SEC Info - Sports Club Co Inc - ‘424B2’ on 4/2/98

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Sports Club Co Inc – ‘424B2’ on 4/2/98

As of: Thursday, 4/2/98 · Accession #: 950148-98-788 · File #: 333-46973

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 4/02/98  Sports Club Co Inc                424B2                  1:261K                                   Bowne of Century City/FA

Prospectus — Rule 424(b)(2)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B2       Prospectus                                            74    439K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Acquisition and Development of Additional Clubs Available Information Business Capitalization Cash and cash equivalents Certain Transactions Common Stock Company, The Current assets Depreciation and amortization Dividend Policy Employment Agreements Experts Incorporation of Certain Documents By Reference Independent Auditors' Report Legal Matters Liquidity and Capital Resources Management Management's Discussion and Analysis of Financial Condition and Results of Operations Notes to Consolidated Financial Statements Offering, The Price Range of Common Stock Price Range of Common Stock and Related Matters Principal and Selling Stockholders Prospectus Summary Risk Factors Selected Consolidated Financial Data Shares Eligible for Future Sale Sports Club/Irvine, The Sports Club/LA, The SportsMed Stock Compensation Plan The Company The Offering The Sports Club/Irvine The Sports Club/LA Underwriting Use of Proceeds
1	1st Page - Filing Submission
"	Common Stock
3	Prospectus Summary
"	The Company
4	The Offering
6	Risk Factors
10	Shares Eligible for Future Sale
"	Dividend Policy
12	Use of Proceeds
13	Price Range of Common Stock and Related Matters
"	Price Range of Common Stock
14	Capitalization
15	Selected Consolidated Financial Data
16	Management's Discussion and Analysis of Financial Condition and Results of Operations
18	Liquidity and Capital Resources
23	Business
24	The Sports Club/LA
"	The Sports Club/Irvine
29	Acquisition and Development of Additional Clubs
37	Management
40	Employment Agreements
43	Stock Compensation Plan
45	Certain Transactions
49	Principal and Selling Stockholders
51	Underwriting
52	Legal Matters
"	Experts
"	Available Information
53	Incorporation of Certain Documents By Reference
55	Independent Auditors' Report
56	Current assets
60	Notes to Consolidated Financial Statements
"	Cash and cash equivalents
"	Depreciation and amortization
63	SportsMed

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PROSPECTUS As filed pursuant to Rule 424(b)(2)
under the Securities Act of 1933
Registration No. 333-46973

6,000,000 SHARES

THE SPORTS CLUB COMPANY, INC.

COMMON STOCK

------------------------

The Sports Club Company, Inc. (the "Company") is hereby offering (the
"Offering") 6,000,000 shares of the Company's common stock, $.01 par value per
share (the "Common Stock"). The Common Stock is listed on the American Stock
Exchange ("AMEX") under the symbol "SCY." On April 1, 1998, the last sale price
of the Common Stock was $8.9375 per share, as reported by the AMEX. See "Price
Range of Common Stock." At the request of the Company, up to 600,000 shares of
Common Stock have been reserved for sale in the Offering to certain individuals,
including directors and employees of the Company, members of their families, and
other persons having business relationships with the Company. See
"Underwriting."

SEE "RISK FACTORS" COMMENCING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS
RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRE-SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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============================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
------------------------------------------------------------------------------------------------------------
Per Share.................................... $8.00 $0.40 $7.60
------------------------------------------------------------------------------------------------------------
Total(3)..................................... $48,000,000 $2,400,000 $45,600,000
============================================================================================================

(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.

(2) Before deducting expenses payable by the Company estimated at $450,000.

(3) The Company and certain stockholders have granted to the Underwriters an
option, exercisable within 30 days hereof, to purchase up to an aggregate of
900,000 additional shares of Common Stock at the price to the public less
underwriting discounts and commissions for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to the Company and Proceeds to the selling stockholders will be
$55,200,000, $2,760,000, $51,680,000 and $760,000, respectively. See
"Principal and Selling Stockholders" and "Underwriting."

The shares of Common Stock are being offered hereby by the several
Underwriters named herein subject to prior sale, when, as, and if accepted by
them, and subject to certain prior conditions including the right of the
Underwriters to reject orders in whole or in part. It is expected that the
delivery of such shares will be made in New York, New York, on or about April 7,
1998.

SCHRODER & CO. INC.
PRUDENTIAL SECURITIES INCORPORATED
SUTRO & CO. INCORPORATED

April 2, 1998

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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
COMMON STOCK, AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

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PROSPECTUS SUMMARY

The following is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the consolidated financial statements and notes thereto, appearing elsewhere in
this Prospectus. Prospective investors should carefully consider the information
set forth under "Risk Factors." Unless otherwise indicated, the "Company" refers
to The Sports Club Company, Inc., its predecessors and its subsidiaries. Unless
otherwise indicated, the information contained in this Prospectus assumes that
the Underwriters' over-allotment option will not be exercised.

THE COMPANY

The Sports Club Company, Inc. operates sports and fitness clubs ("Clubs"),
primarily under the "Sports Club" and "Spectrum Club" names. Sports Clubs have
been developed as "urban country clubs" offering a full range of services,
including numerous fitness and recreation options, diverse facilities and other
amenities. Spectrum Clubs are designed as smaller-scale Sports Clubs with an
extensive but smaller range of services. Both Sports Clubs and Spectrum Clubs
are marketed to affluent, health conscious individuals who desire a premier
Club. The membership fees at Sports Clubs are higher than membership fees
charged at Spectrum Clubs; membership fees at both Clubs are higher than those
charged by most other Clubs, which do not provide as many services.

The Company currently owns interests in 14 Clubs. In 1997 the Company
acquired a Club in Henderson, Nevada which is now operated as The Sports
Club/Las Vegas, acquired four Clubs in Southern California which are now
operated as Spectrum Clubs and opened a Spectrum Club in Valencia, California.
The Company currently operates The Sports Club/LA, The Sports Club/Irvine, the
Reebok Sports Club/NY and The Sports Club/Las Vegas, and operates 10 Spectrum
Clubs in Southern California.

The Company's strategy is to develop and acquire multi-amenity Clubs
complementary to existing Sports Clubs and Spectrum Clubs and to develop and
implement new programs at existing Clubs to expand membership and increase
revenues. The Company intends to develop and acquire Sports Clubs in selected
metropolitan areas where a sufficient potential membership base exists to
support a 80,000 square foot or larger facility. To expand the Spectrum Club
name and concept, the Company intends to develop and acquire suitable Clubs
located in or adjacent to metropolitan areas either near a Sports Club or in
areas where the potential membership base is significant but will not support a
Sports Club facility. The Company is currently developing additional Sports
Clubs in several locations including New York, New York, Washington, D.C.,
Houston, Texas, San Francisco, California, and Boston, Massachusetts, and
Spectrum Clubs in Anaheim Hills, Puente Hills and Thousand Oaks, California. The
Clubs are expected to open from late 1998 through 2001. The Company believes
that, because of the established reputation of the Company and the prestige
associated with the Sports Clubs and the Spectrum Clubs, developers view the
Clubs as valuable components of multi-use developments.

According to the International Health, Racquet & Sportsclub Association
("IHRSA"), the industry's leading trade organization, revenues generated by the
United States fitness club industry increased at a compound annual rate of 9.4%
from $5.5 billion in 1991 to $8.6 billion in 1996. Over the same period,
memberships in all Clubs have grown at a 4.5% compound annual growth rate, to
20.8 million. Both Club revenues and memberships have benefited from the
increasing awareness among the general public of the importance of physical
exercise. The sports and fitness Club industry is highly fragmented and
competitive. According to IHRSA, there were more than 13,000 Clubs in operation
during 1996. According to Club Industry magazine, however, the ten largest
companies in the industry account only for approximately 15% of all industry
revenue and own less than 10% of all Clubs. The Company believes that these
factors, among others, provide an opportunity for continued revenue growth for
Clubs such as Sports Clubs and Spectrum Clubs.
1

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The Company believes that it possesses one of the most experienced
management teams in the industry. Four of the Company's executives each have
more than 18 years experience in the Club industry and have been working for the
Company and its predecessors for more than ten years. Management believes that
it has the depth and experience to manage the Company's internal and external
growth.

THE OFFERING

COMMON STOCK OFFERED................ 6,000,000 shares(1)

COMMON STOCK TO BE OUTSTANDING AFTER
THE OFFERING........................ 20,218,645 shares(2)

USE OF PROCEEDS..................... Of the approximately $45.2 million
estimated net proceeds of the Offering,
approximately $38.9 million will be
used to repay outstanding indebtedness
and the balance will be used for
general corporate purposes, including
to acquire and develop new Clubs. See
"Use of Proceeds."

AMEX COMMON STOCK SYMBOL............ SCY

---------------

(1) Does not include up to 800,000 shares to be issued by the Company and up to
100,000 shares to be sold on a pro rata basis by certain stockholders upon
exercise of the Underwriter's over-allotment option (see "Underwriting" and
"Principal and Selling Stockholders").

(2) Does not include 1,038,000 additional shares reserved for issuance under the
Company's employee and director stock plans at December 31, 1997 under which
there were outstanding options to purchase 642,500 shares at a weighted-
average exercise price of $3.77 per share. Options were exercised for 2,667
shares subsequent to December 31, 1997. Also does not include 159,081 shares
reserved for issuance on December 31, 1998, as consideration for the four
Spectrum Clubs acquired from Racquetball World (see "The Company").

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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA AND OTHER DATA)

The following summary consolidated financial and other data of the Company
are as of the end of and for each of the years in the three-year period ended
December 31, 1997, and are derived from the audited consolidated financial
statements of the Company. The information contained in this table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's historical consolidated
financial statements, including the notes thereto, appearing elsewhere herein.

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YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
STATEMENT OF INCOME DATA: ------- ------- -------

Revenues.................................................... $34,659 $36,918 $61,154
Operating expenses:
Direct.................................................... 21,730 22,989 43,517
Selling, general and administrative....................... 5,486 6,052 6,607
Depreciation and amortization............................. 2,775 2,490 3,919
------- ------- -------
Total operating expenses............................... 29,991 31,531 54,043
------- ------- -------
Income from operations................................. 4,668 5,387 7,111
Other Income (expense):
Interest.................................................. (2,600) (2,682) (3,206)
Minority interests........................................ (150) (150) (22)
Equity interest in net income of unconsolidated
subsidiaries........................................... 860 631 696
Non-recurring items....................................... -- (300) (2,025)
------- ------- -------
Total other income (expense)........................... (1,890) (2,501) (4,557)
------- ------- -------
Income before income taxes............................. 2,778 2,886 2,554
Provision for income taxes.................................. 1,139 1,183 1,014
------- ------- -------
Net income................................................ $ 1,639 $ 1,703 $ 1,540
======= ======= =======
Net income per share:
Basic..................................................... $ 0.14 $ 0.15 $ 0.12
======= ======= =======
Diluted................................................... $ 0.14 $ 0.15 $ 0.12
======= ======= =======
Net income per share before non-recurring items (Basic and
Diluted).................................................. $ 0.14 $ 0.17 $ 0.22
======= ======= =======
Weighted-average number of common shares outstanding:
Basic(1).................................................. 11,353 11,355 12,524
======= ======= =======
Diluted(1)................................................ 11,357 11,360 12,683
======= ======= =======
OTHER DATA:
Total Clubs operated at end of period....................... 8 8 14
Average membership during the period........................ 42,368 45,219 51,038
Members at end of period.................................... 44,114 45,220 75,269

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AT DECEMBER 31, 1997
--------------------------
ACTUAL AS ADJUSTED (2)
BALANCE SHEET DATA: -------- ---------------

Cash and cash equivalents................................... $ 1,581 $ 14,020
Property, plant and equipment............................... 106,791 106,791
Total assets................................................ 131,561 143,700
Long-term debt, including current installments.............. 50,798 20,887
Stockholders' equity........................................ 58,477 101,705

---------------

(1) Does not include up to 159,081 shares reserved for issuance on December 31,
1998, as consideration for the acquisition of the Spectrum Clubs acquired
from Racquetball World (see "The Company").
(2) As adjusted to give effect to the issuance and sale of the Common Stock
offered hereby at the public offering price of $8.00 per share, and the
application of the estimated net proceeds as set forth under "Use of
Proceeds."

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RISK FACTORS

An investment in the Common Stock involves a high degree of risk.
Prospective purchasers of the Common Stock offered hereby should consider the
following risk factors, in addition to the other information set forth in this
Prospectus, before purchasing any Common Stock. Certain information contained in
this Prospectus constitutes "forward-looking" statements, which statements can
be identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate" or "continue" or the negative thereof or
other variations thereon or comparable terminology. The following factors
constitute cautionary statements identifying important factors, including
certain risks and uncertainties with respect to such forward-looking statements
that could cause actual results to differ materially from those reflected in
such forward-looking statements.

ATTRACTION AND RETENTION OF MEMBERS

The Company's profitability is dependent on its ability to attract and
maintain its membership levels at its Clubs, and there can be no assurance that
it will be successful in these efforts, or that the membership levels at one or
more of its Clubs will not decline. There are numerous factors that could lead
to a decline in membership levels or that could prevent the Company from
increasing its membership at newer Clubs (at which membership is generally not
yet at a mature level), including the public image of the Clubs, the ability of
the Clubs to deliver quality service at a competitive cost, the presence of
direct and indirect competition in the areas in which the Clubs are located, the
public's interest in Clubs and general economic conditions. In addition, from
time to time the Company may close a Club and attempt to move members of such
Club to a different Club or may have to temporarily relocate members if a Club
is closed for remodeling or due to fire, earthquake or other casualty. In such
cases, the inability of the Company to successfully transfer and retain members
will lead to an overall membership decline. Additionally, conditions in the
markets in which the Company operates may limit the Company's ability to
maintain or increase membership pricing without a material loss in membership.
As a result of these factors, there can be no assurance that the Clubs'
membership levels will be adequate to maintain or permit the expansion of their
operations.

ABILITY TO DEVELOP AND ACQUIRE ADDITIONAL CLUBS

The Company's strategy is to develop and acquire premier Clubs in order to
respond to the public's demand for a wide variety of sports, fitness and social
activities. However, there can be no assurance that such new Clubs will be
developed or acquired. The successful development of new Clubs will depend on
various factors, including the ability of the Company to obtain financing, the
availability of suitable sites for Clubs, the ability of the Company to
successfully negotiate satisfactory lease and other contracts and to meet
construction schedules and budgets, and the degree to which the Company can
attract members to the newly developed Clubs. The successful acquisition of new
Clubs will depend on similar factors, including the ability of the Company to
obtain financing, the competitive environment for acquisitions, the ability of
the Company to improve operations or other aspects of the Clubs, and the ability
of the Club to retain existing and attract new members, which will depend upon
the degree to which existing and potential members are receptive to the
Company's policies, including higher membership fees. As a result of the
foregoing, there can be no assurance that the Company will be able to develop or
otherwise acquire any particular Club, that it will be able to expand into areas
which it has targeted or that the Company's expansion will not adversely affect
its operations. Additionally, recently-opened Clubs which have not yet achieved
maturity generally operate at a loss or at only a slight profit during their
first years of operation as a result of fixed expenses which, together with
variable operating expenses, approximate or exceed membership fees and other
revenues. The various risks associated with the Company's development and
acquisition of Clubs and uncertainties regarding the profitability of such
operations could have a material adverse effect on the Company's financial
condition and results of operations. Currently, the Company is in the process of
integrating the operation of four Spectrum Clubs acquired in December 1997. See
"The Company."

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NEED FOR ADDITIONAL FINANCING

Expansion of the Company's operations through the development and
acquisition of additional Clubs will require substantial amounts of capital. The
Company's existing credit facility terminates 60 days following the Offering;
the Company is in the process of negotiating to renew, extend or replace its
existing credit facility. There can be no assurance that such credit facility
will be renewed, extended or replaced in a timely manner, if at all. The
availability of financing may affect the Company's ability to expand. To finance
expansion, the Company may seek additional borrowings, and may seek further
equity investments. The Company will also consider entering into joint venture
and partnership agreements for the purpose of developing new Clubs. There can be
no assurance that funds for such expansion, whether from equity or debt
financings or other sources, will be available or, if available, will be on
terms satisfactory to the Company. The Company's future growth may be limited if
it is unable to complete either the development or acquisition of new Clubs due
to a lack of satisfactory financing alternatives, which would have a material
adverse effect on the Company.

RISKS INVOLVED IN DEVELOPMENT ACTIVITIES THROUGH PARTNERSHIPS AND JOINT VENTURES

The Company owns interests in the Spectrum Club/Manhattan Beach and the
Reebok Sports Club/NY in partnership with other investors, and has entered, and
may continue to enter, into similar partnership or joint venture arrangements in
the future. Partnership and joint venture developments may, under certain
circumstances, present certain risks to the Company, including the possibility
that the Company's partners or co-venturers might become bankrupt and that such
partners or co-venturers might have economic or other business interests or
objectives that are inconsistent with the Company's interests or objectives.
Such partners or co-venturers may also be in a position to take actions contrary
to the Company's interests and objectives and cause delays or impasses which may
prevent the Company from implementing business decisions with respect to the
partnerships and joint ventures. These risks are heightened in Clubs (such as
the Spectrum Club/ Manhattan Beach and the Reebok Sports Club/NY) where the
Company's partners may, under certain circumstances, have the right to assert
control over the day-to-day operations of the Clubs. In addition, the Company's
agreements relating to the Reebok Sports Club/NY prohibit the Company from
opening or engaging in pre-sale activities relating to a sports and fitness Club
which exceeds 30,000 square feet prior to June 1999 in New York City or within a
10 mile radius of the Reebok Sports Club/NY. There can be no assurance that the
foregoing factors will not have a material adverse effect on the Company's
results of operation and financial condition.

RELATIONSHIP WITH MILLENNIUM; CONFLICTS OF INTEREST

Millennium Entertainment Partners, L.P., along with its affiliates
(collectively, "Millennium") is the second largest shareholder of the Company,
with 3,929,863 shares or 27.6% of the outstanding Common Stock. Additionally,
Millennium is a partner with the Company in the Reebok-Sports Club/ NY
partnership as well as the landlord of the building in which the Reebok Sports
Club/NY is located. In 1997, Millennium and the Company entered into leases with
respect to the development of two additional Sports Clubs in Washington, D.C.
and San Francisco, California, and are currently negotiating the terms of a
lease for an additional Sports Club in Boston, Massachusetts (see
"Business -- Acquisition and Development of Additional Clubs"). In addition, the
Company and Millennium entered into agreements in March 1998 pursuant to which
Millennium will acquire and develop or finance the acquisition and development
of sites for Sports Clubs in La Jolla, California and Houston, Texas. On June
11, 1997, the Company issued to Millennium 2,105,263 shares of Common Stock in
exchange for $10.0 million consisting of $5.0 million in cash and certain
interests of Millennium in the Reebok-Sports Club/NY partnership, including a
9.9% interest in the partnership and a $2.5 million promissory note issued by
the partnership. The Company also granted to Millennium certain registration and
preemptive rights, which preemptive rights have been waived with respect to the
Offering. In addition, the Company and certain of its shareholders have agreed
to cause a nominee of Millennium to be appointed or elected to the Board of
Directors of the Company; Brian J. Collins, an officer of Millennium, is
currently a member of the Company's Board of Directors

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as Millennium's nominee. On December 31, 1997, the Company sold to Millennium an
additional 625,000 shares of Common Stock for $5.0 million to fund the
acquisition of four Spectrum Clubs from Racquetball World. In addition,
Millennium provided a capital lease for two such Spectrum Clubs. Millennium has
the right to require the Company to purchase the property under certain
circumstances, including consummation of the Offering. Millennium has agreed to
waive this right with respect to the Offering. The Company intends to utilize a
portion of the proceeds of the Offering to repurchase such properties. In
addition, through its rights under its various agreements with the Company,
Millennium may have the ability to advance its economic or business interests or
objectives which may conflict with those of the Company and cause delays which
would not be in the Company's best interest. Any such conflict or delay could
have a material adverse effect on the Company's financial condition and results
of operations. See "Certain Transactions."

In addition, the Company has entered into an agreement with RM Sports Club,
Inc., an entity controlled by D. Michael Talla, the Company's Chairman and Chief
Executive Officer, and Rex A. Licklider, the Company's Vice-Chairman, relating
to the potential acquisition of a Club in New York City. Pursuant to such
agreement, RM Sports Club, Inc. intends to make a $1.0 million deposit to secure
the right to acquire the Club while the Company completes its review of the
acquisition, and has agreed to transfer its rights to the Company in exchange
for reimbursement of such deposit, without interest. In the event the Company
determines not to pursue such acquisition, RM Sports Club, Inc. will have the
right to transfer its rights to a third party.

CONTROL BY PRINCIPAL SHAREHOLDERS, OFFICERS AND DIRECTORS

Upon consummation of the Offering, the Company's principal shareholders,
officers, directors and their affiliates will beneficially own, in the
aggregate, approximately 50.2% of the outstanding shares of the Common Stock
(approximately 47.9% assuming the full exercise of the Underwriters'
over-allotment option). As a result, such persons, acting together, will
continue to have control over all matters requiring shareholder approval. The
concentration of ownership under certain circumstances could have the effect of
delaying or preventing a change in control of the Company.

DEPENDENCE ON SINGLE GEOGRAPHIC AREA

Although the Company is in the process of developing Clubs in other areas,
currently all operating Clubs other than the Reebok Sports Club/NY and The
Sports Club/Las Vegas are located in Southern California and thus the operating
results of the Company are susceptible to events in this area, including natural
disasters. All of the Clubs maintain comprehensive casualty, liability and
business interruption insurance and all Clubs located in California maintain
earthquake insurance. The Company believes that its insurance coverage is in
accordance with industry standards. There are, however, certain types of losses
which may be either uninsurable or not economically insurable. Accordingly,
there can be no assurance that any insurance proceeds will adequately compensate
for all economic consequences of any loss. Should an uninsured loss occur, the
Company could lose both its invested capital in a particular Club or Clubs and
its anticipated profits from such Club or Clubs. Any such event could have a
material adverse effect on the Company's financial condition and results of
operations.

COMPETITION

The sports and fitness industry is highly competitive. Despite recent
consolidation activities, the industry remains highly fragmented. Some of the
Company's competitors are significantly larger and have greater financial and
operating resources than the Company. In addition, a number of individual and
regional operators compete with the Company throughout the Company's existing
and targeted markets. These competitors compete with the Company both for
members and for acquisitions of other Clubs. The Company also competes with
recreational facilities established by governments and businesses, the YMCA and
YWCA, country clubs and weight-reducing salons, as well as products and services
that can be used in the home. Other entertainment and retail businesses also
compete with the Company for the discretionary income of its target market. The
Company believes that additional sports and fitness competitors will emerge in
the future, some of

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which may be larger and have greater financial and operating resources than the
Company. There can be no assurance that such competition will not have a
material adverse effect on the Company's financial condition and results of
operations.

HEALTH RISKS

Use of the Company's fitness Clubs poses some potential health risks to
members or guests through exertion and use of the Company's services and
facilities including exercise equipment. There can be no assurance that a claim
against the Company for death or an injury suffered by members or their guests
while exercising at a Club will not be asserted or that the Company would be
able to successfully defend any claim that might be asserted. The Company
currently maintains general liability coverage; however, there can be no
assurance that the Company will be able to maintain such liability insurance on
acceptable terms in the future or that such insurance will provide adequate
coverage against potential claims.

GOVERNMENT REGULATION

The operations and business practices of the Company are subject to
regulation at federal, state and, in some cases, local levels. General rules and
regulations of the Federal Trade Commission (the "FTC"), and of state and local
consumer protection agencies, and state statutes apply to the Company's
advertising, sales and other trade practices, including the sale of memberships
and the financing and collection of membership fees. Although the Company is not
aware of any proposed material changes in any such statutes, rules or
regulations, any changes could have a material adverse effect on the Company's
financial condition and results of operations.

STAFFING AND LABOR COSTS

The Company is dependent upon the available labor pool of semi and
unskilled employees. The Company is also subject to the Fair Labor Standards
Act, which governs such matters as a minimum wage, overtime and other working
conditions. A shortage in the labor pool or other general inflationary pressures
or changes in applicable laws and regulations could require the Company to
enhance its wage and benefits packages. There can be no assurance that the
Company's labor costs will not increase. Any increase in such costs could have a
material adverse effect on the Company's financial condition and results of
operations.

DEPENDENCE UPON KEY PERSONNEL

The Company is dependent upon the efforts and skills of its executive
officers, who have substantial experience in the sports and fitness club
industry. The loss of one or more of such officers could have a material adverse
impact on the Company's operations. In addition, the development and expansion
of the Company's business will require additional experienced management and
operations personnel. No assurance can be given that such employees will be
available to, or can be retained by, the Company.

CERTAIN ANTI-TAKEOVER CHARTER PROVISIONS AND EFFECTS OF DELAWARE LAW; CLASSIFIED
BOARD MAY DELAY OR PREVENT CORPORATE TAKE-OVER

The Company is subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law, which may have the effect of deterring
hostile takeovers or delaying changes in control of the Company. The Company
also has a classified Board of Directors such that less than a majority of the
members of the Board are elected at each annual meeting of shareholders.
Classified boards may have the effect of delaying, deferring or discouraging
changes in control of the Company. In addition, the Board of Directors has
authority to issue up to 1,000,000 shares of Preferred Stock and to fix the
rights, preferences, privileges and restrictions, including voting rights, of
these shares without any further vote or action by the stockholders. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any such Preferred Stock that may be issued in
the future. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes,
7

424B2 10th Page of 74 TOC 1st Previous Next ↓Bottom Just 10th

could have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company, thereby delaying,
deferring or preventing a change in control of the Company. In addition, such
Preferred Stock may have other rights, including economic rights, senior to the
Common Stock, and as a result, the issuance thereof could have a material
adverse effect on the market value of the Common Stock. Furthermore, certain
provisions of Delaware law could delay or make more difficult a merger, tender
offer or proxy contest involving the Company.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of shares of Common Stock in the public market
following the Offering could have an adverse effect on the market value of the
Common Stock. Upon completion of the Offering, the Company will have outstanding
20,221,312 shares of Common Stock, or 21,021,312 shares if the Underwriters'
over-allotment option is exercised in full. Of these shares, all of the Common
Stock being sold hereby and 11,200,691 shares held by existing stockholders
will, subject to the agreements described below, be freely tradeable (unless
such shares are held by an "affiliate" of the Company as such term is defined in
the Securities Act of 1933, as amended (the "Securities Act"), without
restriction or registration under the Securities Act. The remaining 3,020,621
shares were issued and sold by the Company in private transactions ("Restricted
Shares") and are eligible for public sale only if registered under the
Securities Act or sold in accordance with Rule 144 thereunder. 2,395,621 of
these shares have been registered for public sale under the Securities Act. The
Company has reserved 1,035,333 shares of Common Stock for issuance under the
1994 Stock Incentive Plan and the 1994 Stock Compensation Plan, options to
purchase 637,833 shares of which are outstanding. The Company and its officers,
directors and certain shareholders owning an aggregate of 9,998,597 shares of
Common Stock and options to acquire 385,000 shares of Common Stock have agreed
with Schroder & Co. Inc. not to, directly or indirectly, sell or otherwise
transfer any interest in the Common Stock for a period of 90 days following the
Offering without the consent of Schroder & Co. Inc. Schroder & Co. Inc. may, in
its sole discretion and at any time without notice, allow the sale of all or any
portion of such Common Stock. No predictions can be made as to the effect, if
any, that market sales of Common Stock or the availability of Common Stock for
sale will have on the market price prevailing from time to time. Sale of a
substantial number of shares of Common Stock in the public market following the
Offering could have an adverse effect on the market value of the Common Stock.
See "Shares Eligible for Future Sale."

VOLATILITY OF PRICE OF COMMON STOCK

The market price of the securities offered hereby could be subject to
significant fluctuations in response to various factors and events, including
the liquidity of the market for securities offered hereby, variations in the
Company's operating results or the operating results of other sports and fitness
companies, changes in general conditions in the economy, the sports and fitness
industry, or other developments affecting the Company, its competitors or the
financial markets, could cause the market price of the Common Stock to fluctuate
significantly. In addition, the stock market has recently experienced broad
price and volume fluctuations that have often been unrelated to the operating
performance of particular companies. These market fluctuations could have an
adverse effect on the market value of the Common Stock. See "Price Range of
Common Stock and Related Matters."

DIVIDEND POLICY

The Company has never declared or paid any dividends on its Common Stock
and does not anticipate that it will do so in the foreseeable future. It is the
Company's present policy to retain earnings for use in its operations and the
expansion of its business. In addition, the Company's ability to pay cash
dividends is limited by its current financing agreements and may be similarly
limited by future financing agreements.

424B2 11th Page of 74 TOC 1st Previous Next ↓Bottom Just 11th

THE COMPANY

The Sports Club Company, Inc. (the "Company") operates sports and fitness
clubs ("Clubs"), primarily under the "Sports Club" and "Spectrum Club" names.
The Company currently owns interests in 14 Clubs. The Company's strategy is to
develop and acquire multi-amenity Clubs complementary to existing Sports Clubs
and Spectrum Clubs and to develop and implement new programs at existing Clubs
to expand membership and increase revenues. In 1997, the Company acquired and
developed the Clubs described below:

Racquetball World Acquisition. In December 1997, the Company acquired four
Spectrum Clubs from Racquetball World for a total purchase price of
approximately $19.4 million, consisting of $6.0 million in cash, $10.0 million
in capital lease financing from Millennium, the assumption of $2.0 million of
debt and the agreement to issue to the Sellers up to 159,081 shares of Common
Stock (the shares of Common Stock will be issued to Sellers on December 31,
1998, and are subject to reduction if certain liabilities of the Clubs exceed
agreed-upon amounts). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Certain Transactions."

The buildings in which the four Clubs are situated consist of approximately
323,000 square feet, and reported gross revenues of approximately $8.9 million
during the 12 months ended September 30, 1997. The Company expects to spend
approximately $4.0 million over the next 12 months in order to renovate the
Clubs and $2.0 million for new equipment at the Clubs. The Company is
introducing various fitness programs and services typically offered at Spectrum
Clubs, and is evaluating the introduction of spa and physical therapy services
at the Clubs. The Company intends to initiate increases in membership fees in
conjunction with making the foregoing improvements. The foregoing changes are
designed to attract and retain members at these facilities, and to increase
revenues both from membership fees and auxiliary services.

The Sports Club/Las Vegas. The Company acquired The Sports Club/Las Vegas
in August 1997 for a total purchase price of approximately $6.7 million
consisting of approximately $4.3 million in cash, $750,000 in equipment
financing and the issuance of 290,358 shares of Common Stock. The Club, located
in Henderson, Nevada (approximately three miles east of the Las Vegas airport),
consists of a 136,000 square foot facility and offers members services
comparable to other Sports Clubs. This Club reported revenues of $5.6 million
during the 12 months ended December 31, 1997. The Company has implemented a
capital improvement plan at this Club totalling approximately $1.0 million to
expand the fitness areas, upgrade the locker facilities and purchase new
equipment. The Company also plans to enhance revenues at this facility by
directly providing certain services, including private training, pro shop and
spa, that were previously contracted out to third parties. The foregoing changes
are designed to attract and retain members at these facilities, and to increase
revenues both from membership fees and auxiliary services.

Spectrum Club/Valencia. In July 1997, the Company completed development and
opened the Spectrum Club/Valencia. This 57,000 square foot Club is situated in a
fast-growing, affluent community north of Los Angeles. The Club was developed at
a cost to the Company of approximately $4.0 million and opened with 3,527
members, a figure which had increased to 5,443 at January 31, 1998. The Club
provides facilities and other services comparable to other Spectrum Clubs. The
Company has developed specific programming to accommodate the needs of this
suburban community and will soon expand this Club and add additional programming
focused on youth and teen activities.

Additional Acquisitions and Developments. As discussed in
"Business -- Acquisition and Development of Additional Clubs," the Company is
currently developing additional Sports Clubs and Spectrum Clubs in California,
Massachusetts, New York, Texas, and Washington, D.C.

The Company's executive offices are located at 11100 Santa Monica
Boulevard, Suite 300, Los Angeles, California 90025, and its telephone number is
310-479-5200.

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USE OF PROCEEDS

The net proceeds of the Offering (after deducting discounts, commissions,
estimated fees and other expenses in connection with the Offering) are estimated
to be approximately $45.2 million (or approximately $51.2 million if the
Underwriters' over-allotment is exercised in full). Such proceeds will be used
to (i) retire existing indebtedness and (ii) for general corporate purposes,
which may include the development and acquisition of Clubs. Except as described
herein, the Company currently has no binding agreement or understanding with
respect to any future acquisition. Pending the uses outlined in this table, the
Company will invest the net proceeds in short-term investment-grade, interest
bearing securities. The Company is currently in the process of negotiating to
renew, extend or replace its credit facility which terminates sixty days
following the consummation of the Offering. Until the Company has in place such
facility, the Company may delay payment of one or more of the obligations
described below. In the event that the Company is unable to renew, extend or
replace its credit facility on acceptable terms, the Company may elect not to
repay the Spectrum Club/Agoura Hills note and will instead use the funds for
general corporate purposes.

The following table summarizes the uses of the proceeds (amounts shown are
in millions):

[Download Table]

Prepay The Sports Club/LA note(1)........................... $25.0
Repay credit facility(2).................................... 11.4
Prepay Spectrum Club/Agoura Hills note(3)................... 2.5
General corporate purposes.................................. 6.3

---------------
(1) Prepayment of all outstanding obligations under the note between AT&T
Commercial Finance Corporation ("AT&T") and L.A./Irvine Sports Clubs, Ltd.
("The Sports Club/LA Note"), currently estimated to be approximately $22.2
million, plus a prepayment fee of approximately $2.8 million. The Sports
Club/LA Note bears interest at a rate per annum equal to 10.63% and requires
monthly installment payments of approximately $262,000 with the remaining
principal balance of approximately $17.5 million due and payable on April 1,
2003. The Sports Club/LA Note may be extended by the Company for a period of
five years under certain circumstances. The Sports Club/LA Note is not
subject to prepayment until April 1, 2000; however, AT&T has agreed to
permit the Company to prepay the loan on or before April 30, 1998 provided
it pays a prepayment fee estimated to be approximately $2.8 million. The
Sports Club/LA Note is secured by The Sports Club/LA.

(2) Payment of all amounts outstanding under the Company's credit facility in
the amount of $15.0 million. On December 31, 1997, approximately $5.0
million was outstanding under this facility. On April 1, 1998, the amount
outstanding on this facility was approximately $11.4 million. The advances
under the credit facility have been used by the Company to develop Clubs and
to provide working capital. The Company may borrow funds under this facility
until the earlier of June 30, 1998 or consummation of certain financing
transactions by the Company, including the Offering; provided that, with
respect to the Offering, the Bank has agreed that the facility will not
terminate until 60 days following consummation of the Offering. Upon
consummation of such a financing transaction, the facility is due and
payable in full; otherwise, the Company will be required to make monthly
payments of $250,000 beginning July 1, 1998, with all remaining amounts
becoming due and payable on October 30, 1998. Advances under the facility
bear interest at a variable rate equal to LIBOR plus 2 1/2% or the lender's
prime rate plus 1/2%. At February 25, 1998, the advances accrued interest
at the weighted-average rate of 8.33% per annum.

(3) Prepayment of all outstanding obligations under a note between Hawthorne
Savings and Loan Association and the Company. The note bears interest at a
rate per annum equal to 8.5%. The principal is payable in monthly payments
of approximately $20,000 with a final maturity in April 2024. This note is
secured by the Spectrum Club/Agoura Hills.

424B2 13th Page of 74 TOC 1st Previous Next ↓Bottom Just 13th

PRICE RANGE OF COMMON STOCK AND RELATED MATTERS

The Common Stock is traded on the AMEX under the symbol "SCY." The
following table sets forth the quarterly high and low sale prices for the Common
Stock for the periods indicated, as reported by the AMEX.

[Download Table]

PRICE RANGE OF
COMMON STOCK
-----------------
CALENDAR QUARTER HIGH LOW
---------------- ------ -------

Year Ended December 31, 1996:
First Quarter............................................. $3.375 $ 2.125
Second Quarter............................................ 3.250 2.438
Third Quarter............................................. 3.375 2.313
Fourth Quarter............................................ 3.375 2.375
Year Ended December 31, 1997:
First Quarter............................................. 5.125 2.625
Second Quarter............................................ 5.375 4.125
Third Quarter............................................. 8.875 5.250
Fourth Quarter............................................ 9.500 7.750
Year Ending December 31, 1998:
First Quarter............................................. 9.250 8.250
Second Quarter (through April 1).......................... 9.250 8.938

As of March 25, 1998, there were 48 stockholders of record of the Company's
Common Stock. As of April 1, 1998, the closing price of the Common Stock, as
reported by AMEX, was $8.9375.

DIVIDEND POLICY

424B2 14th Page of 74 TOC 1st Previous Next ↓Bottom Just 14th

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
December 31, 1997, and as adjusted to give effect to the Offering and the
application of the estimated net proceeds therefrom. See "Use of Proceeds." This
table should be read in conjunction with the consolidated financial statements,
and the related notes thereto, included elsewhere herein.

[Enlarge/Download Table]

AT DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- ------------
(IN THOUSANDS)

Current installments of notes payable and capitalized lease
obligations, including notes payable to bank (1).......... $ 7,975 $ 2,176
======== ============
Notes payable and capitalized lease obligations, less
current installments...................................... $ 42,823 $ 18,711
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; no shares issued or outstanding............ -- --
Common Stock, $.01 par value, 40,000,000 shares
authorized; 14,382,621 shares issued and outstanding at
December 31, 1997; 20,382,621 shares issued and
outstanding as adjusted for the Offering(2)............ 144 204
Additional paid-in capital................................ 53,613 98,703
Retained earnings......................................... 5,674 3,752(3)
Less: Treasury stock, at cost, 163,976 shares............. (954) (954)
-------- ------------
Total shareholders' equity........................ 58,477 101,705
-------- ------------
Total capitalization.............................. $101,300 $ 120,416
======== ============

---------------
(1) As of December 31, 1997, the Company had approximately $5.0 million
outstanding under its bank credit facility. On April 1, 1998, approximately
$11.4 million was outstanding under such facility.
(2) Does not include up to 159,081 shares reserved for issuance on December 31,
1998, as consideration for the acquisition of the Spectrum Clubs acquired
from Racquetball World (see "The Company"). Also does not include 1,038,000
additional shares reserved for issuance under the Company's employee and
director stock plans under which there were outstanding on December 31,
1997, options to purchase 642,500 shares at a weighted-average exercise
price of $3.77 per share.
(3) Gives effect to the write-off of deferred financing costs equal to $300,000
and prepayment fees of approximately $2.8 million relating to repayment of
indebtedness with the net proceeds of the Offering, net of income tax
benefit.

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SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The selected consolidated financial data presented below under the captions
"Statement of Income Data" and "Balance Sheet Data" are as of the end of and for
each of the years in the five-year period ended December 31, 1997, and are
derived from the consolidated financial statements of the Company. The
information contained in this table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's historical consolidated financial statements,
including the notes thereto, appearing elsewhere herein.

[Enlarge/Download Table]

YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993(2) 1994 1995 1996 1997
------- ------- ------- ------- -------

STATEMENT OF INCOME DATA:
Revenues.................................................. $13,195 $18,846 $34,659 $36,918 $61,154
Operating expenses:
Direct.................................................. 6,456 10,525 21,730 22,989 43,517
Selling, general and administrative..................... 3,247 3,166 5,486 6,052 6,607
Depreciation and amortization........................... 1,546 1,510 2,775 2,490 3,919
------- ------- ------- ------- -------
Total operating expenses......................... 11,249 15,201 29,991 31,531 54,043
------- ------- ------- ------- -------
Income from operations(1)........................... 1,946 3,645 4,668 5,387 7,111
Other income(expense):
Interest................................................ (538) (1,213) (2,600) (2,682) (3,206)
Minority interests...................................... -- (29) (150) (150) (22)
Equity interest in net income of unconsolidated
subsidiaries.......................................... 212 641 860 631 696
Non-recurring items..................................... -- -- -- (300) (2,025)
------- ------- ------- ------- -------
Total other income (expense)..................... (326) (601) (1,890) (2,501) (4,557)
------- ------- ------- ------- -------
Income before income taxes(1)....................... 1,620 3,044 2,778 2,886 2,554
Provision for income taxes(1)............................. 645 1,244 1,139 1,183 1,014
------- ------- ------- ------- -------
Net income....................................... $ 975 $ 1,800 $ 1,639 $ 1,703 $ 1,540
======= ======= ======= ======= =======
Net income per share:

Basic................................................... $ 0.14 $ 0.23 $ 0.14 $ 0.15 $ 0.12
======= ======= ======= ======= =======
Diluted................................................. $ 0.14 $ 0.23 $ 0.14 $ 0.15 $ 0.12
======= ======= ======= ======= =======
Net income per share before non-recurring items (Basic and
Diluted)................................................ $ 0.14 $ 0.23 $ 0.14 $ 0.17 $ 0.22
======= ======= ======= ======= =======
Weighted-average number of common shares outstanding:
Basic................................................... 6,850 7,836 11,353 11,355 12,524
======= ======= ======= ======= =======
Diluted(3).............................................. 6,850 7,836 11,357 11,360 12,683
======= ======= ======= ======= =======

[Enlarge/Download Table]

AT DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------

BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 209 $ 5,042 $ 1,545 $ 4,146 $ 1,581
Current assets........................................... 2,478 7,398 7,147 7,341 4,926
Property and equipment, net.............................. 2,794 59,811 59,956 72,736 106,791
Total assets............................................. 11,561 81,676 83,161 95,697 131,561
Deferred membership revenue.............................. 2,503 5,878 5,614 7,481 9,936
Current liabilities...................................... 5,480 11,194 11,355 14,159 26,844
Long-term debt including current installments............ 4,818 33,489 32,913 38,497 50,798
Shareholders'/Owners' equity............................. 2,780 37,823 39,491 41,202 58,477

---------------
(1) Prior to October 20, 1994, the Company operated through various partnerships
and corporations. Historical data for periods through October 20, 1994, have
been adjusted to reflect compensation and tax provisions as if the Company
had operated as a corporation during such period.
(2) Effective March 1, 1993, the Company entered into a joint venture management
agreement relating to the operation of the Sports Connections. As a result
of this agreement, the Company's expenses with respect to these Clubs were
substantially eliminated, though the Company continued to receive revenues,
through 1995, from memberships sold prior to the date of the transaction.
Therefore, the results of operations for the year ended December 31, 1993
are not comparable to future periods.
(3) Does not include up to 159,081 shares to be issued on December 31, 1998, as
consideration for the acquisition of the Spectrum Clubs acquired from
Racquetball World.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere herein.
The Reebok Sports Club/NY was accounted for under the equity method of
accounting until December 30, 1996, at which time the Company acquired a
majority interest in the Club and, as a result, the operations of the Reebok
Sports Club/ NY were consolidated with those of the Company. The Spectrum
Club/Manhattan Beach is accounted for under the equity method of accounting.

In July 1997, the Company opened the Spectrum Club/Valencia and, in August
1997, acquired a Club located in Henderson, Nevada which is operated as The
Sports Club/Las Vegas in a transaction accounted for as a purchase. On December
31, 1997, the Company acquired four Clubs from Racquetball World in a
transaction accounted for as a purchase; these Clubs are located in Southern
California and are now operated as Spectrum Clubs. Seasonal factors have not had
a significant effect on the Company's operating results.

RESULTS OF OPERATIONS

Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996

Revenues for the year ended December 31, 1997, were $61.2 million, compared
to $36.9 million for 1996, an increase of $24.3 million or 65.9%. An increase of
$18.1 million resulted from the inclusion of revenues of the Reebok Sports
Club/NY, which was consolidated into the Company following the acquisition of a
majority interest in the Club on December 30, 1996. An increase of $1.6 million
resulted from the opening of the Spectrum Club/Valencia, an increase of $2.2
million resulted from the acquisition of The Sports Club/Las Vegas and an
increase of $900,000 resulted from growth at the remaining Clubs. An increase of
$1.5 million in revenues from The SportsMed Company Inc. ("SportsMed") also
contributed to the overall increase.

Direct operating expenses increased to $43.5 million for the year ended
December 31, 1997, compared to $23.0 million for 1996. The increase resulted
primarily from the inclusion of operating expenses at the Reebok Sports Club/NY
as well as the opening of the Spectrum Club/Valencia and the acquisition of The
Sports Club/Las Vegas. Direct operating expenses as a percentage of revenues
increased to 71.2% for 1997 compared to 62.3% for 1996 due to lower margins at
the Reebok Sports Club/NY and the Spectrum Club/Valencia. Newly developed Clubs
historically operate at lower margins due to various fixed expenses such as
rent, utilities and certain payroll costs until the membership base reaches a
mature level. Similarly, newly acquired Clubs may also perform at lower margins
prior to and during implementation of new policies and programs.

Selling, general and administrative expenses were $6.6 million for the year
ended December 31, 1997, compared to $6.1 million for 1996. Selling costs
increased approximately $211,000 due to the consolidation of direct selling
expenses incurred at the Reebok Sports Club/NY, the opening of the Spectrum
Club/Valencia and the acquisition of The Sports Club/Las Vegas. General and
administrative costs increased by approximately $300,000 due to increases in
corporate overhead and the addition of personnel to accommodate new Clubs.
Selling, general and administrative costs decreased as a percentage of revenue
from 16.4% for 1996 to 10.8% for 1997. This percentage decrease resulted from
the consolidation of the Reebok Sports Club/NY revenues without a corresponding
increase in general and administrative costs because the Company managed the
Club prior to the consolidation.

Depreciation and amortization expenses were $3.9 million for the year ended
December 31, 1997, compared to $2.5 million for 1996. The increase is due
primarily to the consolidation of the Reebok Sports Club/NY, the opening of the
Spectrum Club/Valencia and the acquisition of The

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Sports Club/Las Vegas. Interest expense was $3.2 million in the year ended
December 31, 1997, compared to $2.7 million for 1996. Interest expense of
$340,000 at the Reebok Sports Club/NY and interest on new capital lease
financings was partially offset by increased interest income due to more
available cash for investment and lower interest expenses as other indebtedness
matured.

Equity interest in net income of unconsolidated subsidiary was $696,000 for
1997 compared to $631,000 for 1996. These amounts are associated with the
Spectrum Club/Manhattan Beach's operations and the increase reflects the
Company's share of the improved profitability at that Club. Equity in the
operations of the Reebok Sports Club/NY was not significant for 1996.

The Company's net income before income taxes and non-recurring items was
$4.6 million for the year ended December 31, 1997 compared to $3.2 million for
1996. Non-recurring items for 1997 consisted of litigation settlement costs of
$2.0 million, paid to Century Entertainment Center, L.P., relating to the
closing of the Century City Spectrum Club in July 1995. Non-recurring items for
1996 consisted of a loss of $300,000 recognized on the sale of five Sports
Connection Clubs.

The Company's estimated income tax rate was 38% for the year ended December
31, 1997, and 41% for 1996, resulting in net income of $1.5 million for the year
ended December 31, 1997, compared to net income of $1.7 million in 1996. After
tax net income before non-recurring items was $2.8 million for 1997, compared to
$1.9 million for 1996. The lower tax rate for 1997 resulted from the reduction
of valuation allowances on certain deferred income tax assets. Basic and diluted
earnings per share were $.12 and $.15 for the years ended December 31, 1997 and
1996, respectively. Basic and diluted earnings per share excluding nonrecurring
items were $.22 and $.17 for the years ended December 31, 1997 and 1996,
respectively.

Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995

Revenues for the year ended December 31, 1996 were $36.9 million, compared
to $34.7 million for 1995, an increase of $2.2 million or 6.3%. Revenues
increased by $289,000 as a result of greater management fees earned from the
Reebok Sports Club/NY, which opened in April 1995, by $359,000 as a result of
increased revenues from SportsMed and by $2.9 million as a result of higher
membership dues and increased ancillary revenues at existing Clubs. These
increases were partially offset by a decrease in revenues resulting from the
closure of the Spectrum Club/Century City in July 1995.

Direct operating expenses increased to $23.0 million for 1996 compared to
$21.7 million for 1995, an increase of $1.3 million, or 6.0%. SportsMed, which
was acquired on November 30, 1995, was responsible for an increase in direct
costs of $442,000, while Club operating expenses increased $858,000. Direct
operating expenses as a percentage of revenues decreased to 62.3% for 1996
compared to 62.7% for 1995. Direct operating costs without those costs
associated with SportsMed were 61.7% of revenue for 1996.

Selling, general and administrative expenses were $6.1 million for 1996
compared to $5.5 million for 1995, an increase of $600,000, or 10.9%. SportsMed
was responsible for an increase in selling, general and administrative costs of
$519,000 in 1996. The remaining increase was due to increases in corporate
overhead. As a percentage of revenues, selling, general and administrative
expenses were 16.4% for 1996 compared to 15.8% for 1995. Selling, general and
administrative expenses without those costs associated with SportsMed were 14.8%
of revenue for 1996.

Depreciation and amortization expense was $2.5 million for 1996 compared to
$2.8 million for 1995, a decrease of $300,000, or 10.7%. This decrease was
primarily due to the sale of five Sports Connection Clubs in 1996. Interest
expense was $2.7 million for 1996 compared to $2.6 million for 1995.

In 1996, equity interest in net income of unconsolidated subsidiaries was
$631,000 compared to $860,000 in 1995. The Company did not record any income
from the Sports Connections for 1996 compared to $437,000 for 1995. The 1996
amounts and $443,000 in 1995 are associated primarily
15

424B2 18th Page of 74 TOC 1st Previous Next ↓Bottom Just 18th

with the Spectrum Club/Manhattan Beach's operations. Equity in the operations of
the Reebok Sports Club/NY was not significant during these periods.

Non-recurring items in 1996 included a $300,000 loss resulting from the
sale of five Sports Connection Clubs.

The Company's estimated income tax rate was 41% for the year ended December
31, 1996 and 1995, resulting in net income of $1.7 million for the year ended
December 31, 1996 compared to net income of $1.6 million for 1995. Basic and
diluted earnings per share were $.15 and $.14 for the year ended December 31,
1996 and 1995, respectively. Basic and diluted earnings per share excluding
non-recurring items were $.17 and $.14 for the years ended December 31, 1996 and
1995, respectively.

LIQUIDITY AND CAPITAL RESOURCES

During the years ended December 31, 1997 and 1996, the Company generated
$4.5 million and $3.6 million of cash from operating activities, respectively.
At December 31, 1997, the Company had a cash balance of $1.6 million of which
$417,000 was held by the Reebok-Sports Club/NY partnership. The remaining $1.2
million was available for general corporate purposes.

On January 29, 1997, the Company instituted a stock repurchase program to
repurchase up to $3.0 million of the outstanding Common Stock. Pursuant to this
program, which was terminated in February 1998, the Company repurchased 184,766
shares of Common Stock at an aggregate cost of approximately $1.0 million or a
weighted-average price of approximately $5.58 per share.

In connection with the 1994 acquisition of The Sports Club/Irvine, the
seller agreed to pay the Company for each of the years ending December 31, 1994,
1995 and 1996, the lesser of approximately $1.0 million or the amount by which
The Sports Club/Irvine's earnings before depreciation and the Company's
administrative overhead relating to the Club for such year was less than
approximately $2.9 million. The Company received $500,000 in 1997 relating to
the 1996 shortfall. No further amounts will be received from the seller.

In June 1997, the Company issued 2,105,263 shares of its Common Stock to
Millennium in exchange for $5.0 million in cash and certain interests of
Millennium in the Reebok-Sports Club/NY partnership, including a 9.9% ownership
interest in and a $2.5 million note receivable from the partnership. The Company
currently owns a 60% interest in the Reebok-Sports Club/NY partnership. At
December 31, 1997, the Reebok-Sports Club/NY partnership had outstanding notes
payable of $2.6 million to a third party under a loan secured by equipment and
$3.6 million to the Company, which note is eliminated when presenting the
Company's December 31, 1997 consolidated balance sheet. The Reebok-Sports
Club/NY partnership achieved a positive operating cash flow in September 1995
and has improved its operations since that date. The Club is expected to
continue to improve its operating results in the future as membership levels
increase (although there can be no assurance when, if ever, such increases may
occur). The Reebok-Sports Club/NY partnership is required to pay $900,000 per
year to repay an equipment loan and $2.0 million per year to Millennium as rent.
Available cash flows of the Reebok-Sports Club/NY partnership will then be used
as follows: (i) $3.0 million per year will be used to pay to Millennium a
priority distribution, which is accounted for by the Company as additional rent
expense; and (ii) remaining cash will be distributed to the Company to satisfy
the note payable, accrued management fees and certain additional priority
distributions, which at December 31, 1997, aggregated $15.4 million. After these
amounts plus interest thereon, are paid, the Company is entitled to 60% of
future cash distributions.

In July 1997, the Company opened the 57,000 square foot Spectrum
Club/Valencia. The Company's investment in the property and equipment at this
Club was approximately $4.0 million, of which $1.0 million was obtained by
equipment financing. Amounts borrowed by the Company pursuant to this financing
arrangement are generally repayable in monthly installments over five years,
with effective interest rates ranging between 8% and 10% per annum.

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In July 1997, the Company acquired SportsTherapy Systems, Inc., a physical
therapy and rehab clinic located in Calabasas, California, for approximately
$485,000 in cash plus the assumption of various liabilities in the amount of
approximately $187,000, most of which consisted of bank indebtedness, which was
repaid during 1997.

In August 1997, the Company acquired a Club located in Henderson, Nevada
which is now operated as The Sports Club/Las Vegas. This Club reported revenues
of $5.6 million during the 12 months ended December 31, 1997. This acquisition
was completed with approximately $4.3 million of cash, equipment financing of
$750,000 and the issuance of 290,358 shares of the Company's Common Stock having
a value of approximately $1.7 million. The Company expects to invest
approximately $1.0 million over the next 12 months to make improvements to this
Club.

In December 1997, the Company acquired four Clubs from Racquetball World
for a total purchase price of approximately $19.4 million, consisting of $6.0
million in cash, $10.0 million in lease financing provided by Millennium, the
assumption of $2.0 million of debt and the agreement to issue to certain of the
selling entities ("Sellers") up to 159,081 shares of Common Stock (which shares
will be issued to Sellers on December 31, 1998, subject to reduction if certain
liabilities of the Clubs exceed agreed-upon amounts); these Clubs are now
operated as Spectrum Clubs. These Clubs reported gross revenues of approximately
$8.9 million during the 12 months ended September 30, 1997. Millennium acquired
properties underlying two of the Clubs for $10.0 million and is leasing these
properties to the Company under a financing lease agreement which is reflected
as a capital lease obligation in the Company's consolidated balance sheet. The
lease has a term of 20 years and provides for annual rent of $1.0 million for
the first 10 years and $1.2 million per year thereafter. At any time during the
first three years of the lease, the Company may purchase the leased property
from Millennium for a purchase price (currently estimated to be approximately
$10.1 million) equal to $10.0 million plus all costs incurred by Millennium in
connection with the acquisition of such property, plus an amount sufficient to
provide to Millennium a 12% compound return on its total investment. Millennium
has the right to require the Company to acquire its interest in the property at
such price if (i) the Company receives private debt financing in excess of $95.0
million; (ii) the Company receives public equity financing in excess of $20.0
million; (iii) a default (as defined in the lease) occurs; or (iv) a major
casualty occurs with respect to either property. Millennium has waived this
right in connection with the Offering. The Company sold 625,000 shares of its
Common Stock to Millennium for $5.0 million to raise capital to complete this
acquisition. The Company expects to spend approximately $4.0 million over the
next 12 months in order to renovate the recently-acquired Clubs and $2.0 million
for new equipment at these Clubs.

In December 1997, the Company acquired real property and a vacant building
in Thousand Oaks, California for $6.0 million which it expects to redevelop as a
Spectrum Club. The Company used $5.0 million of its bank credit facility to fund
this purchase. The Company expects to invest an additional $4.5 million in
development costs over a nine-month period to complete construction of this
Club. The Company has entered into a lease with respect to the development of a
Spectrum Club in Anaheim Hills, California, which is currently estimated to
require approximately $2.7 million in development funds, expected to be invested
over the next eighteen months. In March 1998, the Company entered into a lease
with respect to a Club to be built in Puente Hills, California. The Company
expects to expend approximately $500,000 over the next 12 months in connection
with the development of this Club.

In February 1998, the Company signed a lease with respect to the
development of a Sports Club at Rockefeller Center in New York City. The Company
will begin renovation of the existing space later this year and expects to
commence pre-sale activities in June 1999. The Company deposited $4.0 million
with the landlord to secure its performance under the lease agreement and
expects to spend approximately $10.8 million over the next 18 months to complete
development of this Club.

The Company has entered into lease agreements with respect to the
development of Sports Clubs in Washington, D.C. and San Francisco, California
and announced its intention to develop a Sports Club in Boston, Massachusetts.
These projects are scheduled to begin construction in early

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1998. The Company's portion of the development costs for these Clubs is
currently estimated to be approximately $9.0 million and is expected to be
invested over a 12-month period beginning in 2000.

In March 1998, the Company entered into an agreement to acquire undeveloped
land in Houston, Texas, for approximately $3.1 million, on which the Company
intends to develop a Sports Club. The Company has entered into an agreement with
Millennium pursuant to which Millennium has agreed to acquire the land and
negotiate with the Company to develop this Club. In addition, the Company will
have the right, for a period of six months, to reacquire the property from
Millennium. See "Certain Transactions." The total cost of acquiring and
developing this property is currently estimated by management to be
approximately $17.3 million.

The Company is negotiating the acquisition of a Club in New York City,
which it would close, renovate and re-open as a Sports Club. The Company is in
the process of performing due diligence on this potential acquisition. D.
Michael Talla, Chairman and Chief Executive Officer of the Company, and Rex
Licklider, Vice Chairman of the Company, intend to make a $1.0 million
non-refundable deposit in connection with the proposed acquisition. Messrs.
Talla and Licklider have agreed to transfer their rights under such agreement to
the Company upon the payment of $1.0 million. See "Certain Transactions." The
total cost to the Company of acquiring and renovating this Club, which is
expected to take approximately 15 months, is currently estimated to be
approximately $10.0 million.

Other than as described herein and for normal replacement of fitness
equipment and remodeling of Clubs, the Company has no commitments for capital
expenditures. The Company expects to spend approximately $1.2 million during the
next 12 months to upgrade its management information systems. Equipment
financing has generally been available under capital lease arrangements. During
1996 and 1997, the Company obtained lease financing commitments aggregating
approximately $3.0 million which were used to finance new equipment at the
Spectrum Club/Valencia, to purchase equipment at The Sports Club/Las Vegas and
to finance normal capital expenditures at existing Clubs. At December 31, 1997,
$600,000 was still available under these facilities. In February 1998, the
Company received an additional $5.0 million lease financing commitment for
expected equipment additions at the recently-acquired Spectrum Clubs, the
Spectrum Club/Thousand Oaks and for normal equipment expenditures. While capital
expenditures may fluctuate from time to time, generally the Company expects to
spend approximately 4% of revenues on facility and equipment upgrades and
replacements. In 1997, the Company invested approximately $2.5 million in
capital expenditures other than those related to new Club development. Equipping
new Clubs requires expenditures above this level.

The Sports Club/LA Note is secured by all the assets of The Sports Club/LA.
The Sports Club/ LA Note bears interest at a rate per annum equal to 10.63% and
requires monthly installment payments of approximately $262,000 with the
remaining principal balance of approximately $17.5 million due and payable on
April 1, 2003. The Sports Club/LA Note may be extended by the Company for a
period of five years under certain circumstances. The Sports Club/LA Note is not
subject to prepayment until April 1, 2000; however, AT&T has agreed to permit
the Company to prepay the loan on or before April 30, 1998 provided it pays to
AT&T a prepayment fee estimated to be approximately $2.8 million. The Company
intends to repay The Sports Club/LA Note from the proceeds of the Offering. The
note requires the Club to maintain a debt service coverage ratio, as defined, of
1.4 to 1.0.

The Company issued a note ("The Sports Club/Irvine Note") which is secured
by land, equipment, building improvements and the building housing The Sports
Club/Irvine. The Sports Club/Irvine Note was issued in connection with the
acquisition of The Sports Club/Irvine, which bears interest at the rate of 6.0%,
requires quarterly principal payments of $125,000 (which commenced in November
1996), and requires a payment of $4.0 million on November 1, 1999.

The Company issued a note (the "Spectrum Club/Agoura Hills Note") which is
secured by the land, equipment, building improvements and the building housing
the Spectrum Club/Agoura Hills. The Spectrum Club/Agoura Hills Note was issued
to enable the Company to complete its acquisition

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of the Spectrum Club/Agoura Hills. The note bears interest at the rate of 8.5%.
Monthly principal and interest payments of $20,107 are required through the
note's maturity in April 2024.

At December 31, 1997 the Company had a $5.0 million credit facility. This
facility was fully utilized at that date. On February 23, 1998, the amount of
the facility was increased to $15.0 million. As of April 1, 1998, the amount
outstanding under the credit facility was approximately $11.4 million. The
Company may borrow funds under this facility until the earlier of June 30, 1998,
or consummation of certain financing transactions by the Company, including the
Offering; provided that, with respect to the Offering, the Bank has agreed that
the facility will not terminate until 60 days following consummation of the
Offering. Advances under the facility bear interest at a variable rate equal to
LIBOR plus 2 1/2% or the lender's prime rate plus 1/2%. At February 25, 1998,
the advances accrued interest at the weighted-average rate of 8.33% per annum.
The Company is currently in the process of negotiating to renew, extend or
replace the credit facility; however, there can be no assurance that any such
extension, renewal or replacement will occur or will occur on terms favorable to
the Company.

The net proceeds of the Offering will be used to repay approximately $38.9
million of debt, to provide funds for future developments and/or acquisitions
and for general corporate purposes. The Company's long-term capital needs are to
provide funds for the developments described above, additional development and
acquisition projects and general corporate purposes. The Company estimates that
its capital expenditures for the next 12 months on the projects currently under
development will be approximately $20.1 million, which will be financed through
the net proceeds of the Offering and credit anticipated to be available under
credit facilities, lease financings, sale/lease back arrangements and other
financing arrangements. The Company's strategy of opportunistically acquiring
and developing additional Clubs is expected to require additional capital. The
Company believes there are a number of financing alternatives available,
including commercial credit facilities, equipment financing, mortgage financing,
and public and private debt and equity offerings. The Company will also consider
entering into joint venture and partnership agreements for the purpose of
developing new Clubs. The Company believes that the estimated net proceeds of
the Offering, together with operating cash flows and available financings, will
be sufficient for the Company's working capital and capital expenditure needs
for at least the next 12 months. However, there can be no assurance that
financing will be available on commercially reasonable terms, if at all. To the
extent that the Company is unable to obtain additional financing on acceptable
terms, the Company will be forced to delay or limit its development and
acquisition plans.

FORWARD LOOKING STATEMENTS

The foregoing discussion and other published documents contain
forward-looking statements relating to the future operations of the Company,
including the Reebok Sports Club/NY and SportsMed, the adequacy of the Company's
cash for its anticipated requirements, and other matters. These forward-looking
statements are based on a series of projections and assumptions regarding the
economy, other statements which are not historical facts, the Company's
operations and the sports and fitness industry in general. These projections and
assumptions involve certain risks and uncertainties that could cause actual
results to differ materially from those included in the forward-looking
statement. Furthermore, actual results may differ from projected results as a
result of unforeseen developments relating to demand for the Company's services
and competitive pricing trends in the health and fitness market; increased
expenses; the success of planned advertising, marketing and promotional
campaigns; changes in personnel or compensation; business interruptions
resulting from earthquakes, landlord disputes or other causes; general market
acceptance of new and existing Clubs operated by the Company; changes in
membership growth patterns; the success of new products; and regulatory or legal
proceedings and rulings which might adversely affect the Company. Investors are
also directed to consider other risk and uncertainties discussed in all
documents filed by the Company with the SEC. The Company expressly disclaims any
obligation to update any forward-looking statements as a result of developments
after the date hereof.

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NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130"). SFAS 130 establishes standards for the reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. SFAS 130
requires all items that are required to be recognized under accounting standards
as components of comprehensive income to be reported in a financial statement
that is displayed with the same prominence as other financial statements. SFAS
130 does not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive income for
the period covered by that financial statement. SFAS 130 requires an enterprise
to (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. Management has not
determined whether the adoption of SFAS 130 will have a material impact on the
Company's consolidated financial position or results of operations.

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("SFAS 131"). SFAS 131 establishes standards for public business enterprises to
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes FASB Statement
No. 14, Financial Reporting for Segments of a Business Enterprise, but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
SFAS 131 requires, among other items, that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets, information about the revenues derived from the enterprise's
products or services, and major customers. SFAS 131 also requires that the
enterprise report descriptive information about the way that the operating
segments were determined and the products and services provided by the operating
segments. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. SFAS 131 need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. Management has not determined whether the adoption of SFAS 131
will have a material impact on the Company's financial reporting.

YEAR 2000

The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company has
completed a year 2000 impact analysis. Financial accounting systems were
recently installed which, in the opinion of management, are year 2000 compliant.
The Company is currently implementing a new membership accounting and
information system which will be year 2000 compliant. The cost of the new
system, along with necessary equipment, is estimated to be $1.2 million and will
be capitalized pursuant to the Company's accounting policies.

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BUSINESS

GENERAL

The Company operates sports and fitness Clubs primarily under the "Sports
Club" and "Spectrum Club" names. Sports Clubs have been developed as "urban
country clubs" offering a full range of services, including numerous fitness and
recreation options, diverse facilities and other amenities. Spectrum Clubs are
designed as smaller-scale Sports Clubs with an extensive but smaller range of
services. Both Sports Clubs and Spectrum Clubs are marketed to affluent, health
conscious individuals who desire a premier Club. The membership fees at Sports
Clubs are higher than membership fees charged at Spectrum Clubs; membership fees
at both Clubs are higher than those charged by most other Clubs, which do not
provide as many services.

The Company currently owns interests in 14 Clubs. In 1997 the Company
acquired a Club in Henderson, Nevada which is now operated as The Sports
Club/Las Vegas, acquired four Clubs in Southern California from Racquetball
World which are now operated as Spectrum Clubs and opened a Spectrum Club in
Valencia, California. The Company currently operates The Sports Club/ LA, The
Sports Club/Irvine, the Reebok Sports Club/NY and The Sports Club/Las Vegas and
operates 10 Spectrum Clubs in Southern California.

The Company's strategy is to develop and acquire multi-amenity Clubs
complementary to existing Sports Clubs and Spectrum Clubs and to develop and
implement new programs at existing Clubs to expand membership and increase
revenues. The Company intends to develop and acquire Sports Clubs in selected
metropolitan areas where a sufficient potential membership base exists to
support a 80,000 square foot or larger facility. To expand the Spectrum Club
name and concept, the Company intends to develop and acquire suitable Clubs
located in or adjacent to metropolitan areas either near a Sports Club or in
areas where the potential membership base is significant but will not support a
Sports Club facility. The Company is currently developing additional Clubs,
including Sports Clubs in New York, New York, Washington, D.C., San Francisco,
California, and Boston, Massachusetts, and Spectrum Clubs in Anaheim Hills,
Puente Hills and Thousand Oaks, California. These Clubs are expected to open
from late 1998 through 2001. The Company believes that, because of the
established reputation of the Company and the prestige associated with the
Sports Clubs and the Spectrum Clubs, developers view the Clubs as valuable
components of multi-use developments.

The Sports Clubs

Sports Clubs are large, multi-purpose facilities, offering members and
their guests fully equipped gyms with state of the art fitness equipment, modern
programs, wellness protocols such

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as exercise regimens designed for specific groups of members, extensive food and
beverage selections, personal care and beauty options, social programs, child
care and valet parking. The Company currently has four Sports Clubs in
operation. The Sports Club/LA was opened in 1987 and The Sports Club/Irvine was
opened in 1990. The Reebok Sports Club/NY was developed in partnership with the
Company and a subsidiary of Reebok International, Ltd. ("Reebok") and
Millennium. The Company manages the operations of the Club and owns a
controlling 60% interest in the partnership that owns the Reebok Sports Club/NY
with Reebok and Millennium retaining direct interests in the partnership. The
Sports Club/Las Vegas, located in Henderson, Nevada, was acquired in August
1997.

The Sports Club/LA. The Sports Club/LA is located in West Los Angeles, near
the affluent communities of Santa Monica, Brentwood, Beverly Hills, Westwood and
Century City. The Sports Club/LA offers a 9,500 square foot coed gym, a complete
gym with equipment generally preferred by female members, a spinning room with
stationary bicycles used in an aerobic class environment and an approximately
5,800 square foot cardio-vascular deck. Personal trainers are available to
develop and supervise members' exercise routines. The Sports Club/LA has two
2,500 square-foot aerobics/exercise rooms featuring classes throughout the day
and evening, seven days a week, including aerobics, dance, Step Reebok, yoga and
karate. Competitive sports may be played on two racquetball courts, two squash
courts, five outdoor paddle tennis courts and a full court basketball court
(which can be converted into a volleyball court). Additionally, there is a
25-meter indoor pool and a net-enclosed golf swing area. Sports instructors
provide lessons in racquet sports, golf and swimming.

Men's and women's locker rooms feature wood lockers and include complete
spa areas with steam rooms, saunas, jacuzzis and professional massage. The
Sports Club/LA also includes a sundeck, restaurant, sports bar, private
dining/conference room, a sports media center and a press conference area. A
full-time activities director is responsible for social and media events for
members, including organizing trips, lectures and charity events. The Sports
Club/LA also has a pro shop, hair salon, spa and childcare services.

The Sports Club/Irvine. The Sports Club/Irvine is located on a 1.46-acre
site near Newport Beach in Orange County, California. The Club offers 26,700
square feet of fully equipped gyms consisting of a 14,000 square foot coed gym
and a complete gym with equipment generally preferred by female members, a 5,000
square foot cardiovascular deck, basketball and volleyball courts, a rooftop
running track, three racquetball courts, four squash courts and two outdoor
paddle tennis courts. The volleyball/basketball gymnasium is 9,600 square feet
and can accommodate either two full court basketball games or a basketball and
volleyball game simultaneously. There is also an outdoor roof-top basketball
court, and two sand volleyball courts on adjacent property leased on a
month-to-month basis. The Club offers a variety of aerobic and exercise classes
held throughout the day, in addition to a 25-yard indoor-outdoor pool, sundeck,
social area and a roof deck featuring a net-enclosed golf swing area.

Men's and women's locker rooms feature wood lockers and include complete
spa areas with steam rooms, saunas and jacuzzis. Food and beverage facilities
include private dining rooms and conference facilities, a gourmet grill
restaurant and sports bar, a sidewalk cafe and a poolside juice bar. Massages,
facials and spa treatments are available at Oasis Body Salon, which is owned and
operated by the Company. In addition, the Club affords members the opportunity
to work with personal trainers and sports instructors, and to avail themselves
of numerous exercise and dance classes, a beauty salon and childcare services. A
full-time sports coordinator organizes sports tournaments, leagues and classes.

Reebok Sports Club/NY. The Reebok Sports Club/NY located in Manhattan's
upper west side offers among other recreational and fitness options, 13,000
square feet of weight training gyms, a 5,000 square foot cardiovascular center,
two exercise class rooms, two basketball courts, a rooftop roller-blading and
running track, a 45-foot rock climbing wall, a 25-yard Junior Olympic-size

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swimming pool, complete spa facilities, a circuit training center, volleyball,
boxing, fencing, martial arts, gymnastics and badminton. In addition, the Reebok
Sports Club/NY offers members a bistro-style open grill restaurant, a sidewalk
cafe, a sun deck with juice bar, childcare, a body salon, children's sports
programming, meeting and banquet rooms, shoe shine, dry cleaning and tailoring
services. The Company manages and has a controlling 60% interest in the
Reebok-Sports Club/NY partnership.

The Company's agreements relating to the Reebok Sports Club/NY prohibit the
Company from engaging in pre-sale activities or opening a Club in New York City
or within a 10-mile radius of the Reebok Sports Club/NY which exceeds 30,000
square feet in size prior to June 1999. These agreements also prohibit the
Company from selling from the Reebok Sports Club/NY any footwear, apparel,
fitness equipment or other sporting goods manufactured by a competitor of
Reebok, or associating with any health Club facility affiliated with a
competitor of Reebok, through June 2002.

The Sports Club/Las Vegas. The Company acquired The Sports Club/Las Vegas
in August 1997. The Club services the fast growing Las Vegas market and is
situated in Henderson, Nevada approximately three miles east of the Las Vegas
airport. The Club offers 136,000 square feet dedicated to tennis, racquetball,
squash and basketball courts, an aquatic center, running track, state-of-the-art
weight training, resistance and cardiovascular facilities and junior recreation
rooms. In addition to indoor facilities, the Club has outdoor lighted tennis
courts and an outdoor swimming pool. Men's and women's locker rooms are equipped
with private showers, steam rooms and whirlpools. Full service toiletry
amenities such as towel service and complete vanity supplies are available for
members' use.

The Club offers children a number of interactive classes, as well as
supervised age-specific junior recreational rooms and many junior programs such
as gymnastics. The Club also provides a full service bar and cafe along with a
massage and skin care center. Members also have available for their use a beauty
salon, retail shop and physical therapy office which are provided within the
facility by third parties who lease space within the Club.

The Spectrum Clubs

The Company currently operates Spectrum Clubs at ten locations in Southern
California. While more limited in size and in terms of the social and
recreational options offered by Sports Clubs, Spectrum Clubs are generally
housed in relatively large facilities containing modern equipment and offering
members personalized training and instruction; there are, however, differences
among the Spectrum Clubs in terms of their overall size, age and aesthetic
design and the types of exercise and work-out equipment and facilities available
to members.

Spectrum Clubs typically range in size from 30,000 to 65,000 square feet,
generally include full coed weight training rooms, computerized cardiovascular
centers, aerobics and exercise classrooms (with classes held throughout the day
and evening, seven days a week), locker rooms, private training, complete spa
facilities, juice bars and towel service. While three of the Spectrum Clubs
acquired from Racquetball World contain sufficient space to accommodate a Sports
Club, a significant portion of the available space in such Clubs is devoted to
racquetball courts and other facilities and amenities, and the fitness and
exercise facilities in such Clubs are comparable to those typically found at
Spectrum Clubs. Certain of the Spectrum Clubs also offer indoor swimming pools,
childcare, pro shops, basketball courts, racquetball courts, physical therapy
facilities, volleyball, martial arts, dance and children's and seniors'
programs. Nine Spectrum Clubs are wholly-owned and operated by the Company. The
Company is the sole general partner, manages and receives, as its equity
interest, 46.1% of the net income generated by the operation of the Spectrum
Club/ Manhattan Beach.

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The SportsMed Company, Inc.

SportsMed operates facilities within The Sports Club/LA, The Sports
Club/Irvine, the Spectrum Club/Agoura Hills and a stand alone facility in
Calabasas, California. The clinics are staffed by exercise physiologists,
physical therapists and nutritionists who provide services to members and
others. A physician is employed by SCC Medical Group, Inc. which pays a
management fee to SportsMed. The Company believes that SportsMed provides
valuable services which are complementary to the other services provided by the
Clubs, and is considering expanding the SportsMed concept to other Clubs in the
future.

SALES AND MARKETING

The "urban country club" image is essential to the Company's overall
operating and marketing strategies. The four existing Sports Clubs are marketed
as limited membership, private Clubs dedicated to personalized attention and
multiple amenities and services. The Company believes that the image of these
Clubs as leaders in the sports and fitness industry justifies charging a premium
for the added amenities that come with membership in Sports Clubs. Members
include professionals, sports and entertainment personalities and business
people, and the Company believes word-of-mouth advertising from these types of
members has enhanced the reputation of Sports Clubs and generated increased
interest among prospective members.

The Spectrum Clubs are marketed as scaled-down Sports Clubs having modern
equipment, private training, experienced, highly-trained instructors, and
aesthetically-pleasant surroundings. The Spectrum Clubs also emphasize
personalized service and instruction and the creation of a "club" atmosphere in
which members can relax and socialize. The cost of Spectrum Club membership (in
terms of both initiation fees and monthly dues) is less than membership at
Sports Clubs and, within the Southern California market, the Company believes
the Spectrum Clubs offer as many services and are as luxurious and
aesthetically-pleasing as any other Club with which they compete. Because of
their relatively smaller size, Spectrum Clubs can be developed and operated in
locations where the potential membership base is not sufficiently large to
support a Club operating under the Sports Club name.

The Company's marketing strategy is to continue to acquire and develop
Clubs that are consistent with an "urban country club" image and to develop and
implement specific sports, fitness and social programs that are designed to
attract a wider membership base without undermining that image. Both Sports
Clubs and Spectrum Clubs are marketed as multi-amenity Clubs catering to
affluent consumers, reflecting the Company's belief that prospective members are
willing to pay higher fees for well-designed, well-equipped and well-maintained
Clubs offering personalized instruction and multiple fitness and workout
options. The Company's marketing efforts at the older, more seasoned Clubs
emphasize maintaining existing members, replacing those members who leave with
new members and increasing ancillary revenues such as private training and
retail sales. The focus at the newer Clubs is on maintaining existing members
and attracting and maintaining additional members.

Word-of-mouth referrals and endorsements by existing members are the Clubs'
most important source of new members. In addition, all Clubs utilize targeted
marketing programs which include advertisements, promotions, public relations
and community events. The principal marketing media for the Clubs are print
advertisements, with some use of direct mail. The print advertisements are
supplemented by special events and special membership programs. The Clubs host
corporate parties and charity benefits and often donate free or discounted
memberships to charitable organizations. The Company also conducts periodic
membership drives whereby referring members are entitled to receive special
gifts and other incentives. Because the Sports Club and the Spectrum Club names
are widely recognized in Southern California, the Company has been able to rely,
to a large extent, on their reputation and member referrals. The Company
believes that it will be able to continue to utilize these marketing strategies
in the promotion of new Clubs.

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The largest segment of the membership base for the Clubs consists of
health-conscious individuals. The Company targets five other groups in order to
expand membership: children and families, seniors, corporate members, medical
referrals and people who do not exercise on a regular basis. Each of these
groups requires specialized exercise/fitness programs, and the Company has
developed specific programs to attract members of these groups.

The Company believes the children/family market has considerable potential,
as younger members grow older, marry and have children, and seek recreational
activities in which the entire family can participate. To target the family
market, the Company has implemented "KidFit" and "TeenFit" programs which target
children between the ages of 5 and 17, and involve both one-on-one private
training and a six-week fitness training program. The Clubs' weight-training
facilities are made available to children 13 and older at off-peak hours, and
specially-designed movement classes utilizing a variety of fitness equipment are
offered to younger children. The Clubs maintain a summer sports camp, provide
individualized sports instruction and offer multiple fitness activities such as
gymnastics, martial arts and dance that are age appropriate.

The Company anticipates that as the current core membership group ages, it
will meet this group's changing fitness needs and attract additional members
from the senior population. The Company maintains training and exercise protocol
manuals for the senior market (which the Company generally defines as members
who are over 60 years old) which include a description of exercise and fitness
programs specifically designed for seniors. These manuals also contain
discussions of the biological, psychological and medical aspects of aging and
the benefits of regular exercise. The Company believes this market will expand
as the "baby boomers" mature.

The corporate market is a significant source of new members, due to the
proximity of the Clubs to business centers and the use of the Clubs to conduct
business and to develop and maintain business contacts. The Company targets the
corporate membership market primarily through the Sports Clubs. Sports Clubs
employ several Corporate Membership Directors whose principal responsibilities
are to solicit corporate memberships from businesses operating in the vicinity
of Sports Clubs. Sports Clubs offer corporate group-discounted initiation fees
depending upon the number of new members involved. SportsMed has developed
several corporate wellness programs to fit the needs of this particular market.
The Company believes corporations are favorably disposed to Sports Clubs and the
SportsMed programs because of the positive impact regular exercise and overall
fitness can have on employee absenteeism, morale and productivity.

Finally, the Company believes that the image of the Clubs as
multiple-amenity facilities, which offer members numerous social and
less-rigorous exercise options, will help the Company attract prospective
members who do not currently exercise regularly. The Company's "Shape Over"
program is intended to attract those people who are out of shape but who are
interested in resuming a regular exercise regimen. Prospective members are given
a free, introductory fitness consultation with Club instructors, which covers
nutritional and dietary suggestions, personalized fitness programs and home
exercise plans. In addition, the Clubs have group aerobics classes that are
specially designed for this target group. The Company believes that it can also
attract members from the medical referral market through its SportsMed
subsidiary by offering specific rehabilitation and exercise protocols to
complement other forms of physical therapy recommended by a physician or medical
group.

EMPLOYEE TRAINING

A key component of the Company's marketing strategy is a well-trained and
knowledgeable staff. The Company has developed comprehensive training programs
which serve as educational tools to enhance the effectiveness of Company
personnel. All newly-hired employees are required to attend an orientation
seminar, which is led by members of Company management and a personnel
instructor. Topics include member service and member interaction skills, Company
history and philosophy, and safety issues. These orientation seminars are held
throughout the year.

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To aid in the development and continuing education of management employees,
the Company offers a workshop entitled "Introduction to Club Management," for
newly-hired management personnel and other employees demonstrating management
skills. The workshop is intended to educate participants in the areas of people
and time management; hiring, developing, training and evaluating employees;
sales and marketing strategies; and safety concerns. Topics are added
periodically to reflect new management techniques or operating issues. These
seminars consisting of five three-hour seminars are held six times a year or as
needed for new employees, and the Company's management personnel are required to
attend periodically to maintain their skills.

The Company provides additional seminars specifically-designed for targeted
employee groups. Seminars providing specialized instruction for program
directors, private trainers, aerobics teachers and sales/marketing personnel are
offered at various times during the year, for which attendance on the part of
newly-hired personnel within the applicable employee group is mandatory. The
Company places particular emphasis on its sales/marketing training seminars,
which are given once every two months by a personnel instructor and in which all
new membership directors complete 20 hours of participation and all other
membership directors are expected to complete four hours of participation every
two months. Topics covered include sales and marketing goals and recruitment and
qualification of prospective members.

MEMBERSHIP PROGRAMS

Sports Clubs offer three types of memberships: Executive, Racquet and
Health. The Executive membership offers the greatest number of amenities and
services, including unlimited use of all facilities, racquet sports privileges,
personal locker assignments within an executive locker room, laundry service,
free valet parking, and charge privileges for dining and other Club services.
The Racquet membership is currently only offered at The Sports Club/Irvine and
The Sports Club/Las Vegas and, in addition to use of the Club's facilities,
includes the unlimited use of racquetball, squash and paddle tennis courts at
The Sports Club/Irvine, and tennis at The Sports Club/Las Vegas. The Health
membership is the basic membership offering unlimited use of all facilities
excluding those privileges associated with a Racquet membership; courts are
available to holders of Health memberships for an additional fee.

Racquet and Health memberships are generally available at Spectrum Clubs.
The Spectrum Club/Fullerton currently offers executive memberships. At some
Spectrum Clubs, lockers may be rented by members on a monthly basis for an
additional charge. Each Club operating under the Spectrum Club name has
reciprocity with the others, thereby allowing its members unlimited use of all
Spectrum Clubs in exchange for a small increase in monthly dues. The same
reciprocity program is generally in effect at Sports Clubs. As members of the
IHRSA, Spectrum Clubs extend guest membership privileges to out-of-town visitors
who are members of IHRSA Clubs in their hometown, and the Spectrum Club members
may use IHRSA Clubs in cities to which they travel.

All memberships require a one-time initiation fee plus monthly membership
dues. Actual rates vary depending on whether the membership is for a Sports Club
or Spectrum Club and the type of membership selected. Corporate memberships are
also available. Unlike many other Clubs, the Company does not offer financing
for its memberships. Members electing to pay their Club dues on a monthly basis
must pay by the checkfree system, under which each member is automatically
debited each month for dues either through a checking account or credit card.
Prepaid memberships for an entire year entitle the member to a discount equal to
one free month. While the Company

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occasionally institutes special marketing programs which include the offer of
discounts on initiation fees, the Clubs' current base membership fees for new
memberships are as follows:

[Enlarge/Download Table]

HEALTH RACQUET EXECUTIVE
------ ------- ---------

THE SPORTS CLUB/LA
Initiation Fee (1).......................................... $1,295 N/A $2,500
Monthly Dues................................................ 128 N/A 185
THE SPORTS CLUB/IRVINE
Initiation Fee.............................................. 750 $825 1,475(2)
Monthly Dues................................................ 90 105 140
REEBOK SPORTS CLUB/NY
Initiation Fee.............................................. 1,150 N/A 2,000
Monthly Dues................................................ 165 N/A 285(3)
THE SPORTS CLUB/LAS VEGAS
Initiation Fee.............................................. 400 700 N/A
Monthly Dues................................................ 90 130 N/A
THE SPECTRUM CLUBS
Initiation Fee.............................................. 325 325 300(5)
Monthly Dues................................................ 57(4) 67(4) 135(5)

---------------

(1) Initiation fees for The Sports Club/LA may be paid over a two to three month
period.
(2) Initiation fees for Executive membership in The Sports Club/Irvine may be
paid over a two-month period.
(3) Executive memberships with a half sized locker are also available for $225
per month.
(4) In addition, Spectrum Club members are charged an annual towel fee of $40.
(5) Only offered at The Spectrum Club/Fullerton.

ACQUISITION AND DEVELOPMENT OF ADDITIONAL CLUBS

The Company is continually reviewing acquisition and development
opportunities and from time to time enters into letters of intent and makes
refundable and nonrefundable deposits in order to secure opportunities during
the review process. The consummation of the such transactions is subject to
numerous conditions, including the Company's investigation of the feasibility of
the proposed transaction and the availability of suitable financing of the
Company's portion of acquisition and development costs.

Acquisition Criteria. The Company has established general criteria for the
acquisition of existing Clubs to be operated under the Sports Club and Spectrum
Club names. Sports Clubs must be at least 80,000 square feet in size and located
in a large metropolitan area. Spectrum Clubs generally must exceed 30,000 square
feet. The Company seeks Clubs which have in place an initiation fee and monthly
dues structure and are located in an area with desirable demographic
characteristics for a Sports Club or a Spectrum Club, as the case may be. The
Company analyzes the number of members a Club may attract based upon a number of
factors including the current membership and the number of potential members
based upon certain demographic criteria. In addition, the current cash flow,
purchase price and anticipated capital expenditures must meet certain
requirements, and the Company must believe that it has the ability to enhance
the profitability of the Club following its acquisition.

Performance of Newly Acquired Clubs. Clubs acquired by the Company may vary
in terms of the physical layout, decor, age of equipment, staff training,
marketing programs, membership fees, ancillary services offered, and other
characteristics, and, as a result, may have lower operating income than a
typical Sports Club or Spectrum Club. In order to improve a Club which does not
meet the standard for a Sports Club or a Spectrum Club, as the case may be, the
Company may renovate the Club, upgrade fitness equipment, adopt fitness programs
and exercise protocols, install experienced employees, implement marketing and
training programs, and introduce services and

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product sales intended to enhance ancillary revenues. In conjunction with these
improvements, the Company will implement membership fee programs consistent with
other Clubs operated by the Company. Recently acquired Clubs undergoing such
improvements may perform at lower margins during the period of implementation of
new policies and programs.

Development Criteria. The Company will develop a Club if it believes that,
when built, the Club will satisfy the same criteria utilized to consider
acquisitions of Clubs. The Company believes that, because of the established
reputation of the Company and the prestige associated with the Sports Clubs and
the Spectrum Clubs, developers view the Clubs as valuable components of
multi-use developments.

Sports Club Developments. The Company has signed leases with Millennium to
develop Sports Clubs in Washington, D.C. and San Francisco, California.
Negotiations are underway with Millennium for the development of another Sports
Club in Boston, Massachusetts. The three Clubs will be located in projects
developed by Millennium in prime, metropolitan locations which, like the Reebok
Sports Club/NY, include commercial, retail, entertainment and residential space.
These Clubs will be in the 80,000 to 100,000 square foot size range and will
offer services typically found at the Company's other Sports Club sites. The
Clubs are not expected to open until 2001. The Company believes that such
projects offer ideal locations for Sports Clubs and intends to investigate
entering into additional Sports Club developments with Millennium or other
developers in other major metropolitan areas.

The Company has also signed a lease to develop 89,000 square feet of space
within the Rockefeller Center complex in New York City as a Sports Club. The
Company estimates this Club will open in the third quarter of 1999. The Company
is currently evaluating the acquisition or development of one or more additional
Clubs in New York. However, there can be no assurance that the Company will
enter into such a transaction. The Company's agreements relating to the Reebok
Sports Club/NY prohibit the Company from opening or engaging in pre-sale
activities with respect to a Club larger than 30,000 square feet in size in New
York City or within ten miles of the Reebok Sports Club/NY prior to June 1999.
To the extent the foregoing Club proceeds to pre-sale activities prior to June
1999, the Company would be required to seek a waiver of the foregoing
requirement. There can be no assurance that such a waiver could be obtained.

The Company is negotiating and performing due diligence on the acquisition
of a Club in New York City which is expected to close in April 1998. The Company
would concurrently enter into a lease with the owner of the property on which
the Club is located. If the Club is acquired, the Company would close and
completely renovate such facility to re-open it as a Sports Club. The total cost
to the Company of acquiring and renovating this Club, which is expected to take
approximately 15 months, is currently estimated to be approximately $10.0
million. While the Company is completing its investigation, D. Michael Talla,
Chairman and Chief Executive Officer of the Company, and Rex Licklider, Vice
Chairman of the Company (or an entity controlled by them), intend to make a
non-refundable deposit equal to $1.0 million and enter into an agreement,
assignable to the Company, to acquire such facility. Messrs. Talla and Licklider
have agreed to transfer their rights under such agreement to the Company upon
the payment of $1.0 million. Any such acquisition would be subject to the
approval of the Company's current lenders. There can be no assurance that such
approval will be obtained or that the Company will enter into such transaction.

In March 1998, the Company entered into an agreement to acquire
approximately 3.5 acres of undeveloped land in Houston, Texas, on which the
Company expects to develop an approximately 85,000 square foot Sports Club. The
purchase is scheduled to close no later than June 24, 1998. Millennium has
agreed that in the event that the Company does not otherwise obtain satisfactory
financing for the Houston development, Millennium will acquire and negotiate
with the Company to develop the Club with the Company. In addition, the Company
will have the right, for a period of six months following the closing, to
reacquire the property from Millennium. The Company is considering development
alternatives for this property, including a sale/lease back or another financing
or

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joint venture arrangement. The Company is also considering developing a Sports
Club in La Jolla, California, with Millennium. See "Certain Transactions."

The Company has executed a letter agreement with WPI.KOLL Asia Pacific
Advisors, providing the Company a right of first refusal to develop and operate
Sports Clubs in "Mega Malls" being developed in Japan by a consortium of major
Japanese corporations. However, there has been no activity with respect to these
developments since October 1996.

Spectrum Club Developments. The Company is developing Spectrum Clubs in
Anaheim Hills and Thousand Oaks, California. Each Club would be approximately
55,000 square feet. The Company has executed a lease agreement for the Spectrum
Club/Anaheim Hills and has acquired the real property on which the Spectrum
Club/Thousand Oaks will be built. The Company expects the Spectrum Club/Thousand
Oaks to open in the fourth quarter of 1998 and the Spectrum Club/ Anaheim Hills
to open in the third quarter of 1999. The Company has entered into a lease with
respect to an approximately 43,000 square foot Spectrum Club to be built in
Puente Hills, California. The Company expects that this Club will open in late
1999. In addition, the Company will investigate the development of Spectrum
Clubs in multi-use developments in or adjacent to metropolitan areas where the
potential membership base is significant but will not support a Sports Club.

Performance of Newly Developed Clubs. Based on the Company's historical
experience, a newly developed Club tends to achieve significant increases in
revenues during its first years of operation as it reaches maturity.
Recently-opened Clubs which have not achieved maturity have operated at a loss
or at only a slight profit during this period as a result of fixed expenses
which, together with variable operating expenses, approximate or exceed
membership fees and other revenues. While the Company anticipates that these
types of losses will be incurred in the future as a normal part of the Company's
operations to the extent that it develops additional Clubs, the Company believes
that its income from such Clubs will significantly increase as Clubs reach
maturity.

COMPETITION

Although the sports and fitness industry is still fragmented, the industry
has experienced significant consolidation in recent years and certain of the
Company's competitors are significantly larger and have greater financial and
operating resources than the Company. In addition, a number of individual and
regional operators compete with the Company throughout the Company's existing
and targeted markets. Many of these Clubs attract the same types of members
targeted by Spectrum Clubs and Sports Clubs. The Company also competes with
recreational facilities established by governments and businesses, the YMCA and
YWCA, country clubs and weight-reducing salons, as well as products and services
that can be used in the home. Other entertainment and retail businesses also
compete with the Company for the discretionary income of its target market. As
the general public becomes increasingly aware of the benefits of regular
exercise, it is anticipated that additional sports and fitness businesses will
emerge to compete with established operators like the Company, some of which may
be larger and have greater financial and operating resources than the Company.
However, the Company believes that there will continue to exist a market for its
Clubs and that its operating experience, its highly visible image, the
professionalism of its staff and its state-of-the-art equipment and exercise
facilities afford it an advantage over its competitors.

TRADEMARKS AND TRADENAMES

The "Sports Club" name is generally not protectable under federal or state
trademark laws. The Company is currently seeking protection of its "flying lady"
logo as a stand alone design. The Company has successfully registered "The
Sports Club/LA" and "The Sports Club/Irvine" names in combination with the
"flying lady" logo. The Company has registered "The Sports Club/LA" name and
logo in France, Germany and the United Kingdom and is awaiting final approval in
Australia and Japan. The Company holds a federal trademark for the "Spectrum
Club" name.

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GOVERNMENT REGULATION

The operations and business practices of the Company are subject to
regulation at the federal, state and, in some cases, local levels. State and
local consumer protection laws and regulations govern the Company's advertising,
sales and other trade practices.

Statutes and regulations affecting the fitness industry have been enacted
or proposed in California, New York and Nevada, the states in which the Company
currently operates Clubs. Many other states into which the Company may expand
have or likely will adopt similar legislation. Typically, these statutes and
regulations prescribe certain forms and provisions of membership contracts,
afford members the right to cancel the contract within a specified time period
after signing, require an escrow of funds received from pre-opening sales or the
posting of a bond or proof of financial responsibility, and may impose numerous
limitations on the terms of membership contracts. In addition, the Company is
subject to numerous other types of federal and state regulations governing the
sale of memberships. These laws and regulations are subject to varying
interpretations by a number of state and federal enforcement agencies and
courts. In this regard, the California Civil Code imposes a maximum limit on the
amount that may be charged pursuant to a contract for health studio services.
The Company maintains internal review procedures in order to comply with these
requirements, and believes that its activities are in substantial compliance
with all applicable statutes, rules and decisions.

Under so-called state "cooling-off" statutes, a member has the right to
cancel his or her membership for a period of three to ten days (depending on the
applicable state law) and, in such event, is entitled to a refund of any down
payment. In addition, the Company's membership contracts provide that a member
may cancel his or her membership at any time for medical reasons or upon
relocation of a certain distance from the nearest Club. The specific procedures
for cancellation in these circumstances vary due to differing state laws. In
each instance, the canceling member is entitled to a refund of prepaid amounts
only. Furthermore, where permitted by law, a cancellation fee is due to the
Company upon cancellation and the Company may offset such amount against any
refunds owed.

EMPLOYEES

At January 31, 1998, the Company had approximately 2,100 employees, most of
whom are employed on a part-time basis in Club operating activities such as
aerobics, private training and food and beverage services. The Company employs
614 full-time employees. Approximately 227 employees are sales personnel or
supervisory personnel involved in Club operations, and 35 are employed in
general and administrative functions. The Company is not a party to any
collective bargaining agreement with its employees. Although the Company
experiences high turnover of non-management personnel, the Company has never
experienced any labor shortages nor had any difficulty in obtaining adequate
replacements for departing employees and considers its relations with its
employees to be good.

Each of the Company's Clubs has a staff of fitness instructors trained to
assist in the sales function and to implement fitness testing and
individually-tailored exercise programs, as well as one or more managers who are
responsible for sales. Most instructors are college-educated. The Company's
aerobics instructors must have at least one year of teaching experience before
they are permitted to teach at the Clubs, and are required to participate in
ongoing training and periodic re-evaluation.

PROPERTIES

The Company owns The Sports Club/Irvine, The Sports Club/LA, The Sports
Club/Las Vegas, and the Spectrum Clubs in Agoura Hills, Thousand Oaks, Canoga
Park and Fountain Valley including all underlying real estate. The Spectrum
Club/Santa Ana and the Spectrum Club/Fullerton building are leased with a
purchase option from Millennium, and the Company has entered into an
30

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agreement pursuant to which it will negotiate with Millennium to develop a
Sports Club in Houston, Texas and lease the Club to the Company (see "Certain
Transactions"). The land underlying the Spectrum Club/Fullerton is leased from
the City of Fullerton. All other structures in which the Clubs are located are
leased from third parties.

The Sports Club/LA property secures a loan with a balance of approximately
$22.2 million and bears interest at a fixed annual rate of 10.63%. The Company
is required to make monthly principal and interest payments of approximately
$262,000. The note matures in April 2003 but, if certain conditions are met, the
Company has the right to extend the term of the note by an additional five
years. All assets of The Sports Club/LA secure this loan. The building,
improvements and personal property of The Sports Club/Irvine secure a $4.9
million note bearing interest at a fixed annual rate of 6.0%. The note requires
quarterly principal payments of $125,000 with a balloon payment of $4.0 million
due on November 1, 1999. All assets of the Spectrum Club/Agoura Hills secure a
$2.5 million note which bears interest at a fixed annual rate of 8.5%. Monthly
principal and interest payments of $20,107 are required through the note's
maturity in April 2024.

The following table provides certain information concerning the Company's
operating Clubs:

[Enlarge/Download Table]

YEAR OPENED
("O") OR
APPROXIMATE ACQUIRED OWN OR LEASE
CLUB SQUARE FEET ("A") EXPIRATION DATE RENEWAL OPTION
---- ----------- -------------- ----------------- ---------------------

The Sports Club/LA(1)................. 100,000 1994 A Own N/A
The Sports Club/Irvine................ 130,000 1994 A Own N/A
Reebok Sports Club/NY(2).............. 140,000 1995 O 4/19/15 Three 14-year options
The Sports Club/Las Vegas............. 136,000 1997 A Own N/A
Spectrum Club/Santa Monica............ 30,000 1991 A 11/14/98 Two 5-year options
Spectrum Club/Agoura Hills............ 30,000 1994 A Own N/A
Spectrum Club/Water Garden............ 19,000 1993 O 6/30/08 5-year option
Spectrum Club/Howard Hughes Center.... 36,000 1994 A 9/14/08 Two 5-year options
Spectrum Club/Manhattan Beach(3)...... 65,000 1987 O 2/28/02 Three 5-year options
Spectrum Club/Valencia................ 57,000 1997 O 7/1/12 Two 5-year options
Spectrum Club/Fullerton(4)............ 121,000 1997 A Building 12/31/17 Two 10-year options
Land 4/30/35 N/A
Spectrum Club/Santa Ana(5)............ 75,000 1997 A 12/31/17 Two 10-year options
Spectrum Club/Canoga Park............. 85,000 1997 A Own N/A
Spectrum Club/Fountain Valley......... 42,000 1997 A Own N/A

---------------
(1) D. Michael Talla, the Company's Chairman and CEO has the right to 49.9% of
the first $300,000 of annual operating income from the partnership which
owns The Sports Club/LA. See "Certain Transactions."
(2) The Company is entitled to certain priority distributions from the
partnership which owns this Club. After payment of such priority
distributions, the Company is entitled to 60% of all additional profits. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(3) The Company owns a 46.1% interest in the Spectrum Club/Manhattan Beach.
(4) The Company leases the building and land from different parties. The Company
will use a portion of the proceeds of the Offering to acquire ownership of
the building from Millennium. See "Use of Proceeds."
(5) The facility consists of a 75,000 square foot, two-story health Club. A
52,000 square foot, three-story addition was under construction by the prior
owners. The Company will use a portion of the proceeds of the Offering to
acquire ownership of this property. See "Use of Proceeds." The Company is
evaluating whether to complete construction of this building.

The Company has entered into leases with Millennium relating to Sports
Clubs to be developed in Washington, D.C. and San Francisco, California. Each
lease will require payments commencing upon opening of the Clubs by the Company,
expected in 2001, based upon the landlord's development expenses; has an initial
term of 20 years; and provides the Company with three, fourteen-year renewal
options. The Clubs are expected to be from 80,000 to 100,000 square feet in
size. The Company has entered into a lease with respect to the development of a
Sports Club at the Rockefeller Center in New York City. The lease has a term of
fifteen years and provides the Company with two five-year renewal options. The
lease provides for annual rent in the amount of approximately $3.6 million
during the first five years of the term, approximately $4.0 million during

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the second five years of the term, and $4.5 million during the third five years
of the term. The rent during the option terms will be based upon the fair market
value of the leased premises. The Club is expected to be approximately 89,000
square feet in size.

The Company has entered into a "triple net" lease relating to an
approximately 43,000 square foot Spectrum Club to be built in Puente Hills,
California. This lease has a term of fifteen years and options to extend for a
total of 19 years, provides for initial annual rent of approximately $866,000
per year with an increase of 10% each fifth year thereafter.

Leases for the Clubs are generally long-term "triple net" operating leases,
which require the Company to pay all real estate taxes, insurance and
maintenance expenses, in addition to rent, having an average remaining term of
approximately 26 years (including options to extend exercisable by the Company).
The earliest expiration date of any of these leases is November 1998 (with
respect to the Spectrum Club/Santa Monica). These leases generally provide that
rent payments shall be adjusted upward periodically during the terms of the
leases, including adjustments based upon changes in the Consumer Price Index in
the surrounding area (but subject to certain maximum increases that will protect
the Company in inflationary periods), and permit extension of the primary term,
subject to certain notice requirements. The lease with Millennium relating to
the Spectrum Club/Fullerton and the Spectrum Club/Santa Ana has a term of twenty
years and provides for base rent of $1.0 million per year for the first ten
years of the term and $1.2 million per year thereafter. The Company also leases
approximately 15,600 square feet of office space in a commercial building in Los
Angeles, California, for administrative, accounting and general corporate
purposes. This lease requires monthly payments of $28,875 through the end of the
lease term in March 2000.

Effective January 26, 1992, all existing public accommodations (including
the Clubs) were required to comply with the Americans with Disabilities Act (the
"ADA"). The ADA, together with many state and local statutory provisions,
generally require that buildings be made accessible to persons with
disabilities. The Company has undertaken an assessment of its Clubs to determine
the extent of non-compliance and has devised a plan to implement corrective
measures. Although the cost of compliance with existing and evolving ADA, state
and local statutory provisions cannot be predicted with certainty at this time,
the Company currently anticipates the required improvements will be effected as
part of the Company's routine capital expenditures. While the future impact of
evolving ADA, state and local statutory provisions cannot be predicted, such
expenditures are not expected to have a material adverse impact on the Company.

The Company has agreed to operate The Sports Club/Irvine as a first-class
coed athletic and social Club facility until 1999. For a period of 15 years
thereafter, the property use may not be changed if the change requires
development approval by the City of Irvine that cannot be obtained separately
from the development rights of the project in which the Club is located. If
either of these covenants is violated, the master developer of that project has
the right to purchase The Sports Club/Irvine for a cash price equal to 95% of
its original purchase price from the master developer plus 95% of the
construction costs incurred in constructing The Sports Club/Irvine.

The Company anticipates spending a total of approximately $7.0 million at
The Sports Club/Las Vegas and the four recently acquired Spectrum Clubs to
improve these facilities and equipment and ensure that the Clubs meet the
Company's quality standards. The Company believes its properties and equipment,
as well as its leased facilities, are adequate for its needs, have been
well-maintained and, other than described herein, do not require any substantial
renovation or restoration work at this time.

LEGAL PROCEEDINGS

Mkdg/Rhodes SC Partnership and Sports Club, Inc. v. Agricultural Insurance
Company (Los Angeles Superior Court). In connection with the Northridge
earthquake on January 17, 1994, MKDG/Rhodes SC Partnership ("MKDG") carried
excess earthquake coverage for The Sports Club/LA with Agricultural Insurance
Company ("Agricultural"). Certain of the Company's prede-

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cessors and subsidiaries (the "SCLA Parties") were named insureds under the
policy. The SCLA Parties assigned to MKDG all of their rights to payments under
the Agricultural earthquake policy in October 1994 and retained no interest in
any amounts paid by Agricultural under that policy. Agricultural made payments
totaling approximately $3.0 million before a dispute arose under the policy.
MKDG filed a complaint against Agricultural on August 2, 1995, and Agricultural
filed a cross-complaint against MKDG and the SCLA Parties, alleging intentional
misrepresentation (fraud), negligent misrepresentation, breach of contract,
breach of implied covenant of good faith and fair dealing, rescission, money had
and received, declaratory judgment and indemnity. Agricultural seeks the return
of amounts paid plus punitive damages and attorneys fees. An appraisal hearing
is set for March 1998. Trial is scheduled on April 27, 1998. The Company is
informed that if the appraisal shows that the covered loss exceeds the policy
proceeds as claimed by MKDG, MKDG believes the matter may be settled. The
Company will seek to be indemnified by MKDG for all damages and costs incurred
in this action.

ST Institute of California d/b/a Sports Training Physical Therapy, L.A. v.
The Sports Club Company, Inc. (Los Angeles Superior Court). In 1989, ST
Institute of California ("STI") leased space in both The Sports Club/LA and The
Sports Club/Irvine. In 1995, SportsMed entered into an asset purchase agreement
with STI whereby SportsMed purchased STI's assets. SportsMed agreed to make
performance payments to STI in the minimum amount of $100,000 per year. A
dispute subsequently arose between SportsMed and STI, and SportsMed ceased
making payments after having paid approximately $46,000. STI filed a complaint
on December 30, 1996, alleging damages for breach of contract, conversion,
fraud, negligent misrepresentation, and civil conspiracy. STI claims damages of
not less than $2.3 million on the first two causes of action, and not less than
$1.8 million on the fifth cause of action. The Company does not believe that it
is liable for any amounts other than performance payments under the contract
plus attorneys fees and interest. Discovery is continuing and the parties are
discussing settlement. The matter has been set for trial on July 22, 1998.

Harvey Scott Schwartz v. LA/Irvine Sports Club, Ltd. and Sports Club, Inc.
of California. (Los Angeles Superior Court). On March 5, 1997, the Company was
served with a class action lawsuit brought on behalf of all male members, past
and present, of The Sports Club/LA and The Sports Club/Irvine. The complaint
alleges that the civil rights of the class have been violated because of the
existence of "women's preferred" gym areas at these facilities. The complaint
seeks approximately $1,000 in damages for each class member. The Company and its
counsel are presently investigating the facts of the case, the potential size of
the class, and the likelihood that a class can or will be certified by the
court. At this stage, the Company has not evaluated the scope of damages or the
amount in controversy. The Company has responded to the complaint and discovery
is continuing. The Company believes the claim is without merit and will
vigorously defend the action. Men are not prevented from using or excluded from
the "women's preferred" gym area and the Company believes that no civil rights
violation has occurred.

R.W. Management Group, Inc. v. Sequoia Athletic Club & Racquetball World,
et al. (Los Angeles Superior Court). On January 20, 1998, R.W. Management Group
("RWMG") filed an action against various Racquetball World-related entities and
individuals (the "RBW Defendants"), the Spectrum Club Company, Inc. ("SCC"), and
the Company, alleging, among other things, breach of contract, breach of
fiduciary duty and interference with contract. The complaint seeks equitable
relief, unspecified compensatory damages, punitive damages and attorneys' fees.
The contract which RWMG alleges was breached (the "RWMG Contract") relates to
the Racquetball World Club located in Canoga Park, which facility (the "Canoga
Park Club") was acquired by SCC in December 1997. In connection with that
acquisition, SCC acquired the assets thereof and assumed only certain designated
liabilities, none of which related to the RWMG Contract; all other obligations
and liabilities associated with the Canoga Park Club were retained by the
seller. Although neither SCC nor the Company has responded to the complaint,
they believe the allegations against them are without merit, and they intend to
vigorously defend this lawsuit.

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Robert Heller v. HealthFitness America, et al. (Los Angeles Superior
Court). On November 3, 1997, Dr. Robert Heller ("Dr. Heller") filed an action
against SportsMed, SCC Medical Group, Inc., and the Company, alleging breach of
contract in connection with a five-year consulting agreement entered into by
SportsMed's predecessor and Dr. Heller. Dr. Heller seeks to recover $162,000 in
consulting fees ($3,000 per month for the balance of the contract's term) and
royalties generated from diagnostic materials allegedly created by Dr. Heller.
The Company, SportsMed, and SCC Medical Group, Inc. have responded to and denied
the allegations of the complaint and discovery is proceeding. Based upon
preliminary investigation, it is the Company's position that no royalties were
ever generated and Dr. Heller must mitigate damages attributable to unpaid
consulting fees. The defendants will seek mediation and believe an early
settlement is likely.

Other Matters. The Company is also involved in various claims and lawsuits
incidental to its business, including claims arising from accidents and disputes
with landlords. However, in the opinion of management, the Company is adequately
insured against such claims and lawsuits involving personal injuries, and any
ultimate liability arising out of any such proceedings will not have a material
adverse effect on the financial condition, cash flow or operations of the
Company.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The names of the directors and executive officers of the Company, as well
as their respective ages as of March 20, 1998, and positions with the Company,
are as follows:

[Download Table]

NAME AGE POSITION
---- --- --------

D. Michael Talla........... 51 Chairman of the Board and Chief Executive Officer
Rex A. Licklider........... 55 Vice Chairman of the Board
John M. Gibbons............ 49 President, Chief Operating Officer and Director
Nanette Pattee Francini.... 49 Executive Vice President, Secretary and Director
Mark S. Spino.............. 43 Vice President of Development
Philip J. Swain............ 40 Vice President of Operations
Timothy M. O'Brien......... 46 Chief Financial Officer and Assistant Secretary
Brian J. Collins........... 37 Director
Andrew L. Turner........... 51 Director
Dennison T. Veru........... 37 Director

D. Michael Talla co-founded the Company in 1977, has served as Chief
Executive Officer since that time and has served as Chairman of the Board of
Directors since February 1994. Mr. Talla has been in the sports and fitness
industry for more than 20 years and has developed or participated in the
development of more than 20 Clubs in the United States, including all Clubs
developed by the Company. Mr. Talla holds a Bachelor of Arts Degree in Business
Administration from the University of Arizona.

Rex A. Licklider joined the Company as an unpaid consultant in 1991, has
served as a director of the Company since February 1994 and was named Vice
Chairman of the Board in May 1994. Effective August 1, 1996, Mr. Licklider
entered into a consulting agreement with the Company pursuant to which he
advises the Company with respect to strategic and financial matters. Prior to
his involvement with the Company, Mr. Licklider founded Com Systems, Inc., a
publicly traded long-distance telecommunications company and served in various
capacities as Chairman, President and Chief Executive Officer from 1975 until
April 1992. Mr. Licklider is a director of Deckers Outdoor Corporation,
GoldenTel, Inc., and Associated Travel Services, Inc. He also serves on the
Board of Directors of the Children's Bureau of Southern California and Los
Angeles Youth Programs, Inc. Mr. Licklider holds a Bachelor of Arts Degree in
Business Administration from the University of Arizona and a Masters in Business
Administration from the University of California at Los Angeles.

John M. Gibbons was hired by the Company to serve as Chief Financial
Officer in May 1994 and became Executive Vice President in February 1995 and
President and Chief Operating Officer on July 1, 1995. Mr. Gibbons was elected
to the Board of Directors effective August 14, 1995. From September 1993 until
May 1994, Mr. Gibbons was a self-employed financial and business consultant
whose clients included the Company. From February 1990 until September 1993, Mr.
Gibbons was employed as a Vice President by Com Systems, Inc., a publicly traded
long-distance telecommunications company located in Westlake Village,
California, serving as General Manager and Senior Vice President from December
1992 to September 1993, and as Chief Financial Officer from August 1991 through
December 1992. Mr. Gibbons has a Bachelors of Business Administration from Notre
Dame and a Masters of Business Administration from the University of Southern
California, and is a Certified Public Accountant.

Nanette Pattee Francini co-founded the Company in 1977 and has been
principally responsible for overseeing all marketing activities since 1978. Ms.
Pattee Francini has served as a director since February 1994 and was appointed
Executive Vice President and Secretary in May 1994. Ms. Pattee Francini has been
in the sports and fitness industry for more than 20 years and has developed or

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participated in the development of more than 20 Clubs, including all Clubs
developed by the Company. Ms. Pattee Francini holds a Bachelor of Arts Degree
from the University of Arizona.

Mark S. Spino has served the Company as Director of Development since 1980
and was appointed Vice President in 1984. Mr. Spino has been in the sports and
fitness industry for more than 15 years and has developed or participated in the
development of more than 15 Clubs in the United States, including many of the
Clubs developed by the Company. From July 1979 to June 1980, Mr. Spino was
Assistant Manager, and later Manager, of the Mid-Valley Athletic Club in Reseda,
California. Mr. Spino holds Bachelor of Arts and Master of Arts Degrees in
Physical Education from the University of Southern California.

Philip J. Swain has been employed by the Company since 1982 and has served
as Vice President of Operations since 1988. Mr. Swain has been in the sports and
fitness industry for more than 20 years and has developed or participated in the
development of more than 15 Clubs in the United States, including many of the
Clubs developed by the Company. Mr. Swain served as Regional General Manager
from 1986 until 1988. From December 1979 to November 1982, Mr. Swain was the
Director of Marketing and Membership at the Mid-Valley Athletic Club in Reseda,
California. From February 1975 to December 1979, Mr. Swain was employed by
Health & Tennis Corporation of America, managing different facilities in Detroit
and Los Angeles.

Timothy M. O'Brien has been employed as Chief Financial Officer by the
Company since February 1995. In June 1995, he was appointed Assistant Secretary.
From July 1993 until February 1995, Mr. O'Brien was employed as Vice
President/Controller of WCT Communications, Inc., a publicly traded
long-distance telecommunications company located in Santa Barbara, California.
From May 1989 until July 1993, Mr. O'Brien was Controller for Com Systems, Inc.,
a publicly traded long-distance telecommunications company located in Westlake
Village, California. Mr. O'Brien has a Bachelor of Business Administration
degree from the University of Wisconsin-Madison and is a Certified Public
Accountant.

Brian J. Collins has been Vice President and Chief Financial Officer of
Millennium Partners Management LLC and its predecessor company, affiliates of
Millennium Entertainment Partners L.P., a real estate developer of mixed use
urban entertainment projects, since December 1996. Since June 1, 1997, he has
been a principal of Millennium Partners Management LLC. From March 1993 to
November 1996, Mr. Collins was Senior Vice President at Carol Management Corp.,
an owner and operator of real estate and hotel properties, and from June 1992 to
February 1993, he was President of BJC Realty Inc., a real estate consulting
firm. Mr. Collins holds a Bachelor of Arts Degree from Colgate University and a
Masters of Science from New York University Graduate School of Business.

Andrew L. Turner has been a director of the Company since September 1994
and has been Chairman of the Board of Directors, President and Chief Executive
Officer of Sun Healthcare Group, Inc., a publicly traded long-term health care
services provider since its formation in 1989. Mr. Turner was also founder and
previously served as Chief Operating Officer of Horizon Healthcare Corporation,
a publicly traded health care services provider, from 1986 to 1989. Prior to
1986, Mr. Turner served as a Senior Vice President of Operations of The
Hillhaven Corporation.

Dennison T. Veru has been President of Awad & Associates, a money
management division of Raymond James Financial, since November 1992. From
February 1990 to November 1992, he served as Executive Vice President,
Investments, of Smith Barney, Inc., specializing in small and medium
capitalization stocks. Prior to that, Mr. Veru was Vice President of Broad
Street Investment Management and an Assistant Vice President at Drexel Burnham
Lambert. Mr. Veru serves as a director for Lois USA, Inc. a publicly held
company. Mr. Veru is a graduate of Franklin and Marshall College.

The directors of the Company are divided into three classes having terms
expiring at the annual meetings of the Company's stockholders in 1998 (Messrs.
Turner, Gibbons and Collins), 1999

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(Ms. Pattee Francini and Mr. Veru) and 2000 (Messrs. Talla and Licklider), or
such later dates as their successors are elected. At each annual meeting of
stockholders, successors to the class of directors whose term expires at such
meeting will be elected to serve for three-year terms and until their successors
are elected.

Officers serve at the pleasure of the Board of Directors subject to any
rights under employment agreements.

The Board of Directors has created an Audit Committee and a Compensation
Committee. The Audit Committee, composed of Messrs. Turner and Veru, is charged
with reviewing the Company's annual audit and meeting with the Company's
independent auditors and reviewing the Company's internal controls and financial
management practices. The Compensation Committee, also composed of Messrs.
Turner and Veru, recommends to the Board of Directors compensation for the
Company's key employees and administers the 1994 Stock Incentive Plan.

EXECUTIVE COMPENSATION

The following table sets forth the compensation paid by the Company to the
Chief Executive Officer and to the five other most highly compensated executive
officers (the "Named Executive Officers") for the years ended December 31, 1995,
1996 and 1997, for services rendered. Current salaries of the Company's
executives are described below under "Employment Agreements."

SUMMARY COMPENSATION TABLE

[Enlarge/Download Table]

LONG-TERM
ANNUAL COMPENSATION COMPENSATION
NAME AND ----------------------- AWARDS OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS (SHARES) COMPENSATION
------------------ ------ --------- -------- -------------- ------------

D. Michael Talla........... 1997 $239,250(2) -- -- $ 3,135(3)
Chairman of the Board 1996 218,000(2) -- -- --
and Chief Executive
Officer 1995 205,250(2) -- -- --
Nanette Pattee Francini.... 1997 145,100 $ 10,000 15,000 --
Executive Vice President, 1996 124,175 -- 15,000 --
Secretary and Director 1995 122,200 -- -- --
John M. Gibbons............ 1997 245,883(4) 25,000 -- 2,637(3)
President, Chief 1996 232,800(4) 25,000 225,000(5) 2,256(3)
Operating
Officer and Director 1995 218,933(4) -- 450,000(5) --
Mark S. Spino.............. 1997 134,125 10,000 15,000
Vice President and 1996 116,795 -- 15,000 --
Director of Development 1995 111,855 -- -- --
Philip J. Swain............ 1997 146,031 15,000 15,000 908(3)
Vice President and 1996 131,375 -- 25,000 --
Director of Operations 1995 127,000 -- -- --
Timothy M. O'Brien......... 1997 137,667 10,000 15,000 2,807(3)
Chief Financial Officer 1996 122,175 5,000 20,000 1,791(3)
and Assistant Secretary 1995 100,087 -- 25,000 --

---------------

(1) Includes automobile allowance.
(2) Mr. Talla also receives, on an annual basis, 49.9% of the first $300,000 of
The Sports Club/LA's net cash flow. This amount is not included in Mr.
Talla's compensation. See "Certain Transactions."
(3) Represents contribution of the Company's Common Stock pursuant to the
Company's 401-K Profit Sharing Plan.
(4) Includes an allowance for living expenses paid to Mr. Gibbons under the
terms of his employment agreement.
(5) Options to purchase 225,000 shares at the exercise price of $9.00 per share
issued on February 27, 1995, were canceled in connection with the issuance
on July 5, 1995 of options to purchase 225,000 shares at the exercise price
of $5.00 per share. Effective April 24, 1996, the Compensation Committee of
the Board of Directors lowered the exercise price to $3.00 per share.
Pursuant to the rules of the Securities and Exchange Commission, the
cancellation and regrant of the option, and the repricing of the option, are
each deemed to constitute a separate award.

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EMPLOYMENT AGREEMENTS

Effective August 10, 1994, the Company entered into Employment Agreements
with D. Michael Talla, as Chief Executive Officer, and Nanette Pattee Francini,
as Executive Vice President, each of which expire on December 31, 2000. Certain
terms of Mr. Talla's employment agreement were amended by the Board of Directors
as of February 27, 1995. The Agreements provide for annual compensation of
$200,000 payable to Mr. Talla, and $115,000 payable to Ms. Pattee Francini,
subject to upward adjustment at the discretion of the Board of Directors. In
1997, the Compensation Committee of the Board of Directors increased Mr. Talla's
and Ms. Pattee Francini's annual salaries to $225,000 and $147,000,
respectively. The Company may terminate either Employment Agreement without
penalty for cause.

The employment agreements with Mr. Talla and Ms. Pattee Francini entitle
each employee to annual performance bonuses in the discretion of the Board of
Directors, to be paid within 120 days for Mr. Talla and 150 days for Ms. Pattee
Francini following the end of each fiscal year. The employment agreements also
include severance provisions which entitle each executive officer to severance
pay if his or her employment is terminated by the Company without cause; if the
employee dies or is disabled; or if the employee terminates the agreement as a
result of a material breach by the Company of its obligations thereunder (up to
six months' pay for Ms. Pattee Francini and up to twelve months' pay for Mr.
Talla). In addition, the employment agreements provide Mr. Talla and Ms. Pattee
Francini with additional severance benefits upon termination of employment
following the occurrence of any one of the following events without the approval
of a majority of the Board of Directors: (i) the consolidation or merger of the
Company with any other corporation or other entity; (ii) the sale or other
transfer of all or substantially all of the assets of the Company; (iii) the
approval by the stockholders of the Company of a plan of liquidation or
dissolution of the Company; (iv) any person becomes the beneficial owner
directly or indirectly of 25% or more of the Company's outstanding Common Stock;
or (v) a change occurs in the composition of a majority of the Board of
Directors of the Company (unless approved by two-thirds of the Board of
Directors of the Company). If at any time within two years after the occurrence
of any one of the foregoing events Mr. Talla's or Ms. Pattee Francini's
employment is terminated (other than for cause, incapacity or death), or Mr.
Talla or Ms. Pattee Francini elects to terminate his or her employment for "good
reason" (as that term is defined in the agreements), he or she is entitled to
receive severance compensation equal to the lesser of: (i) the maximum amount
which does not constitute a "parachute payment" as defined in Section 280G of
the Internal Revenue Code of 1986, as amended; or (ii) an amount equal to three
times the aggregate of (A) his or her base annual salary then in effect, (B) the
car allowance, Club memberships and dues, and insurance benefits paid for the
employee during the one-year period immediately prior to termination, and (C)
bonuses accrued but unpaid through the date of termination of employment. Under
the agreements, "good reason" includes the assignment of any duties inconsistent
with the employee's position or any other action which diminishes the employee's
position, authority or duties, which determination shall be made in good faith
by the employee. If the employment of Mr. Talla or Ms. Pattee Francini were
terminated within such period as a result of the occurrence of any of the
foregoing events (assuming that neither would be entitled to any performance
bonus), the aggregate approximate amounts payable to Mr. Talla and Ms. Pattee
Francini would be $754,000 and $477,000, respectively.

Effective as of July 1, 1995, the Company entered into an employment
agreement with John M. Gibbons, which expires June 30, 1998. The employment
agreement provides for annual base compensation of $200,000, subject to annual
review and upward adjustment at the discretion of the Board of Directors. On May
27, 1997, the Compensation Committee of the Board of Directors increased Mr.
Gibbons annual base salary to $210,000. In addition to his base salary Mr.
Gibbons is entitled to participate in any management bonus program the Board of
Directors may implement from time to time. The employment agreement also
includes a severance provision which entitles Mr. Gibbons to receive payments
equal to his base compensation until the earlier of 12 months following the date
of his termination date or the expiration of the term of the agreement, if his

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employment is terminated prior to the expiration date other than for cause or by
Mr. Gibbons himself. Mr. Gibbons will be paid $40,000 for living expenses and
$7,800 each year as an auto allowance payable in equal semi-monthly
installments. Pursuant to the terms of the employment agreement, the
Compensation Committee of the Board of Directors, effective July 1, 1995,
granted Mr. Gibbons an option to purchase 225,000 shares of the Company's Common
Stock at an exercise price of $5.00 per share ("Option Shares"). One-third of
the Option Shares became immediately vested upon the grant with the remaining
two-thirds vesting in 24 equal monthly installments commencing October 21, 1995.
Concurrent with the grant of these options to purchase shares of Common Stock,
options for the purchase of 225,000 shares of Common Stock which were granted to
Mr. Gibbons on February 27, 1995 at a price of $9.00 per share were canceled.

Effective April 24, 1996, the Compensation Committee of the Board of
Directors amended the employment agreement with Mr. Gibbons to lower the
exercise price of the Option Shares to $3.00 per share, the fair market price of
a share of the Company's Common Stock, as evidenced by the closing price on the
American Stock Exchange on April 24, 1996. In exchange, Mr. Gibbons agreed to
waive 50% of the $100,000 bonus that was to be paid to him in 1996 pursuant to
the terms of his employment agreement. In addition, payment of 50% of the
remaining bonus was deferred until the second quarter of 1997.

The Company does not have written employment agreements with Messrs. Spino,
Swain, and O'Brien who currently receive annual base salaries of $130,000,
$140,000, and $134,000 respectively.

EMPLOYEE BENEFIT PLANS

1994 Stock Incentive Plan

A total of 1,000,000 shares are reserved for issuance upon exercise of
options granted under the 1994 Stock Incentive Plan (the "Plan"), as adopted on
May 27, 1994. As of March 25, 1998, options to purchase an aggregate of 637,833
shares of Common Stock were outstanding and a weighted-average exercise price of
$3.79 per share. No stock options may be granted under the Plan after May 27,
2004.

The Plan is administered by the Company's Compensation Committee (the
"Administrator"). The Administrator has sole discretion and authority,
consistent with the provisions of the Plan, to select the Eligible Participants
to whom Rights will be granted under the Plan, the number of shares which will
be covered by each Right and the form and terms of agreements to be used to
represent the Rights. All employees, officers and directors of the Company,
other than the members of the Administrator, are eligible to participate in the
Plan.

Options. The Administrator is empowered to determine the exercise price of
Options granted under the Plan, but the exercise price of incentive stock
options must be equal to the fair market value of a share of Common Stock on the
date the option is granted (110% with respect to optionees who own at least 10%
of the outstanding Common Stock) and non-statutory options must have an exercise
price equal to at least 85% of the fair market value of a share of Common Stock
on the date the option is granted. Incentive stock options may only be granted
to employees and directors of the Company, or of any subsidiary or parent
corporation. No incentive stock options may be granted to any optionee which
first become exercisable during any calendar year with respect to shares having
an aggregate fair market value, measured at the time of the grant of such
options, in excess of $100,000. Options granted under the Plan may, in the
discretion of the Administrator, become exercisable in installments, however,
upon any merger, acquisition or other reorganization in which the Company is not
the surviving corporation, or upon a change in control of the Company, all
Options will be fully exercisable. All Options which have not previously been
exercised or terminated will expire on the tenth anniversary of the date of
grant.

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Options terminate on the ninetieth day following the termination of the
employment or position of the Option holder with the Company. If the Option
holder dies, becomes disabled or retires during the term of the Option, the
Option may be exercised following such date by the Option holder or by the
Option holder's estate or by a person who acquired the right to exercise the
Option by reason of the death or disability of the Option holder for a period of
one year. However, a person who retires from the Company may exercise an
incentive stock option only during the ninety-day period following the date of
retirement or termination of employment. An Option will be exercisable following
termination of employment or services only to the extent it was exercisable on
the date of such termination, but no Option may be exercised after the
expiration of its term.

Options granted under the Plan are not transferable other than by will or
by the laws of descent and distribution, and Options may be exercised, during
the lifetime of the Option holder, only by the Option holder or by the Option
holder's guardian or legal representative.

Payment of the exercise price may be made in cash, or, at the discretion of
the Administrator, in shares of Common Stock of the Company already owned by the
Option holder valued at their fair market value on the date of exercise, or by
way of a promissory note from the optionee. The Plan also provides that as a
condition of delivery of shares purchased under the Plan, the Company may
require the Option holder to deposit with the Company an amount sufficient to
satisfy any withholding tax requirements relating to the delivery of the shares.
Under certain conditions, including the consent of the Administrator, the Option
holder may elect to satisfy his or her withholding obligations with a portion of
the shares otherwise deliverable by the Company.

Purchase Rights. Rights to purchase shares of Common Stock to be offered
for direct sale under the Plan must be at a purchase price equal to not less
than 85% of the fair market value of the shares on the day preceding the date of
grant. Purchase Rights are generally exercisable for period of thirty days
following the date of grant. Shares purchased upon exercise of a Purchase Right
must be paid for, in the discretion of the Administrator, by cash or cash
equivalent, by delivery of a promissory note, or by transfer to the Company of
shares of the Company's Common Stock which had been held by the Purchase Right
holder for a period of at least six calendar months preceding the date of
surrender and which have a fair market value equal to the purchase price at the
time of the transfer. The agreements relating to Purchase Rights may contain
such other provisions as the Administrator may from time to time determine to be
appropriate, including "vesting" provisions granting to the Company the right to
repurchase the shares subject to a Purchase Right at the initial exercise price
upon the termination of the employment or position of the holder of such shares
prior to the vesting date or dates provided in the agreement. Generally, the
provisions applicable to Options regarding transfer and exercise upon
termination, death, disability or retirement will also apply to Purchase Rights.

Stock Appreciation Rights. Stock Appreciation Rights ("SARs")allow their
holders to benefit from the appreciation in the value of the shares subject to
the SARs, without the necessity of the investment of any funds by the holders.
Under the Plan, the Administrator may grant SARs in combination with Options or
on a stand-alone basis. SARs granted with respect to an Option (the "Related SAR
Option") will grant to the holder the right to elect to receive on exercise of
the SAR, either in cash or in whole shares of Common Stock, an amount equal to
the difference between the fair market value of the shares subject to the
Related SAR Option and the exercise price per share of the Related SAR Option.
SARs granted without reference to a Related SAR Option will grant to the holder
the right to elect to receive, either in cash or in whole shares of Common
Stock, an amount equal to the difference between the fair market value of the
shares subject to the SAR on the date the SAR is exercised and on the close of
business on the date of grant of the SAR. To date, no SARs have been granted
under the Plan.

SARs granted in tandem with a Related SAR Option are exercisable only to
the extent and under the same terms and conditions as the Related SAR Option. If
a SAR is exercised, the Related SAR Option will be modified to cancel the number
of shares with respect to which the SAR was

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exercised. Upon the exercise or termination of the Related SAR Option, the SAR
granted in connection with the Related SAR Option will terminate to the extent
of the number of shares as to which the Related SAR Option was exercised or
terminated. SARs granted other than in tandem with a Related SAR Option will
contain exercise terms substantially similar to those contained in Options.

All SARs are exercisable for (i) Common Stock (a "Stock Election"); (ii) an
amount payable in cash or cash equivalents; or (iii) any combination of the
foregoing (any exercise which includes a cash element is referred to herein as a
"Cash Election"). A Cash Election may only be made by an "officer" or "director'
within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as
amended (a "Section 16(b) Person") during the period between the third and
twelfth business days following the Company's release for publication of
quarterly or annual summary statements of sales and earnings. A Cash Election by
a person who is not a Section 16(b) Person and a Stock Election by any person
may be made at any time. Notwithstanding the foregoing, the Administrator may,
in its discretion, place a limit on the amount payable upon exercise of a SAR
agreement granting the SAR. The Plan provides that no SAR or Related SAR Option
is exercisable until the expiration of six months following the date of grant of
the SAR or Related SAR Option, except when the grantee dies, retires or becomes
disabled.

Generally, the provisions applicable to Options regarding transfer and
exercise upon termination, death, disability or retirement will also apply to
SARs.

Stock Compensation Plan. On July 8, 1994, the Company instituted its 1994
Stock Compensation Plan (the "Stock Compensation Plan") for the purpose of
compensating eligible directors by granting them shares of the Company's Common
Stock in lieu of a portion of their annual director's fees. A total of 50,000
shares are reserved for issuance pursuant to the Stock Compensation Plan, 12,000
of which have been issued. The Stock Compensation Plan is administered by the
Board of Directors and provides that members of the Board of Directors who are
neither officers nor employees of the Company or of any subsidiary shall
receive, on November 15 of each year, 1,000 shares of Common Stock. The Common
Stock will be granted only to persons who are directors as of the grant date.
Members of the Administrator are eligible to receive shares of Common Stock
pursuant to the Stock Compensation Plan. The Stock Compensation Plan may be
terminated or amended either by the Board of Directors or by the Board of
Directors and the stockholders, but not more often than once every six months,
other than to comport with changes in the Internal Revenue Code, the Employee
Retirement Income Security Act, or the rules thereunder. Unless the Stock
Compensation Plan is amended, neither the number nor type of securities to be
granted to directors pursuant to the Stock Compensation Plan may be changed.

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OPTION GRANTS, EXERCISES AND YEAR-END VALUES

The following table provides information concerning stock options granted
by the Company to the Named Executive Officers during the year ended December
31, 1997.

OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1997

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PERCENT POTENTIAL REALIZABLE
OF TOTAL VALUE AT ASSUMED
NUMBER OPTIONS ANNUAL RATES OF STOCK
OF SHARES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM (1)
OPTIONS IN FISCAL OR BASE EXPIRATION -----------------------
NAME GRANTED (2) YEAR PRICE DATE 5% 10%
---- ----------- ---------- -------- ---------- ---------- ----------

Nanette Pattee Francini...... 15,000 9.68% $4.375 3/20/2007 $106,896 $170,214
Mark S. Spino................ 15,000 9.68% 4.375 3/20/2007 106,896 170,214
Philip J. Swain.............. 15,000 9.68% 4.375 3/20/2007 106,896 170,214
Timothy M. O'Brien........... 15,000 9.68% 4.375 3/20/2007 106,896 170,214

---------------

(1) The dollar amounts under these columns are the result of calculations at the
5% and 10% annual rates of stock appreciation prescribed by the Securities
and Exchange Commission and are not intended to forecast possible future
appreciation, if any, of the Company's stock price. No gain to the optionee
is possible without an increase in the price of the Company's stock which
will benefit all stockholders commensurately.
(2) All of such options are governed by the Company's 1994 Stock Incentive Plan.

The following table provides information with respect to unexercised stock
options as of December 31, 1997. None of the Named Executive Officers exercised
stock options during the last fiscal year.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

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NUMBER OF UNEXERCISED VALUE OF ALL UNEXERCISED IN-THE-
OPTIONS UNDER THE OPTION PLAN MONEY OPTIONS AT FY-END
NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(2)
---- ----------------------------- --------------------------------

John M. Gibbons....................... 225,000/0 $ 1,406,250/$0
Nanette Pattee Francini............... 5,000/25,000 $ 32,813/$138,750
Mark S. Spino......................... 5,000/25,000 $ 32,813/$138,750
Philip J. Swain....................... 8,334/31,666 $ 54,692/$182,496
Timothy M. O'Brien.................... 23,334/36,666 $110,316/$193,747

---------------
(1) All such options are governed by the Company's 1994 Stock Incentive Plan.
(2) An in-the-money option is an option which has an exercise price for the
Common Stock which is lower than the fair market value of the Common Stock
on a specified date. The fair market value of the Common Stock on December
31, 1997, was $9.25, which was the closing price per share on the American
Stock Exchange on such date.

COMPENSATION OF DIRECTORS

Non-employee directors of the Company are entitled to receive an annual fee
of $10,000 and a fee of $500 for each meeting attended. Non-employee directors
who are members of the Audit Committee or Compensation Committee are entitled to
receive $500 for each meeting they attend. In addition, non-employee directors
receive 1,000 shares of the Company's Common Stock each year pursuant to the
Company's 1994 Stock Compensation Plan. Messrs. Licklider, Collins, Turner and
Veru currently serve on the Board as non-employee directors. The Company
provides Mr. Licklider with health insurance under its group insurance plan. All
directors receive reimbursement of reasonable out-of-pocket expenses incurred in
connection with meetings of the Board. Amounts paid to directors were $36,000
during 1995, $37,026 during 1996, and $48,834 during 1997. Under the 1994 Stock
Compensation Plan an aggregate of 12,000 shares of Common Stock were issued to
non-employee directors through December 31, 1997.

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COMPENSATION OF COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board ("Committee") administers the
executive compensation for the Company. Mr. Licklider was appointed Chairman on
July 8, 1994, and served continuously until August 1, 1996, when he resigned to
become a paid consultant with the Company. Mr. Turner has been a member of the
Committee since September 13, 1994, and became its Chairman on February 27,
1995. Mr. Veru was appointed to the Committee on February 20, 1996. None of
these individuals has ever been an officer or employee of the Company.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Certificate of Incorporation includes provisions which limit
the liability of its directors. As permitted by applicable provisions of the
Delaware General Corporation Law (the "Delaware Law"), directors will not be
liable to the Company for monetary damages arising from a breach of their
fiduciary duty as directors in certain circumstances. This limitation does not
affect liability for any breach of a director's duty to the Company or its
stockholders (i) with respect to approval by the director of any transaction
from which he or she derives an improper personal benefit, (ii) with respect to
acts or omissions involving an absence of good faith, that the director believes
to be contrary to the best interests of the Company or its stockholders, that
involve intentional misconduct or a knowing and culpable violation of law, that
constitute an unexcused pattern or inattention that amounts to an abdication of
his or her duty to the Company or its stockholders, or that show a reckless
disregard for duty to the Company or its stockholders in circumstances in which
he or she was, or should have been aware, in the ordinary course of performing
his or her duties, of a risk of serious injury to the Company or its
stockholders, or (iii) based on transactions between the Company and its
directors or another corporation with interrelated directors or on improper
distributions, loans or guarantees under applicable sections of Delaware Law.
This limitation of directors' liability also does not affect the availability of
equitable remedies, such as injunctive relief or rescission.

The Company's Bylaws authorize the Company to indemnify its directors and
officers to the full extent permitted by Delaware Law, including circumstances
in which indemnification is otherwise discretionary under Delaware Law, and the
Company anticipates entering into indemnification agreements (the
"Indemnification Agreements") with its directors providing such indemnity. The
Indemnification Agreements will constitute binding agreements between the
Company and each of the other parties thereto, and thus will prevent the Company
from modifying its indemnification policy in a way that is adverse to any person
who is a party to an Indemnification Agreement.

CERTAIN TRANSACTIONS

The Company possesses a 50.1% interest in the partnership which owns The
Sports Club/LA; Mr. Talla beneficially owns the remaining 49.9% interest. The
partnership agreement provides that, on an annual basis, the partners will share
in the first $300,000 of The Sports Club/LA's net cash flow in proportion to
their percentage interests. The next $35.0 million of net cash flow will be
distributed to the Company. All distributions of net cash flow thereafter, if
any, will be made to the partners in proportion to their percentage interests.
In addition, the partnership agreement provides the Company with an option to
purchase Mr. Talla's interest for an amount equal to the product of four times
the amount of distributions received by Mr. Talla in the year immediately
preceding the year in which the option is exercised.

As of January 1, 1997, Mr. Talla was either the guarantor of, or the named
debtor with respect to, approximately $245,000 in debts of the Company. The
Company agreed with Mr. Talla to make all payments due with respect to all such
debts, and to indemnify him with respect to all costs incurred in connection
therewith. These debts have been reflected in the Company's financial
statements. All such debts were paid in full during 1997.

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In April 1996, the Company extended a loan to Mr. Talla in the amount of
$600,000, secured by 384,000 shares of the Company's Common Stock. The loan was
due and payable on April 3, 1997 and bore interest at 6.8%. In 1997, The
Company's Board of Directors approved the extension of the loan and accrued
interest into a new note in the amount of $641,000 with interest at 5.9%, due on
April 3, 1998, secured by a pledge of 300,000 shares of the Company's stock. Mr.
Talla repaid this loan and accrued interest in September 1997.

Effective August 1, 1996, Mr. Licklider entered into a consulting agreement
with the Company pursuant to which Mr. Licklider received $10,000 per month plus
reimbursement for reasonable and necessary expenses. The agreement had a
one-year term and on August 1, 1997 was extended through July 31, 1998. Under
the terms of the agreement, Mr. Licklider advises the Company with respect to
strategic and financial matters for a minimum of 60 hours of service per month
outside the normal scope of his duties as a director. Effective with the
commencement of the consulting agreement, Mr. Licklider resigned from the audit
and compensation committees of the Board of Directors.

Effective January 28, 1997, the Board of Directors approved the use of up
to $3.0 million to repurchase shares of the Company's Common Stock. When the
plan was terminated in February 1998, the Company had repurchased a total of
184,766 shares at prices per share ranging from a low of $3.50 on February 12,
1997, to a high of $6.675 on September 12 1997, with a weighted-average price of
$5.58 per share. On March 27, 1997, the Company purchased from Ms. Pattee
Francini, Executive Vice President and Secretary, and Mr. Philip Swain, Vice
President of Operations, 25,000 shares and 20,000 shares, respectively, at a
price of $4.6875, representing the closing price of the Common Stock on the AMEX
on March 25, 1997. On September 12, 1997, the Company purchased from D. Michael
Talla, Chairman of the Board and Chief Executive Officer, 97,166 shares of
Common Stock at a price of $6.675, representing the average of the closing price
of the Common Stock on the AMEX for the 10 trading days immediately preceding,
and ending on, September 12th. The proceeds of the purchase of Common Stock from
Mr. Talla were used to repay the loan by the Company to Mr. Talla described
above.

Millennium is the second largest shareholder of the Company, with 3,929,863
shares or 27.6% of the outstanding Common Stock. Additionally, Millennium is a
partner with the Company in the Reebok Sports Club/NY as well as the landlord of
the building in which the Reebok Sports Club/NY is located. The Reebok-Sports
Club/NY partnership pays rent to Millennium in the amount of $2.0 million per
year, and the partnership agreement provides for a first priority annual
distribution of $3.0 million to Millennium (adjusted to $2.1 million for
calendar year 1997). In June 1997, Millennium and the Company entered into
leases with respect to the development of two additional Sports Clubs in
Washington, D.C. and San Francisco, California and are negotiating the terms of
a lease for an additional Sports Club in Boston, Massachusetts (See
"Business -- Acquisition and Development of Additional Clubs").

On June 11, 1997, the Company issued to Millennium 2,105,263 shares of
Common Stock in exchange for $10.0 million consisting of $5.0 million in cash
and certain interests of Millennium in the Reebok-Sports Club/NY partnership,
including a 9.9% interest in the partnership and a $2.5 million promissory note
issued by the partnership. The Company also granted to Millennium certain
registration and preemptive rights, which preemptive rights have been waived
with respect to the Offering. In addition, for so long as Millennium maintains
at least a 12% interest in the equity securities of the Company, the Company and
certain of its shareholders have agreed to cause a nominee of Millennium to be
appointed or elected to the Board of Directors of the Company; Brian J. Collins,
an officer of Millennium, is currently a member of the Company's Board of
Directors as Millennium's nominee.

On December 31, 1997, the Company sold an additional 625,000 shares of
Common Stock to Millennium for $5.0 million, which the Company used to fund the
cash portion of the acquisition of four Spectrum Clubs from Racquetball World.
In addition, Millennium acquired properties underlying

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two of the Clubs for $10.0 million and is leasing these properties to the
Company under a financing lease agreement which is reflected as a capital lease
obligation in the Company's consolidated balance sheet. The lease has a term of
twenty years, and provides for annual rent of $1.0 million for the first ten
years and $1.2 million per year thereafter. At any time during the first three
years of the lease the Company may purchase the leased property from Millennium
for a purchase price (currently estimated to be approximately $10.1 million)
equal to $10.0 million plus all costs incurred by Millennium in connection with
the acquisition of such property, plus a 12% compound return on its total
investment. Millennium has the right to require the Company to acquire its
interest in the property at such price if (i) the Company receives private debt
financing in excess of $95.0 million, (ii) the Company receives public equity
financing in excess of $20.0 million, (iii) a default (as defined in the lease)
occurs, or (iv) a major casualty occurs with respect to either property.
Millennium has waived this right with respect to the Offering.

In September 1997, the Company entered into a non-binding agreement to
purchase undeveloped land from an unaffiliated third party in La Jolla,
California, for approximately $6.4 million, on which the Company is evaluating
the development of a Sports Club. To secure its right to purchase this property,
the Company made a series of deposits aggregating $425,000 through January 12,
1998, $325,000 of which is non-refundable. The right to purchase this property
expires April 12, 1998. In March 1998, the Company entered into an agreement
with Millennium pursuant to which Millennium agreed to pay the Company $425,000
in exchange for an option, exercisable at Millennium's sole discretion, to fund
the purchase price and acquire the La Jolla site, subject to the right of the
Company to reacquire the property as described below. Development of the La
Jolla property is subject to further investigation by the Company of the
feasibility of the project as well as obtaining suitable financing, and there
can be no assurance that the Company (whether independently or together with
Millennium) will develop this project.

In March 1998, the Company entered into an agreement to acquire
approximately 3.5 acres of undeveloped land from an unaffiliated third party in
Houston, Texas, for approximately $3.1 million, on which the Company intends to
develop a Sports Club. Millennium has agreed that in the event the Company does
not otherwise obtain satisfactory financing for the Houston development,
Millennium will acquire and negotiate to develop the Club with the Company.

The Company is considering development alternatives for both the La Jolla
and Houston properties, including a sale/lease back or other financing or joint
venture arrangements with Millennium or another party. The Company has the
right, for a period of six (6) months to reacquire each of the La Jolla and
Houston properties from Millennium at a purchase price equal to all costs
incurred by Millennium in connection with the acquisition, development and
ownership of such property, plus a 12% compound return on its total investment,
plus, in the case of the La Jolla property, a fee of $200,000. See
"Business -- Acquisition and Development of Additional Clubs."

RM Sports Club, Inc., a corporation owned and controlled by D. Michael
Talla, Chairman and Chief Executive Officer of the Company, and Rex Licklider,
Vice Chairman of the Company, intends to enter into an agreement to purchase an
existing Club and in connection therewith intends to make a $1.0 million
non-refundable deposit. In addition, RM Sports Club, Inc. has entered into an
agreement with the Company pursuant to which it has agreed to transfer its
rights under such agreement to the Company for a purchase price equal to $1.0
million. The agreement provides that RM Sports Club, Inc. may not acquire the
Club or sell any rights thereto without first presenting such offer to the
Company. See "Business -- Acquisition and Development of Additional Clubs."

The Company has entered into agreements with its directors and officers
providing for the indemnification of such directors and officers by the Company
to the maximum extent permitted under Delaware law, in the event such persons
are the subject of lawsuits or otherwise suffer losses as a result of their
activities on behalf of the Company. These agreements include, among other
things, indemnity for judgments and settlements in derivative actions, prompt
payment of legal

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expenses in advance of indemnification and equitable contribution by the Company
in certain instances in the event a director or officer is not entitled to full
indemnification.

The Company believes that each of the foregoing transactions has been on
terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All transactions between the Company and any of its
directors or officers are subject to the approval of the disinterested
directors.

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information, as of March 25, 1998,
regarding the beneficial ownership of the Company's Common Stock, by (i) each
person known by the Company to be the beneficial owner of more than five percent
of its Common Stock; (ii) each director; (iii) each executive officer listed in
the Summary Compensation Table; and (iv) all directors and executive officers as
a group. Unless otherwise indicated, each of the following stockholders has sole
voting and investment power with respect to the shares beneficially owned,
except to the extent that such authority is shared by spouses under applicable
law.

[Enlarge/Download Table]

PERCENT OF
OUTSTANDING
NUMBER OF SHARES(9)
SHARES --------------------
BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER(1) OWNED OFFERING OFFERING
------------------- ------------ -------- --------

D. Michael Talla(2)(3)...................................... 4,740,342 33.2% 23.4%
The Licklider Living Trust dated May 2, 1986................ 1,271,562 8.9 6.3
Mona Talla(2)(3)............................................ 4,740,342 33.2 23.4
Nanette Pattee Francini(2)(3)............................... 4,740,342 33.2 23.4
Mark S. Spino(2)(3)......................................... 4,740,342 33.2 23.4
Philip J. Swain(2)(3)....................................... 4,740,342 33.2 23.4
The Jared R. Talla Irrevocable Trust dated January 4,
1993(2)(3)................................................ 4,740,342 33.2 23.4
The Brett M. Talla Irrevocable Trust dated January 4,
1993(2)(3)................................................ 4,740,342 33.2 23.4
John M. Gibbons(4).......................................... 266,034 1.8 1.3
Dennison T. Veru............................................ 12,000 *** ***
Timothy M. O'Brien(5)....................................... 42,130 *** ***
Andrew L. Turner............................................ 54,000 *** ***
Brian J. Collins............................................ 1,000 *** ***
Millennium(6)............................................... 3,929,863 27.6 19.4
Townsend Group Investments(7)............................... 734,300 5.2 3.6
All directors and executive officers as a group (10
persons)(8)............................................... 6,387,068 43.9 31.1

---------------
*** Less than one percent.

(1) The address of each of the foregoing persons is 11100 Santa Monica
Boulevard, Suite 300, Los Angeles, California 90025.

(2) Includes shares with respect to which the named beneficial owner shares
voting power pursuant to a voting agreement which requires each party to
vote their shares in the manner determined by a majority of all holders. The
agreement is effective until October 20, 2004 or until terminated by persons
holding 66 2/3% of the Common Stock held by all persons subject to the
agreement. Mr. Talla, Mona Talla, The Jared R. Talla Irrevocable Trust dated
January 4, 1993, The Brett M. Talla Irrevocable Trust dated January 4, 1993,
Ms. Pattee Francini, Mr. Spino and Mr. Swain are record owners of 3,770,617;
30,953; 114,714; 114,714; 256,107; 227,969 and 173,164 shares of the
Company's Common Stock, respectively. Mr. Talla (including members of his
immediate family and trusts for their benefit) is the record owner of
4,030,998 shares. Includes 98 shares for Mr. Swain and 339 shares for Mr.
Talla vested under the Company's 401-K Profit Sharing Plan. Assumes that the
Underwriters' over-allotment option is not exercised and that the persons
included in the table do not purchase shares in the Offering. The Jared R.
Talla Irrevocable Trust dated January 4, 1993 and the Brett M. Talla
Irrevocable Trust dated January 4, 1993 (the "Selling Stockholders") have
each agreed to sell 50,000 shares of Common Stock pursuant to the
Underwriters' over-allotment option. If the over-allotment option is
exercised in full, each of the Selling Stockholders will own 64,714 shares,
and each of the persons subject to the agreement will beneficially own 21.7%
of the outstanding shares.

(3) Includes 51,667 shares of Common Stock issuable within 60 days upon the
exercise of options granted to Ms. Pattee Francini, Mr. Spino and Mr. Swain
under the Company's 1994 Stock Incentive Plan. Ms. Pattee Francini and Mr.
Spino each hold options exercisable for 15,000 shares and Mr. Swain holds
options exercisable for 21,667 shares.

(4) Includes 35,500 shares owned by Mr. Gibbons, 5,000 shares owned by Mr.
Gibbons' spouse and 225,000 shares of Common Stock issuable within 60 days
upon the exercise of options granted under the Company's 1994 Stock
Incentive Plan, and 534 shares vested under the Company's 401-K Profit
Sharing Plan.

(5) Includes 41,667 shares of Common Stock issuable within 60 days upon the
exercise of options granted under the Company's 1994 Stock Incentive Plan,
and 463 shares vested under the Company's 401-K Profit Sharing Plan.

(6) Includes 1,051,000 shares owned by Millennium Development Partners, L.P.,
625,000 shares owned by Millennium Entertainment Partners L.P., and
2,253,863 shares owned by Millennium Partners LLC.

(7) Townsend Group Investments is a registered investment advisor. Includes
50,500 shares over which Townsend has sole voting and dispositive power and
683,800 shares over which it exercises shared voting and dispositive power.

(8) Includes 318,334 shares of Common Stock issuable within 60 days upon the
exercise of options granted under the Company's 1994 Stock Incentive Plan
and 1,434 shares vested under the Company's 401-K Profit Sharing Plan.

(9) All shares not currently outstanding that are subject to options, warrants,
rights or conversion privileges exercisable within 60 days are deemed to be
outstanding for the purpose of computing the "Percent of Outstanding Shares"
held by the holder thereof, but are not deemed to be outstanding for the
purpose of computing the "Percent of Outstanding Shares" held by any other
shareholder, pursuant to Rule 13d-3(d)(1) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act").

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SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have outstanding
20,221,312 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and excluding 637,833 shares issuable upon exercise of
outstanding employee stock options and up to 159,081 shares issuable to the
sellers of the Racquetball World Clubs on December 31, 1998 (See "The Company").
Of these shares, approximately 17,200,691 shares held by existing stockholders
or issued in the Offering will be freely tradeable (unless such shares are held
by an "affiliate" of the Company as such term is defined in the Securities Act
and subject to the agreements described below) without restriction or
registration under the Securities Act. The remaining 3,020,621 shares were
issued and sold by the Company in private transactions ("Restricted Shares") and
are eligible for public sale only if registered under the Securities Act or sold
in accordance with Rule 144 thereunder. 2,395,621 of these shares have been
registered for public sale under the Securities Act. The Company has reserved
997,333 shares of Common Stock for issuance under its 1994 Stock Incentive Plan
and 38,000 shares remain available for issuance to non-employee directors under
its 1994 Stock Compensation Plan. The Company has filed registration statements
under the Securities Act covering shares of Common Stock issuable under the
Company's 1994 Stock Incentive Plan and 1994 Stock Compensation Plan, and Common
Stock issued upon the exercise of stock options generally will be available for
sale in the open market subject to Rule 144 volume limitations applicable to
affiliates.

The directors, executive officers and certain stockholders of the Company
who in the aggregate hold approximately 9,998,597 shares of Common Stock and
options to acquire 385,000 shares of Common Stock have entered into agreements,
subject to certain limited exceptions, not to offer, sell or otherwise dispose
of, directly or indirectly, any shares of Common Stock owned by them for a
period of 90 days from the closing of the Offering without the prior written
consent of Schroder & Co. Inc. (the "Lock-Up Agreements"). Schroder & Co. Inc.
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to the Lock-Up Agreements.

No predictions can be made as to the effect, if any, that market sales of
Common Stock or the availability of Common Stock for sale will have on the
market price prevailing from time to time. Sale of a substantial number of
shares of Common Stock in the public market following the Offering could have an
adverse effect on the market value of the Common Stock.

In general, under Rule 144 as currently in effect, any holder of Restricted
Shares, including an affiliate of the Company, as to which at least one year
elapsed since the later of the date of their acquisition from the Company or an
affiliate, would be entitled within any three-month period to sell a number of
shares that does not exceed the greater of (i) 1% of the then outstanding shares
of Common Stock (approximately 200,000 shares immediately after the completion
of the Offering assuming no exercise of the Underwriters' over-allotment option)
or (ii) the average weekly trading volume of the Common Stock during the four
calendar weeks immediately preceding the date on which notice of the sale is
filed with the Commission. Sales pursuant to Rule 144 are also subject to
certain other requirements relating to manner of sale, notice and availability
of current public information about the Company. A person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the three months immediately preceding the sale, and
who, together with any previous holder who is not an affiliate of the Company,
has beneficially owned Restricted Shares for at least two years, would be
entitled to sell such shares under Rule 144(k) without regard to the limitations
described above. The foregoing summary is not intended to be a complete
description of Rule 144.

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UNDERWRITING

The underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of an underwriting agreement with the
Company and the Selling Stockholders (the "Underwriting Agreement"), to purchase
from the Company, and the Company has agreed to sell to the Underwriters, the
number of shares of Common Stock set forth opposite their respective names:

[Download Table]

NUMBER
NAME OF SHARES
---- ---------

Schroder & Co. Inc. ........................................ 2,297,500
Prudential Securities Incorporated.......................... 2,297,500
Sutro & Co. Incorporated.................................... 250,000
Cowen & Company............................................. 125,000
NationsBanc Montgomery Securities LLC....................... 125,000
PaineWebber Incorporated.................................... 125,000
Advest, Inc. ............................................... 60,000
William Blair & Company, L.L.C. ............................ 60,000
Crowell, Weedon & Co. ...................................... 60,000
Gaines, Berland Inc. ....................................... 60,000
Janney Montgomery Scott Inc. ............................... 60,000
Jefferies & Company......................................... 60,000
C.L. King & Associates, Inc. ............................... 60,000
Ladenburg Thalmann & Co. Inc. .............................. 60,000
The Robinson-Humphrey Company, LLC. ........................ 60,000
Scott & Stringfellow, Inc. ................................. 60,000
The Seidler Companies Incorporated.......................... 60,000
W.M. Smith & Co. ........................................... 60,000
Van Kasper & Company........................................ 60,000
---------
Total............................................. 6,000,000
=========

The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Common Stock offered hereby, if any such shares
are purchased.

The Underwriters have advised the Company that they propose to offer the
shares of Common Stock directly to the public, initially at the public offering
price set forth on the cover page of this Prospectus; that the Underwriters
propose initially to allow a concession not in excess of $0.24 share to certain
dealers; and that the Underwriters and such dealers may initially allow a
concession not in excess of $0.10 share to other dealers. After the initial
offering of the shares of Common Stock, the public offering price and such
concessions may be changed by the Underwriters.

The Company and the Selling Stockholders have granted an option to the
Underwriters, exercisable for 30 days from the date of this Prospectus, to
purchase, pro rata, up to an aggregate of 900,000 additional shares of Common
Stock, of which 800,000 are to be issued and sold by the Company and 100,000 are
to be sold by the Selling Stockholders, at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriters may exercise such option only to cover over-allotments in
connection with the sale of the Common Stock offered hereby.

The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.

The Company and its executive officers, directors and certain shareholders
have agreed with the Underwriters that, for a period of 90 days following the
Offering, they will not offer, sell, contract to sell, grant an option to
purchase, or otherwise dispose (or announce any offer, sale, grant of any

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option, or other distribution) of any shares of Common Stock or any securities
convertible into or exchangeable for shares of Common Stock without the prior
written consent of Schroder & Co. Inc., other than grants of employee stock
options under existing option plans and the issuance of Common Stock upon
exercise of employee options.

The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids in accordance with Regulation
M under the Exchange Act. Over-allotment involves syndicate sales in excess of
the offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specific maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriters to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the securities to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the AMEX or otherwise and, if commenced, may be discontinued at any
time.

At the request of the Company, up to 600,00 shares of Common Stock have
been reserved for sale in the Offering to certain individuals, including
directors and employees of the Company, members of their families, and other
persons having business relationships with the Company. The price of such shares
to such persons will be the initial public offering price set forth on the cover
of this prospectus. The number of shares available for sale to the general
public will be reduced to the extent these persons purchase such reserved
shares. Any reserved shares not purchased will be offered by the Underwriters to
the general public on the same basis as the other shares offered hereby.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Kinsella, Boesch, Fujikawa & Towle, LLP, 1901 Avenue of the Stars,
7th Floor, Los Angeles, California. Certain legal matters relating to the
Offering will be passed upon for the Underwriters by Stroock & Stroock & Lavan
LLP, Los Angeles, California.

EXPERTS

The consolidated financial statements of the Company as of December 31,
1996 and 1997, and for each of the years in the three-year period ended December
31, 1997, have been incorporated by reference herein and in the registration
statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, and upon the authority of said firm as experts in
accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports, proxy statements, information
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements, information statements and
other information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the following Regional Offices: the Northeast Regional Office, Seven
World Trade Center, Suite 1300, New York, New York 10048, and the Midwest
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. They may also be obtained by written request from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such reports and other information
can be inspected at the

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American Stock Exchange, 36 Trinity Place, New York, New York 10006. The
Commission also maintains a site on the World Wide Web that contains reports,
proxy and information statements and other information regarding the Company.
The address for such site is http://www.sec.gov.

A registration statement on Form S-2, together with all amendments,
exhibits and documents incorporated therein by reference (the "Registration
Statement"), has been filed with the Commission, Washington, D.C., under the
Securities Act, with respect to the Common Stock Offered hereby. This
Prospectus, which forms a part of the Registration Statement, does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. Statements in this Prospectus as to the contents of exhibits are not
necessarily complete, and each statement is qualified in all respects by
reference to the copies of documents filed or incorporated by reference as
exhibits to the Registration Statement or otherwise filed with the Commission.
Copies of the Registration Statement, including exhibits thereto, may be
inspected without charge at the Commission's offices described above, and copies
of all or any part thereof may be obtained from the Commission upon payment of
certain fees prescribed by the Commission.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents (the "Incorporated Documents") filed with the
Commission by the Company pursuant to the Exchange Act are incorporated by
reference in this Prospectus:

(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 filed on February 27, 1998.

(b) The Company's Current Report on Form 8-K filed on January 15,
1998.

(d) The description of the Company's securities contained in the
Company's Registration Statement on Form 8-A, declared effective by the
Commission on October 13, 1994.

(e) The Company's Current Report on Form 8-K filed on March 12, 1998.

Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which is also incorporated by reference herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.

The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, upon the written or oral request of such
person, a copy of any or all of the Incorporated Documents, other than exhibits
to such documents (unless such exhibits are specifically incorporated by
reference into such documents). Written or telephone requests for such documents
should be directed to Investor Relations, The Sports Club Company, Inc, 11100
Santa Monica Boulevard, Suite 300, Los Angeles, California 90025, telephone
(310) 479-5200.

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THE SPORTS CLUB COMPANY, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

[Download Table]

PAGE
----

Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-3
Consolidated Statements of Income for the Three-Year Period
ended December 31, 1997................................... F-4
Consolidated Statements of Shareholders' Equity for the
Three-Year Period ended December 31, 1997................. F-5
Consolidated Statements of Cash Flows for the Three-Year
Period ended December 31, 1997............................ F-6
Notes to Consolidated Financial Statements.................. F-7

F-1

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INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders The Sports Club Company, Inc.:

We have audited the accompanying consolidated financial statements of The
Sports Club Company, Inc. and subsidiaries (the Company) as listed in the
accompanying index. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of The Sports Club Company, Inc. and subsidiaries as of December 31,
1996 and 1997, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1997, in conformity
with generally accepted accounting principles.

KPMG PEAT MARWICK LLP

Los Angeles, California
February 13, 1998, except for note 6,
which is as of February 23, 1998.

F-2

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THE SPORTS CLUB COMPANY, INC.

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)

ASSETS

[Download Table]

1996 1997
------- --------

Current assets
Cash and cash equivalents, includes $727 escrowed
construction funds in 1996............................. $ 4,146 $ 1,581
Accounts receivable, net of allowance for doubtful
accounts of $57 and $385 in 1996 and 1997,
respectively........................................... 1,376 2,072
Inventories............................................... 395 813
Other current assets...................................... 381 354
Due from affiliates....................................... 1,043 106
------- --------
Total current assets.............................. 7,341 4,926
Property and equipment, net................................. 72,736 106,791
Equity interest in unconsolidated subsidiary................ 642 862
Costs in excess of net assets acquired, less accumulated
amortization of $454 and $822 in 1996 and 1997,
respectively.............................................. 13,552 15,917
Organizational costs and other assets, net.................. 1,426 3,065
------- --------
$95,697 $131,561
======= ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of notes payable and capitalized
lease obligations...................................... $ 2,470 $ 2,975
Notes payable to bank..................................... -- 5,000
Accounts payable.......................................... 1,431 948
Accrued liabilities....................................... 2,777 7,985
Deferred membership revenues.............................. 7,481 9,936
------- --------
Total current liabilities......................... 14,159 26,844
Notes payable and capitalized lease obligations, less
current installment....................................... 36,027 42,823
Deferred lease obligations.................................. 3,309 2,817
Minority interest........................................... 1,000 600
------- --------
Total liabilities................................. 54,495 73,084
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; no shares issued or outstanding............ -- --
Common stock, $.01 par value, 40,000,000 shares
authorized; 11,358,000 and 14,382,621 shares issued and
outstanding at December 31, 1996 and 1997,
respectively........................................... 114 144
Additional paid-in capital................................ 36,935 53,613
Retained earnings......................................... 4,153 5,674
Less Treasury stock, at cost, 163,976 shares.............. -- (954)
------- --------
Total shareholders' equity........................ 41,202 58,477
------- --------
$95,697 $131,561
======= ========

See accompanying notes to consolidated financial statements.
F-3

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THE SPORTS CLUB COMPANY, INC.

CONSOLIDATED STATEMENTS OF INCOME
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

[Enlarge/Download Table]

1995 1996 1997
------- ------- -------

Revenues.................................................... $34,659 $36,918 $61,154
Operating expenses
Direct.................................................... 21,730 22,989 43,517
Selling, general and administrative....................... 5,486 6,052 6,607
Depreciation and amortization............................. 2,775 2,490 3,919
------- ------- -------
Total operating expenses............................. 29,991 31,531 54,043
------- ------- -------
Income from operations............................ 4,668 5,387 7,111
Other income (expense):
Interest.................................................. (2,600) (2,682) (3,206)
Minority interests........................................ (150) (150) (22)
Equity interest in net income of unconsolidated
subsidiaries........................................... 860 631 696
Non-recurring items....................................... -- (300) (2,025)
------- ------- -------
Total other income (expense)......................... (1,890) (2,501) (4,557)
------- ------- -------
Income before income taxes........................ 2,778 2,886 2,554
Provision for income taxes.................................. 1,139 1,183 1,014
------- ------- -------
Net Income........................................ $ 1,639 $ 1,703 $ 1,540
======= ======= =======
Net Income per share:
Basic..................................................... $ 0.14 $ 0.15 $ 0.12
======= ======= =======
Diluted................................................... $ 0.14 $ 0.15 $ 0.12
======= ======= =======
Weighted average number of common shares outstanding:
Basic..................................................... 11,353 11,355 12,524
======= ======= =======
Diluted................................................... 11,357 11,360 12,683
======= ======= =======

See accompanying notes to consolidated financial statements.
F-4

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THE SPORTS CLUB COMPANY, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)

[Enlarge/Download Table]

COMMON STOCK ADDITIONAL TREASURY STOCK
--------------- PAID-IN RETAINED ----------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
------ ------ ---------- -------- ------ -------

Balance, January 1, 1995................. 11,350 $114 $36,898 $ 811 -- --
Net Income............................. -- -- -- 1,639 -- --
Issuance of common stock to outside
directors........................... 5 -- 29 -- -- --
------ ---- ------- ------ --- -------
Balance, December 31, 1995............... 11,355 114 36,927 2,450 -- --
Net Income............................. -- -- -- 1,703 -- --
Issuance of common stock to outside
directors........................... 3 -- 8 -- -- --
------ ---- ------- ------ --- -------
Balance, December 31, 1996............... 11,358 114 36,935 4,153 -- --
Net Income............................. 1,540 -- --
Sale of common stock................... 2,730 27 14,973 -- -- --
Issuance of common stock in connection
with acquisition of The Sports Club/
Las Vegas 291 3 1,672 -- -- --
Treasury stock repurchased............. -- -- -- -- 185 $(1,034)
Reissuance of treasury stock for
employee stock plans................ -- -- -- (19) (21) 80
Issuance of common stock to outside
directors........................... 4 -- 33 -- -- --
------ ---- ------- ------ --- -------
Balance, December 31, 1997............... 14,383 $144 $53,613 $5,674 164 $ (954)
====== ==== ======= ====== === =======

See accompanying notes to consolidated financial statements.
F-5

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THE SPORTS CLUB COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)

[Enlarge/Download Table]

1995 1996 1997
------- -------- --------

Cash flows from operating activities:
Net Income................................................ $ 1,639 $ 1,703 $ 1,540
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization......................... 2,775 2,490 3,919
Accrued management fees............................... (502) (97) --
Equity interest in net income of unconsolidated
subsidiaries....................................... (860) (631) (696)
Distributions from unconsolidated subsidiaries........ 320 623 469
Stock issued as directors' fees....................... 29 8 33
Loss on sales of Sports Connections................... -- 300 --
Minority interest in Reebok-Sports Club/NY............ -- -- (128)
(Increase) decrease in:
Accounts receivable, net........................... (23) 149 (1,176)
Inventories........................................ 42 105 (395)
Other current assets............................... (106) (12) (2,187)
Increase (decrease) in:
Accounts payable................................... 1,011 (816) (493)
Accrued liabilities................................ (908) 225 2,519
Deferred membership revenues....................... (263) (633) 1,635
Deferred lease obligations......................... 312 211 (492)
------- -------- --------
Net cash provided by operating activities.......... 3,466 3,625 4,548
Cash flows from investing activities:
Capital expenditures...................................... (929) (2,788) (4,899)
Business acquisitions, net of cash acquired............... (1,255) (2,118) (10,778)
Proceeds from sale of Sports Connections.................. -- 3,569 --
Sale (purchase) of other non-operating assets............. (33) 95 --
Treasury stock acquired................................... -- -- (1,034)
------- -------- --------
Net cash used for investing activities............. (2,217) (1,242) (16,711)
Cash flows from financing activities:
(Increase) decrease in due from affiliates................ (2,658) 540 937
Proceeds from sale of common stock........................ -- -- 10,000
Proceeds from notes payable and capitalized lease
obligations............................................. -- 23,371 2,324
Repayments of notes payable and capitalized lease
obligations............................................. (2,058) (23,693) (3,663)
Distributions and redemptions of partnership interests.... (30) -- --
------- -------- --------
Net cash provided by (used for) financing
activities....................................... (4,746) 218 9,598
------- -------- --------
Net increase (decrease) in cash and cash
equivalents (3,497) 2,601 (2,565)
Cash and cash equivalents at beginning of year.............. 5,042 1,545 4,146
------- -------- --------
Cash and cash equivalents at end of year.................... $ 1,545 $ 4,146 $ 1,581
======= ======== ========
Supplemental disclosure of cash flow information Cash paid
during the year for interest.............................. $ 2,585 $ 3,068 $ 3,599
======= ======== ========
Cash paid during the year for income taxes................ $ 1,473 $ 590 $ 306
======= ======== ========
Capital expenditures financed............................. $ -- $ 153 $ 7,223
======= ======== ========
Stock issued in exchange for interest in Reebok-Sports
Club/NY................................................. $ -- $ -- $ 5,000
======= ======== ========
Stock issued as partial consideration for The Sports
Club/Las Vegas.......................................... $ -- $ -- $ 1,675
======= ======== ========
Acquisition of land and building under capital lease...... $ -- $ -- $ 10,000
======= ======== ========

See accompanying notes to consolidated financial statements.
F-6

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THE SPORTS CLUB COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997

1. ORGANIZATION

The Sports Club Company, Inc. (the "Company") operates sports and fitness
Clubs ("Clubs"), primarily under the "Sports Club" and "Spectrum Club" names.
Sports Clubs have been developed as "urban country clubs" offering a full range
of services including numerous fitness and recreation options, diverse
facilities and other amenities. Spectrum Clubs are designed as smaller-scale
Sports Clubs with an extensive but smaller range of services. Both Sports Clubs
and Spectrum Clubs are marketed to affluent, health conscience individuals who
desire a premier Club.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its majority owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.

Revenue Recognition

The Company receives a one-time non-refundable initiation fee and monthly
dues from its members. Substantially all of the Company's members join on a
month-to-month basis and can therefore cancel their membership at any time.
Initiation fees and related direct expenses, primarily sales commissions, are
deferred and recognized, on a straight-line basis, over an estimated membership
period of between two and one half and three years. Dues that are received in
advance are recognized on a pro-rata basis over the periods in which services
are to be provided.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with original maturities of three months
or less to be cash equivalents.

Inventories

Inventories are stated at the lower of cost or market using the average
cost method.

Depreciation and Amortization

Depreciation is computed primarily using the straight-line method over the
estimated useful lives of the assets, ranging from five to seven years for
equipment and 31.5 to 40 years for buildings. Leasehold improvements are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful life of the improvements. Loan costs are amortized over the
terms of the related loans and organizational costs are amortized over five
years.

Predevelopment Costs

Predevelopment costs consisting of architectural and feasibility
expenditures incurred for certain prospective health and fitness projects are
capitalized and included in "Organizational costs and other assets" in the
consolidated balance sheet. Projects are reviewed periodically by management for
viability. Should a project be deemed not viable for construction, such related
costs are charged to operations at the time of determination. The Company has
predevelopment costs in the amount of $53,000 and $1.6 million at December 31,
1996 and 1997 respectively. Amounts charged to operations for discontinued
projects were $56,000 in the year ended December 31, 1997.

F-7

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THE SPORTS CLUB COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This Statement
requires that long lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net undiscounted operating cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell. Adoption of
this Statement had no impact on the Company's financial position, results of
operation or liquidity.

Intangible Assets

The costs in excess of net assets of acquired businesses resulting from the
acquisitions referred to in Note 3 are being amortized on a straight-line basis
over a period of 40 years. The Company follows the provisions of SFAS No. 121
and periodically evaluates the carrying value of intangible assets and considers
the ability to generate positive cash flow through undiscounted future operating
cash flows of the acquired operation as the key factor in determining whether
the assets have been impaired. The Company has not experienced an impairment of
value of any of its intangible assets as of December 31, 1997.

Equity Interest in Unconsolidated Subsidiary

Equity interest in unconsolidated subsidiary consists of a 46.1% interest
in a Spectrum Club located in Manhattan Beach, California. The Company allocates
profits and losses on a basis defined in the partnership agreement. Summary
financial information of the unconsolidated subsidiary is as follows:

[Download Table]

YEAR ENDED
DECEMBER 31,
----------------
1996 1997
------ ------
(AMOUNTS IN
THOUSANDS)

Revenues................................................. $5,634 $6,392
Net income............................................... 1,237 1,517

[Download Table]

AT DECEMBER 31,
----------------
1996 1997
------ ------
(AMOUNTS IN
THOUSANDS)

Current assets........................................... $ 522 $ 615
Non-current assets....................................... 2,653 2,769
------ ------
Total assets................................... $3,175 $3,384
====== ======
Current liabilities...................................... $1,444 $1,281
Non-current liabilities.................................. 539 444
------ ------
Total liabilities................................... 1,983 1,725
Partners' capital........................................ 1,192 1,659
------ ------
Total liabilities and partners' capital........ $3,175 $3,384
====== ======

F-8

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THE SPORTS CLUB COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997

Income Taxes

The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be applied to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.

Earnings per Share

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share, which is required to be adopted on December 31, 1997.
SFAS No. 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is similar to
the previously required fully diluted earnings per share. SFAS No. 128 also
requires dual presentation of basic and diluted earnings per share on the face
of the statement of earnings for entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic earnings
per share computation to the numerator and denominator of the diluted earnings
per share computation. SFAS No. 128 did not have a material impact on the
Company.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions. These affect the reporting of assets and liabilities, the
disclosure of any contingent assets and liabilities and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from these estimates.

Fair Value of Financial Instruments

The carrying amounts of financial instruments approximate fair value as of
December 31, 1997. The carrying amounts related to cash and cash equivalents,
accounts receivable, other current assets and accounts payable approximate fair
value due to the relatively short maturity of such instruments. The fair value
of long-term debt is estimated by discounting the future cash flows of each
instrument at rates currently available to the Company for similar debt
instruments of comparable maturities by the Company's bankers.

F-9

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THE SPORTS CLUB COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997

3. ACQUISITIONS

SportsMed

On November 30, 1995, the Company acquired 100% of the stock of The
SportsMed Company, Inc. ("SportsMed") formerly known as HealthFitness
Organization of America, Inc. The acquisition was accounted for as a purchase.
Accordingly, the operations of SportsMed are included in the accompanying
statement of income from the date of acquisition.

On July 1, 1997, the Company acquired the assets of SportsTherapy Systems,
Inc. ("STS"), a physical therapy and rehab clinic located in Calabasas,
California for approximately $485,000 in cash plus the assumption of various
liabilities in the amount of $187,000. STS has been merged into the Company's
SportsMed subsidiary. In addition, the Company entered into an employment
agreement with the seller of STS pursuant to which the seller is managing the
operations of SportsMed. The acquisition was accounted for as a purchase.
Accordingly, the operations of STS are included in the Company's statement of
income from the date of acquisition.

Sports Clubs

On December 30, 1996, the Company acquired an additional 10.1% interest in
The Reebok-Sports Club/NY partnership for $2.5 million which resulted in an
increase of the Company's total ownership in the partnership to 50.1%. This
acquisition was accounted for as a purchase and accordingly, the operations of
the Club are included in the Company's consolidated statements of income from
the date of acquisition. Prior to this acquisition, the Company's interest was
recorded under the equity method of accounting. Goodwill of approximately $3.8
million resulted from this transaction.

On June 23, 1997, the Company completed the sale of 2,105,263 shares of its
Common Stock to Millennium Entertainment Partners, L.P., (including affiliated
entities, hereafter referred to as "Millennium"). In exchange for the newly
issued shares, the Company received $5.0 million cash, Millennium's 9.9%
Partnership interest in The Reebok-Sports Club/NY Partnership, a $2.5 million
note due from the Partnership and Millennium's rights to certain accrued
management fees due from the Partnership. This transaction increased the
Company's ownership in the Partnership to 60%. The Company also signed
definitive leases with Millennium to jointly develop Sports Clubs in Washington
D.C. and San Francisco, California on properties currently under development by
Millennium. The Company has also signed a letter of intent to develop a Sports
Club in Boston, Massachusetts on property currently under development by
Millennium.

On August 1, 1997, the Company acquired a Club in Henderson, Nevada which
is now operated as The Sports Club/Las Vegas. The purchase price of
approximately $6.7 million consisted of $5.0 million in cash and 290,358 Shares
of the Company's Common Stock, valued at approximately $1.7 million, in shares
of the Company's Common Stock. The acquisition was accounted for as a purchase.
Accordingly, the operations of The Sports Club/Las Vegas are included in the
Company's statement of income from the date of acquisition.

Spectrum Clubs

On December 31, 1997, the Company acquired four Clubs from Racquetball
World, which are now operated as Spectrum Clubs, for a total purchase price
(including the portion paid by Millennium described below) of approximately
$19.4 million. Millennium acquired properties underlying two of the Clubs for
$10.0 million and is leasing these properties to the Company under a financing
lease agreement which is reflected as capitalized lease obligations in the
Company's

F-10

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THE SPORTS CLUB COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997

consolidated balance sheet. A cash payment of approximately $6.0 million was
made to the sellers and their creditors and the Company assumed approximately
$2.0 million of liabilities. In addition, up to 159,081 shares of the Company's
Common Stock valued at approximately $1.4 million will be issued to certain of
the selling entities ("Sellers"), subject to reduction if certain liabilities of
the Clubs exceed agreed-upon amounts. In a private placement completed in
December 1997, the Company sold 625,000 shares of its Common Stock to Millennium
for $5.0 million to raise funds to complete this acquisition. The acquisition
was accounted for as a purchase. Accordingly, the operations of these four Clubs
will be included in the Company's statement of operations from the date of
acquisition.

The following pro forma financial data present the Company's unaudited pro
forma statement of income for the years ended December 31, 1996 and 1997, giving
effect to the Reebok-Sports Club/ NY, The Sports Club/Las Vegas and the four
Spectrum Club acquisitions as if these transactions had occurred on January 1,
1996. None of the acquisitions was considered to be significant individually or
in the aggregate under the applicable rules of the Securities and Exchange
Commission. The operation of SportsTherapy Systems, Inc. is not material to the
consolidated statement of income, and accordingly, its impact has been excluded
from the following pro forma presentation. The unaudited pro forma condensed
statements of income do not purport to represent what the Company's actual
results of operations would have been had such transactions in fact occurred on
such date. The unaudited pro forma condensed statements of income also do not
purport to project the results of operations of the Company for any future
period.

[Download Table]

(UNAUDITED)
YEAR ENDED DECEMBER
31,
----------------------
1996 1997
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)

Revenues............................................... $66,695 $72,707
Operating expenses..................................... 60,517 65,944
------- -------
Income from operations............................... 6,178 6,763
Other expenses......................................... 5,501 6,159
------- -------
Income before provision for income taxes............. 677 604
Provision for income taxes............................. 277 273
------- -------
Net income................................... $ 400 $ 331
======= =======
Net income per share:
Basic................................................ $ .03 $ .02
======= =======
Diluted.............................................. $ .03 $ .02
======= =======
Weighted-average number of common shares outstanding:
Basic................................................ 14,535 14,456
======= =======
Diluted.............................................. 14,540 14,615
======= =======

F-11

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THE SPORTS CLUB COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997

4. PROPERTY AND EQUIPMENT

Property and equipment is carried at cost, less accumulated depreciation,
which is summarized as follows:

[Download Table]

AT DECEMBER 31,
---------------------
1996 1997
-------- ---------
(AMOUNT IN THOUSANDS)

Land.................................................. $10,234 $ 18,234
Building and improvements............................. 58,076 82,405
Furniture, fixtures and equipment..................... 9,126 14,095
------- --------
77,436 114,734
Less accumulated depreciation and amortization........ 4,700 7,943
------- --------
Net property and equipment.................. $72,736 $106,791
======= ========

Equipment under capital leases was $2,056,000 and $7,456,000 and related
accumulated amortization was $1,008,000 and 1,854,000 at December 31, 1996 and
1997, respectively.

Included in buildings and improvements at December 31, 1997, is $10,000,000
of buildings acquired under a capital lease in connection with the acquisition
of four Spectrum Clubs (See Note 3). No amortization was recorded for the year
ending December 31, 1997.

5. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS

Notes payable and capitalized lease obligations are summarized as follows:

[Download Table]

AT DECEMBER 31,
------------------
1996 1997
------- -------
(AMOUNTS IN
THOUSANDS)

The Sports Club/LA note (a)............................ $23,070 $22,378
The Sports Club/Irvine note (b)........................ 5,375 4,875
Spectrum Club/Agoura Hills note (c).................... 2,550 2,533
Spectrum Clubs Fullerton and Santa Ana lease (d)....... -- 10,000
Equipment financing and capitalized lease obligations
(e).................................................. 4,303 5,602
Other notes payable (f)................................ 3,199 410
------- -------
38,497 45,798
Less current installments.............................. 2,470 2,975
------- -------
$36,027 $42,823
======= =======

---------------
(a) The Sports Club/LA note bears interest at the rate of 10.63% and requires
monthly payments of approximately $262,000 with a balloon payment of
approximately $17.5 million on April 1, 2003. If certain conditions exist,
the Company may extend the term of the loan by five years. The note is
secured by all the assets of The Sports Club/LA and requires the Club to
maintain a debt service coverage ratio, as defined, of 1.4 to 1.0.

(b) The Sports Club/Irvine note was issued to the previous owners of this Club.
The note is secured by land, equipment, building improvements and the
building of The Sports Club/Irvine, bears interest at the rate of 6%, and
requires quarterly principal payments of $125,000, which commenced in
November 1996, and a balloon payment of $4.0 million on November 1, 1999.

F-12

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THE SPORTS CLUB COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997

(c) The Spectrum Club/Agoura Hills note was issued by a savings and loan
association to complete the Company's acquisition of the Spectrum
Club/Agoura Hills. The note is secured by land, equipment, building
improvements and the building of the Spectrum Club/Agoura Hills. The note
bears interest at the rate of 8.5%. Monthly principal and interest payments
of $20,107 are required through the note's maturity in April 2024.

(d) In December 1997, the Company acquired four Spectrum Clubs for a total
purchase price (including the portion paid by Millennium described below) of
approximately $19.4 million. Millennium acquired properties underlying two
of the Clubs for $10.0 million and is leasing these properties to the
Company under a financing lease agreement which is reflected as a capital
lease obligation in the Company's consolidated balance sheet. The lease
requires the Company to make annual payments of $1.0 million through 2007
and annual payments of $1.2 million thereafter through the lease expiration
date on December 31, 2017. At any time during the first three years of the
lease the Company may purchase the leased property from Millennium for a
purchase price (currently estimated to be approximately $10.1 million) equal
to $10.0 million plus all costs incurred by Millennium in connection with
the acquisition of such property, plus a 12% compound return on its total
investment. Millennium has the right to require the Company to acquire its
interest in the property at such price if (i) the Company receives private
debt financing in excess of $95.0 million, (ii) the Company receives public
equity financing in excess of $20.0 million, (iii) a default (as defined in
the lease) occurs, or (iv) a major casualty occurs with respect to either
property. Millennium has agreed to waive this right with respect to the
Offering.

(e) The equipment financing and capitalized lease obligations are secured by the
furniture, fixtures and equipment. The amounts are generally repayable in
monthly payments over five years with effective interest rates between 8% to
10%.

(f) Other notes payable in 1996 include a $2.5 million note from the
Reebok-Sports Club/NY partnership ("Partnership") payable to Millennium, a
limited partner in the Partnership. The note bears interest at the rate of
10% and is repayable as net cash flow of the Partnership is available, with
a final maturity in December 1999. In 1997, the Company acquired this note
from Millennium (See Note 3) and therefore, this obligation is not reflected
in the Company's consolidated balance sheet at December 31, 1997.

Future minimum annual principal payments at December 31, 1997, are as
follows (in thousands):

[Download Table]

1998...................................................... $ 2,975
1999...................................................... 7,031
2000...................................................... 2,874
2001...................................................... 2,415
2002...................................................... 1,861
Thereafter................................................ 28,642
-------
$45,798
=======

6. BANK CREDIT FACILITY

At December 31, 1997, the Company had a $5.0 million bank credit facility.
This facility was fully utilized at that date. On February 23, 1998, the credit
facility was amended and the amount of the facility was increased to $15.0
million. Pursuant to the February amendment, the Company may not borrow
additional funds under the credit facility after June 30, 1998, and will be
required to make

F-13

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THE SPORTS CLUB COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997

monthly payments of $250,000 beginning July 1, 1998, with all remaining amounts
due and payable on October 30, 1998. In addition, the credit facility is due and
payable in full upon consummation by the Company of any debt or equity offering.
The loans are unsecured, however, the Company is prohibited from pledging any of
its assets except for normal furniture, fixture and equipment financing. The
agreement also requires the Company to maintain certain Tangible Net Worth, Debt
Coverage Ratios and Senior Liabilities to Tangible Net Worth Ratio requirements.
The Company was in compliance with its covenants as of December 31, 1997.

7. COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases certain facilities pursuant to various operating lease
agreements. The Club facility leases are generally long-term and noncancelable
triple-net leases (requiring the Company to pay all real estate taxes, insurance
and maintenance expenses), and have an average remaining term of twenty-six
years, including renewal options, with the earliest expiration date of November
1998. Future minimum noncancelable operating lease payments as of December 31,
1997 are as follows (in thousands):

[Download Table]

Year ending December 31:
1998................................................... $ 8,019
1999................................................... 7,912
2000................................................... 7,672
2001................................................... 7,608
2002................................................... 8,211
Thereafter............................................. 84,127
--------
Total minimum lease payments................... $123,549
========

Rent expense for facilities and equipment aggregated, $1,805,000,
$1,960,000 and $7,438,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.

Litigation

On May 22, 1997, the Company announced that it had agreed to pay Century
Entertainment Center, L.P. ("Century") approximately $2.0 million to settle
litigation relating to the Century City Spectrum Club which was closed in July
1995. The settlement relates to a suit filed by Century City Spectrum Club
("CCS"), a subsidiary of the Company, against Century alleging breach of the
lease by the prior landlord. Century had acquired the rights under the lease in
connection with bankruptcy of the prior landlord. Century filed a
cross-complaint against CCS for rent due and against the Company as a guarantor
of CCS's obligations under the lease. The settlement has been completed with the
final payment made in February 1998. The amount has been reflected as a
non-recurring expense on the Company's 1997 statement of income.

The Company is also involved in various claims and lawsuits incidental to
its business, including claims arising from accidents and disputes with
landlords. However, in the opinion of management the Company is adequately
insured against such claims and lawsuits involving personal injuries, and any
ultimate liability arising out of any such proceedings will not have a material
adverse effect on the financial condition, cash flow or operations of the
Company.

F-14

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THE SPORTS CLUB COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997

Employment Agreements

The Company currently has employment agreements with three key executive
officers which expire in 1998 and 2000. The agreements provide the executives
with a base compensation and, in the event of certain conditions, a severance
payment not to exceed three times each executive's annual compensation.

8. INCOME PER SHARE

The following is a reconciliation of the basic and diluted EPS computations
for the years 1995, 1996 and 1997:

[Download Table]

YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income used for basic and diluted
income per share......................... $1,639 $1,703 $1,540
====== ====== ======
Shares of Common Stock and Common Stock
equivalents:
Weighted-average shares used in
basic computation................ 11,353 11,355 12,524
Dilutive impact of stock options.... 4 5 159
------ ------ ------
Weighted-average shares used for
dilutive computation............. 11,357 11,360 12,683
====== ====== ======
Income per share:
Basic............................ $ 0.14 $ 0.15 $ 0.12
====== ====== ======
Diluted.......................... $ 0.14 $ 0.15 $ 0.12
====== ====== ======

9. INCOME TAXES

The provision for income taxes consists of the following:

[Download Table]

YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------ ------ ------
(AMOUNTS IN THOUSANDS)

Federal.................................. $ 881 $ 915 $ 776
State.................................... 258 268 238
------ ------ ------
$1,139 $1,183 $1,014
====== ====== ======

Income tax expense differs from the statutory tax rate as applied to income
before income taxes as follows:

[Download Table]

YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------ ------ ------
(AMOUNTS IN THOUSANDS)

Expected federal income tax expense...... $ 945 $ 981 $ 868
State income taxes, net of federal
benefit............................... 194 202 146
------ ------ ------
$1,139 $1,183 $1,014
====== ====== ======

F-15

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THE SPORTS CLUB COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997

The Company's deferred tax assets and liabilities at December 31, 1996 were
approximately $416,000 and $25,000, respectively, compared with approximately
$680,000 and $2,588,000 at December 31, 1997. The Company's valuation allowance
for deferred taxes was approximately $391,000 and $0 at December 31, 1996 and
1997, respectively. The Company's most significant temporary differences relate
to differences in the bases, depreciable lives and depreciation methods of
property and equipment and cost in excess of net assets acquired for tax and
financial reporting purposes.

10. STOCK PLANS

In October 1995, the FASB issued SFAS 123, Accounting for Stock-Based
Compensation. SFAS 123 defines a fair value based method of accounting for an
employee stock option or similar instrument and encourages all entities to adopt
that method of accounting for all of their employee stock compensation plans.
However, it allows an entity to continue to measure compensation cost for these
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees. Entities electing to remain with the accounting in APB Opinion No.
25 must make pro forma disclosures of net earnings and earnings per share, as if
the fair value based method of accounting defined in SFAS 123 had been applied.
The Company implemented the statement during the year ended December 31, 1996.

The Company has an employee stock option plan which is described below. The
Company applied APB Opinion No. 25 in accounting for its plan. Accordingly, no
compensation cost has been recognized. Had compensation cost for the Company's
plan been determined consistent with SFAS 123, the Company's net income and
income per share would have been reduced to the proforma amounts indicated
below:

[Download Table]

YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income:
As reported.............................. $1,639 $1,703 $1,540
Pro forma................................ 1,474 1,533 1,368
Basic income per share:
As reported.............................. $ .14 $ .15 $ .12
Pro forma................................ $ .13 $ .14 $ .11

The fair value of all option grants for the Company's plan are estimated on
the date of grant using the Black-Scholes option-pricing model with the
weighted-average assumptions used for all fixed option grants in 1995, 1996 and
1997 respectively: dividend yield of 0%, 0% and 0%; expected volatility of
40.0%, 51.3%, and 62.1% risk-free interest rates of 6.5%, 7.0% and 6.5% and
expected lives of 7.5 years, 7.0 years and 6.0 years.

In May 1994 the Company instituted the 1994 Stock Incentive Plan (the
"Plan"). 1,000,000 shares of Common Stock are reserved under the Plan, which
authorizes the issuance of various stock incentives to directors, officers,
employees and consultants including options, stock appreciation rights and
purchase rights.

Options allow for the purchase of Common Stock at prices determined by the
Company's Compensation Committee. Incentive stock options must be granted at a
price at least equal to the fair market value of a share of Common Stock on the
date the option is granted. Non-statutory

F-16

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THE SPORTS CLUB COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997

options must have an exercise price equal to at least 85% of the fair market
value of the Company's Common Stock at the date of grant. Options granted under
the Plan may, at the election of the Compensation Committee, become exercisable
in installments. All options will expire on the tenth anniversary of the grant
date.

A summary of the status of Company stock options in all its stock-based
plans as of December 31, 1995, 1996 and 1997 and changes during the years then
ended are presented below:

[Download Table]

WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------- --------

Outstanding at January 1, 1995......................... -- --
Granted................................................ 522,000 $6.76
Canceled............................................... 225,000 9.00
-------
Outstanding at December 31, 1995....................... 297,000 5.06
=======
Options excercisable at December 31, 1995.............. 93,753 5.00
=======
Weighted-average fair value of options granted during
year ended December 31, 1995......................... 2.37
Outstanding at January 1, 1996......................... 297,000 5.06
Granted................................................ 220,500 2.66
Canceled............................................... 25,000 3.18
-------
Outstanding at December 31, 1996....................... 492,500 3.17
=======
Options excercisable at December 31, 1996.............. 185,505 3.28
=======
Weighted-average fair value of options granted during
year ended December 31, 1996......................... 1.75
Outstanding at January 1, 1997......................... 492,500 3.17
Granted................................................ 155,000 5.51
Canceled............................................... 5,000 3.10
-------
Outstanding at December 31, 1997....................... 642,500 3.77
=======
Options excercisable at December 31, 1997.............. 334,512 3.23
=======
Weighted-average fair value of options granted during
year ended December 31, 1997......................... 3.53

F-17

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THE SPORTS CLUB COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997

The following table summarizes information about stock options outstanding
at December 31, 1997:

[Download Table]

WEIGHTED
AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL OPTIONS
PRICES OUTSTANDING LIFE (YEARS) EXERCISABLE
-------- ----------- ------------ -----------

$8.3750 27,000 9.84 --
5.3750 68,000 9.50 --
4.3750 60,000 9.22 --
2.7500 58,000 8.83 19,338
2.5625 68,500 8.40 22,841
2.6875 70,000 8.17 23,334
3.0000 225,000 7.58 225,000
5.2500 66,000 7.25 43,999
------- -------
642,500 8.60 334,512
======= =======

Stock appreciation rights ("SAR's") may be granted in combination with
options or on a stand-alone basis. SAR's permit the holder to receive shares of
stock, cash or a combination of shares and cash based upon by the difference
between the option price and the fair market value of the Common Stock on the
date of exercise. Upon exercise of a SAR granted in combination with an option,
the related option is canceled. At December 31, 1997, no SAR's had been granted.

Rights to purchase shares of Common Stock to be offered for direct sale
under the Plan must be at a purchase price equal to not less than 85% of the
fair market value of the shares on the day preceding the date of grant. Purchase
rights are generally exercisable for a period of thirty days following the date
of grant. At December 31, 1997, no purchase rights had been granted.

In July 1994, the Company instituted its 1994 Stock Compensation Plan for
the purpose of compensating outside directors by issuing them shares of the
Company's Common Stock as part of their directors' fees. A total of 50,000
shares are reserved for issuance pursuant to this plan. A total of 12,000 shares
have been issued to outside directors under the plan; 5,000 in 1995, 3,000 in
1996 and 4,000 in 1997.

11. RELATED PARTY TRANSACTIONS

Due from affiliates are summarized as follows:

[Download Table]

AT DECEMBER 31,
----------------
1996 1997
------- -----
(IN THOUSANDS)

Note receivable from the Company's CEO, including interest
at 5.3%. Secured by a pledge of 384,000 shares of the
Company's Common Stock. Repaid in September 1997......... $ 624 --
Advances to affiliates made in the normal course of
business, payable on demand........................... 419 $106
------ ----
$1,043 $106
====== ====

The Company manages the operation of its unconsolidated subsidiary, the
Spectrum Club/ Manhattan Beach, of which it owns a 46.1% interest. The Company
receives a fee of $33,322 per month plus 4.5% of the Club's gross revenues for
managing this Club. The Company also manages

F-18

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THE SPORTS CLUB COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997

the operations of the Reebok Sports Club/NY and receives a fee of approximately
5.87% of the gross monthly collections, as defined. Management fees relating to
the Reebok Sports Club/NY of $490,000 and $779,000 for the years ended December
31, 1995 and 1996 were earned and included in the Company's income statement.
Management fees of $1.1 million relating to Reebok Sports Club/NY were earned
for the year ended December 31, 1997. This amount is eliminated from income and
expense in the presentation of the Company's 1997 consolidated statement of
income.

The Reebok Sports Club/NY pays rent to Millennium in the amount of $2.0
million per year, and the partnership agreement provides for a first priority
annual distribution of $3.0 to Millennium. All such payments are reflected as
rent expense in the consolidated statement of income. The Company has entered
into leases with Millennium to develop Sports Clubs in San Francisco, California
and Washington, D.C., and is currently negotiating with Millennium with respect
to the development of a Sports Club in Boston, Massachusetts.

In June 1997 the Company issued Millennium 2,105,263 shares of its Common
Stock in exchange for $5.0 million cash and certain Millennium interests in the
Reebok Sports Club/NY Partnership (See Note 3). In December 1997, the Company
sold 625,000 shares of its Common Stock to Millennium for $5.0 million of cash.

In December 1997, the Company acquired four Spectrum Clubs for a total
purchase price (including the portion paid by Millennium described below) of
approximately $19.4 million. Millennium acquired the real estate at two of the
Clubs for $10.0 million and is leasing these two properties to the Company under
a financing lease agreement which is reflected as a capital lease obligation in
the Company's consolidated balance sheet. The capital lease requires the Company
to make annual payments of $1.0 million through 2007 and annual payments of $1.2
million thereafter through the lease expiration date on December 31, 2017. At
any time during the first three years of the lease the Company may purchase the
property from Millennium for a purchase price equal to an amount that would
enable Millennium to receive a return of its initial $10.0 million investment,
plus all other amounts advanced or transaction costs incurred plus a twelve
percent compound return on all such investments. Millennium has the right to
require the Company to acquire its interest in the lease and land and building
if (i) the Company receives private debt financing in excess of $95.0 million
(ii) the Company receives public equity financing in excess of $20.0 million
(iii) an event of default (as defined in the lease) occurs, or (iv) a major
casualty occurs with respect to either property.

12. CONCENTRATION OF CREDIT RISK

The Company markets its products principally to customers in Southern
California, New York City and Las Vegas. Management performs regular evaluations
concerning the ability of its customers to satisfy their obligations and records
a provision for doubtful accounts based upon these evaluations. The Company's
credit losses for the periods presented are insignificant and have not exceeded
management's estimates.

13. SUBSEQUENT EVENT

The Company has filed a Registration Statement on Form S-2 with the
Securities and Exchange Commission relating to the proposed offering by the
Company of up to 6,000,000 shares of Common Stock (6,900,000 including the
Underwriters' over-allotment option). Estimated proceeds of such offering are
expected to be used to repay long-term debt and for general corporate purposes.
There can be no assurance the offering will be completed.

F-19

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Photographs on inside back cover showing
various interiors of the sports clubs

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======================================================
NO DEALER, SALESPERSON, OR REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED
IN THIS PROSPECTUS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY COMMON STOCK IN ANY JURISDICTION IN WHICH SUCH
AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
AN OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------

TABLE OF CONTENTS

[Download Table]

PAGE
----

Prospectus Summary................... 1
Risk Factors......................... 4
The Company.......................... 9
Use of Proceeds...................... 10
Price Range of Common Stock and
Related Matters.................... 11
Dividend Policy...................... 11
Capitalization....................... 12
Selected Consolidated Financial
Data............................... 13
Management Discussion and Analysis of
Financial Condition and Results of
Operation.......................... 14
Business............................. 21
Management........................... 35
Certain Transactions................. 43
Principal and Selling Stockholders... 47
Shares Eligible for Future Sale...... 48
Underwriting......................... 49
Legal Matters........................ 50
Experts.............................. 50
Available Information................ 50
Incorporation of Certain Documents By
Reference.......................... 51
===========================================

======================================================
6,000,000 SHARES

THE SPORTS CLUB COMPANY, INC.

COMMON STOCK
--------------------

PROSPECTUS
--------------------
SCHRODER & CO. INC.

PRUDENTIAL SECURITIES INCORPORATED

SUTRO & CO. INCORPORATED
April 2, 1998
======================================================

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘424B2’ Filing	Date	First	Last	Other Filings

	12/31/17	66	72
	10/20/04	49
	5/27/04	41
	4/1/03	12	65
	12/31/00	40		10-K
	4/1/00	12	20
	11/1/99	20	65
	12/31/98	4	50	10-K
	10/30/98	12	67
	7/31/98	46
	7/22/98	35
	7/1/98	12	67
	6/30/98	12	66	10-Q, DEF 14A
	6/24/98	30
	4/30/98	12	20	8-K
	4/27/98	35
	4/12/98	47
	4/7/98	1
	4/3/98	46
Filed on:	4/2/98	1	74
	4/1/98	1	21	S-2/A
	3/25/98	13	49
	3/20/98	37
	3/12/98	53		8-K
	2/27/98	53		10-K405, S-2, SC 13G/A
	2/25/98	12	21
	2/23/98	21	66
	2/13/98	55
	2/2/98	53		8-K
	1/31/98	11	32
	1/20/98	35
	1/15/98	53		8-K
	1/12/98	47
	12/31/97	4	72	10-K405, 4, 8-K
	12/15/97	22
	11/3/97	36
	9/30/97	11	19	10-Q, 4
	9/12/97	46
	8/1/97	46	63
	7/1/97	63		SC 13D
	6/23/97	63
	6/11/97	7	46
	6/1/97	38
	5/27/97	40
	5/22/97	67		8-K
	4/3/97	46
	3/27/97	46
	3/25/97	46
	3/5/97	35
	2/12/97	46
	1/29/97	18
	1/28/97	46
	1/1/97	45	70
	12/31/96	13	72	10-K405, 10-K405/A
	12/30/96	16	63
	8/1/96	37	46
	4/24/96	39	41
	2/20/96	45
	1/1/96	61	70
	12/31/95	17	72
	11/30/95	17	63
	10/21/95	41
	8/14/95	37
	8/2/95	35
	7/5/95	39
	7/1/95	37	41
	2/27/95	39	45
	1/1/95	58	70
	12/31/94	18
	10/20/94	15
	10/13/94	53
	9/13/94	45
	8/10/94	40
	7/8/94	43	45
	5/27/94	41
	1/17/94	34
	12/31/93	15
	3/1/93	15
	1/4/93	49
	1/26/92	34
				List all Filings

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Filing Submission 0000950148-98-000788 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Sports Club Co Inc – ‘424B2’ on 4/2/98

As of: Thursday, 4/2/98 · Accession #: 950148-98-788 · File #: 333-46973

Prospectus — Rule 424(b)(2)Filing Table of Contents

Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Prospectus — Rule 424(b)(2)
Filing Table of Contents