Q CLUBS INC, S-1/A, 1996-05-10

Q CLUBS INC
S-1/A, 1996-05-10
MEMBERSHIP SPORTS & RECREATION CLUBS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 10, 1996

REGISTRATION STATEMENT NO. 333-3216

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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------

AMENDMENT NO. 1 TO

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------

Q CLUBS INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 7991 34-1742051
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
</TABLE>

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

395 SPRINGSIDE DRIVE

AKRON, OHIO 44333
(330) 665-1281
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------

FRANK M. LEONESIO

PRESIDENT AND CHIEF EXECUTIVE OFFICER
Q CLUBS INC.
395 SPRINGSIDE DRIVE
AKRON, OHIO 44333
(330) 665-1281
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------

COPIES TO:

<TABLE>
<S> <C>
DAVID P. PORTER, ESQ. THOMAS F. MCKEE, ESQ.
JONES, DAY, REAVIS & POGUE CALFEE, HALTER & GRISWOLD
901 LAKESIDE AVENUE 1400 MCDONALD INVESTMENT CENTER
CLEVELAND, OHIO 44114 800 SUPERIOR AVENUE
(216) 586-3939 CLEVELAND, OHIO 44114
(216) 622-8200
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE

AFTER THIS REGISTRATION STATEMENT HAS BECOME EFFECTIVE.
------------------

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _______________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _______________

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

If the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

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<PAGE> 2

Q CLUBS INC.

CROSS-REFERENCE SHEET

PURSUANT TO ITEM 501(B) OF REGULATION S-K

SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS ON FORM S-1

<TABLE>
<CAPTION>
ITEM
NO. FORM S-1 HEADING CAPTION OF LOCATION IN PROSPECTUS
- ----- ---------------------------------------- --------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus.............................. Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus..................... Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges...... Prospectus Summary; Risk Factors
4. Use of Proceeds......................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price......... Outside Front Cover Page of Prospectus; Risk
Factors; Underwriting
6. Dilution................................ Dilution
7. Selling Security Holders................ Not Applicable
8. Plan of Distribution.................... Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to be
Registered.............................. Prospectus Summary; Description of Capital
Stock
10. Interests of Named Experts and
Counsel................................. Legal Matters
11. Information with Respect to
the Registrant.......................... Outside Front Cover Page of Prospectus;
Prospectus Summary; Risk Factors; Use of
Proceeds; Dividend Policy; Dilution;
Capitalization; Selected Consolidated
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business; Management;
Principal Stockholders; Description of
Capital Stock; Shares Eligible for Future
Sale; Underwriting; Experts; Additional
Information; Index to Consolidated Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................. Not Applicable
</TABLE>
<PAGE> 3

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATIONS UNDER THE SECURITIES LAWS
OF ANY STATE.

SUBJECT TO COMPLETION, DATED MAY 10, 1996

PROSPECTUS

2,000,000 SHARES

Q CLUBS INC.
COMMON STOCK
------------------------

All of the shares of Common Stock offered hereby are being sold by Q Clubs
Inc. (the "Company"). Prior to this offering, there has been no public market
for the Common Stock of the Company. It is currently estimated that the initial
public offering price will be between $13.00 and $15.00 per share. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The Company has applied to have the Common Stock
approved for quotation, subject to official notice of issuance, on the Nasdaq
National Market under the trading symbol "QCLB."

SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<S> <C> <C> <C>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Share................................ $ $ $
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Total(3)................................. $ $ $
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</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."

(2) Before deducting expenses payable by the Company estimated at $700,000.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 300,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------

The shares of Common Stock are offered by the several Underwriters when, as
and if delivered to and accepted by them and subject to the right to reject
orders in whole or in part. It is expected that delivery of the certificates for
the Common Stock will be made on or about , 1996.

MORGAN KEEGAN & COMPANY, INC. RAUSCHER PIERCE REFSNES, INC.
------------------------

The date of this Prospectus is , 1996
LOGO
<PAGE> 4

1. A PHOTOGRAPH OF THE ENTRY WAY TO A PROTOTYPICAL Q CLUB.

2. A PHOTOGRAPH OF A SERVICE PERSON AT A Q CLUB.

3. A PHOTOGRAPH OF CUSTOMERS USING EXERCISE EQUIPMENT.

4. A PHOTOGRAPH OF CUSTOMERS IN A Q FOR KIDS DEPARTMENT.

5. A PHOTOGRAPH OF CUSTOMERS IN A Q CAFE IN A Q CLUB.

6. A PHOTOGRAPH OF CUSTOMERS USING A SWIMMING POOL AT A Q CLUB.

The Company intends to furnish to its stockholders annual reports
containing audited consolidated financial statements certified by its
independent auditors and quarterly reports for each of the first three fiscal
quarters of each fiscal year containing unaudited financial information.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the consolidated
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus. Except as otherwise noted, all of the information in this Prospectus
assumes: (i) no exercise of the Underwriters' over-allotment option; (ii) a
19.65165-for-one stock split to be effected immediately prior to the completion
of the offering; (iii) the conversion of all outstanding shares of Series A
Preferred Stock into Common Stock on a one-for-one basis and Series B Preferred
Stock into Common Stock on a 1.379-for-one basis immediately prior to the
completion of the offering; and (iv) the exercise of all but 58,130 of the
outstanding warrants to purchase Common Stock. Prospective investors should
carefully read the entire Prospectus and should consider, among other things,
the matters set forth in "Risk Factors."

THE COMPANY

Q Clubs Inc. operates large (approximately 44,000 to 47,000 square foot),
high quality, full-service health clubs at attractive prices under the name "Q
The Sports Club." The Company opened its first Q Club in November 1990 and
currently operates 16 Q Clubs. It anticipates opening approximately four
additional Q Clubs during the remainder of 1996 and approximately 13 additional
clubs in 1997. In developing its Q Club concept, the Company has sought to
capitalize on the increasing health and exercise commitment of older
deconditioned Americans by designing and marketing its Q Clubs to appeal to a
target segment composed of individuals in the 35 and older age group, who
generally have higher disposable incomes. The Company's objective is to
establish itself as the first nationwide operator of commercial health clubs
employing a large, standardized facility and uniform operations under a highly
recognizable brand name.

The health club industry is highly fragmented. The Company estimates that
there are less than 15 companies that own and operate more than 25 facilities.
In a 1996 report, the International Health, Racquet and Sportsclub Association
("IHRSA"), a trade association comprised of higher-end sports and fitness clubs,
estimates that there are approximately 12,000 commercial fitness centers in the
United States and that revenue generated from membership fees from such
facilities approximates $8.25 billion. American Sports Data, Inc. ("ASDI"), a
consumer panel research organization, reported in its most recent industry study
in 1994 that health club memberships have grown 64% for the 35 to 54 year old
age group and 70% for the 55 and older age group (which groups together
represent the Company's target market segment) between the years 1987 and 1994.
This compares to a 26% growth in memberships among the 18 to 34 year old age
group. The majority of Q Club members fall within the targeted segment and the
median age of a Q Club member is approximately 37 years old. ASDI further
reports that approximately 20 million Americans, or 8.6% of the total U.S.
population, are currently members of a health club. Based on the ASDI report,
the Company estimates that among Americans with incomes greater than $50,000,
15.4% have health club memberships.

The Company's strategy is to offer its members health and fitness services
including a large assortment of exercise options and ancillary programs in a
state-of-the-art facility supported by a large, customer-oriented staff at
economical membership prices. This operating strategy is based on the
substantial experience of the Company's management team and its analysis of the
competitive environment. The key components of this strategy are:

3
<PAGE> 6

- Providing a Broad Array of Services at Attractive Prices. The Company seeks
to provide its members with excellent value by offering them high quality
health and fitness services at prices that it believes are substantially
less than health clubs that offer comparable amenities. Each Q Club offers
a variety of innovative and specialized programs to its members in addition
to providing them with a state-of-the-art exercise facility. For instance,
each Q Club offers a supervised fitness and child care facility, known as Q
4 Kids, where members can leave their children while exercising at the
club.

- Utilizing an Advanced Sales and Marketing Program. One of the Company's key
marketing strategies is to establish a dominant presence and maintain a
high level of brand name recognition in its markets. To create brand
awareness and identify prospective members, the Company maintains extensive
advertising and marketing programs in each of its markets. These programs
include local television advertisements and direct response sales
activities which generate substantial new member activity at the opening of
clubs and help to grow the membership base over time.

- Employing a Highly-Trained, Service-Oriented Staff. Each Q Club has a staff
of approximately 90 full-and part-time employees, including personal
trainers, fitness instructors, massotherapists, sales associates and
maintenance personnel. Through a variety of training programs, the Company
seeks to instill in its employees the Q Club's emphasis on service. Each
staff member completes in-house training and each personal trainer must be
certified by an accredited health institution and hold a Bachelor's degree
in exercise or another health-related discipline.

The Company's unique operating strategy and standardized design for each of
its facilities provides economies of scale in construction, advertising,
marketing and staffing. The Company is typically able to open a new Q Club in
less than six months after acquiring the necessary real estate. The Company
currently plans to expand only through the construction of new Q Clubs in order
to ensure its ability to replicate its well-established physical design and
operating procedures at each site. The Company's expansion strategy, including
its strict criteria for selecting sites, has been implemented in the Phoenix,
Houston and Dallas markets.

The Company's founder, Frank M. Leonesio, has 28 years of experience in the
health club industry. In 1972, Mr. Leonesio founded, developed, managed and
subsequently sold a successful company that operated 35 clubs. He used a portion
of the proceeds to found the Company, for which he organized a management team
of individuals with an average tenure in the industry of over 16 years.

The Company was incorporated in Delaware in April 1993 under the name
Sports & Fitness Clubs, Inc. to serve as a holding company for the Company's
principal operating subsidiary, Sports & Fitness Clubs of America, Inc., an Ohio
corporation ("SFCA"), which was formed in January 1990. On April 1, 1996, the
Company's name was changed to Q Clubs Inc. The Company's principal executive
offices are located at 395 Springside Drive, Akron, Ohio 44333, and its
telephone number is (330) 665-1281.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.......... 2,000,000 shares
Common Stock to be outstanding after the
Offering(1)................................ 7,537,035 shares
Use of Proceeds.............................. To repay certain bank and shareholder
indebtedness, to pay certain preferred stock
dividends, to finance the construction of new
Q Clubs and for general working capital
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol....... QCLB
</TABLE>

- ---------------
(1) Excludes 161,631 shares of Common Stock issuable upon the exercise of
outstanding management stock options granted under the Company's 1994 Stock
Option Plan and 58,130 shares of Common Stock reserved for issuance upon the
exercise of warrants. See "Management -- 1994 Stock Option Plan."

4
<PAGE> 7

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARES, PER SHARE AMOUNTS AND SELECTED OPERATING DATA)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED
--------------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 ---------------------
--------- --------- --------- --------- --------- 1995 1996
--------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues.................. $ 9,619 $ 12,007 $ 15,012 $ 32,642 $ 53,624 $ 14,221 $ 24,331
Operating income.............. 1,102 2,105 2,349 2,952 3,836 1,285 3,988
Interest expense.............. 1,042 1,298 1,211 1,992 3,633 1,313 1,699
Income (loss) before income
taxes....................... 60 807 1,138 960 203 (28) 2,289
Pro forma net income
(loss)(1)................... $ 37 $ 495 $ 698 $ 577 $ 125 $ (11) $ 1,379
Pro forma net income (loss)
per
common share(2)............. $ 0.02 $ (--) $ 0.23
Shares used for purposes of
computing pro forma net
income per share(2)......... 5,883,813 5,883,813 5,883,813
SELECTED OPERATING DATA:
Q Clubs open at end of
period...................... 3 3 4 9 13 11 16
Membership contracts at end of
period(3)................... 15,133 22,249 28,792 44,367 74,436 54,847 91,458
Club operating months(4)...... 28 36 39 70 132 31 45
Average age of Q Clubs (in
months)(4).................. 9.7 21.7 26.0 19.3 23.5 18.8 22.1
</TABLE>

<TABLE>
<CAPTION>
AT MARCH 31, 1996
---------------------------
PRO FORMA
AS ADJUSTED(5)
--------------
ACTUAL (UNAUDITED)
--------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................................. $ (4,387) $ (3,287)
Total assets.............................................................. 123,013 123,013
Total debt................................................................ 57,644 34,651
Redeemable Convertible Preferred Stock.................................... 28,682 --
Shareholders' equity...................................................... 3,712 55,387
</TABLE>

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

(1) On May 1, 1993, the Company changed its tax status from an S to a C
corporation for income tax purposes. As an S corporation, the Company was
not subject to federal income taxes. As a result of this change, deferred
income tax liabilities of $761,000 related to the cumulative effect of
changing from an S to a C corporation were recorded in the second quarter of
1993. The pro forma information has been computed as if the Company had been
subject to corporate income taxes for the periods 1991 through 1993, based
upon the tax laws in effect during the respective periods.

(2) The number of shares used in the pro forma net income per share computation
include shares of outstanding Common Stock, shares of Common Stock to be
issued upon the conversion of outstanding Series A and Series B Preferred
Stock, the issuance of 81,639 shares of Common Stock for the payment of $1.1
million of stock dividends on the Series A Preferred Stock, 167,651 shares
of Common Stock that would be required to be issued to fund the $2.3 million
cash dividend on the Series B Preferred Stock (using $14.00 per share, the
mid-point of the assumed initial public offering range), shares of Common
Stock to be issued upon the exercise of all but 58,130 of the outstanding
warrants to purchase Common Stock and the common equivalent shares
underlying stock options and 58,130 of the outstanding warrants (using the
treasury stock method). All share information has been adjusted to reflect
the 19.65165-for-one split of Common Stock and such shares are considered
outstanding for all periods presented.

(3) May include more than one member per contract.

(4) Aggregate number of full months of operation during the given year for the
clubs open at the end of such year.

(5) Adjusted to reflect the application of the net proceeds from the sale by the
Company of 2,000,000 shares of Common Stock offered hereby using $14.00 per
share, the mid-point of the assumed initial public offering range. See "Use
of Proceeds."

5
<PAGE> 8

RISK FACTORS

In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating the Company and
its business before purchasing any of the shares of Common Stock offered hereby.
Each of the following factors may have a material adverse effect on the
Company's operations, financial results, financial condition, liquidity, market
valuation or market liquidity in future periods.

RISKS ASSOCIATED WITH EXPANSION PLANS

The Company opened its first Q Club in November 1990 and had expanded to 16
Q Clubs at March 31, 1996. The Company's growth depends to a significant degree
upon its ability to successfully open and profitably operate new Q Clubs and to
manage and maintain adequate controls over a significantly larger number of
clubs than are now open. The Company, which has never opened more than five Q
Clubs in any year, plans to open an aggregate of approximately seven Q Clubs in
1996 (three of which are already open) and approximately 13 Q Clubs in 1997. The
Company's ability to open this number of new Q Clubs on a timely basis will
depend on a number of factors, including the identification and availability of
suitable locations, the acquisition or lease of such locations on acceptable
terms, the resolution of any zoning or other regulatory issues relating to such
locations, the construction of the new facilities, the hiring, training and
retention of qualified employees (particularly sales and marketing managerial
personnel), the ability of management to effectively control the expansion
process, and other factors, some of which may be beyond the Company's control.
As a result, there can be no assurance that the Company will be able to open new
Q Clubs on a timely and cost-efficient basis or operate its new and existing Q
Clubs on a profitable basis. See "Business -- Q The Sports Club -- Personnel and
Training," "-- Expansion Strategy" and "-- Sales and Marketing."

POSSIBLE INABILITY TO OBTAIN SUFFICIENT CAPITAL FOR EXPANSION

Expansion of the Company's operations will require substantial amounts of
capital. Based upon its experience to date, the Company estimates that its cost
to acquire land and to build a new Q Club is approximately $6.5 to $7.5 million,
depending on the location of the club. In addition, based on the Company's
recent experience, it estimates that an additional $1.0 million in financing is
required to fully equip each new Q Club. Historically, such financing has been
provided by third party equipment lessors. There can be no assurance that the
Company will be able to acquire land, build and equip new Q Clubs at such
estimated costs. The Company currently anticipates opening approximately four
new Q Clubs during the remainder of 1996 and approximately 13 Q Clubs in 1997.
The funds for these new openings will come from reborrowing amounts paid down
under the Credit Agreement (as defined herein), a portion of the net proceeds of
the offering, internally generated funds, proceeds of sale-leasebacks of Q
Clubs, and from future debt or equity financings. The Company also anticipates
that certain of its future Q Clubs will be developed through build-to-suit lease
transactions. Although the Company believes that it will have access to adequate
financing to support its planned expansion program for the next 18 months, there
can be no assurance that funds for the planned expansion program will be
available or, if available, will be on terms satisfactory to the Company. The
Company's growth, net revenues and profitability will be limited if it is unable
to complete the opening of new Q Clubs due to lack of available funds. See
"Business -- Q Clubs Locations" and "Use of Proceeds."

POSSIBLE FLUCTUATION OF QUARTERLY FINANCIAL RESULTS DUE TO NEW CLUB OPENINGS

The Company recognizes revenue (net of the revenue deferral referred to
below) for pre-opening membership sales and charges preopening costs associated
with each new Q Club to earnings in the month when the new club is opened. The
Company begins selling memberships approximately five to six months prior to the
opening of a club during which time it typically obtains between 750 and 2,000
members. As a result, the Company's quarterly results may fluctuate materially
depending on the timing of new Q Club openings. New Q Club openings will have a
significant impact on quarterly results for the foreseeable future due to the
large number of planned openings of new Q Clubs in relation to the number of
existing clubs.

6
<PAGE> 9

SEASONALITY

The Company's business also is subject to some seasonal fluctuation.
Historically, the Company has realized a higher portion of its net revenues and
net income in the first quarter as a result of increased membership sales
believed to be the result of a heightened concern over fitness after the holiday
season and a lower portion of net revenues and net income in the fourth quarter
due to the holiday season. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

PROFITABILITY DEPENDENT ON MEMBERSHIP LEVELS

The Company has a limited history of opening and operating Q Clubs.
Presently, 13 of the Company's 16 existing Q Clubs have been open less than
three years and have not yet achieved the mature membership levels of the
Company's three other Q Clubs. Based upon its limited operating experience to
date, the Company estimates that it takes approximately four to five years after
the opening of a Q Club for it to reach mature membership levels. The
profitability of the newer Q Clubs, as well as the continued profitability of
the Company's other Q Clubs, is dependent on the Company's ability to achieve
and maintain mature membership levels at its Q Clubs. There can be no assurance
that the Company will be able to achieve or maintain such membership levels at
its Q Clubs or that the Company will be able to attract and retain qualified
personnel. The Company's future operating results may also be impacted by the
effect of member attrition. The Company's present estimates of member attrition
are based on its limited operating history and may not be reflective of future
results. The estimates of attrition impact the amount of the provision for
doubtful accounts associated with the Company's term contracts. Increases in
member attrition rates related to the Company's term contracts could require an
increase in the Company's provision for doubtful accounts. The establishment of
such additional reserves, if necessary, would have a negative impact on future
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

COSTS ASSOCIATED WITH REFURBISHING EXISTING CLUBS

The maturing process of each club and the need to maintain and grow an
individual club's membership base over time impose a need to refurbish clubs in
a timely manner, typically every four to five years. Such expenditures,
currently estimated at approximately $1.3 million per club, will require the
availability of liquidity at such time and could have an impact on future
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Sales and Marketing --
Refurbishing of Clubs."

POSSIBLE ADVERSE CONSEQUENCES OF DEFERRED REVENUE RECOGNITION POLICY

Nearly all of the memberships that the Company sells are term memberships,
which cover periods of 24 or 36 months, for a fixed fee. The Company defers the
recording of the portion of the revenue generated from term memberships that is
related to the cost of providing future services to members including an amount
representing a normal profit with the balance included in revenue to offset
selling and promotion costs for new members. The amount of deferred revenue
requires management to estimate the clubs' future membership-related expenses
and profits thereon. There can be no assurance that the current estimated costs
of servicing member contracts will reflect the actual costs incurred.
Accordingly, if future service costs exceed estimates without commensurate
increases in membership fees, this will have a negative impact on future
operating results. See Note 2 to the Consolidated Financial Statements.

DEPENDENCE ON EXECUTIVE OFFICERS

The Company's continued success will depend largely on the efforts,
abilities and services of its current executive officers, particularly Frank M.
Leonesio, the Company's Chairman of the Board, Chief Executive Officer,
President and founder. The loss of Mr. Leonesio's services could have a material
adverse effect upon the Company, and there can be no assurance that an adequate
replacement could be found for Mr. Leonesio in the event of his unavailability.
The Company carries key-man insurance on the life of Mr. Leonesio in the amount
of $14.0 million, of which $11.0 million is pledged as collateral to secure
certain indebtedness of the

7
<PAGE> 10

Company. In addition, the loss of any of the Company's executive officers, who
average over 16 years of experience in the health and fitness club industry,
could have a material adverse effect upon the Company. The Company does not have
employment agreements with any of its executive officers. See "Management --
Directors, Executive Officers and Certain Other Key Personnel."

RISKS ASSOCIATED WITH REGIONAL CONCENTRATION OF OPERATIONS

The Company's recent expansion has included the clustering of clubs in
metropolitan areas in the southwestern region of the United States. The Company
opened five clubs in the Dallas metropolitan area between December 1995 and
January 1996, four Q Clubs in the Houston metropolitan area between 1994 to
mid-1995, one club in Las Vegas in January 1995, and three Q Clubs in the
Phoenix metropolitan area between 1993 and early 1994. Currently, 14 of the
Company's 16 existing Q Clubs are located in this region of the United States.
The Company's expansion in the next 12 months is currently planned for southern
Florida, the greater metropolitan area of Denver, and the greater metropolitan
area of Dallas, as well as an additional location in Las Vegas. The Company has
focused its expansion efforts in the southern and southwestern regions. The
Company's current expansion strategy is to open clusters of Q Clubs in the
suburbs of major metropolitan areas that meet its demographic and competitive
criteria. However, the Company's current and planned geographic concentration
exposes its business to risks associated with adverse developments in the local
or regional economy, competition, weather conditions and demographic and
population changes. There can be no assurance that the geographic concentration
of the Company's business will not have a material adverse effect on its results
of operations or financial condition in the future. See "Business -- Expansion
Strategy."

COMPETITION

The health club industry is highly competitive. The Company competes within
each market in which it operates principally with other commercial health clubs,
as well as with physical fitness and recreational facilities established by
local governments and businesses for their employees, non-profit organizations
such as the YMCA and YWCA, and to a lesser extent, racquet and tennis clubs,
country clubs and weight-reducing salons. The Company also competes with
manufacturers of home fitness equipment, which certain individuals purchase in
lieu of joining a health club. Although the Company believes the Q Club concept
currently provides it with an advantage over traditional health clubs, there can
be no assurance that competitors will not adopt a similar approach and thereby
offset any such advantage. Certain of the Company's competitors may have greater
financial or other resources than the Company. Additionally, there are
relatively few barriers to entry into the market by new competitors. Although
the health club industry currently is highly fragmented, should the industry
undergo consolidation there may be an increased number of large competitors
which compete with the Company in multiple markets. See
"Business -- Competition."

POSSIBLE EFFECTS OF GOVERNMENT REGULATION

The Company's operations and business practices are subject to federal,
state and, in some cases, local government regulation in the various
jurisdictions in which its Q Clubs are located, including regulations that
prescribe certain forms and provisions of membership contracts and govern the
sale, financing and collection of such memberships. The Company believes that it
is in substantial compliance with all such applicable regulations and, based
upon the Company's experience to date, the cost of such compliance has not had a
material adverse effect on the Company's financial condition, liquidity or
results of operations. However, future events, such as changes in existing
regulations or the enactment of new regulations, could have a material adverse
effect on the Company's financial condition, liquidity or results of operations.
Additionally, regulations in certain jurisdictions impose restrictions, such as
limitations on the term of the membership contract, that may preclude the
Company from expanding its operations into such jurisdictions. See
"Business -- Government Regulation."

POTENTIAL LIABILITY

Use of the Company's facilities poses some potential health risks to
members, their children or guests through exertion and use of swimming pools,
exercise equipment, tanning facilities or on-site physiotherapy

8
<PAGE> 11

programs. In addition, the Company's Q 4 Kids facilities pose some risk of
exposure to claims associated with child care, as the children are left in the
care of the Company's employees. To date, the Company has not had any
significant claims asserted against it as a result of an injury or arising from
Q 4 Kids. Although the Company has established a risk management program that it
believes is effective in limiting its liability exposure, there can be no
assurance that a claim against the Company for death or an injury suffered by a
member or their children or guests while exercising or undergoing physical
therapy at a Q Club will not be asserted or that the Company successfully would
be able to defend any claim that might be asserted. The Company is also subject
from time to time to the risk of litigation arising out of the alleged
misconduct of employees. See "Business -- Legal Proceedings." 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 any such insurance will provide adequate
coverage against potential claims. If any claims exceed available insurance, or
should insurance be unavailable, there could be an adverse impact on the
Company.

CONTROL OF THE COMPANY BY CERTAIN EXISTING STOCKHOLDERS

Upon completion of the offering, Frank M. Leonesio, his spouse and certain
trusts for the benefit of his three children will beneficially own in the
aggregate approximately 23.0% of the outstanding shares of Common Stock
(approximately 22.1% if the Underwriters' over-allotment option is exercised in
full). As a result, in the event that these stockholders vote together, they
will have a significant influence over the management and policies of the
Company. In addition, the Company's existing stockholders will own approximately
73.5% of the outstanding shares of Common Stock (70.6% if the Underwriters'
over-allotment option is exercised in full) upon completion of the offering.
This percentage could increase to approximately 74.0% (approximately 71.0% if
the Underwriters' over-allotment option is exercised in full) if the conversion
ratio for the Series B Preferred Stock is adjusted as a result of the initial
offering price falling below the range indicated on the cover page of this
Prospectus. Although no voting agreement will exist among such stockholders upon
completion of the offering, if all or some of such stockholders were to vote
together they would have the power to elect or remove the Company's Board of
Directors and to approve all other actions requiring stockholder approval. See
"Principal Stockholders" and "Description of Capital Stock."

ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS

Certain provisions of the Company's Restated Certificate of Incorporation
(the "Certificate") and By-Laws, including limitations on stockholders actions
by written consent or by special meetings and the requirement that stockholders
deliver written notice of any action at least 60 days before an annual meeting
of stockholders, as well as certain provisions of the Delaware General
Corporation Law (including the "business combinations" restrictions contained in
Section 203 of such statute which have been made part of the Company's
Certificate), could have the effect of deterring hostile takeovers or delaying
or preventing changes in control or management of the Company. In addition, the
Board of Directors will have the authority, without any action by the
stockholders, to fix the rights and preferences of any shares of Serial
Preferred Stock. These provisions, along with the potential control by existing
stockholders, could have the effect of preventing the realization by
stockholders of additional value as a result of a change in control. See
"Description of Capital Stock -- Certain Charter Provisions and Delaware Law."

ABSENCE OF PUBLIC TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to the offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained. Accordingly, no assurance can be given as to the liquidity of
the market for the Common Stock or the price at which any sales may occur, which
price will depend upon the number of shares available for trading, the number of
holders thereof, the interest of securities dealers in maintaining a market in
the Common Stock and other factors beyond the control of the Company. The
initial public offering price will be determined solely by negotiations among
the Company and representatives of the Underwriters based on several factors and
does not necessarily reflect the price at which the Common Stock may be sold in
the public market after this offering. In addition, the stock market has from
time-to-time experienced extreme price and volume volatility. These fluctuations
may be unrelated to the operating performance of particular companies whose
shares are traded. Generally, market fluctuations may

9
<PAGE> 12

adversely affect the market price of the Company's Common Stock. Further, the
market price of the Common Stock could be subject to significant fluctuations in
response to the Company's operating results and other factors, including
conditions effecting health and fitness clubs, and there can be no assurance
that the market price of the Common Stock will not decline below the initial
public offering price. The strength or weakness of the public market for the
Common Stock, and its trading price, may affect the Company's ability to raise
additional debt or equity financing. See "Underwriting."

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS AND POTENTIAL ADVERSE
EFFECT ON STOCK PRICE

Upon completion of the offering, 7,537,035 shares of Common Stock will be
outstanding. Of these shares, the 2,000,000 shares offered hereby are freely
tradeable by persons that are not "affiliates" of the Company without
restriction under the Securities Act of 1933, as amended (the "Securities Act").
The Company believes that an additional 2,904,985 shares of Common Stock may be
sold pursuant to Rule 144 under the Securities Act if sold in compliance with
the resale volume limitations of Rule 144. These volume limitations will apply
only if, and as long as, the holders of these shares are "affiliates" of the
Company for purposes of Rule 144. The remaining 2,632,050 shares of Common Stock
outstanding upon completion of the offering are "restricted securities" (as that
phrase is defined in Rule 144 under the Securities Act) and will not be eligible
for immediate resale subsequent to the offering. Most of these 2,632,050 shares
of Common Stock are held by "affiliates" of the Company and will be eligible for
sale in May 1997 subject to the resale volume limitations of Rule 144. See
"Shares Eligible for Future Sale."

The Company, its Directors, officers, existing stockholders and holders of
a majority of the shares issuable upon the exercise of warrants and options,
which, upon completion of the offering, will hold 5,537,035 shares of Common
Stock in the aggregate, have agreed that they will not, directly or indirectly,
without the prior written consent of Morgan Keegan & Company, Inc., sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into, or exchangeable or exercisable for, shares of Common Stock for a period of
180 days from the date of this Prospectus.

The holders of approximately 2,990,536 shares of Common Stock, holders of
warrants to purchase an aggregate of 581,335 shares of Common Stock, which are
expected to be exercised immediately prior to the completion of the offering and
holders of warrants to purchase an aggregate of 58,130 shares of Common Stock,
which will not be exercised prior to completion of the offering (collectively,
the "Holders") are entitled to certain rights with respect to the registration
of such shares under the Securities Act. If the Company proposes to register any
of its securities under the Securities Act, either for its own account or for
the account of other security holders, the Holders are entitled to notice of the
registration and are entitled to include, at the Company's expense, such shares
therein, provided, among other conditions, that the underwriters of any offering
have the right to limit the number of such shares included in the registration.
In addition, beginning one year after the date of the Prospectus, certain of the
Holders may require the Company, on not more than three occasions at the
Company's expense, to file a registration statement under the Securities Act
with respect to their shares of Common Stock, and the Company is required to use
its best efforts to effect the registration, subject to certain conditions and
limitations. Further, certain of the Holders may require the Company at any time
and from time-to-time, at the Company's expense, to register their shares on
Form S-3 when such form becomes available to the Company, subject to certain
conditions and limitations.

Any sale of a significant number of these shares in the public market
following the offering could adversely affect the market price of the Common
Stock and could impair the Company's ability to raise capital at that time
through the sale of equity securities.

DILUTION

Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution of $7.14 in the tangible net book value per share of
Common Stock from the assumed initial public offering price of $14.00 per share
(the mid-point of the proposed public offering range).

ABSENCE OF DIVIDENDS

The Company does not anticipate declaring any cash dividends on its capital
stock in the foreseeable future, except with respect to the cash dividends
payable on the Company's Series B Preferred Stock contemporaneous with the
consummation of the offering. See "Dividend Policy" and "Use of Proceeds."

10
<PAGE> 13

USE OF PROCEEDS

The net proceeds to the Company from the sale of 2,000,000 shares of Common
Stock in the offering, based upon an assumed initial public offering price of
$14.00 per share (the mid-point of the proposed public offering range) and after
deducting estimated offering expenses and underwriting discounts, are estimated
to be approximately $25.3 million ($29.2 million if the Underwriters'
over-allotment option is exercised in full).

The Company expects to use approximately $23.0 million of the net proceeds
of the offering to temporarily reduce certain indebtedness incurred to finance
the construction of certain of its existing clubs. Of this total, $17.9 million
of indebtedness to be repaid from the net proceeds of the offering consist of
borrowings under the Company's bank revolving credit agreement (the "Credit
Agreement"), which matures in November 1997 and bears interest at an annual rate
equal to the lender's prime rate plus 2.25% (10.5% at March 31, 1996).
Additionally, indebtedness to be repaid from the net proceeds of the offering
consists of $1.1 million of estimated borrowings under the Company's receivable
line of credit (the "Receivable Line of Credit") which matures in December 1996
and bears interest at prime rate plus 4.5% per annum and $2.0 million of
construction payables. The Company anticipates that it will reborrow
substantially all of such monies to finance a portion of the costs of the
construction of additional Q Clubs in 1996 and 1997 (including the costs
associated with the acquisition of real estate, construction, fixtures purchases
and preopening expenses). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

In addition, the Company also anticipates that it will use approximately
$2.3 million of the net proceeds of the offering to pay cash dividends on the
Series B Preferred Stock. Furthermore, the Company anticipates that it will use
$2.0 million of the net proceeds of the offering to repay a note due to Frank M.
Leonesio, which matures on January 1, 2001 and bears interest at an annual rate
equal to the prime rate plus 0.5%. See "Description of Capital Stock -- Series B
Preferred Stock Conversion."

In the event that the net proceeds to the Company are less than $25.3
million, the amount used to temporarily reduce indebtedness under the Credit
Agreement will be reduced on a dollar-for-dollar basis. Furthermore, in the
event that the initial public offering price is below the proposed public
offering range, the Company may, as part of the negotiated repricing of the
Series B Preferred Stock, be required to pay an additional cash dividend of up
to approximately $715,000 to the holders of the Series B Preferred Stock, all of
whom, with one exception are affiliates of the Company. See "Description of
Capital Stock -- Series B Preferred Stock Conversion." Consequently, the amount
used to temporarily reduce indebtedness under the Credit Agreement would be
reduced further.

DIVIDEND POLICY

The Company has not declared or paid any dividends on its Common Stock
since its incorporation in April 1993. The Company currently intends to retain
earnings to support its expansion strategy and does not anticipate paying
dividends on its Common Stock in the foreseeable future. Payment of future
dividends, if any, will be at the discretion of the Company's Board of Directors
after taking into account various factors, including the Company's financial
condition, operating results, current and anticipated cash needs and plans for
expansion. As a holding company, the ability of the Company to pay dividends is
dependent in part upon the receipt of dividends or other payments from its
operating subsidiaries. In addition, the Company is currently prohibited,
without the consent of its lender, from paying dividends on its Common Stock
under its Credit Agreement.

Pursuant to the terms of the Series B Preferred Stock, which will be
converted into Common Stock upon the consummation of the offering, the Company
anticipates that it will immediately use $2.3 million of the net proceeds of the
offering to pay cash dividends on the Series B Preferred Stock. See "Use of
Proceeds." Pursuant to the terms of the Series A Preferred Stock, the Company
anticipates that, prior to the consummation of the offering, it will issue
81,639 shares of Common Stock for the payment of $1.1 million of estimated
cumulative stock dividends in arrears at June 12, 1996.

11
<PAGE> 14

CAPITALIZATION

The following table sets forth (i) the historical capitalization of the
Company as of March 31, 1996, (ii) the pro forma capitalization as of March 31,
1996 after giving effect to the conversion of all outstanding shares of Series A
Preferred Stock into 882,909 shares of Common Stock and Series B Preferred Stock
into 1,880,644 shares of Common Stock, the issuance of 81,639 shares of Common
Stock for the payment of stock dividends on the Series A Preferred Stock,
167,651 shares of Common Stock that would be required to be issued to fund a
$2.3 million payment of cash dividends on the Series B Preferred Stock (using
$14.00 per share, the mid-point of the assumed initial public offering range),
and the issuance of 581,335 shares of Common Stock upon the exercise of all but
58,130 of the outstanding warrants, and (iii) such pro forma capitalization, as
adjusted to reflect the application of the net proceeds from the sale by the
Company of 2,000,000 shares of Common Stock offered hereby (using $14.00 per
share, the mid-point of the assumed initial public offering range).

<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
--------- -------------
HISTORICAL
-----------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C>
Notes payable and current portion of long-term debt
and lease obligations:
Notes payable....................................... $ 1,100 $ 1,100 $ --
Long-term debt and lease obligations................ 2,395 2,395 2,395
------- -------
Total notes payable and current portion of
long-term debt and lease obligations........... $ 3,495 $ 3,495 $ 2,395
======= =======
Long-term obligations:
Notes payable to financial institutions............. $31,001 $31,001 $13,074(1)
Construction payable................................ 1,966 1,966 --
Senior subordinated notes........................... 16,160 16,160 16,160
Lease obligations................................... 3,022 3,022 3,022
Subordinated note payable to shareholder............ 2,000 2,000 --
------- -------
Total long-term obligations................. 54,149 54,149 32,256
Redeemable Convertible Preferred Stock................ 28,682 -- --
Shareholders' equity:(2)
Common Stock, par value $.01 per share; 5,502,462
shares authorized, historical; and 25,000,000
shares authorized, pro forma and as adjusted;
2,110,508 shares issued and outstanding,
historical; 5,704,686 shares issued and
outstanding, pro forma; and 7,537,035 shares
issued and outstanding, as adjusted.............. 21 57 75
Additional paid-in capital and other................ 2,751 29,990 55,312
Retained earnings................................... 940 0 0
------- -------
Total shareholders' equity....................... 3,712 30,047 55,387
------- -------
Total capitalization........................ $86,543 $84,196 $87,643
======= =======
</TABLE>

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

(1) Notes payable to financial institutions will increase dollar-for-dollar to
the extent the net proceeds to the Company from the offering are less than
$25.3 million. See "Use of Proceeds."

(2) Excludes 161,631 shares of Common Stock issuable upon the exercise of
outstanding management stock options granted under the Company's 1994 Stock
Option Plan and 58,130 shares of Common Stock reserved for issuance upon
exercise of warrants. See "Management -- 1994 Stock Option Plan."

12
<PAGE> 15

DILUTION

The pro forma net tangible book value of the Company at March 31, 1996 was
$26.4 million, or $4.63 per share, based on 5,704,686 shares of Common Stock
outstanding, which assumes the conversion of all shares of Series A Preferred
Stock into Common Stock on a one-for-one basis and Series B Preferred Stock into
Common Stock on a 1.379-for-one basis, the issuance of 81,639 shares of Common
Stock for the payment of stock dividends on the Series A Preferred Stock,
167,651 shares of Common Stock that would be required to be issued to fund the
$2.3 million cash dividend on the Series B Preferred Stock (using $14.00 per
share, the mid-point of the assumed initial public offering price), and the
exercise of all but 58,130 of the outstanding warrants. Pro forma net tangible
book value per share is equal to the Company's total tangible assets less its
liabilities, divided by the total number shares of Common Stock assumed to be
outstanding. After giving effect to the sale of the shares of Common Stock
offered by the Company hereby (at $14.00 per share, the mid-point of the assumed
initial public offering range), and the receipt and application of the net
proceeds therefrom, the pro forma net tangible book value of the Company at
March 31, 1996 would have been $51.7 million or $6.86 per share. This represents
an immediate increase in net tangible book value of $2.23 per share to the
existing stockholders and an immediate dilution of $7.14 per share to new
investors purchasing shares in the offering. Dilution is determined by
subtracting pro forma net tangible book value per share of Common Stock after
the offering from the initial public offering price per share. The following
table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $14.00
Pro forma net tangible book value prior to the offering..................... $4.63
Increase attributable to new investors per share.......................... 2.23
---- ----
Pro forma net tangible book value per share after the offering.............. 6.86
----
Dilution per share to new investors......................................... $ 7.14
====
</TABLE>

The following table summarizes, on a pro forma basis as of December 31,
1995, the differences between the existing stockholders and the new investors
with respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid and the average price per share (based upon the
assumed initial public offering price of $14.00 per share and before deducting
the estimated underwriting discount and offering expenses). The following table
assumes the conversion of all shares of Series A Preferred Stock and Series B
Preferred Stock into Common Stock and the exercise of all but 58,130 of the
warrants.

<TABLE>
<CAPTION>
SHARES PURCHASED (1) TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 5,537,035 73.5% $29,923,000 51.7% $ 5.40
New investors....................... 2,000,000 26.5% 28,000,000 48.3% 14.00
--------- ----- ----------- -----
Total............................. 7,537,035 100.0% $57,923,000 100.0%
========= ===== =========== =====
</TABLE>

- ---------------
(1) Excludes 161,631 shares of Common Stock issuable upon the exercise of
outstanding management stock options granted under the Company's 1994 Stock
Option Plan and 58,130 shares of Common Stock reserved for issuance upon
exercise of warrants. See "Management -- 1994 Stock Option Plan."

13
<PAGE> 16

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

The following selected consolidated financial data are derived from the
consolidated financial statements of the Company. This information should be
read in conjunction with the consolidated financial statements, related notes
and other financial information included herein. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ ---------------------
1991 1992 1993 1994 1995 1995 1996
------ ------- ------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues......................... $9,619 $12,007 $15,012 $32,642 $ 53,624 $ 14,221 $ 24,331
Costs and expenses:
Selling and promotion.............. 2,777 3,770 5,225 13,015 22,336 6,163 9,660
Cost of membership services........ 3,460 2,619 2,919 6,678 12,937 3,203 4,480
Provision for doubtful
receivables...................... 1,452 2,202 2,724 6,661 10,076 2,569 4,758
General and administrative
expenses......................... 828 1,311 1,795 3,336 4,439 1,001 1,445
-------- -------- --------
-- -- --
------- ---------- ---------- ----------
---
Operating income..................... 1,102 2,105 2,349 2,952 3,836 1,285 3,988
Interest expense and amortization of
deferred financing costs........... 1,042 1,298 1,211 1,992 3,633 1,313 1,699
Income (loss) before income taxes.... 60 807 1,138 960 203 (28) 2,289
Provision (benefit) for income
taxes(1)......................... -- -- 995 383 78 (17) 910
-------- -------- --------
-- -- --
------- ---------- ---------- ----------
---
Net income (loss).................... $ 60 $ 807 $ 143 $ 577 $ 125 $ (11) $ 1,379
========== ========== ========== ========== ========== ========== ==========
Pro forma net income (loss)(1)....... $ 37 $ 495 $ 698 $ 577 $ 125 $ (11) $ 1,379
========== ========== ========== ========== ========== ========== ==========
Pro forma net income (loss) per
common share (2)................. $ 0.02 $ (--) $ 0.23
========== ==========
Pro forma weighted average common
shares outstanding............... 5,883,813 5,883,813 5,883,813
</TABLE>

<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31, 1996
------------------------------------------------ -----------------------
1991 1992 1993 1994 1995 ACTUAL PRO FORMA(3)
------- ------- ------- ------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......... $(3,016) $(2,329) $(2,889) $(3,916) $ (4,266) $ (4,387) $ (6,734)
Total assets...................... 23,308 23,126 47,217 70,165 111,017 123,013 123,013
Total debt........................ 14,751 14,023 29,884 46,261 55,184 57,644 57,644
Redeemable Convertible Preferred
Stock........................... -- -- 4,494 4,944 28,211 28,682 --
Shareholders' equity.............. 2,377 3,184 3,737 3,918 2,788 3,712 30,047
</TABLE>

- ---------------
(1) On May 1, 1993, the Company changed its tax status from an S to a C
corporation for income tax purposes. As an S corporation, the Company was
not subject to federal income taxes. As a result of this change, deferred
income tax liabilities of $761,000 related to the cumulative effect of
changing from an S to a C corporation were recorded in the second quarter of
1993. The pro forma information has been computed as if the Company had been
subject to corporate income taxes for the periods 1991 through 1993, based
upon the tax laws in effect during the respective periods.

(2) The number of shares used in the pro forma net income per share computation
includes shares of outstanding Common Stock, shares of Common Stock to be
issued upon the conversion of outstanding Series A and Series B Preferred
Stock, the issuance of 81,639 shares of Common Stock for the payment of $1.1
million of stock dividends on the Series A Preferred Stock, 167,651 shares
of Common Stock that would be required to be issued to fund a $2.3 million
payment of cash dividends on the Series B Preferred Stock (assuming $14.00
per share, the mid-point of the assumed initial public offering range),
shares of Common Stock to be issued upon the exercise of all but 58,130 of
the outstanding warrants to purchase Common Stock and the common equivalent
shares underlying stock options and 58,130 of the outstanding warrants
(using the treasury stock method). All share information has been adjusted
to reflect the 19.65165-for-one split of Common Stock and such shares are
considered outstanding for all periods presented.

(3) The unaudited pro forma Balance Sheet data at March 31, 1996 gives effect to
the conversion of all outstanding shares of Series A Preferred Stock into
882,909 shares of Common Stock and Series B Preferred Stock into 1,880,644
shares of Common Stock, the issuance of 81,639 shares of Common Stock for
the payment of stock dividends on the Series A Preferred Stock, a $2.3
million accrued cash dividend on the Series B Preferred Stock, and the
issuance of 581,335 shares of Common Stock upon the exercise of all but
58,130 of the outstanding warrants.

14
<PAGE> 17

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

GENERAL

The Company opened its first Q Club in November 1990 in Memphis and
currently operates 16 health and fitness clubs located in five states. Q Clubs
are designed to accommodate membership levels ranging from 9,000 to 14,000 per
club. Based on the Company's experience to date, management estimates that Q
Clubs typically reach this mature membership level approximately four to five
years after opening. Presently, 13 of the Company's 16 Q Clubs have been open
less than three years and have not yet achieved mature membership levels. At
March 31, 1996 and 1995, the Company operated 16 and 11 clubs, respectively. At
December 31, 1995, 1994 and 1993, the Company operated 13, nine and four clubs,
respectively. The timing, opening and maturity of clubs significantly impacts
the Company's operating performance and profitability. The Company expects that
its future revenue increases will result from a combination of additional Q Club
openings and membership growth at existing facilities. The Company anticipates
that, as its operations mature and the number of new clubs opened per year
declines in proportion to the number of existing clubs, future increases in net
revenues and net income, if any, will be decreasingly dependent on the opening
and profitability of new Q Clubs and increasingly impacted by the Company's
ability to maintain and grow its membership base. There can be no assurance that
the Company will be able to achieve its planned expansion on a timely and
profitable basis. See "Risk Factors -- Risks Associated with Expansion Plans,"
"-- Possible Inability to Obtain Sufficient Capital for Expansion," "-- Possible
Fluctuation of Quarterly Financial Results Due to New Club Openings,"
"-- Seasonality," "-- Profitability Dependent on Membership Levels," and
"-- Costs Associated With Refurbishing Existing Clubs."

The Company's net revenues are derived principally from membership sales.
In addition, approximately 8.7% and 7.7% of the Company's revenue for the three
months ended March 31, 1996 and for the year ended December 31, 1995,
respectively, was derived from the sale of ancillary in-club services such as
personal trainer instruction, physical therapy, massotherapy and tanning. The
Company's operating expenses include, among other things, the actual costs
incurred by the Company to market and sell memberships and to operate the Q
Clubs for the periods reported (cost of membership services), and a provision
for uncollectible installment contracts receivable. Approximately one-half of
the provision for uncollectible installment contracts receivable results from
members who relocated more than 25 miles from a Q Club or became unable to
exercise, due to medical conditions (which allows such members to be released
from their term commitment). A majority of expenses incurred at the club level
are fixed, and accordingly, to the extent the Company is unable to maintain an
adequate membership base from which to derive revenue, the Company's results of
operations will be negatively impacted. See "Risk Factors -- Profitability
Dependent on Membership Levels."

The Company offers three principal types of memberships all of which
require the payment of a one-time initiation fee: (i) Gold (term) membership
(representing approximately 66% of the Company's memberships in 1995), which
permits a member to join for a commitment period of two or three years and pay a
fixed monthly fee over the membership term, (ii) Platinum (prepaid term)
membership (representing approximately 22% of the Company's memberships in
1995), which permits a member either to prepay the membership fee (at a 15%
discount) in a lump sum at the beginning of the commitment period, which is two
or three years, or to divide the fee and pay installments during the first three
months of the commitment period, and (iii) month-to-month (dues) membership
(representing approximately 12% of the Company's memberships in 1995), which
permits a member to pay on a monthly basis, without any further commitment. The
Company requires the purchase of any membership providing for future periodic
payments to be made using either EFT (Electronic Funds Transfer) or automatic
charge to a major credit card as a method of payment. By requiring EFT payment
methods, the Company believes its collection performance is more favorable
compared to traditional coupon book payment methods typically used in the
industry. A majority of term memberships are automatically renewable on a
monthly basis after the expiration of the commitment period at a comparable
monthly cost. In addition, Platinum members have the option to renew the

15
<PAGE> 18

membership for an additional commitment period or to continue their membership
by paying a monthly fee. EFT payment methods are also required for monthly
payments during membership renewal periods.

In addition to the initiation fee, members are required to make monthly
payments, including imputed finance charges, over the contract term or members
may elect to make a lump sum payment and receive a small discount. The Company
defers that portion of the revenue from term memberships that approximates the
cost of providing the contracted services in future periods, plus a reasonable
profit, with the balance included in net revenues to offset selling and
promotion costs for new members. Significant direct marketing costs, such as
advertising and commissions, are incurred in connection with the acquisition of
new members and are expensed in the period incurred. Unearned finance charges
are amortized over the installment term using the interest method at rates
comparable to similar consumer financing contracts. Upon expiration of the
initial contract term, membership continues on a month-to-month basis at
comparable prices and revenue is recorded as received. The Company also offers
short-term memberships (on a limited basis), month-to-month memberships and
ancillary services, the revenue from which is recorded as received. See "Risk
Factors -- Possible Adverse Consequences of Deferred Revenue Recognition
Policy."

Revenue and expenses attributable to clubs in the pre-opening stages are
deferred until opening. The Company begins selling memberships approximately
five to six months prior to the opening of a new club. Therefore, the Company
expects the opening of a large number of Q Clubs in a given quarter to favorably
impact results of operations for that quarter. Alternatively, the absence of
openings of Q Clubs in any given quarter could negatively impact results of
operations for that quarter. The Company had two clubs in the pre-opening stage
at March 31, 1996, which are scheduled to open in August 1996; three clubs in
the pre-opening stage at December 31, 1995, which opened in January 1996; two
clubs in the pre-opening stage at December 31, 1994, which opened in January
1995; and two clubs in the pre-opening stage at December 31, 1993, which opened
in January and June 1994. In addition to the favorable impact caused by the
opening of new clubs in the first quarter, the Company typically realizes
greater revenue in the first quarter as a result of increased membership sales
believed to be the result of a heightened concern with fitness after the
holidays. Further, fourth quarter sales tend to be lower, which the Company
believes is the result of the holiday periods. See "Risk Factors -- Possible
Fluctuation of Quarterly Financial Results Due to New Club Openings" and
"-- Seasonality."

On May 1, 1993, the Company changed its tax status from an S to C
corporation for income tax purposes. Prior to such change in tax status, the
Company was not subject to federal and state income taxes. As a result, net
income does not differ from income before taxes for those periods reported prior
to such conversion. As a result of the change in tax status, deferred income tax
liabilities of $761,000 were recorded with an offsetting charge to net income in
the second quarter of 1993.

The Company's future operating results may be adversely affected by a
variety of risk factors associated with its operations. See "Risk
Factors -- Dependence on Executive Officers," "-- Risks Associated with Regional
Concentration of Operations," "-- Competition," "-- Possible Effects of
Government Regulation" and "-- Potential Liability."

16
<PAGE> 19

RESULTS OF OPERATIONS

The following table sets forth for each of the periods indicated, data for
the percentage of net revenues represented by certain items reflected in the
Company's consolidated statement of operations:

<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
-----------------------------------------------
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Selling and promotion.................. 34.8 39.9 41.7 43.3 39.7
Cost of membership services............ 19.4 20.4 24.1 22.5 18.4
General and administrative expenses.... 12.0 10.2 8.3 7.0 5.9
Provision for doubtful receivables..... 18.1 20.4 18.8 18.1 19.6
----- ----- -----
Operating income......................... 15.7 9.1 7.1 9.1 16.4
Interest expense......................... 8.1 6.1 6.8 9.2 7.0
----- ----- -----
Income (loss) before income taxes........ 7.6 3.0 0.3 (0.1) 9.4
Pro forma provision (benefit) for income
taxes.................................. 2.9 1.2 0.1 (0.1) 3.7
----- ----- -----
Pro forma net income (loss).............. 4.7 1.8 0.2 (0.0) 5.7
===== ===== =====
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Q Clubs open at end of
period.................. 3 3 4 9 13 11 16
Membership contracts at the
end of the period(1).... 15,133 22,249 28,792 44,367 74,436 54,847 91,458
Club operating months(2)... 28 36 39 70 132 31 45
Average age of Q Clubs (in
months)................. 9.7 21.7 26.0 19.3 23.5 18.8 22.1
Club lease months (3)...... -- -- 7 23 43 9 13
</TABLE>

- ---------------
(1) May include more than one member per contract.

(2) Aggregate number of full months of operation during the given year for the
clubs open at the end of such year.

(3) Aggregate number of full months of operation during the given year for clubs
under lease.

THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995

Net revenues increased by $10.1 million or 71.1%, to $24.3 million in 1996
from $14.2 million in 1995, primarily due to an increase in clubs from 11 in
1995 to 16 in 1996. Of the total increase, $8.6 million is attributable to
revenue from membership sales which increased from $12.4 million in 1995 to
$21.0 million, or 69.8%, in 1996, $0.4 million is attributable to finance
charges earned which increased from $0.8 million in 1995 to $1.2 million in 1996
or 49.0%, and $1.1 million is attributable to ancillary service fees which
increased from $1.0 million in 1995 to $2.1 million in 1996 or 104.0%.
Membership revenue increased as a result of new membership revenue increasing
67.0% to $16.6 million in 1996 from $9.9 million in 1995, primarily due to the
opening of new clubs, and dues and renewals revenue increasing 81.1% from $2.5
million in 1995 to $4.4 million in 1996 primarily attributable to the 66.8%
growth in the number of membership contracts. The increase in finance charges
earned is due to the increase in installment contracts receivable. The
percentage increase in ancillary service fees was greater than the increase in
membership sales, due to an increase in prices and a greater emphasis placed by
management on maximizing revenue from ancillary services in 1996.

17
<PAGE> 20

Selling and promotion expenses increased by $3.5 million, or 56.7%, to $9.7
million in 1996 from $6.2 million in 1995, due primarily to the increase in the
aggregate months of club operations during the year ("club operating months") in
1996 compared to 1995. As a percentage of net revenue, selling and promotion
expenses decreased 3.6%, from 43.3% in 1995 to 39.7% in 1996, attributable to
the increase in the average age of the clubs as selling and promotion expenses
as a percentage of net revenues are typically higher in new clubs and tend to
decrease as clubs mature.

Cost of membership services increased by $1.3 million, or 39.9%, to $4.5
million in 1996 from $3.2 million in 1995, due primarily to a 45.0% increase in
the number of club operating months in 1996 compared to 1995. Cost of membership
services as a percentage of net revenues decreased from 22.5% in 1995 to 18.4%
in 1996, as a result of the revenue generated by the three new clubs opened
during 1996 without the associated operating costs necessary to generate such
revenue in an existing club.

The provision for doubtful accounts increased $2.2 million, or 85.2%, from
$2.6 million in 1995 to $4.8 million in 1996. The provision for doubtful
accounts as a percentage of net revenues increased from 18.1% in 1995 to 19.6%
in 1996 as a result of a decrease in prepaid memberships from 25.7% in 1995 to
22.0% in 1996, which is attributable to a higher than normal level of prepaid
memberships generated by a club opened in January 1995. The allowance for
doubtful accounts as a percentage of net (of unearned finance charges)
installment contracts receivable was 23.0% as of March 31, 1996 compared to
22.0% at March 31, 1995, which compares with installment contracts written off
as an annualized percentage of average installment contracts receivable
outstanding being 21.0% in 1996 and 1995. Over 50% of the installment contracts
receivable that were charged off are attributed to the contractual right of
members to cancel their commitment as a result of relocation or disability. The
provision for doubtful accounts as a percentage of net revenues, the allowance
for doubtful accounts as a percentage of net installment contracts receivable
and installment contracts receivable written off as a percentage of average
installment contracts receivable outstanding have remained within a comparable
range for the periods presented and have been consistent with targeted goals.

General and administrative expenses increased by $0.4 million, or 44.4%,
from $1.0 million in 1995 to $1.4 million in 1996, but decreased as a percentage
of net revenues from 7.0% in 1995 to 5.9% in 1996. The increase in expenses was
due primarily to adding new management and staff positions to support the
increase in the number of clubs. The decrease in general and administrative
expenses as a percentage of net revenues was primarily the result of favorably
leveraging fixed general and administrative expenses over a larger revenue base.

Interest expense increased $0.4 million, or 29.4%, to $1.7 million in 1996
from $1.3 million in 1995. The increase is attributable to a higher outstanding
balance under the Company's Credit Agreement offset by refinancing $13.5 million
under new borrowings with a lower interest rate during 1996. The additional
borrowings supported investment in club properties which increased to $2.8
million in 1996 from $1.9 million in 1995. Interest expense as a percentage of
net revenues decreased from 9.2% in 1995 to 7.0% in 1996.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Net revenues increased by $21.0 million, or 64.3%, to $53.6 million in 1995
from $32.6 million in 1994, due primarily to a larger number of Q Clubs
operating in 1995 (13 clubs) compared to 1994 (nine clubs) resulting in an 88.6%
increase in the club operating months to 132 in 1995 from 70 in 1994. Clubs
opened during 1995 accounted for $15.1 million, or 71.9%, of the increase in net
revenue. Of the $21.0 million increase in net revenue, $17.0 million is
attributable to membership revenue which increased from $29.0 million in 1994 to
$46.0 million, or 58.4% in 1995, 1.6 million is attributable to finance charges
earned which increased from $2.0 million in 1994 to $3.6 million, or 80.5% in
1995, and $2.4 million is attributable to ancillary service fees which increased
from $1.7 million in 1994 to $4.1 million in 1995 or 146.8%. Membership revenue
increased as a result of new membership revenue increasing 53.1% to $33.7
million in 1995 from $22.0 million in 1994, primarily due to the opening of new
clubs, and dues and renewals revenue increasing 75.3% from $7.0 million in 1994
to $12.3 in 1995 due to 67.8% growth in the number of membership contracts.
Finance charges earned increased commensurate with the 81.2% increase in the
average balance of installment contracts

18
<PAGE> 21

receivable outstanding. Ancillary service fees increased due to a larger number
of club operating months and expansion of revenue producing services provided.

Selling and promotion expenses increased by $9.3 million, or 71.6%, to
$22.3 million in 1995 from $13.0 million in 1994 and as a percentage of net
revenues by 1.8% to 41.7% in 1995 from 39.9% in 1994. The dollar increase was
due to an 88.6% increase in the number of club operating months in 1995 compared
to 1994. The increase as a percentage of net revenues was primarily due to the
opening of four new clubs in 1994 and the fact that selling and promotion
expenses as a percentage of net revenues are typically higher in new clubs and
tend to decrease as clubs mature. An additional factor contributing to an
increase in selling and promotion expenses as a percentage of net revenues was
an increase in commission expenses attributable to a higher percentage of
prepaid memberships sold in the two new markets opened in 1995, Dallas (two
clubs) and Las Vegas, and the corresponding higher commissions associated with
such prepaid term memberships.

Cost of membership services increased by $6.3 million, or 93.7%, to $12.9
million in 1995 from $6.7 million in 1994, due primarily to the increase in the
number of club operating months in 1995 (88.6%) compared to 1994, and as a
percentage of net revenues by 3.7% from 20.4% in 1994 to 24.1% in 1995. A
substantial portion of this increase is attributable to the higher occupancy
costs associated with the sale-leasebacks of four clubs which increased the
number of club lease months to 43 months in 1995 from 23 months in 1994. The
balance of the increase was associated with higher payroll costs used to
compensate the Company's expanded service staff.

General and administrative expenses increased by $1.1 million, or 33.1%, to
$4.4 million in 1995 from $3.3 million in 1994, but decreased as a percentage of
net revenues from 10.2% to 8.3%. The dollar increase was primarily the result of
adding new management, including three officer level positions and staff
positions to support club expansion. The decrease in general and administrative
expenses as a percentage of net revenues was primarily the result of favorably
leveraging fixed general and administrative expenses over a larger revenue base.

The provision for doubtful accounts increased 51.3%, or $3.4 million to
$10.1 million in 1995 from $6.7 million in 1994. The provision for doubtful
accounts as a percentage of net revenues decreased from 20.4% in 1994 to 18.8%
in 1995, attributable to an increase in the percentage of prepaid memberships
from 21.8% in 1994 to 24.7% in 1995. The allowance for doubtful accounts as a
percentage of net installment contracts receivable was 23.0% as of December 31,
1995 compared to 21.0% at December 31, 1994 which compares with installment
contracts receivable written off, as a percentage of average installment
contracts receivable outstanding being 23.0% in 1994 and 19.0% in 1995.
Management believes that the level of the provision for doubtful accounts is in
a range normal for the industry in light of all term membership agreements
providing for members being released from their contractual commitment if they
relocate over 25 miles from a facility or become medically unable to exercise.
Over 50% of the installment contracts receivable that are written off are
attributable to such contractual rights of cancellation. The provision for
doubtful accounts as a percentage of net revenues, the allowance for doubtful
accounts as a percentage of net contracts receivable and installment contracts
receivable written off as a percentage of average installment contracts
receivable outstanding continue to remain within a comparable range for the
periods presented and have been consistent with target goals. Although no
circumstances currently exist that would lead management to believe that a
material change could occur, there can be no assurance that an adverse change
will not occur. See "Risk Factors -- Profitability Dependent on Membership
Levels."

Interest expense increased $1.6 million, or 82.4%, to $3.6 million in 1995
from $2.0 million in 1994. The increase is attributable to a higher average
outstanding balance under the Company's Credit Agreement, as well as borrowings,
under the Receivable Line of Credit during 1995 which was unused in 1994.

YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993

Net revenues increased by $17.6 million, or 117.4%, to $32.6 million in
1994 from $15.0 million in 1993, due primarily to the opening of five new Q
Clubs during 1994 which contributed $5.0 million, or 33.3%, of the increase and
the resulting 79.5% increase in club operating months to 70 months in 1994 from
39 months in 1993. Of the total $17.6 million increase in net revenues, $15.9
million is attributable to membership revenue

19
<PAGE> 22

which increased 120.8% from $13.1 million in 1993 to $29.0 million in 1994, $0.9
million is attributable to finance charges earned which increased from $1.1
million in 1993 to $2.0 million, or 72.7%, in 1994 and $0.9 million is
attributable to ancillary service fees which increased 127.6% from $0.7 million
in 1993 to $1.7 million in 1994. Membership revenue increased as a result of new
membership revenue increasing 135.1% to $22.0 million in 1994 from $9.4 million
in 1993, primarily due to the opening of new clubs, and dues and renewals
revenue increasing 85.3% from $3.8 million in 1993 to $7.0 million in 1994 due
to a 54.0% increase in the number of membership contracts along with the
Company's original three clubs attaining an age during 1994 whereby a
significant number of memberships became eligible for renewal. Finance charges
earned increased as a result of the increase in the installment contracts
receivable outstanding. Ancillary service fees increased commensurate with the
increase in membership revenues and as a result of a larger number of Q Clubs.

Selling and promotion expenses increased $7.8 million, or 149.1% from $5.2
million in 1993 to $13.0 million in 1994, and increased as a percentage of net
revenues by 5.1% from 34.8% to 39.9%. The overall increase was primarily the
result of opening five clubs in 1994 resulting in a 79.5% increase in the number
of club operating months and significant increases in pre-opening and
advertising expenses associated with the grand openings. The increase as a
percentage of net revenues was due primarily to higher preopening expenses in
1994 attributable to the larger number of clubs opened, from one in 1993 to five
in 1994. Selling and promotion expenses as a percentage of net revenues are
higher in new clubs and decrease as clubs mature.

Cost of membership services increased $3.8 million, or 128.8%, to $6.7
million in 1994 from $2.9 million in 1993, primarily as a result of the increase
in the number of club operating months and increased staff required to service a
growing membership base and increased as a percentage of net revenues by 1.0% to
20.4% in 1994 from 19.4% in 1993. The increase in cost of membership services as
a percentage of net revenues was due primarily to an increase in occupancy
expenses associated with one sale-leaseback transactions occuring during 1993
and two such transactions in 1994. As a result, the number of club operating
months under lease increased from seven in 1993 to 23 in 1994.

General and administrative expenses increased 85.8% or $1.5 million to $3.3
million in 1994 from $1.8 million in 1993, but decreased as a percentage of net
revenues to 10.2% from 12.0%. The $1.5 million increase was primarily the result
of adding new management and staff positions and expansion of office facilities
to support the growth of the Company. In addition, expansion into new markets
caused an increase in travel expenses.

The provision for doubtful accounts increased by $3.9 million, or 144.5%,
to $6.7 million in 1994 from $2.7 million in 1993. The provision for doubtful
accounts as a percentage of net revenues increased from 18.1% in 1993 to 20.4%
in 1994, attributable to the maturing of the installment contract receivables.
The allowance for doubtful accounts as a percentage of net (of unearned finance
charges) installment contracts receivable was 21.0% at December 31, 1994
compared to 23.0% at December 31, 1993, which compares with installment contract
receivables charged off as a percentage of the average installment contracts
receivable outstanding being 22.0% in 1993 and 23.0% in 1994.

Interest expense increased $0.8 million, or 64.5%. The increase was
primarily attributable to the issuance of the 10% Senior Subordinated Notes on
December 29, 1993 and a higher average outstanding balance under the Company's
Credit Agreement, offset in part by an increase in capitalized construction
period interest.

On May 1, 1993, the Company changed its tax status from an S to a C
corporation for income tax purposes. As an S corporation, the Company was not
subject to federal income taxes. As a result of this change, a provision for
deferred taxes of $761,000 was recorded by the Company in the second quarter of
1993. The pro forma information has been computed as if the Company had been
subject to corporate income taxes for all periods presented based upon the tax
laws in effect during such periods.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations and expansion program to date
through a combination of borrowings, sale-leasebacks of real estate, issuance of
securities and net cash provided by operations. During 1993, the Company raised
an aggregate of $4.65 million through the sale of Series A Preferred Stock,
which

20
<PAGE> 23

will be converted into 882,909 shares of Common Stock immediately prior to the
completion of the offering. In December 1993, the Company raised an aggregate of
$15.0 million from the sale of its 10% Senior Subordinated Notes and detachable
warrants to purchase an aggregate of 726,679 shares of Common Stock at $.01 per
share. In May 1995, the Company raised an aggregate of $22.25 million through
the sale of Series B Preferred Stock, which will be converted into 1,880,644
shares of Common Stock immediately prior to the completion of the offering. For
the three months ended March 31, 1996 and 1995, net cash provided by operations
totaled approximately $0.7 million and $0.2 million, respectively. For 1995,
1994, 1993 and 1992, net cash provided by operations totaled approximately $1.0,
$0.2, $1.9 and $1.0 million, respectively.

In October 1994, the Company entered into the Credit Agreement providing
for revolving borrowings equal to the lesser of $24.0 million or the collateral
limit, which is calculated by adding (i) the value of certain trust assets
consisting of marketable securities pledged by Frank M. Leonesio and his wife;
(ii) the aggregate value of each Q Club owned by the Company (determined by
taking the lesser of 35% of the appraised fair market value of each Q Club or
$1.55 million); and (iii) 75% of the purchase price of any undeveloped property
owned by the Company. See "Certain Transactions." The Company estimates that its
current collateral limit under the Credit Agreement is approximately $24.0
million. At March 31, 1996, the Company had approximately $1.1 million of unused
borrowing availability under the Credit Agreement. Approximately $17.9 million
of the net proceeds of the offering will be applied to repay borrowings which
are expected to be outstanding under the Credit Agreement. In the event that the
net proceeds to the Company are less than $25.3 million, the amount used to
temporarily reduce indebtedness under the Credit Agreement will be reduced on a
dollar-for-dollar basis. See "Use of Proceeds."

The Credit Agreement contains restrictive covenants that require, among
other things, minimum levels of tangible net worth, certain membership levels at
each Q Club, limitations on capital expenditures and the incurrence of
additional indebtedness and the maintenance of certain financial ratios. Under
the Credit Agreement, the Company is prohibited from declaring any dividends on
its capital stock without the consent of its lender. Each of the Company's owned
properties, except those which secure the Finova Loan Agreement as discussed
below, is mortgaged to secure its borrowings under the Credit Agreement. In
addition, Frank M. Leonesio and his wife have pledged certain of their personal
assets to secure the Company's borrowings under the Credit Agreement. The
maturity date of the Credit Agreement is November 30, 1997 at which time any
outstanding amounts borrowed will be due. The Company intends to renegotiate the
terms of the Credit Agreement upon completion of the offering, although no
assurance can be given as to the availability or timing of such terms.

The Company is currently negotiating for the sale-leaseback of three clubs
in Dallas and for build-to-suit development of up to seven additional clubs with
three commercial real estate groups.

In addition, the Company has entered into sale-leaseback transactions with
respect to its clubs located in Memphis, Phoenix, Scottsdale, Austin and
Bedford, Texas which provided aggregate proceeds of approximately $25.8 million.
The Company is currently negotiating similar sale-leaseback transactions
relating to either existing or new health clubs. See "Business -- Q Club
Locations."

In January 1996, the Company entered into a Loan and Security Agreement
with Finova Capital Corporation (the "Finova Loan Agreement") providing for a
term loan of $13.5 million funded at closing (the "Initial Advance") and a
potential additional advance of $1.5 million available after the first quarter
of 1997, contingent upon the Company meeting certain financial tests (the
"Additional Advance," collectively, with the Initial Advance, the "Finova
Loan"). The Finova Loan requires monthly payments of interest and principal
calculated by amortizing the outstanding principal over a 144-month period, with
all remaining principal due in a lump sum in February 2001. A prepayment premium
for early payment of the principal decreases from five percent to zero percent
over the term of the loan.

The Finova Loan is secured by (i) first priority mortgages or deeds of
trust on the Company's Las Vegas, Tempe, Jacksonville, Mesquite, Texas and
Sugarland, Texas Q Club locations (the "Finova Collateral Properties"); (ii)
first priority security interests in the membership contracts, equipment leases,
fixtures, personalty and intangibles relating to the Finova Collateral
Properties; and (iii) a $4.0 million key man life insurance policy on the life
of Frank M. Leonesio. The Mesquite facility and related collateral is subject to

21
<PAGE> 24

release after fiscal 1996 to the extent the Company achieves an operating cash
flow to debt ratio of 1.3 to 1.0 with respect to the Finova Collateral
Properties, excluding Mesquite. In addition, the Finova Loan contains certain
restrictive covenants, including financial covenants, which are substantially
similar to those contained in the Credit Agreement.

In April 1995, the Company entered into the Receivable Line of Credit,
which provides for revolving borrowings up to $4.0 million secured by first
priority security interests in the membership contracts of the Austin, Phoenix,
Scottsdale, and Bedford, Texas Q Club locations. The Receivable Line of Credit
requires monthly payments of interest at 13% and quarterly payments of 0.75% of
the unused portion. The Receivable Line of Credit matures on December 1, 1996 at
which time any amounts outstanding will be payable in 36 equal monthly
installments of principal together with interest on the balance at prime plus
4.5%. At March 31, 1996, the Company had $2.9 million of unused borrowings
available under the Receivable Line of Credit.

In 1990, the Company entered into a loan agreement with Frank M. and
Melissa A. Leonesio providing for the borrowing of $2.0 million (the
"Shareholder Note"). The Shareholder Note provides for payments of interest only
at the rate of prime plus 0.5%. The Shareholder Note matures on January 1, 2001
and allows the Company to prepay all or any portion of the principal upon
completion of an initial public offering or achieving certain financial results.
Approximately $2.0 million of the net proceeds of the offering will be applied
to pay off the Shareholder Note. See "Use of Proceeds" and "Certain
Transactions."

The Company's primary capital requirements are used to finance the
construction of new Q Clubs. Each of the Company's existing clubs has been newly
constructed. It is anticipated that new clubs will also be newly constructed.
The Company expects to open approximately four additional Q Clubs during the
remainder of 1996 and approximately 13 in 1997. Based on its experience to date,
the Company estimates that the cost to build a new Q Club will average
approximately $6.5 to $7.5 million, depending on the particular real estate
market in which the club is located. The Company typically leases the exercise
equipment and furnishings in each new club for an initial period of four to five
years at an annual cost ranging from $240,000 to $300,000 per club. The Company
expects to reborrow approximately $19.0 million under the Credit Agreement and
the Receivable Line of Credit, which will have been reduced by a like amount out
of the net proceeds of the offering, to fund in part the opening of
approximately seven new Q Clubs during the remainder of 1996 and in early 1997,
although two of the seven are anticipated to be build-to-suit lease
transactions. See "Use of Proceeds."

The Company expects that funds from future operations, additional
borrowings under the Credit Agreement and net proceeds from the offering will be
sufficient to fund its operations and expansion program over the next two years.
In addition, the Company anticipates that it will enter into additional
sale-leaseback transactions of existing and new clubs to provide, along with
cash from operations, funds for new club openings thereafter. The Company also
anticipates that it will enter into build-to-suit lease transactions as part of
its expansion program. The Company may also seek additional financings from new
debt or equity securities offerings. The Company's ability to access additional
capital may be adversely affected by risks attendant to the market for the
Company's Common Stock. See "Risk Factors -- Absence of Public Trading Market;
Possible Volatility of Stock Price" and "-- Shares Eligible for Future Sale;
Registration Rights and Potential Adverse Effect on Stock Price." Further, there
can be no assurance that the Company will have access to adequate sources of
liquidity to finance future expansion. The Company's future expansion may be
limited if it is unable to complete the opening of new Q Clubs due to the lack
of available funds. See "Risk Factors -- Possible Inability to Obtain Sufficient
Capital for Expansion."

RECENT ACCOUNTING STANDARDS

Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" was issued in 1995 to prescribe the accounting and
reporting for all stock-based compensation plans, and is effective in 1996.
Companies may elect to adopt the fair value method prescribed under Statement
123 or to remain under the existing rules of Accounting Principles Board Opinion
No. 25's intrinsic value method for recognition of compensation expense. The
Company has elected to continue to account for its stock-based

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compensation in accordance with APB No. 25. Additional disclosures will be
required in 1996 in accordance with Statement 123.

Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" was
issued in 1995 and requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present. The Company
adopted Statement 121 in the first quarter of 1996 and the adoption of the
Statement 121 had no significant impact on its financial statements.

EFFECT OF INFLATION

Inflation generally affects the Company by increasing the interest expense
of floating rate indebtedness and by increasing the cost of labor, fixtures and
fitness equipment and costs associated with constructing new clubs. The Company
does not believe that inflation has had any material effect on the Company's
business over the past three years. However, a future material increase in
inflation would materially increase the Company's liquidity needs relating to
future expansion. See "Risk Factors -- Possible Inability to Obtain Sufficient
Capital for Expansion."

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BUSINESS

GENERAL

Q Clubs Inc. operates large (approximately 44,000 to 47,000 square foot),
high quality, full-service health clubs at attractive prices under the name "Q
The Sports Club" in large metropolitan areas located in the southern and
southwestern regions of the United States. The Company opened its first Q Club
in November 1990 and currently operates 16 Q Clubs. It anticipates opening
approximately four additional Q Clubs during the remainder of 1996 in Florida
and approximately 13 additional clubs in 1997. The Company's objective is to
establish itself as the first nationwide operator of commercial health clubs
employing a standardized facility and uniform operations under a highly
recognizable brand name. The Company believes that it has developed a unique
standardized operating strategy and a proprietary sales and marketing system
that is designed to enable the Company's Q Clubs to achieve membership levels at
maturity (usually four to five years after opening) ranging from 9,000 to 14,000
members per club as compared to the industry average of 1,500 to 3,200. The
Company offers its high quality services at prices that the Company believes are
substantially less than health clubs that offer comparable amenities. In
developing its operating strategy, the Company has sought to capitalize on the
increasing health and exercise commitment of older Americans by designing and
marketing its Q Clubs to appeal to a target segment composed of individuals in
the 35 and older age group, which comprise a majority of Q Club memberships.

The Company's founder and principal stockholder, Frank M. Leonesio, has 28
years of experience in the health club industry. After successfully expanding a
health club chain for women, in 1972 Mr. Leonesio founded Scandinavian Health
Spa, Inc. ("Scandinavian"), the nation's first commercial unisex health club.
Mr. Leonesio sold Scandinavian to Bally Total Fitness Holding Corporation,
formerly Bally's Health and Tennis Corporation (which operates under the trade
name Bally Total Fitness) ("Bally's") in 1984. At the time of the sale to
Bally's, Scandinavian operated 35 health clubs generating annual revenues of
approximately $25 million. Following the sale, Mr. Leonesio served as a Senior
Vice President of Bally's, where he expanded his former company into a 95-club
division within Bally's that generated over $250 million in annual revenues.
Among the Company's other executive officers, Richard A. Intorcio (Senior Vice
President and Treasurer/ Controller), Stephen J. Currier (Senior Vice President
of Marketing and Sales) and John J. Leonesio (Senior Vice President of
Operations) each have over 16 years of experience working with Frank Leonesio in
the health club industry. In addition, the Company's Chief Financial Officer,
Thomas J. Klimback, has 25 years of experience working with retailers such as
Petstuff Inc., Office Products of America, Inc., Sports Giant (a division of
Builders Square) and Grace Retail Corporation.

INDUSTRY OVERVIEW

The health club industry is highly fragmented. The Company estimates that
there are less than 15 companies that own and operate more than 25 facilities.
In a 1996 report, IHRSA, a trade association comprised of higher-end sports and
fitness clubs, estimated that there are approximately 12,000 commercial fitness
centers in the United States and that revenue generated from membership fees
from such facilities will approximate $8.25 billion. The Company believes that
smaller operators of health facilities will find it increasingly difficult to
compete with the operators of larger health clubs, who are able to offer their
members a wide range of exercise alternatives at more economical membership
prices. The health club industry has grown in the past two decades as the public
has become increasingly aware of the benefits of regular exercise and physical
fitness. ASDI reported in its most recent industry study that in 1995, health
club memberships have grown 64% for the 35 to 54 year old age group and 70% for
the 55 and older age group (which groups together represent the Company's target
market segment) between the years 1987 and 1994. This compares to a 26% growth
in memberships among the 18 to 34 year old age group, which is the traditional
target market for many of the Company's competitors. ASDI further reports that
approximately 20 million Americans, or 8.6% of the total U.S. population, are
currently members of a health club. Based on the ASDI report, the Company
estimates that among Americans with incomes greater than $50,000, 15.4% have
health club memberships.

The Company believes that the increased interest of employers in the health
and wellness of their employees provides another substantial growth opportunity.
The interest by employers results from the

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perception, supported by industry surveys, that exercise programs can reduce
overall health care costs. Similarly, the Company believes opportunities exist
as a result of the growing number of insurance companies that are reimbursing or
subsidizing their subscribers for health club memberships. The Company does not
presently participate in any insurance company subsidized programs.

Q CLUB STRATEGY

The Company's objective is to establish itself as the first nationwide
operator of commercial health clubs employing a standardized facility and
uniform operations under a highly-recognizable brand name. The Company's
strategy is to offer its members health and fitness services including a large
assortment of exercise options and health and fitness services in a
state-of-the-art facility, supported by a large, service-oriented staff at
economical membership prices. The key components of this strategy are:

- Developing a Unique, Branded Concept -- Q The Sports Club. Q Clubs are
designed to attract people who may not otherwise be drawn to more typical
health club facilities by creating an enjoyable and comfortable environment
for club members and their families. The Company has sought to target the
increasing health and exercise commitment of older Americans by designing,
operating and marketing its Q Clubs to appeal to the 35 and older age
group, which comprises a majority of the Q Club memberships. According to
industry studies, this group represents the fastest growing segment of the
health club industry. The Q Club concept is especially designed to address
and overcome commonly perceived shortcomings of traditional health and
fitness clubs, such as overcrowding, inconvenient location, high membership
costs and intimidating atmosphere. For example, the Company provides a less
intimidating atmosphere through enforcing a dress code that requires all
members to wear conservative exercise apparel.

- Building Uniform, High-Capacity Clubs. The Company has designed its
prototype Q Club to provide members with the convenience of a large variety
of exercise options and services at a single location. The Company believes
based on ASDI's industry study that the Q Club's efficient design, which
can accommodate more than 2,000 users per day, permits utilization of its
space (in mature clubs) at more than double industry averages in terms of
memberships per square foot. Each Q Club includes an abundance of
state-of-the-art exercise equipment in order to handle the large membership
base and minimize waiting. Upon reaching a mature membership level
(typically in four to five years), Q Clubs are expected to range from
approximately 9,000 to 14,000 members per Q Club, which is significantly
greater than the industry average of 1,500 to 2,500 members per club. The
Company believes, based on its operating experience to date, that the
membership level of a Q Club is typically a function of the age of that
club. As of May 7, 1996, the average membership level for all Q Clubs was
9,185 members (with an average club age of 22 months). The Company's three
core clubs (with an average club age of 61 months) had a higher average
membership level of 12,597 members per club. While smaller than "megaclub"
concepts that include racquet sports, basketball courts or other "sport"
concepts, the Company believes the Q Club concept achieves a higher pre-tax
income for mature clubs, as evidenced by the 13.8% pre-tax income, as a
percentage of revenue, of the Company's three core clubs as compared to an
industry average of 9.4% for such larger facilities. The Company's
standardized Q Club design format provides economies of operation and
permits efficiencies in management and staff training. The standardized Q
Club design also provides for more efficient future construction and
expansion, by reducing costs. In addition, the Company has developed a
highly effective, centralized and systematic approach to club operations,
sales and marketing.

- Providing a Broad Array of Services at Attractive Prices. The Company
seeks to provide its members with excellent value by providing them with a
high quality experience at an economical membership price. In general, an
individual Q Club membership consists of an initiation fee ranging from
$149 to $249 with a 24 or 36 month dues commitment of $29 to $39 per month.
Because of each Q Club's large membership base, the Company is able to
offer membership plans priced at what it believes to be approximately half
the price of the national average for other health clubs that offer
comparable amenities. Each Q Club offers a variety of innovative and
specialized programs to its members in addition to providing them with a
state-of-the-art exercise facility. The Company has developed over 25
special programs designed to address many of the typical health issues
facing its members, including educational

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instruction on such topics as proper nutrition, stress reduction, lower
back pain prevention, arthritis management and high blood pressure
management. Another service offered at each club is a supervised fitness
and child care facility, known as Q 4 Kids, where members can leave their
children while exercising at the clubs. In addition, the Company recently
expanded its ancillary services by introducing physical therapy as leased
departments at six of its Q Clubs through an arrangement with Physiotherapy
Associates, Inc.

- Utilizing an Advanced Sales and Marketing Program. One of the Company's
key marketing strategies is to establish a dominant presence and maintain a
high level of brand name recognition in its markets. To create brand
awareness and identify prospective members, the Company maintains extensive
advertising and marketing programs in each of its markets. These programs
include local television advertisements and direct response sales
activities which generate substantial new member activity at the opening of
clubs and help to grow the membership base over time. The Company has
developed a technology-based membership lead and sales tracking system that
management believes is more sophisticated than that of any other in the
industry.

- Employing a Highly-Trained, Service-Oriented Staff. Management places a
high priority on service as it believes member satisfaction is measured on
a daily basis. As a result, each Q Club has a staff of approximately 85
full- and part-time employees, including personal trainers, exercise
consultants, massotherapists, sales associates and maintenance personnel.
Each staff member completes in-house training and each personal trainer
must be certified by an accredited health institution and hold a Bachelor's
degree in exercise or another health-related discipline. Through a variety
of training programs, the Company seeks to instill in its employees the Q
Club's emphasis on service. To further promote the Company's service
orientation, a portion of the total compensation of each Q Club's
operations manager is based on monthly satisfaction surveys completed by
club members.

Q THE SPORTS CLUB

The Facility. All existing Q Clubs are substantially identical in design
and operation and the Company expects that all new Q Clubs will follow this same
general model. Each Q Club is a custom-built, approximately 44,000 to 47,000
square foot, two-story building on five to six acres of land, with approximately
350 well-lighted parking spaces, and decorated in a contemporary motif with high
quality furnishings. The Q Club entrance features a two-story glass atrium with
an adjoining lounge and non-alcoholic beverage center. The first level contains
an indoor 25-meter, five-lane, lap pool, the Q 4 Kids fitness and child care
facility, towel service, locker rooms, a large whirlpool, steam room and sauna.
The second level contains a 22,000 square foot exercise room with over 300
pieces of state-of-the-art exercise equipment. Throughout the main exercise room
there are a number of mounted television sets with local audio transmission to
permit members to listen through their own audio headsets if they so desire. For
strength development, each club contains complete lines of progressive
resistance exercise equipment from manufacturers such as Cybex, Nautilus,
Kaiser, Sprint or Pyramid, as well as a substantial amount of free weights. In
order to provide its members with the benefits of the latest advances in
exercise technology, the Company continuously reviews, tests and, when
appropriate, purchases newly introduced lines of health equipment. Each Q Club
has two mirrored aerobic exercise rooms with cushioned hardwood floors measuring
2,000 and 3,000 square feet in size, respectively, and a 16-station, 30 minute
express workout area. Aerobic dance and step classes are conducted throughout
the day on an hourly basis. Each Q Club also contains tanning booths for use by
members upon payment of an additional fee.

Each Q Club is designed and operated to create an enjoyable and comfortable
environment for club members and their families. To maintain appearances,
cleaning and maintenance activities are conducted throughout all hours of club
operation, rather than only during periods in which the Q Club is closed. In
addition, the Company enforces a dress code that requires its members to wear
conservative exercise apparel, thereby making members feel more comfortable
regardless of fitness level.

Personnel and Training. In order to ensure a high level of service to each
member, each Q Club employs approximately 90 full- and part-time employees,
including personal trainers, fitness instructors, massotherapists, salespeople
and maintenance personnel. Management of each club is divided between the sales
and marketing manager, who is responsible for membership sales and the hiring
and training of sales

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associates, and the operations manager, who is responsible for the day-to-day
operations of the club, including responsibility for member satisfaction, hiring
and training operational personnel, work scheduling and maintenance activities.
The Company hires as club managers individuals who have proven sales or
operational experience, as the case may be, in the health and fitness industry,
preferably within the Company's organization.

The personal trainers, aerobic dance professionals and massotherapists
comprise over 35% of each club's staff. Personal trainers complete a minimum of
120 hours of in-club training before they are permitted to provide instruction
to members. Personal trainers are required to be certified by an accredited
health institution and to hold at least a Bachelor's degree in exercise or
another health-related discipline. Personal trainers are responsible for leading
new member orientation classes, teaching educational seminars and handling
one-on-one personal training instruction. The aerobic dance instructors also are
required to be certified by accredited organizations. All personal trainers and
exercise consultants are centrally located at a service desk in the center of
the main exercise area in order to be easily accessible to members.

Q 4 Kids. The Company believes that providing children with a fun and safe
play environment is an important factor in attracting families to join the Q
Clubs. As a result, each Q Club contains a supervised fitness and child care
facility where members can leave their children while exercising at the club.
Each Q 4 Kids center contains a variety of entertainment options for children.
While attending Q 4 Kids, children can engage in a variety of free play and
planned activities, many of which are designed to promote physical fitness. The
Company has installed in its Q 4 Kids center a variety of specialized exercise
equipment, such as "ball crawls" similar to that found in commercial children's
playcenters. See "Risk Factors -- Potential Liability."

Innovative Programs and Services. Each Q Club offers a variety of
innovative programs and services to its members in addition to providing them
with a state-of-the-art exercise facility. For example, each club offers
personal training services to members for an additional hourly fee. The Company
also sponsors a variety of exercise and health programs that provide educational
instruction to members on such topics as proper nutrition, stress reduction,
lower back pain prevention, arthritis management and high blood pressure
management. Exercise programs include boxercise, body building, aquatics, soft
exercise and pre/post-natal exercise. In addition, each club offers a variety of
exercise and health programs to non-members for a specified fee, such as
self-defense and nutrition classes. The Company believes that participation in
such programs by non-members is an effective advertising tool and will lead many
such participants to purchase memberships. The Company has assembled a national
board of advisors, comprised primarily of physicians and other health care
professionals, to review and evaluate the exercise programs offered at each
club. In addition, each club has affiliated physical therapists who are
available to club members on the premises.

Physical Therapy Leased Department. In six clubs, including five clubs in
Dallas and one in Memphis, the Q Club provides physical therapy services to the
general public and its member base through an arrangement with Physiotherapy
Associates, Inc. ("PAI"), a subsidiary of Stryker Corporation, a diversified
medical products and services-based operation with specialized emphasis in
orthopedic applications and physical therapy. "Physiotherapy Associates at the
Q" is a leased department arrangement, whereby PAI provides a full array of
physical therapy services, including evaluations, application of physical
modalities, mobilization, exercise, functional training and orthotics. The
leased departments are staffed by licensed or certified physical therapists and
related professionals. Physiotherapy at these Q Clubs is located on the second
floor in a specially designed physical therapy center which includes four
treatment rooms, an office, a waiting room and an entrance from the exercise
floor. "Physiotherapy Associates at the Q" is marketed by both PAI and the Q
Club. If the performance of the existing six centers meet expectations,
"Physiotherapy Associates at the Q" may be expanded to other Q Clubs.

Membership Plans. The Company offers its members three principal types of
membership plans: (i) Gold (term) membership (representing approximately 66% of
the Company's membership in 1995), which permits a member to join for a
commitment period of two or three years, and pay a fixed fee over the membership
term, (ii) Platinum (prepaid term) membership (representing approximately 22% of
the Company's memberships in 1995), which permits a member to prepay the
membership fee (at a 15% discount) in a lump sum payment at the beginning of the
commitment period, which is two or three years, or

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the member may divide the fee and pay installments during the first three months
of the commitment period and (iii) month-to-month (dues) membership
(representing approximately 12% of the Company's memberships in 1995), which
permits a member to pay a monthly fee, without any further commitment, after the
payment of a nonrefundable initiation fee. The membership plans differ primarily
in term, renewability and the inclusion of certain additional in-club services.
From time-to-time, the Company also offers special discounts on membership plans
and other promotional arrangements particularly during each club's initial
membership enrollment period. Membership plans generally require an initiation
fee ranging from $149 to $249. The Company permits new members to spread the
payment of the initiation fee over a three-month period.

In addition to the one-time initiation fee, members must pay monthly
membership dues in order to maintain their membership privileges. Most
membership plans require members to pay such monthly payments for a specified
period, generally 24 or 36 months, which are generally renewable on a monthly
basis after the expiration of such period at comparable prices. The Company also
has membership plans which permit a member to continue membership on a
month-to-month basis after the payment of the initiation fee. Monthly dues for Q
Club members range from $29 to $39 per month depending upon the particular
membership plan. The Company believes that its average membership dues are
substantially less than the amount charged by other multi-recreational clubs.

The Company also offers corporate membership plans to businesses in the
vicinity of each of its Q Clubs. A corporate membership allows for a discount
per employee on initiation fees and on monthly dues when a certain number of
individual memberships are purchased by employees of the same corporation.
Discounts vary based on the number of memberships purchased with the average
discount approximating 10%. Approximately 25% to 30% of the Company's
memberships are sold through this program.

The Company offers its members two methods for the payment of monthly dues,
electronic funds withdrawal and automatic credit card charge. Under either
method, a predetermined amount is automatically transferred monthly from a
member's checking or savings account or charged to the member's designated
credit card. The Company has found that these two methods of payment are
superior from a collection standpoint than the industry's more traditional
monthly statement or coupon book method, which requires a member to mail a
check, accompanied by a payment coupon to the health club. See "Risk Factors --
Possible Adverse Consequences of Deferred Revenue Recognition Policy" and
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations."

Hours of Operation. In order to provide maximum flexibility to its
members, each Q Club operates a seven-day, 109 hour week. Normal hours are 5:00
a.m. to 11:00 p.m. on weekdays and 8:00 a.m. to 8:00 p.m. on weekends. Each Q
Club is designed to accommodate more than 2,000 workouts per day.

SALES AND MARKETING

In order to attract and maintain mature membership levels of 9,000 to
14,000 members per club, the Company has designed a sophisticated sales and
marketing program that is implemented at both the centralized corporate level
and club level. Because of the importance of sales and marketing to new member
generation and retention, the Company devotes substantial resources to this
effort at each of its Q Clubs. In 1996, the Company expects to spend
approximately $5.7 million for advertising and promotional activities as
compared to expenditures of approximately $3.6 million and $2.3 million for 1995
and 1994, respectively. Approximately one-half of the prospects that eventually
become members of the Q Club are generated by marketing activities conducted at
the corporate level while the other half are generated from marketing activities
conducted at the club level.

Corporate Marketing. At the centralized corporate level, the Company
engages in a variety of direct response marketing programs in order to create a
high level of consumer awareness and brand name identity in each of the markets
in which it operates. The Company uses television as its principal media for
advertising and has developed a series of commercials featuring the Company's
founder, Frank M. Leonesio, together with a well-known television personality. A
typical commercial often involves a light-hearted discourse between Mr. Leonesio
and the television celebrity that serves to illustrate one of the unique
operating features

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of a Q Club. These commercials are televised on network television stations
located in the markets in which the Company operates its Q Clubs and usually
advertise a toll-free number prospective members may call to obtain further
information. In addition, these commercials are often used to introduce special
discounts on membership plans and other promotional arrangements. In addition to
television, the Company also promotes its Q Clubs through direct mailings to
prospective members, typically individuals living within a five-mile radius of a
Q Club. Like the Company's television commercials, the direct mail literature
also contains a toll-free number for prospective members to call for further
information.

Through its television and direct mail advertising programs, the Company's
strategy is to become the dominant health club advertiser in each market where
it operates a Q Club. Initially, the Company selected its original Q Club
locations in order to become the dominant health club advertiser in a
cost-effective manner while operating a single facility in that market.
Currently, the Company's expansion strategy is to open clusters of Q Clubs in
the suburbs of large metropolitan areas in order to increase the efficiency of
its marketing and advertising programs. See "Expansion Strategy."

The Company's advertising and sales efforts are directed toward its target
market, the 35 and older age group. For example, one of the Company's
commercials discusses the Company's dress code as a means of conveying the
non-intimidating atmosphere at each Q Club. The Company positions itself as a
family-oriented operation. In its marketing programs, the Company emphasizes
many of its special programs and services designed to appeal to the target
market, such as its Q 4 Kids fitness and child care facility, low impact
exercise programs and educational instruction on such topics as stress
reduction, lower back pain prevention and high blood pressure management. The
Company believes that an operating and marketing strategy to appeal to the 35
and older age group will enhance its competitive advantage over more traditional
health clubs as the current demographic trends accelerate throughout the
remainder of the decade. Another important part of the Company's marketing
program is the pricing of its membership plans. Because of its large customer
base and unique operating strategy, the Company is able to offer membership
plans priced at what it believes to be substantially less than the national
average for other large health clubs with similar amenities.

In order to determine the effectiveness of its marketing programs, the
Company collects data from each of its clubs to track the level of new
membership interest generated from each of its marketing programs. For example,
each new member is given a questionnaire upon enrollment in a Q Club that
requests the source from which the new member was first introduced to the Q
Club. This information is used to generate a computer data base from which the
Company can monitor and evaluate its existing marketing programs. Similarly, the
Company monitors each of its television commercials by tracking the number of
telephone inquires generated from such commercial.

Q Club Marketing. The Company's corporate sales and marketing activities
are specifically designed to support the sales and marketing activities
conducted at the club level. Each Q Club generally has a 15 person sales and
marketing staff that implements a proprietary telemarketing system to solicit
new membership sales. Typically, each in-club sales staff is comprised of a
sales and marketing manager, 8-10 sales associates, who generally have a
Bachelor's degree or have past sales experience, two departmental supervisors,
who are responsible for monitoring the effectiveness of each sales associate and
a data entry person, who inputs information about prospective members into the
Company's data base system. In addition, each Q Club has a corporate membership
representative whose principal responsibility is to solicit corporate
memberships from businesses operating in the vicinity of the Q Clubs.

In addition to the new membership interest that is generated from the sales
and marketing activities conducted at the corporate level, each Q Club engages
in a variety of in-club membership activities to identify prospective members.
Each prospective member that is identified from the Company's marketing
activities is assigned to a sales associate for follow-up sales activity. The
results of such sales activity is monitored by the Company through its database
system and the sales associate receives feedback relating to his sales
performance on a weekly basis. A large portion of each sales associate's annual
compensation is tied to both the number and type of new memberships sold. The
Company supports its sales associates by developing innovative programs designed
to assist them in their selling effort, such as the ability to give prospective
members a free two-week trial membership.

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The Company continually evaluates its operating systems and develops and
tests new marketing systems. For example, the Company is developing a new
proprietary data-based sales production system, known as the TurboLead System,
designed to efficiently utilize the information collected through both corporate
and local marketing activities in order to provide its sales force additional
focus on the most likely sales leads. The system enables a salesperson to
classify consumers into market segments, and it then prioritizes the leads
according to lead type, offer, or call back date. The TurboLead System tracks
each lead to maximize an individual salesperson's results, and then generates
reports on a salesperson's efficiency, telemarketing activity, lead status,
appointment show percentage and closing percentage. The effectiveness of the
Company's advertising and promotions is also tracked by the TurboLead System.
The system captures and records every consumer inquiry (lead) from 10 different
lead sources, including telephone inquiries and walk-ins, and tracks them
through appointment shows to sales. This information can then be used to analyze
marketing efficiency and overall activities to determine the most cost effective
strategy. The new system has been developed and tested in the Scottsdale
location and will be introduced on a wider scale in the new Florida locations.

Pre-opening Marketing. The Company typically begins to market and sell
memberships to a new Q Club five to six months prior to its scheduled opening.
Initially, the Company's marketing effort is focused upon introducing the Q Club
to its target market generally by televising a series of commercials that
describe the many amenities offered at a Q Club. During this period, the Company
offers a variety of special discounts on membership plans and other promotional
arrangements in order to attract new members. To supplement its television
advertising, the Company conducts a series of direct mailings to households and
businesses generally located within a five mile radius of the new Q Club. These
direct mailings invite potential members to a "sneak preview" of the club, which
permits the potential member to get a free guided tour of the club one to two
days in advance of its scheduled opening. Each opening of a new Q Club is
scheduled on a Saturday and is accompanied by a grand opening party that all new
members and prospective members are invited to attend. Each grand opening party
features live entertainment, food and beverages. The Company will continue to
offer special discounts for a limited period following a grand opening to
continue to attract new members. The Company follows substantially the same
preopening marketing process with respect to the opening of each of its new Q
Clubs.

Refurbishing of Clubs. The Company believes that maintaining a fresh
appearance for its facilities is an important part of its marketing program.
Accordingly, as clubs age, each Q Club's ability to maintain and grow its
membership base over time requires the Company to refurbish clubs in a timely
manner, typically every four to five years. The Company estimates based on its
current experience that the cost of refurbishing a club approximates $1.3
million. Each refurbishing includes not only a refurbishing of the physical
facility but also a replacement of the exercise equipment with newer
state-of-the-art equipment. The refurbishment culminates in a re-grand opening
of the Q Club to enhance the marketing effort for such club. See "Risk Factors
- -- Costs Associated With Refurbishing Existing Clubs."

EXPANSION STRATEGY

The Company's current expansion strategy is to open clusters of Q Clubs in
the suburbs of major metropolitan areas that meet its demographic and
competitive criteria. The Company has implemented this strategy in the Dallas
(five clubs), Houston, (four clubs) and Phoenix (three clubs) metropolitan
markets. The Company believes that clustering its Q Clubs will provide economies
of scale in construction, advertising, marketing and managerial costs. Within a
specific market, the Company's site selection strategy attempts to locate Q
Clubs within a five mile radius with a population of at least 175,000
individuals with a median household income of at least $40,000 and 100,000
day-time workers. Q Club sites are selected after a detailed analysis of the
surrounding area demographic characteristics, parking, traffic count and
patterns, real estate availability and competitive conditions. Despite the
Company's implementation of a cluster strategy, the Company may open a single Q
Club in a geographic market where market and competitive conditions indicate
that such a strategy will be successful. See "Risk Factors -- Risks Associated
with Expansion Plans" and "-- Risks Associated with Regional Concentration of
Operations."

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The Company plans to open approximately four Q Clubs in Florida during the
remainder of 1996 and approximately 13 additional Q Clubs in 1997. Presently,
the Company estimates that there is a potential market for approximately 200 Q
Clubs in the United States.

To ensure its ability to successfully implement its uniform operating
procedures at all of its Q Clubs, the Company expects that all of its future
expansion will come from the construction of additional Q Clubs in new and
existing markets and not through the acquisition of existing health clubs. The
Company believes that its standardized operations will permit it to accomplish
its aggressive expansion strategy while ensuring a consistently high quality
experience for each of its members at either a new or existing Q Club.

The Company's experience has been that it can open a new Q Club for
business within six months after acquiring the necessary real estate. Based upon
its experience to date, the Company estimates that its cost to acquire land and
build a new Q Club has ranged from approximately $6.5 to $7.5 million, depending
upon the particular real estate market in which the club is located. In
addition, based on the Company's recent experience, the Company estimates that
it requires an additional $1.0 million to fully equip each new Q Club.
Historically, the Company has acquired such equipment through third party
leasing arrangements. The Company begins to market and sell memberships to a new
Q Club five to six months prior to its opening and a new club typically opens
with approximately 1,400 members, depending upon the length of the presale
period. Q Clubs typically reach a mature membership level of approximately 9,000
to 14,000 members per club during their fourth or fifth year of operation. See
"Risk Factors -- Possible Fluctuation of Quarterly Financial Results Due to New
Club Openings" and "-- Possible Adverse Consequences of Deferred Revenue
Recognition Policy."

COMPETITION

The health club industry is highly competitive and fragmented. IHRSA
estimates that there are over 12,000 commercial fitness facilities in the United
States, although the Company believes that there are only approximately 15
companies that own and operate more than 25 health clubs. The largest operator
of commercial health clubs in the United States, Bally's, operates over 300
health clubs under various trade names. The Company believes that the principal
competitive factors influencing its business are the breadth of exercise
activities and programs available, the level of customer service to members,
membership costs, club appearance and cleanliness, lack of crowding and location
of competing clubs. Within each market in which it operates, the Company
competes with other health clubs, physical health and recreational facilities
established by local governments and businesses for employees, the YMCA and
YWCA, and to a lesser extent, racquet and tennis clubs, country clubs and weight
reducing salons. The Company also competes with the manufacturers of home health
equipment, which certain individuals purchase in lieu of joining a health club.
See "Risk Factors -- Competition."

Q CLUB LOCATIONS

The Company currently operates 16 Q Clubs and has nine additional Q Clubs
under development. The Company's existing prototype building is approximately
47,300 square feet, which is somewhat larger than its earlier clubs. The
following tables set forth certain information with respect to those Q Clubs
that are open and those which are under development:

EXISTING Q CLUB LOCATIONS

<TABLE>
<CAPTION>
APPROXIMATE
METROPOLITAN AREA ADDRESS SQUARE FEET MONTH OPENED
- ------------------------------- --------------------------- ----------- -----------------
<S> <C> <C> <C>
Memphis, Tennessee............. 1285 Ridgeway Rd. 44,382 November 1990
Memphis, TN 38119
Jacksonville, Florida.......... 1731 Wells Rd. 44,382 March 1991
Orange Park, FL 32073
Austin, Texas.................. 10616 Research Blvd. 44,727 May 1991
Austin, TX 78759
Phoenix, Arizona............... 2145 East Baseline Rd. 44,400 September 1993
Tempe, AZ 85283
</TABLE>

31
<PAGE> 34

<TABLE>
<CAPTION>
APPROXIMATE
METROPOLITAN AREA ADDRESS SQUARE FEET MONTH OPENED
- ------------------------------- --------------------------- ----------- -----------------
<S> <C> <C> <C>
Phoenix, Arizona............... 3233 East Camelback Rd. 44,400 January 1994
Phoenix, AZ 85018
Phoenix, Arizona............... 13220 N. Scottsdale Rd. 44,400 June 1994
Scottsdale, AZ 85254
Houston, Texas................. 7300 West Greens Rd. 46,700 October 1994
Houston, TX 77064
Houston, Texas................. 1550 Post Oak Blvd. 46,700 October 1994
Houston, TX 77056
Houston, Texas................. 14111 Southwest Freeway 46,700 November 1994
Sugar Land, TX 77478
Houston, Texas................. 10707 Westheimer Rd. 46,700 January 1995
Houston, TX 77042
Las Vegas, Nevada.............. 601 South Rainbow Blvd. 46,700 January 1995
Las Vegas, NV 89128
Dallas, Texas.................. 2100 Plaza Parkway 46,700 December 1995
Bedford, TX 76021
Dallas, Texas.................. 1131 West Arbrook Blvd. 46,700 December 1995
Arlington, TX 76015
Dallas, Texas.................. 3600 Emporium Circle 46,700 January 1996
Mesquite, TX 75150
Dallas, Texas.................. 1375 E. Campbell Road 47,300 January 1996
Richardson, TX 75081
Dallas, Texas.................. 4600 W. Park Boulevard 46,700 January 1996
Plano, TX 75093
</TABLE>

Q CLUBS UNDER DEVELOPMENT

<TABLE>
<CAPTION>
EXPECTED
METROPOLITAN AREA LOCATION OPENING DATE
- -------------------------------------------------- --------------------- -----------------
<S> <C> <C>
Fort Lauderdale, Florida.......................... Coral Springs, FL August 1996
Fort Lauderdale, Florida.......................... Plantation, FL August 1996
Fort Lauderdale, Florida.......................... Pembroke Pines, FL December 1996
Fort Lauderdale, Florida.......................... Cypress Creek, FL December 1996
Dallas, Texas..................................... Hulen, TX January 1997
Dallas, Texas..................................... North Arlington, TX January 1997
Denver, Colorado.................................. Denver, CO January 1997
Denver, Colorado.................................. Aurora, CO January 1997
Las Vegas, Nevada................................. Las Vegas, NV January 1997
</TABLE>

The Company constructed each of its existing Q Clubs and currently owns all
but five facilities: two located in Phoenix, one in Memphis, one in Austin and
one in Bedford, Texas which are all subject to sale-leaseback transactions
pursuant to which the Company has entered into long-term lease arrangements
(ranging from 18 to 25 years with additional renewal options) for such
facilities. The Company received an aggregate of approximately $25.8 million
from these sale-leaseback transactions. In order to provide the necessary
financing for future growth, the Company is currently negotiating similar
sale-leaseback transactions with respect to certain of its other existing and
new health clubs. Each of the Company's owned properties is mortgaged to secure
its borrowings under either the Credit Agreement or the Finova Loan Agreement.

The Company's executive offices are located in Akron, Ohio and occupy
approximately 10,000 square feet of leased office space under a lease expiring
in 1997. The Company anticipates that its future expansion may necessitate
larger office space and is currently analyzing its space needs in connection
therewith.

32
<PAGE> 35

TRADEMARKS

The Company owns the registered trademark "Q The Sports Club" and believes
that such trademark has become an important component in its advertising and
marketing strategy. The Company believes that it has all the necessary trademark
rights necessary to conduct its business.

EMPLOYEES

As of December 31, 1995, the Company had 1,484 employees (approximately 630
of whom were employed full-time). The Company is not subject to any collective
bargaining agreements. The Company considers its employee relations to be good.
See "Risk Factors -- Risks Associated with Expansion Plans."

GOVERNMENT REGULATION

The operations and business practices of the Company are subject to
regulations at federal, state and, in some cases, local levels. General rules
and regulations of the Federal Trade Commission, and of state and local consumer
protection agencies, apply to the Company's advertising, sales and other trade
practices.

Statutes and regulations affecting the health and fitness industry have
been enacted or proposed in all of the states where the Company conducts
business. Typically, these statutes and regulations prescribe certain forms and
provisions of membership contracts, giving the member the right to cancel the
contract within, in most cases, three business days after signing, requiring an
escrow of funds received from preopening sales or the posting of a bond or proof
of financial responsibility, and may establish maximum prices for membership
contracts and limitations on the term of contracts. In addition, the Company is
subject to numerous other types of federal and state regulations governing the
sale, financing and collection of memberships, including, among others, the
Federal Truth-in-Lending Act and Regulation Z adopted thereunder (which apply to
the Company as a result of the Company's practice of collecting monthly dues
from members through automatic credit card debiting), as well as similar state
laws and state laws regarding debt collection. These laws and regulations are
subject to varying interpretations by a large number of state and federal
enforcement agencies and the courts. The Company maintains internal review
procedures in order to comply with these requirements, and it believes that its
activities are in substantial compliance with all applicable statutes, rules and
decisions.

Under state consumer statutes, a member has the right to cancel his
membership for a period of three to ten days, depending on applicable law, and
during such period is entitled to a refund of any down payment made. In
addition, the Company's membership contracts provide that a membership may be
cancelled at any time for death, permanent disability or relocation of 25 miles
or more from an existing Q Club. The specific procedures for cancellation in
these circumstances vary due to differing state laws. In each instance, the
cancelling member is entitled to a refund of prepaid amounts only and no portion
of the initiation fee.

LEGAL PROCEEDINGS

The Company is involved in various lawsuits arising in the ordinary course
of business. In addition to claims relating to the construction of Q Clubs and
employment related claims typical to many employers, the Company from
time-to-time has been a defendant in actions arising from alleged misconduct by
its employees, including claims relating to alleged sexual harassment or sexual
assault. A complaint was filed on August 11, 1995 by a former employee, naming
the Company and a former club supervisor as defendants in a lawsuit filed in the
District Court of Harris County, Texas, alleging, among other claims, negligent
hiring, supervision and retention, assault and battery and intentional
infliction of emotional distress, all as a result of an alleged rape of the
plaintiff by the former club supervisor at the former club supervisor's
apartment after an off-premises party. The complaint seeks compensatory and
punitive damages. The plaintiff has orally asserted a claim of $5 million. In
management's opinion, the outcome of these matters will not have a material
adverse effect on the Company's financial condition or results of operations.
See "Risk Factors -- Potential Liability."

33
<PAGE> 36

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN OTHER KEY PERSONNEL

The name, age, current principal position or employment of each director,
director nominee, executive officer and certain other key employees of the
Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---------------------------------------- --- ---------------------------------------------------
<S> <C> <C>
Frank M. Leonesio....................... 47 Chairman of the Board, Chief Executive Officer and
President, Director
Thomas J. Klimback...................... 47 Senior Vice President of Finance, Secretary and
Chief Financial Officer
Richard A. Intorcio..................... 42 Senior Vice President, Controller and Treasurer
Stephen J. Currier...................... 44 Senior Vice President of Marketing and Sales
John J. Leonesio........................ 45 Senior Vice President of Operations
Larry E. Cook........................... 52 Vice President of Real Estate
Robert M. Heer, Jr...................... 39 Vice President of Human Resources
Jeffrey B. Korsvik...................... 41 Vice President of Marketing
Kenneth P. DeAngelis.................... 43 Director
Lloyd D. Ruth........................... 48 Director
Kevin J. Roche.......................... 37 Director
J. Travis Hain.......................... 36 Director
Michael J. Horvitz(1)................... 46 Director nominee
Nathan R. Light(2)...................... 61 Director nominee
</TABLE>

- ---------------
(1) Mr. Horvitz will become a Director of the Company and a member of the Audit
and Compensation Committees immediately following the completion of the
offering.

(2) Mr. Light will become a Director of the Company immediately following the
completion of the offering.

In May 1995, the Company and all of its securityholders entered into a
second amended and restated securityholders' agreement (the "Securityholders'
Agreement"), whereby, among other things, the parties thereto agreed to vote
their shares of voting securities owned or controlled by them to elect a Board
of Directors comprising persons designated as follows: (i) one Director
designated by the holder or holders of at least a majority of the warrants
issued in December 1993 or the shares of Common Stock issued upon the exercise
thereof; (ii) Frank M. Leonesio; and (iii) three persons designated by the
holders of a majority of the remaining outstanding Common Stock, not more than
one of whom shall be an affiliate of the Company. The current Directors filling
these categories are as follows: Kevin J. Roche; Frank M. Leonesio; and Kenneth
P. DeAngelis; Lloyd D. Ruth; and J. Travis Hain. The Securityholders' Agreement
will terminate automatically by its terms upon completion of the offering.

Upon completion of the offering, certain of the existing stockholders, by
ownership of Common Stock, may have the effective power to elect or remove the
Company's Board of Directors. See "Risk Factors -- Control of the Company by
Certain Existing Stockholders; Anti-takeover Effect of Certain Provisions of the
Company's Certificate of Incorporation and Bylaws."

Executive officers are elected by and serve at the discretion of the Board
of Directors until their successors are duly elected and qualified. There are no
family relationships between or among any Directors of the Company. Frank M.
Leonesio and John J. Leonesio are brothers.

FRANK M. LEONESIO has been the President and a Director of the Company
since its formation in April 1993 and in such capacity has also served as the
Company's chief executive officer. Mr. Leonesio was elected Chairman of the
Board of the Company in 1995. In addition, Mr. Leonesio served as the President
of the Company's principal subsidiary, SFCA, since its formation in January
1990. Mr. Leonesio founded Scandinavian in 1972, which he later sold to Bally's
in 1984. At the time of the sale, Scandinavian owned and operated a total of 35
fitness centers. From 1985 to 1989, Mr. Leonesio served as the Senior Vice
President, North

34
<PAGE> 37

Central Region, of Bally's, where he expanded his former company to a 95-fitness
club division within Bally's that generated over $250 million in annual
revenues.

THOMAS J. KLIMBACK joined the Company in June 1995 as Senior Vice President
of Finance, Secretary and Chief Financial Officer. From June 1992 to June 1995,
Mr. Klimback held the position of Vice President of Finance and Chief Financial
Officer of Petstuff, Inc., a retailer of pet foods and supplies. From 1988 to
1992, Mr. Klimback served as President and Principal at Americapital Corporation
where his responsibilities included retail management consulting and investment
management, with an emphasis on retail concept development. In addition, from
June 1989 to July 1991, Mr. Klimback served as President and Chief Executive
Officer of Office Products of America, Inc. ("OPA"), a retail office products
superstore. In May 1991, OPA filed for bankruptcy after it was unable to obtain
additional financing.

RICHARD A. INTORCIO is a certified public accountant, served as Chief
Financial Officer of the Company and SFCA since their respective formations
until June 1995, and currently holds the offices of Senior Vice President,
Controller and Treasurer of the Company. Prior to joining SFCA in 1990, Mr.
Intorcio was employed by Bally's since its acquisition of Scandinavian in 1984
and prior thereto was the Chief Financial Officer of Scandinavian. Prior to
leaving Bally's, Mr. Intorcio was responsible for the financial accounting and
administration of over 90 health clubs.

STEPHEN J. CURRIER was formally named the Company's Senior Vice President
of Marketing and Sales in April 1993 and has served in such capacity since the
respective formations of the Company and SFCA. Prior to joining SFCA in 1990,
Mr. Currier held the position of Area Director of Bally's, where he was
responsible for managing the operations of 26 health clubs located in six
states. Mr. Currier joined Scandinavian in 1979.

JOHN J. LEONESIO has served as the Senior Vice President of Operations of
the Company and SFCA since their respective formations. Prior to joining SFCA,
Mr. J. Leonesio was employed by Bally's since its acquisition of Scandinavian in
1984. While at Bally's, Mr. J. Leonesio managed the equipment requirements for
over 100 health clubs. Mr. J. Leonesio has purchased over $40 million in fitness
equipment and has equipped over 35 new health clubs during his career in the
fitness industry.

LARRY E. COOK joined the Company as the Vice President of Real Estate in
January 1993. From June 1989 to September 1992, Mr. Cook was employed by Doppelt
& Company, a commercial real estate brokerage firm. Mr. Cook has approximately
25 years of experience in the commercial real estate business.

ROBERT M. HEER, JR. joined the Company as the Vice President of Human
Resources in November 1994. From April 1993 to October 1994, Mr. Heer was the
Director of Research at Columbia Consulting Group, a human resource consulting
and recruiting organization and prior thereto was employed for over ten years by
Career Consultants, Inc., a nationally recognized recruiting firm specializing
in the placement of sales personnel.

JEFFREY B. KORSVIK joined the Company as the Vice President of Marketing in
June 1994. Prior to joining the Company, Mr. Korsvik held various
marketing-related positions for The Michelin Tire Corporation (formerly The B.F.
Goodrich Company) since 1977, the latest being the Sales Manager of Major
Account Sales.

KENNETH P. DEANGELIS has served as a Director of the Company since May
1993. Mr. DeAngelis has been a General Partner of Austin Ventures, L.P., a
venture capital investment firm, since June 1984. Mr. DeAngelis began his career
in venture capital investing in 1981.

LLOYD D. RUTH has served as a Director of the Company since May 1993. Mr.
Ruth has been a Principal Partner of Marquette Venture Partners, L.P., a venture
capital investment firm, since 1987. Mr. Ruth, who has over 12 years experience
in the venture capital industry, was a director of Sports Authority, Inc. from
May 1987 to March 1993 and a director of Bizmart, Inc. from December 1987 to
June 1991.

J. TRAVIS HAIN has served as a Director of the Company since May 1995. Mr.
Hain has been a Senior Vice President at NationsBank N.A. since January 1992 and
was a Vice President from 1987 to 1992.

35
<PAGE> 38

KEVIN J. ROCHE has served as a Director of the Company since December 1993.
Mr. Roche has been Senior Vice President of First Union Capital Partners, Inc.
since April 1993, Senior Vice President of First Union Corporation since April
1991 and Senior Vice President of First Union National Bank of North Carolina
since December 1988. Mr. Roche has served as a director of CompUSA Inc., a
computer equipment retailer, since January 1989.

MICHAEL J. HORVITZ will become a Director of the Company upon the
completion of the offering. Mr. Horvitz has been a partner in the law firm of
Jones, Day, Reavis & Pogue since 1985. Mr. Horvitz currently serves as a
director of a variety of privately-held businesses and serves on the board of
trustees of several not-for-profit organizations.

NATHAN R. LIGHT will become a Director of the Company upon the completion
of the offering. From April 1986 to February 1995, Mr. Light was employed by
Sterling Inc., a large retail jewelry company, a wholly-owned subsidiary of
Signet Group plc, where he served as chairman and chief executive officer.

BOARD COMMITTEES

The Board of Directors of the Company has established two committees: (i) a
Compensation Committee to make recommendations concerning salaries, incentive
compensation and stock option grants to officers, other key employees and
consultants to the Company; and (ii) an Audit Committee to review the results
and scope of the audit and other services provided by the Company's independent
auditors and to approve the selection of auditors. The Board of Directors
elected Messrs. DeAngelis and Roche to the Compensation Committee and Messrs.
DeAngelis and Hain to the Audit Committee.

36
<PAGE> 39

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The table below provides information relating to the annual compensation
for the year ended December 31, 1995 for the Chief Executive Officer and the
other executive officers of the Company (collectively, the "Named Executive
Officers"). The amounts shown include compensation for services in all
capacities that were provided to the Company.

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
AWARDS
-------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
---------------------------------- STOCK UNDERLYING
NAME AND SALARY BONUS OTHER ANNUAL AWARD(S) OPTIONS/SARS
PRINCIPAL POSITION YEAR ($) ($) COMPENSATION ($)(1) (#)
- ---------------------------------- ---- -------- ------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Frank M. Leonesio................. 1995 $160,000 $10,000 -- -- --
Chairman of the Board, President
and Chief Executive Officer(2)
Thomas J. Klimback(3)............. 1995 $ 70,615 $ 5,833 -- -- 112,997
Senior Vice President of
Finance, Chief Financial Officer
and Secretary
Richard A. Intorcio............... 1995 $126,000 $10,000 -- $ 22,500 --
Senior Vice President,
Controller and Treasurer
Stephen J. Currier................ 1995 $126,000 $10,000 -- $ 22,500 --
Senior Vice President of
Marketing
and Sales
John J. Leonesio.................. 1995 $126,000 $10,000 -- $ 9,000 --
Senior Vice President of
Operations
</TABLE>

- ---------------
(1) On December 8, 1993, Messrs. Intorcio and Currier each purchased 98,258
shares of restricted Common Stock and Mr. J. Leonesio purchased 39,303
shares at a price of less than $.01 per share. These shares had an estimated
fair market value of $162,500 and $65,000 respectively, as of December 31,
1995. Under the terms of the purchase, 25% of the restricted shares vested
on the date of purchase and, if each remains an employee of the Company,
18.75% of the shares will vest on each anniversary of the date of purchase
until fully vested. Until fully vested, these shares are subject to a
variety of restrictions. Dividends, to the extent declared by the Company,
will be paid on these shares of restricted stock.

(2) Concurrent with the completion of the offering, Mr. F. Leonesio will be
granted options to purchase 50,000 shares of Common Stock at the initial
public offering price.

(3) Mr. Klimback joined the Company in June 1995 at an initial annual
compensation rate of $136,000.

37
<PAGE> 40

OPTION GRANTS IN LAST FISCAL YEAR

The following table contains information concerning the grants of options
made during 1995 to the Named Executive Officers.

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------ RATES OF STOCK
NUMBER OF PERCENTAGE OF PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(2)
OPTION EMPLOYEES IN BASE PRICE EXPIRATION -------------------
NAME GRANTED(#) FISCAL YEAR ($/SH)(1) DATE 5%($) 10%($)
- ---------------------------------------------- ---------- ------------- ----------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Frank M. Leonesio............................. -- -- -- --
Thomas J. Klimback............................ 58,955 42.7% $1.63 6/12/2005 $60,453 $153,153
54,042 39.1% $1.27 11/30/2005 $43,163 $109,384
Richard A. Intorcio........................... -- -- -- --
Stephen J. Currier............................ -- -- -- --
John J. Leonesio.............................. -- -- -- --
</TABLE>

- ---------------
(1) In valuing the Common Stock, the Company relied on valuation methods that
included comparisons to comparable companies and discounted cash flow
analysis.

(2) Potential Realizable Value is based on certain assumed rates of appreciation
pursuant to rules prescribed by the Securities and Exchange Commission (the
"Commission"). Actual gains, if any, on stock option exercises are dependent
on the future performance of the stock. There can be no assurance that the
amounts reflected in this table will be achieved. In accordance with rules
promulgated by the Commission, Potential Realizable Value is based upon the
exercise price of the options, which is substantially less than the expected
initial public offering price. Therefore, the Potential Realizable Values
may be significantly understated.

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

No options were exercised by the Named Executive Officers during 1995. The
following table provides information regarding unexercised stock options held by
the Named Executive Officers as of December 31, 1995:

<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FISCAL AT FISCAL
YEAR-END YEAR-END
SHARES VALUE ---------------- ----------------
ACQUIRED ON REALIZED EXERCISABLE(E)/ EXERCISABLE(E)/
NAME EXERCISE ($) UNEXERCISABLE(U) UNEXERCISABLE(U)(1)
- ------------------------------ ----------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Frank M. Leonesio............. -- -- -- --
Thomas J. Klimback............ -- -- 7,683(E) $ 296(E)
105,314(U) $ 21,849(U)
Richard A. Intorcio........... -- -- -- --
Stephen J. Currier............ -- -- -- --
John J. Leonesio.............. -- -- -- --
</TABLE>

- ---------------
(1) The Company's Board of Directors determined the fair market value of the
underlying shares of Common Stock at the time of the grant to equal the
exercise price of 54,042 shares at $1.27 per share and 58,955 shares at
$1.63 per share, respectively, pursuant to an independent, third party
appraisal performed by Key Corp Business Valuation Services, a subsidiary of
Key Corp.

38
<PAGE> 41

1994 STOCK OPTION PLAN

The Company's 1994 Stock Option Plan (the "Option Plan"), which was adopted
by the Board of Directors on June 21, 1994 and by stockholders of the Company on
May 31, 1994, authorizes grants to officers, including officers who may also be
members of the Board of Directors, and other key employees of the Company and
its subsidiaries of (i) stock options that are intended to qualify as "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986 and (ii) nonqualified stock options. The Option Plan also authorizes grants
of nonqualified stock options to consultants to the Company and its
subsidiaries. The Option Plan authorizes the granting of stock options for up to
an aggregate of 191,211 shares of Common Stock, subject to adjustment upon the
occurrence of certain events to prevent any dilution or expansion of the rights
of participants that might otherwise result from the occurrence of such events.
It is expected that the Option Plan will be amended to include authorization of
an additional 350,000 shares of Common Stock effective with the consummation of
the offering. Incentive stock options are exercisable for up to ten years at an
option price of not less than the fair market value of the Common Stock on the
date on which the option is granted or at an option price of not less than 110%
of the fair market value of the Common Stock in the case of an officer or other
key employee who owns at the time the option is granted more than 10% of the
Common Stock. Nonqualified stock options may be granted for up to ten years at
such exercise price and upon such terms and conditions as the Board of Directors
or the Compensation Committee may determine. The Compensation Committee will
administer the Option Plan following the completion of the offering. The Company
has granted an aggregate of 161,631 incentive stock options under the Option
Plan. Such options have an exercise price equal to from $1.27 to $2.20 per share
and become exercisable at the rate of 25% per year of service accumulated by the
optionee after the date of grant.

DIRECTOR COMPENSATION

The Company's Directors do not currently receive any cash compensation for
service on the Board of Directors, but Directors are reimbursed for certain
expenses in connection with attendance at Board meetings. The Company intends to
continue to reimburse out-of-pocket expenses related to the Directors'
attendance at such meetings; however, the Company does not anticipate paying
Director fees in the foreseeable future.

BOARD OF DIRECTORS INTERLOCKS AND INSIDER PARTICIPATION

Decisions concerning the compensation of the executive officers of the
Company for the year ended December 31, 1995 were made by Frank M. Leonesio,
President and Chief Executive Officer of the Company. Frank M. Leonesio's salary
for the year ended December 31, 1995 was approved by the Board of Directors.

In July 1990, Frank Leonesio and his wife, Melissa, made a loan to the
Company in the principal sum of $2.0 million, all of which is currently
outstanding. An identical sum was borrowed by the Leonesios from Mellon Bank,
N.A., under a related loan agreement. Outstanding principal balances under the
loan payable by the Company bear interest for each day at an annual rate equal
to 50 basis points in excess of the prime rate for such day. This loan is
scheduled to mature on January 1, 2001. The Company intends to repay this loan
with a portion of the proceeds from the offering. See "Use of Proceeds." The
loan payable by the Leonesios to Mellon Bank, N.A. matures April 30, 1997 and
bears interest at the prime rate.

From time-to-time, Frank Leonesio has guaranteed certain indebtedness of
the Company and pledged certain of his personal assets to secure borrowings of
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

On May 3, 1993, the Company issued and sold Series A Preferred Stock to
Marquette Venture Partners II, L.P. and MVP II Affiliates Fund, L.P.
(collectively, the "Marquette Entities") (of which Mr. Ruth is a Principal
Partner) and Austin Ventures III-A, L.P. and Austin Ventures III-B, L.P.
(collectively, the "Austin Ventures Entities") (of which Mr. DeAngelis is a
General Partner) at an aggregate purchase price of $4.65 million or $5.27 per
share. As a result of such sale, such entities became beneficial owners of more
than 5% of the Company's voting securities. All of the issued and outstanding
shares of Series A Preferred Stock will be converted into 882,909 shares of
Common Stock immediately prior to the completion of the offering. See "Principal
Stockholders."

39
<PAGE> 42

On December 28, 1993, the Company issued and sold $15.0 million in
aggregate principal amount of 10% Senior Subordinated Notes (the "10% Notes"),
together with warrants to purchase an aggregate of 726,679 shares of Common
Stock at an exercise price of $.01 per share (the "Investor Warrants"), at a
purchase price of $15.0 million, to the following entities: First Union Capital
Partners, Inc. (of which Mr. Roche is an officer) -- $12.0 million in 10% Notes
and Investor Warrants for 581,335 shares; the Austin Ventures Entities -- $1.5
million in 10% Notes and Investor Warrants for 72,672 shares; and the Marquette
Entities -- $1.5 million in 10% Notes and Investor Warrants for 72,672 shares.

On January 7, 1994, the Marquette Entities and the Austin Venture Entities
each exercised their respective Investor Warrants, receiving an aggregate of
145,344 shares of Common Stock.

On May 16, 1995, the Company issued and sold shares of Series B Preferred
Stock convertible into shares of Common Stock as follows: the Marquette Entities
(of which Mr. Ruth is a Principal Partner) -- 126,793 shares, the Austin
Ventures Entities together with Austin Ventures IV-A, L.P. and Austin Ventures
IV-B, L.P. (of which Mr. DeAngelis is a General Partner) -- 295,836 shares,
First Union Capital Partners, Inc. (of which Mr. Roche is a Senior Vice
President) -- 253,565 shares, NationsBanc Capital Corp. (of which Mr. Hain is a
Senior Vice President of an affiliate, NationsBank N.A.) -- 845,237 shares and
the Board of Trustees of the Texas Growth Fund -- 359,213 shares at an aggregate
purchase price of $22.25 million or $11.83 per share. All of the issued and
outstanding shares of Series B Preferred Stock will be converted into 1,880,644
shares of Common Stock immediately prior to the completion of the offering. The
Company and the holders of the Series B Preferred Stock have tentatively agreed
to modify the conversion terms of such shares in anticipation of the offering.
See "Description of Capital Stock -- Series B Preferred Stock Conversion."

The Company and certain of its stockholders, including the Marquette
Entities, the Austin Ventures Entities and First Union Capital Partners, Inc.,
are parties to a registration rights agreement with respect to approximately
3,513,741 shares of Common Stock, including 58,130 shares of Common Stock
issuable upon the exercise of the Investor Warrants. See "Shares Eligible For
Future Sale."

40
<PAGE> 43

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of February 1, 1996, assuming the
conversion of all outstanding shares of Series A Preferred Stock and Series B
Preferred Stock into Common Stock by: (i) each person who is known to the
Company to own beneficially more than 5% percent of the Company's voting
securities; (ii) by each of the Company's Directors and Director nominees and
each of the Named Executive Officers of the Company; and (iii) all Directors,
Director nominees and the Named Executive Officers, as a group. All information
with respect to beneficial ownership has been furnished by the respective
Director, Director nominee or executive officer, as the case may be. Unless
otherwise indicated below, the persons or entities named below have sole voting
and investment power with respect to the number of shares set forth opposite
their names. Beneficial ownership of the Common Stock has been determined for
this purpose in accordance with the rules and regulations promulgated by the
Commission under the Securities Exchange Act of 1934, which provide, among other
things, that a person is deemed to be the beneficial owner of Common Stock if
such person, directly or indirectly, has or shares voting power or investment
power in respect of such stock or has the right to acquire such ownership within
60 days. Accordingly, the amounts shown in the table do not purport to represent
beneficial ownership for any purpose other than compliance with such reporting
requirements.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES OF
COMMON STOCK
BENEFICIALLY OWNED
------------------------
BEFORE AFTER
DIRECTORS, OFFICERS AND 5% STOCKHOLDERS NUMBER OF SHARES(1) OFFERING OFFERING(2)
- ---------------------------------------------- ------------------- -------- -----------
<S> <C> <C> <C>
Frank M. Leonesio............................. 1,729,345(3) 31.2% 23.0%
395 Springside Drive
Akron, Ohio 44333
Austin Ventures, L.P.......................... 850,782(4) 15.3 11.3
1300 Norwood Tower
114 West Seventh Street
Austin, Texas 78701
NationsBank Capital Corporation............... 845,237 15.2 11.2
100 N. Tryon Street
Charlotte, North Carolina 28255
First Union Capital Partners, Inc............. 834,900(5) 15.1 11.1
301 South College Street
Charlotte, North Carolina 28288
Marquette Venture Partners.................... 681,739(6) 12.3 9.0
Corporate 500 Center
520 Lake Cook Road
Deerfield, Illinois 60015
Texas Growth Fund............................. 359,213(7) 6.5 4.8
100 Congress Avenue, Suite 980
Austin, Texas 78701
J. Travis Hain................................ --(8)
Thomas J. Klimback............................ --
Richard A. Intorcio........................... 98,258(9) 1.8 1.3
Stephen J. Currier............................ 98,258(9) 1.8 1.3
John J. Leonesio.............................. 39,303(9) 0.7 0.5
Kenneth P. DeAngelis.......................... 850,782(10) 15.3 11.3
Lloyd D. Ruth................................. 681,739(11) 12.3 9.0
Kevin J. Roche................................ --(12) * *
Michael J. Horvitz............................ --(13) * *
Nathan R. Light............................... --(14) * *
All Directors, Director nominee and
executive officers as a group (8 persons)... 5,175,929 93.5% 68.7%
</TABLE>

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

41
<PAGE> 44

* Less than one percent.

(1) The preceding table assumes the effectiveness of: (i) the conversion of all
outstanding shares of Series A Preferred Stock into Common Stock on a
one-for-one basis and Series B Preferred Stock into Common Stock on a
1.379-for-one basis; (ii) the issuance of 581,335 shares of Common Stock
upon the exercise of all but 58,130 of the outstanding warrants to purchase
Common Stock of the Company, which is expected to occur immediately prior
to the completion of the offering; and (iii) a 19.65165-for-one stock
split.

(2) Assuming no exercise of the Underwriters' over-allotment option.

(3) Mr. Leonesio exercises sole voting power pursuant to a grant of proxy with
respect to 98,258 shares of Common Stock owned of record by his spouse,
Melissa A. Leonesio. The reported share amount also includes 147,387 shares
of Common Stock held by certain trusts for the benefit of Mr. Leonesio's
three children. Mr. Leonesio disclaims beneficial ownership of these
245,645 shares.

(4) Includes 369,550 and 312,189 shares of Common Stock held of record by
Austin Ventures III-A, L.P. and Austin Ventures III-B, L.P., respectively,
and 54,592 and 114,451 shares of Common Stock held by Austin Ventures IV-A,
L.P. and Austin Ventures IV-B, L.P., respectively.

(5) Includes 581,335 shares of Common Stock that will be acquired upon the
exercise of the Investor Warrant currently held by the First Union Capital
Partners, Inc. immediately prior to the completion of the offering. See
"Board of Directors Interlocks and Insider Participation." The Investor
Warrant was issued in connection with the Company's issuance and sale of
its 10.0% Notes in December 1993.

(6) Includes 662,401 and 19,337 shares of Common Stock held of record by
Marquette Venture Partners II, L.P. and MVP II Affiliates Fund, L.P.,
respectively.

(7) Texas Growth Fund, a trust created by the constitution of the State of
Texas is the record and beneficial holder of such securities under a
management agreement. TGF Management Corp. has the contractual power to
direct the voting of, and the decision to dispose of, the Company
securities described above. James J. Kozlowski is the sole shareholder and
sole director of, and is the President of, TGF Management Corp. Mr.
Kozlowski disclaims beneficial ownership of the shares described above.

(8) Mr. Hain is a Senior Vice President of NationsBank N.A.

(9) Represents shares of restricted Common Stock that are subject to repurchase
by the Company. These shares will be fully vested and no longer subject to
repurchase on December 13, 1997.

(10) Represents shares of Common Stock held of record by the Austin Ventures
Entities. Mr. DeAngelis is an indirect general partner of the Austin
Ventures Entities and may be deemed to share beneficial ownership of such
shares of Common Stock. Mr. DeAngelis disclaims beneficial ownership of
such shares.

(11) Represents shares of Common Stock held of record by the Marquette Entities.
Mr. Ruth is an indirect general partner of the Marquette Entities and may
be deemed to share beneficial ownership of such shares of Common Stock. Mr.
Ruth disclaims beneficial ownership of such shares.

(12) Mr. Roche is Senior Vice President of First Union Capital Partners, Inc.

(13) Mr. Horvitz will become a Director of the Company immediately following the
completion of the offering.

(14) Mr. Light will become a Director of the Company immediately following the
completion of the offering.

CERTAIN TRANSACTIONS

The law firm of Jones, Day, Reavis & Pogue, of which Mr. Michael J. Horvitz
is a partner, provided legal services to the Company in 1995 and the current
fiscal year, and has also provided legal services to Frank M. Leonesio. See also
the matters referred to in "Executive Compensation -- Board of Directors
Interlocks and Insider Participation" and "Series B Preferred Stock Conversion."

42
<PAGE> 45

DESCRIPTION OF CAPITAL STOCK

Prior to the completion of the offering, the Company will amend its
Certificate of Incorporation (the "Certificate") to increase the number of
authorized shares of Common Stock, par value $.01 per share, to 25,000,000 and
authorize 2,500,000 shares of preferred stock, par value $.01 per share (the
"Serial Preferred Stock"). The amendment will also effect, immediately prior to
the consummation of the offering, the conversion, on a one-for-one basis of all
issued and outstanding shares of Series A Preferred Stock to Common Stock, the
conversion on a 1.379-for-one basis (assuming the initial public offering price
is within the proposed public offering range) of all issued and outstanding
shares of Series B Preferred Stock to Common Stock and a 19.65165-for-one stock
split of its issued and outstanding Common Stock (the "Stock Split"). Upon
completion of the offering, the Company will have 7,537,035 shares of Common
Stock issued and outstanding (assuming no exercise of the Underwriters'
over-allotment option) and no shares of Serial Preferred Stock issued and
outstanding.

SERIES B PREFERRED STOCK CONVERSION

Pursuant to the terms of the existing Certificate of Incorporation, each
share of Series A Preferred Stock and Series B Preferred Stock outstanding
immediately prior to the consummation of the offering will, on the date the
offering is consummated, be converted into shares of Common Stock if the
offering meets certain minimum price per share and net proceeds criteria. Since,
however, it is currently contemplated that the offering will not satisfy such
criteria as to the Series B Preferred Stock, the Company is seeking the approval
of its Series B stockholders to convert upon the consummation of the offering
each share of outstanding Series B Preferred Stock into Common Stock on a
1.379-for-one basis. The conversion ratio for the Series B Preferred Stock has
been adjusted in order to provide the holders of Series B Preferred Stock (the
"Series B Holders") with a return on their investment approaching the 30%
internal rate of return required under the existing Certificate to automatically
convert to Common Stock in the event of an initial public offering. Eight
percent of this required return will be distributed in the form of a cash
dividend. See "Dividend Policy" and "Use of Proceeds."

The conversion ratio has been set so that the Series B Holders will achieve
a 28% return (including the 8% return to be paid as a cash dividend) if the
initial public offering price is at $14.00 (the mid-point of the public offering
range). So long as the initial offering price is within the proposed public
offering range of $13.00 to $15.00, the conversion ratio will remain
1.379-for-one. Therefore, assuming an initial public offering price within the
proposed public offering range, the 69,397 shares of Series B Preferred Stock
outstanding would convert into an aggregate of 95,699 shares of Common Stock.
After giving effect to the Stock Split, the Series B Holders will hold an
aggregate of 1,880,644 shares of Common Stock, or approximately 24.96% of the
shares of Common Stock outstanding upon completion of the offering.

If the initial public offering price is above the proposed public offering
range, the cash dividend payable to the holders of the Series B Preferred Stock
will be adjusted so that the holders of the Series B Preferred Stock will
receive a return that does not exceed the high end of the range (34.8%). If the
initial public offering price is below the proposed public offering range, the
holders of the Series B Preferred Stock will receive an additional cash dividend
of up to approximately $715,000, to provide an aggregate return of 17.9%. If the
cash adjustments are insufficient to establish the agreed upon return, the
conversion ratio of the Series B Preferred Stock may be adjusted to provide such
agreed upon return to a maximum of 1.4634 shares of Common Stock per share. In
such event, the 69,397 shares of Series B Preferred Stock outstanding would
convert into an aggregate of 101,556 shares of Common Stock prior to the stock
split; as a result of the stock split, the holders of the Series B Preferred
Stock would hold an aggregate of 1,995,735 shares of Common Stock, or
approximately 26% of the shares of Common Stock outstanding upon completion of
the offering. As a result, the holders of the 2,000,000 shares offered hereby
would own 26% of the shares of Common Stock outstanding upon completion of the
offering, rather than 26.5% if the initial public offering price is within the
proposed range.

COMMON STOCK

The holders of Common Stock are entitled to receive dividends when, if and
as declared from time to time by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." Under Delaware

43
<PAGE> 46

corporate law, the Company is prohibited from paying any dividends unless it has
surplus earnings or capital earmarked for such purpose. Upon the liquidation,
dissolution or winding up of the Company, the holders of Common Stock will be
entitled to receive ratably the net assets of the Company available after the
payment of all debts and other liabilities and subject to the prior rights of
any holders of any outstanding Serial Preferred Stock. The shares of Common
Stock have no preemptive rights or conversion rights and will not be subject to
further calls or assessments by the Company. There are no redemption or sinking
fund provisions applicable to the Common Stock. The holders of Common Stock are
entitled to one vote per share on all matters to be voted upon by the
stockholders and do not have the right to vote cumulatively in the election of
Directors. The outstanding shares of capital stock are, and the shares of Common
Stock being offered will be upon payment therefor, fully paid and nonassessable.
The rights, preferences and privileges of the holders of Common Stock are
subject to the rights of the holders of shares of any Serial Preferred Stock.

SERIAL PREFERRED STOCK

Under the Certificate, the Board of Directors is authorized, without
further action by the stockholders, to issue, from time to time, Serial
Preferred Stock in one or more series and to fix or alter the voting powers,
designations, preferences and relative, participating, optional or other special
rights, if any, and qualifications, limitations or restrictions thereof,
including, without limitation, dividend rights and whether dividends are
cumulative, conversion rights, if any, rights and terms of redemption, including
sinking fund provisions, if any, redemption price and liquidation preferences of
any unissued shares or wholly unissued series of Serial Preferred Stock. In
addition, the Board of Directors may establish the number of shares constituting
any such class or series and the designation thereof, and increase or decrease
the number of shares any such series subsequent to the issuance of shares of
such series, but not below the number of shares of such series. The issuance of
Serial Preferred Stock may adversely effect the voting rights and other rights
of the holders of Common Stock. Upon the completion of the offering, the Company
will not have any issued and outstanding Serial Preferred Stock and has no
present plans to issue any Serial Preferred Stock.

WARRANTS

As of February 29, 1996, there were warrants outstanding to purchase
639,465 shares of Common Stock. Warrants to purchase 58,130 shares of Common
Stock were issued by the Company in July 1993 in connection with the sale and
leaseback of the Company's health club located in Memphis to the purchaser of
such facility. It is currently anticipated that all but 58,130 of the
outstanding warrants to purchase Common Stock will be exercised immediately
prior to the completion of the offering at an exercise price equal to $.01 per
share. Under the terms of the warrant, the warrantholder was granted, among
other things, certain "piggyback" registration rights with respect to the shares
of Common Stock issuable upon the exercise of the warrants.

The Investor Warrants were issued under the Warrant Agreement dated as of
December 28, 1993 to a group of five sophisticated investors in connection with
the issuance and sale of the 10% Notes. See "Management -- Board of Directors
Interlocks and Insider Participation." As of December 31, 1995, there were
Investor Warrants outstanding to purchase 581,335 shares of Common Stock, which
are expected to be exercised immediately prior to the completion of the offering
at an exercise price of $.01 per share.

CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK

Under the Company's Certificate, upon completion of the offering there will
be approximately 17,243,204 shares of Common Stock and approximately 2,500,000
shares of Serial Preferred Stock available for future issuance without
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes including future public offerings to raise additional capital
or to facilitate corporate acquisitions.

One of the effects of the existence of unissued and unreserved Common Stock
and Serial Preferred Stock may be to enable the Board of Directors to issue
shares to persons friendly to current management which could render more
difficult or discourage an attempt to obtain control of the Company by means of
a merger, tender offer, proxy contest or otherwise, and thereby protect the
continuity of the Company's management.

44
<PAGE> 47

Such additional shares also could be used to dilute the stock ownership of
persons seeking to obtain control of the Company.

The Board of Directors is authorized without any further action by the
stockholders to determine the rights, preferences, privileges and restrictions
of the unissued Serial Preferred Stock. The purpose of authorizing the Board of
Directors to determine such rights and preferences is to eliminate delays
associated with a stockholder vote on specific issuances. The Board of Directors
may issue Serial Preferred Stock with voting and conversion rights which could
adversely affect the voting power of the holders of Common Stock, and which
could, among other things, have the effect of delaying, deferring or preventing
a change in control of the Company.

The Company does not currently have any plans to issue additional shares of
Common Stock or Serial Preferred Stock other than shares of Common Stock which
may be issued upon the exercise of warrants or options which have been granted
or which may be granted in the future.

CERTAIN CHARTER PROVISIONS AND DELAWARE LAW

It is anticipated that the Company's Certificate and By-Laws will be
amended prior to the completion of the offering to provide, in general, that (i)
stockholder action can be taken only at an annual or special meeting of
stockholders and not by written consent in lieu of a meeting, (ii) special
meetings of the stockholders may be called only by the Chairman of the Board,
the President or the Secretary of the Company, by a majority of the total number
of Directors of the Company (assuming no vacancies) or by the holders of a
majority of the outstanding shares of Common Stock, and (iii) the provisions of
Section 203 of the Delaware General Corporation Law (as described below) are
made part of the Company's Certificate. The By-Laws also will require that
stockholders desiring to bring any business, including nominations for
Directors, before an annual meeting of stockholders deliver written notice
thereof to the Secretary of the Company not later than 60 days in advance of the
meeting of stockholders; provided, however, that in the event that the date of
the meeting is not publicly announced by the Company by press release or
inclusion in a report filed with the Commission or furnished to stockholders
more than 75 days prior to the meeting, notice by the stockholder to be timely
must be delivered to the Secretary of the Company not later than the close of
business on the tenth day following the day on which such announcement of the
date of the meeting was so communicated. The By-Laws will further require that
the notice by the stockholder set forth a description of the business to be
brought before the meeting and the reasons for conducting such business at the
meeting and certain information concerning the stockholder proposing such
business and the beneficial owner, if any, on whose behalf the proposal is made,
including their names and addresses, the class and number of shares of the
Company that are owned beneficially and of record by each of them, and any
material interest of either of them in the business proposed to be brought
before the meeting.

Under applicable provisions of Delaware law, the approval of a Delaware
corporation's board of directors, in addition to stockholder approval, is
required to adopt any amendment to the corporation's certificate of
incorporation, but a corporation's by-laws may be amended either by action of
its stockholders or, if the corporation's certificate of incorporation so
provides, its board of directors. It is anticipated that the Company's
Certificate and By-Laws will provide that the provisions summarized above may
not be amended by the stockholders, nor may any provision inconsistent therewith
be adopted by the stockholders, without the affirmative vote of the holders of
at least 80% of the Company's voting stock, voting together as a single class.

Under Section 203 of the Delaware General Corporation Law, certain
"business combinations" between a Delaware corporation whose stock generally is
publicly traded or held of record by more than 2,000 stockholders, and an
"interested stockholder" are prohibited for a three-year period following the
date that such stockholder became an interested stockholder, unless (i) the
business combination was approved by the board of directors of the corporation
before the other party to the business combination became an interested
stockholder, (ii) upon consummation of the transaction that made it an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the commencement of the
transaction (excluding voting stock owned by directors who are also officers or
held in employee benefit plans in which the employees do not have a confidential
right to tender or vote stock held by the plan), or (iii) the

45
<PAGE> 48

business combination was approved by the board of directors of the corporation
and ratified by holders of 66 2/3% of the voting stock which the interested
stockholder did not own. The three-year prohibition also does not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of certain extraordinary transactions involving
the corporation and a person who had not been an interested stockholder during
the previous three years or who became an interested stockholder with the
approval of a majority of the corporation's directors.

The term "business combination" is defined generally to include mergers or
consolidations between a Delaware corporation and an "interested stockholder,"
transactions with an "interested stockholder" involving the assets or stock of
the corporation or its majority-owned subsidiaries, and transactions which
increase an interested stockholder's percentage ownership of stock. The term
"interested stockholder" is defined generally as any stockholder who becomes the
beneficial owner of 15% or more of a Delaware corporation's voting stock.

It is possible that these provisions and the ability of the Board of
Directors to issue Serial Preferred Stock or additional shares of Common Stock
will discourage other persons from making a tender offer for or acquisitions of
substantial amounts of the Company's Common Stock, or may delay changes in
control or management of the Company.

DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY

The Company's Certificate contains provisions indemnifying Directors of the
Company to the fullest extent permitted by law. In addition, the Certificate
contains provisions limiting the personal liability of Directors to the Company
or stockholders to the fullest extent permitted by law. The Company has also
entered into indemnity agreements pursuant to which it has agreed, among other
things, to indemnify its Directors against certain liabilities.

NASDAQ NATIONAL MARKET LISTING

The Company has applied to have the Common Stock approved for quotation on
the Nasdaq National Market under the trading symbol "QCLB."

TRANSFER AGENT AND REGISTRAR

The Company currently intends to use American Stock Transfer Company as the
Transfer Agent and Registrar for the Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the offering, there has been no public market for the Common Stock
of the Company, and no prediction can be made that an active trading market will
develop or as to the effect, if any, that market sales of shares or the
availability of such shares for sale will have on the market price of the Common
Stock prevailing from time to time. Future sales of substantial amounts of
Common Stock in the public market could adversely affect prevailing market
prices.

Upon completion of the offering, the Company will have 7,537,035 shares of
Common Stock outstanding. Of these shares, the 2,000,000 shares of Common Stock
sold in the offering will be freely tradeable without restriction under the
Securities Act, except for any such shares which may be acquired by an
"affiliate" of the Company (an "Affiliate") as that term is defined in Rule 144
under the Securities Act ("Rule 144"), which shares will be subject to the
resale limitations of Rule 144. Ninety days after the date of this Prospectus,
approximately 2,904,985 shares of Common Stock will be eligible for sale in the
public market under Rule 144, subject to the volume limitations and other
requirements described below, without consideration of the contractual
restrictions described below. The remaining 2,632,050 shares of Common Stock
outstanding upon completion of the offering are "restricted securities" (as
defined below) and will not be eligible for immediate resale subsequent to the
offering. Most of these 2,632,050 shares of Common Stock are held by
"affiliates" of the Company and will be eligible for sale in May 1997 subject to
the resale volume limitations of Rule 144.

46
<PAGE> 49

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, if a period of at least two years has elapsed since
the later of the date the "restricted securities" (as that phrase is defined in
Rule 144) were acquired from the Company and the date they were acquired from an
Affiliate, then the holder of such restricted securities (including an
Affiliate) is entitled to sell a number of shares within any three-month period
that does not exceed the greater of 1% of the then outstanding shares of the
Common Stock (approximately 75,370 shares immediately after the offering) or the
average weekly reported volume of trading of the Common Stock on the Nasdaq
National Market during the four calendar weeks preceding such sale. The holder
may only sell such shares through unsolicited brokers' transactions. Sales under
Rule 144 are also subject to certain requirements pertaining to the manner of
such sales, notices of such sales and the availability of current public
information concerning the Company. Affiliates may sell shares not constituting
restricted shares in accordance with the foregoing volume limitations and other
requirements but without regard to the two-year period.

Notwithstanding the foregoing, the Company, its Directors, officers,
existing stockholders and holders of a majority of the shares issuable upon the
exercise of warrants and options, have agreed that they will not, directly or
indirectly, without the prior written consent of Morgan Keegan & Company, Inc.,
sell or otherwise dispose of any shares of Common Stock owned by them for a
period of 180 days after the date of this Prospectus, or any securities
convertible into, or exercisable or exchangeable for, shares of Common Stock,
except pursuant to the Underwriting Agreement. See "Underwriting." Of the
approximately 7,537,035 shares of Common Stock otherwise eligible for sale
including Common Stock issuable upon exercise of warrants as discussed above,
approximately 5,537,035 shares are subject to such agreements and, as a result,
will not be freely tradeable for 180 days after the date of this Prospectus.

The Holders are entitled to certain rights with respect to the registration
of such shares under the Securities Act. If the Company proposes to register any
of its securities under the Securities Act, either for its own account or for
the account of other securityholders, the Holders are entitled to notice of the
registration and are entitled to include, at the Company's expense, such shares
therein, provided, among other conditions, that the underwriters of any offering
have the right to limit the number of such shares included in the registration.

The Holders have waived their rights with respect to registration of their
shares in connection with this offering. In addition, beginning one year after
the date of the Prospectus, certain of the Holders may require the Company, on
not more than two occasions at the Company's expense and two additional
occasions at the Holder's expense, to file a registration statement under the
Securities Act with respect to their shares of Common Stock, and the Company is
required to use its best efforts to effect the registration, subject to certain
conditions and limitations. Further, certain of the Holders may require the
Company at any time and from time to time, at the Company's expense, to register
their shares on Form S-3 when such form becomes available to the Company, the
subject to certain conditions and limitations.

47
<PAGE> 50

UNDERWRITING

The Underwriters named below, for which Morgan Keegan & Company, Inc. and
Rauscher Pierce Refsnes, Inc. are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
in the Underwriting Agreement by and among the Underwriters and the Company, to
purchase from the Company the number of shares of Common Stock set forth below
opposite their respective names. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent and
that the Underwriters are committed to purchase all of such shares if any are
purchased.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Morgan Keegan & Company, Inc. ....................................................
Rauscher Pierce Refsnes, Inc. ....................................................

---------
Total................................................................... 2,000,000
=========
</TABLE>

The Representatives have advised the Company that the Underwriters propose
to offer the Common Stock to the public initially at the public offering price
set forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $ per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. The concession to selected
dealers and the allowances to other dealers may be changed by the
Representatives. After the initial public offering, the offering price and other
selling terms may be changed by the Representatives. The Common Stock is offered
subject to receipt and acceptance by the Underwriters, and to certain other
conditions, including the right to reject orders in whole or in part.

The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 300,000 additional shares of Common Stock at the same price per share to be
paid by the Underwriters for the shares offered hereby. To the extent that the
Underwriters purchase any such additional shares pursuant to this option, each
of the Underwriters will be committed, subject to certain conditions, to
purchase such additional shares in approximately the same proportion as set
forth in the above table. The Underwriters may exercise this option only to
cover over-allotments made in connection with the offering.

The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or will contribute to payments that the Underwriters may be
required to make in respect thereof.

The Company, its Directors, officers, existing stockholders and holders of
a majority of the shares issuable upon the exercise of warrants and options,
have agreed for a period of 180 days after the date of this Prospectus not to
sell or offer to sell or otherwise dispose of any shares of Common Stock of the
Company, any options or warrants to purchase any shares of Common Stock or any
securities convertible into or exchangeable for any shares of Common Stock
without the prior written consent of Morgan Keegan & Company, Inc. Morgan Keegan
& Company, Inc. may in its sole discretion, and at any time without notice,
release all or any portion of the securities subject to agreements not to sell.
In addition, the Company has agreed that for a period of 180 days after the date
of this Prospectus it will not, without the prior written consent of Morgan
Keegan & Company, Inc., directly or indirectly offer to sell, issue, distribute
or otherwise dispose of any equity securities or securities convertible into or
exchangeable for equity securities or any options, rights or warrants with
respect to any equity securities except for (i) shares of Common Stock offered
hereby, (ii) shares of Common Stock issued pursuant to the exercise of
outstanding options or warrants

48
<PAGE> 51

disclosed in this Prospectus or (iii) the issuance of options under the Option
Plan. See "Shares Eligible For Future Sale."

The Representatives have advised the Company that the Underwriters do not
intend to confirm sales of Common Stock offered by this Prospectus to accounts
over which they exercise discretionary authority in excess of five percent of
the number of shares of Common Stock offered hereby.

Prior to the offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined by
negotiations between the Company and the Representatives. Among the factors to
be considered in such negotiations will be the history of, and prospects for,
the Company and the industry in which it operates, an assessment of the
Company's management, its past and present operations and financial performance,
the prospects for future earnings of the Company, the general condition of the
securities markets at the time of the offering and the market prices of and
demand for publicly traded common stock of comparable companies in recent
periods and other factors deemed relevant.

The Representatives have notified the Company of their intent to make a
market in the Company's Common Stock upon consummation of the offering.

The Company has applied to have the Common Stock approved for quotation and
trading on the Nasdaq National Market under the symbol "QCLB."

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Jones, Day, Reavis & Pogue, Cleveland, Ohio. Michael J.
Horvitz, a partner in the firm of Jones, Day, Reavis & Pogue, has consented to
become a Director of the Company immediately following the completion of the
offering. Certain legal matters will be passed upon for the Underwriters by
Calfee, Halter & Griswold, Cleveland, Ohio.

EXPERTS

The consolidated financial statements of Q Clubs Inc. at December 31, 1995
and 1994, and for each of the three years in the period ended December 31, 1995,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 (of which this Prospectus is a part) under the Securities Act with respect
to the securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
Statements contained in the Prospectus as to the contents of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules thereto. For further information
regarding the Company and the shares of Common Stock offered hereby, reference
is hereby made to the Registration Statement and such exhibits and schedules
which may be obtained from the Commission at the Public Reference Section of the
Commission, maintained by the Commission at its principal office located at 450
Fifth Street, N.W., Washington, D.C. 20549, the New York Regional Office located
at Seven World Trade Center, Suite 1300, New York, New York 10048, and the
Chicago Regional Office located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 at prescribed rates.

49
<PAGE> 52

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Auditors......................................................... F-2
Consolidated Balance Sheets at December 31, 1994 and 1995; and unaudited March 31,
1996................................................................................. F-3
Consolidated Statements of Income for the Years Ended December 31, 1993, 1994 and 1995;
and unaudited for the three months ended March 31, 1995 and 1996..................... F-4
Consolidated Statements of Redeemable Convertible Preferred Stock and Shareholders
Equity for the Years Ended December 31, 1993, 1994 and 1995; and unaudited for the
three months ended March 31, 1996.................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995;
and unaudited for the three months ended March 31, 1995 and 1996..................... F-6
Notes to Consolidated Financial Statements............................................. F-7
</TABLE>

F-1
<PAGE> 53

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
Q Clubs Inc.

We have audited the accompanying consolidated balance sheets of Q Clubs
Inc. (formerly Sports & Fitness Clubs, Inc.) and Subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income, redeemable
convertible Preferred Stock and shareholders' equity, and cash flows for each of
the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Q Clubs Inc.
and Subsidiaries at December 31, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.

Cleveland, Ohio

February 22, 1996, except as to Note 12,

as to which the date is May , 1996

The foregoing report is in the form that will be signed upon the completion
of the 19.65165-for-one split of the Company's Common Stock as described in Note
12 to consolidated financial statements.

ERNST & YOUNG LLP

Cleveland, Ohio

May 10, 1996

F-2
<PAGE> 54

Q CLUBS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1996
-------------------- ------------------------
1994 1995 HISTORICAL PRO FORMA
------- -------- ---------- ---------
(UNAUDITED)
(SEE NOTE
1 BELOW)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 113 $ 507 $ 321 $ 321
Installment contracts receivable, net -- Note 3............................. 7,771 14,231 17,914 17,914
Preopening expenses -- Note 2............................................... 265 625 284 284
Prepaid expenses and other.................................................. 608 514 1,552 1,552
------- -------- -------- --------
Total current assets.......................................................... 8,757 15,877 20,071 20,071
Long-term installment contracts receivable, net............................... 10,254 14,178 19,211 19,211
Property and equipment:
Land........................................................................ 7,922 13,108 15,598 15,598
Buildings................................................................... 26,050 41,650 53,665 53,665
Exercise equipment.......................................................... 5,971 7,154 7,125 7,125
Office equipment and furniture.............................................. 1,733 3,497 4,147 4,147
Construction in progress -- Note 2.......................................... 9,029 15,855 2,401 2,401
------- -------- -------- --------
50,705 81,264 82,936 82,936
Less accumulated depreciation and amortization.............................. 2,477 3,926 4,593 4,593
------- -------- -------- --------
48,228 77,338 78,343 78,343
Other assets and deferred income taxes........................................ 2,926 3,624 5,388 5,388
------- -------- -------- --------
$70,165 $111,017 $123,013 $123,013
======= ======== ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable -- Note 5..................................................... $ 1,850 $ 2,000 $ 1,100 $ 1,100
Accounts payable............................................................ 1,181 1,552 2,784 2,784
Accrued liabilities -- Note 4............................................... 1,881 4,286 5,221 5,221
Dividends payable........................................................... 2,347
Deferred income taxes -- Note 7............................................. 1,400 2,042 2,647 2,647
Deferred revenue............................................................ 4,780 8,492 10,311 10,311
Current portion of long-term debt and lease obligations -- Note 6........... 1,581 1,771 2,395 2,395
------- -------- -------- --------
Total current liabilities..................................................... 12,673 20,143 24,458 26,805
Deferred revenue.............................................................. 5,800 8,462 12,012 12,012
Long-term obligations:
Notes payable to financial institutions -- Note 5........................... 17,178 22,378 31,001 31,001
Construction payable........................................................ 4,186 7,418 1,966 1,966
Senior subordinated notes -- Note 5......................................... 16,050 16,138 16,160 16,160
Lease obligations -- Note 6................................................. 3,416 3,479 3,022 3,022
Subordinated note payable to shareholder -- Note 5.......................... 2,000 2,000 2,000 2,000
------- -------- -------- --------
42,830 51,413 54,149 54,149
Redeemable convertible Series A Preferred Stock - authorized 48,310 shares,
issued and outstanding 44,928 shares at stated value, aggregate liquidation
preference of $5,270 and $5,642 at December 31, 1994 and 1995, respectively
and $5,735 at March 31, 1996 -- Notes 8, 12 and 13.......................... 4,944 5,376 5,485 --
Redeemable convertible Series B Preferred Stock-authorized, issued and
outstanding 69,397 shares at stated value, aggregate liquidation preference
of $23,097 at December 31, 1995 and $23,443 at March 31, 1996 -- Notes 8, 12
and 13...................................................................... 22,835 23,197 --
Shareholders' equity:
Common Stock -- $.01 par value per share; authorized 4,912,913 shares at
December 31, 1994, 5,502,462 shares at December 31, 1995 and March 31,
1996, and 25,000,000 shares at March 31, 1996 pro forma; issued and
outstanding 2,110,508 shares at December 31, 1994 and 1995 and March 31,
1996, and 5,704,686 shares at March 31, 1996 pro forma.................... 21 21 21 57
Retained earnings........................................................... 940 0
Additional paid-in capital and other -- Notes 8, 12 and 13.................. 3,897 2,767 2,751 29,990
------- -------- -------- --------
Total shareholders' equity.................................................... 3,918 2,788 3,712 30,047
------- -------- -------- --------
$70,165 $111,017 $123,013 $123,013
======= ======== ======== ========
</TABLE>

Note 1 -- The unaudited pro forma consolidated balance sheet above gives effect
to the adjustments to the unaudited historical balance sheet at March
31, 1996 to reflect the conversion of all outstanding shares of Series
A Preferred Stock into 882,909 shares of Common Stock and Series B
Preferred Stock into 1,880,644 shares of Common Stock, the issuance of
81,639 shares of Common Stock for the payment of stock dividends on
the Series A Preferred Stock, a $2.3 million accrued cash dividend on
the Series B Preferred Stock, and the issuance of 581,335 shares of
Common Stock upon the exercise of all but 58,130 of the outstanding
warrants. See Note 13 to consolidated financial statements for a
further description of the capitalization of the Company.

See notes to consolidated financial statements.

F-3
<PAGE> 55

Q CLUBS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- ---------------------
1993 1994 1995 1995 1996
------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Membership revenues
New................................... $ 9,364 $ 22,011 $ 33,692 $ 9,914 $ 16,557
Dues and renewals..................... 3,778 7,000 12,273 2,452 4,440
------- --------- --------- ------- -------
13,142 29,011 45,965 12,366 20,997
Finance charges earned................... 1,138 1,965 3,547 815 1,214
Ancillary services and other............. 732 1,666 4,112 1,040 2,120
------- --------- --------- ------- -------
15,012 32,642 53,624 14,221 24,331
Operating costs and expenses:
Selling and promotion.................... 5,225 13,015 22,336 6,163 9,660
Cost of membership services.............. 2,919 6,678 12,937 3,203 4,480
General and administrative............... 1,795 3,336 4,439 1,001 1,445
Provision for doubtful receivables....... 2,724 6,661 10,076 2,569 4,758
------- --------- --------- ------- -------
12,663 29,690 49,788 12,936 20,343
Operating income........................... 2,349 2,952 3,836 1,285 3,988
Interest expense........................... 1,211 1,992 3,633 1,313 1,699
------- --------- --------- ------- -------
Income (loss) before income taxes.......... 1,138 960 203 (28) 2,289
Income tax expense (benefit) (1)........... 995 383 78 (17) 910
------- --------- --------- ------- -------
Net income (loss).......................... $ 143 $ 577 $ 125 $ (11) $ 1,379
======= ========= ========= ======= =======
Pro forma:
Net income (loss) per common share....... $ 0.02 $ (--) $ 0.23
========= ======= =======
Shares used for purposes of computing pro
forma net income per share -- Note
13.................................... 5,883,813 5,883,813 5,883,813
</TABLE>

- ---------------
(1) Effective May 1, 1993, the Company changed its tax status from an S to a C
corporation. The 1993 income tax provision of $995 includes $761 related to
the cumulative effect of changing from an S to a C corporation and $234 for
federal and state taxes for the period from May 1, 1993 to December 31,
1993. A pro forma income tax provision for 1993, excluding the $761
cumulative effect adjustment above and assuming federal and state income
taxes for all of 1993 is approximately $440.

See notes to consolidated financial statements.

F-4
<PAGE> 56

Q CLUBS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
REDEEMABLE REDEEMABLE
CONVERTIBLE CONVERTIBLE SHAREHOLDERS' EQUITY
SERIES A SERIES B -------------------------------------------------------
PREFERRED STOCK PREFERRED STOCK COMMON STOCK UNVESTED
------------------ ------------------- ------------------ ADDITIONAL ACCUMULATED STOCK AWARDS TOTAL
NUMBER STATED NUMBER STATED NUMBER STATED PAID-IN EARNINGS AND DEFERRED SHAREHOLDERS'
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE CAPITAL (DEFICIT) COMPENSATION EQUITY
--------- ------ --------- ------- --------- ------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
at
January
1,
1993... 1,729,345 $ 17 $ 3,006 $ 161 $ 3,184
Net
income
(January
1-April
30,
1993)... 516 516
Capital
contribution
of S
Corporation
earnings -- Note
2..... 677 (677)
Issuance
of
stock
awards... 235,819 3 285 $ (288)
Amortization
of stock
awards... 72 72
Issuance
of
detachable
Common
Stock
warrants... 618 618
Issuance
of
Preferred
Stock,
net of
expense... 44,928 $4,214
Preferred
dividends
accrued... 248 (248) (248)
Accretion
of
Preferred
Stock
to
liquidation
value... 32 (32) (32)
Net loss
(May
1-December
31,
1993)... (373) (373)
------ ------ ------ ------- --------- ------ ------- ----- ----- -------
Balance
at
December
31,
1993... 44,928 4,494 1,965,164 20 4,306 (373) (216) 3,737
Warrants
exercised... 145,344 1 (1)
Amortization
of stock
awards... 54 54
Preferred
dividends
accrued... 372 (168) (204) (372)
Accretion
of
Preferred
Stock
to
liquidation
value... 78 (78) (78)
Net
income... 577 577
------ ------ ------ ------- --------- ------ ------- ----- ----- -------
Balance
at
December
31,
1994... 44,928 4,944 2,110,508 21 4,059 0 (162) 3,918
Stock
option
grants... 30 (22) 8
Issuance
of
Preferred
Stock,
net of
expense... 69,397 $21,948
Amortization
of stock
awards... 54 54
Preferred
dividends
accrued... 372 848 (1,095) (125) (1,220)
Accretion
of
Preferred
Stock
to
liquidation
value... 60 39 (97) (97)
Net
income... 125 125
------ ------ ------ ------- --------- ------ ------- ----- ----- -------
Balance
at
December
31,
1995... 44,928 5,376 69,397 22,835 2,110,508 21 2,897 0 (130) 2,788
Unaudited:
Amortization
of stock
awards... 16 16
Preferred
dividends
accrued... 93 346 (439) (439)
Accretion
of
Preferred
Stock
to
liquidation
value... 16 16 (32) (32)
Net
income... 1,379 1,379
------ ------ ------ ------- --------- ------ ------- ----- ----- -------
Balance
at
March
31,
1996
(Unaudited)... 44,928 $5,485 69,397 $23,197 2,110,508 $ 21 $ 2,865 $ 940 $ (114) $ 3,712
====== ====== ====== ======= ========= ====== ======= ===== ===== =======
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE> 57

Q CLUBS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------- -------------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................. $ 143 $ 577 $ 125 $ (11) $ 1,379
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization............... 869 1,221 2,661 668 787
Compensation from vesting of stock awards... 72 54 62 14 15
Deferred income taxes....................... 995 383 23 (17) 910
Provision for doubtful receivables.......... 2,724 6,661 10,076 2,569 4,758
Accrued interest and original issue
discount................................. 1,668 88 22 22
Loss on disposal of exercise equipment...... 81
Changes in operating assets and liabilities:
Accounts receivable...................... (4,182) (16,959) (20,460) (6,896) (13,474)
Other assets............................. (892) (206) (808) 400 (1,783)
Accounts payable......................... 1,470 502 373 139 1,232
Accrued liabilities...................... 389 547 2,405 (36) 935
Deferred revenue......................... 327 5,792 6,374 3,824 5,369
-------- -------- --------
Cash provided by operating activities......... 1,915 240 1,000 676 150
INVESTING ACTIVITIES
Purchases of property and equipment, net...... (11,287) (31,908) (34,277) (1,898) (7,702)
Proceeds from sale of land, buildings and
exercise equipment.......................... 4,890 9,713 5,124 4,929
-------- -------- --------
Cash used in investing activities............. (6,397) (22,195) (29,153) (1,898) (2,773)
FINANCING ACTIVITIES
Net (payments) proceeds related to short-term
debt........................................ (199) 120 (1,850) 1,314 (900)
Proceeds from long-term debt.................. 20,266 8,065 33,722 3,991 23,160
Payments on long-term debt.................... (4,173) (2,660) (26,522) (13,884)
Construction payable.......................... 2,881 3,232 (3,765) (5,452)
Payments on capitalized lease obligations..... (205) (744) (1,983) (513) (487)
Proceeds from preferred stock, net............ 4,214 21,948
Other......................................... (868) (219)
-------- -------- --------
Cash provided by financing activities......... 19,035 7,443 28,547 1,027 2,437
-------- -------- --------
Increase (decrease) in cash and cash
equivalents................................. 14,553 (14,512) 394 (195) (186)
Cash and cash equivalents at beginning of
year........................................ 72 14,625 113 113 507
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR
(INCLUDING RESTRICTED CASH IN 1993)......... $ 14,625 $ 113 $ 507 $ (82) $ 321
======== ======== ========
SUPPLEMENTAL INFORMATION
Interest paid (net of amount capitalized):
Interest paid to shareholder................ $ 132 $ 155 $ 165 $ 45 $ 49
Other interest.............................. $ 1,077 $ 2,972 $ 2,578 $ 1,180 $ 1,838
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE> 58

Q CLUBS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

THREE YEARS ENDED DECEMBER 31, 1995

(INFORMATION WITH RESPECT TO MARCH 31, 1996

AND THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)

1. BASIS OF PRESENTATION

In 1996, the Company's name was changed from Sports & Fitness Clubs, Inc.
to Q Clubs Inc. The consolidated financial statements include the accounts of Q
Clubs Inc. (the "Company") and its wholly-owned subsidiaries. Significant
intercompany transactions have been eliminated. All of the Company's revenue is
derived from the operation of high quality, full-service fitness clubs in major
domestic metropolitan areas in the south and southwest.

2. SIGNIFICANT ACCOUNTING POLICIES

Membership Revenue Recognition

The Company primarily offers term memberships for periods of 24 or 36
months. After paying an initiation fee, members are required to make monthly
payments, including finance charges, over the contract term or elect to make a
lump sum payment and receive a small discount. The Company defers that portion
of the revenue from term memberships which approximates the cost of providing
the contracted services in future periods, plus a reasonable profit, with the
balance included in revenues to offset selling and promotion costs for new
members. Significant direct marketing costs such as advertising and commissions
are incurred in connection with the acquisition of new members. Such costs are
expensed in the period incurred. Unearned finance charges are amortized over the
installment term using the interest method at rates comparable to similar
consumer financing contracts. Upon expiration of the initial contract term,
membership continues on a month-to-month basis at comparable prices and revenue
is recorded as received. The Company also offers short-term memberships (on a
limited basis), month-to-month memberships and ancillary services, the revenue
from which is recorded as received.

Revenues and expenses attributable to clubs in the preopening stages are
deferred until opening. The Company had two clubs in the preopening stage at
December 31, 1994, which opened in January 1995, and three clubs in the
preopening stage at December 31, 1995, which opened in January 1996.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.

Property and Equipment

Property and equipment are stated on the basis of cost. Depreciation is
computed by the straight-line method over the estimated useful lives of the
assets. Major classes of property and equipment and related useful lives are as
follows:

<TABLE>
<CAPTION>
ASSET ESTIMATED USEFUL LIFE
---------------------------------------------------------- ---------------------
<S> <C>
Buildings................................................. 39 years
Exercise equipment........................................ 5-10 years
Office equipment and furniture............................ 5 years
</TABLE>

As of December 31, 1994 and 1995, an additional $943 and $2,253,
respectively, is required to complete the construction in progress for the
Company's various facilities. Subsequent to 1995, the Company entered into three
contracts totaling $11,295 to purchase land and to construct two new clubs.
Interest capitalized and included in property and equipment was $58, $960 and
$1,507 in 1993, 1994 and 1995, respectively ($74,480 at March 31, 1995 and
$329,383 at March 31, 1996, unaudited).

F-7
<PAGE> 59

Q CLUBS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred Financing Costs

Significant costs were associated with obtaining financing (included in
other assets), which are being amortized using the interest method over the term
of the related debt. Included in interest expense is amortization of deferred
financing costs of $186, $258 and $436 in 1993, 1994 and 1995, respectively.

Asset Impairment

In 1995, the Financial Accounting Standards Board issued Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. This Statement requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present.
The Company adopted Statement 121 in the first quarter of 1996 and the adoption
of Statement 121 had no significant impact on its financial statements.

Fair Value of Debt

The carrying amounts of the Company's long- and short-term debt approximate
their fair value. The fair value is determined using a discounted cash flow
analysis based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.

Income Taxes

On May 1, 1993, the Company changed its tax status from an S to a C
corporation under the Internal Revenue Code. As an S corporation, all taxable
income or losses of the Company was reportable by the Company's shareholders
and, therefore, no provision for current or deferred income taxes was required.
Upon a change in tax status to a C corporation, the Company is responsible for
paying income taxes and accordingly follows the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. Under
Statement No. 109, the liability method is used in accounting for income taxes
whereby deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the current enacted tax rates. For federal and state income tax
purposes, a net deferred income tax liability and provision for income taxes of
$761 was established effective May 1, 1993 to give effect to the Company's
change in tax status.

Stock Compensation

The Company accounts for its stock compensation arrangements under the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and intends to continue to do so.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities, most
significantly accounts receivable and deferred revenue, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates, the
result of which could have a material effect on the financial statements.

F-8
<PAGE> 60

Q CLUBS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Advertising

The Company expenses advertising costs as incurred. Advertising expense is
as follows:

<TABLE>
<CAPTION>
YEAR ENDED AMOUNT
---------------------------------------------------- ------
<S> <C>
1993................................................ $ 892
1994................................................ 2,307
1995................................................ 3,577
Three months ended March 31, 1996 (unaudited)....... 1,265
</TABLE>

3. INSTALLMENT CONTRACTS RECEIVABLE

At December 31, 1994 and 1995, installment contract receivables from
members consist of the following:

<TABLE>
<CAPTION>
1994 1995
------- ------- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Current:
Installment contracts receivable, gross........... $11,500 $20,664 $25,922
Less:
Unearned finance charges....................... 1,486 2,023 2,634
Allowance for cancellations and doubtful
accounts..................................... 2,243 4,410 5,374
------- ------- -------
$ 7,771 $14,231 $17,914
======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
MARCH 31,
1996
1994 1995 -----------
------- ------- (UNAUDITED)
<S> <C> <C> <C>
Long-term:
Installment contracts receivable, gross........... $14,142 $20,473 $27,695
Less:
Unearned finance charges....................... 1,325 2,078 2,938
Allowance for cancellations and doubtful
accounts..................................... 2,563 4,217 5,546
------- ------- -------
$10,254 $14,178 $19,211
======= ======= =======
</TABLE>

The carrying amount of the installment contracts receivable at December 31,
1994 and 1995 and March 31, 1996 (unaudited) approximates fair value based on a
discounted cash flow analysis.

4. ACCRUED LIABILITIES

At December 31, 1994 and 1995, accrued liabilities consist of the
following:

<TABLE>
<CAPTION>
1994 1995
------- ------- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Payroll and benefit-related liabilities............. $ 667 $ 1,216 $ 2,060
Interest............................................ 149 656 468
Taxes, other than income taxes...................... 584 1,452 937
Other............................................... 481 962 1,756
------ ------ ------
$ 1,881 $ 4,286 $ 5,221
====== ====== ======
</TABLE>

F-9
<PAGE> 61

Q CLUBS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. FINANCING ARRANGEMENTS

The Company has a revolving line of credit with a finance company which
provides for maximum borrowings of $4,000, limited to 50% of the eligible
receivables, as defined, and expires in December 1996. The line of credit is
secured by accounts receivable of four of the Company's health clubs ($11,130 at
December 31, 1995) and bears interest at 13%. At December 31, 1995 and 1994, the
amount borrowed under this agreement was $2,000 and $500, respectively ($1,100
at March 31, 1996, unaudited). At the Company's option, any balance due can be
converted into a three-year term loan which bears interest at the prime rate
plus 4.5%. The Company pays a standby fee of 3% per annum on the unused portion
of the line of credit. There is $2,000 in available borrowings at December 31,
1995. The weighted average interest rates for 1994 and 1995 were 12.4% and
13.2%, respectively.

In December 1994, the Company purchased land with $1,350 of the purchase
price evidenced by a promissory note. The note together with interest at 8.5%
was fully paid in June 1995.

At December 31, 1994 and 1995, long-term debt consists of the following:

Long-term notes payable to a bank ($17,178 and $22,378 outstanding at
December 31, 1994 and 1995, respectively; $18,257 outstanding at March 31, 1996,
unaudited) represent amounts borrowed under a $24,000 revolving loan agreement
for the construction of health and fitness clubs which matures in November 1997,
and has the following terms:

- Total borrowings under this loan agreement are limited to the lesser of
the margined value of the collateral, as defined, or $24,000. There is
$6,446 and $470 in available borrowings at December 31, 1994 and 1995,
respectively ($1,134 at March 31, 1996, unaudited).

- The loan requires monthly payments of interest at the prime rate (8.5% at
December 31, 1995; 8.25% at March 31, 1996, unaudited) plus 2.25% along
with a disbursement fee of 0.5% of the amount of each advance. In
addition, a commitment fee of 0.125% of the unused portion of the loan is
payable quarterly.

- The Company's bank debt is secured by substantially all of its assets and
is guaranteed by an officer/shareholder, and certain assets of the
officer/shareholder are pledged as collateral.

- Under the terms of the agreement as amended, among other things, the
Company is required to maintain certain financial ratios, maintain
certain levels of tangible net worth, as defined, and payment of any
dividends, amount of capital expenditures, debt and capital lease
obligations are restricted.

Standby letters of credit have been issued against the collateral limit in
the amount of $376 and $1,152 at December 31, 1994 and 1995, respectively ($753
at March 31, 1996, unaudited; no letters of credit have been presented for
payment at either December 31, 1994 or 1995).

In December 1993, the Company issued $15,000 in 10% senior subordinated
notes ($16,050 and $16,138 outstanding at December 31, 1994 and 1995,
respectively, including interest accrued; $16,160 at March 31, 1996, unaudited)
which are due in December 2000 with detachable warrants (see Note 8). Of the
proceeds, $618 was allocated to the warrants reflecting their estimated fair
value at the date issued. Interest was accrued on the notes through December 31,
1994 and is payable quarterly, thereafter. This facility contains covenant
requirements similar to those under the notes payable to a bank described above.

The $2,000 subordinated note payable to shareholder bears interest at the
prime rate plus 0.5%, is unsecured and matures in January 2001. At the Company's
option, if certain financial measurements are met, this note may be paid earlier
than 2001. In the event of an initial public offering of Common Stock, the
Company plans to repay this note.

F-10
<PAGE> 62

Q CLUBS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In January 1996, the Company entered into an agreement with a finance
company providing for a term loan of $15 million, with an initial advance of
$13.5 million. The loan requires monthly payments of interest at 9.26% and
principal based on a 12-year amortization period, with the remaining principal
due in February 2001. The loan is secured by first priority mortgages on five of
the Company's clubs and contains certain financial covenants similar to those
described above. The proceeds of the loan were used to pay down long-term notes
payable at December 31, 1995. The Company has $4,186 and $7,418 million
outstanding in construction payables at December 31, 1994 and 1995. Since
management subsequently refinanced these payables on a long-term basis, they
have been classified as long-term obligations.

Future maturities of the long-term obligations (other than lease
obligations) are as follows:

<TABLE>
<CAPTION>
MARCH 31, 1996
DECEMBER 31, 1995 --------------
----------------- (UNAUDITED)
<S> <C> <C>
1997............................ $29,796 $ 2,396
1998............................ 22,448
1999............................ 1,775
2000............................ 16,138 19,543
Thereafter...................... 2,000 10,383
------- -------
$47,934 $ 56,545
======= =======
</TABLE>

6. LEASE OBLIGATIONS

Equipment Capital Leases

The Company leases certain exercise and office equipment that have been
capitalized and are included in property and equipment as follows:

<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1994 1995
------- -------
<S> <C> <C>
Exercise and office equipment............................ $ 7,704 $10,651
Accumulated amortization................................. (1,329) (2,253)
-------- -------
$ 6,375 $ 8,398
======== =======
</TABLE>

Operating Leases Commitments

The Company operates four of its clubs from leased locations. The Company
completed the sale/leaseback of one club in 1993, two clubs in 1994 and one club
in 1995 with any gain or loss deferred and recognized over the term of the lease
agreement. The initial terms of the leases under the sale/leaseback agreements
range from 18 to 25 years. The leases contain renewal options ranging from 2 to
4 years, escalation clauses, and contingent rents. Certain leases also contain
covenants related to maintenance of certain financial ratios, as defined. In
February 1996, the Company entered into another sale/leaseback transaction for
one of its clubs with terms and conditions similar to those described above.

The Company has operating leases for land associated with two of its clubs.
The initial lease terms are for 15 and 30 years, with renewal options ranging
from 3 to 4 years. One lease includes contingent rentals based on club revenues.
The Company also has operating leases for certain equipment for terms of 3 to 4
years.

F-11
<PAGE> 63

Q CLUBS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 1995, future minimum lease payments are as follows:

<TABLE>
<CAPTION>
EQUIPMENT OPERATING
CAPITAL LEASES LEASES
-------------- ---------
<S> <C> <C>
1996................................................. $2,301 $ 5,298
1997................................................. 1,980 5,297
1998................................................. 1,217 5,263
1999................................................. 808 4,731
2000................................................. 3,839
Thereafter........................................... 68,023
---- -----
Total future minimum lease payments.................. 6,306 $92,451
=====
Less amounts representing interest................... 1,056
----
Present value of future minimum lease payments....... 5,250
Less current maturities.............................. 1,771
----
$3,479
====
</TABLE>

Rent expense in 1993, 1994 and 1995 was $328, $771 and $3,293, respectively
($818 for the three months ended March 31, 1996, unaudited).

7. INCOME TAXES

The Company's provision for income taxes consists of the following:

<TABLE>
<CAPTION>
MARCH 31,
1996
1993 1994 1995 -----------
---- ---- ---- (UNAUDITED)
<S> <C> <C> <C> <C>
Deferred federal income taxes.................... $895 $312 $ 55 $ 782
Deferred state income taxes...................... 100 71 (32) 106
--- --- --- ----
Total deferred income taxes...................... 995 383 23 888
State income taxes -- current.................... 55 22
--- --- --- ----
Total provision for income taxes................. $995 $383 $ 78 $ 910
=== === === ====
</TABLE>

The $995 income tax provision for 1993 includes $761 related to the
cumulative effect of changing from an S to a C corporation and $234 for taxes
related to the period from May 1, 1993 to December 31, 1993.

F-12
<PAGE> 64

Q CLUBS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income taxes are provided to reflect the tax effects of temporary
differences in the recognition of revenues and expenses for tax and financial
reporting purposes. Significant components of the Company's deferred tax assets
and liabilities at December 31, 1994 and 1995 are as follows:

<TABLE>
<CAPTION>
MARCH 31,
1996
1994 1995 -----------
------ ------ (UNAUDITED)
<S> <C> <C> <C>
Deferred tax liabilities:
Tax depreciation in excess of financial
depreciation..................................... $1,116 $1,329 $ 1,852
Membership revenue deferred for tax reporting, net
of related expenses.............................. 3,052 4,531 5,920
Other items, net.................................... 456 572 596
------ ------
Deferred tax liabilities.............................. 4,624 6,432 8,368
Deferred tax assets:
Federal and state net operating loss carryover...... 2,807 4,541 5,456
Other items, net.................................... 439 490 601
------ ------
Deferred tax assets................................... 3,246 5,031 6,057
------ ------
NET DEFERRED TAX LIABILITIES.......................... $1,378 $1,401 $ 2,311
====== ======
</TABLE>

A reconciliation of income taxes computed at the U.S. federal statutory
rate to the provision for income taxes is as follows:

<TABLE>
<CAPTION>
MARCH 31,
1996
1993 1994 1995 -----------
----- ---- --- (UNAUDITED)
<S> <C> <C> <C> <C>
Tax at statutory rate............................ $ 387 $326 $69 $ 778
State income taxes, net of federal income tax
benefits....................................... 53 47 14 137
Taxes at statutory rate attributable to earnings
prior to becoming a C corporation.............. (206)
Effect of conversion from S to C corporation
status......................................... 761
Other items, net................................. 10 (5) (5)
---- ---- ---
PROVISION FOR INCOME TAXES....................... $ 995 $383 $78 $ 910
==== ==== ===
</TABLE>

For federal income tax purposes the Company has a net operating loss
carryover of $11,076 at December 31, 1995 ($13,308 at March 31, 1996,
unaudited). The unused net operating losses can be carried forward for fifteen
years as follows:

<TABLE>
<CAPTION>
EXPIRATION AMOUNT
- ---------- -------
<S> <C> <C>
2008................................................. $ 1,352
2009................................................. 5,495
2010................................................. 4,229
2011................................................. 2,232
-------
$13,308
=======
</TABLE>

Under the provisions of Section 382 of the Internal Revenue Code, upon a
change in ownership, the utilization of net operating loss carryovers may be
limited for tax years after the change in ownership. However, the Company
believes that even with the application of Section 382, it will be able to fully
utilize its net operating loss carryovers of $11,076 at December 31, 1995
($13,308 at March 31, 1996, unaudited) and that the section 382 limitation will
not have a material adverse effect upon the Company.

State income taxes of $88 were paid in 1995.

F-13
<PAGE> 65

Q CLUBS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. CAPITALIZATION

During 1993, the Company authorized 48,310 and issued for net cash proceeds
of $4,214, 44,928 shares of Series A Preferred Stock which are convertible into
882,909 shares of common stock. All shares of the Series A Preferred Stock have
voting rights equal to shares of Common Stock along with a special class vote on
transactions affecting the Company's capitalization. Series A Preferred Stock is
redeemable at the shareholder's option at the greater of the liquidation value
or the fair market value, as defined, upon the earlier of a qualified public
offering or October 31, 2000 through December 31, 2000. Redemptions are
prohibited while the 10% senior subordinated notes are outstanding. The Series A
Preferred Stock have a dividend rate of $8.28 per share, when and as declared,
and dividends not paid are cumulative.

In May 1995, the Company authorized and issued 69,397 shares of Series B
Preferred Stock for net cash proceeds of $21,948. The shares are convertible
into 1,363,766 shares of Common Stock. The Series B Preferred Stock has a
dividend rate of 6% per share, when and as declared, and dividends not paid are
cumulative. Other terms of the Series B Preferred Stock parallel those of the
Series A Preferred Stock. (See Note 12)

Effective upon the closing of an initial public offering at or above a
specified price per common share, all outstanding Series A and B Preferred Stock
will be automatically converted, according to their terms, into common stock and
cumulative dividends in arrears of $1,840 at December 31, 1995 ($620 at December
31, 1994 and $2,279 at March 31, 1996, unaudited) will be paid in the form of
cash or Common Stock at the Company's option.

In connection with the 10% senior subordinated notes (see Note 5), the
Company issued detachable stock warrants to purchase 726,679 shares of Common
Stock at $.01 per share, which expire in December 2013. Upon the earlier of
October 31, 2000 or events creating a change of control of the Company,
warrantholders, as defined, have the right to sell all or part of their warrants
or "warrant shares" to the Company at the fair market value of a share of Common
Stock. Such rights expire upon the closing of an initial public offering. In
1994, a portion of the warrants were exercised for the purchase of 145,344
shares of Common Stock.

In connection with the lease of a health club in 1993, the Company issued a
warrant to the lessor to purchase 58,130 shares of Common Stock at $5.27 per
share increasing 3%, annually, which expires on July 16, 2004. The Company is
required to redeem the warrant at the option of the holder, as defined, during
the period commencing December 31, 2000 and continuing through July 16, 2004.

Common shares are reserved for the following:

<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------ MARCH 31,
1996
---------
(UNAUDITED)
<S> <C> <C>
Conversion of Series A and B Preferred Stock............. 2,246,675 2,246,675
Stock dividend issuable on Series A Preferred Stock...... 69,862 76,394
Warrants to purchase Common Stock........................ 639,465 639,465
Stock Option Plan........................................ 191,211 191,211
---------
3,147,213 3,153,745
=========
</TABLE>

9. STOCK OPTIONS AND AWARDS

In December 1993, the Company issued stock awards of 235,819 shares of
Common Stock at $.01 per share, which vest over a four-year period, to certain
members of management. Compensation expense from the vesting of the stock awards
of $72, $54 and $54 was recognized in 1993, 1994 and 1995, respectively.

F-14
<PAGE> 66

Q CLUBS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 1994, the Company's Board of Directors approved an employee stock option
plan. The plan, among other things, allows for the grant of incentive stock
options to key employees for up to 5% of the Company's authorized Common Stock.

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------
SHARES PRICE
AVAILABLE PER
FOR GRANT SHARES SHARE
--------- ------- ----------
<S> <C> <C> <C>
Authorized......................................... 191,211
Granted............................................ (29,477) 29,477 $1.49
--------- ------- ----------
Balance at December 31, 1994....................... 161,734 29,477 1.49
Granted............................................ (138,053) 138,053 1.27-2.20
Canceled........................................... 5,895 (5,899) 1.49
--------- ------- ----------
Balance at December 31, 1995....................... 29,576 161,631 $1.27-2.20
========= ======= ==========
</TABLE>

Options vest over a four-year period and at December 31, 1995, options for
5,895 shares of Common Stock are exercisable. The weighted average exercise
price of the options outstanding is $1.52 at December 31, 1995.

10. DEFINED CONTRIBUTION PLAN

In January 1995, the Company formed a 401(k) plan for all employees who
meet certain age and service requirements. Participants may contribute between
2% and 15% of their salary. The Company at its discretion, may make
contributions to the plan. There were no Company contributions made in 1995.

11. CONTINGENCIES

The Company is from time to time involved in various legal and other
proceedings that relate to the ordinary course of operating its business,
including, but not limited to: employment-related actions, construction liens,
and workers' compensation claims. While the Company is unable to predict the
outcome of the current proceedings, based upon the facts currently known to it,
the Company does not believe that resolution of these proceedings will have a
material adverse effect on the operations of the Company.

12. SUBSEQUENT EVENT

All share and per share data in the accompanying financial statements have
been adjusted retroactively to give effect to the 19.65165-for-one stock split
on , 1996.

13. SUBSEQUENT EVENTS--UNAUDITED

PRO FORMA INFORMATION

The pro forma balance sheet at March 31, 1996 reflects the assumed
conversion of all outstanding shares of Series A Preferred Stock into 882,909
shares of Common Stock on a one-for-one basis and Series B Preferred Stock into
1,880,644 shares of Common Stock on a 1.379 for one basis, the issuance of
81,639 shares of Common Stock for the payment of stock dividends on the Series A
Preferred Stock, a $2.3 million accrued cash dividend on the Series B Preferred
Stock (to be paid immediately subsequent to the completion of the offering), and
the issuance of 581,335 shares of Common Stock upon the exercise of all but
58,130 of the warrants outstanding at March 31, 1996.

Prior to the consummation of the initial public offering, the Company
intends to seek stockholder approval for a 19.65165-for-one stock split of its
Common Stock. The split will be effected immediately prior to the consummation
of an initial public offering expected in May 1996. Upon completion of an
initial public

F-15
<PAGE> 67

Q CLUBS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

offering, the Company will increase the authorized number of shares under the
stock option plan by 350,000 shares, and will revise the number of authorized
shares of Common Stock to 25,000,000 shares and the number of authorized shares
of Preferred Stock to 2,500,000 shares. All share, pro forma share and per share
information in the accompanying financial statements and conversion ratios of
the Series A and B Preferred Stock, Common Stock, and stock options have been
adjusted retroactively to reflect the split.

The Company is seeking the approval of its Series B Preferred Stockholders
to change the conversion ratio of outstanding Series B Preferred Stock to range
between a 1.379-to-one basis, or 1,880,644 shares of Common Stock and a
1.4634-to-one basis, or 1,995,735 shares of Common Stock (to be based on the
initial public offering price). The agreement also proposes to increase the
dividend rate retroactively from 6% to 8%, which would increase accrued
dividends at December 31, 1995 from $848 to $1,135.

Pro forma net income per common share is computed using the pro forma
weighted average number of common shares outstanding. These shares include
common shares outstanding, common shares to be issued upon the conversion of
outstanding Series A and Series B Preferred Stock, the issuance of 81,639 shares
of Common Stock for the payment of stock dividends on the Series A Preferred
Stock, 167,651 shares of Common Stock that would be required to be issued to
fund the $2.3 million cash dividend on the Series B Preferred Stock (using
$14.00 per share, the mid-point of the assumed initial public offering range),
the exercise of all but 58,130 of the outstanding warrants to purchase Common
Stock and Common Stock equivalents underlying all outstanding stock options and
58,130 of the outstanding warrants (using the treasury stock method). All shares
have been effected by the 19.65165-for-one split of Common Stock.

INTERIM FINANCIAL INFORMATION

The consolidated balance sheet as of March 31, 1996, the related
consolidated statements of income and cash flows for the three months ended
March 31, 1995 and 1996, and the consolidated statements' of Redeemable
Convertible Preferred Stock and Shareholders' Equity equity for the three months
ended June 30, 1996 (interim financial statements) have been prepared by the
Company and are unaudited. The interim financial statements include all
adjustments, consisting of only normal recurring adjustments necessary for a
fair statement of the results of the interim periods. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted from the interim financial statements. The interim financial statements
should be read in conjunction with the Company's December 31, 1995 audited
consolidated financial statements appearing herein. The results for the three
months ended March 31, 1996 may not be indicative of operating results for the
full year.

F-16
<PAGE> 68
Q THE SPORTS CLUB

AUSTIN
10616 Research Blvd. (515) 794-9151

DALLAS/FORT WORTH AREA
Bedford, 2100 Plaza Parkway (817) 545-4900
Mesquite, 3600 Emporium Circle (214) 285-8600
Arlington, 1131 W. Arbrook Blvd. (817) 465-2600
Plano, 4600 W. Park Blvd. (214) 612-6960
Richardson, 1375 E. Campbell Rd. (214) 644-4888
UNDER DEVELOPMENT:
------------------
HULEN
N. ARLINGTON

HOUSTON AREA
Houston, 1550 Post Oak Blvd. (713) 840-1436
Houston, 7300 W. Greens Road (713) 894-6151
Houston, 10707 Westheimer Road (713) 977-0057
Sugar Land, 14111 Southwest Freeway (713) 565-3355

JACKSONVILLE
Orange Park, 1731 Wells Rd. (904) 269-3222

LAS VEGAS
601 S. Rainbow Blvd. (702) 258-7080
ANOTHER LOCATION UNDER DEVELOPMENT

MEMPHIS
1285 Ridgeway Road (901) 763-3265

PHOENIX AREA
Phoenix, 3233 E. Camelback Rd. (602) 224-9394
Scottsdale, 13220 N. Scottsdale Rd. (602) 951-8883
Tempe, 2145 Baseline Rd. (602) 831-2200

UNDER DEVELOPMENT:
------------------
DENVER AREA
AURORA
DENVER

MIAMI/FT. LAUDERDALE AREA
CORAL SPRINGS
PLANTATION
CYPRESS CREEK
PEMBROOK PINES

[A MAP OF THE UNITED STATES, DEPICTING SITES OF EXISTING CLUBS AND CLUBS UNDER
DEVELOPMENT]
<PAGE> 69

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

NO DEALER, SALES REPRESENTATIVES, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS 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 ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 11
Dividend Policy....................... 11
Capitalization........................ 12
Dilution.............................. 13
Selected Consolidated Financial
Data................................ 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
Business.............................. 24
Management............................ 34
Executive Compensation................ 37
Principal Stockholders................ 41
Certain Transactions.................. 42
Description of Capital Stock.......... 43
Shares Eligible for Future Sale....... 46
Underwriting.......................... 48
Legal Matters......................... 49
Experts............................... 49
Additional Information................ 49
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,000,000 SHARES

LOGO

Q CLUBS INC.

COMMON STOCK
------------------------
PROSPECTUS
------------------------
MORGAN KEEGAN & COMPANY, INC.

RAUSCHER PIERCE REFSNES, INC.

, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 70

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following is a list of the expenses and costs to be incurred by the
Company in connection with the issuance and distribution of the Common Stock
being registered hereby, other than underwriting discounts and commissions.

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 11,897
National Association of Securities Dealers, Inc. filing fee....... 3,950
Transfer Agent and Registrar's fees............................... 20,000
Nasdaq National Market application fee............................ 42,685
Accounting fees and expenses...................................... 150,000
Printing costs.................................................... 125,000
Legal fees and expenses (not including Blue Sky).................. 200,000
Blue Sky fees and expenses........................................ 10,000
Miscellaneous expenses............................................ 136,468
--------
Total................................................... $700,000
========
</TABLE>

All of the foregoing, except the Commission registration fee and the NASD
filing fee, are estimated.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Article Seventh of the Company's Certificate of Incorporation, as amended
(incorporated by reference to Exhibit 3.1(i) to this Registration Statement),
provides for the indemnification of the Company's Directors and officers to the
full extent permitted by the General Corporation Law of the State of Delaware
(the "DGCL"). In addition, the Company's Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.2 to this Registration Statement), which
will become effective immediately prior to the completion of the offering, will
likewise provide for the indemnification of the Company's Directors and officers
to the full extent permitted by the DGCL.

Subsection (a) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative, or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation or enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.

Subsection (b) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor, by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted
under standards similar to those set forth in the paragraph above, except that
no indemnification may be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation,
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
that despite the adjudication of liability, but in view of all the circumstances

II-1
<PAGE> 71

of the case, such person is fairly and reasonably entitled to be indemnified for
such expenses which the court shall deem proper.

Section 145 further provides that, to the extent that a director or officer
of a corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of Section
145, or in defense of any claim, issue or matter therein, he will be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith; that any indemnification under subsections (a) and
(b) of Section 145 (unless ordered by a court) will be made by a corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
subsections (a) and (b) of Section 145; that expenses incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount
unless it is ultimately determined that he is not entitled to be indemnified by
the corporation; that indemnification provided for by Section 145 will not be
deemed exclusive of any other rights to which the indemnified party may be
entitled; and that a corporation is empowered to purchase and maintain insurance
on behalf of a director or officer of the corporation against any liability
asserted against him and incurred by him in such capacity, or arising out of his
status as such, whether or not the corporation would have the power to indemnify
him against such liability under Section 145.

The Company has entered into indemnity agreements ("Indemnity Agreements")
with its current Directors and expects to enter into similar agreements with any
Director elected or appointed in the future at the time of their election or
appointment upon the approval of the Board of Directors of the Company. Pursuant
to the Indemnity Agreements, the Company has agreed, among other things, to
indemnify its Directors against certain liabilities. A copy of the form of
Indemnity Agreement is included herein as Exhibit 10.11 to this Registration
Statement.

Reference is made to Section of the Underwriting Agreement (Exhibit 1.1
to this Registration Statement) which provides for indemnification of the
Company's Directors and officers by the Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act").

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

No securities of the Company that were not registered under the Securities
Act have been issued or sold by the Company since its incorporation in April
1993, except as follows:

(1) In connection with its initial capitalization in May 1993, the
Company issued 88,000 shares of Common Stock to Frank M. Leonesio in
exchange for all of his outstanding capital stock of SFCA, an Ohio
corporation.

(2) On May 3, 1993, the Company issued and sold an aggregate of 44,928
shares of its Series A Preferred Stock to four sophisticated investors for
an aggregate purchase price of $4,650,000.

(3) On July 16, 1993, the Company issued a warrant to purchase up to
2,958 shares of its Common Stock at an initial exercise price of $103.49
per share to SFC (TN) QRS 11-21, Inc., a Tennessee corporation, in
connection with the sale and leaseback of certain real property owned by a
wholly-owned subsidiary of the Company.

(4) On December 8, 1993, the Company issued an aggregate of 12,000
restricted shares of its Common Stock to certain of its executive officers
for an aggregate consideration equal to $120.00. Such shares are subject to
repurchase by the Company until fully vested, which will occur on December
8, 1997.

(5) On December 28, 1993, the Company issued in the aggregate
principal amount of $15.0 million its 10% Notes to a group of five
sophisticated investors (the "Investors"). In connection with its sale of
the 10% Notes, the Company also issued warrants that expire in December
2013 to the Investors to

II-2
<PAGE> 72

purchase up to an aggregate of 36,978 shares of its Common Stock at an
exercise price of $.01 per share. The Company issued an aggregate of 7,396
shares of its Common Stock to certain of the Investors upon the exercise of
their warrants. The exercise price of the warrants was $.01 per share,
resulting in aggregate proceeds of $73.96 to the Company.

(6) On May 16, 1995, the Company issued and sold an aggregate of 69,397
shares of its Class B Preferred Stock to nine sophisticated investors for an
aggregate purchase price of $22,250,066.

Registration under the Securities Act was not effected with respect to the
transactions described above in paragraphs (1) through (3), (5) and (6) in
reliance upon the exemption from registration contained in Section 4(2) of the
Securities Act. Sales of Common Stock to management as described above in
paragraph (4) were deemed to be exempt by virtue of Rule 701 promulgated under
the Securities Act, in that they were offered and sold pursuant to a written
contract relating to compensation.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(A) EXHIBITS. The following Exhibits are filed herewith and made a part
hereof:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------
<S> <C>
***1.1 -- Form of Underwriting Agreement.
*3.1(i) -- Certificate of Incorporation of the Company, as amended.
* (ii) -- By-Laws of the Company, as amended.
***3.2(i) -- Form of Amendment to Certificate of Incorporation of the Company.
***3.3(i) -- Form of Restated Certificate of Incorporation of the Company.
***3.3(ii) -- Form of Restated By-Laws of the Company.
***4.1 -- Specimen certificate for the Common Stock, par value $.01 per share, of the
Company.
*4.2 -- Note and Warrant Purchase Agreement, dated December 28, 1993, between the
Company and the purchasers named therein (together with the form of the 10%
Senior Subordinated Note).
*4.3 -- First Amendment to Note and Warrant Purchase Agreement, dated October 14,
1994, between the Company and First Union Capital Partners.
*4.4 -- Second Amendment to Note and Warrant Purchase Agreement, dated March 27,
1995, between the Company and First Union Capital Partners.
*4.5 -- Third Amendment to Note and Warrant Purchase Agreement, dated May 9, 1995,
between the Company and First Union Capital Partners.
*4.6 -- Fourth Amendment to Note and Warrant Purchase Agreement, dated May 11, 1995,
between the Company and First Union Capital Partners.
*4.7 -- Second Amended and Restated Securityholders' Agreement, dated as of May 16,
1995, by and among the Company and the securityholders named therein.
*4.8 -- Second Amended and Restated Registration Agreement, dated as of May 16, 1995,
by and among the Company and the securityholders named therein.
*4.9 -- Voting Agreement, dated December 28, 1993, by and among Richard A. Intorcio,
Stephen J. Currier and John J. Leonesio.
*4.10 -- Executive Stock Agreement, dated December 8, 1993, by and between the Company
and Richard A. Intorcio.
*4.11 -- Executive Stock Agreement, dated December 8, 1993, by and between the Company
and John J. Leonesio.
*4.12 -- Executive Stock Agreement, dated December 8, 1993, by and between the Company
and Stephen J. Currier.
*4.13 -- Warrant Agreement, dated December 28, 1993, by and among the Company and the
Warrantholders listed on Schedule I thereto.
*4.14 -- First Amendment to Warrant Agreement, dated May 16, 1995, by and among the
Company and the warrantholders named therein.
*4.15 -- Warrant, dated as of July 16, 1993, issued by the Company to SFC (TN) QRS
11-21, Inc.
</TABLE>

II-3
<PAGE> 73

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------
<S> <C>
*4.16 -- Amendment and Waiver to the Warrant, dated as of May 16, 1995, between the
Company and SFC (TN) QRS 11-21, Inc.
*4.17 -- Second Amended and Restated Note of the Company to Frank and Melissa Anne
Leonesio, dated December 28, 1993.
*4.18 -- Modification of Second Amended and Restated Note of the Company to Frank and
Melissa Anne Leonesio, dated May 16, 1995.
*4.19 -- Preferred Stock Purchase Agreement, dated May 3, 1993, by and among the
Company and the investors named therein.
*4.20 -- First Amendment to Preferred Stock Purchase Agreement, dated as of May 16,
1995, between the Company and the investors named therein.
*4.21 -- Preferred Stock Purchase Agreement, dated May 16, 1995, between the Company
and NationsBanc Capital Corp. and the purchasers listed on Schedule 2.1
thereto.
**5.1 -- Form of opinion of Jones, Day, Reavis & Pogue as to the validity of the
securities being offered.
*10.1 -- 1994 Stock Option Plan.
*10.2 -- Form of Incentive Stock Option Agreement.
*10.3 -- Revolving Credit Agreement, dated October 6, 1994, by and between the Company
and Mellon Bank, N.A. (together with the related loan documents).
*10.4 -- Letter Amendment to Revolving Credit Agreement, dated March 31, 1995, by and
between the Company and Mellon Bank, N.A.
*10.5 -- Letter Amendment to Revolving Credit Agreement, dated May 10, 1995, by and
between the Company and Mellon Bank, N.A.
*10.6 -- Letter Amendment to Revolving Credit Agreement, dated January 23, 1996, by
and between the Company and Mellon Bank, N.A.
*10.7 -- Promissory Note, dated January 23, 1996, by the Company to Finova Capital
Corporation.
*10.8 -- Loan and Security Agreement, dated January 23, 1996, by and between the
Company and Finova Capital Corporation.
*10.9 -- Loan and Security Agreement, dated as of April 17, 1995, by and between
Sports & Fitness Clubs of America, Inc. and Fair Finance Co.
*10.10 -- Guaranty Agreement, dated as of April 17, 1995, by and between the Company
and Fair Finance Co.
*10.11 -- Revolving Promissory Note, dated as of April 17, 1995, by and between Sports
& Fitness Clubs of America, Inc. and Fair Finance Co.
*10.12 -- 1996 Bonus Plan for Senior and Selected Corporate Officers.
*10.13 -- Guaranty and Suretyship Agreement, dated July 16, 1993, between the Company,
Sports & Fitness Clubs of America, Inc. and SFC (TN) QRS 11-21, Inc.
*10.14 -- First Amendment to Guaranty and Suretyship Agreement, dated as of May 9,
1995, by and between the Company, Sports & Fitness Clubs of America, Inc. and
SFC (TN) QRS 11-21, Inc.
*10.15 -- Second Amendment to Guaranty and Suretyship Agreement, dated as of May 15,
1995, by and between the Company, Sports & Fitness Clubs of America, Inc. and
SFC (TN) QRS 11-21, Inc.
*10.16 -- Amended and Restated Agreement to Provide Guaranty, dated as of May 16, 1995,
by and among the Company, Frank Leonesio and the investors named therein.
*10.17 -- Guaranty and Suretyship Agreement, dated June 8, 1995, by and between the
Company and SFC (TX) QRS 12-7, Inc.
*10.18 -- Form of Director Indemnity Agreement.
*10.19 -- 401(k) Profit Sharing Plan.
**11.1 -- Statement regarding computation of Pro Forma Net Income Per Share of Common
Stock and Pro Forma Net Income Per Share of Common Stock As Adjusted.
</TABLE>

II-4
<PAGE> 74

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------
<S> <C>
*21.1 -- Subsidiaries of the Company.
**23.1 -- Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1).
**23.2 -- Consent of Ernst & Young LLP.
*24.1 -- Power(s) of Attorney.
***99.1 -- Consent of Michael J. Horvitz.
***99.2 -- Consent of Nathan R. Light.
</TABLE>

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

* Previously filed.

** Filed herewith.

*** To be filed by Amendment.

(B) FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
SCHEDULE
NUMBER DESCRIPTION OF DOCUMENT
- --------- ---------------------------------
<C> <S>
II Valuation and Qualifying Accounts
</TABLE>

All other schedules have been omitted because they are not applicable, not
required or the required information is included in the financial statements and
notes thereto.

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For the purpose of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.

(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-5
<PAGE> 75

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Cleveland, State of Ohio, on May 10, 1996.

Q CLUBS INC.

By: /s/ RICHARD A. INTORCIO

------------------------------------
Richard A. Intorcio
Senior Vice President,
Controller and Treasurer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated and on the 10th day of May 1996.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ---------------------------------------- ---------------
<S> <C> <C>
* President, Chief Executive Officer and May 10, 1996
- ----------------------------------- Director (Principal Executive Officer)
Frank M. Leonesio
* Chief Financial Officer and Secretary May 10, 1996
- ----------------------------------- (Principal Financial and Accounting
Thomas J. Klimback Officer)
* Director May 10, 1996
- -----------------------------------
Kenneth P. DeAngelis
* Director May 10, 1996
- -----------------------------------
Lloyd D. Ruth
* Director May 10, 1996
- -----------------------------------
Kevin J. Roche
* Director May 10, 1996
- -----------------------------------
J. Travis Hain
</TABLE>

* The undersigned by signing his name hereto, does sign and execute this
Registration Statement pursuant to the Powers of Attorney executed by the
above-named officers and directors of the Company and filed with the
Securities and Exchange Commission on behalf of such officers and Directors.

By: /s/ RICHARD A. INTORCIO

----------------------------------------------------------------
Richard A. Intorcio, Attorney-in-Fact

II-6
<PAGE> 76

REPORT OF INDEPENDENT AUDITORS

We have audited the consolidated financial statements of Q Clubs Inc.
(formerly Sports & Fitness Clubs, Inc.) and Subsidiaries as of December 31, 1995
and 1994, and for each of the three years in the period ended December 31, 1995,
and have issued our report thereon dated February 22, 1996 (except as to Note
12, as to which the date is May , 1996), included elsewhere in this
Registration Statement. Our audits also included the financial statement
schedule listed in Item 16(b) of this Registration Statement. This schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

Cleveland, Ohio

May 10, 1996

The foregoing report is in the form that will be signed upon the completion
of the 19.65165-for-one split of the Company's Common Stock as described in Note
12 to the consolidated financial statements.

ERNST & YOUNG LLP

Cleveland, Ohio

May 10, 1996

S-1
<PAGE> 77

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

Q CLUBS INC. AND SUBSIDIARIES

YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
COL. C
ADDITIONS
COL. B ------------------------------- COL. E
BALANCE AT CHARGED TO CHARGED TO COL. D BALANCE
COL. A BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- -------------------------------- ---------- ----------- ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Three Months ended March 31,
1996 (unaudited)
Allowance for doubtful
accounts receivable......... $8,627,000 $ 4,758,000 $ 0 $2,465,000(A) $10,920,000
Year ended December 31, 1995
Deducted from assets accounts:
Allowance for doubtful
accounts receivable......... $4,806,000 $10,076,000 $ 0 $6,255,000(A) $ 8,627,000
Year ended December 31, 1994
Deducted from assets accounts:
Allowance for doubtful
accounts receivable......... $2,352,000 $ 6,661,000 $ 0 $4,207,000(A) $ 4,806,000
Year ended December 31, 1993
Deducted from assets accounts:
Allowance for doubtful
accounts receivable......... $1,901,000 $ 2,724,000 $ 0 $2,273,000(A) $ 2,352,000
</TABLE>

Note A -- Bad debts written off.

S-2
<PAGE> 78

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------ ------------
<C> <S> <C>
***1.1 -- Form of Underwriting Agreement. ...............................
*3.1 (i) -- Certificate of Incorporation of the Company, as amended. ......
* (ii) -- By-Laws of the Company, as amended. ...........................
***3.2 (i) -- Form of Amendment to Certificate of Incorporation of the
Company. ......................................................
***3.3 (i) -- Form of Restated Certificate of Incorporation of the
Company. ......................................................
***3.3 (ii) -- Form of Restated By-Laws of the Company. ......................
***4.1 -- Specimen certificate for the Common Stock, par value $.01 per
share, of the Company. ........................................
*4.2 -- Note and Warrant Purchase Agreement, dated December 28, 1993,
between the Company and the purchasers named therein (together
with the form of the 10% Senior Subordinated Note). ...........
*4.3 -- First Amendment to Note and Warrant Purchase Agreement, dated
October 14, 1994, between the Company and First Union Capital
Partners. .....................................................
*4.4 -- Second Amendment to Note and Warrant Purchase Agreement, dated
March 27, 1995, between the Company and First Union Capital
Partners. .....................................................
*4.5 -- Third Amendment to Note and Warrant Purchase Agreement, dated
May 9, 1995, between the Company and First Union Capital
Partners. .....................................................
*4.6 -- Fourth Amendment to Note and Warrant Purchase Agreement, dated
May 11, 1995, between the Company and First Union Capital
Partners. .....................................................
*4.7 -- Second Amended and Restated Securityholders' Agreement, dated
as of May 16, 1995, by and among the Company and the
securityholders named therein. ................................
*4.8 -- Second Amended and Restated Registration Agreement, dated as of
May 16, 1995, by and among the Company and the securityholders
named therein. ................................................
*4.9 -- Voting Agreement, dated December 28, 1993, by and among Richard
A. Intorcio, Stephen J. Currier and John J. Leonesio. .........
*4.10 -- Executive Stock Agreement, dated December 8, 1993, by and
between the Company and Richard A. Intorcio. ..................
*4.11 -- Executive Stock Agreement, dated December 8, 1993, by and
between the Company and John J. Leonesio. .....................
*4.12 -- Executive Stock Agreement, dated December 8, 1993, by and
between the Company and Stephen J. Currier. ...................
*4.13 -- Warrant Agreement, dated December 28, 1993, by and among the
Company and the Warrantholders listed on Schedule I
thereto. ......................................................
*4.14 -- First Amendment to Warrant Agreement, dated May 16, 1995, by
and among the Company and the warrantholders named therein. ...
*4.15 -- Warrant, dated as of July 16, 1993, issued by the Company to
SFC (TN) QRS 11-21, Inc. ......................................
*4.16 -- Amendment and Waiver to the Warrant, dated as of May 16, 1995,
between the Company and SFC (TN) QRS 11-21, Inc. ..............
</TABLE>

<PAGE> 79

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------ ------------
<C> <S> <C>
*4.17 -- Second Amended and Restated Note of the Company to Frank and
Melissa Anne Leonesio, dated December 28, 1993. ...............
*4.18 -- Modification of Second Amended and Restated Note of the Company
to Frank and Melissa Anne Leonesio, dated May 16, 1995. .......
*4.19 -- Preferred Stock Purchase Agreement, dated May 3, 1993, by and
among the Company and the investors named therein. ............
*4.20 -- First Amendment to Preferred Stock Purchase Agreement, dated as
of May 16, 1995, between the Company and the investors named
therein. ......................................................
*4.21 -- Preferred Stock Purchase Agreement, dated May 16, 1995, between
the Company and NationsBanc Capital Corp. and the purchasers
listed on Schedule 2.1 thereto. ...............................
**5.1 -- Form of opinion of Jones, Day, Reavis & Pogue as to the
validity of the securities being offered. .....................
*10.1 -- 1994 Stock Option Plan. .......................................
*10.2 -- Form of Incentive Stock Option Agreement. .....................
*10.3 -- Revolving Credit Agreement, dated October 6, 1994, by and
between the Company and Mellon Bank, N.A. (together with the
related loan documents). ......................................
*10.4 -- Letter Amendment to Revolving Credit Agreement, dated March 31,
1995, by and between the Company and Mellon Bank, N.A. ........
*10.5 -- Letter Amendment to Revolving Credit Agreement, dated May 10,
1995, by and between the Company and Mellon Bank, N.A. ........
*10.6 -- Letter Amendment to Revolving Credit Agreement, dated January
23, 1996, by and between the Company and Mellon Bank, N.A. ....
*10.7 -- Promissory Note, dated January 23, 1996, by the Company to
Finova Capital Corporation. ...................................
*10.8 -- Loan and Security Agreement, dated January 23, 1996, by and
between the Company and Finova Capital Corporation. ...........
*10.9 -- Loan and Security Agreement, dated as of April 17, 1995, by and
between Sports & Fitness Clubs of America, Inc. and Fair
Finance Co. ...................................................
*10.10 -- Guaranty Agreement, dated as of April 17, 1995, by and between
the Company and Fair Finance Co. ..............................
*10.11 -- Revolving Promissory Note, dated as of April 17, 1995, by and
between Sports & Fitness Clubs of America, Inc. and Fair
Finance Co. ...................................................
*10.12 -- 1996 Bonus Plan for Senior and Selected Corporate Officers. ...
*10.13 -- Guaranty and Suretyship Agreement, dated July 16, 1993, between
the Company, Sports & Fitness Clubs of America, Inc. and SFC
(TN) QRS 11-21, Inc. ..........................................
*10.14 -- First Amendment to Guaranty and Suretyship Agreement, dated as
of May 9, 1995, by and between the Company, Sports & Fitness
Clubs of America, Inc. and SFC (TN) QRS 11-21, Inc. ...........
*10.15 -- Second Amendment to Guaranty and Suretyship Agreement, dated as
of May 15, 1995, by and between the Company, Sports & Fitness
Clubs of America, Inc. and SFC (TN) QRS 11-21, Inc. ...........
</TABLE>

<PAGE> 80

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------ ------------
<C> <S> <C>
*10.16 -- Amended and Restated Agreement to Provide Guaranty, dated as of
May 16, 1995, by and among the Company, Frank Leonesio and the
investors named therein. ......................................
*10.17 -- Guaranty and Suretyship Agreement, dated June 8, 1995, by and
between the Company and SFC (TX) QRS 12-7, Inc. ...............
*10.18 -- Form of Director Indemnity Agreement. .........................
*10.19 -- 401(k) Profit Sharing Plan. ...................................
**11.1 -- Statement regarding computation of Pro Forma Net Income Per
Share of Common Stock and Pro Forma Net Income Per Share of
Common Stock As Adjusted. .....................................
*21.1 -- Subsidiaries of the Company. ..................................
**23.1 -- Consent of Jones, Day, Reavis & Pogue (included in Exhibit
5.1). .........................................................
**23.2 -- Consent of Ernst & Young LLP. .................................
*24.1 -- Power(s) of Attorney. .........................................
***99.1 -- Consent of Michael J. Horvitz. ................................
***99.2 -- Consent of Nathan R. Light. ...................................
</TABLE>

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

* Previously filed.

** Filed herewith.

*** To be filed by Amendment.

<PAGE> 1

EXHIBIT 5.1

May 10, 1996

Q Clubs Inc.

395 Springside Drive

Akron, Ohio 44333

Re: 2,300,000 Shares of Common Stock, par

value $0.01 per share, of Q Clubs Inc.

to Be Offered Through Underwriters

Gentlemen:

We are acting as counsel for Q Clubs Inc., a Delaware corporation (the
"Company"), in connection with the issuance and sale of up to 2,300,000 shares
(including 300,000 shares which may be sold pursuant to an over-allotment option
granted by the Company to the Underwriters) of Common Stock, par value $0.01 per
share, of the Company (the "Shares") in accordance with the terms and conditions
of an Underwriting Agreement (the "Underwriting Agreement") to be entered into
among the Company, Morgan Keegan & Company and Rauscher Pierce Refsnes, Inc., as
representatives of the Underwriters named therein (the "Underwriters") with
respect to the Shares.

We have examined such documents, records and matters of law as we have
deemed necessary for purposes of this opinion, and based thereupon we are of the
opinion that, subject to the approval by the Company's stockholders and Board of
Directors of the Amendment to the Company's Certificate of Incorporation (the
"Certificate") as contemplated by the Prospectus (as defined below) on file with
the Securities and Exchange Commission as of the date hereof and the filing of
the Amendment to the Certificate with the Secretary of State of the State of
Delaware and effectiveness thereof, and to the due authorization of the
specified terms of sale of the Shares by the Board of Directors of the Company
or an authorized committee thereof:

The Shares will be duly authorized and, when issued and delivered by the
Company to the Underwriters pursuant to the Underwriting Agreement against
payment of the consideration therefor as provided therein (and provided payment
of consideration received by the Company is at least equal to the par value of
such Shares), will be validly issued, fully paid and nonassessable.

We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement on Form S-1 (Registration File No. 333-3216) filed by the
Company to effect the registration of the Shares under the Securities Act of
1933 and to the reference to us under the caption "Legal Matters" in the
Prospectus constituting a part of such Registration Statement.

Very truly yours,

Jones, Day, Reavis & Pogue

<PAGE> 1

EXHIBIT 11.1

Q CLUBS INC.

COMPUTATION OF PRO FORMA EARNINGS PER SHARE(1)

<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1995 MARCH 31, 1996
----------------- -------------- --------------
<S> <C> <C> <C>
Average Common shares outstanding.................. 2,110,508 2,110,508 2,110,508
Net effect of the following (as if outstanding for
all periods presented):
Conversion of Series A Preferred Stock and
cumulative dividends thereon, into Common
Stock (2) and (3)............................. 964,548 964,548 964,548
Conversion of Series B Preferred Stock into
Common Stock (2).............................. 1,880,644 1,880,644 1,880,644
Common Stock required to be issued to fund the
$2.3 million cash dividend on the Series B
Preferred Stock (5)........................... 167,651 167,651 167,651
Conversion of warrants into Common Stock (4)..... 581,335 581,335 581,335
Impact of outstanding stock options and warrants
(using treasury stock method)................. 179,127 179,127 179,127
----------------- -------------- --------------
Pro Forma shares outstanding....................... 5,883,813 5,883,813 5,883,813
============= =========== ===========
Net income (loss).................................. $ 125,000 $ (11,000) $1,379,000
============= =========== ===========
Pro Forma net income (loss) per share.............. $ 0.02 $ (--) $ 0.23
============= =========== ===========
</TABLE>

(1) All shares give effect to a 19.65165-for-one stock split assumed to occur
immediately prior to the completion of the offering.

(2) Assumes conversion of Series A Preferred Stock into Common Stock on a
one-for-one basis and Series B Preferred Stock into Common Stock on a
1.379-for-one basis.

(3) Assumes that cumulative dividends on Series A Preferred Stock are converted
to 81,639 shares of Common Stock.

(4) Assumes the exercise of all but 58,130 of the outstanding warrants to
purchase Common Stock.

(5) Using $14.00 per share, the mid-point of the assumed public offering range.

<PAGE> 1

EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated February 22, 1996 (except as to Note 12, as to
which the date is May , 1996) in the Registration Statement (Amendment No. 1
to Form S-1 No. 333-3216) and related Prospectus of Q Clubs Inc. for the
registration of 2,300,000 shares of its Common Stock.

Cleveland, Ohio

May 10, 1996

The foregoing consent is in the form that will be signed upon the
completion of the 19.65165-for-one split of the Company's Common Stock as
described in Note 12 to the consolidated financial statements.

ERNST & YOUNG LLP

Cleveland, Ohio

May 10, 1996