30, 2003, were $96.3
million, compared to $90.1 million for the same period in 2002, an increase of
$6.2 million or 6.9%. Revenue increased by $5.9 million at our five most
recently opened Sports Club/LA Clubs primarily as a result of a 11.2% increase
in membership at these five Sports Club/LA Clubs, from September 30, 2002
through September 30, 2003, and to annual rate increases for monthly dues and
other ancillary services. Revenue increased by $682,000 at our three mature
Clubs primarily due to a $327,000 increase in food and beverage revenues, a
$89,000 increase in private training revenues and a $204,000 increase in dues
revenues. Revenue increased by approximately $211,000 at our SportsMed
subsidiary primarily due to increased patient visits and revenue decreased by
$547,000 as a result of the sale of The Sports Club/Las Vegas on January 31,
2002.
Our direct expenses increased by $4.3 million (5.7%) to $79.2 million for
the nine months ended September 30, 2003, versus $74.9 million for the same
period in 2002. Direct expenses increased by $3.1 million at our five most
recently opened Sports Club/LA Clubs primarily due to increases in variable
direct expenses associated with the 11.2% membership increase and resulting
revenue growth that occurred at these five Sports Club/LA Clubs between
September 30, 2002 and September 30, 2003 and to increases in workers
compensation, group medical and property/liability insurance rates. Direct
expenses increased by $1.7 million at our three mature Clubs primarily due to
increased payroll, utility and property tax costs and to increases in workers
compensation, group medical and property/liability insurance rates. Direct
expenses decreased by $505,000 due to the sale of The Sports Club/Las Vegas on
January 31, 2002. Direct expenses as a percent of revenue for the nine months
ended September 30, 2003, decreased to 82.2% from 83.2% for the same period in
2002. As membership levels and therefore revenues increase at the five Sports
Club/LA Clubs opened in 2000 and 2001, the direct expense percentage should
continue to decrease. There is no assurance, however, that such membership or
revenue growth will occur.
Our general and administrative expenses were $5.9 million for the nine
months ended September 30, 2003, versus $5.8 million for the same period in
2002, an increase of $164,000 or 2.8%. The increase in our general and
administrative expenses was primarily the result of increased workers
compensation insurance rates, increased group medical and property/liability
insurance costs, plus a small increase in payroll costs. General and
administrative expenses decreased as a percentage of revenue to 6.1% for the
nine months ended September 30, 2003, from 6.4% for the same period in 2002. 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 remained flat at $3.7 million for both the nine months
ended September 30, 2003 and for the nine months ended September 30, 2002. We
continue to concentrate our advertising and promotion efforts at the five Sports
Club/LA Clubs opened in 2000 and 2001. Selling expenses decreased as a
percentage of revenue to 3.8% for the nine months ended September 30, 2003, from
4.1% for the same period in 2002.
13
Our depreciation and amortization expenses remained flat at $8.9 million
for both the nine months ended September 30, 2003 and for the nine months ended
September 30, 2002. A decrease in depreciation and amortization expense of
$32,000, resulting from the sale of The Sports Club/Las Vegas on January 31,
2002, was partially offset by increased depreciation resulting from capital
additions made in 2002 and 2003.
Pre-opening expenses were $1.7 million for the nine months ended September
30, 2003, versus $130,000 for the same period in 2002. Pre-opening expenses for
the nine months ended September 30, 2003, consisted of expenses related to The
Sports Club/LA-Beverly Hills, which opened on October 6, 2003. The pre-opening
expenses for the nine months ended September 30, 2002, consisted of expenses
related to a possible Club site on Long Island in New York. We have since
decided not to develop the Long Island site.
Our net interest expense remained flat at $10.0 million for both the nine
months ended September 30, 2003 and for the nine months ended September 30,
2002. Net interest expense decreased by $344,000 due to the capitalization of
interest on our construction costs for The Sports Club/LA-Beverly Hills during
the construction period and by $134,000 due to a reduction of equipment
financing loans. These decreases in net interest expense were offset by interest
incurred on our new five-year mortgage loan secured by The Sport Club/Irvine of
$483,000.
We recorded two non-recurring gains, totaling $127,000, during the nine
months ended September 30, 2002. We recorded a non-recurring gain of $30,000,
related to the sale of The Sports Club/Las Vegas on January 31, 2002 and a
non-recurring gain of $97,000, related to the sale of real estate in Houston,
Texas on August 30, 2002.
The tax provision of $415,000 recorded for the nine months ended September
30, 2003, is comprised of New York City and New York State income taxes incurred
on pre-tax earnings at Reebok Sports Club/NY. We did not record any federal or
state deferred tax benefit related to our consolidated pre-tax loss incurred for
the nine months ended September 30, 2003. After the tax provision of $415,000
and dividends on preferred stock of $1.0 million, our consolidated net loss
attributable to common shareholders for the nine months ended September 30,
2003, was $14.7 million or $0.80 per basic and diluted share. The tax benefit of
$445,000 recorded for the nine months ended September 30, 2002, was the result
of a $900,000 federal income tax refund we recorded due to tax law changes that
allowed us to carry-back our 2001 loss to prior tax years and New York City and
New York State income taxes of $455,000 incurred on pre-tax earnings at Reebok
Sports Club/NY. We did not record any federal or state deferred tax benefit
related to our consolidated pre-tax loss incurred for the nine months ended
September 30, 2002. After the tax benefit of $445,000 and dividends on preferred
stock of $537,000, our consolidated net loss attributable to common shareholders
for the nine months ended September 30, 2002, was $13.4 million or $0.74 per
basic and diluted share.
Liquidity and Capital Resources
Capital Requirements - Existing Operations
On April 1, 1999, we issued in a private placement $100.0 million of 11
3/8% Senior Secured Notes (the "Senior Secured Notes") due in March 2006, with
interest due semi-annually. The Senior Secured Notes were issued pursuant to the
terms of an indenture 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
14
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
an offer to retire Senior Secured Notes if the net proceeds of any asset sale
are not reinvested in assets related to our business, unless the remaining net
proceeds are less than $10.0 million. To the extent we sell assets, the proceeds
from those sales would be subject to the excess proceeds provision of the
Indenture. We are currently not required to make such an offer as a result of
the sale of any of our assets. 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
$430,000 during the next year to upgrade our management information systems and
enhance our disaster recovery capabilities.
All our mature Sports Clubs (Clubs open at least five years) currently
generate positive cash flow from operations. Newly developed Clubs tend to
achieve significant increases in revenues until a mature membership level is
reached. In the past, recently opened Clubs that have not yet achieved mature
membership levels have operated at a loss or at only a slight profit as a result
of fixed expenses that, together with variable operating expenses, approximate
or exceed membership fees and other revenue. The time period necessary to
achieve positive cash flows is dependent upon the membership levels and amount
of fixed costs. Three of our new Clubs now generate positive cash flows while
two of the new Clubs require cash to fund their operating activities. Our
consolidated cash flows from operations for each of the last three years and for
the first nine months of 2003 were negative. We expect this trend to continue
until the newly opened Clubs generate sufficient positive cash flows. Our
ability to generate positive cash flow from operating activities is dependent
upon increasing membership levels at these Clubs and we cannot offer any
assurance that we will be successful in these efforts.
At September 30, 2003, we had $2.5 million of outstanding equipment
financing loans. We make monthly principal and interest payments on this debt.
These monthly payments are currently $203,000 and they will continue until
December 2004, when a significant portion of the debt will be repaid. On June
12, 2003, we entered into a new loan to replace our prior bank credit facility.
This loan requires us to make monthly principal and interest payments of
$144,561 through June 2008.
Other than our normal operating activities and capital expenditures, our
total cash requirements for our existing operations through September 30, 2004
are estimated to be as follows (amounts in thousands):
Indenture interest...................................... $ 11,375
Information system upgrades............................. 430
Payments on long-term debt.............................. 4,171
-----------------
$ 15,976
=================
15
Capital Requirements - New Clubs
On April 22, 2002, we signed a lease to develop The Sports Club/LA -
Beverly Hills and on October 7, 2003 opened this Club. The new Sports Club/LA is
approximately 40,000 square feet and is located at 9601 Wilshire Boulevard in
the heart of the Beverly Hill's retail and commercial district. 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 size Clubs to be built in
locations near existing Sports Club/LA sites. As of September 30, 2003 we have
spent approximately $7.0 million on this development and we anticipate spending
another $1.5 million by December 31, 2003.
We also anticipate entering into a management service agreement with
Terremark Brickell II Ltd., an affiliate of Millennium Partners LLC, to manage
The Sports Club/LA - Miami. Millennium Partners LLC and its affiliates
("Millennium") collectively owns approximately 33.7% of our common stock. Under
the terms of the agreement, Millennium will provide all the capital required to
develop this facility and Millennium will retain a 100% ownership in the Club.
We will be entitled to a management fee based upon the Club's revenues and can
also earn a profit participation based upon the facility's net operating income,
as defined. We will not be required to invest any of our capital into this
development.
Cash and Credit Availability
During the first nine months of 2003 our operating activities generated
$6.5 million before we made interest payments of $12.1 million resulting in a
net use of cash from operating activities of $5.6 million. We believe we will
continue to generate positive cash flow from operating activities before
interest payments and that such amount will increase as our new Clubs continue
to mature.
On June 12, 2003, we replaced our existing bank credit facility with a new
$20.0 million loan. We used $3.1 million of those proceeds to repay our bank
credit facility and $5.2 million to establish a deposit account with the bank as
collateral for letters of credit they have issued on our behalf. After the
payment of various closing costs, the remaining net proceeds of $10.9 million
was added to our cash balances. The bank credit facility has now been
terminated. We used most of the net proceeds to complete the development of The
Sports Club/LA-Beverly Hills and to make the September 15, 2003 interest payment
on the Senior Secured Notes.
The Indenture allows us to incur up to $10.0 million of equipment financing
obligations. At September 30, 2003, we had $2.5 million of equipment financing
obligations outstanding and would be allowed to finance an additional $7.5
million with our equipment serving as collateral.
On April 4, 2003, we announced that we had received a "going private"
proposal from a group consisting of four of our principal stockholders and a
private equity fund ("Palisade") 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 was to
evaluate the offer on behalf of the public stockholders. The transaction, as
then structured, would have resulted in a capital infusion of approximately $8.5
million to the Company. Those funds would have been available for general
working capital purposes. On October 13, 2003, we announced that we have
mutually agreed with Palisade to set aside the
16
previously announced offer of "going private." We have received an amended
letter of intent setting forth revised terms and conditions under which Palisade
would propose to make an equity investment in us. Palisade's term sheet has been
submitted to the Special Committee of our Board of Directors for review. The
Special Committee will negotiate the terms with Palisade on behalf of the
Company and its Shareholders. There can be no assurance, however, that such an
agreement will be reached.
Summary
In order to make our interest payment due on March 15, 2004, we will need
to sell additional assets or complete a transaction to raise additional equity.
There can be no assurance that we will be able to 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 mortgage loan, have
committed to providing us with sufficient financial support to continue our
operations through March 31, 2004.
Additional funds will be required to undertake any future acquisitions or
the development of additional new Clubs. We would consider entering into joint
ventures, partnership agreements or management agreements (subject to the
restrictions and limitations on such transactions in the Indenture) for the
purpose of developing new Clubs, but only if such arrangements would generate
additional cash flow or further enhance The Sports Club/LA brand name in the
market place.
Forward Looking Statements
From time to time we make "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements include the words "may,"
"will," "estimate," "continue," "believe," "expect" or "anticipate" and other
similar words. The forward-looking statements generally appear in the material
set forth under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" but may be found in other locations as
well. Forward-looking statements may also be found in our other reports filed
with the Securities and Exchange Commission and in our press releases and other
public disclosures. These forward-looking statements generally relate to our
plans and objectives for future operations and are based upon managements'
reasonable estimates of future results or trends. Although we believe that our
plans and objectives reflected in or suggested by such forward-looking
statements are reasonable, such plans or objectives may not be achieved. Actual
results may differ from projected results due to unforeseen developments,
including developments relating to the following:
o the availability and adequacy of our cash flow and financing
facilities for our requirements, including payment of the Senior
Secured Notes and mortgage note,
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,
17
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.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are also exposed to risk from a change in interest rates to the extent
we are required to refinance existing fixed rate indebtedness at rates higher
than those prevailing at the time the existing indebtedness was incurred. As of
September 30, 2003, we had Senior Secured Notes totaling $100.0 million due in
March 2006. Annual interest of $11.4 million is payable semi-annually in March
and September. At September 30, 2003, the fair value of the Senior Secured Notes
is approximately $91.0 million. We also have a $19.9 million loan with a fixed
interest rate of 7.25% that matures and requires a final principal payment of
$18.3 million on July 1, 2008. A change in interest rates of 1% would impact our
interest expense by approximately $1.2 million per year.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our management, including the Co-Chief Executive Officers and Chief
Financial Officer, have conducted an evaluation of the effectiveness of 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 relating to the Company required to be
filed in this quarterly report has been made known to them in a timely manner.
(b) Changes in internal controls.
There have been no significant changes made in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the Evaluation Date.
19
PART II. OTHER INFORMATION
ITEM 1. 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 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
99.1 Certification of D. Michael Talla pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Rex A. Licklider pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
99.3 Certification of Timothy O'Brien pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
99.4 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
b) The following reports on Form 8-K have been filed since June 30, 2003:
On July 9, 2003, we filed a report on Form 8-K stating that on July 3,
2003, we issued a press release announcing the filing of a purported shareholder
class action lawsuit against us and our principal shareholders and directors.
The lawsuit alleges, among other things, that the individual defendants had
violated certain fiduciary duties owed the minority shareholders by announcing
the principal shareholders' offer to cash out the minority shareholders in a
"going private" transaction at a price of $3.00 per share. The complaint also
asserts that the defendants were using the proposed going private transaction to
avoid disclosure of accounting problems that resulted in the restatement of our
financial statements, which were re-filed with
20
the Securities and Exchange Commission on June 26, 2003. The plaintiffs are
seeking to enjoin the completion of the going private transaction, damages and
attorney's fees.
On July 31, 2003, we filed a report on Form 8-K stating that on July 31,
2003, we issued a press release announcing operating results for the second
quarter and six months ending June 30, 2003. Additionally, on July 25, 2003, the
Special Committee of our Board of Directors approved an amendment to our Rights
Agreement adopted on September 29, 1998. The Amendment provides that until
September 30, 2003, the Rights Plan will not be triggered as a result of any
non-binding "going private" negotiations or understandings between and among the
principal shareholders, so long as such negotiations or understandings relate to
a transaction that has been, or is intended to be, proposed to our Special
Committee.
On October 3, 2003, we filed a report on Form 8-K announcing that on
September 29, 2003, the Special Committee of our Board of Directors approved an
amendment to our Rights Agreement adopted on September 29, 1998. The Amendment
provides that until November 30, 2003, the Rights Plan will not be triggered as
a result of any non-binding "going private" negotiations or understandings
between and among the Principal Shareholders, so long as such negotiations or
understandings relate to a transaction that has been, or is intended to be,
proposed to our Special Committee.
On October 9, 2003, we filed a report on Form 8-K stating that on October
8, 2003, we issued a press release announcing the opening of The Sports
Club/LA-Beverly Hills. The new Club opened on October 7, 2003 and is located in
Beverly Hills, California. The Club, a two-story 40,000 square foot luxury
sports and fitness complex offers a state-of-the art environment including a Bar
and Lounge and spa services.
On October 14, 2003, we filed a report on Form 8-K stating that on October
13, 2003, we issued a press release announcing that we had mutually agreed with
Palisade Concentrated Equity Partnership, L.P. ("Palisade") to set aside its
previously announced offer of "going private." We also stated that we expect to
receive an amended letter of intent setting forth the revised terms and
conditions under which Palisade would propose to make an $18.5 million equity
investment in us, subject to an additional investment by certain of our existing
stockholders, the proceeds of which would be retained by us to fund operations.
There can be no assurance that the proposed financing transaction with Palisade
will be completed.
On November 3, 2003, we filed a report on Form 8-K stating that on November
3, 2003, we issued a press release announcing operating results for the third
quarter and nine months ending September 30, 2003.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SPORTS CLUB COMPANY, INC.
Date: November 12, 2003 by /s/ Rex A. Licklider
------------------------------------
Rex A. Licklider
Vice Chairman of the Board
and Co-Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 2003 by /s/ Michael Talla
------------------------------------
D. Michael Talla
Chairman of the Board
and Co-Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 2003 by /s/ Timothy M. O'Brien
------------------------------------
Timothy M. O'Brien
Chief Financial Officer
(Principal Financial and Accounting
Officer)
22
EXHIBIT 99.1
CERTIFICATION
I, D. Michael Talla, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Sports Club
Company, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others within the registrant, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
23
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ D. Michael Talla
------------------------------------
D. Michael Talla
Co-Chief Executive Officer
Date: November 12, 2003
24
EXHIBIT 99.2
CERTIFICATION
I, Rex A. Licklider, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Sports Club
Company, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others within the registrant, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
25
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Rex A. Licklider
-----------------------------------
Rex A. Licklider
Co-Chief Executive Officer
Date: November 12, 2003
26
EXHIBIT 99.3
CERTIFICATION
I, Timothy M. O'Brien, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Sports Club
Company, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others within the registrant, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
27
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Timothy M. O'Brien
---------------------------------------
Timothy M. O'Brien
Chief Financial Officer
Date: November 12, 2003
28
EXHIBIT 99.4
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned herby certifies, in his capacity as an officer of
The Sports Club Company, Inc. (the "Company"), for purposes of 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
to the best of his knowledge:
o The Quarterly Report of the Company on Form 10-Q for the period ended
September 30, 2003 fully complies with the requirements of Section
13(a) of the Securities Exchange Act of 1934; and
o The information contained in such report fairly represents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: November 12, 2003
/s/ D. Michael Talla
---------------------------------
D. Michael Talla
Co-Chief Executive Officer
/s/ Rex A. Licklider
---------------------------------
Rex A. Licklider
Co-Chief Executive Officer
/s/ Timothy O'Brien
---------------------------------
Timothy O'Brien
Chief Financial Officer
29