The Sports Club Company Business Information, Profile, and History

Company Perspectives:

The Company believes that it has developed a nationwide reputation for its ability to acquire, develop and operate first-class sports and fitness facilities, and that such facilities are increasingly sought after by developers of premiere, multi-use projects. Consequently, there exist numerous opportunities to develop the Sports Club name and concept throughout the country and internationally and to develop the Spectrum Club name throughout Southern California. The Company intends to continue to pursue those opportunities which maximize its earning potential.

History of The Sports Club Company

Based in Los Angeles, The Sports Club Company owns and operates fitness and health clubs across the United States. Sports Club operations are marked by their "urban country club" feel, combining multiple fitness options with every imaginable service and luxury. The rise of The Sports Club Company parallels the 1980s era of consciousness about physical fitness; the company was actually born in the region most associated with that craze: Southern California.

A Lasting Partnership Launches Urban Country Clubs

The story of the business partnership that formed The Sports Club Company began in Mexico in 1969, when Michael Talla met Nanette Pattee Francini in a hotel in Mazatlan. Talla and Francini first became romantically involved, and later--after their relationship ended--stayed together as business partners. Their first joint venture was a bikini manufacturing company that sold split sizes for tops and bottoms in 1969. In 1972, they sold their business for $125,000. Talla moved to Milwaukie, Oregon to build a racquetball club, and Francini moved to Colorado. In 1973, she was named Miss Aspen, and she went on to work in beer sales as The Budweiser Girl. By 1975, she was fed up with this line of work, and contacted Talla about rejuvenating their business partnership. Talla sold his racquetball club for $285,000 and moved to Los Angeles.

In 1979, Talla and Francini borrowed money from a friend and leased a 40,000 square foot piece of land in a Santa Monica industrial park. With some friends selling memberships out of a trailer, Talla and Francini opened their first sports club: The Sports Connection. Here, they pioneered their "urban country club" concept, with private trainers, a pro shop, a cafe, and multiple fitness options under a single roof. In addition, The Sports Connection was one of the first coeducational health clubs (previous fitness centers were segregated by sex). Soon, a second club was opened in the exclusive city of Beverly Hills. Medium-sized health clubs in Long Beach, the South Bay, Costa Mesa, and Century City followed.

Talla and Francini's success was augmented by the membership of celebrities and sports stars--working out at sports clubs meant an opportunity to "star-gaze" as well as slim down. With a star-studded membership list, the Sports Connection began to receive attention in media stories covering the fitness boom of the 1980s. In 1985, the Sports Connection chain inspired a major motion picture about the fitness lifestyle, "Perfect," starring John Travolta as a journalist and Jaime Lee Curtis as an aerobics instructor. Jane Fonda's aerobics videos of the early 1980s also helped popularize the idea of working out to achieve supreme physical fitness. By 1985, the company owned six workout centers, which grossed $12 million annually.

From Health Clubs to Megaclubs: The Late 1980s

Positive response to the Sports Connection clubs led Talla and Francini to take the luxury concept a step further. In 1987, they opened the first Spectrum Club in Manhattan Beach. The new megaclub, a 65,000 square foot complex, was designed to emulate a beach resort, with an Olympic sized swimming pool, a full health spa and complete food and beverage service. New Spectrum Club locations were added in Santa Monica's Water Garden, Howard Hughes Center, AgouraHills and Valencia. Having moved on to the highest end of the sports and fitness market, the company sold its original Sports Connection clubs to focus solely on the new megaclub idea.

That same year, the company opened The Sports Club/LA, a new $30 million sports and fitness complex in an old wheelchair factory in West Los Angeles. The Sports Club/LA was a 100,000 square foot structure with marble lobbies, and housed state-of-the-art equipment, exercise classes, private trainers, valet parking, car detailing, a sundeck, shoe shine, hair salon, and an executive business center. Conceptually, the club combined an exclusive workout facility with a 5-star hotel. The club opened with a star-studded gala, and in a very short time it reached membership capacity (5,000 members), with a $2,500 initiation fee plus $160 a month for executive membership dues. Celebrities including Magic Johnson, Madonna, Bruce Springsteen, Princess Stephanie of Monaco, Jack Nicholson, Arnold Schwarzenegger, Dyan Cannon, Linda Rondstadt, Tyra Banks, and Brooke Shields could be spotted working out with the club's personal trainers, as were the powerful elite of Los Angeles' corporate and entertainment industries. According to the Los Angeles Times, the club was described by some as "the Acropolis of physical fitness centers."

In 1988, Oil and entertainment mogul Marvin Davis invested $34 million in the company to support its expansion. Davis received stakes in the various clubs, which were all separately incorporated at that time. In sum, Davis controlled about 50 percent of the sports club operations. Davis' investment, however, would later be plagued by the downturn in the southern California economy and the slowing of the health club craze, as well as a competitive race with another company in Irvine, California.

Heavy Competition in the Early 1990s

The Sports Club became involved in a protracted competition around the construction and operation of a new facility in Irvine, California. During the mid-1980s, money for new construction flowed freely. Laguna Niguel-based developer Birtcher decided to construct a super health club to entice tenants to its new Irvine office buildings. The Koll Company elected to develop a competitive health club, and both developers easily secured financing. Koll chose the Sports Club Company to build its health facility, while Birtcher opted for Sporting Clubs of America, a Sports Club rival company headquartered in La Jolla, California. As a result, two upscale, $20 million-plus sports clubs were soon under construction, just across the San Diego Freeway from each other.

Public opinion was that the rival health clubs--a Sports Club/Irvine and a Sporting Club--would cannibalize each other's business. The Irvine community just did not contain enough affluent fitness fans to support two luxury sports facilities. Early efforts to reach a merger agreement were unsuccessful, and neither company would scrap its new facility. The two clubs' plans predicted similar facilities, each at 100,000 square feet with executive dining rooms, child care centers, cocktail lounges, and hair salons, with projected initiation fees of around $1,000. Basic membership fees would run about $500 at both clubs, with slightly higher monthly dues at Sports Club/Irvine. Target membership for Sports Club/Irvine was 5,000 (with a capacity of 9,000), with 4,000 members sought by Sporting Club. Knowing that 9,000 potential members were not to be found in the 110,000 person community of Irvine, Sports Club/Irvine was forced to begin its promotional sales long before the planned timetable, to respond to early advertising by its rival Sporting Club. By May of 1990, Sports Club/Irvine had attracted 4,500 members at initiation fees between $550 and $1,500. However, with a capacity of 1,700 customers a day, the club had yet to reach 1,000 daily exercisers.

Despite falling short of its goals, Sports Club/Irvine had the edge. It opened almost two years sooner than Sporting Club--in February of 1990--due to a series of problems with Sporting Club's building permit and other issues. Koll, developer of the new Sports Club/Irvine, had already received the city of Irvine's approval to build a health spa in conjunction with its permit for a retail and office complex. Koll had merely returned to the city and was granted permission to build a much larger health facility. Birtcher, however, was slowed by the paperwork and procedures associated with acquiring an initial permit from the city of Irvine. A joint venture by San Diego developer Naiman Co. and two Japanese companies (Nissho Iwai Corp. and Hiroshima Yakult Co.), the Sporting Club did not actually open until July of 1992, seven years after the project began. The delays cost the clubs potential customers, and many originally planned features and services (a kayak run and indoor swimming pool, for example) were rejected due to the construction delays. When both clubs were finally opened, similar services were offered, with the only distinguishing features being rooftop paddle tennis and tanning salons at Sports Club/Irvine and outdoor volleyball courts and a soccer field at the Sporting Club. In 1992, when the Sporting Club opened, it had secured an initial 2,200 members, falling short of the minimum of 3,800 members that were needed in order to break even.

Expansion and Public Offering in the Mid-1990s

The economic recession exacerbated the difficulties of the competing businesses, as did the general slowdown in the popularity boom of health clubs in the 1990s. While health club memberships in the U.S. grew 10 to 15 percent annually in the 1980s, growth slowed to 5 percent in the 1990s. Growth did continue, however, with 17 million Americans belonging to health clubs in 1992 versus 12 million in 1980, according to the Los Angeles Times. Nonetheless, by 1990, billionaire investor Marvin Davis wanted to sell his investment and cut his losses. Talla sought underwriting, but loans were difficult to procure in California.

Finally, in 1994, NetWest Securities and Oppenheimer & Co. were enlisted to help. The Sports Club Company went public--the first company involved in the development, acquisition and operation of sports clubs ever to do so. The chain of clubs had revenues of $38 million, with debt of $33.4 million. The underwriters sold 4.5 million shares at $9 per share, valuing the company at about $100 million. Marvin Davis was paid $26.5 million for his interests in the clubs, which were effectively consolidated under a single corporate parent.

In 1995, the company expanded eastward, opening its Reebok Sports Club/NY in Manhattan. The $55 million, 140,000 square foot club was launched in partnership with Reebok International. The New York facility was the most ambitious to date, offering fitness and recreation options including a 45 foot rock climbing wall, three floors of weight training and cardiovascular equipment, private trainers and exercise classes, a full day spa, a gourmet restaurant, an Olympic swimming pool with underwater music, and a Kid's club.

The recipe for success in California was not easily transferable to New York, however. While Reebok Sports Club/NY boasted the same state-of-the-art fitness equipment and fake granite rock climbing walls as its California cousins, the celebrity factor was missing. Meanwhile, back in California, membership in Sports Club/LA dropped 9 percent since 1994, when it was closed due to the Northridge earthquake. Membership cancellations and low new memberships caused earnings to drop, along with stock prices, which decreased 30 percent since the public offering, to $6 per share.

Acquisitions, Continued Expansion, and the Turn of the Century

The fitness industry, accepting the fact that the explosive growth of the 1980s had matured and stabilized in the 1990s, began to consolidate. Sports Club had made a number of acquisitions since going public in 1994, and by 1997 its ownership list totaled 10 clubs nationwide with 47,000 members. In 1997, Sports Club Company seriously considered the acquisition of Gold's Gym Enterprises, a 34-year-old company with over 500 franchises worldwide. After two months analyzing Gold's books, the company chose to reject the agreement to acquire the company. Immediately afterward, the company signed an agreement to purchase an 88,000 square foot building in Thousand Oaks for $6.8 million, where it would open a new Spectrum Club. In August, 1997, the company acquired a facility in Las Vegas, and in July it opened its first suburban Spectrum Club in Valencia, California. The company's expansion and acquisitions resulted in higher revenues of $61.2 million in 1997. The company's stock price climbed back to $9 during the year.

In 1998, The Sports Club Company owned and operated 15 clubs, with seven more under development. The company began to expand nationally more than had been the case in the past. Two new Manhattan clubs were in progress, including one in Rockefeller Center, along with sites in Boston, San Francisco, and Washington D.C. In a $17 million acquisition from Sequoia Athletic Company, the company purchased four Racquetball World clubs in Fullerton, Santa Ana, Canoga Park, and Fountain Valley, California. Financing of the deal was assisted by $10 million from an affiliate of Millennium Entertainment Partners L.P., and the remaining $6.5 million was procured through company stock sales ($5 million purchased by Millennium Entertainment partners). After a million dollars worth of enhancements and renovations, the acquisitions were slated to join the company's Spectrum Club Collection. An additional Spectrum Club was under development and scheduled to open in Thousand Oaks, California in 1998. All new Spectrum Clubs would feature basketball, volleyball, aerobics, weight training, private training, cardiovascular centers, childcare services, and sidewalk cafes.

As a pioneer of fitness developments, the company received a myriad of group exercise awards. The Sports Club was the first to offer coeducational exercise classes, private training, yoga, step classes, group cycling, low impact aerobics, and the Private Trainer System program. In the late 1990s, Arnold Schwarzenegger presented Michael Talla with the Lifetime Achievement Award from the Governor's Council on Physical Fitness in recognition of his leadership in the health club industry and his achievements on behalf of The Sports Club Company. Talla and Francini were flown to San Francisco in Schwarzenegger's private jet for the ceremony.

Talla and Francini rode the wave of the 1980s fitness craze, and had managed to stay on. The Sports Club Company was challenged by competition, the slowing popularity of the workout lifestyle, earthquakes, and differing cultural environments outside of California. Yet the company has still been able to build a niche for itself among the famous and the wealthy, grooming and maintaining healthy bodies in a luxury atmosphere. Its stock prices and earnings have been vulnerable to change, and its future success remains to be seen in its first decade as a public company.

Principal Operating Units: The Sports Club/LA; The Sports Club/Irvine; Reebok Sports Club/NY; The Sports Club/Las Vegas; Spectrum Club-Agora Hills; Spectrum Club-Canoga Park; Spectrum Club-Fountain Valley; Spectrum Club-Fullerton; Spectrum Club-Howard Hughes; Spectrum Club-Manhattan Beach; Spectrum Club-Puente Hills; Spectrum Club-Santa Ana; Spectrum Club-Santa Monica; Spectrum Club-Thousand Oaks; Spectrum Club-Valencia; Spectrum Club-Water Garden.