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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2004
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
-------- ----------
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
Shares
Outstanding at
Class August 16, 2004
---------------------------------- ---------------------------------
Common Stock, 18,783,744
par value $.01 per share
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2003 and June 30, 2004
(in thousands, except per share amounts)
(unaudited)
December 31, June 30,
ASSETS 2003 2004
---- ----
Current assets:
Cash and cash equivalents................................................................ $ 1,932 $ 3,723
Accounts receivable, net of allowance for doubtful accounts of $517 and $446
at December 31, 2003 and June 30, 2004, respectively................................. 3,923 3,232
Inventories.............................................................................. 994 1,002
Prepaid expenses......................................................................... 1,789 1,009
----------- -----------
Total current assets................................................................. 8,638 8,966
Property and equipment, net.............................................................. 155,173 151,676
Goodwill................................................................................. 7,660 7,660
Restricted cash.......................................................................... 4,432 4,381
Other assets............................................................................. 8,056 6,646
----------- -----------
$ 183,959 $ 179,329
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and equipment financing loans.................... $ 2,099 $ 1,111
Accounts payable....................................................................... 2,464 2,385
Accrued liabilities.................................................................... 13,713 13,435
Deferred revenues...................................................................... 18,292 17,983
----------- -----------
Total current liabilities............................................................ 36,568 34,914
Notes payable and equipment financing loans,
less current installments............................................................. 119,731 119,492
Accrued lease obligations................................................................ 8,976 9,392
Deferred revenues........................................................................ 869 714
Minority interest........................................................................ 600 1,042
----------- -----------
Total liabilities..................................................................... 166,744 165,554
Commitments and contingencies
Redeemable preferred stock, Series B, $.01 par value, 10,500 shares authorized;
10,500 shares issued and outstanding (liquidation preference of $12,198 and
$12,673 at December 31, 2003 and June 30, 2004, respectively)......................... 11,761 12,278
Stockholders' equity:
Preferred stock, $.01 par value, 984,500 and 919,500 shares authorized at December 31,
2003 and June 30, 2004, respectively; no shares issued or outstanding............... -- --
Preferred stock, Series C, $.01 par value, 5,000 shares authorized, issued and
outstanding (liquidation preference of $5,590 and $5,814 at December 31, 2003 and June
30, 2004, respectively)............................................................. 5,590 5,814
Preferred stock, Series D, $.01 par value, 65,000 shares authorized, issued and
outstanding (liquidation preference of $6,677 at June 30, 2004)..................... -- 6,249
Common stock, $.01 par value, 40,000,000 shares authorized; 21,074,717 shares issued.. 211 211
Additional paid-in capital............................................................ 100,348 99,430
Accumulated deficit................................................................... (86,217) (96,439)
Treasury stock, at cost, 2,650,003 and 2,290,973 shares at December 31, 2003
and June 30, 2004, respectively .................................................... (14,478) (13,768)
------------ ------------
Stockholders' equity............................................................... 5,454 1,497
----------- -----------
$ 183,959 $ 179,329
=========== ===========
See accompanying notes to condensed consolidated financial statements.
1
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three And Six Months Ended June 30, 2003 and 2004
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2004 2003 2004
---- ---- ---- ----
(Restated) (Restated)
Revenues:
Membership revenues.............................. $ 32,180 $ 36,486 $ 64,584 $ 72,407
Reimbursed costs................................. 448 1,246 705 2,503
----------- ---------- --------- ---------
Total revenue.................................. 32,628 37,732 65,289 74,910
Operating expenses:
Direct........................................... 26,358 29,830 52,707 59,872
Reimbursed costs................................. 448 1,246 705 2,503
General and administrative....................... 1,996 2,206 3,969 4,252
Selling.......................................... 1,233 1,267 2,600 2,798
Depreciation and amortization.................... 2,969 3,168 5,929 6,340
Pre-opening expenses............................. 636 -- 776 46
Non-recurring items.............................. -- -- -- 1,104
----------- ---------- ---------- ----------
Total operating expenses....................... 33,640 37,717 66,686 76,915
----------- ---------- --------- ----------
Income (loss) from operations................ (1,012) 15 (1,397) (2,005)
Other income (expense):
Interest, net.................................... (3,255) (3,672) (6,535) (7,360)
Minority interests............................... (37) (479) (75) (517)
------------ ----------- ----------- ----------
Loss before income taxes ..................... (4,304) (4,136) (8,007) (9,882)
Provision for income taxes.......................... 168 172 360 340
----------- --------- --------- ----------
Net loss..................................... (4,472) (4,308) (8,367) (10,222)
Dividends on Preferred Stock....................... 350 495 698 876
------------ ---------- --------- ----------
Net loss attributable to common stockholders. $ (4,822) $ (4,803) $ (9,065) $ (11,098)
============ =========== =========== ===========
Net loss per share:
Basic and diluted................................. $ (0.26) $ (0.26) $ (0.50) $ (0.60)
============ =========== =========== ===========
Weighted average shares outstanding:
Basic and diluted................................. 18,326 18,697 18,244 18,631
============= =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
2
THE SPORTS CLUB COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2003 and 2004
(in thousands)
(unaudited)
Six Months Ended
June 30,
2003 2004
---- ----
Cash flows from operating activities:
Net loss..................................................................... $ (8,367) $ (10,222)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization........................................... 5,929 6,340
Related party costs settled with common stock........................... 617 711
(Increase) decrease in:
Accounts receivable, net............................................. 529 691
Inventories.......................................................... (124) (8)
Other current assets................................................. 110 780
Other assets......................................................... (509) 1,410
Increase (decrease) in:
Accounts payable..................................................... (1,234) (79)
Accrued liabilities.................................................. (544) (278)
Deferred revenues.................................................... (743) (464)
Minority interest.................................................... -- 442
Accrued lease obligations............................................ 278 416
------------ ------------
Net cash used in operating activities............................. (4,058) (261)
Cash flows from investing activities:
Capital expenditures.................................................... (4,317) (2,844)
Decrease (increase) in restricted cash.................................. (5,200) 51
Increase in due from affiliates......................................... (4) --
------------- ------------
Net cash used in investing activities............................. (9,521) (2,793)
Cash flows from financing activities:
Proceeds from issuance of Series D Preferred Stock, net of issuance costs -- 6,072
Proceeds from notes payable and equipment financing loans............... 30,641 --
Repayments of notes payable and equipment financing loans............... (12,456) (1,227)
------------- -------------
Net cash provided by financing activities......................... 18,185 4,845
------------ ------------
Net increase in cash and cash equivalents......................... 4,606 1,791
Cash and cash equivalents at beginning of period................................ 3,185 1,932
------------ ------------
Cash and cash equivalents at end of period...................................... $ 7,791 $ 3,723
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest.................................................. $ 5,955 $ 6,475
============ ============
Cash paid for income taxes.............................................. $ 12 $ 590
============ ============
See accompanying notes to condensed consolidated financial statements.
3
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and June 30, 2004
1. Basis of Presentation
The unaudited 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, 2003,
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 United States generally accepted accounting
principles have been condensed or omitted pursuant to SEC rules and regulations
for interim financial statements. 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 six-month periods ended
June 30, 2004, are not necessarily indicative of the results for the fiscal year
ending December 31, 2004.
2. Restatement
Revenues and operating expenses for the three months and six months ended
June 30, 2003, have been restated to record the impact of reimbursed costs,
which previously had not been shown on the consolidated statement of operations.
Reimbursed costs relate to The Sports Club/LA - Miami, which is a non-Company
owned Club that the Company manages for its owner. The Company receives a
management fee for managing the Club and is reimbursed for costs that are
advanced on the owner's behalf. Reimbursed costs are recorded as both revenue
and expense in the consolidated financial statements. The effect of reimbursed
costs on the Company's loss from operations, net loss, loss attributable to
common stockholders and net loss per share (basic and diluted) is zero, since
reimbursed costs are reported both as revenue and as operating expenses in the
consolidated financial statements in equal amounts. Reimbursed costs represent
both pre-opening expenses and normal operating expenses of the Club. Reimbursed
costs were $448,000 and $705,000 for the three months and six months ended June
30, 2003, respectively.
3. Liquidity/Going Concern
The Company has experienced recurring net losses of $40.7 million, $22.7
million and $18.4 million during the years ended December 31, 2001, 2002 and
2003, respectively. The Company has also experienced net cash flows used in
operating activities of $6.0 million, $4.4 million and $3.5 million during the
years ended December 31, 2001, 2002 and 2003, respectively. Additionally, the
Company may incur a significant loss and net cash flows used in operating
activities during the year ending December 31, 2004. The Company has had to
raise funds through the offering of equity securities in order to make the
interest payments due on its Senior Secured Notes. The above historical and
estimated future results of operations and cash flows raise doubt about the
Company's ability to continue as a going concern.
4
The Company's continued existence is primarily dependent upon its ability
to increase membership levels at its six most recently opened Clubs. Five Clubs
were opened during 2000 and 2001 and The Sports Club/LA-Beverly Hills was opened
in October 2003. Recently opened Clubs that have not yet achieved mature
membership levels have operated at a loss or only a slight profit as a result of
fixed expenses that, together with variable operating expenses, approximate or
exceed current revenues. Increasing membership levels at these six most recently
opened Clubs is the key to producing operating profits and positive cash flows
from operating activities. The Company is constantly generating programs to
market the Clubs to potential new members as well as striving to reduce its
membership attrition rates. The Company has also pursued aggressive cost cutting
programs that have reduced general and administrative expenses (including
employment costs) from $8.5 million during the year ended December 31, 2001 to
$7.8 million during the year ended December 31, 2003. Direct and selling
expenses have also dropped as a percentage of revenues during the last three
years.
If the Company is unable to increase membership levels or reduce costs to
the point where cash flows from operating activities are sufficient to make the
September 15, 2004 or future interest payments, the Company would be required to
sell assets or issue additional equity or debt securities. There can be no
assurance that the Company will be able to sell assets or additional equity or
debt securities to generate the funds with which to make such payments, or that
any such sales would be on terms and conditions reasonable to the Company. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
4. 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 June 30, 2004,
cash and cash equivalents were $3.7 million.
The Company considers cash, cash equivalents and other short-term
investments that are required to be held as deposits to satisfy certain
governmental regulatory or Club security deposits as restricted cash. At June
30, 2004, the Company had $4.4 million of restricted cash.
5. Notes Payable and Equipment Financing Loans
Notes payable and equipment financing loans are summarized as follows:
December 31, June 30,
2003 2004
---- ----
(in thousands)
Senior secured notes (a)........... $ 100,000 $ 100,000
Mortgage note (b).................. 19,855 19,706
Equipment financing loans (c)...... 1,975 897
-------------- --------------
121,830 120,603
Less current installments.......... 2,099 1,111
-------------- --------------
$ 119,731 $ 119,492
============== ==============
- ---------
5
(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 June 30, 2004, 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 Secured
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, 2005................. 102.844%
Thereafter.............................. 100.000%
(b) On June 12, 2003, the Company obtained mortgage financing in the form
of a secured five-year promissory loan in the amount of $20.0 million. The
loan is evidenced by a promissory note that bears interest at a fixed
interest rate of 7.25%; requires monthly principal and interest payments of
$144,561; is secured by the common stock and all the assets of Irvine
Sports Club, Inc., the Company's wholly owned subsidiary that owns The
Sports Club/LA - Orange County; and is guaranteed by the Company's Chairman
and it's Chief Executive Officer. The note requires The Sports Club/LA -
Orange County 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 June 30, 2004, the Company has maintained the minimum
operating income. The note may be prepaid at any time without penalty or
premium 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 3.5% and 13.3%.
6. Non-recurring Item
The non-recurring charge of $1.1 million during the six months ended June
30, 2004 represents various costs, primarily legal fees and investment banking
fees, related to an equity raising transaction that was initiated in April 2003
but abandoned in February 2004.
7. Income Tax Provision
The income tax provision recorded for the three-month and six-month periods
ended June 30, 2004 and 2003, respectively, was the result of an accrual for
state and city income taxes related to pre-tax profits at Reebok Sports Club/NY.
6
8. Net Loss per Share
Basic loss per share represents the net loss less 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 potential
common shares. For the three-months and six-months ended June 30, 2004, there
were 3,610,479 and 3,301,518 anti-dilutive potential common shares,
respectively. For the three-months and six-months ended June 30, 2003, there
were 1,718,057 and 2,121,347 anti-dilutive potential common shares,
respectively.
9. Series B 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 option to redeem any outstanding shares of
Series B Preferred at any time and the holders may require the redemption of any
outstanding shares of Series B Preferred on or after 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 $2.8871 per
share, as adjusted for the issuance of Series D Preferred Stock in March 2004
(resulting in the issuance of 3,636,867 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 $2.8871 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 warrants 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 Convertible Preferred Stock (See Note 9), an amount
equal to $1,000 for each share of Series B Preferred then outstanding.
The initial carrying value of the Series B Preferred was recorded at its
"fair value" (sale price less costs to issue) on the date of issuance. The
carrying value of the Series B Preferred will be periodically adjusted so that
the carrying value equals the redemption value on the redemption date. The
carrying value of the Series B Preferred will also be periodically adjusted for
any accrued and unpaid dividends. At December 31, 2003 and June 30, 2004, the
Series B Preferred carrying value consisted of the following ($ in thousands):
December 31, June 30,
2003 2004
---- ----
Initial fair value, sale price of $10,500
less costs to issue of $592............. $ 9,908 $ 9,908
Redemption value accretion................... 155 97
Accrued and unpaid dividends accretion....... 1,698 2,173
-------------- -------------
Total carrying value..................... $ 11,761 $ 12,278
============== =============
7
10. Series C 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, less some minor issuance costs, 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. Dividends are paid pari passu with dividends
on the Series B Preferred. In addition, upon conversion any earned and unpaid
dividends would become payable. The Series C Convertible Preferred may, at the
option of the holder, be converted into shares of Common Stock at the rate of
$2.8871 per share, as adjusted for the issuance of Series D Preferred Stock in
March 2004 (resulting in the issuance of 1,731,842 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 in cash or
additional shares of Series C Convertible Preferred, at the Company's option.
The conversion price will be adjusted downward in the event the Company issues
additional shares of Common Stock at a price below $2.8871 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 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 warrants 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 $1,000 for each
share of Series C Convertible Preferred then outstanding, plus earned and unpaid
dividends.
The carrying value of the Series C Convertible Preferred is periodically
adjusted for any accrued and unpaid dividends. The Series C Convertible
Preferred dividends are accrued because they must be paid concurrently with any
redemption of the Series B Preferred. At December 31, 2003 and June 30, 2004,
the Series C Convertible Preferred carrying value consisted of the following (in
thousands):
December 31, June 30,
2003 2004
---- ----
Initial fair value..........................$ 5,000 $ 5,000
Accrued and unpaid dividend accretion....... 590 814
------------- -------------
Total carrying value........................$ 5,590 $ 5,814
============= =============
11. Series D Preferred Stock
On March 12, 2004, the Company completed a $6.5 million private placement
of a newly created series of convertible Preferred Stock. The Company received
$6.1 million in cash, after issuance costs of $393,000, and issued 65,000 shares
of $.01 par value Series D Convertible Preferred Stock ("Series D Convertible
Preferred"), at a price of $100 per share. The Series D Convertible Preferred
was purchased by three of the Company's principal shareholders: Rex Licklider
(the Company's Chief Executive Officer), Millennium and Kayne Anderson Capital
Advisors. Dividends are earned at an annual rate of $9.00 per share and shall be
paid prior and in preference to any dividends earned on the Series B Preferred,
Series C Convertible Preferred, Common Stock or any other class of equity
security that is junior to
8
the Series D Convertible Preferred. 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 D Convertible Preferred. The Series D Convertible Preferred may, at
the option of the holder, be converted into shares of Common Stock at the rate
of $2.00 per share (resulting in the issuance of 3,250,000 shares of Common
Stock if 100% of the Series D Convertible Preferred is converted). Each share of
Series D Convertible Preferred shall automatically be converted into shares of
Common Stock upon the consummation of a qualified public offering of Common
Stock of at least $50.0 million or if the closing price of the Common Stock for
a period of thirty (30) consecutive trading days exceeds $4.00 per share until
March 15, 2005, or $6.00 per share thereafter, and at least 150,000 shares of
Common Stock have been traded during such applicable thirty (30) day period.
Upon conversion, any earned and unpaid dividends would become payable. The
conversion price will be adjusted equitably in the event of any combination,
recapitalization, merger, reclassification or similar transaction or issuance of
Common Stock (or any instrument convertible into or exercisable for Common
Stock) at a price per share less than the Series D Convertible Preferred
conversion price then in effect. Commencing on the sixth anniversary of the
issuance of the Series D Convertible Preferred, the Company at its option may
redeem the Series D Convertible Preferred in whole or in part by paying in cash
the sum of $100 per share plus any earned and unpaid dividends. In the event of
liquidation, the Series D Convertible Preferred holders are entitled to receive,
prior and in preference to any distribution to common shareholders and holders
of the Series B Preferred and Series C Convertible Preferred, an amount equal to
$100 for each share of Series D Convertible Preferred then outstanding, plus any
earned and unpaid dividends. The holders of the Series D Convertible Preferred
are afforded protective rights that among other things restrict the Company's
ability to incur debt or lease obligations, make investments or acquisitions,
sell a Club leased from Millennium, issue any new class of equity securities,
repurchase or redeem any equity securities, hire or fire the Chief Executive
Officer, enter into any new line of business or change the primary line of
business and issue options under the Company's stock option plans. In addition,
Millennium is entitled to designate two directors (at least one of whom must be
independent) and the other two holders are each entitled to designate one
director, to serve on the Company's Board of Directors.
The carrying value of the Series D Convertible Preferred is periodically
adjusted for any accrued and unpaid dividends. The Series D Convertible
Preferred dividends are accrued because they must be paid prior to any
redemption of the Series B Preferred. At June 30, 2004, the Series D Convertible
Preferred carrying value consisted of the following (in thousands):
Initial fair value............................. $ 6,500
Issuance costs................................. (428)
Accrued and unpaid dividend accretion.......... 177
-----------------
Total carrying value at June 30, 2004.......... $ 6,249
=================
12. 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, whether insured or not, will not have a material adverse effect on
the Company's consolidated financial condition, cash flows or results of
operations.
9
13. 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 Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("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 stockholders and
income (loss) per share would have been reduced to the pro-forma amounts
indicated below:
Three Months Ended June 30, Six Months Ended June 30,
2003 2004 2003 2004
---- ---- ---- ----
(in thousand, except per share data)
Net loss attributable to common
stockholders, as reported.................... $ (4,822) $ (4,803) $ (9,065) $ (11,098)
Stock-based employee compensation expense
Included in reported net loss................ -- -- -- --
Stock-based employee compensation expense
determined under fair value based method
for all awards............................... (164) -- (327) (93)
---------- ---------- ----------- ------------
Adjusted net loss attributable to
Common stockholders.......................... $ (4,986) $ (4,803) $ (9,392) $ (11,191)
========== =========== =========== ============
Net loss per share as reported basic and
Diluted...................................... $ (0.26) $ (0.26) $ (0.50) $ (0.60)
========== =========== =========== ============
Adjusted net loss per share basic and diluted $ (0.27) $ (0.26) $ (0.51) $ (0.60)
========== =========== =========== ============
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our historical results of operations and our
liquidity and capital resources should be read in conjunction with the condensed
consolidated financial statements and related notes appearing elsewhere herein.
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 disclosures. On an on-going basis, we evaluate our
estimates and judgments that are based on historical experience and other
assumptions that we believe to be reasonable under the circumstances. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements.
Overview
We are the operator of ten (10) sports and fitness Clubs located in major
metropolitan markets across the United States, including one Club operated under
a management agreement. Our Clubs are spacious, modern facilities that typically
include spas, restaurants, fitness centers, swimming pools and basketball
courts. Our Clubs, which are usually named The Sports Club/LA, are recognized as
among the finest sports and fitness facilities in the United States. In 1999, we
decided to focus our efforts on the national development of The Sports Club/LA
brand. At that time, we sold all of our smaller sized Clubs. We also issued
$100.0 million of Senior Secured Notes due in March 2006. The proceeds from
these transactions were utilized to develop five additional new Clubs in New
York City, Washington D.C., Boston and San Francisco. We have since opened The
Sports Club/LA in Beverly Hills and are operating in Miami under a management
agreement.
Most of our Clubs range in size from 90,000 to 140,000 square feet. Due to
the size of these facilities and the additional amenities included in our Clubs,
we have historically expended significant amounts to construct a new facility.
We evaluate the results of our Clubs based upon how long the Clubs have been
open at the most recent measurement period. We categorize Clubs as either
"mature" or "recently opened". Mature Clubs are those Clubs for which we believe
the membership levels have reached a stable level and, based upon the amount of
new membership sales and attrition, or the size of the Club, we do not believe a
significant additional growth in the membership level will occur. Clubs are
considered to be recently opened while the membership level is increasing. Three
of the Clubs that we own are considered to be mature while the other six are
considered to be recently opened; of these six Clubs, five were opened between
2000 and 2001, while The Sports Club/LA - Beverly Hills was opened in October
2003. Newly developed Clubs tend to achieve significant increases in revenues
until a mature membership level is reached. Recently opened Clubs that have not
yet achieved mature membership levels have initially operated at a loss or only
a slight profit as a result of fixed expenses that, together with variable
operating expenses, approximate or exceed membership fees and other revenues.
Since 2000, we have invested significant amounts of cash in the construction and
operation of these new Clubs. Our operating performances and our liquidity have
been negatively impacted due to the start up nature of these Clubs and the
initial construction cost.
We measure performance using key operating statistics such as initiation
fees, monthly dues and ancillary revenues per member. We closely focus on new
membership sales and the level of membership attrition at each Club. We also
closely evaluate our expenses with an emphasis on controlling payroll costs. We
use Club operating income, before depreciation
11
expenses and rent expense, as a means to evaluate the overall performance of an
individual Club.
We have two primary sources of revenues. First, our largest source of
revenue is from membership dues and initiation fees. We recognize revenue from
dues in the month it is earned. Initiation fees are deferred and recognized as
revenue on a straight-line basis over a period of three years, which represents
the average life of a membership based upon historical data. Secondly, we
generate ancillary revenue from our membership within each Club. The largest of
these ancillary revenue sources is individual private training. We also generate
revenues from our spas, restaurants, childcare, sports programs and guest fees.
Our total ancillary revenues represent 38.3% of total Club revenue, and we
believe that percentage is among the highest in the industry. We believe that
membership levels are the primary indicator of a Club's ability to generate
revenue. Therefore, we are consistently generating programs to market the Clubs
to potential new members as well as striving to reduce our membership attrition
rates. We believe our current attrition rate of 25.5% is well below the normal
in the industry.
Our direct expenses include costs to operate our Clubs. These consist
primarily of payroll and employee benefits, rent and other occupancy related
costs, supplies, repairs, costs of products sold and various other operating
costs. A significant amount of these costs is fixed in nature.
General and administrative expenses include costs related to our
centralized support functions such as accounting, information technology,
development and our executive management. Costs associated with being a
publicly-owned company are also included in this category. Selling expenses
include our advertising, marketing department and promotional costs associated
with the generation of new memberships.
Critical Accounting Policies and 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, which
represents the average life of a membership based upon historical data. 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 our SportsMed subsidiary are recognized based upon the estimated
amount to be collected.
12
Effective July 1, 2003, we adopted EITF 00-21, Revenue Arrangements with
Multiple Deliverables. As a result of the adoption of EITF 00-21, the fair value
of any free products or services bundled with new memberships is now recorded as
revenue when the product is delivered or the service is performed. Prior to the
adoption of EITF 00-21, we considered all payments as initiation fees and no
revenue was recorded for the free products or services bundled with new
memberships.
Allowance for doubtful accounts. We provide a reserve against our
receivables for estimated losses that may result from our members' inability to
pay. We determine the amount of the reserve by analyzing known uncollectible
accounts, economic conditions and historical losses and our members'
creditworthiness. The likelihood of a material loss from this area is minimal
due to our limited exposure to credit risk.
Impairment of long-lived assets. The carrying value of our long-lived
assets is reviewed annually and whenever events or changes in circumstances
indicate that such carrying values may not be recoverable. We consider a history
of consistent and significant operating losses to be our primary indicator of
potential impairment. Assets are grouped and evaluated for impairment at the
lowest level for which there are identifiable cash flows, which is generally at
an individual Club or a group of Clubs located in the same geographical area.
The determination of whether an impairment has occurred is based on an estimate
of undiscounted future cash flows directly related to that Club or group of
Clubs compared to the carrying value of the assets. If an impairment has
occurred, the amount of impairment recognized is determined by estimating the
fair value of the assets and recording a loss if the carrying value is greater
than the fair value. There was no impairment of long-lived assets at June 30,
2004.
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. We recorded goodwill in connection with
our acquisitions of The Sports Club/LA in Los Angeles and Orange County, Reebok
Sports Club/NY and SportsMed. 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 reperformed the transitional impairment test
and determined that goodwill was impaired as of January 1, 2002 by $5,134,000.
This amount was expensed in our 2002 financial statements. We are required to
evaluate goodwill for impairment on at least an annual basis. We performed the
analysis, as of December 31, 2002 and 2003, respectively, and determined that
our remaining goodwill was not impaired.
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.
13
Results of Operations
Comparison of Three Months Ended June 30, 2004 to Three Months Ended June 30,
2003.
Our revenues for the three months ended June 30, 2004, were $37.7 million,
compared to $32.6 million for the same period in 2003, an increase of $5.1
million or 15.6%. Revenue increased by $2.0 million as a result of the opening
of The Sports Club/LA-Beverly Hills on October 7, 2003. Revenue increased by
another $2.3 million at the five new Clubs opened in 2001 and 2002 primarily as
a result of a 7.9% increase in membership at these Clubs and to annual rate
increases for monthly dues and other ancillary services. Revenue increased by
$798,000 as a result of increased cost reimbursements due us primarily from our
management of The Sports Club/LA-Miami, a non-owned Club in Florida. Revenue
decreased by $35,000 at our SportsMed subsidiary primarily due to decreased
patient visits, revenue increased by $70,000 primarily due to increased
management fees earned from our management of The Sports Club/LA-Miami and
revenue decreased by $9,000 at our three mature Clubs.
Our direct expenses increased by $3.5 million (13.2%) to $29.8 million for
the three months ended June 30, 2004, versus $26.3 million for the same period
in 2003. Direct expenses increased by $2.1 million as a result of the opening of
The Sports Club/LA-Beverly Hills on October 7, 2003. Direct expenses increased
by $846,000 at the five Clubs opened in 2000 and 2001 primarily as a result of
an increase in variable direct expenses associated with the 7.9% revenue growth
that occurred at these five Clubs between June 30, 2003 and June 30, 2004.
Direct expenses increased by $511,000 at our three mature Clubs and our
SportsMed subsidiary primarily due to increased payroll costs. Direct expenses
as a percent of revenue for the three months ended June 30, 2004, decreased to
79.1% from 80.8% for the same period in 2003. As membership levels and therefore
revenues increase at the six new Sports Club/LA Clubs, the direct expense
percentage should decrease. There is no assurance, however, that such membership
or revenue growth will occur.
Reimbursed costs were $1.2 million for the three months ended June 30,
2004, versus $448,000 for the same period in 2003, an increase of $798,000.
These costs primarily relate to The Sports Club/LA-Miami, which is a non-owned
Club that we manage for its owner. We receive a management fee for managing the
Club and are reimbursed for all costs we advance on the owner's behalf.
Management fees and reimbursed costs are recorded as revenue and the reimbursed
costs are also recorded as expenses in our consolidated financial statements.
The effect of reimbursed costs on our loss from operations is therefore zero,
since reimbursed costs are both reported as revenue and as operating costs in
our consolidated financial statements. The reimbursed costs of $448,000 for the
three months ended June 30, 2003, represent pre-opening expenses incurred by us
on the owner's behalf. The reimbursed costs of $1.2 million, for the three
months ended June 30, 2004, represent operating costs of the Club, which opened
in November 2003. The increase of $798,000 compared to the same period in 2003
is due to the Club becoming fully operational.
General and administrative expenses were $2.2 million for the three months
ended June 30, 2004, versus $2.0 million for the same period in 2003, an
increase of $210,000. Payroll and payroll related expenses for the three months
ended June 30, 2004 increased by $40,000, primarily due to normal annual
compensation increases. Accounting and legal fees increased by approximately
$50,000 primarily due to the new audit and accounting requirements mandated by
the Sarbanes-Oxley legislation. In the second quarter of 2004, we retained an
investment bank to assist us in evaluating alternatives to restructure our debt
levels and paid them $120,000 for their services during the quarter. General and
administrative expenses decreased as a percentage of revenue to 5.8% for the
three months ended June 30, 2004, from
14
6.1% for the same period in 2003. 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 $1.3 million for the three months ended June 30,
2004, versus $1.2 million for the same period in 2003, an increase of $34,000 or
2.8%. Selling expenses increased by $139,000 as a result of the opening of The
Sports Club/LA-Beverly Hills on October 7, 2003 and decreased by $105,000 at our
other Clubs primarily due to the timing of our promotions, media and direct mail
programs. Selling expenses as a percentage of revenue decreased to 3.4% for the
three months ended June 30, 2004, from 3.8% for the same period in 2003.
Our depreciation and amortization expenses were $3.2 million for the three
months ended June 30, 2004, versus $3.0 million for the same period in 2003, an
increase of $199,000 or 6.7%. Depreciation and amortization expenses increased
by $151,000 as a result of the opening of The Sports Club/LA-Beverly Hills on
October 7, 2003, and by $48,000 due principally to capital additions made at our
other Clubs during 2003 and 2004.
Pre-opening expenses of $636,000 for the three months ended June 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 $417,000 (12.8%) to $3.7 million for
the three months ended June 30, 2004, versus $3.3 million for the same period in
2003. Net interest expense increased by $312,000 as a result of interest
incurred on a new $20.0 million five-year mortgage loan, which funded on June
12, 2003. Net interest expense increased by $150,000 due to the termination of
the capitalization of interest on our construction costs for The Sports
Club/LA-Beverly Hills, which opened on October 7, 2003. Net interest expense
increased by $46,000 primarily due to loan guarantee fees incurred on the new
$20.0 million mortgage loan and decreased by $91,000 primarily due to a
reduction of equipment financing loans, and the payoff of the former credit line
with our bank.
Our minority interests increased by $442,000 to $479,000 for the three
months ended June 30, 2004, versus $37,000 for the same period in 2003. Minority
interests increased by $442,000, as a result of the accrual of a minority
interest at our Reebok Sports Club/NY. The quarter ended June 30, 2004, was the
first quarter we recorded a minority interest in the profits of the Reebok
partnership.
The tax provisions recorded for the three months ended June 30, 2004 and
2003 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 June 30, 2004 and 2003.
After the tax provisions and dividends on preferred stock of $495,000 in
2004 and $350,000 in 2003, our consolidated net loss attributable to common
shareholders was $4.8 million, or $0.26 per basic and diluted share for the
three months ended June 30, 2004, versus a loss of $4.8 million, or $0.26 per
basic and diluted share for the three months ended June 30, 2003.
15
Comparison of Six Months Ended June 30, 2004 to Six Months Ended June 30, 2003.
Our revenues for the six months ended June 30, 2004, were $74.9 million,
compared to $65.3 million for the same period in 2003, an increase of $9.6
million or 14.7%. Revenue increased by $3.7 million as a result of the opening
of The Sports Club/LA-Beverly Hills on October 7, 2003. Revenue increased by
another $4.0 million at the five new Clubs opened in 2001 and 2002 primarily as
a result of an 7.9% increase in membership at these Clubs and to annual rate
increases for monthly dues and other ancillary services. Revenue increased by
$1.8 million as a result of increased cost reimbursements due us from our
management of The Sports Club/LA-Miami, a non-owned Club in Florida. Revenue
increased by $59,000 at our SportsMed subsidiary primarily due to increased
patient visits and revenue increased by $150,000 due to increased management
fees earned primarily from our management of The Sports Club/LA-Miami. Revenue
decreased by $63,000 at our three mature Clubs.
Our direct expenses increased by $7.2 million (13.6%) to $59.9 million for
the six months ended June 30, 2004, versus $52.7 million for the same period in
2003. Direct expenses increased by $4.0 million as a result of the opening of
The Sports Club/LA-Beverly Hills on October 7, 2003. Direct expenses increased
by $2.2 million at the five Clubs opened in 2000 and 2001 primarily as a result
of an increase in variable direct expenses associated with the 7.9% revenue
growth that occurred at these five Clubs between June 30, 2003 and June 30,
2004. Direct expenses increased by $1.0 million at our three mature Clubs and
our SportsMed subsidiary primarily due to increased payroll costs. Direct
expenses as a percent of revenue for the six months ended June 30, 2004,
decreased to 79.9% from 80.7% for the same period in 2003. As membership levels
and therefore revenues increase at the six new Sports Club/LA Clubs, the direct
expense percentage should decrease. There is no assurance, however, that such
membership or revenue growth will occur.
Reimbursed costs were $2.5 million for the six months ended June 30, 2004,
versus $705,000 for the same period in 2003, an increase of $1.8 million. These
costs relate to The Sports Club/LA-Miami, which is a non-owned Club that we
manage for its owner. We receive a management fee for managing the Club and are
reimbursed for all costs we advance on the owner's behalf. Management fees and
reimbursed costs are recorded as revenue and the reimbursed costs are also
recorded as expenses in our consolidated financial statements. The effect of
reimbursed costs on our loss from operations is therefore zero, since reimbursed
costs are both reported as revenue and as operating costs in our consolidated
financial statements. The reimbursed costs of $705,000, for the six months ended
June 30, 2003, represent pre-opening expenses incurred by us on the owner's
behalf. The reimbursed costs of $2.5 million, for the six months ended June 30,
2004, represent operating costs of the Club, which opened on October 7, 2003.
The increase of $1.8 million compared to the same period in 2003 is due to the
Club becoming fully operational.
General and administrative expenses were $4.3 million for the six months
ended June 30, 2004, versus $4.0 million for the same period in 2003, an
increase of $283,000. Payroll and payroll-related expenses for the six months
ended June 30, 2004 increased by $112,000, primarily due to normal annual
compensation increases. Accounting and legal fees increased by approximately
$87,000 primarily due to the new audit and accounting requirements mandated by
the Sarbanes-Oxley legislation. In the second quarter of 2004, we retained an
investment bank to assist us in evaluating alternatives to restructure of debt
levels and paid them $120,000 for their services during the first six months of
2004. There were other minor increases and decreases in other general and
administrative expenses accounting for a net decrease of $36,000. General and
administrative expenses decreased as a percentage of revenue to 5.7% for the six
months ended June 30, 2004, from 6.1% for the same period in
16
2003. 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 $2.8 million for the six months ended June 30,
2004, versus $2.6 million for the same period in 2003, an increase of $198,000
or 7.6%. Selling expenses increased by $316,000 as a result of the opening of
The Sports Club/LA-Beverly Hills on October 7, 2003 and decreased by $118,000 at
our other Clubs primarily due to the timing of our media advertising. Selling
expenses as a percentage of revenue decreased to 3.7% for the six months ended
June 30, 2004, from 4.0% for the same period in 2003.
Our depreciation and amortization expenses were $6.3 million for the six
months ended June 30, 2004, versus $5.9 million for the same period in 2003, an
increase of $411,000 or 6.9%. Depreciation and amortization expenses increased
by $316,000 as a result of the opening of The Sports Club/LA-Beverly Hills on
October 7, 2003 and by $95,000 primarily due to capital additions made at our
other Clubs during 2003 and 2004.
Pre-opening expenses of $46,000 and $776,000 for the six months ended June
30, 2004 and six months ended June 30, 2003, respectively, consisted of expenses
related to The Sports Club/LA-Beverly Hills, which opened on October 7, 2003.
We recorded a non-recurring charge of $1.1 million during the six months
ended June 30, 2004. This charge is comprised of various costs, primarily legal
fees and investment banking fees, related to a "Going Private/Equity Investment"
transaction that was initiated in April 2003 and abandoned in February 2004.
Our net interest expense increased by $825,000 (12.6%) to $7.4 million for
the six months ended June 30, 2004, versus $6.5 million for the same period in
2003. Net interest expense increased by $714,000 as a result of interest
incurred on a new $20.0 million five-year mortgage loan, which funded on June
12, 2003. Net interest expense increased by $150,000 due to the termination of
the capitalization of interest on our construction costs for The Sports
Club/LA-Beverly Hills, which opened on October 7, 2003. Net interest expense
increased by $112,000 primarily due to loan guarantee fees incurred on the new
$20.0 million mortgage loan and decreased by $151,000 due principally to a
reduction of equipment financing loans, and the payoff of the former credit line
with our bank.
Our minority interests increased by $442,000 to $517,000 for the six months
ended June 30, 2004, versus $75,000 for the same period in 2003. Minority
interests increased by $442,000, as a result of the accrual of a minority
interest at our Reebok Sports Club/NY. The quarter ended June 30, 2004, was the
first quarter that we recorded a minority interest in the profits of the Reebok
partnership.
The tax provisions recorded for the six months ended June 30, 2004 and 2003
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 six months ended June 30, 2004 and 2003.
After the tax provisions and dividends on preferred stock of $876,000 in
2004 and $698,000 in 2003, our consolidated net loss attributable to common
shareholders was $11.1 million, or $0.60 per basic and diluted share for the six
months ended June 30, 2004, versus a loss of $9.1 million, or $0.50 per basic
and diluted share for the six months ended June 30, 2003.
17
Non-GAAP Financial Measures
We use the term "EBITDA" in this discussion. EBITDA consists of net income
(loss) plus, interest, net, provision for income taxes and depreciation and
amortization. This term, as we define it, may not be comparable to a
similarly-titled measure used by other companies and is not a measure of
performance presented in accordance with GAAP. We use EBITDA and EBITDA margin
as measures of operating performance. EBITDA should not be considered as a
substitute for net income (loss), cash flows provided by operating activities,
or other income or cash flow data prepared in accordance with GAAP. We believe
EBITDA is useful to an investor in evaluating our operating performance and
liquidity because:
o it is a widely accepted financial indicator of a company's ability to
service its debt;
o it is widely used to measure a company's operating performance without
regard to items such as depreciation and amortization, which can vary
depending upon accounting methods and the book value of assets, and to
present a meaningful measure of corporate performance exclusive of our
capital structure and the method by which assets were acquired; and
o it helps investors to more meaningfully evaluate and compare the results of
our operations from period to period by removing from our operating results
the impact of our capital structure, primarily interest expense from our
outstanding debt, and asset base, primarily depreciation and amortization
of our properties.
Our management uses EBITDA:
o as a measurement of operating performance because it assists us in
comparing our performance on a consistent basis, as it removes from our
operating results the impact of our capital structure, which includes
interest expense from our outstanding debt, and our asset base, which
includes depreciation and amortization of our properties;
o in presentations to the members of our board of directors to enable our
board to have the same consistent measurement basis of operating
performance used by management; and
o as the basis for incentive bonuses paid to selected members of senior and
Club level management.
Below is a reconciliation of EBITDA to net income ($'s in thousands):
Six Months Ended
June 30, 2004
-------------
EBITDA ...................................... $ 3,818
Depreciation and amortization................ (6,340)
Interest, net................................ (7,360)
Provision for income taxes................... (340)
--------------------
Net loss ...................................... $ (10,222)
=====================
18
Liquidity and Capital Resources
Liquidity
Historically, we have satisfied our liquidity needs through various debt
arrangements, sales of Common or Preferred Stock and cash flows from operations.
Our primary liquidity needs the past several years have been the development of
new Clubs and the interest cost associated with our $100.0 million Senior
Secured Notes.
In order to make our March 15, 2004 interest payment on the Senior Secured
Notes, we issued $6.5 million of a newly-created class of Series D Convertible
Preferred Stock. We are not certain that amounts we will generate from
operations through September 15, 2004 will be sufficient for us to make the
Senior Secured Note interest payment due on September 15, 2004. If cash flows
from operations are insufficient to make the September 15, 2004 or future
interest payments, we would be required to dispose of assets or sell additional
equity or debt securities to generate cash to make such payments. There can be
no assurance that we will be able to sell assets or issue additional equity or
debt securities, or that any such sales or issuances will be on reasonable
terms. If we were unable to complete such sales or issuances prior to the date
such interest payments are due, our ability to continue to operate our business
would be materially adversely affected.
We are currently exploring financing alternatives with holders of our
Series D Convertible Preferred and we believe that we will be able to finalize a
transaction that will allow us to meet our September 15 interest payment
obligation with respect to the Senior Secured Notes; however, no assurance can
be given that such financing will be completed in a timely fashion.
In addition, we have engaged an independent investment banker to assist us
in selling certain assets or Clubs in order to generate cash for working capital
purposes and to retire a portion of the Senior Secured Notes. While we are
optimistic that such sales will be completed, no assurance can be given that
such transactions will be consummated.
Additional funds will be required to provide working capital and to service
interest payments on our Senior Secured Notes. In addition, we will not consider
future acquisitions or the development or management of new Clubs unless such
transactions could be structured in a way that would not require our expenditure
of capital; could be done in partnership with other development partners or
other third parties; could be expected to generate cash flow; or would further
enhance The Sports Club/LA brand name in the market place.
Operating Activities
Our cash balance on June 30, 2004 was $3.7 million. During the first six
months of 2004, our earnings before interest, taxes, depreciation and
amortization ("EBITDA") were $3.8 million. We believe we will continue to
generate positive EBITDA and that such amount will increase as our new Clubs
continue to mature.
We have various deposits that secure our performance under several
contracts. We expect to receive back $1.0 million of such deposits in the third
quarter of 2004 and $2.7 million in the fourth quarter of 2004.
19
Investing Activities
Investing activities consist of new Club development and expenditures to
maintain and update our existing Clubs. Capital expenditures related to new
Clubs were approximately $1.3 million in the first six months of 2004. 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. Capital
expenditures to maintain and update our existing Clubs were approximately $1.5
million in the first six months of 2004. We estimate that expenditures of
between 2% 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 have
budgeted approximately $600,000 during the next year to upgrade our management
information systems and enhance our disaster recovery capabilities.
On April 22, 2002, we signed a lease to develop The Sports Club/LA -
Beverly Hills. The new Sports Club/LA, of approximately 40,000 square feet, is
located at 9601 Wilshire Boulevard in the heart of the Beverly Hills 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 The Sports Club/LA sites. At
June 30, 2004, all construction costs for this Club have been accrued and paid.
The Club opened in October 2003.
We entered into a management service agreement with Terremark Brickell II
Ltd., an affiliate of Millennium (affiliate of one of our principal
shareholders) to manage The Sports Club/LA - Miami. Millennium provided all the
capital to develop this facility and retained a 100% ownership in the Club. We
earn a management fee based upon the Club's revenues and can also earn a profit
participation based upon the Club's net operating income. We were not required
to invest any of our capital into this development. The Club opened in November
2003.
We currently have no other plans for new Club developments that would
require the expenditure of our own capital. As noted above, our involvement in
any new Club development or acquisition will depend upon the structure of the
arrangement; the absence of any material expenditure of capital by us; a
reasonable expectation of positive cash flow; and the enhancement of The Sports
Club/LA brand name in the market place.
Financing Activities
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 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
20
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.
On January 12, 2003, we obtained financing in the form of a secured
five-year promissory loan in the amount of $20.0 million. 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., our wholly
owned subsidiary that owns The Sports Club/LA - Orange County; and is guaranteed
by two of our major stockholders. The note may be prepaid at any time without
penalty or premium and requires a final principal payment of $18.3 million on
July 1, 2008.
The Indenture allows us to incur up to $10.0 million of equipment financing
obligations. At June 30, 2004, we had $897,000 of equipment financing
obligations outstanding and would be allowed to finance an additional $9.1
million with new equipment purchased serving as collateral. We make monthly
principal and interest payments on this debt. These monthly payments are
currently $124,000 and they will continue until December 2004, when a
significant portion of the debt will be repaid.
In March 2004, three of our principal shareholders purchased $6.5 million
of a newly created class of Series D Convertible Preferred Stock in a private
placement. The proceeds were used to pay the March 15, 2004 interest payment on
our Senior Secured Notes and to provide additional working capital.
Other than our normal operating activities and capital expenditures, our
total cash requirements for our existing operations through June 30, 2005, are
estimated to be as follows (amounts in thousands):
Indenture interest.............................. $ 11,375
Information system upgrades..................... 600
Payments on long-term debt...................... 2,566
-------------
$ 14,541
-------------
-------------
Impact of Inflation
We do not believe inflation has had a material impact on our consolidated
results of operations. We cannot provide assurance that future inflation will
not have an adverse impact on our consolidated operating results and financial
condition.
Seasonality of Business
Seasonal trends have a limited impact on our operations. We typically
experience a slight increase in membership sales in the first quarter.
Additionally, we normally experience a slight decrease in our ancillary revenues
during the summer months at our east coast Clubs due to lower membership
attendance.
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
21
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 management's reasonable estimates of future results or trends. Although we
believe that our plans and objectives reflected in or suggested by such
forward-looking statements are reasonable, such plans or objectives may not be
achieved. Actual results may differ from projected results due to unforeseen
developments, including developments relating to the following:
o the availability and adequacy of our cash flow and financing facilities for
our requirements, including payment of the Senior Secured Notes 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 Clubs,
o disputes or other problems arising with our development partners or
landlords,
o changes in economic, competitive, demographic and other conditions in the
geographic areas in which we operate, including business interruptions
resulting from earthquakes or other causes,
o competition,
o changes in personnel or compensation, and
o changes in statutes and regulations or legal proceedings and rulings.
We will not update forward-looking statements even though our situation may
change in the future.
22
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
June 30, 2004, 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 June 30, 2004, the fair value of the Senior Secured Notes is
approximately $94.0 million. We also have a $19.7 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, with the participation of our Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), has evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") as of the end of the quarterly period ended June 30, 2004. This evaluation
included a review of the steps management undertook in an effort to ensure that
information required to be disclosed in its Exchange Act filings is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission (the "SEC"), in light
of certain deficiencies in our controls and procedures identified by our
independent auditor, KPMG LLP ("KPMG"), as more particularly described below.
Based on such evaluation and input from KPMG, the CEO and CFO concluded that, as
of the end of such period, these deficiencies have caused our disclosure
controls and procedures not to be effective at a reasonable assurance level.
In performing its audit of our Consolidated Financial Statements for the
year ended December 31, 2003, KPMG noted a matter involving our internal
controls that it considered a "reportable condition", as defined under standards
established by the American Institute of Certified Public Accountants. A
"reportable condition", which may or may not be deemed a material weakness,
involves matters relating to significant deficiencies in the design or operation
of internal controls that, in KPMG's judgment, could adversely affect our
ability to record, process, summarize and report financial data consistent with
the assertions of management in the financial statements.
The reportable condition, which KPMG considered to be a material weakness,
was that we do not have adequate internal controls over the application of new
accounting principles or the application of existing accounting principles to
new transactions. In this regard, KPMG noted that, during their review of our
financial statements for the quarter ended March 31, 2003, we had not properly
accounted for private training revenues. In addition, in connection with their
audit of our financial statements for the year ended December 31, 2003, KPMG
determined that we were not properly accounting for our management arrangement
with The Sports Club/LA-Miami; that we had not properly followed Financial
Accounting Standard No. 142 relating to goodwill; and that we had not properly
accounted for the accretion of dividends on our Series C Convertible Preferred
Stock. Finally, KPMG suggested that we needed to consider additional staffing in
our accounting department, and take other action (such as encouraging attendance
at training seminars on new accounting rules and pronouncements) to ensure that
we have the expertise and resources to implement new
23
accounting standards and apply existing accounting standards to new
transactions. KPMG's observations were summarized in its letter dated June 16,
2004, to the Audit Committee of the Board of Directors.
In connection with the completion of the 2003 audit, our
accounting personnel worked with, and considered the recommendations of, KPMG in
accounting for private training revenues, goodwill, management fees and dividend
accrual on our Series C Convertible Preferred Stock. They conducted detailed
validation work on these accounts to substantiate the accuracy of the financial
information and related disclosures contained in this Form 10-Q. The accounting
personnel reviewed the requirements of Financial Accounting Standards 142 to
understand the methodology underlying the accounting treatment of goodwill and
continue to monitor any new developments or changes in accounting treatment or
policies for these assets to ensure that they are accurately disclosed in our
financial statements.
As a result of KPMG's observations, the Audit Committee has authorized and
directed management to devise and implement actions to address these
deficiencies and to enhance the reliability and effectiveness of our internal
controls over financial reporting and to provide reasonable assurance that our
disclosure controls and procedures allow for the acurate presentation and timely
filing of our financial statements. Our accounting personnel have reviewed their
reporting and certification obligations under the Exchange Act and the Sarbanes
Oxley Act of 2002, and have consulted with our outside counsel with respect to
those obligations. We are now performing regular analyses of revenues
attributable to private training and management fees. In addition, our
accounting personnel have determined that if there should occur any changes in
existing accounting rules or policies, or if accounting principles are adopted,
which apply to our financial accounts (particularly with respect to the manner
in which private training revenues, management fees, goodwill and dividend
accrual is accounted for), such matters will be brought to the attention of our
independent audior and, if necessary, outside counsel to ensure that all
required disclusures are accurate and complete and are made in a timely fashion.
We have assigned a high priority to both the short-term and long-term
strengthening of these controls and have identified certain additional measures
which we believe will address the conditions identified by KPMG as a material
weakness, including the following:
o engaging an independent accounting or financial consulting firm (other
than the our independent auditor) to consult with us on accounting issues,
including the interpretation of new accounting rules and releases promulgated by
the SEC, the Financial Accounting Standards Board and other organizations, and
the application of accounting principles to new transactions in which we engage;
o creating and maintaining a written "log" in which new FASB, EITF, SOP and
other accounting rules and pronouncements are recorded. The log will include a
description of the new rule or pronouncement; whether or not it amends or
modifies an existing rule or pronouncement; its applicability to us or any
transactions in which we have engaged, or propose to engage; and the appropriate
accounting ramifications of the new rule or pronouncement. Management intends to
submit this log to the Audit Committee and its independent auditors on a
quarterly basis, as part of their respective financial statement review;
o subscribing to selected professional publications that discuss new
accounting rules and regulations applicable to reporting companies, and
encouraging our accounting personnel to attend seminars and other presentations
which focus on new accounting and financial disclosure rules and pronouncements;
and
24
o establishing an internal audit procedure to ensure that transactional
recording, transactional review and adherence to applicable accounting policies
and principles are observed.
Management believes that the foregoing measures will address the conditions
identified as a material weakness by KPMG. We will continue to monitor and
evaluate the effectiveness of our disclosure controls and procedures and our
internal controls over financial reporting on an ongoing basis, and are
committed to taking further action and implementing additional enhancements or
improvements, as necessary. We believe that these measures are reasonably likely
to have a material impact on our internal controls over reporting in future
periods.
(b) Changes in internal controls.
Except as described above, there have been no changes in our internal
controls over financial reporting (as those terms are defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, its internal controls over financial
reporting.
25
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, whether insured or not, arising out of any
such proceedings will not have a material adverse effect on our consolidated
financial condition, cash flows 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
31.1 Certification of Rex A. Licklider pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Timothy O'Brien pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Rex A. Licklider pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Timothy O'Brien 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 between April 1, 2004 and
June 30, 2004:
April 16, 2004. We filed a report on Form 8-K announcing that Pending
adoption by the stockholders at the upcoming annual meeting (expected to be held
in June of this year) the Board of Directors on April 8, 2004, approved an
amendment to the our Restated Certificate of Incorporation providing for the
annual election of Directors. Previously, the Directors have been divided into
three classes with the stockholders electing approximately one-third of the
members of the Board of Directors at each annual meeting. If approved, the
26
Amendment would mean that beginning with the 2004 Annual Meeting, 100% of the
Directors will be elected each year.
We also announced that effective April 8, 2004, Brian J. Collins and
Nanette Pattee Francini, without disagreements or conflicts, resigned their
positions as Directors. Ms. Francini will continue to serve as our Executive
Vice President.
We also announced that the terms of the $6.5 million private placement of
the newly created Series D Convertible Preferred Stock consummated on March 12,
2004, entitle the three holders of the Series D (an affiliate of Millennium
Entertainment Partners ("Millennium"), affiliates of Kayne Anderson Capital
Advisors ("Kayne") and Rex A. Licklider ("Licklider") to each designate one
director to serve on our Board of Directors. Additionally, Millennium has the
right to designate a second independent director.
We also announced that Mr. Licklider continues to serve on the Board of
Directors as the designee of Licklider and Charles Norris will continue to serve
as the designee of Kayne.
We also announced that effective April 8, 2004, Christopher M. Jeffries was
elected to fill one of the vacancies created by the resignations of Ms. Francini
and Mr. Collins. Mr. Jeffries is a principal of Millennium and will serve as one
of its designees. Millennium continues to have the right to designate a second
independent director.
April 16, 2004. We filed a report on Form 8-K stating that we issued a
Press Release on April 15, 2004, announcing we were delaying the reporting of
our final year-end and fourth quarter 2003 financial statements due to certain
issues relative to the application of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets and Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. We also reported that we did not meet the
prescribed April 14, 2004 extension date for filing our Annual Report on Form
10-K with the Securities and Exchange Commission. Preliminary operating results
for the fourth quarter and year ended December 31, 2003 without reflecting any
adjustments related to the recoverability of goodwill or impairment of fixed
assets were included in the Press Release.
April 23, 2004. We filed a report on Form 8-K announcing that as reported
in our Current Report on Form 8-K filed with the Securities and Exchange
Commission on April 16, 2004, Nanette Pattee Francini, without disagreement or
conflict, resigned her position as a Director effective April 8, 2004. At a
Board meeting duly and validly held on April 8, 2004 the Board elected Mr.
Charles Ferraro to fill the vacancy created by Ms. Francini's resignation.
Effective April 19, 2004, Mr. Ferraro accepted the position and was appointed to
our Board of Directors. The Board of Directors of Registrant is currently
comprised of seven members. Mr. Ferraro meets the criteria of "independent" as
defined by the Securities and Exchange Commission and the American Stock
Exchange and will bring the number of independent directors to four.
May 26, 2004. We filed a report of Form 8-K stating that on May 26, 2004 we
issued a Press Release announcing that we were delaying the reporting of our
first quarter 2004 financial statements. We previously announced that we were
delaying the reporting of our fiscal 2003 year-end and fourth quarter results
due to certain issues relative to the application of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets and Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. We also reported that we did not meet the
prescribed May 24, 2004 extension date for filing of our Quarterly Report on
Form 10-Q with
27
the Securities and Exchange Commission. Preliminary operating results for the
first quarter ended March 31, 2004 without reflecting any adjustments related to
the impairment of fixed assets were included in the Press Release.
May 28, 2004. We filed a report on form 8-K announcing that we had received
a default notice from U.S. Bank, as Trustee for the holders of our 11 3/8%
Senior Secured Notes due in March 2006. As previously reported, we had delayed
the filing of our annual report on Form 10-K for the year ended December 31,
2003 due to complex issues associated with Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets and Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment and
Disposal of Long-Lived Assets. The letter from the Trustee, received by us on
May 25, 2004, notified us that an "event of default" under the Indenture would
arise if we failed to file our financial reports with the Securities and
Exchange Commission within thirty-days after our receipt of such notice. Filing
the financial reports within the allotted thirty-day period would constitute a
cure and nullify the Trustee's notice.
June 24, 2004. We filed a report on Form 8-K stating that on June 22, 2004
we issued a Press Release announcing that On June 21, 2004, we had filed our
2003 Annual Report on Form 10-K and First Quarter 2004 Report on Form 10-Q with
the Securities and Exchange Commission. The reported results did not differ
materially from the previously announced preliminary results for each of these
reporting periods.
We also announced that the Form 10-K included consolidated financial
statements audited by the independent registered public accounting firm, KPMG
LLP, as of and for the year ended December 31, 2003, together with management's
discussion and analysis of financial condition and results of operations. KPMG's
opinion with respect to the financial statements includes an explanatory
paragraph that states that we have suffered recurring net losses, a working
capital deficiency and negative cash flows from operating activities that raises
substantial doubt about our ability to continue as a going concern. The opinion
also states that our financial statements do not include any adjustments that
might result from the outcome of this business uncertainty.
We also announced that the auditors were concerned that our current cash
flows were not sufficient to enable us to meet our interest and principal
obligations with respect to our Senior Secured Notes due in March 2006. Because
we did not have a definitive plan in place either to repay or refinance the $100
million of Notes prior to their stated maturity date, the auditors concluded
that the qualification was appropriate under the circumstances.
We also announced that we were currently exploring various strategies to
raise additional capital and expect to consummate one or more transactions prior
to the March 2006 due date of the Notes. In the interim, we believe our
operating cash flows and, if necessary, additional equity infusions from one or
more of our current major shareholders will provide us with the funds necessary
to support current operations.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SPORTS CLUB COMPANY, INC.
Date: August 16, 2004 by /s/ Rex A. Licklider
----------------------------------------
Rex A. Licklider
Chief Executive Officer
(Principal Executive Officer)
Date: August 16, 2004 by /s/ Timothy M. O'Brien
----------------------------------------
Timothy M. O'Brien
Chief Financial Officer
(Principal Financial and Accounting
Officer)
29
EXHIBIT 31.1
CERTIFICATIONS
I, Rex A. Licklider, Chief Executive Officer of The Sports Club Company, Inc.
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 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 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 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-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures (as of the end
of the period covered by this report based on such evaluation); and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's second fiscal quarter in
the case of this quarterly report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial financial information;
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 over financial reporting.
Dated, August 16, 2004
/s/ Rex A. Licklider
- --------------------------------------
Rex A. Licklider
Chief Executive Officer
30
EXHIBIT 31.2
CERTIFICATIONS
I, Timothy O'Brien, Chief Financial Officer of The Sports Club Company, Inc.
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 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 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 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-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures (as of the end
of the period covered by this report based on such evaluation); and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's second fiscal quarter in
the case of this quarterly report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial financial information;
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 over financial reporting.
Dated, August 16, 2004
/s/ Timothy O'Brien
- --------------------------------------
Timothy O'Brien
Chief Financial Officer
31
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of The Sports Club Company, Inc. (the
"Company") on Form 10-Q for the period ending June 30, 2004 filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Rex A.
Licklider, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. (Section Mark) 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act
of 2002, that to my knowledge:
(i) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(ii) The information contained in the Report fairly represents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Rex A. Licklider
--------------------------------------
The Sports Club Company, Inc.
Chief Executive Officer
August 16, 2004
32
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of The Sports Club Company, Inc. (the
"Company") on Form 10-Q for the period ending June 30, 2004 filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Timothy
O'Brien, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
(Section Mark) 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge:
(i) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(ii) The information contained in the Report fairly represents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Timothy O'Brien
--------------------------------------
The Sports Club Company, Inc.
Chief Financial Officer
August 16, 2004
33