SPORTS CLUB CO INC, S-2, 1998-02-27

SPORTS CLUB CO INC
S-2, 1998-02-27
MEMBERSHIP SPORTS & RECREATION CLUBS

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<PAGE> 1
As filed with the Securities and Exchange Commission on February 27, 1998
Registration No. 333-_____
================================================================================

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

FORM S-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933

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

THE SPORTS CLUB COMPANY, INC.
-------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 95-4479735
---------------------------- ----------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)

11100 Santa Monica Blvd., Suite 300
Los Angeles, California 90025
310-479-5200
-------------------------------------------------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)

D. Michael Talla
Chairman of the Board
The Sports Club Company, Inc.
11100 Santa Monica Blvd., Suite 300
Los Angeles, California 90025
310-479-5200
-------------------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Copies to:

Joseph P. Bartlett, Esq. Glenn D. Smith, Esq.
Kinsella Boesch Fujikawa & Towle, LLP Stroock & Stroock & Lavan LLP
1901 Avenue of the Stars, 7th Floor 2029 Century Park East, Suite 1800
Los Angeles, California 90067 Los Angeles, California 90067
(310) 201-2000 (310) 556-5800

Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of the Registration Statement.

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

If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this form, check the following box. [ ]

If this form is filed to register additional securities or 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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. [ ]

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
================================================================================================================================
Proposed Maximum Proposed Maximum Amount of
Title of each class of Amount to be Offering Price Aggregate Offering Registration
Securities to be registered registered (1) Per Share(2) Price(2) Fee(1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $ .01 par value per share 6,900,000 $9.00 $62,100,000 $18,319.50
================================================================================================================================
</TABLE>

(1) Includes 900,000 shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.

(2) Estimated solely for purposes of computing the amount of the registration
fee pursuant to Rule 457 under the Securities Act.

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, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.

================================================================================

<PAGE> 2

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 QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

<PAGE> 3

SUBJECT TO COMPLETION DATED FEBRUARY 27, 1998
PROSPECTUS
6,000,000 SHARES

[THE SPORTS CLUB COMPANY, INC. LOGO]

COMMON STOCK

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

The Sports Club Company, Inc. (the "Company") is hereby offering (the
"Offering") 6,000,000 shares (the "Shares") of the Company's common stock, $.01
par value per share (the "Common Stock"). The Common Stock is listed on the
American Stock Exchange ("AMEX") under the symbol "SCY." On February 26, 1998,
the last sale price of the Common Stock was $9.00 per share, as reported by the
AMEX. See "Price Range of Common Stock." At the request of the Company, up to
600,000 shares of Common Stock have been reserved for sale in the Offering to
certain individuals, including directors and employees of the Company, members
of their families, and other persons having business relationships with the
Company. See "Underwriting."

SEE "RISK FACTORS" COMMENCING ON PAGE 4 FOR A DISCUSSION OF CERTAIN
FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
================================================================================
Underwriting
Discounts and Proceeds to
Price to Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.......... $______ $______ $______
Total(3)........... $______ $______ $______
================================================================================
</TABLE>

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

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

(3) The Company has granted to the Underwriters an option, exercisable within
30 days hereof, to purchase up to an aggregate of 900,000 additional shares
of Common Stock at the price to the Public less underwriting discounts and
commissions for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
$___, $___ and $___, respectively. See "Underwriting."

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

SCHRODER & CO. INC. PRUDENTIAL SECURITIES INCORPORATED

_____________, 1998

<PAGE> 4

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH COMMON STOCK, AND THE IMPOSITION OF A PENALTY BID IN
CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE> 5

PROSPECTUS SUMMARY

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

THE COMPANY

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

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

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

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

<PAGE> 6

working for the Company and its predecessors for more than ten years. Management
believes that it has the depth and experience to manage the Company's internal
and external growth.

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered................................ 6,000,000 shares
Common Stock to be Outstanding after
the Offering................................... 20,218,645 shares (1)
Use of Proceeds..................................... Of the $50.9 million estimated net proceeds of the Offering,
approximately $45.5 million will be used to repay
outstanding indebtedness and the balance will be used for
general corporate purposes, including to acquire and develop
new Clubs. See "Use of Proceeds".
AMEX Symbol......................................... SCY
</TABLE>

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

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

<PAGE> 7

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

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

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
STATEMENT OF INCOME DATA: 1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues .............................................. $ 34,659 $ 36,918 $ 61,154

Operating expenses:
Direct .............................................. 21,730 22,989 43,517
Selling, general and administrative ................. 5,486 6,052 6,607
Depreciation and amortization ....................... 2,775 2,490 3,919
-------- -------- --------
Total operating expenses .......................... 29,991 31,531 54,043
-------- -------- --------
Income from operations .......................... 4,668 5,387 7,111

Other Income (expense):
Interest ............................................ (2,600) (2,682) (3,206)
Minority interests .................................. (150) (150) (22)
Equity interest in net income
of unconsolidated subsidiaries ..................... 860 631 696
Non-recurring items ................................. -- (300) (2,025)
-------- -------- --------
Total other income (expense) .................... (1,890) (2,501) (4,557)
-------- -------- --------
Income before income taxes ...................... 2,778 2,886 2,554

Provision for income taxes ............................ 1,139 1,183 1,014
-------- -------- --------
Net income .......................................... 1,639 1,703 1,540
======== ======== ========
Net income per share:
Basic ............................................... $ 0.14 $ 0.15 $ 0.12
======== ======== ========
Diluted ............................................. $ 0.14 $ 0.15 $ 0.12
======== ======== ========
Net income per share before
non-recurring items (Basic and Diluted) ............. $ 0.14 $ 0.17 $ 0.22
======== ======== ========
Weighted-average number of common shares outstanding:
Basic(1) ............................................ 11,353 11,355 12,524
======== ======== ========
Diluted(1) .......................................... 11,357 11,360 12,683
======== ======== ========
OTHER DATA:
Total Clubs operated at end of period ................. 8 8 14
Average Membership during the period .................. 42,368 45,219 51,038
Members at end of period............................... 44,114 45,220 75,269
</TABLE>

<TABLE>
<CAPTION>
At December 31, 1997
-----------------------------
BALANCE SHEET DATA: Actual As Adjusted (2)
------- ---------------
<S> <C> <C>
Cash and cash equivalents ............................. $ 1,581 $ 9,831
Property, plant and equipment ......................... 106,791 106,791
Total assets .......................................... 131,561 139,811
Long-term debt, including current installments ........ 50,798 10,887
Stockholders' equity .................................. 58,477 107,405
</TABLE>

(1) Does not include up to 159,081 shares reserved for issuance on December 31,
1998, as consideration for the acquisition of the Spectrum Clubs acquired
from Racquetball World (see "The Company").

(2) As adjusted to give effect to the issuance and sale of the Common Stock
offered hereby at an assumed public offering price of $9.00 per share, and
the application of the estimated net proceeds as set forth under "Use of
Proceeds."

<PAGE> 8

RISK FACTORS

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

ATTRACTION AND RETENTION OF MEMBERS

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

ABILITY TO DEVELOP AND ACQUIRE ADDITIONAL CLUBS

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

<PAGE> 9

NEED FOR ADDITIONAL FINANCING

Expansion of the Company's operations through the development and
acquisition of additional Clubs will require substantial amounts of capital. The
availability of additional financing may affect the Company's ability to expand.
To finance expansion, the Company may use existing credit facilities, seek
additional borrowings, and may seek further equity investments. The Company will
also consider entering into joint venture and partnership agreements for the
purpose of developing new Clubs. There can be no assurance that funds for such
expansion, whether from equity or debt financings or other sources, will be
available or, if available, will be on terms satisfactory to the Company. The
Company's future growth may be limited if it is unable to complete either the
development or acquisition of new Clubs due to a lack of satisfactory financing
alternatives.

RISKS INVOLVED IN DEVELOPMENT ACTIVITIES THROUGH PARTNERSHIPS AND JOINT VENTURES

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

RELATIONSHIP WITH MILLENNIUM; CONFLICTS OF INTEREST

Millennium Entertainment Partners, L.P., along with its affiliates
(collectively, "Millennium") is the second largest shareholder of the Company,
with 3,929,863 shares or 27.6% of the outstanding Common Stock. Additionally,
Millennium is a partner with the Company in the Reebok-Sports Club/NY
partnership as well as the landlord of the building in which the Reebok Sports
Club/NY is located. In 1997, Millennium and the Company entered into leases with
respect to the development of two additional Sports Clubs in Washington, D.C.
and San Francisco, California, and are currently negotiating the terms of a
lease for an additional Sports Club in Boston, Massachusetts (see "Business -
Developments and Acquisitions"). On June 11, 1997, the Company issued to
Millennium 2,105,203 shares of Common Stock in exchange for $10.0 million
consisting of $5.0 million in cash and certain interests of Millennium in the
Reebok Sports Club/NY partnership, including a 9.9% interest in the partnership
and a $2.5 million promissory note issued by the partnership. The Company also
granted to Millennium certain registration and preemptive rights, which
preemptive rights have been waived with respect to the Offering. In addition,
the Company and certain of its shareholders have agreed to cause a nominee of
Millennium to be appointed or elected to the Board of Directors of the Company;
Brian J. Collins, an officer of Millennium, is currently a member of the
Company's Board of Directors as Millennium's nominee. On December 31, 1997, the
Company sold to Millennium an additional 625,000 shares of Common Stock for $5.0
million to fund the acquisition of four Spectrum Clubs from Racquetball World.
In addition, Millennium provided a capital lease for two such Spectrum Clubs.
Millennium has the right to require the Company to purchase the property under
certain circumstances, including consummation of the Offering. Millennium has
agreed to waive this right with respect to the Offering. The Company intends to
utilize a portion of the proceeds of the Offering to repurchase such properties.
However, if the net proceeds from the Offering are insufficient to fund all of
the Company's intended use of proceeds, the requirement that the Company
purchase the Racquetball World property from Millennium could

<PAGE> 10

have a material adverse effect on the Company's financial condition and results
of operation. In addition, through its rights under its various agreements with
the Company, Millennium may have the ability to advance its economic or business
interests or objectives which may conflict with those of the Company and cause
delays which would not be in the Company's best interest. Any such conflict or
delay could have a material adverse effect on the Company's financial condition
and results of operations. See "Certain Transactions."

CONTROL BY PRINCIPAL SHAREHOLDERS, OFFICERS AND DIRECTORS

Upon consummation of the Offering, the Company's principal stockholders,
officers, directors and their affiliates will beneficially own, in the
aggregate, approximately 50.2% of the outstanding shares of the Common Stock
(approximately 48.1% assuming the full exercise of the Underwriters'
over-allotment option). As a result, such persons, acting together, will
continue to have control over all matters requiring stockholder approval. The
concentration of ownership under certain circumstances could have the effect of
delaying or preventing a change in control of the Company.

DEPENDENCE ON SINGLE GEOGRAPHIC AREA

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

COMPETITION

The sports and fitness industry is highly competitive. Despite recent
consolidation activities, the industry remains highly fragmented. Some of the
Company's competitors are significantly larger and have greater financial and
operating resources than the Company. In addition, a number of individual and
regional operators compete with the Company throughout the Company's existing
and targeted markets. These competitors compete with the Company both for
members and for acquisitions of other Clubs. The Company also competes with
recreational facilities established by governments and businesses, the YMCA and
YWCA, country clubs and weight-reducing salons, as well as products and services
that can be used in the home. Other entertainment and retail businesses also
compete with the Company for the discretionary income of its target market. The
Company believes that additional sports and fitness competitors will emerge in
the future, some of which may be larger and have greater financial and operating
resources than the Company. There can be no assurance that such competition will
not have a material adverse effect on the Company's results of operation and
financial condition.

HEALTH RISKS

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

<PAGE> 11

GOVERNMENT REGULATION

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

STAFFING AND LABOR COSTS

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

DEPENDENCE UPON KEY PERSONNEL

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

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

The Company is subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law, which may have the effect of deterring
hostile takeovers or delaying changes in control of the Company. The Company
also has a classified Board of Directors such that less than a majority of the
members of the Board are elected at each annual meeting of stockholders.
Classified boards may have the effect of delaying, deferring or discouraging
changes in control of the Company. In addition, the Board of Directors has
authority to issue up to 1,000,000 shares of Preferred Stock and to fix the
rights, preferences, privileges and restrictions, including voting rights, of
these shares without any further vote or action by the stockholders. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any such Preferred Stock that may be issued in
the future. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company, thereby
delaying, deferring or preventing a change in control of the Company. In
addition, such Preferred Stock may have other rights, including economic rights,
senior to the Common Stock, and as a result, the issuance thereof could have a
material adverse effect on the market value of the Common Stock. Furthermore,
certain provisions of Delaware law could delay or make more difficult a merger,
tender offer or proxy contest involving the Company.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of shares of Common Stock in the public
market following the Offering could have an adverse effect on the market value
of the Common Stock. Upon completion of the Offering, the Company will have
outstanding 20,218,645 shares of Common Stock, or 21,118,645 shares if the
Underwriters' over-allotment option is exercised in full. Of these shares, all
of the Common Stock being sold hereby and approximately 11,198,000 shares held
by existing stockholders will, subject to the agreements described below, be
freely tradeable (unless such shares are held by an "affiliate" of the Company
as such term is defined in

<PAGE> 12
the Securities Act of 1933, as amended (the "Securities Act"), without
restriction or registration under the Securities Act. The remaining 3,020,621
shares were issued and sold by the Company in private transactions ("Restricted
Shares") and are eligible for public sale only if registered under the
Securities Act or sold in accordance with Rule 144 thereunder. 2,395,621 of
these shares have been registered for public sale under the Securities Act. The
Company has reserved 1,038,000 shares of Common Stock for issuance under the
1994 Stock Incentive Plan and the 1994 Stock Compensation Plan, options to
purchase 642,500 shares of which are outstanding. The Company and its officers,
directors and certain shareholders owning an aggregate of 10,316,398 shares of
Common Stock and options to acquire 385,000 shares of Common Stock have agreed
with Schroder & Co. Inc. on behalf of the Underwriters not to, directly or
indirectly, sell or otherwise transfer any interest in the Common Stock for a
period of 90 days following the Offering without the consent of Schroder & Co.
Inc. Schroder & Co. Inc. may, in its sole discretion and at any time without
notice, allow the sale of all or any portion of such Common Stock. No
predictions can be made as to the effect, if any, that market sales of Common
Stock or the availability of Common Stock for sale will have on the market price
prevailing from time to time. Sale of a substantial number of shares of Common
Stock in the public market following the Offering could have an adverse effect
on the market value of the Common Stock. See "Shares Eligible for Future Sale."

VOLATILITY OF PRICE OF COMMON STOCK

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

DIVIDEND POLICY

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

<PAGE> 13

THE COMPANY

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

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

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

The Sports Club/Las Vegas. The Company acquired The Sports Club/Las Vegas in
August 1997 for a total purchase price of approximately $6.8 million consisting
of approximately $4.3 million in cash, $750,000 in equipment financing and the
issuance of 293,358 shares of Common Stock. The Club, located in Henderson,
Nevada (approximately three miles east of the Las Vegas airport), consists of a
136,000 square foot facility and offers members services comparable to other
Sports Clubs. This Club reported revenues of $5.6 million during the 12 months
ended December 31, 1997. The Company has implemented a capital improvement plan
at this Club totalling approximately $1.0 million to expand the fitness areas,
upgrade the locker facilities and purchase new equipment. The Company also plans
to enhance revenues at this facility by directly providing certain services,
including private training, pro shop and spa, that were previously contracted
out to third parties. The foregoing changes are designed to attract and retain
members at these facilities, and to increase revenues both from membership fees
and auxiliary services.

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

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

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

<PAGE> 14

USE OF PROCEEDS

The net proceeds of the Offering (after deducting discounts,
commissions, estimated fees and other expenses in connection with the Offering)
are estimated to be $50.9 million (or approximately $58.5 million if the
underwriter's over-allotment is exercised in full). Such proceeds will be used
to (i) retire existing indebtedness and (ii) for general corporate purposes,
which may include the development and acquisition of Clubs. The Company
currently has no binding agreement or understanding with respect to any future
acquisition. Pending the uses outlined in this table, the Company will invest
the net proceeds in short-term investment-grade, interest bearing securities.
The Company is currently in the process of negotiating to renew its credit
facility effective as of the consummation of the Offering. To the extent that
the Company does not have in place such facility, the Company may delay payment
of one or more of the obligations described below.

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

<TABLE>
<S> <C>
Prepay The Sports Club/LA note(1).............................. $ 25.1
Prepay Spectrum Club/Fullerton and Spectrum
Club/Santa Ana lease(2)..................................... 10.1
Prepay Spectrum Club/Agoura Hills note(3)...................... 2.5
Repay credit facility(4)....................................... 7.8
General corporate purposes..................................... 5.4
</TABLE>

- ----------

(1) Prepayment of all outstanding obligations under the note between AT&T
Commercial Finance Corporation ("AT&T") and L.A./Irvine Sports Clubs, Ltd.
("The Sports Club/LA Note"), currently estimated to be approximately $22.3
million, plus a prepayment fee of approximately $2.8 million. The Sports
Club/LA Note bears interest at a rate per annum equal to 10.63% and requires
monthly installment payments of approximately $262,000 with the remaining
principal balance of approximately $17.5 million due and payable on April 1,
2003. The Sports Club/LA Note may be extended by the Company for a period of
five years under certain circumstances. The Sports Club/LA Note is not
subject to prepayment until April 1, 2000; however, AT&T has agreed to
permit the Company to prepay the loan on or before March 31, 1998 provided
it pays a $2.8 million prepayment fee. The Sports Club/LA Note is secured by
The Sports Club/LA.

(2) Prepayment of all obligations under a capital lease between Millennium and
the Company and to acquire Millennium's interest. See "The Company." This
lease has a term of 20 years and calls for lease payments of $1.0 million
per year for the first ten years and $1.2 million thereafter. The Company
has the option to acquire Millennium's fee and leasehold interest through
December 31, 2000, and could be required by Millennium to make such purchase
upon the occurrence of certain events, including the consummation of the
Offering. Millennium has waived this right with respect to this Offering.
See "Certain Transactions."

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

(4) Payment of all amounts outstanding under the Company's credit facility in
the amount of $15.0 million. On December 31, 1997, approximately $5.0
million was outstanding under this facility. On February 25, 1998, the
amount outstanding on this facility was approximately $7.8 million. The
advances under the credit facility have been used by the Company to provide
working capital. The Company may borrow funds under this facility until the
earlier of June 30, 1998 or consummation of certain financing transactions
by the Company, including the Offering. Upon consummation of such a
financing transaction, the facility is due and payable in full; otherwise,
the Company will be required to make monthly payments of $250,000 beginning
July 1, 1998, with all remaining amounts becoming due and payable on October
30, 1998. Advances under the facility bear

<PAGE> 15

interest at a variable rate equal to LIBOR plus 2 1/2% or the lender's prime
rate plus 1/2%. At February 24, 1998, the advances accrued interest at the
weighted-average rate of 8.33% per annum.

<PAGE> 16

PRICE RANGE OF COMMON STOCK AND RELATED MATTERS

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

<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
---------------------
CALENDAR QUARTER HIGH LOW
---------------- ------ ------
<S> <C> <C>
Year Ended December 31, 1996:
First Quarter...................................... $3.375 $2.125
Second Quarter..................................... 3.250 2.438
Third Quarter...................................... 3.375 2.313
Fourth Quarter..................................... 3.375 2.375
Year Ended December 31, 1997:
First Quarter...................................... 5.125 2.625
Second Quarter..................................... 5.375 4.125
Third Quarter...................................... 8.875 5.250
Fourth Quarter..................................... 9.500 7.750
Year Ending December 31, 1998:
First Quarter (through February 26, 1998).......... 9.125 8.250
</TABLE>

As of February 26, 1998, there were 47 stockholders of record of the
Company's Common Stock. As of February 26, 1998, the closing price of the Common
Stock, as reported by AMEX, was $9.00.

DIVIDEND POLICY

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

<PAGE> 17

CAPITALIZATION

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

<TABLE>
<CAPTION>
At December 31, 1997
------------------------------
Actual As Adjusted
---------- -----------
(in thousands)
<S> <C> <C>
Current installments of notes payable and capitalized
lease obligations, including notes payable to bank (1) ............................. $ 7,975 $ 1,920
========== ==========
Notes payable and capitalized lease obligations, less current installments ........... $ 42,823 $ 8,967
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized;
no shares issued or outstanding .............................................. -- --
Common Stock, $.01 par value, 40,000,000 shares authorized; 14,382,621
shares issued and outstanding at December 31, 1997; 20,382,621 shares
issued and outstanding as adjusted for the
Offering(2) .................................................................. 144 204
Additional paid-in capital ...................................................... 53,613 104,403
Retained earnings ............................................................... 5,674 3,752(3)
Less: Treasury stock, at cost, 163,976 shares .................................. (954) (954)
---------- ----------
Total shareholders' equity ................................................... 58,477 107,405
---------- ----------
Total capitalization ........................................................ $ 101,300 $ 116,372
========== ==========
</TABLE>

(1) As of December 31, 1997, the Company had approximately $5.0 million
outstanding under its bank credit facility. On February 25, 1998,
approximately $7.8 million was outstanding under such facility.

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

(3) Gives effect to the write-off of deferred financing costs equal to $300,000
and prepayment fees of approximately $2.8 million relating to repayment of
indebtedness with the net proceeds of the Offering, net of income tax
benefit.

<PAGE> 18

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

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
STATEMENT OF INCOME DATA: 1993 (2) 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues ................................................... $ 13,195 $ 18,846 $ 34,659 $ 36,918 $ 61,154

Operating expenses:
Direct .................................................. 6,456 10,525 21,730 22,989 43,517
Selling, general and administrative ..................... 3,247 3,166 5,486 6,052 6,607
Depreciation and amortization ........................... 1,546 1,510 2,775 2,490 3,919
-------- -------- -------- -------- --------
Total operating expenses ............................. 11,249 15,201 29,991 31,531 54,043
-------- -------- -------- -------- --------
Income from operations (1) ........................ 1,946 3,645 4,668 5,387 7,111
Other income (expense):
Interest ................................................ (538) (1,213) (2,600) (2,682) (3,206)
Minority interests ...................................... -- (29) (150) (150) (22)
Equity interest in net income
of unconsolidated subsidiaries ....................... 212 641 860 631 696
Non-recurring items ..................................... -- -- -- (300) (2,025)
-------- -------- -------- -------- --------
Total other income (expense) ......................... (326) (601) (1,890) (2,501) (4,557)
-------- -------- -------- -------- --------
Income before income taxes (1) ....................... 1,620 3,044 2,778 2,886 2,554
Provision for income taxes (1) ............................. 645 1,244 1,139 1,183 1,014
-------- -------- -------- -------- --------
Net income ........................................... $ 975 $ 1,800 $ 1,639 $ 1,703 $ 1,540
======== ======== ======== ======== ========
Net income per share:
Basic ................................................... $ 0.14 $ 0.23 $ 0.14 $ 0.15 $ 0.12
======== ======== ======== ======== ========
Diluted ................................................. $ 0.14 $ 0.23 $ 0.14 $ 0.15 $ 0.12
======== ======== ======== ======== ========

Net income per share before
non-recurring items (Basic and Diluted) .................... $ 0.14 $ 0.23 $ 0.14 $ 0.17 $ 0.22
======== ======== ======== ======== ========

Weighted-average number of common shares outstanding:
Basic ................................................... 6,850 7,836 11,353 11,355 12,524
======== ======== ======== ======== ========
Diluted (3) ............................................. 6,850 7,836 11,357 11,360 12,683
======== ======== ======== ======== ========
</TABLE>

<PAGE> 19

<TABLE>
AT DECEMBER 31,
----------------------------------------------------
BALANCE SHEET DATA: 1993 1994 1995 1996 1997
------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents............................ $ 209 $ 5,042 $ 1,545 $ 4,146 $ 1,581
Current assets....................................... 2,478 7,398 7,147 7,341 4,926
Property and equipment, net.......................... 2,794 59,811 59,956 72,736 106,791
Total assets......................................... 11,561 81,676 83,161 95,697 131,561
Deferred membership revenue.......................... 2,503 5,878 5,614 7,481 9,936
Current liabilities.................................. 5,480 11,194 11,355 14,159 26,844
Long-term debt including current installments........ 4,818 33,489 32,913 38,497 50,798
Shareholders'/Owners' equity......................... 2,780 37,823 39,491 41,202 58,477
</TABLE>

- ----------
(1) Prior to October 20, 1994, the Company operated through various
partnerships and corporations. Historical data for periods through October
20, 1994, have been adjusted to reflect compensation and tax provisions as
if the Company had operated as a corporation during such period.

(2) Effective March 1, 1993, the Company entered into a joint venture
management agreement relating to the operation of the Sports Connections.
As a result of this agreement, the Company's expenses with respect to these
Clubs were substantially eliminated, though the Company continued to
receive revenues, through 1995, from memberships sold prior to the date of
the transaction. Therefore, the results of operations for the year ended
December 31, 1993 are not comparable to future periods.

(3) Does not include up to 159,081 shares to be issued on December 31, 1998, as
consideration for the acquisition of the Spectrum Clubs acquired from
Racquetball World.

<PAGE> 20

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

OVERVIEW

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

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

RESULTS OF OPERATIONS

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

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

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

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

Depreciation and amortization expenses were $3.9 million for the year
ended December 31, 1997, compared to $2.5 million for 1996. The increase is due
primarily to the consolidation of the Reebok Sports Club/NY, the opening of the
Spectrum Club/Valencia and the acquisition of The Sports Club/Las Vegas.
Interest expense was $3.2 million in the year ended December 31, 1997, compared
to $2.7 million for 1996. Interest expense of $340,000 at the Reebok Sports
Club/NY and interest on new capital lease financings was partially offset by

<PAGE> 21

increased interest income due to more available cash for investment and lower
interest expenses as other indebtedness matured.

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

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

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

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

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

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

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

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

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

<PAGE> 22

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

<PAGE> 23

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

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

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

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

The Company has entered into lease agreements with respect to the
development of Sports Clubs in Washington, D.C. and San Francisco, California
and announced its intention to develop a Sports Club in Boston, Massachusetts.
These projects are scheduled to begin construction in early 1998. The Company's
portion of the development costs for these Clubs is currently estimated to be
approximately $9.0 million and is expected to be invested over a 12-month period
beginning in 2000.

Other than as described herein and for normal replacement of fitness
equipment and remodeling of Clubs, the Company has no commitments for capital
expenditures. The Company expects to spend approximately $1.2 million during the
next 12 months to upgrade its management information systems. Equipment
financing has

<PAGE> 24

generally been available under capital lease arrangements. During 1996 and 1997,
the Company obtained lease financing commitments aggregating approximately $3.0
million which were used to finance new equipment at the Spectrum Club/Valencia,
to purchase equipment at The Sports Club/Las Vegas and to finance normal capital
expenditures at existing Clubs. At December 31, 1997, $600,000 was still
available under these facilities. The Company is currently seeking an additional
$5.0 million lease financing commitment for expected equipment additions at the
recently-acquired Spectrum Clubs, the Spectrum Club/Thousand Oaks and for normal
equipment expenditures. While capital expenditures may fluctuate from time to
time, generally the Company expects to spend approximately 4% of revenues on
facility and equipment upgrades and replacements. In 1997, the Company invested
approximately $2.5 million in capital expenditures other than those related to
new Club development. Equipping new Clubs requires expenditures above this
level.

The Sports Club/LA Note is secured by all the assets of The Sports
Club/LA. The Sports Club/LA Note bears interest at a rate per annum equal to
10.63% and requires monthly installment payments of approximately $262,000 with
the remaining principal balance of approximately $17.5 million due and payable
on April 1, 2003. The Sports Club/LA Note may be extended by the Company for a
period of five years under certain circumstances. The Sports Club/LA Note is not
subject to prepayment until April 1, 2000; however, AT&T has agreed to permit
the Company to prepay the loan on or before March 31, 1998 provided it pays to
AT&T a prepayment fee of approximately $2.8 million. The Company intends to
repay The Sports Club/LA Note from the proceeds of the Offering. The note
requires the Club to maintain a debt service coverage ratio, as defined, of 1.4
to 1.0.

The Company issued a note ("The Sports Club/Irvine Note") which is
secured by land, equipment, building improvements and the building housing The
Sports Club/Irvine. The Sports Club/Irvine Note was issued in connection with
the acquisition of The Sports Club/Irvine, which bears interest at the rate of
6%, requires quarterly principal payments of $125,000 (which commenced in
November 1996), and requires a payment of $4.0 million on November 1, 1999.

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

At December 31, 1997 the Company had a $5.0 million credit facility.
This facility was fully utilized at that date. On February 23, 1998, the amount
of the facility was increased to $15.0 million. As of February 25, 1998, the
amount outstanding under the credit facility was approximately $7.8 million. The
Company may borrow funds under this facility until the earlier of June 30, 1998,
or consummation of certain financing transactions by the Company, including the
Offering. Upon consummation of such a financing transaction, the facility is due
and payable in full. Advances under the facility bear interest at a variable
rate equal to LIBOR plus 2 1/2% or the lender's prime rate plus 1/2%. At
February 25, 1998, the advances accrued interest at the weighted-average rate of
8.33% per annum. The Company is seeking to renew and increase its credit
facility upon completion of the Offering; however, there can be no assurance
that any such renewal or increase will occur on terms favorable to the Company.

The net proceeds of the Offering will be used to repay approximately
$45.5 million of debt, to provide funds for future developments and/or
acquisitions and for general corporate purposes. The Company's long-term capital
needs are to provide funds for the developments described above, additional
development and acquisition projects and general corporate purposes. The Company
estimates that its capital expenditures for the next 12 months on the projects
currently under development will be approximately $16.8 million, which will be
financed through the net proceeds of the Offering and credit anticipated to be
available under bank facilities and lease financings. The Company's strategy of
opportunistically acquiring additional Clubs is expected to require additional
capital. The Company believes there are a number of financing alternatives
available, including commercial credit facilities, equipment financing, mortgage
financing,

<PAGE> 25

and public and private debt and equity offerings. The Company will also consider
entering into joint venture and partnership agreements for the purpose of
developing new Clubs. The Company believes that the estimated net proceeds of
the Offering, together with operating cash flows and available financings, will
be sufficient for the Company's working capital and capital expenditure needs
for at least the next 12 months. However, there can be no assurance that
financing will be available on commercially reasonable terms, if at all. To the
extent that the Company is unable to obtain additional financing on acceptable
terms, the Company will be forced to delay or limit its development and
acquisition plans.

FORWARD LOOKING STATEMENTS

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

NEW ACCOUNTING PRONOUNCEMENTS

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

In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"). SFAS 131 establishes standards for public business
enterprises to report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes FASB Statement
No. 14, Financial Reporting for Segments of a Business Enterprise, but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
SFAS 131 requires, among other items, that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets,

<PAGE> 26

information about the revenues derived from the enterprise's products or
services, and major customers. SFAS 131 also requires that the enterprise report
descriptive information about the way that the operating segments were
determined and the products and services provided by the operating segments.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. SFAS 131 need not be applied to interim
financial statements in the initial year of its application, but comparative
information for interim periods in the initial year of application is to be
reported in financial statements for interim periods in the second year of
application. Management has not determined whether the adoption of SFAS 131 will
have a material impact on the Company's financial reporting.

<PAGE> 27

BUSINESS

GENERAL

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

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

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

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

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

The Sports Clubs

Sports Clubs are large, multi-purpose facilities, offering members and
their guests fully equipped gyms with state of the art fitness equipment, modern
programs, wellness protocols such as exercise regimens designed for specific
groups of members, extensive food and beverage selections, personal care and
beauty options, social

<PAGE> 28

programs, child care and valet parking. The Company currently has four Sports
Clubs in operation. The Sports Club/LA was opened in 1987 and The Sports
Club/Irvine was opened in 1990. The Reebok Sports Club/NY was developed in
partnership with the Company and a subsidiary of Reebok International, Ltd.
("Reebok") and Millennium. The Company manages the operations of the Club and
owns a controlling 60% interest in the Partnership that owns the Reebok Sports
Club/NY with Reebok and Millennium retaining direct interests in the
partnership. The Sports Club/Las Vegas, located in Henderson, Nevada, was
acquired in August 1997.

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

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

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

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

Reebok Sports Club/NY. The Reebok Sports Club/NY located in Manhattan's
upper west side offers among other recreational and fitness options, 13,000
square feet of weight training gyms, a 5,000 square foot cardiovascular center,
two exercise class rooms, two basketball courts, a rooftop roller-blading and
running track, a 45-foot rock climbing wall, a 25-yard Junior Olympic-size
swimming pool, complete spa facilities, a circuit training center, volleyball,
boxing, fencing, martial arts, gymnastics and badminton. In addition, the Reebok
Sports Club/NY offers members a bistro-style open grill restaurant, a sidewalk
cafe, a sun deck with juice bar, childcare, a body salon, children's sports
programming, meeting and banquet rooms, shoe shine, dry cleaning and tailoring
services. The Company manages and has a controlling 60% interest in the
Reebok-Sports Club/NY partnership.

<PAGE> 29

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

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

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

The Spectrum Clubs

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

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

The SportsMed Company, Inc.

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

<PAGE> 30

SALES AND MARKETING

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

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

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

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

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

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

<PAGE> 31

summer sports camp, provide individualized sports instruction and offer multiple
fitness activities such as gymnastics, martial arts and dance that are age
appropriate.

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

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

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

EMPLOYEE TRAINING

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

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

The Company provides additional seminars specifically-designed for
targeted employee groups. Seminars providing specialized instruction for program
directors, private trainers, aerobics teachers and sales/marketing personnel are
offered at various times during the year, for which attendance on the part of
newly-hired personnel within the applicable employee group is mandatory. The
Company places particular emphasis on its sales/marketing training seminars,
which are given once every two months by a personnel instructor and in which all
new

<PAGE> 32

membership directors complete 20 hours of participation and all other membership
directors are expected to complete four hours of participation every two months.
Topics covered include sales and marketing goals and recruitment and
qualification of prospective members.

<PAGE> 33

MEMBERSHIP PROGRAMS

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

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

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

<TABLE>
<CAPTION>
Health Racquet Executive
------ ------- ---------
<S> <C> <C> <C>
THE SPORTS CLUB/LA
Initiation Fee (1)...................... $1,295 N/A $2,500
Monthly Dues............................ 128 N/A 185

THE SPORTS CLUB/IRVINE
Initiation Fee.......................... 750 $825 1,475(2)
Monthly Dues............................ 90 105 140

REEBOK SPORTS CLUB/NY
Initiation Fee.......................... 1,150 N/A 2,000
Monthly Dues............................ 165 N/A 285(3)

THE SPORTS CLUB/LAS VEGAS
Initiation Fee.......................... 400 700 N/A
Monthly Dues............................ 90 130 N/A

THE SPECTRUM CLUBS
Initiation Fee.......................... 325 325 300(5)
Monthly Dues............................ 57(4) 67(4) 135(5)
</TABLE>

<PAGE> 34

- ----------

(1) Initiation fees for The Sports Club/LA may be paid over a two to three month
period.

(2) Initiation fees for Executive membership in The Sports Club/Irvine may be
paid over a two month period.

(3) Executive memberships with a half sized locker are also available for $225
per month.

(4) In addition, Spectrum Club members are charged an annual towel fee of $40.

(5) Only offered at The Spectrum Club/Fullerton.

ACQUISITION AND DEVELOPMENT OF ADDITIONAL CLUBS

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

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

Performance of Newly Acquired Clubs. Clubs acquired by the Company may
vary in terms of the physical layout, decor, age of equipment, staff training,
marketing programs, membership fees, ancillary services offered, and other
characteristics, and, as a result, may have lower operating income than a
typical Sports Club or Spectrum Club. In order to improve a Club which does not
meet the standard for a Sports Club or a Spectrum Club, as the case may be, the
Company may renovate the Club, upgrade fitness equipment, adopt fitness programs
and exercise protocols, install experienced employees, implement marketing and
training programs, and introduce services and product sales intended to enhance
ancillary revenues. In conjunction with these improvements, the Company will
implement membership fee programs consistent with other Clubs operated by the
Company. Recently acquired Clubs undergoing such improvements may perform at
lower margins during the period of implementation of new policies and programs.

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

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

<PAGE> 35

The Company's agreements relating to the Reebok Sports Club/NY prohibit
the Company from opening or engaging in pre-sale activities with respect to a
Club larger than 30,000 square feet in size in New York City or within ten miles
of the Reebok Sports Club/NY prior to June 1999.

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

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

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

COMPETITION

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

TRADEMARKS AND TRADENAMES

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

<PAGE> 36

awaiting final approval in Australia and Japan. The Company holds a federal
trademark for the Spectrum Club name.

GOVERNMENT REGULATION

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

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

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

EMPLOYEES

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

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

PROPERTIES

The Company owns The Sports Club/Irvine, The Sports Club/LA, The Sports
Club/Las Vegas, and the Spectrum Clubs in Agoura Hills, Thousand Oaks, Canoga
Park and Fountain Valley including all underlying real

<PAGE> 37

estate. The Spectrum Club/Santa Ana and the Spectrum Club/Fullerton building are
leased with a purchase option from Millennium (See "Certain Relationships and
Transactions"). The land underlying the Spectrum Club/Fullerton is leased from
the City of Fullerton. All other structures in which the Clubs are located are
leased from third parties.

The Sports Club/LA property secures a loan with a balance of $22.3 million
and bears interest at a fixed annual rate of 10.63%. The Company is required to
make monthly principal and interest payments of approximately $262,000. The note
matures in April 2003 but, if certain conditions are met, the Company has the
right to extend the term of the note by an additional five years. All assets of
The Sports Club/LA secure this loan. The building, improvements and personal
property of The Sports Club/Irvine secure a $4.9 million note bearing interest
at a fixed annual rate of 6%. The note requires quarterly principal payments of
$125,000 with a balloon payment of $4.0 million due on November 1, 1999. All
assets of the Spectrum Club/Agoura Hills secure a $2.5 million note which bears
interest at a fixed annual rate of 8.5%. Monthly principal and interest payments
of $20,107 are required through the note's maturity in April 2024.

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

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

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

(1) D. Michael Talla, the Company's Chairman and CEO has the right to 49.9% of
the first $300,000 of annual operating income from the partnership which
owns The Sports Club/LA. See "Certain Relationships and Transactions."

(2) The Company is entitled to certain priority distributions from the
partnership which owns this Club. After payment of such priority
distributions, the Company is entitled to 60% of all additional profits.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operation - Liquidity and Capital Resources."

(3) The Company owns a 46.1% interest in the Spectrum Club/Manhattan Beach.

(4) The Company leases the building and land from different parties. The
Company will use a portion of the proceeds of the Offering to acquire
ownership of the building from Millennium. See "Use of Proceeds."

<PAGE> 38

(5) The facility consists of a 75,000 square foot, two story health Club. A
52,000 square foot, three-story addition was under construction by the
prior owners. The Company will use a portion of the proceeds of the
Offering to acquire ownership of this property. See "Use of Proceeds." The
Company is evaluating whether to complete construction of this building.

The Company has entered into leases with Millennium relating to Sports
Clubs to be developed in Washington, D.C. and San Francisco, California. Each
lease will require payments commencing upon opening of the Clubs by the
Company, expected in 2001, based upon the landlord's development expenses; has
an initial term of 20 years; and provides the Company with three, fourteen year
renewal options. The Clubs are expected to be from 80,000 to 100,000 square feet
in size.

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

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

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

The Company anticipates spending a total of approximately $7.0 million at
The Sports Club/Las Vegas and the four recently acquired Spectrum Clubs to
improve these facilities and equipment and ensure that the Clubs meet the
Company's quality standards. The Company believes its properties and equipment,
as well as its leased

<PAGE> 39

facilities, are adequate for its needs, have been well-maintained and, other
than described herein, do not require any substantial renovation or restoration
work at this time.

LEGAL PROCEEDINGS

Mkdg/Rhodes SC Partnership and Sports Club, Inc. v. Agricultural
Insurance Company (Los Angeles Superior Court). In connection with the
Northridge earthquake on January 17, 1994, MKDG/Rhodes SC Partnership ("MKDG")
carried excess earthquake coverage for The Sports Club/LA with Agricultural
Insurance Company ("Agricultural"). Certain of the Company's predecessors and
subsidiaries (the "SCLA Parties") were named insureds under the policy. The SCLA
Parties assigned to MKDG all of their rights to payments under the Agricultural
earthquake policy in October 1994 and retained no interest in any amounts paid
by Agricultural under that policy. Agricultural made payments totaling
approximately $3.0 million before a dispute arose under the policy. MKDG filed a
complaint against Agricultural on August 2, 1995, and Agricultural filed a
cross-complaint against MKDG and the SCLA Parties, alleging intentional
misrepresentation (fraud), negligent misrepresentation, breach of contract,
breach of implied covenant of good faith and fair dealing, rescission, money had
and received, declaratory judgment and indemnity. Agricultural seeks the return
of amounts paid plus punitive damages and attorneys fees. An appraisal hearing
is set for March 1998. Trial is scheduled on April 27, 1998. The Company is
informed that if the appraisal shows that the covered loss exceeds the policy
proceeds as claimed by MKDG, MKDG believes the matter may be settled. The
Company will seek to be indemnified by MKDG for all damages and costs incurred
in this action.

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

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

R.W. Management Group, Inc. v. Sequoia Athletic Club & Racquetball
World, et al. (Los Angeles Superior Court). On January 20, 1998, R.W. Management
Group ("RWMG") filed an action against various Racquetball World-related
entities and individuals (the "RBW Defendants"), the Spectrum Club Company, Inc.
("SCC"), and the Company, alleging, among other things, breach of contract,
breach of fiduciary duty and interference with contract. The complaint seeks
equitable relief (including a temporary restraining order, preliminary and
permanent injunction), unspecified compensatory damages, punitive damages and
attorneys' fees. The contract which RWMG alleges was breached (the "RWMG
Contract") relates to the Racquetball World Club located in Canoga Park, which

<PAGE> 40

facility (the "Canoga Park Club") was acquired by SCC in December 1997. In
connection with that acquisition, SCC acquired the assets thereof and assumed
only certain designated liabilities, none of which related to the RWMG Contract;
all other obligations and liabilities associated with the Canoga Park Club were
retained by the seller. Although neither SCC nor the Company has responded to
the complaint, they believe the allegations against them are without merit, and
they intend to vigorously defend this lawsuit.

Robert Heller v. HealthFitness America, et al. (Los Angeles Superior
Court). On November 3, 1997, Dr. Robert Heller ("Dr. Heller") filed an action
against SportsMed, SCC Medical Group, Inc., and the Company, alleging breach of
contract in connection with a 5-year consulting agreement entered into by
SportsMed's predecessor and Dr. Heller. Dr. Heller seeks to recover $162,000 in
consulting fees ($3,000 per month for the balance of the contract's term) and
royalties generated from diagnostic materials allegedly created by Dr. Heller.
The Company, SportsMed, and SCC Medical Group, Inc. have responded to and denied
the allegations of the complaint and discovery is proceeding. Based upon
preliminary investigation, it is believed that neither the Company nor SCC
Medical Group, Inc. have any liability in connection with the contract.
SportsMed may have some minimal exposure for terminating the contract. Damages
will likely be limited because no royalties were ever generated and Dr. Heller
must mitigate damages attributable to unpaid consulting fees. The defendants
will seek mediation and believe an early settlement is likely.

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

<PAGE> 41

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The names of the directors and executive officers of the Company, as
well as their respective ages as of February 28, 1998, and positions with the
Company, are as follows:

<TABLE>
<CAPTION>
NAME Age Position
---- --- --------
<S> <C> <C>
D. Michael Talla.................... 51 Chairman of the Board and Chief Executive Officer
Rex A. Licklider.................... 54 Vice Chairman of the Board
John M. Gibbons..................... 49 President, Chief Operating Officer and Director
Nanette Pattee Francini............. 49 Executive Vice President, Secretary and Director
Mark S. Spino....................... 43 Vice President of Development
Philip J. Swain..................... 40 Vice President of Operations
Timothy M. O'Brien.................. 46 Chief Financial Officer and Assistant Secretary
Brian J. Collins.................... 37 Director
Andrew L. Turner.................... 51 Director
Dennison Veru....................... 37 Director
</TABLE>

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

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

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

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

<PAGE> 42

Clubs, including all Clubs developed by the Company. Ms. Pattee Francini holds a
Bachelor of Arts Degree from the University of Arizona.

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

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

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

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

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

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

<PAGE> 43

The directors of the Company are divided into three classes having terms
expiring at the annual meetings of the Company's stockholders in 1998 (Messrs.
Turner, Gibbons and Collins), 1999 (Ms. Pattee Francini and Mr. Veru) and 2000
(Messrs. Talla and Licklider), or such later dates as their successors are
elected. At each annual meeting of stockholders, successors to the class of
directors whose term expires at such meeting will be elected to serve for
three-year terms and until their successors are elected.

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

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

EXECUTIVE COMPENSATION

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

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
NAME AND ----------------------------- AWARDS OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS (SHARES) COMPENSATION
- ------------------ ---- ----------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
D. Michael Talla 1997 $239,250(2) -- -- --
Chairman of the Board 1996 218,000(2) -- -- --
and Chief Executive Officer 1995 205,250(2) -- -- --

Nanette Pattee Francini 1997 145,100 $ 10,000 15,000 --
Executive Vice President, 1996 124,175 -- 15,000 --
Secretary and Director 1995 122,200 -- -- --

John M. Gibbons 1997 245,883(4) 25,000 -- $ 2,256(3)
President, Chief Operating 1996 232,800(4) 225,000(5) -- 25,000
Officer and Director 1995 218,933(4) -- 450,000(5) --

Mark S. Spino 1997 134,125 10,000 15,000
Vice President and 1996 116,795 -- 15,000 --
Director of Development 1995 111,855 -- -- --

Philip J. Swain 1997 146,031 15,000 15,000
Vice President and 1996 131,375 -- 25,000 --
Director of Operations 1995 127,000 -- -- --

Timothy M. O'Brien 1997 137,667 10,000 15,000 1,791(3)
Chief Financial Officer 1996 122,175 5,000 20,000 --
and Assistant Secretary 1995 100,087 -- 25,000 --
</TABLE>

<PAGE> 44

- ----------

(1) Includes automobile allowance.

(2) Mr. Talla also receives, on an annual basis, 49.9% of the first $300,000 of
The Sports Club/LA's net cash flow. This amount is not included in Mr.
Talla's compensation. See "Certain Transactions."

(3) Contribution pursuant to the Company's 401 K Profit Sharing Plan.

(4) Includes an allowance for living expenses paid to Mr. Gibbons under the
terms of his employment agreement.

(5) Options to purchase 225,000 shares at the exercise price of $9.00 per share
issued on February 27, 1995, were canceled in connection with the issuance
on July 5, 1995 of options to purchase 225,000 shares at the exercise price
of $5.00 per share. Effective April 24, 1996, The Compensation Committee of
the Board of Directors lowered the exercise price to $3.00 per share.
Pursuant to the rules of the Securities and Exchange Commission, the
cancellation and regrant of the option, and the repricing of the option, are
each deemed to constitute a separate award.

EMPLOYMENT AGREEMENTS

Effective August 10, 1994, the Company entered into Employment Agreements
with D. Michael Talla, as Chief Executive Officer, and Nanette Pattee Francini,
as Executive Vice President, each of which expire on December 31, 2000. Certain
terms of Mr. Talla's employment agreement were amended by the Board of Directors
as of February 27, 1995. The Agreements provide for annual compensation of
$200,000 payable to Mr. Talla, and $120,000 payable to Ms. Pattee Francini,
subject to upward adjustment at the discretion of the Board of Directors. In
1997, the Compensation Committee of the Board of Directors increased Mr. Talla's
and Ms. Francini's annual salaries to $225,000 and $147,000 respectively. The
Company may terminate either Employment Agreement without penalty for cause.

The employment agreements with Mr. Talla and Ms. Pattee Francini entitle
each employee to annual performance bonuses in the discretion of the Board of
Directors, to be paid within 120 days for Mr. Talla and 150 days for Ms. Pattee
Francini following the end of each fiscal year. The employment agreements also
include severance provisions which entitle each executive officer to severance
pay if his or her employment is terminated by the Company without cause; if the
employee dies or is disabled; or if the employee terminates the agreement as a
result of a material breach by the Company of its obligations thereunder (six
months' pay for Ms. Pattee Francini and twelve months' pay for Mr. Talla). In
addition, the employment agreements provide Mr. Talla and Ms. Pattee Francini
with additional severance benefits upon termination of employment following the
occurrence of any one of the following events without the approval of a majority
of the Board of Directors: (i) the consolidation or merger of the Company with
any other corporation or other entity; (ii) the sale or other transfer of all or
substantially all of the assets of the Company; (iii) the approval by the
stockholders of the Company of a plan of liquidation or dissolution of the
Company; (iv) any person becomes the beneficial owner directly or indirectly of
25% or more of the Company's outstanding Common Stock; or (v) a change occurs in
the composition of a majority of the Board of Directors of the Company (unless
approved by two-thirds of the Board of Directors of the Company). If at any time
within two years after the occurrence of any one of the foregoing events Mr.
Talla's or Ms. Pattee Francini's employment is terminated (other than for cause,
incapacity or death), or Mr. Talla or Ms. Pattee Francini elects to terminate
his or her employment for "good reason" (as that term is defined in the
agreements), he or she is entitled to receive severance compensation equal to
the lesser of: (i) the maximum amount which does not constitute a "parachute
payment" as defined in Section 280G of the Internal Revenue Code of 1986, as
amended; or (ii) an amount equal to three times the aggregate of (A) his or her
base annual salary then in effect, (B) the car allowance, Club memberships and
dues, and insurance benefits paid for the employee during the one-year period
immediately prior to termination, and (C) bonuses accrued but unpaid through the
date of termination of employment. Under the agreements, "good reason" means the
assignment of any duties inconsistent with the employee's position or any other
action which diminishes the employee's position, authority or duties, which
determination shall be made in good faith by the employee. If the employment of
Mr. Talla or Ms. Pattee Francini were terminated within such period as a result
of the occurrence of any of the foregoing events (assuming that

<PAGE> 45

neither would be entitled to any performance bonus), the aggregate approximate
amounts payable to Mr. Talla and Ms. Francini would be $754,000 and $477,000,
respectively.

Effective as of July 1, 1995, the Company entered into an employment
agreement with John M. Gibbons, which expires June 30, 1998. The employment
agreement provides for annual base compensation of $200,000, subject to annual
review and upward adjustment at the discretion of the Board of Directors. On May
27, 1997, the Compensation Committee of the Board of Directors increased Mr.
Gibbons annual base salary to $210,000. In addition to his base salary Mr.
Gibbons is entitled to participate in any management bonus program the Board of
Directors may implement from time to time. The employment agreement also
includes a severance provision which entitles Mr. Gibbons to receive payments
equal to his base compensation until the earlier of 12 months following the date
of his termination date or the expiration of the term of the agreement, if his
employment is terminated prior to the expiration date other than for cause or by
Mr. Gibbons himself. Mr. Gibbons will be paid $40,000 for living expenses and
$7,800 each year as an auto allowance payable in equal semi-monthly
installments. Pursuant to the terms of the employment agreement, the
Compensation Committee of the Board of Directors, effective July 1, 1995,
granted Mr. Gibbons an option to purchase 225,000 shares of the Company's Common
Stock at an exercise price of $5.00 per share ("Option Shares"). One-third of
the Option Shares became immediately vested upon the grant with the remaining
two-thirds vesting in 24 equal monthly installments commencing October 21, 1995.
Concurrent with the grant of these options to purchase shares of Common Stock,
options for the purchase of 225,000 shares of Common Stock which were granted to
Mr. Gibbons on February 27, 1995 at a price of $9.00 per share were canceled.

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

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

EMPLOYEE BENEFIT PLANS

1994 Stock Incentive Plan

A total of 1,000,000 shares are reserved for issuance upon exercise of
options granted under the 1994 Stock Incentive Plan (the "Plan"), as adopted on
May 27, 1994. As of February 28, 1997, options to purchase an aggregate of
642,500 shares of Common Stock were outstanding and a weighted-average exercise
price of $3.77 per share. No stock options may be granted under the Plan after
May 27, 2004.

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

Options. The Administrator is empowered to determine the exercise price
of Options granted under the Plan, but the exercise price of incentive stock
options must be equal to the fair market value of a share of Common Stock on the
date the option is granted (110% with respect to optionees who own at least 10%
of the outstanding Common Stock) and non-statutory options must have an exercise
price equal to at least 85% of the fair market value of a share of Common Stock
on the date the option is granted. Incentive stock options may only be granted
to employees and directors of the Company, or of any subsidiary or parent
corporation. No incentive stock options may be

<PAGE> 46

granted to any optionee which first become exercisable during any calendar year
with respect to shares having an aggregate fair market value, measured at the
time of the grant of such options, in excess of $100,000. Options granted under
the Plan may, in the discretion of the Administrator, become exercisable in
installments, however, upon any merger, acquisition or other reorganization in
which the Company is not the surviving corporation, or upon a change in control
of the Company, all Options will be fully exercisable. All Options which have
not previously been exercised or terminated will expire on the tenth anniversary
of the date of grant.

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

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

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

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

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

<PAGE> 47

SARs granted in tandem with a Related SAR Option are exercisable only to
the extent and under the same terms and conditions as the Related SAR Option. If
a SAR is exercised, the Related SAR Option will be modified to cancel the number
of shares with respect to which the SAR was exercised. Upon the exercise or
termination of the Related SAR Option, the SAR granted in connection with the
Related SAR Option will terminate to the extent of the number of shares as to
which the Related SAR Option was exercised or terminated. SARs granted other
than in tandem with a Related SAR Option will contain exercise terms
substantially similar to those contained in Options.

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

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

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

OPTION GRANTS, EXERCISES AND YEAR-END VALUES

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

<PAGE> 48

OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
PERCENT POTENTIAL REALIZABLE
OF TOTAL VALUE AT ASSUMED
NUMBER OPTIONS ANNUAL RATES OF STOCK
OF SHARES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM (1)
OPTIONS IN FISCAL OR BASE EXPIRATION -----------------------
GRANTED (2) YEAR PRICE DATE 5% 10%
----------- ------------ --------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Nanette Pattee Francini....... 15,000 9.68% $ 4.375 3/20/2007 $ 106,896 $ 170,214
Mark S. Spino................. 15,000 9.68% 4.375 3/20/2007 106,896 170,214
Philip J. Swain............... 15,000 9.68% 4.375 3/20/2007 106,896 170,214
Timothy M. O'Brien............ 15,000 9.68% 4.375 3/20/2007 106,896 170,214
</TABLE>

- ----------

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

(2) All of such options are governed by the Company's 1994 Stock Incentive Plan

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

<PAGE> 49

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

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF ALL UNEXERCISED IN-THE-
OPTIONS UNDER THE OPTION PLAN MONEY OPTIONS AT FY-END
NAME EXERCISABLE/UNEXERCISABLE(1) EXCERCISABLE/UNEXERCISABLE(2)
---- ----------------------------- -----------------------------
<S> <C> <C>
John M. Gibbons.................. 225,000/0 $1,406,250/$0
Nanette Pattee Francini.......... 5,000/25,000 $32,813/$138,750
Mark S. Spino.................... 5,000/25,000 $32,813/$138,750
Philip J. Swain.................. 8,334/31,666 $54,692/$182,496
Timothy M. O'Brien............... 23,334/36,666 $110,316/$193,747
</TABLE>

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

(1) All such options are governed by the Company's 1994 Stock Incentive Plan.

(2) An in-the-money option is an option which has an exercise price for the
Common Stock which is lower than the fair market value of the Common Stock
on a specified date. The fair market value of the Common Stock on December
31, 1997, was $9.25, which was the closing price per share on the American
Stock Exchange on such date.

COMPENSATION OF DIRECTORS

Effective February 1995, non-employee directors of the Company are
entitled to receive an annual fee of $10,000 and a fee of $500 for each meeting
attended. Non-employee directors who are members of the Audit Committee or
Compensation Committee are entitled to receive $500 for each meeting they
attend. In addition, non-employee directors receive 1,000 shares of the
Company's Common Stock each year pursuant to the Company's 1994 Stock
Compensation Plan. Messrs. Licklider, Collins, Turner and Veru currently serve
on the Board as non-employee directors. The Company provides Mr. Licklider with
health insurance under its group insurance plan. All directors receive
reimbursement of reasonable out-of-pocket expenses incurred in connection with
meetings of the Board. Amounts paid to directors were $36,000 during 1995,
$37,026 during 1996, and $48,783 during 1997. Under the 1994 Stock Compensation
Plan an aggregate of 12,000 shares of Common Stock were issued to non-employee
directors through December 31, 1997.

COMPENSATION OF COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

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

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Certificate of Incorporation includes provisions which
limit the liability of its directors. As permitted by applicable provisions of
the Delaware General Corporation Law (the "Delaware Law"), directors will not be
liable to the Company for monetary damages arising from a breach of their
fiduciary duty as directors in certain circumstances. This limitation does not
affect liability for any breach of a director's duty to the Company or its
stockholders (i) with respect to approval by the director of any transaction
from which he or she derives an improper personal benefit, (ii) with respect to
acts or omissions

<PAGE> 50

involving an absence of good faith, that the director believes to be contrary to
the best interests of the Company or its stockholders, that involve intentional
misconduct or a knowing and culpable violation of law, that constitute an
unexcused pattern or inattention that amounts to an abdication of his or her
duty to the Company or its stockholders, or that show a reckless disregard for
duty to the Company or its stockholders in circumstances in which he or she was,
or should have been aware, in the ordinary course of performing his or her
duties, of a risk of serious injury to the Company or its stockholders, or (iii)
based on transactions between the Company and its directors or another
corporation with interrelated directors or on improper distributions, loans or
guarantees under applicable sections of Delaware Law. This limitation of
directors' liability also does not affect the availability of equitable
remedies, such as injunctive relief or rescission.

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

CERTAIN TRANSACTIONS

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

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

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

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

<PAGE> 51

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

Millennium is the second largest shareholder of the Company, with
3,929,863 shares or 27.6% of the outstanding Common Stock. Additionally,
Millennium is a partner with the Company in the Reebok-Sports Club/NY as well as
the landlord of the building in which the Reebok Sports Club/NY is located. The
Reebok-Sports Club/NY partnership pays rent to Millennium in the amount of $2.0
million per year, and the partnership agreement provides for a first priority
annual distribution of $3.0 million to Millennium (adjusted to $2.1 million for
calendar year 1997). In June 1997, Millennium and the Company entered into
leases with respect to the development of two additional Sports Clubs in
Washington, D.C. and San Francisco, California and are negotiating the terms of
a lease for an additional Sports Club in Boston, Massachusetts (See "Business -
Developments and Acquisitions"). On June 11, 1997, the Company issued to
Millennium 2,105,263 shares of Common Stock in exchange for $10.0 million
consisting of $5.0 million in cash and certain interests of Millennium in the
Reebok Sports Club/NY partnership, including a 9.9% interest in the partnership
and a $2.5 million promissory note issued by the partnership. The Company also
granted to Millennium certain registration and preemptive rights, which
preemptive rights have been waived with respect to the Offering. In addition,
for so long as Millennium maintains at least a 12% interest in the equity
securities of the Company, the Company and certain of its shareholders have
agreed to cause a nominee of Millennium to be appointed or elected to the Board
of Directors of the Company; Brian J. Collins, an officer of Millennium, is
currently a member of the Company's Board of Directors as Millennium's nominee.
On December 31, 1997, the Company sold an additional 625,000 shares of Common
Stock to Millennium for $5.0 million, which the Company used to fund the cash
portion of the acquisition of four Spectrum Clubs from Racquetball World. In
addition, Millennium acquired properties underlying two of the Clubs for $10.0
million and is leasing these properties to the Company under a financing lease
agreement which is reflected as a capital lease obligation in the Company's
consolidated balance sheet. The lease has a term of twenty years, and provides
for annual rent of $1.0 million for the first ten years and $1.2 million per
year thereafter. At any time during the first three years of the lease the
Company may purchase the leased property from Millennium for a purchase price
(currently estimated to be approximately $10.1 million) equal to $10.0 million
plus all costs incurred by Millennium in connection with the acquisition of such
property, plus a 12% compound return on its total investment. Millennium has the
right to require the Company to acquire its interest in the property at such
price if (i) the Company receives private debt financing in excess of $95.0
million, (ii) the Company receives public equity financing in excess of $20.0
million, (iii) a default (as defined in the lease) occurs, or (iv) a major
casualty occurs with respect to either property. Millennium has waived this
right with respect to the Offering.

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

<PAGE> 52

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

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

<PAGE> 53

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information, as of February
20, 1998, regarding the beneficial ownership of the Company's Common Stock, by
(i) each person known by the Company to be the beneficial owner of more than
five percent of its Common Stock; (ii) each director; (iii) each executive
officer listed in the Summary Compensation Table; and (iv) all directors and
executive officers as a group. Unless otherwise indicated, each of the following
stockholders has sole voting and investment power with respect to the shares
beneficially owned, except to the extent that such authority is shared by
spouses under applicable law.

<TABLE>
<CAPTION>
Percent of
Number of Outstanding Shares (9)
Shares -----------------------
Beneficially Before After
Beneficial Owner(1) Owned Offering Offering
- ----------------------------- ------------ ---------- ----------
<S> <C> <C> <C>
D. Michael Talla (2) (3).............................. 4,739,905 33.2 % 23.4 %
The Licklider Living Trust
dated May 2, 1986.................................. 1,271,562 8.9 % 6.3 %
Mona Talla (2) (3).................................... 4,739,905 33.2 % 23.4 %
Nanette Pattee Francini (2) (3)....................... 4,739,905 33.2 % 23.4 %
Mark S. Spino (2) (3)................................. 4,739,905 33.2 % 23.4 %
Phil Swain (2) (3).................................... 4,739,905 33.2 % 23.4 %
The Jared R. Talla
Irrevocable Trust dated
January 4, 1993 (2) (3)............................ 4,739,905 33.2 % 23.4 %
The Brett M. Talla
Irrevocable Trust dated
January 4, 1993 (2) (3)............................ 4,739,905 33.2 % 23.4 %
John M. Gibbons (4)................................... 266,089 1.8 % 1.3 %
Dennison Veru......................................... 12,000 *** ***
Timothy M. O'Brien (5)................................ 41,979 *** ***
Andrew Turner......................................... 54,000 *** ***
Brian Collins......................................... 1,000 *** ***
Millennium (6)........................................ 3,929,863 27.6 % 19.4 %
Townsend Group Investments (7)........................ 734,300 5.2 % 3.6 %
All directors and executive officers as a group
(10 persons) (8)................................... 6,386,535 43.9 % 31.1 %
</TABLE>

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

*** Less than one percent.

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

(2) Includes shares with respect to which the named beneficial owner shares
voting power pursuant to a voting agreement which requires each party to
vote their shares in the manner determined by a majority of all holders.
The agreement is effective until October 20, 2004 or until terminated by
persons holding 66-2/3% of the Common Stock held by all persons subject to
the agreement. Mr. Talla, Mona Talla, The Jared R. Talla Irrevocable Trust
dated January 4, 1993, The Brett M. Talla Irrevocable Trust dated January
4, 1993, Ms. Pattee Francini, Mr. Spino and Mr. Swain are record owners of
3,770,617; 30,953; 114,714; 114,714; 256,107; 227,969 and 173,164 shares
of the Company's Common Stock, respectively. Mr. Talla (including members
of his immediate family and trusts for their benefit) is the record owner
of 4,030,998 shares.

<PAGE> 54

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

(4) Includes 35,500 shares owned by Mr. Gibbons, 5,000 shares owned by Mr.
Gibbons' spouse and 225,000 shares of Common Stock issuable within 60 days
upon the exercise of options granted under the Company's 1994 Stock
Incentive Plan, and 589 shares vested under the Company's 401K Profit
Sharing Plan.

(5) Includes 41,667 shares of Common Stock issuable within 60 days upon the
exercise of options granted under the Company's 1994 Stock Incentive Plan,
and 312 shares vested under the Company's 401K Profit Sharing Plan.

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

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

(8) Includes 318,334 shares of Common Stock issuable within 60 days upon the
exercise of options granted under the Company's 1994 Stock Incentive Plan
and 901 shares vested under the Company's 401K Profit Sharing Plan.

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

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have outstanding
20,218,645 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and excluding 642,500 shares issuable upon exercise of
outstanding employee stock options and up to 159,081 shares issuable to the
sellers of the Racquetball World Clubs on December 31, 1998 (See "The Company").
Of these shares, approximately 17,198,000 shares held by existing stockholders
or issued in the Offering will be freely tradeable (unless such shares are held
by an "affiliate" of the Company as such term is defined in the Securities Act
and subject to the agreements described below) without restriction or
registration under the Securities Act. The remaining 3,020,621 shares were
issued and sold by the Company in private transactions ("Restricted Shares") and
are eligible for public sale only if registered under the Securities Act or sold
in accordance with Rule 144 thereunder. 2,395,621 of these Shares have been
registered for public sale under the Securities Act. The Company has reserved
1,000,000 shares of Common Stock for issuance under its 1994 Stock Incentive
Plan and 38,000 shares remain available for issuance to non-employee directors
under its 1994 Stock Compensation Plan. The Company has filed registration
statements under the Securities Act covering shares of Common Stock issuable
under the Company's 1994 Stock Incentive Plan and 1994 Stock Compensation Plan,
and Common Stock issued upon the exercise of stock options generally will be
available for sale in the open market subject to Rule 144 volume limitations
applicable to affiliates.

The directors, executive officers and principal stockholders of the
Company who in the aggregate hold approximately 10,316,398 shares of Common
Stock and options to acquire 385,000 shares of Common Stock have entered into
agreements, subject to certain limited exceptions, not to offer, sell or
otherwise dispose of, directly or indirectly, any shares of Common Stock owned
by them for a period of 90 days from the closing of the Offering without the
prior written consent of Schroder & Co. Inc.

<PAGE> 55
(the "Lock-Up Agreements"). Schroder & Co. Inc. may, in its sole discretion and
at any time without notice, release all or any portion of the securities subject
to the Lock-Up Agreements.

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

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

UNDERWRITING

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

<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Schroder & Co. Inc.............................................

Prudential Securities Incorporated.............................
---------
Total................................................... 6,000,000
=========
</TABLE>

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

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

The Company has granted an option to the Underwriters, exercisable for
30 days from the date of this Prospectus Supplement, to purchase up to 900,000
additional shares of Common Stock at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus Supplement.
The Underwriters may exercise such option only to cover over-allotments in
connection with the sale of the Common Stock offered hereby.

<PAGE> 56

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

The Company and its executive officers, directors and certain
shareholders have agreed with the Underwriters that, for a period of 90 days
following the Offering, they will not offer, sell, contract to sell, grant an
option to purchase, or otherwise dispose (or announce any offer, sale, grant of
any option, or other distribution) of any shares of Common Stock or any
securities convertible into or exchangeable for shares of Common Stock without
the prior written consent of Schroder & Co. Inc. on behalf of the Underwriters,
other than grants of employee stock options under existing option plans and the
issuance of Common Stock upon exercise of employee options.

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

At the request of the Company, up to 600,000 shares of Common Stock have
been reserved for sale in the Offering to certain individuals, including
directors and employees of the Company, members of their families, and other
persons having business relationships with the Company. The price of such shares
to such persons will be the initial public offering price set forth on the cover
of this prospectus. The number of shares available for sale to the general
public will be reduced to the extent these persons purchase such reserved
shares. Any reserved shares not purchased will be offered by the Underwriters to
the general public on the same basis as the other shares offered hereby.

LEGAL MATTERS

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

EXPERTS

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

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements, information statements
and other information with the Securities and Exchange Commission (the

<PAGE> 57

"Commission"). Such reports, proxy statements, information statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the following Regional Offices: the Northeast Regional Office, Seven
World Trade Center, Suite 1300, New York, New York 10048, and the Midwest
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. They may also be obtained by written request from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such reports and other information
can be inspected at the American Stock Exchange, 36 Trinity Place, New York, New
York 10006. The Commission also maintains a site on the World Wide Web that
contains reports, proxy and information statements and other information
regarding the Company. The address for such site is http://www.sec.gov.

A registration statement on Form S-2, together with all amendments,
exhibits and documents incorporated therein by reference (the "Registration
Statement"), has been filed with the Commission, Washington, D.C., under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Common Stock Offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. Statements in this Prospectus as to
the contents of exhibits are not necessarily complete, and each statement is
qualified in all respects by reference to the copies of documents filed or
incorporated by reference as exhibits to the Registration Statement or otherwise
filed with the Commission. Copies of the Registration Statement, including
exhibits thereto, may be inspected without charge at the Commission's offices
described above, and copies of all or any part thereof may be obtained from the
Commission upon payment of certain fees prescribed by the Commission.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

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

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

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

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

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

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

<PAGE> 58

THE SPORTS CLUB COMPANY, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report F-2

Consolidated Balance Sheets as of December 31, 1996 and 1997 F-3

Consolidated Statements of Income for the Three-Year Period ended
December 31, 1997 F-4

Consolidated Statements of Shareholders' Equity for the Three-Year Period ended
December 31, 1997 F-5

Consolidated Statements of Cash Flows for the Three-Year Period ended
December 31, 1997 F-6

Notes to Consolidated Financial Statements F-7
</TABLE>

F-1

<PAGE> 59

INDEPENDENT AUDITORS' REPORT

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

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

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

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

KPMG PEAT MARWICK LLP

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

F-2
<PAGE> 60
THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
ASSETS 1996 1997
---------- ----------
<S> <C> <C>
Current assets
Cash and cash equivalents, includes $727 escrowed
construction funds in 1996 $ 4,146 $ 1,581
Accounts receivable, net of allowance for doubtful accounts
of $57 and $385 in 1996 and 1997, respectively 1,376 2,072
Inventories 395 813
Other current assets 381 354
Due from affiliates 1,043 106
---------- ----------
Total current assets 7,341 4,926

Property and equipment, net 72,736 106,791
Equity interest in unconsolidated subsidiary 642 862
Costs in excess of net assets acquired, less accumulated amortization of
$454 and $822 in 1996 and 1997, respectively 13,552 15,917
Organizational costs and other assets,net 1,426 3,065
---------- ----------
$ 95,697 $ 131,561
========== ==========
LIABILITIES AND SHAREHOLDERS EQUITY

Current liabilities
Current installments of notes payable and capitalized
lease obligations $ 2,470 $ 2,975
Notes payable to bank -- 5,000
Accounts payable 1,431 948
Accrued liabilities 2,777 7,985
Deferred membership revenues 7,481 9,936
---------- ----------
Total current liabilities 14,159 26,844

Notes payable and capitalized lease obligations,
less current installment 36,027 42,823
Deferred lease obligations 3,309 2,817
Minority interest 1,000 600
---------- ----------
Total liabilities 54,495 73,084

Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock, $.01 par value, 40,000,000 shares authorized; 11,358,000 and
14,382,621 shares issued and outstanding at December 31, 1996 and
1997, respectively 114 144
Additional paid-in capital 36,935 53,613
Retained earnings 4,153 5,674
Less Treasury stock, at cost, 163,967 shares -- (954)
---------- ----------
Total shareholders' equity 41,202 58,477
---------- ----------
$ 95,697 $ 131,561
========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3

<PAGE> 61

THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues $ 34,659 $ 36,918 $ 61,154

Operating expenses
Direct 21,730 22,989 43,517
Selling, general and administrative 5,486 6,052 6,607
Depreciation and amortization 2,775 2,490 3,919
-------- -------- --------
Total operating expenses 29,991 31,531 54,043
-------- -------- --------
Income from operations 4,668 5,387 7,111

Other income (expense):
Interest (2,600) (2,682) (3,206)
Minority interests (150) (150) (22)
Equity interest in net income of unconsolidated subsidiaries 860 631 696
Non-recurring items -- (300) (2,025)
-------- -------- --------
Total other income (expense) (1,890) (2,501) (4,557)
-------- -------- --------
Income before income taxes 2,778 2,886 2,554

Provision for income taxes 1,139 1,183 1,014
-------- -------- --------
Net Income $ 1,639 $ 1,703 1,540
======== ======== ========
Net Income per share:
Basic $ 0.14 $ 0.15 $ 0.12
======== ======== ========
Diluted $ 0.14 $ 0.15 $ 0.12
======== ======== ========
Weighted average number of common shares outstanding:
Basic 11,353 11,355 12,524
======== ======== ========
Diluted 11,357 11,360 12,683
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4

<PAGE> 62

THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)

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

See accompanying notes to consolidated financial statements.

F-5

<PAGE> 63

THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)

<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income $ 1,639 $ 1,703 $ 1,540
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 2,775 2,490 3,919
Accrued management fees (502) (97) --
Equity interest in net income of unconsolidated subsidiaries (860) (631) (696)
Distributions from unconsolidated subsidiaries 320 623 469
Stock issued as directors' fees 29 8 33
Loss on sales of Sports Connections -- 300 --
Minority interest in Reebok-Sports Club/NY -- -- (128)
(Increase) decrease in:
Accounts receivable, net (23) 149 (1,176)
Inventories 42 105 (395)
Other current assets (106) (12) (2,187)
Increase (decrease) in:
Accounts payable 1,011 (816) (493)
Accrued liabilities (908) 225 2,519
Deferred membership revenues (263) (633) 1,635
Deferred lease obligations 312 211 (492)
-------- -------- --------
Net cash provided by operating activities 3,466 3,625 4,548

Cash flows from investing activities:
Capital expenditures (929) (2,788) (4,899)
Business acquisitions, net of cash acquired (1,255) (2,118) (10,778)
Proceeds from sale of Sports Connections -- 3,569 --
Sale (purchase) of other non-operating assets (33) 95 --
Treasury stock acquired -- -- (1,034)
-------- -------- --------
Net cash used for investing activities (2,217) (1,242) (16,711)

Cash flows from financing activities
(Increase) decrease in due from affiliates (2,658) 540 937
Proceeds from sale of common stock -- -- 10,000
Proceeds from notes payable and capitalized lease obligations -- 23,371 2,324
Repayments of notes payable and capitalized lease obligations (2,058) (23,693) (3,663)
Distributions and redemptions of partnership interests (30) -- --
-------- -------- --------
Net cash provided by (used for) financing activities (4,746) 218 9,598
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (3,497) 2,601 (2,565)
Cash and cash equivalents at beginning of year 5,042 1,545 4,146
-------- -------- --------
Cash and cash equivalents at end of year $ 1,545 $ 4,146 $ 1,581
======== ======== ========

Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 2,585 $ 3,068 $ 3,599
======== ======== ========
Cash paid during the year for income taxes $ 1,473 $ 590 $ 306
======== ======== ========
Capital expenditures financed $ -- $ 153 $ 7,223
======== ======== ========
Stock issued in exchange for interest in Reebok-Sports Club/NY $ -- $ -- $ 5,000
======== ======== ========
Stock issued as partial consideration for The Sports Club/Las Vegas $ -- $ -- $ 1,675
======== ======== ========
Acquisition of land and building under capital lease $ -- $ -- $ 10,000
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6

<PAGE> 64

THE SPORTS CLUB COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997

1. ORGANIZATION

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Revenue Recognition

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

Cash and Cash Equivalents

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

Inventories

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

Depreciation and Amortization

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

Predevelopment Costs

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

F-7

<PAGE> 65

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

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

Intangible Assets

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

Equity Interest in Unconsolidated Subsidiary

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

<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1997
------- -------
(Amounts in thousands)
<S> <C> <C>
Revenues.......................................... $ 5,634 $ 6,392
Net income........................................ 1,237 1,517
</TABLE>

<TABLE>
<CAPTION>
At December 31,
----------------------------
1996 1997
------- -------
(Amounts in thousands)
<S> <C> <C>
Current assets.................................... $ 522 $ 615
Non-current assets................................ 2,653 2,769
------- -------
Total assets...................................... $ 3,175 $ 3,384
======= =======
Current liabilities............................... $ 1,444 $ 1,281
Non-current liabilities........................... 539 444
------- -------
Total liabilities................................. 1,983 1,725
Partners' capital................................. 1,192 1,659
------- -------
Total liabilities and partners' capital........... $ 3,175 $ 3,384
======= =======
</TABLE>

Income Taxes

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

F-8

<PAGE> 66

Earnings per Share

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

Use of Estimates

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

Fair Value of Financial Instruments

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

Year 2000

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

3. ACQUISITIONS

SportsMed

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

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

F-9

<PAGE> 67

Sports Clubs

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

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

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

Spectrum Clubs

On December 31, 1997, the Company acquired four Clubs from Racquetball World,
which are now operated as Spectrum Clubs, for a total purchase price (including
the portion paid by Millennium described below) of approximately $19.4 million.
Millennium acquired properties underlying two of the Clubs for $10.0 million and
is leasing these properties to the Company under a financing lease agreement
which is reflected as capitalized lease obligations in the Company's
consolidated balance sheet. A cash payment of approximately $6.0 million was
made to the sellers and their creditors and the Company assumed approximately
$2.0 million of liabilities. In addition, up to 159,081 shares of the Company's
Common Stock valued at approximately $1.4 million will be issued to certain of
the selling entities ("Sellers"), subject to reduction if certain liabilities of
the Clubs exceed agreed-upon amounts. In a private placement completed in
December 1997, the Company sold 625,000 shares of its Common Stock to Millennium
for $5.0 million to raise funds to complete this acquisition. The acquisition
was accounted for as a purchase. Accordingly, the operations of these four Clubs
will be included in the Company's statement of operations from the date of
acquisition.

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

F-10

<PAGE> 68

<TABLE>
<CAPTION>
(Unaudited)
Year ended December 31,
--------------------------
1996 1997
------- -------
(in thousands, except
per share data)
<S> <C> <C>
Revenues ............................................ $66,695 $72,707
Operating expenses .................................. 60,517 65,944
------- -------
Income from operations .......................... 6,178 6,763
Other expenses ...................................... 5,501 6,159
------- -------
Income before provision for income taxes ........ 677 604
Provision for income taxes .......................... 277 273
------- -------
Net income ...................................... $ 400 $ 331
======= =======
Net income per share:
Basic ........................................... $ .03 $ .02
======= =======
Diluted ......................................... $ .03 $ .02
======= =======
Weighted-average number of common shares outstanding:
Basic ........................................... 14,535 14,456
======= =======
Diluted ......................................... 14,540 14,615
======= =======
</TABLE>

4. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
At December 31,
----------------------------
1996 1997
-------- --------
(Amount in thousands)
<S> <C> <C>
Land ................................................... $ 10,234 $ 18,234
Building and improvements .............................. 58,076 82,405
Furniture, fixtures and equipment ...................... 9,126 14,095
-------- --------
77,436 114,734
Less accumulated depreciation and amortization ......... 4,700 7,943
-------- --------
Net property and equipment ............................. $ 72,736 $106,791
======== ========
</TABLE>

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

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

5. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS

Notes payable and capitalized lease obligations are summarized as follows:

<TABLE>
<CAPTION>
At December 31,
--------------------------
1996 1997
------- -------
(Amounts in thousands)
<S> <C> <C>
The Sports Club/LA note (a) ............................ $23,070 $22,378
The Sports Club/Irvine note (b) ........................ 5,375 4,875
Spectrum Club/Agoura Hills note (c) .................... 2,550 2,533
Spectrum Clubs Fullerton and Santa Ana lease (d) ....... -- 10,000
Equipment financing and capitalized
lease obligations (e) .............................. 4,303 5,602
Other notes payable (f) ................................ 3,199 410
------- -------
38,497 45,798
Less current installments .............................. 2,470 2,975
------- -------
$36,027 $42,823
======= =======
</TABLE>

(a) The Sports Club/LA note bears interest at the rate of 10.63% and requires
monthly payments of approximately $262,000 with a balloon payment of
approximately $17.5 million on April 1, 2003. If certain conditions exist, the
Company may extend the term of the loan by five years. The note is secured

F-11

<PAGE> 69

by all the assets of The Sports Club/LA and requires the Club to maintain a debt
service coverage ratio, as defined, of 1.4 to 1.0.

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

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

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

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

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

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

<TABLE>
<S> <C>
1998........................................................ $ 2,975
1999........................................................ 7,031
2000........................................................ 2,874
2001........................................................ 2,415
2002........................................................ 1,861
Thereafter.................................................. 28,642
---------
$ 45,798
=========
</TABLE>

6. BANK CREDIT FACILITY

At December 31, 1997, the Company had a $5.0 million bank credit facility. This
facility was fully utilized at that date. On February 23, 1998, the credit
facility was amended and the amount of the facility was increased to $15.0
million. Pursuant to the February amendment, the Company may not borrow
additional funds under the credit facility after June 30, 1998, and will be
required to make monthly payments of $250,000 beginning July 1, 1998, with all
remaining amounts due and payable on October 30, 1998. In addition, the credit
facility is due and payable in full upon consummation by the Company of any debt
or equity offering. The loans are unsecured, however, the Company is prohibited
from pledging any of its assets except for normal furniture, fixture and
equipment financing. The agreement also requires the

F-12

<PAGE> 70

Company to maintain certain Tangible Net Worth, Debt Coverage Ratios and Senior
Liabilities to Tangible Net Worth Ratio requirements. The Company was in
compliance with its covenants as of December 31, 1997.

7. COMMITMENTS AND CONTINGENCIES

Lease Commitments

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

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

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

Litigation

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

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

Employment Agreements

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

8. INCOME PER SHARE

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

F-13

<PAGE> 71

<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1995 1996 1997
-------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C>
Net income used for basic and
diluted income per share ................... $ 1,639 $ 1,703 $ 1,540
======== ======== ========
Shares of Common Stock and
Common Stock equivalents:
Weighted-average shares used
in basic computation ................ 11,353 11,355 12,524
Dilutive impact of stock options ......... 4 5 159
-------- -------- --------
Weighted-average shares used for
dilutive computation ................ 11,357 11,360 12,683
======== ======== ========
Income per share:
Basic ............................... $ 0.14 $ 0.15 $ 0.12
======== ======== ========
Diluted ............................. $ 0.14 $ 0.15 $ 0.12
======== ======== ========
</TABLE>

9. INCOME TAXES

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1995 1996 1997
------ ------ ------
(Amounts in thousands)
<S> <C> <C> <C>
Federal ............................ $ 881 $ 915 $ 776
State .............................. 258 268 238
------ ------ ------
$1,139 $1,183 $1,014
====== ====== ======
</TABLE>

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

<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1995 1996 1997
-------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C>
Expected federal income tax expense ................ $ 945 $ 981 $ 868
State income taxes, net of federal benefit ......... 194 202 146
-------- -------- --------
$ 1,139 $ 1,183 $ 1,014
======== ======== ========
</TABLE>

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

10. STOCK PLANS

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

F-14

<PAGE> 72

value based method of accounting defined in SFAS 123 had been applied. The
Company implemented the statement during the year ended December 31, 1996.

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

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1995 1996 1997
-------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C>
Net income:
As reported ............... $ 1,639 $ 1,703 $ 1,540
Pro forma ................. 1,474 1,533 1,368

Basic income per share:
As reported ............... $ .14 $ .15 $ .12
Pro forma ................. .13 $ .14 $ .11
</TABLE>

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

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

Options allow for the purchase of Common Stock at prices determined by the
Company's Compensation Committee. Incentive stock options must be granted at a
price at least equal to the fair market value of a share of Common Stock on the
date the option is granted. Non-statutory options must have an exercise price
equal to at least 85% of the fair market value of the Company's Common Stock at
the date of grant. Options granted under the Plan may, at the election of the
Compensation Committee, become exercisable in installments. All options will
expire on the tenth anniversary of the grant date.

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

F-15

<PAGE> 73

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

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

<TABLE>
<CAPTION>
Weighted
Average
Remaining
Exercise Number Contractual Options
Prices Outstanding Life (Years) Exercisable
-------- ----------- ------------ -----------
<S> <C> <C> <C>
$8.3750 27,000 9.84 --
5.3750 68,000 9.50 --
4.3750 60,000 9.22 --
2.7500 58,000 8.83 19,338
2.5625 68,500 8.40 22,841
2.6875 70,000 8.17 23,334
3.0000 225,000 7.58 225,000
5.2500 66,000 7.25 43,999
--------- ---------
642,500 8.60 334,512
========= =========
</TABLE>

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

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

F-16

<PAGE> 74

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

11. RELATED PARTY TRANSACTIONS

Due from affiliates are summarized as follows:

<TABLE>
<CAPTION>
At December 31,
------------------------
1996 1997
-------- --------
(In thousands)
<S> <C> <C>
Note receivable from the Company's CEO, including interest at
5.3%. Secured by a pledge of 384,000 shares of the
Company's Common Stock. Repaid in September 1997 ............. $ 624 --
Advances to affiliates made in the normal course of business,
payable on demand ............................................. 419 $ 106
-------- --------
$ 1,043 $ 106
======== ========
</TABLE>

The Company manages the operation of its unconsolidated subsidiary, the Spectrum
Club/Manhattan Beach, of which it owns a 46.1% interest. The Company receives a
fee of $33,322 per month plus 4.5% of the Club's gross revenues for managing
this Club. The Company also manages the operations of the Reebok Sports Club/NY
and receives a fee of approximately 5.87% of the gross monthly collections, as
defined. Management fees relating to the Reebok Sports Club/NY of $490,000 and
$779,000 for the years ended December 31, 1995 and 1996 were earned and included
in the Company's income statement. Management fees of $1.1 million relating to
Reebok Sports Club/NY were earned for the year ended December 31, 1997. This
amounts is eliminated from income and expense in the presentation of the
Company's 1997 consolidated statement of income.

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

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

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

F-17

<PAGE> 75

12. CONCENTRATION OF CREDIT RISK

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

13. SUBSEQUENT EVENT

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

F-18
<PAGE> 76
================================================================================

No dealer, salesperson, or representative or any other person has been
authorized to give any information or to make any representations not contained
in this Prospectus in connection with this Offering other than those contained
in this Prospectus, and if given or made, such information or representations
must not be relied upon as having been authorized by the Company or the
Underwriters. This Prospectus does not constitute an offer to sell or the
solicitation of any offer to buy Common Stock in any jurisdiction in which such
an offer or solicitation is not authorized, or in which the person making such
an offer or solicitation is not qualified to do so or to any person to whom it
is unlawful to make such an offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create an
implication that there has not been any change in the facts set forth in this
Prospectus or in the affairs of the Company since the date hereof.

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

TABLE OF CONTENTS
PROSPECTUS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................
The Offering..........................................................
Risk Factors..........................................................
The Company...........................................................
Use of Proceeds.......................................................
Price Range of Common Stock...........................................
Dividend Policy.......................................................
Capitalization........................................................
Selected Consolidated Financial Data..................................
Management Discussion and Analysis of
Financial Condition and Results of Operation.......................
Business..............................................................
Management............................................................
Certain Transactions..................................................
Principal Stockholders................................................
Shares Eligible for Future Sale.......................................
Underwriting..........................................................
Legal Matters.........................................................
Experts...............................................................
Available Information.................................................
Incorporation of Certain Documents By
Reference...........................................................
</TABLE>

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

6,000,000 SHARES

[LOGO]

COMMON STOCK

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

PROSPECTUS

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

SCHRODER & CO. INC.

PRUDENTIAL SECURITIES INCORPORATED

__________, 1998

================================================================================

<PAGE> 77

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The estimated expenses set forth below will be borne as indicated
below:

<TABLE>
<CAPTION>
Item Amount
- ---- -------------
<S> <C>
SEC Registration Fee.............................................. $ 18,319.50
NASD Registration Fee............................................. $ 6,710.00
Blue Sky Fees and Expenses (including legal fees)................. $ 5,000.00
Printing and Engraving Fees....................................... $ 100,000.00
AMEX Fees......................................................... $ 17,500.00
Legal Fees and Expenses........................................... $ 130,000.00
Accounting Fees and Expenses...................................... $ 75,000.00
Miscellaneous Expenses............................................ $ 97,470.50
Total............................................................. $ 450,000.00
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

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

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

II-1

<PAGE> 78

ITEM 16. EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
4.1 Specimen Common Stock Certificate.*

5.1 Opinion of Kinsella, Boesch, Fujikawa & Towle, LLP

10.1 1994 Stock Incentive Plan.*#

10.2 Form of Stock Option Agreement.*#

10.3 Form of Stock Purchase Agreement.*#

10.4 1994 Stock Compensation Plan.*#

10.5 Form of Indemnification Agreement between the Registrant and its directors and
certain officers.*

10.6 Indemnification Agreement between the Registrant and D. Michael Talla.*

10.7 Indemnification Agreement between Registrant and Rex A. Licklider.*

10.8 Employment Agreement between Registrant and D. Michael Talla.*#

10.9 Employment Agreement between the Registrant and Nanette Pattee Francini.*#

10.10 Promissory Notes executed by D. Michael Talla dated November 5, 1991 in favor
of World Trade Bank, N.A., and related Loan Agreement dated June 24, 1992, as
amended.*

10.11 Promissory Note executed by Agoura Hills/Spectrum Club dated March 29, 1994
in favor of Hawthorne Savings and Loan Association.*

10.12 Lease of premises for Reebok Sports Club/NY located at 160 Columbus Avenue,
New York, New York 10023 dated June 3, 1992.*

10.13 Agreement of Purchase and Sale between MKDG/RHODES SC
Partnership and Rex Licklider dated November 19, 1993, as
amended November 19, 1993, December 10, 1993, December 31,
1993, and February 18, 1994.*

10.14 Joint Venture Agreement for Sports Connection - ES/MB between El Segundo-
TDC, Ltd. and Continental El Segundo Corporation effective as of January 3,
1986.*

10.15 First Amendment to Joint Venture Agreement for Sports Connection - ES/MB
dated January 3, 1986.*
</TABLE>

II-2

<PAGE> 79

<TABLE>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
10.16 Restated Agreement of Limited Partnership of El Segundo-TDC, Ltd., as
amended.*

10.17 Agreement of Limited Partnership of R-SC/NY, Ltd.*

10.18 Management Agreement effective as of June 3, 1992, between R-SC/NY, Ltd.
and Pontius Realty, Inc.*

10.19 License Agreement between Reebok Fitness Centers, Inc. and R-SC/NY, Ltd.
dated June 3, 1992.*

10.20 Agreement of Purchase and Sale and Joint Escrow Instructions entered between
Hawthorne Savings and Loan Association and Agoura Hills/Spectrum Club, Inc.
effective as of April 14, 1994.*

10.21 Form of Membership Agreements for the Sports Clubs, Spectrum Clubs and
Sports Connections.*

10.22 Letter Agreement regarding R-SC/NY dated June 3, 1992.*

10.23 Club Management Contract for the Spectrum Club/Manhattan Beach dated
January 3, 1986, as amended January 3, 1986 and September 17, 1987 and as
assigned June 30, 1992.*

10.24 Agreement of Limited Partnership of NY-SC, Ltd. dated as of April 29, 1992, as
amended July 1, 1992.*

10.25 Sixth Amended and Restated Agreement of Limited Partnership of L.A./Irvine
Sports Clubs. Ltd., dated June 30, 1992.*

10.26 Memorandum of Agreement between Reebok Fitness Centers, Inc. and the
Company dated as of June 3, 1992.*

10.27 Seventh Amendment and Restated Agreement of Limited Partnership of
L.A./Irvine Sports Club, Ltd., a California Limited Partnership dated as of
October 12, 1994.*

10.28 First Amendment to Seventh Amended and Restated Agreement of Limited
Partnership of L.A./Irvine Sports Club, Ltd., a California Limited Partnership
dated as of October 12, 1994.*

10.29 Form of Option Agreement by and between D. Michael Talla, an individual, TTO
Partners, a California Limited Partnership, and Sports Club, Ltd., a California
Corporation, relating to L.A./Irvine Sports Club, Ltd., a California Limited
Partnership.*
</TABLE>

II-3

<PAGE> 80

<TABLE>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
10.30 Amended and Restated Agreement of Limited Partnership of TTO Partners, a
California Limited Partnership, dated June 30, 1992, as amended January 1, 1993,
January 4, 1993 and February 12, 1994 and as assigned January 1, 1993.*

10.31 Letter Agreement dated October 11, 1994, by and between MKDG
Rhodes/SC Partnership, a General Partnership, and Rex
Licklider, including a $5,500,000 promissory note and deed of
trust to be delivered concurrently with the consummation of the
Offering.*

10.32 First Amended and Restated Agreement of Limited Partnership of Reebok-Sports
Club/NY, Ltd. dated as of October 12, 1994.*

10.33 Letter Agreement by and between Reebok Fitness Centers, Inc. and the Company
dated October 12, 1994.*

10.34 Amendment to First Amended and Restated Agreement of Limited Partnership of
Reebok-Sports Club/NY, Ltd. dated as of October 12, 1994.*

10.35 Letter Agreement by and between Reebok Fitness Centers, Inc. and the Company,
which became effective on October 20, 1994.*

10.36 License Agreement by and between Reebok Fitness Centers, Inc. and the
Company, dated October 20, 1994.*

10.37 Promissory Note executed by L.A./Irvine Sports Clubs, Ltd. in favor of
MKDG/Rhodes SC Partnership, dated October 20, 1994.**

10.38 Employment Agreement between the Registrant and John M. Gibbons.**#

10.39 First Amendment to Employment Agreement between Registrant and D. Michael
Talla, dated February 27, 1995. ***#

10.40 Amended and Restated Employment Agreement between Registrant and John M.
Gibbons, dated July 14, 1995. ***#

10.41 Settlement Agreement by and among Lincoln Metrocenter Partners, L.P., Reebok-
Sports Club/NY, Ltd., Talla New York, Inc., RFC, Inc., and LMP Health Club
Co. dated as of December 28, 1995 and Promissory Notes in connection
therewith.***

10.42 Credit Agreement and related Exhibits by and between The Sports Club Company,
Inc. and HealthFitness Organization of America, Inc. dated as of November 28,
1995.***

10.43 Notification to HealthFitness Organization of America, Inc.'s shareholders of The
Sports Club Company, Inc.'s exercise of its option to acquire shares of
HealthFitness Organization of America, Inc. dated as of November 28, 1995.***
</TABLE>

II-4

<PAGE> 81

<TABLE>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
10.44 Loan Agreement between AT&T Commercial Finance Corporation and
L.A./Irvine Sports Clubs, Ltd. dated March 9, 1996.***

10.45 First Amendment to Loan Agreement between AT&T Commercial Finance
Corporation and L.A./Irvine Sports Clubs, Ltd., dated March 12, 1996.***

10.46 401-K Profit Sharing Plan and related Group Annuity Contract No. GA-P K522
and Group Separate Account Annuity Contract No. GA-P K523, both with
Nationwide Life Insurance Company with an effective date of February 1,
1996.****

10.47 First Amendment to Restated Employment Agreement between Registrant and
John M. Gibbons dated as of April 24, 1996.#****

10.48 Asset Purchase Agreement among 24 Hour Fitness, Inc., The Sports Connection
Holding Company, and Registrant dated as of November 1, 1996.****

10.49 Management Agreement by and between Registrant and C.I.T.E. Design Corp.
dated as of May 2, 1996.****

10.50 Consulting Agreement by and between Registrant and Rex A. Licklider dated as
of August 1, 1996.#****

10.51 Letter Agreement by and between Registrant and WPI.Koll Asia Pacific Advisors
dated as of October 9, 1996.****

10.52 Second Amendment to Loan Agreement and related documents between AT&T
Commercial Finance Corporation and L.A./Irvine Sports Clubs, Ltd. dated as of
October 11, 1996.****

10.53 Termination Agreement by and among Bally Total Fitness Holding Corporation,
Bally Total Fitness Corporation, Bally's S.C. Management, Inc., The Sports
Connection Holding Company and Registrant dated October 31, 1996.****

10.54 Fourth Amendment to Athletic Club Lease dated December 11, 1996, by and
between Howard Hughes Properties, Limited Partnership, a Delaware limited
partnership and The Spectrum Club Company, Inc.****

10.55 Agreement by and among Reebok-Sports Club/NY Ltd., Talla New York, Inc.,
RFC, Inc., LMP Health Club Co., Millennium Entertainment Partners, L.P. and
Registrant dated as of December 30, 1996.****

10.56 Letter Agreement between Millennium Entertainment Partners, L.P. and the
Registrant dated as of March 13, 1997.****
</TABLE>

II-5

<PAGE> 82

<TABLE>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
10.57 Loan Agreement entered into by and among the Registrant, The
Spectrum Club Company, Inc., Pontius Realty, Inc., Sports Club,
Inc. of California, Irvine Sports Club, Inc., HealthFitness
Organization of America, Inc., L.A./Irvine Sports Club, Ltd.,
Talla New York, Inc., SCC Sports Club, Inc. and Sumitomo Bank
of California dated as of March 20, 1997.****

10.58 First Amendment to Option Agreement between D. Michael Talla and TTO
Partners dated May 27, 1997.*****

10.59 Consulting Agreement between the Registrant and Rex A. Licklider. #*****

10.60 First Amendment to Loan Agreement by and among the Registrant
and various of its subsidiaries and Sumitomo Bank of California
dated August 1, 1997.*****

10.61 Second Amendment to Loan Agreement by and among the Registrant
and various of its subsidiaries and Sumitomo Bank of California
dated August 14, 1997.*****

10.62 Settlement Agreement, Agreement for Dismissal and General Release and Waiver
by and between Century Entertainment, L.P., the Registrant and Century City
Spectrum Club, Inc. dated May 16, 1997.*****

10.63 Modification to the March 13, 1997 letter between Millennium Entertainment
Partners, L.P. and the Registrant dated June 10, 1997.*****

10.64 Asset Purchase Agreement between Green Valley Athletic Club Limited
Partnership and the Registrant dated as of May 1, 1997.*****

10.65 Agreement of Purchase and Sale of Real Property between Green
Valley Investment Company, Inc., and the Registrant dated as of
May 1, 1997.*****

10.66 Agreement for Purchase and Sale of Assets by and among HFA Services, Inc.,
SportsTherapy, Inc. and Larry Schwartz made as of July 1, 1997.*****

10.73 Amended and Restated Loan Agreement by and among the Registrant and various
of its subsidiaries and Sumitomo Bank of California dated as of February 2,
1998.*****

10.74 Amendment of Lease between Lincoln Metrocenter Partners, L.P. and Reebok-
Sports Club/NY Ltd. as of January 31, 1998.*****

10.75 Letter Agreement between AT&T Commercial Finance Corporation and
L.A./Irvine Sports Clubs, Ltd. dated January 8, 1998.*****

10.76 Athletic Club Lease between Millennium Partners LLC and San Francisco Sports
Club, Inc. dated as of June 22, 1997.*****

10.77 Athletic Club Lease between Millennium Partners LLC and Washington D.C.
Sports Club, Inc. dated as of June 22, 1997.*****
</TABLE>

II-6

<PAGE> 83

<TABLE>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
10.78 Escrow Instruction to Chicago Title Insurance Company from La Salle Fund II
and the Registrant dated July 24, 1997 regarding purchase of real estate in
Thousand Oaks, California.*****

10.79 First Amendment to Amended and Restated Loan Agreement by and among the
Registrant and various of its subsidiaries, Sumitomo Bank of California and
Comerica Bank - California, dated as of February 23, 1998.*****

23.1 Consent from KPMG Peat Marwick LLP

23.2 Consent of Kinsella, Boesch, Fujikawa & Towle (See Exhibit 5.1)

24.1 Power of Attorney (included on Page II-10)
</TABLE>

- ----------

# Compensation agreement or plan.

* Incorporated by reference to the Registrant's Registration Statement on
Form S-1, declared effective on October 13, 1994 (SEC file No.
33-79552).

** Incorporated by reference to the Registrant's Annual Report on Form
10-K, filed with the Securities and Exchange Commission on March 31,
1995 (SEC file No. 1-13290).

*** Incorporated by reference to the Registrant's Annual Report on Form
10-K, filed with the Securities and Exchange Commission on March 29,
1996 (SEC file No. 1-13290).

**** Incorporated by reference to the Registrant's Annual Report on Form
10-K/A, filed with the Securities and Exchange Commission on October 14,
1997 (SEC file No. 1-3290).

***** Incorporated by reference to the Registrant's Annual Report on Form
10-K, filed with the Securities and Exchange Commission on February 27,
1998 (SEC file No. 1-3290).

II-7

<PAGE> 84

ITEM 17. UNDERTAKINGS

1. The undersigned registrant hereby undertakes:

(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933,

(ii) To reflect in the prospectus any facts or events
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
change in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement.

(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration Statement.

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

(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the Offering.

2. 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 Act 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 Act and will
be governed by the final adjudication of such issue.

3. The undersigned registrant hereby undertakes that:

(a) For purposes 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 340A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4)

II-8

<PAGE> 85

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.

(b) For the purpose 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-9

<PAGE> 86

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-2 and has duly caused this
registration statement to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Los Angeles, State of California, on February
26, 1998.

THE SPORTS CLUB COMPANY, INC.

By: /s/ D. Michael Talla
------------------------------------------
D. Michael Talla
Chairman of the Board
Chief Executive Officer
(Duly Authorized Representative)

The undersigned director and/or officer of THE SPORTS CLUB COMPANY (the
"Company"), does hereby constitute and appoint D. Michael Talla, John M. Gibbons
and Timothy M. O'Brien, and each of them, with full power of substitution and
resubstitution, as his true and lawful attorney(s) to do any and all things, and
to execute any and all instruments, which said attorney(s) and agent(s) may deem
necessary or advisable to enable the Company to comply with the Securities Act
of 1933, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission in respect thereof, in connection with the
registration under the Securities Act of 1933, as amended, of shares of Common
Stock, including specifically, but without limiting the generality of the
foregoing, the power and authority to sign the name of the undersigned in the
capacities indicated below to the registration statement on Form S-2 to be filed
for such registration, and any and all amendments (including post-effective
amendments) thereto whenever filed.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ D. Michael Talla Chairman of the Board February 26, 1998
- -------------------------------- Chief Executive Officer
D. Michael Talla (Principal Executive Officer)

/s/ John M. Gibbons President, Chief Operating Officer and a February 26, 1998
- -------------------------------- Director
John M. Gibbons

/s/ Nanette Pattee Francini Executive Vice President, February 26, 1998
- ------------------------------- Secretary and a Director
Nanette Pattee Francini

/s/ Timothy M. O'Brien Chief Financial Officer February 26, 1998
- ------------------------------- (Principal Financial and Accounting Officer)
Timothy M. O'Brien

/s/ Rex A. Licklider Vice Chairman of the Board February 26, 1998
- -------------------------------
Rex A. Licklider

Director February 26, 1998
- -------------------------------
Andrew L. Turner

Director February 26, 1998
- -------------------------------
Dennison Veru

Director February 26, 1998
- -------------------------------
Brian J. Collins
</TABLE>

II-10

<PAGE> 87
Index to Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
------- --------
<S> <C>
5.1 Opinion of Kinsella, Borsch, Fujikawa & Towls.
23.1 Consent from KPMG Peat Marwick LLP.
</TABLE>

<PAGE> 1

EXHIBIT 5.1

February 26, 1998

C1670-002

The Sports Club Company, Inc.
11100 Santa Monica Blvd., Suite 300
Los Angeles, CA 90025

Re: THE SPORTS CLUB COMPANY, INC.
REGISTRATION STATEMENT ON FORM S-2

Ladies and Gentlemen:

We have acted as counsel for The Sports Club Company, Inc. (the
"Company"), a Delaware corporation, in connection with the authorization,
issuance, and sale of up to 6,900,000 shares of the Common Stock, par value
$0.01 (the "Shares"), as described in the above-referenced Registration
Statement (the "Registration Statement"), and the preparation of the
Registration Statement under the Securities Act of 1933, as amended.

In this regard, we are familiar with the corporate proceedings taken by
the Company in connection with the issuance and sale of the Shares. We have also
reviewed the Registration Statement and the exhibits thereto, and we have made
such other examinations of law and fact as we considered necessary in order to
form a basis for the opinion hereafter expressed.

Based on the foregoing, we are of the opinion that the Shares have been
duly authorized, legally issued, fully paid, and nonassessable.

We consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus which is part of the Registration Statement.

Very truly yours,

/s/ Kinsella, Boesch, Fujikawa & Towle, LLP

Kinsella, Boesch, Fujikawa & Towle, LLP

JPB:lr

<PAGE> 1

EXHIBIT 23.1

CONSENT OF KPMG PEAT MARWICK LLP

Board of Directors
The Sports Club Company, Inc.:

We consent to the use of our report included herein and to the
reference to our firm under the heading "Experts" in the prospectus.

/s/ KPMG PEAT MARWICK LLP

Los Angeles, California
February 25, 1998