<PAGE>   1

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                    FORM 10-K

[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended DECEMBER 31, 1999.

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act for the transition period from _______to_______.

COMMISSION FILE NUMBER: 1-13290

                          THE SPORTS CLUB COMPANY, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                                                  <C>
                            Delaware                                              95-4479735
 (State or other jurisdiction of incorporation or organization)      (I.R.S. Employer Identification No.)

              11100 Santa Monica Blvd., Suite 300
                    Los Angeles, California                                          90025
     (Address of registrant's principal executive offices)                         (Zip Code)
</TABLE>

      Registrant's telephone number, including area code:
                         (310) 479-5200

<TABLE>
<S>                                                               <C>
  Securities registered pursuant to Section 12(b) of the Act:     Name of each exchange on which registered
                      Title of each class

                  Common Stock $.01 par value                              American Stock Exchange

  Securities registered pursuant to Section 12(g) of the Act:                        None
</TABLE>




Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 15, 2000 was $24,018,728.

The number of shares of the Common Stock, par value $ .01 per share, outstanding
(the only class of Common Stock of the registrant outstanding) was 17,731,753 on
March 15, 2000.



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                                     PART I

ITEM 1. BUSINESS

GENERAL

        We were organized in 1994 to consolidate the ownership of several sports
and fitness clubs ("Clubs"). We currently operate five Clubs, under the "Sports
Club" name, including The Sports Club/LA in Los Angeles, The Sports Club/LA in
New York at Rockefeller Center, The Sports Club/Irvine, The Sports Club/Las
Vegas and Reebok Sports Club/NY. Our Clubs offer a wide range of fitness and
recreation options and amenities, and are marketed to affluent, health conscious
individuals who desire a service oriented state-of-the-art club. Our Clubs are
widely recognized as being among the finest sports and fitness clubs in the
country.

        Our Clubs are conveniently located in spacious, modern facilities that
typically include fitness centers, swimming pools and basketball courts. Our
Clubs are designed as "urban country clubs," and range in size from 90,000 to
140,000 square feet. Initiation fees and monthly membership dues at Sports Clubs
are higher than those charged by most other sports and fitness clubs, which we
believe do not provide comparable services. Income from ancillary services
and products, including private training, food and beverages, spa services and
sports boutiques, also contribute a significant portion of our revenues. Our
subsidiary, The SportsMed Company ("SportsMed"), operates physical therapy
facilities in some Clubs.

        Prior to December 1999, we also owned and operated the Spectrum Clubs.
These Clubs are typically housed in 25,000 to 65,000 square foot facilities and
offer many amenities similar to but less extensive than our Sports Clubs.
Initiation fees and monthly dues at Spectrum Clubs are lower than at Sports
Clubs. In December 1999, we sold the Spectrum Clubs to an investment group and
realized $60.4 million of gross proceeds from the sale. We continue to manage
the Spectrum Clubs under a transition services agreement with the buyer and will
continue to do so until the buyer establishes their administrative offices later
in the year 2000.

        Our strategy is to expand The Sports Club/LA brand in major metropolitan
markets and to increase revenues and profitability at existing Clubs, through
regular increases in monthly membership dues and expanded ancillary services and
products. There are currently four The Sports Club/LA Clubs under development
in New York City, Washington, D.C., San Francisco and Boston. We expect to open
these Clubs from mid 2000 through mid 2001. We own 3.5 acres of undeveloped land
in Houston, Texas on which we expect to develop an approximately 85,000 square
foot Sports Club. We will continue to investigate other sites for new Club
developments and acquisitions.

        According to the International Health, Racquet & Sportsclub Association
("IHRSA"), the industry's leading trade organization, 22.5 million Americans
were members of more than 14,100 sports and fitness clubs in 1999. Revenues
generated by the United States sports and fitness club industry increased at a
compound annual rate of 8.3% from $5.5 billion in 1991 to $9.6 billion in 1998.
The industry has benefited from the general public's increasing awareness of the
importance of physical exercise. Among other groups, we target members age 35
and older who, according to IHRSA, represent 50% of all memberships and are the
fastest growing segment of the industry.

THE SPORTS CLUBS

        Sports Clubs are 90,000 to 140,000 square foot multi-purpose facilities,
which generally include the following features:

        o       large, fully equipped gyms with state-of-the-art fitness
                equipment, including weight training, cardio-vascular
                equipment and flexibility/balance centers,

        o       basketball, volleyball, racquetball, squash and paddle tennis
                courts and, in the case of The Sports Club/Las Vegas, indoor
                and outdoor tennis courts,




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        o       aerobics/group exercise studios featuring classes throughout the
                day and evening, seven days a week, including aerobics, dance,
                muscle conditioning, boxing, martial arts and bodymind,

        o       group cycling studios and, in the case of Reebok Sports Club/NY,
                climbing walls,

        o       swimming pools, sun decks, golf practice nets and running
                tracks,

        o       destination cityspa offering massage, facials and full body
                treatments,

        o       men's and women's locker rooms featuring wood lockers,

        o       steam rooms, saunas and jacuzzis,

        o       restaurants, sports bars, private dining/conference rooms, media
                centers and sundecks,

        o       valet parking, pro shops, hair salons and childcare services,

        o       sports medicine and physical therapy facilities,

        o       personal trainers to develop and supervise members' exercise
                routines,

        o       registered dietitians,

        o       fitlab assessment center,

        o       PTS Private Training System nutritional programs and products,

        o       registered dietitians for nutritional consultations,

        o       interactive children's classes, as well as supervised
                age-specific junior recreational rooms and junior programs such
                as gymnastics,

        o       instruction in racquet sports, golf, running, swimming, boxing,
                martial arts, and, in the case of Reebok Sports Club/NY, rock
                climbing,

        o       full-time activities directors responsible for social and media
                events for members, including organizing trips, lectures and
                charity events,

        o       full-time sports managers who organize sports tournaments,
                leagues and classes, and

        o       wellness protocols such as exercise regimens designed for
                specific groups of members.

        We currently have five Sports Clubs in operation. The Sports Club/LA
opened in 1987 in west Los Angeles, California, near the affluent communities of
Santa Monica, Brentwood, Beverly Hills, Pacific Palisades, Westwood and Century
City. The Sports Club/Irvine opened in 1990 near Newport Beach in Orange County,
California. Reebok Sports Club/NY opened in 1995 in Manhattan's upper west side,
and was developed in partnership with a subsidiary of Reebok International, Ltd.
("Reebok") and Lincoln Metrocenter Partners, L.P. (collectively with its
affiliates "Millennium"). We manage the operations of this Club and own a
controlling 60% interest in the partnership that owns this Club. Reebok and
Millennium have each retained an interest in the partnership. We acquired a club
in Henderson, Nevada and converted it to The Sports Club/Las Vegas in August
1997. The Sports Club/Las Vegas services the rapidly growing Las Vegas market
and is situated approximately three miles east of the Las Vegas airport. Our
newest Club, New York's The Sports Club/LA is located within the Rockefeller
Center complex and was opened in February 2000. This Club was designed to
service the executive business community in mid-town Manhattan.

THE SPORTSMED COMPANY, INC.

        Our SportsMed subsidiary operates physical therapy facilities within The
Sports Club/LA in Los Angeles, The Sports Club/Irvine, the Spectrum Club --
Agoura Hills, and the Spectrum Club -- Valencia. SportsMed also operates in a
stand alone facility in Calabasas, California. The clinics are staffed by
exercise physiologists, physical therapists and registered dietitians who
provide services to members and



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others. We believe that SportsMed provides valuable services which are
complementary to the other services provided by the Clubs, and are considering
expanding the SportsMed concept to other Clubs in the future.

DEVELOPMENT OF ADDITIONAL CLUBS

        Current Sports Club Developments. The following outlines our current
development plans for Sports Clubs.

        The Sports Club/LA-Upper East Side, New York. This 140,000 square foot
Club is located in the upper east side of Manhattan and is expected to be open
in the third quarter of 2000. This site is the location of the former Vertical
Club, which was closed in February 1999 for major renovation and conversion to a
Sports Club.

        Millennium Developments. We are developing The Sports Club/LA in Boston,
Washington, D.C. and San Francisco with Millennium, with whom we developed
Reebok Sports Club/NY. Millennium is a developer of premier multi-use projects,
and is funded by Quantum Realty Fund, a member of the Quantum Group of Funds,
which are off-shore investment funds managed by Soros Fund Management, a
management firm headed by George Soros. These Clubs will be located in projects
developed by Millennium in prime, metropolitan locations which, like Reebok
Sports Club/NY, include commercial, retail, entertainment and residential space.
In addition, each of these developments is expected to include either a Ritz
Carlton or Four Seasons five star hotel. These Clubs will be approximately
100,000 square feet and will offer services typically found at our other Sports
Club sites. We expect to open these Clubs between September 2000 and April 2001.
We believe that such projects offer ideal locations for Sports Clubs and intend
to investigate additional Sports Club developments with Millennium or other
developers in other major metropolitan areas.

        The Sports Club/LA-Houston. In June 1998, we acquired approximately 3.5
acres of undeveloped land in Houston, Texas, on which we expect to develop an
approximately 85,000 square foot Sports Club. At the current time, we are not
actively developing this property.

        Other Developments. We currently believe that our resources can be best
used to develop The Sports Club/LA in additional locations, but we may consider
the acquisition and conversion of existing sports and fitness clubs to a Sports
Club/LA if a suitable opportunity arises. We believe that, because of our
established reputation and the prestige associated with the Sports Clubs,
developers view our Clubs as valuable components of multi-use developments.

        Performance of Newly Developed and Acquired Clubs. Based on our
experience, a newly developed Club tends to achieve significant increases in
revenues until a mature membership level is reached. In the past, recently
opened Clubs which have not yet achieved mature membership levels 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. We expect this trend to continue at the five
Clubs we will open in 2000 and 2001 as the current presale membership levels are
below the amount required to reach a break even operating level. The
demographics in the vicinity of our newly opened Sports Club/LA at Rockefeller
Center and the upper east side Club under development compare favorably to the
demographics at Reebok Sports Club/NY. Therefore, we believe that our income
from these Clubs will significantly increase as membership levels mature.

        The physical layout, decor, age of equipment, staff training, marketing
programs, membership fees, ancillary services offered and other characteristics
of Clubs we may acquire vary, and, as a result, acquired Clubs may have lower
operating income than a typical Sports Club. We generally will renovate an
acquired Club, upgrade equipment, fitness programs and exercise protocols,
install experienced employees, implement marketing and training programs, and
introduce new services and products to enhance ancillary revenues. We will also
implement membership fees consistent with other Sports Clubs. Newly acquired
Clubs undergoing such improvements may perform at lower margins during the
period of implementation of new policies and programs.



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SALES AND MARKETING

        Strategy. The Sports Clubs are marketed as "urban country clubs"
offering personalized attention and multiple amenities and services. We believe
that the image of The Sports Clubs as the leader in the sports and fitness
industry justifies charging a premium. Our members include professionals, sports
and entertainment personalities and business people. Our Sports Clubs emphasize
personalized service and instruction and the creation of an "urban country club"
atmosphere in which members can relax and socialize. Our marketing efforts at
older, more seasoned Sports Clubs emphasize maintaining existing members,
replacing members who leave with new members and increasing ancillary revenues
such as private training and retail sales. Our focus at the newer Sports Clubs
is on attracting additional members.

        Referrals, Endorsements and Advertising. Word-of-mouth referrals and
endorsements by existing members are the Sports Clubs' most important source of
new members. In addition, all Sports Clubs utilize targeted marketing programs
which include advertisements, promotions, public relations and community events.
The principal marketing media for the Clubs are direct mail with some use of
print advertisements. The print advertisements are supplemented by special
events and special membership programs. The Sports Clubs host corporate parties
and charity benefits and often donate free or discounted memberships to
charitable organizations. We also conduct periodic membership drives whereby
referring members are entitled to receive special gifts and other incentives. We
believe that we will be able to continue to utilize these marketing strategies
in the promotion of new Clubs.

        Targeted Members. The largest segment of the membership base for the
Sports Clubs consists of health-conscious individuals. We target five other
groups in order to expand membership: corporate members, "shape-over" members,
medical referrals, families, and seniors. Each of these groups requires
specialized exercise/fitness programs, and we have developed specific programs
to attract members of these groups.

        Corporate Programs. We believe the corporate market is a significant
source of new members, due to the proximity of the Sports Clubs to business
centers and the use of the Clubs to conduct business and to develop and maintain
business contacts. We employ several Corporate Membership Directors whose
principal responsibilities are to solicit corporate memberships from businesses
operating in the vicinity of our Clubs. The Sports Clubs offer corporate
group-discounted initiation fees depending upon the number of new members
involved. Our SportsMed subsidiary has developed several corporate wellness
programs to fit the needs of this particular market. We believe that
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.

        Medical Referrals. We target members from the medical referral market
through our SportsMed subsidiary by offering specific rehabilitation and
exercise protocols to complement other forms of physical therapy recommended by
a physician or medical group.

        Family Programs. We believe that 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, we have implemented "Fun N Fit" programs which target
children between the ages of 6 months and 15 years and involve youth sports
camps and clinicks, fitness programs, art classes and birthday parties. The
Clubs' weight-training, basketball and swimming pool facilities are made
available to children and their parents during family day, and
specially-designed movement classes utilizing a variety of fitness equipment are
offered to younger children. The Clubs offer a summer sports camp, provide
individualized sports



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instruction and offer multiple fitness activities such as gymnastics, martial
arts and dance that are age appropriate.

        Senior Programs. We anticipate that as the current core membership group
ages, we will meet the changing fitness needs of seniors and attract additional
members from the senior population. We maintain training and exercise protocol
manuals for the senior market (which we generally define 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. We believe this market will expand as the "baby boomers"
mature.

EMPLOYEE TRAINING

        We believe that a key component of our operating strategy is a
well-trained and knowledgeable staff. We have comprehensive training programs to
enhance the effectiveness of our personnel. All newly-hired employees are
required to attend an orientation seminar, which is led by members of our
management and a personnel instructor. Topics include member service and member
interaction skills, our 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, we offer a workshop entitled "Introduction to 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, generally consisting of five three-hour sessions, are held six times a
year or as needed for new employees, and our management personnel are required
to attend periodically to maintain their skills.

        We provide 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. We
place particular emphasis on sales/marketing training seminars, which are given
once every two months by a personnel instructor and in which all new membership
directors complete 20 hours of participation and all other membership directors
are expected to complete four hours of participation every two months. Our
fitness instructors are trained to assist in the sales function and to implement
fitness testing and individually-tailored exercise programs. Most instructors
are college-educated. Our aerobics instructors hold a nationally recognized
certification and 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.

MEMBERSHIP PROGRAMS

        Sports Club memberships require an initiation fee plus monthly
membership dues. Unlike many other clubs, we do not offer financing for
memberships. Members are currently required to pay their dues on a monthly basis
by EFT, by which each member is automatically debited each month for dues either
through a checking account or credit card. At established Sports Clubs, the
average life of a member is four to five years.

        Sports Clubs offer three types of memberships: executive, health and
racquet. Sports Club initiation fees and monthly membership dues vary depending
on the location of the Club. The Sports Clubs' initiation fees range from $400
to $2,500 and monthly membership dues range from $90 to $225. Corporate,
bicoastal and spousal memberships are also available.

        Executive Membership. Executive membership offers the greatest number of
amenities and services, including unlimited use of all facilities, racquet
sports privileges, personal locker assignments



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within an executive locker room, laundry service, free valet parking and charge
privileges for dining and other Club services. Executive membership entitles a
member to use all Sports Clubs.

        Health Membership. Health membership is the basic membership offering
unlimited use of the facility excluding those privileges associated with a
racquet membership; courts are available to holders of health memberships for an
additional fee. We also offer a bi-coastal membership which entitles a member to
use all Sports Clubs throughout the country.

        Racquet Membership. 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.

COMPETITION

        Although the sports and fitness industry is still fragmented, the
industry has experienced significant consolidation in recent years and certain
of our competitors are significantly larger and have greater financial and
operating resources than we do. In addition, a number of individual and regional
operators compete with us in our existing and targeted markets. Many of these
sports and fitness clubs attract the same types of members we target. We also
compete 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. As the general public
becomes increasingly aware of the benefits of regular exercise, it is
anticipated that additional sports and fitness businesses will emerge. We
believe that there will continue to exist a market for our Clubs and that our
operating experience, our highly visible image, the professionalism of our staff
and our state-of-the-art equipment and exercise facilities afford us an
advantage over our competitors. However, we may be unable to maintain our
membership fees or membership levels in areas where another sports and fitness
club offers competitive facilities and services at a lower cost to members.

TRADEMARKS AND TRADENAMES

        The "Sports Club" name is generally not protectable under federal or
state trademark laws. We have registered our "flying lady" logo as a stand-alone
design and in combination with "The Sports Club/LA" and "The Sports Club/Irvine"
names under federal trademark laws. We have also registered "The Sports Club/LA"
name and logo in France, Germany, the United Kingdom, Japan and Australia and we
are awaiting final trademark approval under a common mark for the "European
Community" in general.

GOVERNMENT REGULATION

        Our operations and business practices are subject to regulation at the
federal, state and, in some cases, local levels. State and local consumer
protection laws and regulations govern our 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 we
currently operate Clubs. Many other states into which we 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, we are 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. We maintain internal review
procedures in order to comply with these requirements, and subject to the
matters described in "Item 3 Legal Proceedings," believe that our activities
are in substantial compliance with all applicable statutes, rules and decisions.



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        Under so-called state "cooling-off" statutes, a member has the right to
cancel his or her membership for a period of three to 10 days (depending on the
applicable state law) and, in such event, is entitled to a refund of any down
payment. In addition, our membership contracts provide that a member may cancel
his or her membership at any time upon death, disability or 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 us upon cancellation and we
may offset such amount against any refunds owed.

EMPLOYEES

        At March 15, 2000, we had approximately 1,600 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. At March 15, 2000 we employed
approximately 700 full-time employees, approximately 150 of whom were sales
personnel or supervisory personnel involved in Club operations, and
approximately 50 of whom were in general and administrative functions. We are
not a party to any collective bargaining agreement with our employees. Although
we experience high turnover of non-management personnel, we have never
experienced any labor shortages nor had any difficulty in obtaining adequate
replacements for departing employees. We consider our relations with our
employees to be good.

ITEM 2. PROPERTIES

        We own The Sports Club/Irvine, The Sports Club/LA in Los Angeles
(subject to a minority interest held by D. Michael Talla) and The Sports
Club/Las Vegas including all underlying real estate. We own land in Houston,
Texas on which we plan to develop a Sports Club. All other structures in which
the Clubs are located are leased.

         The following table provides certain information concerning our Clubs:


<TABLE>
<CAPTION>
                                              APPROXIMATE     OPEN DATE    OWN OR LEASE
CLUB                                          SQUARE FEET       (3)       EXPIRATION DATE      RENEWAL OPTION
----                                          -----------       ---       ---------------      --------------
<S>                                           <C>             <C>         <C>               <C>
The Sports Club/LA-Los Angeles (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        4/17/15        Three 14-year options
The Sports Club/Las Vegas...............        136,000        1997 A          Own                   N/A
The Sports Club/LA - Rockefeller Center          90,000        2000 O        1/31/13          Two 5-year options
The Sports Club/LA - 61st Street........        140,000        2000 E        12/31/20         Two 5-year options
The Sports Club/LA - Washington D.C.....        100,000        2000 E        2020 (4)        Three 14-year options
The Sports Club/LA - Boston.............        100,000        2001 E        2021 (4)        Three 14-year options
The Sports Club/LA - San Francisco......        100,000        2001 E        2021 (4)        Three 14-year options
</TABLE>

----------

(1)     D. Michael Talla, our Chairman and Co 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 in Los Angeles. See "Certain Relationships and
        Related Transactions."

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

(3)     Date of acquisition ("A"), opening ("O") or estimated opening date
        ("E").

(4)     The initial term for each lease expires 20 years after the rent
        commencement date, as defined in the lease.


        We remain obligated under lease agreements for seven of our former
Spectrum Club locations. We have subleased each of these properties to the buyer
of these Clubs under sublease agreements which



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provide that all operating costs of these facilities be assumed by the new
owners. We also own the land and building at the former Spectrum Club - Fountain
Valley and are leasing that property to another club operator.

        All of the Clubs maintain comprehensive casualty, liability and business
interruption insurance and Clubs located in California maintain a blanket $40.0
million earthquake insurance policy. We believe that our insurance coverage is
in accordance with or above industry standards. There are, however, certain
types of losses which may be either uninsurable or not economically insurable,
and insurance proceeds may not adequately compensate for all economic
consequences of any loss. Should a loss occur, we could lose both our invested
capital and our anticipated profits from the affected Clubs. Any such event
could have a material adverse effect on our operations.

ITEM 3. LEGAL PROCEEDINGS

        MKDG/Rhodes SC Partnership and Sports Club, Inc. v. Agricultural
Insurance Company (Los Angeles Superior Court). At the time of the Northridge
earthquake on January 17, 1994, Agricultural Insurance Company ("Agricultural")
provided certain excess earthquake coverage for The Sports Club/LA in Los
Angeles. Certain of our predecessors (the "SCLA Parties") were named insureds
under the policy. The Partners assigned to MKDG/Rhodes SC Partnership ("MKDG")
all of their rights to payments under the policy and retained no interest in any
amounts paid by Agricultural. A dispute arose under the policy and MKDG filed a
complaint against Agricultural, 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 sought the return of amounts paid
(approximately $3.0 million), plus punitive damages and attorneys fees. This
matter was settled in December 1999 without any material expense to us.

        OTR v. Spectrum Club Liquidation, Inc. and The Sports Club Company, Inc.
(Orange County Superior Court). OTR and Spectrum Club Liquidation, Inc. ("SCLI")
entered into a lease with respect to a proposed Spectrum Club development site
in Anaheim Hills, California, and we guaranteed SCLI's obligations under the
lease. SCLI sought to rescind the lease, and OTR brought this action for damages
against SCLI for breach of the lease and against us on the guarantee, seeking
specific damages and unspecified general damages. We filed a cross-complaint
seeking rescission of the lease on the basis of fraud, mistake and negligent
misrepresentation. In November 1999, the parties settled both actions and we
paid OTR $2,950,000. We agreed to this settlement concurrent with the sale of
the Spectrum Clubs. As a result, the settlement payment was recorded as a
reduction in the gain on the Spectrum Clubs sale.

        Randy Pinkerton and Nick Thedes, individually and as Partners of Think
Physical Therapy v. SCC California, Inc. (Orange County Superior Court). On
April 23, 1999, Randy Pinkerton and Nick Thedes, individually and as partners of
Think Therapy Physical Therapy (collectively, "Think Therapy") filed an action
against SCC California, Inc., ("Spectrum"), our wholly-owned subsidiary,
alleging among other things, breach of contract and interference with economic
relationships. The complaint seeks declaratory relief (including the
confirmation of Think Therapy's lease term through December 1999), unspecified
compensatory damages and attorneys' fees. The contract which Think Therapy
alleges was breached relates to a lease at the former Spectrum Club - Santa Ana
facility ("Santa Ana Club") which facility was acquired by Spectrum in December
1997 and sold in April 1999 as commercial property unrelated to the sports and
fitness business. We believe that Think Therapy was on a month-to-month lease
and in connection with the sale of the Santa Ana Club we terminated their
tenancy by serving a thirty day Notice to Quit in March 1999. Spectrum has
responded to the complaint against them and believes the allegations are without
merit and will vigorously defend this lawsuit.

        Lyudmirsky and those similarly situated v. Sports Club, Inc. of
California; LA/Irvine Sports Club, Ltd. (Los Angeles Superior Court). On June
25, 1999, Ilya Lyudmirsky ("Lyudmirsky") filed a class action lawsuit against
Sports Club, Inc. of California and LA/Irvine Sports Club, Ltd. (collectively,
the "Company") alleging, among other things, violations of California Civil Code
Section 1812.80 et seq., claiming our membership fee structure and membership
contracts violate certain provisions of the Health



                                       9
<PAGE>   10

Studio Services Act (the "HSS Act"). Lyudmirsky further alleges violations of
the Unruh Act and the Consumer Legal Remedies Act, claiming we give unlawful,
preferential discounts to attractive women and advertises membership fees which
are higher than fees actually charged to some members. The complaint seeks
equitable relief, (including a temporary and permanent injunction), unspecified
compensatory damages, punitive damages and attorneys' fees. We stipulated to a
preliminary injunction, which prohibits us from violating the HSS Act, effective
as of November 29, 1999. On October 22, 1999, the Court ruled that Lyudmirsky's
membership contract violated the HSS Act and is void. However, the Court has not
ruled that Lyudmirsky suffered damages as a result of the violation of the HSS
Act. Under the HSS Act, a claimant may recover an amount up to three times the
actual damages suffered plus attorneys' fees. The amount of actual damages is
measured by the amount paid less reasonable value of services. We believe our
initiation fees and monthly dues are reasonable, and our members have not
suffered actual damages as a result of the alleged violation of the HSS Act. The
hearing on Lyudmirsky's motion for class certification regarding the HSS Act
claim is set for March 29, 2000. We have denied violating the Unruh Act, and
providing preferential discounts to women based on beauty. We have also denied
making misleading or false statements regarding our pricing structure or
discounts. We are in the process of evaluating Lyudmirsky's damage claim as well
as the size of the class which may be certified with respect to the HSS claim
and are unable at this time to estimate the damages, if any, which any class may
be awarded. However, if a significantly large class is certified and the court
or jury accepts plaintiff's damage claims, this action may have a materially
adverse effect on our financial condition. The trial date is August 7, 2000.

        Park Place Entertainment Corporation v. The Sports Club Company, Inc.
(Los Angeles Superior Court). On December 23, 1999, Park Place Entertainment
Corporation ("Park Place") filed an action against us for money due on a
promissory note. Park Place is the current holder of a purchase money promissory
note in the amount of $2,666,666 (the "Note") given to Hilton Hotels Corporation
("Hilton") in connection with our 1998 acquisition of the Vertical Club - a
sports and fitness club located in New York (the "Club"). We believe that we
have various claims in connection with the repair and refurbishing of the Club
which offset the money owed on the Note. Park Place feels that no basis exists
which excuses us from the timely payment of installments on the Note and is
asking for damages in the amount of $2,666,666 plus interest, attorneys' fees
and costs of the suit. On February 25, 2000, we filed an answer raising offsets
and a cross-complaint against Hilton seeking damages in the amount of
$14,415,000 for alleged breach of contract, fraud and negligent
misrepresentation, plus interest, attorneys' fees and costs of suit. Hilton has
not yet responded. We are just commencing discovery and intend to vigorously
pursue our cross-claims. We are unable to estimate, at this time, the amount, if
any, that will be awarded in this matter.

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

        Not applicable



                                       10
<PAGE>   11

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS

        Our Common Stock is traded on the American Stock Exchange ("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>
               CALENDAR QUARTER                PRICE RANGE OF COMMON STOCK
                                               ---------------------------
                                                   HIGH          LOW
                                                  ------       ------
<S>                                            <C>             <C>
Year Ended December 31, 1998:
     First Quarter ........................       $9.250       $8.250
     Second Quarter .......................        9.250        6.750
     Third Quarter ........................        7.500        4.750
     Fourth Quarter .......................        6.063        3.750

Year Ended December 31, 1999:
     First Quarter ........................        5.250        3.750
     Second Quarter .......................        5.125        3.812
     Third Quarter ........................        6.000        3.937
     Fourth Quarter .......................        5.000        3.125

Year Ended December 31, 2000:
     First Quarter (through March 15, 2000)        4.500        3.375
</TABLE>

        As of March 15, 2000 we had approximately 59 stockholders of record and
approximately 400 nonobjecting beneficial owners. The closing price of our
Common Stock as reported by the AMEX on March 15, 2000, was $4.125.

DIVIDEND POLICY

        We have never declared or paid any dividends on our Common Stock and we
do not anticipate doing so in the foreseeable future. It is our present policy
to retain earnings for use in our operations and the expansion of our business.
In addition, our ability to pay cash dividends is limited by our current
financing agreements and may be similarly limited by future financing
agreements.



                                       11
<PAGE>   12

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

        The following table presents our summary financial and operating data
for the fiscal years ended December 31, 1995 through 1999 and have been derived
from our consolidated financial statements, which have been audited by KPMG LLP,
independent certified public accountants. The summary financial and operating
data should be read in conjunction with, and is qualified in its entirety by
reference to, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the notes
thereto appearing elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                                                    FISCAL YEAR ENDED DECEMBER 31,
                                                                  ----------------------------------------------------------------
                                                                   1995          1996           1997          1998          1999
                                                                  --------      --------      --------      --------      --------
                                                                            (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                               <C>           <C>           <C>           <C>           <C>
STATEMENT OF INCOME DATA:
  Revenues ..................................................     $ 34,659      $ 36,918      $ 61,154      $ 81,923      $ 87,325
  Operating expenses:
    Direct ..................................................       21,730        22,989        43,517        56,746        60,528
    Selling, general and administrative .....................        5,486         6,052         6,607         8,556         9,234
    Depreciation and amortization ...........................        2,775         2,490         3,919         5,282         6,147
   Pre-opening expenses .....................................           --            --            --            --         3,090
                                                                  --------      --------      --------      --------      --------
         Total operating expenses ...........................       29,991        31,531        54,043        70,584        78,999
                                                                  --------      --------      --------      --------      --------
         Income from operations .............................        4,668         5,387         7,111        11,339         8,326
  Other income (expense):
    Interest ................................................       (2,600)       (2,682)       (3,206)       (1,629)       (5,991)
    Minority interests ......................................         (150)         (150)          (22)         (150)         (150)
    Equity interest in net income of unconsolidated
     subsidiaries ...........................................          860           631           696           880           931
    Non-recurring items .....................................           --          (300)       (2,025)         (314)          553
                                                                  --------      --------      --------      --------      --------
         Total other income (expense) .......................       (1,890)       (2,501)       (4,557)       (1,213)       (4,657)
                                                                  --------      --------      --------      --------      --------
         Income before income taxes, extraordinary charge and
         cumulative effect of change in accounting
         principle ..........................................        2,778         2,886         2,554        10,126         3,669
  Provision for income taxes ................................        1,139         1,183         1,014         3,971         1,460
                                                                  --------      --------      --------      --------      --------
         Income before extraordinary charge and cumulative
          effect of change in accounting principle ..........        1,639         1,703         1,540         6,155         2,209
  Extraordinary charge from early extinguishment
   of debt, net of income tax benefit of $1,331 .............           --            --            --         2,173            --
  Cumulative effect of change in accounting principle,
   net of income tax benefit of $600 ........................           --            --            --            --           899
                                                                  --------      --------      --------      --------      --------
         Net income .........................................     $  1,639      $  1,703      $  1,540      $  3,982      $  1,310
                                                                  ========      ========      ========      ========      ========

  Net income per share:
    Basic ...................................................     $   0.14      $   0.15      $   0.12      $   0.21      $   0.07
                                                                  ========      ========      ========      ========      ========
    Diluted .................................................     $   0.14      $   0.15      $   0.12      $   0.21      $   0.07
                                                                  ========      ========      ========      ========      ========

  Weighted average number of common shares outstanding:
    Basic ...................................................       11,353        11,355        12,524        18,603        18,114
                                                                  ========      ========      ========      ========      ========
    Diluted(1) ..............................................       11,357        11,360        12,683        18,829        18,290
                                                                  ========      ========      ========      ========      ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                 AT DECEMBER 31,
                                                          ------------------------------------------------------------
                                                            1995         1996         1997         1998         1999
                                                          --------     --------     --------     --------     --------
                                                                             (DOLLARS IN THOUSANDS)
<S>                                                       <C>          <C>          <C>          <C>          <C>
BALANCE SHEET DATA:
  Cash, cash equivalents and short-term investments .     $  1,545     $  4,146     $  1,581     $  2,233     $ 77,496
  Current assets ....................................        7,147        7,341        4,926        7,043       83,341
  Property and equipment, net .......................       59,956       72,736      106,791      135,269      118,959
  Total assets ......................................       83,161       95,697      131,561      163,757      223,553
  Deferred membership revenue .......................        5,614        7,481        9,936        9,953        9,712
  Current liabilities ...............................       11,355       14,159       26,844       26,199       23,833
  Long-term debt including current installments .....       32,913       38,497       50,798       37,441      103,887
  Stockholders' equity ..............................       39,492       41,202       58,477      104,539       97,687
</TABLE>

----------

(1)     Does not include up to 119,093 shares to be issued as consideration for
        the acquisition of one Spectrum Club acquired from Racquetball World.



                                       12
<PAGE>   13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

        The following discussion should be read in conjunction with our
consolidated financial statements and notes thereto appearing elsewhere herein.
The Spectrum Club -- Manhattan Beach was accounted for under the equity method
of accounting until December 1999 at which time we sold all of our Spectrum
Clubs.

        In July 1997, we opened the Spectrum Club -- Valencia. In August 1997,
we acquired a sports and fitness club in Henderson, Nevada which we converted to
The Sports Club/Las Vegas in a transaction accounted for as a purchase. On
December 31, 1997, we acquired four Clubs in Southern California, which were
operated as Spectrum Clubs in a transaction accounted for as a purchase; one of
these Clubs was leased to another health and fitness operator in January 1999
and one Club was sold in April 1999. In November 1998 we closed the Spectrum
Club -- Santa Monica and in December 1999 sold the remaining Spectrum Clubs.
Seasonal factors have not had a significant effect on our operating results.

RESULTS OF OPERATIONS

        As a result of the sale of the Spectrum Clubs in November 1999, results
for past periods are not indicative of results in future periods.

        Fiscal 1999. Our revenues for the year ended December 31, 1999, were
$87.3 million, compared to $81.9 million for 1998, an increase of $5.4 million
or 6.6%. Revenue increased at the Spectrum Clubs by $1.4 million, as the
revenues at our two new Clubs offset the lost revenues at Clubs we sold or
closed. Revenue increased by $4.0 million at The Sports Clubs and SportsMed.
The revenue increase at The Sports Clubs was primarily due to increases in
membership dues and ancillary services fees and the final maturation of the
membership base at The Reebok Sports Club/NY.

        Our direct operating expenses increased to $60.5 million for the year
ended December 31, 1999, compared to $56.7 million for 1998. Direct expenses
increased primarily due to the opening of two new Spectrum Clubs in 1999 and to
direct expenses related to increased revenues at The Sports Clubs. Direct
operating expenses as a percentage of revenues were 69.3% in both 1999 and 1998.

        Selling, general and administrative expenses were $9.2 million for the
year ended December 31, 1999, compared to $8.6 million for 1998, an increase of
$600,000 or 7.9%. Selling costs increased approximately $70,000. General and
administrative costs increased by approximately $600,000. General and
administrative costs increased primarily due to legal expenses associated with
litigation (See "Item 3 - Legal Proceedings") and the increase in our corporate
infrastructure related to our planned expansion. Selling, general and
administrative costs slightly increased as a percentage of revenue to 10.6% in
1999 from 10.4% in 1998. We believe these costs should decrease as a percentage
of future revenues as we expand and achieve economies of scale. There is no
assurance, however, that said expansion or economies of scale will be achieved.

        Depreciation and amortization expenses were $6.1 million for the year
ended December 31, 1999, compared to $5.3 million for 1998. Depreciation expense
increased primarily due to the opening of two new Spectrum Clubs in 1999 and to
additional depreciation related to improvements made at other Clubs in 1998 and
1999.

        Pre-opening expenses incurred in 1999 were $3.1 million. We adopted
Statement of Position 98-5, "Accounting for Start-Up Costs" ("SOP 98-5")
effective January 1, 1999. SOP 98-5 provides that all costs related to the
development of new fitness clubs, except for real estate related costs, be
expensed as incurred. This is a change from our previous accounting policy,
whereby many of these costs were capitalized and charged to expense upon the
Club opening. In 1999, we incurred start up costs at two Spectrum Clubs and two
Sports Clubs.



                                       13
<PAGE>   14

        Interest expense was $6.0 million for the year ended December 31, 1999,
compared to $1.6 million for 1998. Interest expense increased primarily due to
the interest expense associated with our $100.0 million Senior Secured Notes
issued in April 1999. The Senior Secured Notes bear interest at an annual rate
of 11 3/8% and are due in March 2006.

        Equity interest in net income of unconsolidated subsidiary was $931,000
for the year ended December 31, 1999, compared to $880,000 for 1998, an increase
of $51,000 or 5.8%. These amounts are associated with improved profits at the
Spectrum Club -- Manhattan Beach, which we sold in December 1999.

        In the year ended December 31, 1999, we had a non-recurring gain of
$553,000 compared to a non-recurring charge of $314,000 for the year ended
December 31, 1998. The non-recurring gain in 1999 is associated with the sale of
the Spectrum Club - Fountain Valley in January 1999 and the sale of the
remaining Spectrum Clubs in December 1999. The non-recurring item in 1998 is
associated with our closing of the Spectrum Club - Santa Monica in November
1998.

        Our net income before income taxes, non-recurring items, extraordinary
charge and cumulative effect of change in accounting principle was $3.1 million
for the year ended December 31, 1999, compared to $10.4 million for 1998. In
1999, we incurred a charge from a cumulative effect of change in accounting
principle, net of applicable taxes, of $899,000. This charge is associated with
the write off of pre-opening expenses incurred and capitalized prior to January
1, 1999. In 1998, we incurred a loss from early estinguishment of debt, net of
applicable taxes, of $2.2 million, which was recorded as an extraordinary
charge.

        Our estimated income tax rate was 40% and 38% for the year ended
December 31, 1999 and 1998 respectively, resulting in net income of $1.3 million
for 1999 and $4.0 million for 1998. Basic and diluted earnings per share, before
non-recurring items, extraordinary charge and cumulative effect of change in
accounting principle was $.17 and $.17 in 1999 and $.35 and $.34 in 1998,
respectively. Basic and diluted net income per share was $.07 in 1999 and $.21
in 1998.

        Pro forma fiscal 1999. During the fiscal year ended December 31, 1999,
we sold or disposed of all of our Spectrum Clubs (see Note 3 to consolidated
financial statements). Below is a discussion of the unaudited results of
operations for the fiscal years ended December 31, 1999 and 1998 on a pro forma
basis assuming the sale of the Spectrum Clubs occurred on January 1, 1998.
The purpose of the pro forma consolidated statements of operations are to
present what our operating results might have been for the years ended December
31, 1998 and 1999, had the sale of the Spectrum Clubs occurred on January 1,
1998. However, the pro forma consolidated statements of operation do not
purport to and do not represent what our actual results of operations might
have been had the Spectrum Club sale been completed on January 1, 1998.
Moreover, the pro forma consolidated statements of operation do not purport to
be projections of our results of operations either for the current period or
for any future periods and therefore should not be relied upon to project
future operating results. Operating results can be affected by a number of
circumstances the nature and effect of which cannot be predicted.

        Our revenues for the year ended December 31, 1999, were $62.2 million,
compared to $57.9 million for 1998, an increase of $4.3 million or 7.4%. Revenue
increased primarily due to increases in membership dues and ancillary services
fees and the final maturation of the membership base at the Reebok Sports
Club/NY.

        Operating expenses for the year ended December 31, 1999, were $56.0
million, compared to $49.0 million for 1998, an increase of $7.0 million or
14.1%. Operating expenses increased primarily due to additional direct expenses
associated with the increased revenues, increased general and administrative
expenses and the recognition of pre-opening costs. General and administrative
expenses increased primarily due to legal expenses associated with litigation
and the increase in corporate infrastructure related to our planned expansion.
Pre-opening expenses incurred in 1999 were $2.4 million. We adopted Statement of
Position 98-5, "Accounting for Start-Up Costs" ("SOP 98-5") effective January 1,
1999. SOP 98-5 provides that all costs related to the development of new fitness
clubs, except for real estate related costs, be expensed as incurred. This is a
change from our previous accounting policy, whereby many of these costs were
capitalized and charged to expense upon the Clubs opening.

        Other expenses for the year ended December 31, 1999, were $2.3 million,
compared to other income of $2.3 million for 1998. The change in other income
and expense is primarily due to increased interest expense associated with our
$100.0 million Senior Secured Notes issued in April 1999.



                                       14
<PAGE>   15

        Our pro forma net income for the year ended December 31, 1999 was $2.0
million or $0.11 per basic and diluted share, compared to net income of $4.6
million in 1998 or $0.25 per basic and diluted share. In 1999, we incurred a
charge from a cumulative effect of change in accounting principle, net of
applicable taxes, of $221,000. This charge is associated with the write off of
pre-opening expenses incurred and capitalized prior to January 1, 1999. In 1998,
we incurred a loss from early extinguishment of debt, net of applicable taxes of
$2.2 million, which was recorded as an extraordinary charge.

        Fiscal 1998. Our revenues for the year ended December 31, 1998, were
$81.9 million, compared to $61.2 million for 1997, an increase of $20.7 million
or 33.8%. An increase of $14.6 million resulted from revenue at our new Clubs
acquired and/or opened during the last six months of 1997. Revenue growth of
$6.1 million resulted from the remaining Clubs and SportsMed.

        Our direct operating expenses increased to $56.7 million for the year
ended December 31, 1998, compared to $43.5 million for 1997. The increase
resulted primarily from the Clubs acquired and/or opened during the last six
months of 1997. Direct operating expenses as a percentage of revenues decreased
to 69.3% for 1998 compared 71.2% for 1997. Operating margins continued to
improve at Reebok Sports Club/NY as membership levels at this Club mature. Lower
operating margins at acquired Clubs partially offset this increase.

        Selling, general and administrative expenses were $8.6 million for the
year ended December 31, 1998, compared to $6.6 million for 1997. Selling costs
increased approximately $900,000 primarily due to Clubs acquired and/or opened
during the last six months of 1997. General and administrative costs increased
by approximately $1.1 million as we added corporate overhead to support the six
new Clubs and the growth of SportsMed. Selling, general and administrative costs
decreased as a percentage of revenue from 10.8% for 1997 to 10.4% for 1998.

        Depreciation and amortization expenses were $5.3 million for the year
ended December 31, 1998, compared to $3.9 million for 1997. The increase is
primarily due to the addition of depreciation and amortization at the Clubs
acquired and/or opened during the last six months of 1997. Interest expense was
$1.6 million for the year ended December 31, 1998, compared to $3.2 million for
1997. Interest expense decreased due to the payoff of the note secured by The
Sports Club/LA in April 1998 with the proceeds of a Common Stock offering.

        Equity interest in net income of unconsolidated subsidiary was $880,000
for the year ended December 31, 1998, compared to $696,000 for 1997, an increase
of $184,000 or 26.4%. These amounts are associated with improved profits at the
Spectrum Club -- Manhattan Beach.

        Costs reported as non-recurring items were $314,000 for the year ended
December 31, 1998, compared to $2,025,000 for 1997. The non-recurring expense in
1998 is associated with our closing of the Spectrum Club -- Santa Monica and
moving its members to the Spectrum Club -- Water Garden. The non-recurring loss
in 1997 was the result of a litigation settlement.

        Our net income before income taxes, non-recurring items and
extraordinary charge was $10.4 million for the year ended December 31, 1998,
compared to $4.6 million for 1997. In 1998, we incurred a loss from the early
extinguishment of debt, net of applicable taxes, of $2.2 million, which was
recorded as an extraordinary charge.

        Our estimated income tax rate was 38% for the years ended December 31,
1998 and 1997, resulting in net income of $4.0 million for 1998 and $1.5 million
for 1997. Basic and diluted earnings per share, before non-recurring items and
extraordinary charge, was $.35 and $.34 in 1998 and $.22 and $.22 in 1997,
respectively. Basic and diluted net income per share was $.21 in 1998 and $.12
in 1997.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Credit Availability. On April 1, 1999, we issued in a private placement
$100.0 million of 11 3/8% Senior Secured Notes due in March 2006 (the "Senior
Secured Notes") with interest due semi-


                                       15
<PAGE>   16

annually beginning September 15, 1999. We used $37.6 million of the proceeds to
repay existing indebtedness. The balance is being used to develop new Clubs and
for general corporate purposes. The Senior Secured Notes are secured by
substantially all of our assets, other than certain excluded assets. In
connection with the issuance of the Senior Secured Notes, we entered into an
indenture dated as of April 1, 1999 (the "Indenture") which includes certain
covenants which limit our ability, subject to certain exceptions, to: (i) incur
additional indebtedness; (ii) pay dividends or other distributions, repurchase
capital stock or other equity interest or subordinated indebtedness; (iii) enter
into transactions with affiliates; (iv) make investments; (v) create liens or
sell certain assets and (vi) enter into mergers and consolidations.

        Our bank credit facility provides us $15.0 million of financing with a
maturity date of May 31, 2001. Advances under our credit facility bear interest
at a variable rate of LIBOR plus 2 1/2% or the agent's prime rate. At December
31, 1999, no borrowings were outstanding under the credit facility and $4.0
million was utilized in the form of a letter of credit, leaving $11.0 million
available for future borrowings. Under the terms of the Indenture, we are
currently allowed to increase our existing bank facility by $5.0 million and to
incur an additional $8.8 million in equipment financing.

        As part of a strategy to focus on The Sports Club/LA line of Clubs, we
sold our Spectrum Clubs during 1999. In April, we sold our Spectrum Club - Santa
Ana for $5.6 million in cash. In September, we completed the sale and leaseback
of the real estate at our Spectrum Club - Thousand Oaks and realized gross
proceeds of $12.0 million. In December, we sold our remaining Spectrum Clubs to
an investment group and realized gross proceeds of $48.4 million. With those
funds, we retired approximately $5.2 million of equipment financing obligations,
paid transaction fees and expenses, completed various construction projects at
several of the Spectrum Clubs and resolved litigation related to the Spectrum
Clubs. Our net proceeds from the December sale were approximately $38.0 million.
We have designated $9.1 million of this amount to be used for our two new Sports
Club/LA construction projects in New York City leaving $28.9 million. Under the
terms of our Indenture, we will be required, before December 3, 2000, to make an
offer to retire the Senior Notes to the extent these funds are not invested in
assets related to our business.

        We generated $9.5 million of cash from operating activities in the year
ended December 31, 1999. During this year we repurchased $8.4 million of our
Common Stock at an average price of $4.23 per share. We invested $39.7 million
on new Club developments and $5.3 million for capital expenditures at existing
locations. On December 31, 1999 our balance of cash and short-term investments
was $77.5 million. Of this amount, $41.4 million has been segregated into a
disbursement escrow account and is specifically restricted for the development
of new Clubs.

        New Club Development. In February 1998, we signed a lease with respect
to the development of The Sports Club/LA at Rockefeller Center in New York City.
We commenced pre-sale activities in October 1999 and opened the Club on February
14, 2000. We delivered a $4.0 million letter of credit to the landlord to secure
our performance under the lease agreement. As of December 31, 1999 we expect to
spend an additional $8.0 million from the disbursement escrow account for
constructing and equipping this Club.

        In April 1998, we acquired rights to develop The Sports Club/LA at 61st
and 1st Streets on the Upper East Side in New York City. We issued a
non-interest bearing note for $2.7 million to the seller. The note requires two
equal principal payments in April 1999 and April 2000. We have not made the
April 1999 payment because we believe that we have various claims in connection
with the repairs and refurbishing of the Club which offset the money owed on the
note. Based on current estimates, as of December 31, 1999, we expect to spend
approximately $33.5 million constructing and equipping this Club, which
commenced pre-sale activities in September 1999. At December 31, 1999, we had
$24.4 million in our disbursement escrow account for construction of this Club.
The remaining $9.1 million will come from the Spectrum Clubs sales proceeds. We
currently expect to open this Club in the third quarter of 2000.

        We have entered into lease agreements with Millennium Entertainment
Partners and/or their affiliates (collectively, "Millennium") with respect to
the development of Sports Club/LA's in San Francisco, Washington, D.C. and
Boston. Millennium began construction on each of these projects in



                                       16
<PAGE>   17

1998. Our portion of the aggregate development costs for these Clubs is
currently estimated to be approximately $16.5 million. The construction
disbursement account has $9.0 million reserved for the Boston and Washington,
D.C. sites. Millennium and its affiliates own approximately 28% of our
outstanding Common Stock. The Sports Club/LA in Washington D.C. is scheduled to
open in September 2000 and The Sports Club/LA in Boston and San Francisco are
expected to open in the second quarter of 2001.

        In June 1998, we acquired undeveloped land in Houston, Texas, for
approximately $3.1 million, on which we intend to develop a Sports Club/LA. We
will not start construction at this location until the two new Sports Clubs/LA's
in New York City are open and operating to our satisfaction. Based on
preliminary estimates, we would spend approximately $20.0 million to complete
development of this Club.

        Future Capital Requirements. In addition to the development projects
described above, we incur capital expenditures for normal replacement of fitness
equipment and remodeling of Clubs. Equipment financing and operating cash flow
have funded these expenditures. Amounts borrowed pursuant to equipment financing
arrangements are generally repayable in monthly installments over five years,
with effective interest rates between 8% and 10% per annum. While capital
expenditures may fluctuate from time to time, we generally expect to spend
approximately 4% of revenues on facility and equipment upgrades and
replacements. We also expect to spend approximately $1.5 million during the next
12 months to upgrade our management information systems. The terms of the
Indenture currently allow us to borrow an additional $8.8 million for equipment
financing. Operating cash flow will be utilized for the remaining capital
expenditures.

        Our long-term capital needs are to provide funds for the developments
described above, for additional development and acquisition projects, to pay
interest on the Senior Secured Notes and for general corporate purposes. Future
acquisitions and developments will also require additional capital. Pursuant to
the terms of the Indenture, we may borrow up to $20.0 million under our credit
facility and up to $10.0 million through equipment financing. In addition, if
certain conditions are met, the terms of the Indenture and our credit facility
permit us to incur additional indebtedness. We may also consider entering into
joint venture and partnership agreements for the purpose of developing new
Clubs, subject to the terms of the Indenture and our credit facility.

        We estimate that the cash in the disbursement escrow account, our cash
and short-term investment balances, operating cash flows, and credit available
under our credit facility and equipment financing will be sufficient to fund our
capital expenditures in fiscal 2000 and 2001 on the projects currently under
development.

YEAR 2000 READINESS

        Until recently, computer programs were written to store only two digits
of date-related information in order to more efficiently handle and store data,
and thus are unable to distinguish between the year 1900 and the year 2000. This
problem is frequently referred to as the "Year 2000 Problem." We initiated a
Year 2000 Project to bring all of our information technology ("IT") systems and
non-IT systems into Year 2000 compliance. During 1999, we contacted our material
suppliers, service providers and contractors to determine the extent of our
vulnerability to those third parties' failure to remedy their own Year 2000
issues. To our knowledge, these suppliers, service providers and contractors
have incurred no problems with their own Year 2000 issues that impacted us.
Utilizing internal resources, we defined, assessed and converted, or replaced,
various programs, hardware and instrumentation systems to make them Year 2000
compliant. We successfully completed our Year 2000 planning, replacements and or
conversions and have had no Year 2000 related problems.

        We have developed a contingency plan to handle any unexpected Year 2000
problems that may occur in the future.



                                       17
<PAGE>   18

FORWARD-LOOKING STATEMENTS

        From time to time we make "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements include the words "may,"
"will," "estimate," "continue," "believe," "expect" or "anticipate" and other
similar words. The forward-looking statements contained in this Report are
generally located in the material set forth under the headings, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Financial Statements" and "Business" but may be found in other locations as
well. Forward-looking statements may also be found in our quarterly and other
reports filed with the Securities and Exchange Commission and in our press
releases and other statements. These forward-looking statements generally relate
to our plans and objectives for future operations and are based upon
management's reasonable estimates of future results or trends. Although we
believe that our plans and objectives reflected in or suggested by such
forward-looking statements are reasonable, such plans or objectives may not be
achieved. Actual results may differ from projected results due to unforeseen
developments including developments relating to the following:

        -       the availability and adequacy of our cash flow and financing
                facilities for our requirements, including payment of our Senior
                Secured Notes,

        -       our ability to attract and retain members, which depends on
                competition, market acceptance of new and existing sports and
                fitness clubs and services, demand for sports and fitness club
                services generally and competitive pricing trends in the sports
                and fitness market,

        -       our ability to successfully develop new sports and fitness
                clubs,

        -       disputes or other problems arising with our development partners
                or landlords,

        -       changes in economic, demographic and other conditions in the
                geographic areas in which we operate, including business
                interruptions resulting from earthquakes or other causes,

        -       competition,

        -       changes in personnel or compensation, and

        -       changes in statutes and regulations or legal proceedings and
                rulings.

        We will not update forward-looking statements even though our situation
will change in the future.

ITEM 8. FINANCIAL STATEMENTS

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                               PAGE
                                                                                                               ----
<S>                                                                                                            <C>
Independent Auditors' Report..........................................................................          F-1

Consolidated Balance Sheets as of December 31, 1998 and 1999..........................................          F-2

Consolidated Statements of Income for each of the Years in the Three-Year Period
ended December 31, 1999...............................................................................          F-3

Consolidated Statements of Stockholders' Equity for each of the Years in the Three-Year Period
ended December 31, 1999................................................................................         F-4
</TABLE>



                                       18
<PAGE>   19

<TABLE>
<S>                                                                                                             <C>
Consolidated Statements of Cash Flows for each of the Years in the Three-Year Period                            F-5
ended December 31, 1999................................................................................

Notes to Consolidated Financial Statements.............................................................         F-6
</TABLE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

        Not applicable



                                       19
<PAGE>   20

                          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, 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, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.


                                            KPMG LLP


LOS ANGELES, CALIFORNIA
FEBRUARY 25, 2000



                                      F-1
<PAGE>   21

                          THE SPORTS CLUB COMPANY, INC.
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1999
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                     ASSETS
<TABLE>
<CAPTION>
                                                                                           1998           1999
                                                                                        ---------      ---------
<S>                                                                                     <C>            <C>
Current assets:
    Cash and cash equivalents .....................................................     $   2,233      $  53,060
    Short term investments ........................................................            --         24,436
    Accounts receivable, net of allowance for doubtful accounts of $215 and $342 at
      December 31, 1998 and 1999, respectively ....................................         2,480          2,149
    Inventories ...................................................................         1,527          1,355
    Other current assets ..........................................................           569          2,183
    Due from affiliates ...........................................................           234            158
                                                                                        ---------      ---------
         Total current assets .....................................................         7,043         83,341

Property and equipment, net .......................................................       135,269        118,959
Equity interest in unconsolidated subsidiary ......................................         1,295             50
Costs in excess of net assets acquired, less accumulated amortization of
    $1,294 and $1,588 at December 31, 1998 and 1999, respectively .................        15,443         13,890
Organizational costs and other assets, net ........................................         4,707          7,313
                                                                                        ---------      ---------
                                                                                        $ 163,757      $ 223,553
                                                                                        =========      =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Current installments of notes payable and capitalized lease obligations .......     $   7,746      $   3,520
    Accounts payable ..............................................................         2,273          2,052
    Accrued liabilities ...........................................................         6,227          8,549
    Deferred membership revenues ..................................................         9,953          9,712
                                                                                        ---------      ---------
         Total current liabilities ................................................        26,199         23,833

Notes payable and capitalized lease obligations, less current installments ........        18,755        100,367
Notes payable to bank .............................................................        10,940             --
Deferred lease obligations ........................................................         2,724          1,066
Minority interest .................................................................           600            600
                                                                                        ---------      ---------
         Total liabilities ........................................................        59,218        125,866

Commitments and contingencies

Stockholders' 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;
      20,896,623 and 20,907,289 shares issued and outstanding at
      December 31, 1998 and 1999, respectively ....................................           209            209
    Additional paid-in capital ....................................................       102,361        102,403
    Retained earnings .............................................................         9,656         10,966
    Treasury stock, at cost, 1,258,691 and 3,194,536 shares at
      December 31, 1998 and 1999, respectively ....................................        (7,687)       (15,891)
                                                                                        ---------      ---------
         Total stockholders' equity ...............................................       104,539         97,687
                                                                                        ---------      ---------
                                                                                        $ 163,757      $ 223,553
                                                                                        =========      =========
</TABLE>

          See accompanying notes to consolidated financial statements.



                                      F-2
<PAGE>   22

                          THE SPORTS CLUB COMPANY, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                    THREE-YEAR PERIOD ENDED DECEMBER 31, 1999
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                      1997          1998          1999
                                                                                    --------      --------      --------
<S>                                                                                 <C>           <C>           <C>
Revenues ......................................................................     $ 61,154      $ 81,923      $ 87,325

Operating expenses:
    Direct ....................................................................       43,517        56,746        60,528
    Selling, general and administrative .......................................        6,607         8,556         9,234
    Depreciation and amortization .............................................        3,919         5,282         6,147
    Pre-opening expenses ......................................................           --            --         3,090
                                                                                    --------      --------      --------
         Total operating expenses .............................................       54,043        70,584        78,999
                                                                                    --------      --------      --------
             Income from operations ...........................................        7,111        11,339         8,326

Other income (expense):
    Interest ..................................................................       (3,206)       (1,629)       (5,991)
    Minority interests ........................................................          (22)         (150)         (150)
    Equity interest in net income of unconsolidated subsidiary ................          696           880           931
    Non-recurring items .......................................................       (2,025)         (314)          553
                                                                                    --------      --------      --------

           Income before income taxes, extraordinary charge and
           cumulative effect of change in accounting principle ................        2,554        10,126         3,669
Provision for income taxes ....................................................        1,014         3,971         1,460
                                                                                    --------      --------      --------

           Income before extraordinary charge and cumulative effect of
           change in accounting principle .....................................        1,540         6,155         2,209

Extraordinary charge from early extinguishment of debt,
    net of income tax benefit of $1,331 .......................................           --         2,173            --
Cumulative effect of change in accounting principle,
    net of income tax benefit of $600 .........................................           --            --           899
                                                                                    --------      --------      --------
           Net income .........................................................     $  1,540      $  3,982      $  1,310
                                                                                    ========      ========      ========

Income per share before extraordinary charge and cumulative effect of change in
accounting principle:
    Basic .....................................................................     $   0.12      $   0.33      $   0.12
                                                                                    ========      ========      ========
    Diluted ...................................................................     $   0.12      $   0.33      $   0.12
                                                                                    ========      ========      ========

Effect of extraordinary charge and cumulative effect of change in accounting
principle:
    Basic .....................................................................     $     --      $  (0.12)     $  (0.05)
                                                                                    ========      ========      ========
    Diluted ...................................................................     $     --      $  (0.12)     $  (0.05)
                                                                                    ========      ========      ========

Net income per share:
    Basic .....................................................................     $   0.12      $   0.21      $   0.07
                                                                                    ========      ========      ========
    Diluted ...................................................................     $   0.12      $   0.21      $   0.07
                                                                                    ========      ========      ========

Weighted average number of common shares outstanding:
    Basic .....................................................................       12,524        18,603        18,114
                                                                                    ========      ========      ========
    Diluted ...................................................................       12,683        18,829        18,290
                                                                                    ========      ========      ========
</TABLE>


          See accompanying notes to consolidated financial statements.



                                      F-3
<PAGE>   23

                          THE SPORTS CLUB COMPANY, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                    THREE-YEAR PERIOD ENDED DECEMBER 31, 1999
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                        ADDITIONAL
                                                    COMMON STOCK          PAID-IN      RETAINED         TREASURY STOCK
                                                 SHARES       AMOUNT      CAPITAL      EARNINGS       SHARES       AMOUNT
                                                --------     --------     --------     --------      --------      --------
<S>                                             <C>          <C>        <C>            <C>           <C>           <C>
Balance, January 1, 1997 ..................       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)
     Net income ...........................           --           --           --        3,982            --            --
     Sale of common stock net
       of issuance cost of $695 ...........        6,500           65       48,639           --            --            --
     Treasury stock repurchased ...........           --           --           --           --         1,107        (6,800)
     Reissuance of treasury stock
       for employee stock plans ...........           --           --           45           --           (12)           67
     Exercise of employee stock options ...           10           --           26           --            --            --
     Issuance of common stock to
       outside directors ..................            4           --           38           --            --            --
                                                --------     --------     --------     --------      --------      --------
Balance, December 31, 1998 ................       20,897          209      102,361        9,656         1,259        (7,687)
     Net income ...........................           --           --           --        1,310            --            --
     Treasury stock repurchased ...........           --           --           --           --         1,975        (8,357)
     Reissuance of treasury stock
       for employee stock plans ...........           --           --           --           --           (39)          153
     Exercise of employee stock options ...            2           --            7           --            --            --
     Issuance of common stock to
       outside directors ..................            8           --           35           --            --            --
                                                --------     --------     --------     --------      --------      --------
Balance, December 31, 1999 ................       20,907     $    209     $102,403     $ 10,966         3,195      $(15,891)
                                                ========     ========     ========     ========      ========      ========
</TABLE>


          See accompanying notes to consolidated financial statements.



                                      F-4
<PAGE>   24

                          THE SPORTS CLUB COMPANY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                    THREE-YEAR PERIOD ENDED DECEMBER 31, 1999
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                1997          1998         1999
                                                                              --------      --------      --------
<S>                                                                           <C>           <C>           <C>
Cash flows from operating activities:
    Net income ..........................................................     $  1,540      $  3,982      $  1,310
    Adjustments to reconcile net income to cash provided by operations ..
         Loss on early extinguishment of debt, net of tax ...............           --         2,173            --
         Cumulative effect of change in accounting principle ............           --            --           899
         Gain on sale of Spectrum Clubs .................................           --            --          (783)
         Depreciation and amortization ..................................        3,919         5,282         6,147
         Equity interest in net income of unconsolidated subsidiary .....         (696)         (880)         (931)
         Distributions from unconsolidated subsidiary ...................          469           447         1,106
         Stock issued for employee benefit plan .........................           80            67           153
         Stock issued as directors' fees ................................           33            38            35
         Minority interest in Reebok Sports Club/NY .....................         (128)           --            --
         (Increase) in:
             Accounts receivable, net ...................................       (1,176)         (408)          (59)
             Inventories ................................................         (395)         (714)         (131)
             Other current assets .......................................       (2,187)         (830)       (1,087)
         Increase (decrease) in:
             Accounts payable ...........................................         (493)        1,325          (285)
             Accrued liabilities ........................................        2,439          (382)        2,836
             Deferred membership revenues ...............................        1,635            17           650
             Deferred lease obligations .................................         (492)          (93)         (409)
                                                                              --------      --------      --------
             Net cash provided by operating activities ..................        4,548        10,024         9,451
Cash flows from investing activities:
    Capital expenditures ................................................       (4,899)      (28,623)      (45,025)
    Business acquisitions, net of cash acquired .........................      (10,778)           --          (902)
    Purchase of other assets ............................................           --            --          (124)
    Proceeds from sale of Spectrum Clubs ................................           --            --        60,778
    Purchase of short term investments ..................................           --            --       (24,436)
    Treasury stock acquired .............................................       (1,034)       (6,800)       (8,357)
                                                                              --------      --------      --------
             Net cash used for investing activities .....................      (16,711)      (35,423)      (18,066)
Cash flows from financing activities:
    (Increase) decrease in due from affiliates ..........................          937          (128)           76
    Exercise of employee stock options ..................................           --            26             7
    Proceeds from Senior Secured Notes - net of costs & discount ........           --            --        93,713
    Proceeds from sale of common stock ..................................       10,000        48,704            --
    Proceeds from notes payable and capitalized lease obligations .......        2,324        10,940        37,263
    Repayments of notes payable and capitalized lease obligations .......       (3,663)      (33,491)      (71,617)
                                                                              --------      --------      --------
             Net cash provided by financing activities ..................        9,598        26,051        59,442
                                                                              --------      --------      --------
             Net increase (decrease) in cash and cash equivalents .......       (2,565)          652        50,827
Cash and cash equivalents at beginning of year ..........................        4,146         1,581         2,233
                                                                              --------      --------      --------
Cash and cash equivalents at end of year ................................     $  1,581      $  2,233      $ 53,060
                                                                              ========      ========      ========

Supplemental disclosure of cash flow information:
    Cash paid during the year for interest ..............................     $  3,599      $  2,636      $  6,389
                                                                              ========      ========      ========
    Cash paid during the year for income taxes ..........................     $    306      $  1,881      $  2,010
                                                                              ========      ========      ========
    Capital expenditures financed .......................................     $  7,223      $  5,690      $     --
                                                                              ========      ========      ========
    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-5
<PAGE>   25

                          THE SPORTS CLUB COMPANY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1998 AND 1999


1. ORGANIZATION

        The Sports Club Company, Inc. (the "Company") operates sports and
fitness Clubs ("Clubs"), under the "Sports Club" and until December 1999 the
"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 range of services. Both Sports
Clubs and Spectrum Clubs are marketed to affluent, health conscience individuals
who desire a premier Club. In December 1999, the Company sold the Spectrum Clubs
to an investment group (See Note 3).

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 initiation fees and monthly membership 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

        The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1999,
cash and cash equivalents were $53.1 million, of which $17.0 million has been
segregated into a disbursement escrow account and is specifically restricted and
designated for the development of new clubs. In addition, $7.5 million of cash
and cash equivalents, from the proceeds of the sale of the Spectrum Clubs, are
held in escrow accounts and will be released to the Company upon satisfaction of
certain conditions of the sale (See Note 3).

Short Term Investments

        The Company considers investments with original maturities of greater
than three months and less than or equal to one year to be short-term
investments. At December 31, 1999, short term investments of $24.4 million, are
segregated into a disbursement escrow account which is restricted and
specifically designated for the development of new Clubs. The Company's
short-term investments are invested in high grade commercial paper and United
States government agency discount notes.



                                      F-6
<PAGE>   26

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 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. Costs in excess of net assets of acquired businesses are being
amortized on a straight-line basis over forty years.

Start-up Costs

        The Company adopted Statement of Position 98-5, "Accounting for Start-Up
Costs" ("SOP 98-5") effective January 1, 1999. SOP 98-5 provides that all costs
related to the development of new sports and fitness clubs, except for real
estate related costs, be expensed as incurred. This is a change from the
Company's previous accounting policy, whereby many of these costs were
capitalized and charged to expense upon the Club opening. As a result, the
Company recorded a one-time charge equal to the unamortized balance of all
capitalized start-up costs as of January 1, 1999. This charge was recorded as a
cumulative effect of a change in accounting principle net of the related income
tax effect. The amount of this charge before income taxes was approximately $1.5
million.

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

        The Company reviews its long-lived assets and certain identifiable
intangible assets 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. The Company has not experienced an impairment of value of any of
its long-lived or identifiable intangible assets as of December 31, 1999.

Income Taxes

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

Earnings per Share

        The Company presents Basic and Diluted earnings per share. Basic
earnings reflects only the actual weighted average shares of common stock
outstanding during the period. Diluted earnings per share includes the effects
of all dilutive options, warrants and other securities and utilizes the treasury
stock method.



                                      F-7
<PAGE>   27

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, 1999. The carrying amounts related to cash and cash equivalents,
short-term investments, 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.

Segment Reporting

        The Company has adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") effective January 1, 1998. SFAS
131 establishes standards for public enterprises to report information about
operating segments in annual and interim financial statements. It also
establishes standards for related disclosures concerning products and services,
geographic areas and major customers. Management has determined that the Company
has one principal operating segment, the operation of sports and fitness clubs.
The adoption of SFAS 131 has had no impact on the Company's financial position
or results of operations.

Computer Software Costs

        The Company adopted Statement of Position 98-1 "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1")
effective January 1, 1999. SOP 98-1 provides guidance as to appropriate
treatment of internal use software costs that is acquired or internally
developed. The adoption of SOP 98-1 did not have a material impact upon the
Company's financial position or results of operations.

3. ACQUISITIONS AND DISPOSITIONS

Sports Clubs Acquisitions

        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%.

        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. 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 Acquisitions

        On December 31, 1997, the Company acquired four Clubs from Racquetball
World, which were operated as Spectrum Clubs, for a total purchase price
(including the portion paid by Millennium described



                                      F-8
<PAGE>   28

below) of approximately $19.4 million. Millennium acquired properties underlying
two of the Clubs for $10.0 million and leased these two properties to the
Company under a financing lease agreement which was reflected as a capitalized
lease obligation 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 119,093 shares of the Company's Common Stock
valued at approximately $479,000 will be issued to one of the selling entities.
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 are included in the Company's
statement of operations from the date of acquisition.

SportsMed 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.

Spectrum Clubs Dispositions

        In September of 1999, the Company completed the sale and leaseback of
the real estate at the Spectrum Club - Thousand Oaks for approximately $12.0
million. On December 3, 1999, the Company completed the sale of the Spectrum
Clubs, a group of ten sports and fitness clubs located in Southern California,
to an investment group for approximately $48.4 million. The Company recorded a
pre-tax gain of approximately $783,000 and an after tax gain of approximately
$470,000 ($0.03 per diluted share after tax) on the sale of the Spectrum Clubs.
The consolidated financial statements and accompanying notes reflect the
operating results of the Spectrum Clubs as a continuing operation. Pro-forma
consolidated operating results for the fiscal years ended December 31, 1998 and
1999 are presented below. The pro-forma statements present the unaudited results
of operations as if the Spectrum Clubs had been sold at the beginning of each
period.

<TABLE>
<CAPTION>
                                                                 YEAR ENDED
                                                                  DECEMBER 31,
                                                               1998         1999
                                                             --------     --------
                                                             (IN THOUSANDS, EXCEPT
                                                                PER SHARE DATA)
<S>                                                          <C>          <C>
Revenues ...............................................     $ 57,944     $ 62,229
Operating expenses .....................................       49,037       55,963
                                                             --------     --------
   Income from operations ..............................        8,907        6,266
Other income (expense) .................................        2,288       (2,314)
                                                             --------     --------
   Income before income taxes, extraordinary charge and
   Cumulative effect of change in accounting principle .       11,195        3,952
Income tax provision ...................................        4,390        1,724
                                                             --------     --------
   Income before extraordinary charge and cumulative
   effect of change in accounting principle ............        6,805        2,228
Extraordinary charge, net of tax .......................        2,173           --
Cumulative effect of change in accounting principle,
   net of tax ..........................................           --          221
                                                             --------     --------
Net income .............................................     $  4,632     $  2,007
                                                             ========     ========

Net income per share
   Basic ...............................................     $   0.25     $   0.11
                                                             ========     ========
   Diluted .............................................     $   0.25     $   0.11
                                                             ========     ========
</TABLE>



                                      F-9
<PAGE>   29

4. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                      AT DECEMBER 31,
                                                     1998         1999
                                                   --------     --------
                                                       (IN THOUSANDS)
<S>                                                <C>          <C>
Land .........................................     $ 21,484     $ 18,632
Building and improvements ....................      107,000       98,540
Furniture, fixtures and equipment ............       19,305       14,660
                                                   --------     --------
                                                    147,789      131,832
Less accumulated depreciation and amortization       12,520       12,873
                                                   --------     --------
Net property and equipment ...................     $135,269     $118,959
                                                   ========     ========
</TABLE>

        Equipment under capital leases was $10,479,000 and $3,660,000 and
related accumulated amortization was $3,271,000 and $2,440,000 at December 31,
1998 and 1999, respectively.

        Included in buildings and improvements at December 31, 1998 is
$10,000,000 of buildings acquired under a capital lease in connection with the
acquisition of two Spectrum Clubs (See Note 3). No amortization was recorded for
the year ending December 31, 1997 due to the close proximity of the acquisition
to the end of the year. Accumulated amortization at December 31, 1998 was
$255,000. The capital lease was paid off in April 1999.

5. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS

        Notes payable and capitalized lease obligations are summarized as
follows:

<TABLE>
<CAPTION>
                                                         AT DECEMBER 31,
                                                       1998         1999
                                                     --------     --------
                                                         (IN THOUSANDS)
<S>                                                  <C>          <C>
Senior secured notes (a) .......................     $     --     $100,000
The Sports Club/Irvine note (b) ................        4,375           --
Spectrum Club - Agoura Hills note (c) ..........        2,506           --
Spectrum Clubs Fullerton and Santa Ana lease (d)        9,745           --
Equipment financing loans (e) ..................        7,208        1,220
Other notes payable (f) ........................        2,667        2,667
                                                     --------     --------
                                                       26,501      103,887
Less current installments ......................        7,746        3,520
                                                     --------     --------
                                                     $ 18,755     $100,367
                                                     ========     ========
</TABLE>

(a) On April 1, 1999, the Company issued in a private placement $100.0 million
of Senior Secured Notes (the "Senior Secured Notes") with interest due
semi-annually beginning September 15, 1999. The Senior Secured Notes bear
interest at an annual rate of 11 3/8% and are due in March 2006. In May 1999,
the Company exchanged the Senior Secured Notes for registered Series B Senior
Secured Notes.

The Senior Secured Notes are secured by substantially all of the Company's
assets, other than certain excluded assets. In connection with the issuance of
the Senior Secured Notes, the Company entered into an indenture dated as of
April 1, 1999 (the "Indenture") which includes certain covenants which limit the
Company's ability, subject to certain exceptions, to: (i) incur additional
indebtedness; (ii) pay dividends or other distributions, repurchase capital
stock or other equity interest or subordinated indebtedness; (iii) enter into
transactions with affiliates; (iv) make investments; (v) create liens or sell
certain assets and (vi) enter into mergers and consolidations.

Under the terms of the Indenture, after March 15, 2003, the Company may, at its
option, redeem all or some of the Senior Secured Notes at a redemption price
that will decrease over time from 105.688% to



                                      F-10
<PAGE>   30

100% of their face amount, plus interest. Prior to March 15, 2002, if the
Company publicly offers certain equity securities the Company may, at its
option, apply certain of the net proceeds from those transactions to the
redemption of up to 35% of the principle amount of the Senior Secured Notes at
111.375% of their face amount, plus interest. If the Company undergoes a change
in control, as defined in the Indenture, it must give holders of the Senior
Secured Notes the opportunity to sell their Senior Secured Notes to the Company
at 101% of their face amount, plus interest. At December 31, 1999 the estimated
fair value of the Senior Secured Notes was $98.75 million.

(b) The Sports Club/Irvine note was issued to previous owners of this Club. The
note was secured by land, equipment, building improvements and the building of
The Sports Club/Irvine, bore interest at the rate of 6%, and required quarterly
principal payments of $125,000 and a balloon payment of $4.0 million on November
1, 1999. This note was paid off with part of the proceeds from the issuance of
the Company's Senior Secured Notes on April 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 was secured by land, equipment, building improvements and the
building of the Spectrum Club - Agoura Hills. The note bore interest at the rate
of 8.5%. Monthly principal and interest payments of $20,107 were required
through the note's maturity in April 2024. This note was paid off with part of
the proceeds from the issuance of the Company's Senior Secured Notes on April 1,
1999.

(d) In December 1997, the Company acquired four Spectrum Clubs. Millennium
acquired properties underlying two of the Clubs for $10.0 million and leased
these two properties to the Company under a financing lease agreement which was
reflected as a capital lease obligation in the Company's consolidated balance
sheet. This capital lease was paid off with part of the proceeds from the
issuance of the Company's Senior Secured Notes on April 1, 1999.

(e) The equipment financing loans 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) This note was issued in connection with the acquisition of The Sports
Club/LA site at 61st and 1st Street in New York. The note agreement provided for
payments in installments of $1,334,000 and 1,333,000 due in April 1999 and April
2000, respectively. The Company believes that they have various claims in
connection with the repair and refurbishing of the Club which offset the money
owed on the Note.

        Future minimum annual principal payments at December 31, 1999, are as
follows (in thousands):

<TABLE>
<S>                                                          <C>
2000.....................................................    $     3,520
2001.....................................................            363
2002.....................................................              4
2003.....................................................             --
2004.....................................................             --
Thereafter...............................................        100,000
                                                             -----------
                                                             $   103,887
                                                             ===========
</TABLE>

6. BANK CREDIT FACILITY

        At December 31, 1999, the Company had a $15.0 million bank credit
facility. The facility matures on May 31, 2001 and bears interest at a variable
rate of LIBOR plus 2 1/2% or the bank's prime rate. At that date, $4.0 million
was utilized in the form of a letter of credit. The loans are secured by all the
assets of The Sports Club/Irvine and The Sports Club/Las Vegas. The agreement
also requires the Company to maintain certain Tangible Net Worth, Debt Coverage
and Senior Liabilities to Tangible Net Worth Ratio requirements. The Company was
in compliance with its covenants as of December 31, 1999.



                                      F-11
<PAGE>   31

7. COMMITMENTS AND CONTINGENCIES

Lease Commitments

        The Company leases certain facilities pursuant to various operating
lease agreements. The Sports 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 50 years, including renewal options, with the earliest Sports Club lease
expiration date of January 31, 2013. Future minimum noncancelable operating
lease payments as of December 31, 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                       NET
                                                         SUBLEASE     RENTAL
                                          COMMITMENTS    RENTALS    COMMITMENTS
                                          -----------    -------    -----------
<S>                                       <C>           <C>         <C>
Year ending December 31:
     2000 ............................     $ 17,114     $  5,400     $ 11,714
     2001 ............................       25,025        5,400       19,625
     2002 ............................       26,691        5,425       21,266
     2003 ............................       27,256        5,498       21,758
     2004 ............................       27,507        5,712       21,795
     Thereafter ......................      348,444       53,555      294,889
                                           --------     --------     --------
          Total minimum lease payments     $472,037     $ 80,990     $391,047
                                           ========     ========     ========
</TABLE>

        Rent expense for facilities and equipment aggregated, $7,438,000,
$8,174,000 and $8,440,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.

Litigation

        Randy Pinkerton and Nick Thedes, individually and as Partners of Think
Physical Therapy v. SCC California, Inc. (Orange County Superior Court). On
April 23, 1999, Randy Pinkerton and Nick Thedes, individually and as partners of
Think Therapy Physical Therapy (collectively, "Think Therapy") filed an action
against SCC California, Inc., ("Spectrum"), a wholly-owned subsidiary, alleging
among other things, breach of contract and interference with economic
relationships. The complaint seeks declaratory relief (including the
confirmation of Think Therapy's lease term through December 1999), unspecified
compensatory damages and attorneys' fees. The contract which Think Therapy
alleges was breached relates to a lease at the former Spectrum Club - Santa Ana
facility ("Santa Ana Club") which facility was acquired by Spectrum in December
1997 and sold in April 1999 as commercial property unrelated to the sports and
fitness business. The Company believes that Think Therapy was on a
month-to-month lease and in connection with the sale of the Santa Ana Club the
lease was terminated by serving a thirty day Notice to Quit in March 1999. The
Company has responded to the complaint against them and believes the allegations
are without merit and will vigorously defend this lawsuit.

        Lyudmirsky and those similarly situated v. Sports Club, Inc. of
California; LA/Irvine Sports Club, Ltd. (Los Angeles Superior Court). On June
25, 1999, Ilya Lyudmirsky ("Lyudmirsky") filed a class action lawsuit against
Sports Club, Inc. of California and LA/Irvine Sports Club, Ltd. alleging, among
other things, violations of California Civil Code Section 1812.80 et seq.,
claiming the Company's membership fee structure and membership contracts violate
certain provisions of the Health Studio Services Act (the "HSS Act"). Lyudmirsky
further alleges violations of the Unruh Act and the Consumer Legal Remedies Act,
claiming the Company gives unlawful, preferential discounts to attractive women
and advertises membership fees which are higher than fees actually charged to
some members. The complaint seeks equitable relief, (including a temporary and
permanent injunction), unspecified compensatory damages, punitive damages and
attorneys' fees. The Company stipulated to a preliminary injunction, which
prohibits it from violating the HSS Act, effective as of November 29, 1999. On
October 22, 1999, the Court ruled that Lyudmirsky's membership contract violated
the HSS Act and is void. However, the Court has not ruled that Lyudmirsky
suffered damages as a result of the violation of the HSS Act. Under the HSS Act,
a



                                      F-12
<PAGE>   32

claimant may recover an amount up to three times the actual damages suffered
plus attorneys' fees. The amount of actual damages is measured by the amount
paid less reasonable value of services. The Company believes the initiation fees
and monthly dues are reasonable and that members have not suffered actual
damages as a result of the alleged violation of the HSS Act. The hearing on
Lyudmirsky's motion for class certification regarding the HSS Act claim is set
for March 29, 2000. The Company has denied violating the Unruh Act, and
providing preferential discounts to women based on beauty. The Company has also
denied making misleading or false statements regarding pricing structure or
discounts. The Company is in the process of evaluating Lyudmirsky's damage claim
as well as the size of the class which may be certified with respect to the HSS
claim and is unable at this time to estimate the damages, if any, which any
class may be awarded. However, if a significantly large class is certified and
the court or jury accepts plaintiff's damage claims, this action may have a
materially adverse effect on the Company's financial condition. The trial date
is August 7, 2000.

        Park Place Entertainment Corporation v. The Sports Club Company, Inc.
(Los Angeles Superior Court). On December 23, 1999, Park Place Entertainment
Corporation ("Park Place") filed an action against the Company for money due on
a promissory note. Park Place is the current holder of a purchase money
promissory note in the amount of $2,666,666 (the "Note") given to Hilton Hotels
Corporation ("Hilton") in connection with the 1998 acquisition of the Vertical
Club - a sports and fitness club located in New York (the "Club"). The Company
believes they have various claims in connection with the repair and refurbishing
of the Club which offset the money owed on the Note. Park Place feels that no
basis exists which excuses the Company from the timely payment of installments
on the Note and is asking for damages in the amount of $2,666,666 plus interest,
attorneys' fees and costs of the suit. On February 25, 2000, the Company filed
an answer raising offsets and a cross-complaint against Hilton seeking damages
in the amount of $14,415,000 for alleged breach of contract, fraud and negligent
misrepresentation, plus interest, attorneys' fees and costs of suit. Hilton has
not yet responded. The Company is just commencing discovery and intends to
vigorously pursue their cross-claims. The Company is unable to estimate, at this
time, the amount, if any, that will be awarded in this matter.

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

Employment Agreements

        At December 31, 1999, The Company had employment agreements with three
key executive officers which expire on December 31, 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.



                                      F-13
<PAGE>   33

8. INCOME PER SHARE

        The following is a reconciliation of the basic and diluted income per
share computations for the years 1997, 1998 and 1999:

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                          -----------------------------------
                                            1997          1998          1999
                                          -------       -------       -------
                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                      <C>            <C>           <C>
Net income used for basic and
  diluted income per share ........       $ 1,540       $ 3,982       $ 1,310
                                          =======       =======       =======

Shares of Common Stock and
  Common Stock equivalents:
       Weighted average shares used
        in basic computation ......        12,524        18,603        18,114

       Weighted stock options .....           159           226           176
                                          -------       -------       -------
       Impact from dilutive shares         12,683        18,829        18,290
                                          =======       =======       =======

Income per share:
  Basic ...........................       $  0.12       $  0.21       $  0.07
                                          =======       =======       =======
  Diluted .........................       $  0.12       $  0.21       $  0.07
                                          =======       =======       =======
</TABLE>

9. INCOME TAXES

        The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                                                    YEAR ENDED DECEMBER 31,
                                                                               -------------------------------------
                                                                                1997           1998           1999
                                                                               -------        -------        -------
                                                                                          (IN THOUSANDS)
<S>                                                                            <C>            <C>            <C>
Current:
      Federal ..........................................................       $   842        $ 2,893        $ 2,126
      State ............................................................           255            839            537
                                                                               -------        -------        -------
                                                                                 1,097          3,732          2,663
                                                                               -------        -------        -------
Deferred:
      Federal ..........................................................           (78)           156           (923)
      State ............................................................            (5)            83           (280)
                                                                               -------        -------        -------
                                                                                   (83)           239         (1,203)
                                                                               -------        -------        -------
Income tax provision ...................................................       $ 1,014        $ 3,971        $ 1,460
                                                                               =======        =======        =======

Tax benefit from extraordinary charge and cumulative effect of change in
accounting principle:
      Federal ..........................................................                      $(1,021)       $  (510)
      State ............................................................                         (310)           (90)
                                                                                              -------        -------
Total provision from extraordinary charge and cumulative
effect of change in accounting principle ...............................                      $(1,331)       $  (600)
                                                                                              =======        =======
</TABLE>



                                      F-14
<PAGE>   34

        Income tax expense from net income before income taxes, extraordinary
charge and cumulative effect of change in accounting principle, differs from the
statutory rate as applied to net income before income taxes, extraordinary
charge and cumulative effect of change in accounting principle as follows:

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31
                                                 -------------------------------------
                                                  1997           1998           1999
                                                 -------        -------        -------
                                                            (IN THOUSANDS)
<S>                                              <C>            <C>            <C>
Computed "expected" tax expense ..........       $   868        $ 3,443        $ 1,338
Increase (decrease) in tax resulting from:
    State taxes - net of federal benefit .           165            609            110
    Meals and entertainment ..............             8              8             24
    Goodwill amortization ................            80             80            (52)
    Other ................................          (107)          (169)            40
                                                 -------        -------        -------
Income tax provision .....................       $ 1,014        $ 3,971        $ 1,460
                                                 =======        =======        =======
</TABLE>

        The effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are presented as follows. The
net deferred tax liability is recorded in accrued expenses on the consolidated
balance sheet.

<TABLE>
<CAPTION>
                                                     AT DECEMBER 31,
                                                 ----------------------
                                                  1998           1999
                                                 -------        -------
                                                     (IN THOUSANDS)
<S>                                              <C>            <C>
Deferred tax assets:
     Deferred initiation fees ............       $   811        $ 1,245
     Accrued vacation ....................           182            231
     Bad debt ............................            86            133
     State taxes .........................           180            492
                                                 -------        -------
            Gross deferred tax assets ....         1,259          2,101
                                                 -------        -------
Deferred tax liabilities:
     Depreciation and amortization .......        (3,889)        (3,513)
     Other ...............................          (542)        (2,482)
                                                 -------        -------
            Gross deferred tax liabilities        (4,431)        (5,995)
                                                 -------        -------
Net deferred tax liability ...............       $(3,172)       $(3,894)
                                                 =======        =======
</TABLE>

10. STOCK PLANS

        The Company has elected to measure the impact of its stock options under
the provisions of APB No. 25, using the intrinsic value method. Entities
electing to remain with the accounting in APB Opinion No. 25 must make pro forma
disclosures of net income and income per share, as if the fair value based
method of accounting defined in SFAS 123 had been applied.

        The Company has an employee stock option plan which is described below.
The Company applied APB 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
                              -----------------------------------------
                                1997             1998           1999
                              ---------       ---------       ---------
                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                           <C>             <C>             <C>
Net income:
         As reported ..         $1,540          $3,982          $1,310
         Pro forma ....         $1,368          $3,504          $  632
Basic income per share:
         As reported ..         $  .12          $  .21          $  .07
         Pro forma ....         $  .11          $  .19          $  .03
</TABLE>



                                      F-15
<PAGE>   35

        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 1997, 1998 and
1999 respectively: dividend yield of 0%, 0% and 0%; expected volatility of
62.1%, 71.4% and 100.1% risk-free interest rates of 6.5%, 6.0% and 6.25% and
expected economic lives of 6.0 years, 5.9 years and 6.0 years.

        1,800,000 shares of Common Stock are reserved under the Company's
Amended and Restated 1994 Stock Incentive Plan (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. Except for
the options granted to D. Michael Talla, Co-Chief Executive Officer, which
expire on the fifth anniversary of the grant date, all options will expire on
the tenth anniversary of the grant date.

        A summary of the status of the Company's stock option plans as of
December 31, 1997, 1998 and 1999 and changes during the years then ended are
presented below:

<TABLE>
<CAPTION>
                                                                      WEIGHTED
                                                                      AVERAGE
                                                                      EXERCISE
                                                         SHARES        PRICE
                                                         ------        -----
<S>                                                    <C>            <C>
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 exercisable at December 31, 1997 .......         334,512       3.23
                                                       =========
Weighted-average per share fair value of options
   granted during year ended December 31, 1997 .                       3.53

Outstanding at January 1, 1998 .................         642,500       3.77
Granted ........................................         342,000       7.99
Canceled .......................................           2,000       2.56
Exercised ......................................          10,002       2.61
                                                       ---------
Outstanding at December 31, 1998 ...............         972,498       5.25
                                                       =========
Options exercisable at December 31, 1998 .......         462,696       3.52
                                                       =========
Weighted-average per share fair value of options
   granted during year ended December 31, 1998 .                       5.43

Outstanding at January 1, 1999 .................         972,498       5.25
Granted ........................................         210,000       3.94
Canceled .......................................          10,000       5.59
Exercised ......................................           2,666       2.70
                                                       ---------
Outstanding at December 31, 1999 ...............       1,169,832       5.01
                                                       =========
Options exercisable at December 31, 1999 .......         683,166       4.32
                                                       =========
Weighted-average per share fair value of options
   granted during year ended December 31, 1999 .                       3.22
</TABLE>



                                      F-16
<PAGE>   36

        The following table summarizes information about stock options
outstanding at December 31, 1999:

<TABLE>
<CAPTION>
                                             WEIGHTED
                                             AVERAGE
                                            REMAINING
EXERCISE                NUMBER             CONTRACTUAL               OPTIONS
 PRICES              OUTSTANDING           LIFE (YEARS)            EXERCISABLE
 ------              -----------           ------------            -----------
<S>               <C>                      <C>                   <C>
$8.3750                 27,000                 7.85                     18,000
 5.3750                 63,000                 7.51                     42,000
 4.3750                 60,000                 7.22                     40,000
 2.7500                 53,666                 6.84                     53,666
 2.5625                 57,166                 6.41                     57,166
 2.6875                 70,000                 6.11                     70,000
 3.0000                225,000                 5.51                    225,000
 5.2500                 64,000                 5.25                     64,000
 8.2500                 30,000                 3.32                     10,000
 8.0000                300,000                 8.29                    100,000
 7.0000                 10,000                 8.55                      3,334
 3.9375                210,000                 9.10                         --
                 -------------                                   -------------
                     1,169,832                                         683,166
                 =============                                   =============
</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, 1999, 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, 1999, no purchase rights had been granted.

        In July 1994, the Company instituted its 1994 Stock Compensation Plan
(which was amended in July 1999) 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 24,000 shares have been issued to outside directors under
the plan.

11. RELATED PARTY TRANSACTIONS

        Due from affiliates consist of advances made to unconsolidated
affiliates in the normal course of business. Such advances are payable on
demand.

        Until December 3, 1999, the Company managed the operation of its
unconsolidated subsidiary, the Spectrum Club - Manhattan Beach, of which it
owned a 46.1% interest. The Company received 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 of $1.1 million, $1.3 million and $1.4 million relating to Reebok Sports
Club/NY were earned for the years ended December 31, 1997, 1998 and 1999. These
amounts are eliminated from income and expense in the presentation of the
Company's 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, Washington
D.C., and Boston.



                                      F-17
<PAGE>   37

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.



                                      F-18
<PAGE>   38

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The following provides certain information regarding our directors and
executive officers:

<TABLE>
<CAPTION>
NAME                                        AGE    POSITION
----                                        ---    --------
<S>                                         <C>    <C>
D. Michael Talla.......................     53     Chairman of the Board and Co-Chief Executive Officer
Rex A. Licklider.......................     57     Vice Chairman of the Board and Co-Chief Executive Officer
Nanette Pattee Francini................     51     Executive Vice President and Director
Timothy M. O'Brien.....................     48     Chief Financial Officer and Assistant Secretary
Philip J. Swain........................     42     Sr. Vice President of Operations
Mark S. Spino..........................     45     Sr. Vice President of Development
Brian J. Collins.......................     39     Director
Andrew L. Turner.......................     53     Director
Dennison T. Veru.......................     39     Director
</TABLE>

        The following information summarizes the business experience during at
least the past five years of each of our directors and executive officers.

        D. Michael Talla began developing sports and fitness clubs in 1977. He
has served as Chairman of the Board since our inception in 1994 and served until
July 1999 as our Chief Executive Officer. Mr. Talla assumed the position of
Co-Chief Executive Officer with Mr. Licklider in February 2000. He has been in
the sports and fitness industry for more than 20 years and has developed or
participated in the development of more than 25 sports and fitness clubs in the
United States, including all Clubs developed by The Sports Club Company. Mr.
Talla holds a Bachelor of Arts Degree in Business Administration from the
University of Arizona.

        Rex A. Licklider has served as Vice Chairman of the Board since 1994 and
was appointed Co-Chief Executive Officer in February 2000 and has served as the
Vice Chairman of the Board since 1994. Mr. Licklider has been a consultant to us
for strategic and financial planning since our inception. He founded Com
Systems, Inc., a publicly traded long-distance telecommunications company, and
at various times between 1975 and April 1992 served as its Chairman, President
and Chief Executive Officer. Mr. Licklider is a founder and director of Pentium
Investments, Inc. and a director of Deckers Outdoor Corporation. He also serves
on the Board of Directors of The Children's Bureau of Southern California, Los
Angeles Youth Programs, Inc. and Marymount High School in Los Angeles,
California. 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.

        Nanette Pattee Francini began developing sports and fitness clubs in
1977 and has served as our Executive Vice President and has been principally
responsible for overseeing all imaging/marketing activities since our inception
in 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 25 sports and fitness clubs, including all the Clubs developed by The
Sports Club Company. She has been one of our Directors since 1994. Ms. Pattee
Francini holds a Bachelor of Arts Degree from the University of Arizona.

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



                                       20
<PAGE>   39

        Philip J. Swain was appointed Senior Vice President of Operations in
February 2000, having served as Vice President of Operations since our inception
in 1994. 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 20
sports and fitness clubs in the United States, including many of our current
Clubs.

        Mark S. Spino was appointed Senior Vice President of Development in
February 2000, having served as our Vice President of Development since our
inception in 1994. Mr. Spino 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 sports and fitness clubs in the United States, including many of our
current Clubs. Mr. Spino holds a Bachelor of Arts and a Master of Arts degree in
physical education from the University of Southern California.

        Brian J. Collins has been one of our Directors since 1997. Since
December 1996 Mr. Collins has served as Vice President and Chief Financial
Officer of Millennium Partners Management LLC, an affiliate of Millennium
Entertainment Partners L.P., which is a real estate developer of mixed use urban
entertainment projects. In June 1997 he became a principal of Millennium
Partners Management LLC and in June 1999 was named Chief Operating Officer. Mr.
Collins continues to serve as Chief Financial Officer of Lincoln 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. Mr. Collins holds a Bachelor of Arts Degree from
Colgate University and a Masters of Science from New York Graduate School of
Business. For so long as Millennium maintains at least a 12% interest in our
equity securities, we and certain of our stockholders have agreed with
Millennium to cause a nominee of Millennium to be appointed or elected to our
Board of Directors. Mr. Collins is currently serving as Millennium's nominee
pursuant to this agreement. See "Certain Relationships and Related
Transactions."

        Andrew L. Turner has been a Director since 1994. He has also been
Chairman of the Board of Directors and Chief Executive Officer of Sun Healthcare
Group, Inc., a publicly traded long-term health care services provider, since
its formation in 1989. From 1986 to 1989, Mr. Turner served as Chief Operating
Officer of Horizon Health Care Corporation, a publicly traded health care
services provider. Mr. Turner is also a director of Watson Pharmaceuticals,
Inc., a publicly traded pharmaceutical manufacturing company.

        Dennison T. Veru has been a Director since 1996. In March 2000, Mr. Veru
became Executive Vice President of Palisade Capital Management, LLC. From
November 1992 until December 1999, he served as President and director of
research of Awad & Associates, a money management division of Raymond James
Financial. From November 1990 to November 1992, Mr. Veru served as Executive
Vice President, Investments of Smith Barney, Inc., specializing in small and
medium capitalization stocks. He is a graduate of Franklin and Marshall College.

        Directors who are not our employees receive an annual retainer fee of
$12,000, a fee of $1,000 for each Board and committee meeting attended and
reimbursement of expenses of attending Board and committee meetings. They also
receive an annual award of 2,000 shares of our Common Stock pursuant to our
Amended and Restated 1994 Stock Compensation Plan.

        Our directors are divided into three classes having terms expiring at
the annual stockholders meetings in 2000 (Messrs. Talla and Licklider),
2001 (Messrs. Turner and Collins) and 2001 (Ms. Francini and Mr. Veru) 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. Collins, Turner and Veru, is
charged with reviewing our annual audit and meeting with our independent
auditors and reviewing our internal controls and financial management



                                       21
<PAGE>   40

practices. The Compensation Committee, also composed of Messrs. Collins, Turner
and Veru, recommends to the Board of Directors compensation for key employees
and administers our 1994 Stock Incentive Plan (as amended and restated June 3,
1998).

CERTAIN TRANSACTIONS

        Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our officers and directors and persons who own more than ten percent of
a registered class of our equity securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission and to furnish
us with copies of such reports. Based on our review of the copies of those
reports and written representations which we have received, we believe that all
such filings required to be made during calendar 1999 have been made.



                                       22
<PAGE>   41

ITEM 11. EXECUTIVE COMPENSATION

        The table below shows, for the last three fiscal years, the amount of
compensation earned by the Co-Chief Executive Officer and the next five most
highly compensated executive officers (the "Named Executive Officers"). The
current salaries of such executive officers are described below under
"Employment Agreements."

<TABLE>
<CAPTION>
                                                                              LONG-TERM
                                                                            COMPENSATION
                                                                               SHARES             ALL OTHER
                                           ANNUAL COMPENSATION               UNDERLYING         COMPENSATION
NAME & POSITION                YEAR     SALARY($)(a)       BONUS($)         OPTIONS AWARDS          ($)(b)
---------------                ----     ------------       --------         --------------          ------
<S>                            <C>      <C>               <C>               <C>                 <C>
D. Michael Talla..........     1999       243,000(c)       60,000                  --               3,168
  Co-Chief Executive Officer   1998       243,000(c)       45,000              30,000               3,168
  And Chairman of the Board    1997       239,250(c)           --                  --               3,135

Nanette Pattee Francini...     1999       159,993          45,000              50,000               1,980
  Executive Vice President     1998       154,800          35,000              30,000                 825
  And Director                 1997       145,100          10,000              15,000                  --

John M. Gibbons...........     1999       304,508(d)       55,000                  --               2,534
  President, Chief Operating   1998       264,108(d)       42,000              30,000               2,534
  Officer and Director         1997       245,883(d)       25,000                  --               2,637
  (Resigned February 2000)

Mark S. Spino.............     1999       150,000          45,000              50,000               3,168
  Senior Vice President of     1998       145,000          35,000              30,000               2,775
  Development                  1997       134,125          10,000              15,000                  --

Philip J. Swain...........     1999       160,000          45,000              50,000               1,980
  Senior Vice President of     1998       155,000          35,000              30,000               2,063
  Operations                   1997       146,031          15,000              15,000                 908

Timothy M. O'Brien........     1999       150,000          45,000              50,000               3,168
  Chief Financial Officer      1998       146,300          35,000              30,000               3,168
  and Assistant Secretary      1997       137,667          10,000              15,000               2,807
</TABLE>

----------

(a)     Includes automobile allowance.

(b)     Represents value of our Common Stock contributed for the benefit of the
        Named Executive Officer, under the 401-K Profit Sharing Plan, based upon
        the December 31 closing market price each year, on the American Stock
        Exchange.

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

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

OPTION GRANTS, EXERCISES AND YEAR-END VALUES

        The following table describes option grants to the Named Executive
Officers during the last fiscal year.

<TABLE>
<CAPTION>
                                              % OF                                    POTENTIAL REALIZABLE
                                              TOTAL                                     VALUE AT ASSUMED
                                             OPTIONS                                  ANNUAL RATES OF STOCK
                                SHARES       GRANTED                                 PRICE APPRECIATION FOR
                              UNDERLYING       TO      EXERCISE                          OPTION TERM(b)
                                OPTIONS     EMPLOYEES    PRICE      EXPIRATION       ----------------------
NAME                         GRANTED(#)(a)  FOR 1999    ($/SH)         DATE            5%($)         10%($)
----                         -------------  --------    ------         ----          --------       -------
<S>                          <C>            <C>        <C>          <C>               <C>           <C>
D. Michael Talla.........           --         --           --             --              --            --
Nanette Pattee Francini..       50,000       23.81      3.9375       2/9/2009         123,815       313,770
John M. Gibbons..........           --         --           --             --              --            --
Mark S. Spino............       50,000       23.81      3.9375       2/9/2009         123,815       313,770
Phillip J. Swain.........       50,000       23.81      3.9375       2/9/2009         123,815       313,770
Timothy M. O'Brien.......       50,000       23.81      3.9375       2/9/2009         123,815       313,770
</TABLE>



                                       23
<PAGE>   42

----------

(a)     All grants are incentive stock options granted under the terms of our
        1994 Stock Incentive Plan (as amended and restated June 3, 1998), at
        an exercise price equal to the fair market value of our Common Stock
        on the date of grant. All of these options expire ten years from the
        date of grant, and all of these options vest in 33 1/3% increments on
        the first three anniversaries of the grant.

(b)     The dollar amounts listed are the result of calculations at the 5% and
        10% annual rates of stock appreciation prescribed by the SEC and are not
        intended to forecast possible future appreciation, if any, of our Common
        Stock. If our Common Stock does not appreciate, the Named Executive
        Officers will receive no benefit from the options.

UNEXERCISED STOCK OPTIONS AND FISCAL YEAR-END OPTION VALUES

        None of the Named Executive Officers exercised stock options during the
last fiscal year. The following table provides information with respect to
unexercised stock options outstanding as of December 31, 1999.

<TABLE>
<CAPTION>
                               NUMBER OF SHARES UNDERLYING         VALUE OF IN-THE-MONEY
                              UNEXERCISED OPTIONS AT FISCAL    UNEXERCISED OPTIONS AT FISCAL
                                      YEAR-END(a)                      YEAR-END(b)
                              EXERCISABLE    UNEXERCISABLE     EXERCISABLE    UNEXERCISABLE
NAME                               (#)             (#)              ($)             ($)
----                          -----------    -------------     -----------    -------------
<S>                           <C>            <C>               <C>            <C>
D. Michael Talla........         10,000          20,000               --              --
Nanette Pattee Francini.         35,000          75,000           17,812              --
John M. Gibbons.........        235,000          20,000          196,875              --
Mark S. Spino...........         35,000          75,000           17,812              --
Philip J. Swain.........         45,000          75,000           29,687              --
Timothy M. O'Brien......         65,000          75,000           23,437              --
</TABLE>
----------

(a)     All options were granted under our 1994 Stock Incentive Plan (as amended
        and restated June 3, 1998).

(b)     The in-the-money options had exercise prices of less than the $3.875,
        the closing price of our Common Stock on the American Stock Exchange on
        December 31, 1999. The calculations of value assume a fair market value
        of our Common Stock on December 31, 1999 at the price of $3.875 per
        share.

EMPLOYMENT AGREEMENTS

        In August 1994, we entered into employment agreements with D. Michael
Talla, as Chief Executive Officer, and Nanette Pattee Francini, as Executive
Vice President, each of which, as renewed, 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 originally provided for annual
compensation of $200,000 payable to Mr. Talla, and $115,000 payable to Ms.
Pattee Francini, subject to upward adjustment at the discretion of the Board of
Directors. In 1997, Mr. Talla's salary was increased to $225,000 and in 1998,
Ms. Francini's annual salary was increased to $155,000. In February 2000, the
Compensation Committee of the Board of Directors recommended and the Board of
Directors concurred and increased Mr. Talla's annual salary to $250,000 and Ms.
Pattee Francini's annual salary to $200,000. We may terminate either employment
agreement for cause without penalty.

        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. The employment agreements also include severance provisions which
entitle each executive officer to severance pay if his or her employment is
terminated by us without cause; if the employee dies or is disabled; or if the
employee terminates the agreement as a result of our material breach of our
obligations thereunder (up to six months' pay for Ms. Pattee Francini and up to
twelve months' pay for Mr. Talla). In addition, the employment agreements
provide Mr. Talla and Ms. Pattee Francini with additional severance benefits
upon termination of employment following the occurrence of any one of the
following events (each, a "Change in Control") without the approval of a
majority of the Board of Directors: (i) the consolidation or merger of us with
any other corporation or other entity; (ii) the sale or other transfer of all or
substantially all of our the assets; (iii) the approval by our stockholders of a
plan of liquidation or dissolution; (iv) any person becomes the beneficial owner
directly or indirectly of 25% or more of our outstanding Common Stock; or (v) a
change



                                       24
<PAGE>   43

occurs in the composition of a majority of our Board of Directors (unless
approved by two-thirds of our Board of Directors). 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 28OG 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 insurance benefits paid for
the employee during the one-year period immediately prior to termination, and
(C) bonuses accrued but unpaid through the date of termination of employment.
Under the agreements, "good reason" includes the relocation of the executive
officer's place of employment, 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 two years following a Change in Control as a result of the
occurrence of any of the foregoing events (assuming that neither would be
entitled to any accrued bonus), the aggregate approximate amounts payable to Mr.
Talla and Ms. Pattee Francini would be $777,000 and $621,000, respectively.

        Effective June 1, 1998, we entered into an employment agreement with Mr.
Gibbons which remained in effect until terminated as described below. The
agreement provided for an annual base salary of $250,000, subject to annual
review and upward adjustment at the discretion of the Board of Directors.
Additionally, Mr. Gibbons received $40,000 for living expenses each year and a
car allowance. The Board, in its discretion, could also award him a bonus. The
Board awarded Mr. Gibbons a bonus of $42,000 in 1998 (relating to services
provided in 1997) and a 1999 bonus of $55,000 (for services provided in 1998).

        Effective February 11, 2000, Mr. Gibbons resigned from the Company and
we entered into a Separation from Employment Agreement pursuant to which Mr.
Gibbons is to receive a payment of $250,000 prorated over a twelve-month period.
Our obligation to make such monthly payments terminates should Mr. Gibbons
accept employment with, consult with or advise certain of our competitors.
Additionally, the Board in its discretion awarded Mr. Gibbons a bonus of
$70,000.

        We do not have written employment agreements with Messrs. Spino, Swain
and O'Brien, who each currently receive annual base salaries of $200,000.

COMPENSATION OF DIRECTORS

        Non-employee directors are entitled to receive an annual fee of $12,000
and a fee of $1,000 for each meeting attended. Non-employee directors who are
members of the Audit Committee or Compensation Committee are entitled to receive
$1,000 for each meeting they attend. In addition, non-employee directors receive
2,000 shares of our Common Stock each year pursuant to our Amended and Restated
1994 Stock Compensation Plan. Messrs. Licklider, Collins, Turner and Veru
currently serve on the Board as non-employee directors. Mr. Licklider is
currently serving as Co-Chief Executive Officer without compensation and
continues to receive amounts due to non-employee directors. We provide Mr.
Licklider with health insurance under our 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 $48,783
during 1997, $53,320 during 1998 and $69,240 during 1999. Under the Amended and
Restated 1994 Stock Compensation Plan an aggregate of 24,000 shares of Common
Stock were issued to non-employee directors through December 31, 1999.

COMPENSATION OF COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

        The Compensation Committee of the Board ("Committee") administers the
executive compensation. Mr. Turner has been a member of the Committee since
September 13, 1994, and became its



                                       25
<PAGE>   44

Chairman on February 27, 1995. Mr. Veru was appointed to the Committee on
February 20, 1996, and Mr. Collins was appointed on April 10, 1998. None of
these individuals has ever been an officer or employee.



                                       26
<PAGE>   45

ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The following table shows the shares of our Common Stock beneficially
owned as of March 10, 2000 by our directors and Executive Officers. It also
shows other individuals or entities that beneficially owned more than 5% of the
17,731,753 outstanding shares of our Common Stock.



<TABLE>
<CAPTION>
                                     SHARES          OPTIONS        SHARES HELD      TOTAL AND PERCENT OF
       NAME AND ADDRESS              OWNED         EXERCISABLE         UNDER          STOCK OUTSTANDING
    OF BENEFICIAL OWNER(a)        DIRECTLY(b)    WITHIN 60 DAYS(c) 401-K PLAN(d)     NUMBER      PERCENT
    ----------------------        -----------    ----------------- -------------     ------      -------
<S>                               <C>            <C>               <C>             <C>           <C>
D. Michael Talla(e) ........       4,726,815          20,000           1,144       4,747,959       26.78%
Nanette Pattee Francini(e)..         256,107          66,667             210         322,984       26.78%
Mark S. Spino(e) ...........         227,969          66,667             705         295,341       26.78%
Philip J. Swain(e) .........         163,164          76,667             622         240,453       26.78%
Voting Trust(e) ............       5,374,055              --              --       5,606,737       31.62%
John M. Gibbons ............          90,500         245,000           1,712         337,212        1.90%
Timothy O'Brien ............           3,000          96,667             865         100,532           *
The Licklider Living Trust
  Dated May 2, 1986 ........       1,391,862              --              --       1,391,862        7.85%
Andrew L. Turner ...........          77,000              --              --          77,000           *
Dennison T. Veru ...........          25,000              --              --          25,000           *
Brian J. Collins ...........          35,001              --              --          35,001           *
All Directors and Executive
  Officers as a Group
  (10 persons) .............       6,996,418         571,668           5,258       7,573,344       42.71%
Millennium(f) ..............       4,912,613              --              --       4,912,613       27.71%
Baron Capital Group, Inc.(g)       1,292,500              --              --       1,292,500        7.29%
</TABLE>

----------

*       Less than 1%

(a)     The address of all directors and executive officers is c/o The Sports
        Club Company, Inc. at 11100 Santa Monica Blvd., Suite 300, Los Angeles,
        California 90025.

(b)     Includes shares for which the named person is considered the owner
        because:

        1.      the named person has sole voting and investment power,

        2.      the spouse has voting and investment power, or

        3.      the shares are held by other members of the immediate family.

(c)     Includes shares that can be acquired through stock option exercises
        through May 8, 2000.

(d)     Does not include 1999 matching shares that will be issued in 2000.

(e)     Named persons share voting power pursuant to a voting agreement that
        requires each party to vote his or her 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 shares of
        our Common Stock subject to the agreement. The parties to the voting
        agreement in effect each control the voting of all shares held by the
        parties to the agreement and under SEC rules are deemed beneficial
        owners of the shares subject to the agreement. The total number of
        shares of our Common Stock held by the parties without giving effect to
        beneficial ownership resulting from the voting agreement is:

<TABLE>
<CAPTION>
                                             SHARES        TOTAL SHARES
                                              HELD             HELD
              NAMED PERSON                  DIRECTLY     (SEE ABOVE TABLE)
              ------------                  --------     -----------------
<S>                                        <C>           <C>
D. Michael Talla:
     Individually ..................       4,556,434
     Spouse ........................          30,953
     Trusts for two minor children .         139,428
        Total ......................                        4,726,815
Nanette Pattee Francini ............                          256,107
Mark S. Spino ......................                          227,969
Philip J. Swain ....................                          163,164
                                                            ---------
     All Parties to Voting Agreement                        5,374,055
</TABLE>



                                       27
<PAGE>   46

(f)     The Millennium shares are held by the following affiliates:

<TABLE>
<CAPTION>
                                                                 SHARES HELD
                                                                 -----------
<S>                                                              <C>
      Millennium Partners LLC.............................         2,253,863
      Millennium Development Partners L.P.................           978,900
      MDP Ventures I LLC..................................            72,100
      MDP Ventures II LLC.................................           982,750
      Millennium Entertainment Partners L.P...............           625,000
                                                                 -----------
                                                                   4,912,613
</TABLE>

        The address of all such entities is c/o Millennium Partners Management
        LLC, 1995 Broadway, New York, New York, 10023.

(g)     The "Number of Shares Beneficially Owned" is based on information
        contained in a report on Schedule 13F by Baron Capital Group, Inc. (and
        affiliates) on file with the SEC as of December 31, 1999. Baron Capital
        Group, Inc. is a registered investment advisor located at 767 Fifth
        Avenue, New York, NY 10153.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        From time to time we have entered into transactions with our officers,
directors and stockholders. We believe that each of the following transactions
has been on terms no less favorable to us than could have been obtained from
unaffiliated third parties. All transactions between us and any of our directors
or officers are subject to the approval of the disinterested directors.

        Messrs. Talla and Licklider. We have a 50.1% interest in the partnership
that owns The Sports Club/LA in Los Angeles and Mr. Talla beneficially owns the
remaining 49.9%. The partnership agreement provides that, on an annual basis,
the partners will share in the first $300,000 of the Club's net cash flow in
proportion to their percentage interests. The next $35.0 million of net cash
flow will be distributed to us. All distributions of net cash flow thereafter,
if any, will be made to the partners in proportion to their percentage
interests. Under certain circumstances, we have an option to purchase Mr.
Talla's interest in the partnership for an amount equal to four times the amount
of his most recent annual distribution from the partnership.

        In January 1998, Messrs. Talla and Licklider purchased a 7,000 square
foot parcel of land adjacent to property owned and used by The Sports Club/LA in
Los Angeles. In February 1999, we acquired the property from them for $637,422,
such price being equal to the purchase price paid by Messrs. Talla and
Licklider, minus rental income received by them, plus an interest credit on
their investment at an annual rate of 6.56%. The acquired property is currently
leased to a non-affiliated third party.

        In September 1999, we sold the property on which our the Spectrum Club
-- Thousand Oaks is located for a purchase price of $12.0 million. Under the
terms of the sale, the sum of $10.0 million was paid at the close of the sale
and the remaining $2.0 million will be paid upon the fulfillment of certain
conditions by us. We entered into a sale and leaseback agreement for the
property under a long-term lease with an initial annual base rent of $1.1
million, until such time as we receive the final $2.0 million of the purchase
price, at which time the annual rent will increase to $1.3 million. The Thousand
Oaks property consists of the Spectrum Club -- Thousand Oaks, unimproved office
space and a parking area. We are currently subleasing the Spectrum Club space to
another club operator. Mr. Licklider owns approximately a 4.6% interest in the
purchaser of the property and trusts for the benefit of Mr. Talla's minor
children own approximately a 5.2% interest in the purchaser of the property.

        Millennium. Millennium is a partner in the Reebok-Sports Club/NY
partnership as well as the landlord of the building in which Reebok Sports
Club/NY is located. 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.

        In June 1997, we issued to Millennium 2,105,263 shares of our 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



                                       28
<PAGE>   47

by the partnership. We also granted to Millennium certain registration and
preemptive rights regarding its shares. In addition, for so long as Millennium
maintains at least a 12% interest in our equity securities, we and certain of
our stockholders have agreed to cause a nominee of Millennium to be appointed or
elected to the Board of Directors. Pursuant to this agreement Brian J. Collins,
an officer of Millennium, is currently serving as a member of our Board of
Directors.

        In December 1997, we sold 625,000 shares of Common Stock to Millennium
for $5.0 million, which we used to fund the cash portion of the acquisition of
four Spectrum Clubs. In addition, Millennium acquired properties underlying two
of the Clubs for $10.0 million and leased these properties to us under a
financing lease agreement. The lease had a term of twenty years, and provided
for an annual rent of $1.0 million for the first ten years and $1.2 million per
year thereafter. In 1999, we purchased the leased property from Millennium for a
price equal to $10.3 million.

        We have entered into leases with Millennium relating to Sports Clubs to
be developed in San Francisco, Washington D.C. and Boston. The leases for the
San Francisco and Washington D.C. developments provide for base rental payments
of $3.0 million per year, for a term of 20 years, and for three 14 year renewal
options. In addition, once we have received a management fee equal to 6% of all
revenues, an amount equal to our investment in the Club plus an 11% annual
return on our investment and an additional distribution sufficient to reduce our
average base rental payment for each club to $2.75 million per year, Millennium
is entitled to receive 20% of all additional cash flows from each Club as
additional rent. The lease for the Boston development has similar terms, except
that the base rental payment is $2.75 million per year. We expect each of the
Clubs to be approximately 100,000 square feet.



                                       29
<PAGE>   48

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)     (1)     Financial Statements filed as part of this Report are listed in
                Item 8 of this Report.

        (2)     No financial schedules have been included because they are not
                applicable, not required or because required information is
                included in the consolidated financial statements or notes
                thereto.

        (3)     The following exhibits are filed as part of this Report.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER          EXHIBIT
------          -------
<S>             <C>
3.1             Restated Certificate of Incorporation of the Registrant.*

3.2             Bylaws of the Registrant.*

3.3             Amendment to Bylaws dated February 1, 1995.**

4.1             Specimen Common Stock Certificate.*

4.2             Rights Agreement by and between the Registrant and American Stock
                Transfer & Trust dated as of October 6, 1998.++

4.3             First Amendment to Rights Agreement by and between the
                Registrant and American Stock Transfer & Trust entered into as
                of February 18, 1999.+++

4.4             Indenture by and among Registrant, U.S. Bank Trust National
                Association and the Subsidiary Guarantors referred to therein,
                dated as of April 1, 1999.++++

4.5             Registration Rights Agreement by and among the Registrant,
                Jeffries & Company, Inc. and CIBC Oppenheimer Corp., dated as of
                April 1, 1999.++++

4.6             Purchase Agreement by and among the Registrant, Jeffries &
                Company, Inc. and CIBC Oppenheimer Corp., dated March 29,
                1999.++++

4.7             Second Amendment to Rights Agreement entered into as of the
                second day of July 1999.

9.1             Voting Agreement among D. Michael Talla, Nanette Pattee
                Francini, Mark S. Spino, Peter Feinstein, Philip J. Swain and FP
                II.*

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.*
</TABLE>



                                       30
<PAGE>   49

<TABLE>
<CAPTION>
EXHIBIT
NUMBER          EXHIBIT
------          -------
<S>             <C>
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           Lease of premises for Reebok Sports Club/NY located at 160
                Columbus Avenue, New York 10023 dated June 3, 1992.*

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

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

10.13           Restated Agreement of Limited Partnership of El Segundo-TDC,
                Ltd., as amended.*

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

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

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

10.17           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.*

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

10.19           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.*

10.20           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.*

10.21           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 Cub, Ltd., a California Limited Partnership.*

10.22           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.*

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

10.24           Letter Agreement by and between Reebok Fitness Centers, Inc. and
                the Company dated October 12, 1994.*
</TABLE>



                                       31
<PAGE>   50

<TABLE>
<CAPTION>
EXHIBIT
NUMBER          EXHIBIT
------          -------
<S>             <C>
10.25           Amendment to First Amended and Restated Agreement of Limited
                Partnership of Reebok-Sports Club/NY, Ltd. dated as of October
                12, 1994.*

10.26           Letter Agreement by and between Reebok Fitness Centers, Inc. and
                the Company, which became effective on October 29, 1994.*

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

10.28           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.**

10.29           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.**

10.30           Letter Agreement between Millennium Entertainment Partners, L.P.
                and the Registrant dated as of March 13, 1997.**

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

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

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

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

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

10.36           Letter Agreement between Millennium Entertainment Partners, L.P.
                and the Registrant dated December 29, 1997.+

10.37           Agreement of Purchase and Sale between The Spectrum Club
                Company, Inc. and Norcan dated as of December 31, 1997.+

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

10.39           Lease Agreement between RCPI Trust and the Registrant as of
                February 27, 1998.****

10.40           Amended and Restated Net Operating Lease among Hirschfeld Realty
                Club Corporation and 328 E. 61 Corp., and Vertical Fitness and
                Racquet Club, Ltd., dated March 26, 1985.****

10.41           Lease Modification Agreement by and among Hirschfeld Realty
                Corporation and 328 E. 61 Corp., and Vertical Fitness and
                Racquet Club, Ltd., dated July 1, 1990.****
</TABLE>



                                       32
<PAGE>   51

<TABLE>
<CAPTION>
EXHIBIT
NUMBER          EXHIBIT
------          -------
<S>             <C>
10.42           Assignment and Assumption of Lease by and between Vertical
                Fitness and Racquet Club, Ltd., and Bally Entertainment
                Corporation dated January 8, 1996.****

10.43           Assignment of Lease executed by Hilton Hotels Corporation, as
                successor to tenant, and agreed to and accepted by the
                Registrant, dated April 15, 1998.****

10.44           Second Amendment to Amended and Restated Net Operating Lease by
                and among Hirschfeld Realty Club Corporation and 328 E. 61
                Corp., and the Registrant dated April 15, 1998.****

10.45           Letter Agreement among the Registrant and Rex A. Licklider and
                D. Michael Talla dated March 31, 1998.****

10.46           Asset Purchase Agreement between Hilton Hotels Corporation and
                RM Sports Club, Inc. dated as of April 1, 1998.****

10.47           Assignment and Assumption of Asset Purchase Agreement between RM
                Sports Club, Inc. and the Registrant entered into as of April 1,
                1998.****

10.48           Note Payable issued by the Registrant to Hilton Hotels
                Corporation dated April 15, 1998.****

10.49           Instructions for Purchase of Real Estate in Houston, Texas dated
                March 5, 1998.****

10.50           Amended and Restated 1994 Stock Incentive Plan as of June 2,
                1998.#****

10.51           Second Amended and Restated Loan Agreement among the Registrant
                and certain of its subsidiaries, Sumitomo Bank of California and
                Comerica Bank - California dated as of June 9, 1998.****

10.52           Third Amendment to Amended and Restated Loan Agreement among the
                Registrant and certain of its subsidiaries, California Bank &
                Trust and Comerica Bank - California dated as of January 11,
                1999.****

10.53           Third Amended and Restated Loan Agreement between the Registrant
                and certain of its subsidiaries and Comerica Bank - California
                dated as of February 1, 1999.****

10.54           First Amendment to Third Amended and Restated Loan Agreement
                between the Registrant and certain of its subsidiaries and
                Comerica Bank - California dated as of February 1, 1999.****

10.55           Employment Agreement between the Registrant and John Gibbons
                dated October 16, 1998.#****

10.56           Settlement Agreement and Mutual Release among the Registrant, RM
                Sports Club, Inc. and Bally Total Fitness Holding Corporation
                made as of December 31, 1998.****

10.57           Letter Agreement between the Registrant and Millennium Partners
                LLC dated as of October 27, 1998.****

10.58           Participation Agreement between the Registrant and Millennium
                Partners LLC, dated as of October 27, 1998.****
</TABLE>



                                       33
<PAGE>   52

<TABLE>
<CAPTION>
EXHIBIT
NUMBER          EXHIBIT
------          -------
<S>             <C>
10.59           First Amendment to Lease between RCPI Trust and the Registrant
                dated October 30, 1998.****

10.60           Second Amendment to Lease between RCPI Trust and the Registrant
                dated March 4, 1999.****

10.61           Lease between CB-1 Entertainment Partners LP and S.F. Sports
                Club, Inc. dated June 1, 1997.****

10.62           Lease between 2200 M Street LLC and Washington D.C. Sports Club,
                Inc. dated March 1999.****

10.63           Fourth Amended and Restated Loan Agreement by and among the
                Registrant, certain of its subsidiaries and Comerica
                Bank-California, dated April 1, 1999.++++

10.64           Intercreditor Agreement by and among the Registrant, certain of
                its subsidiaries, Comerica Bank-California and U.S. Bank Trust
                National Association, dated April 1, 1999.++++

10.65           Disbursement Agreement between U.S. Bank Trust National
                Association and the Registrant and certain of its subsidiaries
                dated as of April 1, 1999.++++

10.66           Stock Purchase Agreement dated September 16, 1999 by and among
                Racquetball and Fitness Clubs, Inc., The Spectrum Club Company,
                Inc., Canoga Agoura Spectrum Club, Inc., Spectrum Club, Inc.,
                Spectrum Club Anaheim, El Segundo - TDC, Ltd., TVE, Inc. and the
                Registrant.+++++

10.67           Amendment #1 to the Stock Purchase Agreement dated September 16,
                1999 by and among Racquetball and Fitness Clubs, Inc., The
                Spectrum Club Company, Inc., Canoga Agoura Spectrum Club, Inc.,
                Spectrum Club Anaheim, El Segundo - TDC, Ltd., TVE, Inc. and the
                Registrant.+++++

10.68           Amended and Restated 1994 Stock Compensation Plan.#

10.69           Lease Agreement as of September 24, 1999 between The Spectrum
                Club Company, Inc. and West Hollywood Property Limited
                Partnership and 2400 Willow Lane Associates Limited Partnership.

10.70           Lease Agreement as of November 5, 1999 by and between New
                Commonwealth Center Limited Partnership and Washington D.C.
                Sports Club, Inc.

10.71           Separation from Employment Agreement made as of February 11,
                2000 by and between the Registrant and John M. Gibbons.#

10.72           Letter Agreement dated March 11, 1999 amending the October 27,
                1998 Letter Agreement between the Registrant and Millennium
                Partners, LLC.

10.73           Settlement Agreement and Mutual Release entered November 16,
                1999 between OTR, the Registrant and Spectrum Liquidating Corp.

10.74           Amendment adopted November 4, 1999 to the Registrant's 1994
                Stock Incentive Plan.#

10.75           Amendment adopted February 9, 2000 to the Registrant's 401(k)
                Profit Sharing Plan.
</TABLE>



                                       34
<PAGE>   53

<TABLE>
<S>             <C>
10.76           Certificate representing Series "B" Senior Secured Notes.

10.77           First Amendment to Fourth Amended and Restated Loan Agreement
                among the Registrant and certain of its subsidiaries and
                Comerica Bank - California as of December 3, 1999.

10.78           Form of The Sports Club Membership Agreements.

10.79           Transition Services Agreement made as of December 3, 1999 by and
                among the Registrant and Racquetball & Fitness Clubs, Inc.

21.1            Subsidiaries of the Registrant.

23.1            Consent of KPMG LLP.
</TABLE>

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

#       Compensation agreement of plan.

*       Incorporated by reference to the Registrant's Registration Statement of
        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/A, filed with the Securities and Exchange Commission on October 14,
        1997 (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 February 26,
        1998 (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 25,
        1999 (SEC file No. 1-13290).

+       Incorporated by reference to the Registrant's Form 8-K, filed with the
        Securities and Exchange Commission on January 15, 1998 (SEC file No.
        1-13290).

++      Incorporated by reference to the Registrant's Form 8-K, filed with the
        Securities and Exchange Commission on October 6, 1998 (SEC file No.
        1-13290).

+++     Incorporated by reference to the Registrant's Form 8-K, filed with the
        Securities and Exchange Commission on March 15, 1999 (SEC file No.
        1-13290).

++++    Incorporated by reference to the Registrant's Form 8-K, filed with the
        Securities and Exchange Commission on April 14, 1999 (SEC file No.
        1-13290).

+++++   Incorporated by reference to the Registrant's Form 8-K, filed with the
        Securities and Exchange Commission on October 5, 1999 (SEC file No.
        1-13290).

(b)     Reports on Form 8-K

        The following reports on Form 8-K were filed from October 1, 1999
        through the date of this report.

<TABLE>
<CAPTION>
                   DATE                                EVENT
                   ----                                -----
<S>                                                    <C>
                   October 5, 1999                     Announced that an agreement has been
                                                       reached to sell the Spectrum Clubs to an
                                                       investment group.

                   December 16, 1999                   Announced the sale of the Spectrum
</TABLE>



                                       35
<PAGE>   54

<TABLE>
<S>                                                    <C>
                                                       Clubs to an investment group.

                   February 11, 2000                   Reported pro forma financial information
                                                       required by Article 11 of Regulation S-X
                                                       regarding the sale of the Spectrum Clubs.

                   February 23, 2000              1)   Announced the resignation of John M.
                                                       Gibbons as President, Chief Executive
                                                       Officer and a director and named D.
                                                       Michael Talla and Rex A. Licklider as
                                                       interim Co-Chief Executive Officers.

                                                  2)   Announced the opening of New York's The
                                                       Sports Club/LA at Rockefeller Center.
</TABLE>

(c)     Exhibits

Index to Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER          EXHIBIT
------          -------
<S>             <C>
4.7             Second Amendment to Rights Agreement entered into as of the
                second day of July 1999.

10.68           Amended and Restated 1994 Stock Compensation Plan.#

10.69           Lease Agreement as of September 24, 1999 between The Spectrum
                Club Company, Inc. and West Hollywood Property Limited
                Partnership and 2400 Willow Lane Associates Limited Partnership.

10.70           Lease Agreement as of November 5, 1999 by and between New
                Commonwealth Center Limited Partnership and Washington D.C.
                Sports Club, Inc.

10.71           Separation from Employment Agreement made as of February 11,
                2000 by and between the Registrant and John M. Gibbons.#

10.72           Letter Agreement dated March 11, 1999 amending the October 27,
                1998 Letter Agreement between the Registrant and Millennium
                Partners, LLC.

10.73           Settlement Agreement and Mutual Release entered November 16,
                1999 between OTR, the Registrant and Spectrum Liquidating Corp.

10.74           Amendment adopted November 4, 1999 to the Registrant's 1994
                Stock Incentive Plan.#

10.75           Amendment adopted February 9, 2000 to the Registrant's 401(k)
                Profit Sharing Plan.

10.76           Certificate representing Series "B" Senior Secured Notes.

10.77           First Amendment to Fourth Amended and Restated Loan Agreement
                among the Registrant and certain of its subsidiaries and
                Comerica Bank - California as of December 3, 1999.

10.78           Form of The Sports Club Membership Agreements.

10.79           Transition Services Agreement made as of December 3, 1999 by and
                among the Registrant and Racquetball & Fitness Clubs, Inc.
</TABLE>



                                       36
<PAGE>   55

<TABLE>
<S>             <C>
21.1            Subsidiaries of the Registrant.

23.1            Consent of KPMG LLP.
</TABLE>

------------------
#        Compensation agreement or plan.



                                       37
<PAGE>   56

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act
of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, on the 28th
day of March, 2000.


                                            THE SPORTS CLUB COMPANY, INC.



                                            /s/ D. Michael Talla
                                            ------------------------------------
                                            D. Michael Talla,
                                            Co-Chief Executive Officer

                                            /s/ Rex A. Licklider
                                            ------------------------------------
                                            Rex A. Licklider
                                            Co-Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant, in the capacities and on the date indicated.


<TABLE>
<CAPTION>
Signature                                    Title                                      Date
---------                                    -----                                      ----
<S>                                          <C>                                        <C>
/s/ D. Michael Talla                         Chairman of the Board                      March 28, 2000
-------------------------------------------- and Co-Chief Executive Officer
D. Michael Talla


/s/ Rex Licklider                            Vice Chairman of the Board                 March 28, 2000
-------------------------------------------- and Co-Chief Executive Officer
Rex A. Licklider


/s/ Timothy M. O'Brien                       Chief Financial Officer                    March 28, 2000
-------------------------------------------- (Principal Financial and Accounting
Timothy M. O'Brien                           Officer)


/s/ Brian J. Collins                         Director                                   March 28, 2000
--------------------------------------------
Brian J. Collins


/s/ Nanette Pattee Francini                  Director                                   March 28, 2000
--------------------------------------------
Nanette Pattee Francini


/s/ Andrew L. Turner                         Director                                   March 28, 2000
--------------------------------------------
Andrew L. Turner


/s/ Dennison Veru                            Director                                   March 28, 2000
--------------------------------------------
Dennison Veru
</TABLE>



                                       38