LOS ANGELES — When Sports Club Co. announced that it had a letter of intent to sell most of its clubs, it wasn't a big surprise to many in the industry. Rumors of a sale had been flying, especially after the company's former accounting firm stated that the company was financially rocky and the American Stock Exchange threatened to delist the company because it failed to meet certain standards.
In February, The Sports Club Co. announced that a subsidiary of real-estate development company Millennium Partners had signed a letter of intent to purchase six of the Sports Club Co. facilities for $65 million. Millennium Partners is the landlord for several of The Sports Club's facilities and is the largest stockholder in the company. The facilities to be sold include the three clubs in New York City and each of its clubs in Boston, Washington, D.C., and San Francisco. In addition, the management agreement for the Miami club will be assigned to Millennium. Michael Talla, who is founder and chairman of the board, and some of the other minority stockholders will buy the remaining three clubs in Los Angeles, Beverly Hills and Orange County. The company would then go private. The letter of intent is subject to the execution of a definitive purchase agreement and the satisfaction of a number of conditions.
Millennium Partners, through its subsidiary, is the largest shareholder in the Sports Club Co. Christopher M. Jeffries, principal and founding partner of Millennium Partners said that Millennium would continue to operate the clubs at the high level of service for which the brand is known.
“From day one, we have supported the vision of Sports Club's facilities as urban country clubs,” said Jeffries. “The Sports Club Co.'s clubs have always been known for their broad range of services, luxurious facilities, and five-star amenities. We intend to build on this foundation and provide an even more extensive range of services and programs than exists today.”
For the Sports Club Co., the road to this point has been a rocky one full of financial problems.
In March 2004, the company's former accounting company, KPMG LLP, noted that “the company has suffered recurring net losses, has working capital deficiency and has negative cash flows from operating activities that raise substantial doubt about its ability to continue as a going concern.” Sports Club Co. later dismissed KPMG as its accounting company, although it stated that the accounting firm's statement about the company was not a factor in the dismissal.
In March 2004, Talla gave up his co-CEO title and responsibilities. Rex A. Licklider, who had been co-CEO, assumed the full CEO role. Also that month, three major stockholders in the company infused $6.5 million into the company with the purchase of a newly created class of preferred stock. The three investors were Licklider, affiliates of Kayne Anderson Capital, and affiliates and advisors of Millennium Entertainment Partners.
In May 2004, the company received a default notice from U.S. Bank, as trustee for the holders of the company's 11 3/8 percent senior secured notes due in March 2006. The company delayed filing of its annual report for the year 2003 due to issues with its accounting standards.
The company's board formed a special committee in September 2004 to look at strategic alternatives for the company. However, in December, the American Stock Exchange threatened to pull the company's listing. The Exchange said that the company failed to meet certain of its standards for continued listing. Specifically, the Exchange noted that the company's stockholders' equity was less than $2 million and the company had reported net losses in two of its most recent fiscal years.
In addition, the company had sustained losses which were so substantial in relation to the company's overall operations or its existing financial resources, or the company's financial condition had become so impaired that it appeared questionable, in the opinion of the Exchange, whether the company would be able to continue operations or meet its obligations as they matured.
In response, the Sports Club Co. submitted a plan of compliance to the Exchange and at the end of November, the Exchange granted the company an extension of time to regain compliance with the Exchange's continued listing standards.