**UNITED STATES SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

# **FORM 10-K**

 

| **ý**                                           | ** ** | **Annual Report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**     |
|------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                 |       |                                                                                                    |
| **For the fiscal year ended December 31, 2004** |
|                                                 |
| **OR**                                               |
|                                                 |       |                                                                                                    |
| **o**                                                | ** ** | **Transition Report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                                 |       |                                                                                                    |
| **For the transition period from**                   |
| ** **                                           |
| **Commission file number: 333-112531**               |

 

## **EQUINOX HOLDINGS, INC**

(Exact name of Registrant as specified in itscharter)

 

| **DELAWARE**                                                    | ** ** | **13-4034296**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S.  Employer Identification No.) |

 

**895BROADWAY**

**NEW YORK,NEW YORK 10003**

**TELEPHONE:(212) 677-0181**

(ADDRESS, ZIP CODE, ANDTELEPHONE NUMBER, INCLUDINGAREA CODE, OF REGISTRANTS PRINCIPAL EXECUTIVE OFFICES.)

 

Securitiesregistered pursuant to Section 12(b) of the Act: **None**

Securitiesregistered pursuant to Section 12(g) of the Act: **None**

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirement for the past90 days.  Yes o  Noý

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part IV ofthis Form 10-K or any amendment to this Form 10-K.  Yes o  No ý

 

Indicateby check mark whether the Registrant is an accelerated filer (as defined inExchange Act Rule 12b-2).  Yes o  No ý

 

Theaggregate market value of Common Stock held by non-affiliates of theregistrant: **Not applicable**

 

Asof June 1, 2005, there were 9,438,247 shares of Common Stock of theCompany outstanding.

 

 

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#### **TABLE OF CONTENTS**

 
| **PART I**                                                                                                            |
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| ** **                                                                                                                 |
| Item 1. Business                                                                                                           |
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| Item 2. Properties                                                                                                         |
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| Item 3. Legal Proceedings                                                                                                  |
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| Item 4. Submission of Matters to a Vote of Security Holders                                                                |
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| **PART II**                                                                                                           |
| ** **                                                                                                                 |
| Item 5. Market for Registrant’s Common  Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |
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| Item 6. Selected Financial Data                                                                                            |
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| Item 7. Management’s Discussion and Analysis of Financial Condition  and Results of Operations                        |
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| Item 7A. Quantitative and Qualitative  Disclosures About Market Risk                                                       |
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| Item 8. Financial Statements and  Supplementary Data                                                                       |
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| Item 9. Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                              |
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| Item 9A. Controls and Procedures                                                                                           |
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| Item 9B. Other Information                                                                                                 |
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| **PART III**                                                                                                          |
| ** **                                                                                                                 |
| Item 10. Directors and Executive Officers  of the Registrant                                                               |
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| Item 11. Executive Compensation                                                                                            |
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| Item 12. Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                   |
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| Item 13. Certain Relationships and Related  Transactions                                                                   |
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| Item 14. Principal Accountant Fees and  Services                                                                           |
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| **PART IV**                                                                                                           |
| ** **                                                                                                                 |
| Item 15. Exhibits and Financial Statement  Schedules                                                                       |

 

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**PART I**

 

#### **Item 1.     Business**

#### ** **

***Restatements***

 

Equinox Holdings, Inc. identified certain accounting mattersrelating to our December 31, 2003 and 2002, consolidated financialstatements and 2003 and 2004 interim periods. The matters subject to therestatement adjustments, which are summarized below and discussed in Note 2 toour consolidated financial statements, increased our accumulated deficit by $3.3 millionas of December 31, 2004. These adjustments were necessary to (i) properly account for construction allowancesreceived from landlords; (ii) correct the estimated useful lives ofcertain fixed assets; (iii) correct certain membership fees and otherrevenue recognition; (iv) correct the recording of certain prepaid commissionexpense; and (v) record prior period state and local sales taxobligations.

 

***Overview***

* *

The terms “Equinox”, “Company”, “we”, “us” and “ours” refer to EquinoxHoldings, Inc. and its subsidiaries. Equinox operates under one businesssegment and is an operator of upscale, full-service fitness clubs that offer anintegrated selection of Equinox-branded programs, services and products. As of December 31,2004, we operate 24 fitness clubs and offer our 77,600 members strength andcardio training, group fitness classes, personal training, spa services andproducts, apparel, food/juice bars, locker rentals and laundry services.Members are charged a one-time initiation fee and membership dues that vary bytype of membership, location and club model. Initiation fees vary by locationand club model. Our initiation fees currently range from $245 to $545. Monthlydues for a Select membership range from $127 to $142 at our urban facilitiesand from $110 to $127 at our suburban facilities. Monthly dues for an All Accessmembership are currently $147 for all facilities.

 

***History***

* *

As of December 31, 1999, Equinox operated 7 fitness clubs in theNew York City Metropolitan area. Through December 31, 2004, we added 17 ofour current 24 fitness clubs as follows:

•      10 clubs in theNew York City Metropolitan Area

•      3 clubs in theChicago area

•      2 clubs in LosAngeles

•      1 club in SanFrancisco

•      1 club in Santa Monica

 

During 2004, we opened the following fiveclubs:

•      Columbus Circle, New York, New York

•      Highland Park, Chicago

•      Roslyn, New York

•      San Francisco, California

•      Santa Monica, California

 

Since December 31, 1999, we have increased our membership base by155%, or 47,200 members, to 77,600 members at December 31, 2004. Theincreases in the number of clubs and members have attributed to our increase inrevenues. Revenue totaled $144.2 million, $115.5 million and $93.4 million forthe years

 

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ended December 31, 2004, 2003, and 2002, respectively. Totalrevenues are comprised of membership fees, personal training revenue and otherrevenue.

 

Revenue from membership fees, includinginitiation fees and membership dues, was $95.6 million, $76.2 million and $62.2million, and as a percentage of total revenue was 66.3%, 66.0% and 66.6%, forthe years ended December 31, 2004, 2003, and 2002, respectively.

 

Revenue from personal training fees was $30.9million, $25.0 million and $17.7 million, and as a percentage of total revenuewas 21.4%, 21.6% and 19.0%, for the years ended December 31, 2004, 2003,and 2002, respectively.

 

Other revenue, which includes spa servicesand products, apparel and food/juice bar revenues, locker rentals and laundryservices was $17.8 million, $14.3 million and $13.5 million, and as apercentage of total revenue was 12.3%, 12.4% and 14.4%, for the years ended December 31,2004, 2003, and 2002, respectively.

 

***RecentEvents***

 

In January 2004, we opened a fitness club in Columbus Circle inNew York City, as well as in Highland Park, a Chicago suburb. In addition toweight training, cardio equipment, various fitness studios and many otherofferings, the Columbus Circle and Highland park clubs have 41,000 and 30,700 squarefeet, respectively, and include a spa, steam room and swimming pool.

 

In June 2004, we opened a fitness clubin Roslyn, a suburb of New York City. In addition to weight training, cardioequipment, various fitness studios and many other offerings, this 24,000 squarefoot suburban club includes a spa and steam room.

 

In December 2004, we opened our firstfitness clubs in San Francisco and Santa Monica, California. In addition toweight training, cardio equipment, various fitness studios and many otherofferings, our San Francisco club has 32,000 square feet and includes a spa,swimming pool and sauna. The Santa Monica fitness club has 29,000 square feetand includes a spa and steam room.

 

During thesecond quarter of 2005 we opened a club in San Mateo, California and anotherclub in Mamaroneck, New York.

 

***Strategy***

 

Our strategy is to continue to capitalize on investments in newerclubs, continue opening new clubs in existing markets and enter select newmarkets, maintain current member retention levels and increase revenues permember.

 

*New clubs -*Newclubs incur certain fixed operating costs without the benefit of a maturemembership base. We estimate that it generally takes up to four years for newclubs to reach a mature membership base.

 

 *Markets -*Equinox fitness clubsare typically located in major metropolitan areas. As of December 31, 2004there were 17 Equinox fitness clubs in the New York City Metropolitan area,four in California in San Francisco, West Hollywood, Santa Monica and Pasadena,and 3 in Chicago, Illinois. Once we have saturated our existing markets,specifically the New York City Metropolitan area, we may encounter difficultiesin opening new clubs, as we may not have as much demand at our current pricingstructure in other markets and our brand may not be as widely known. Currently,the Company has plans to open six new clubs through November 2005. Thefollowing outlines our plans for the six new clubs in both existing

 

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markets, as well as the South Beach, Florida area, which is the firstEquinox Fitness Club in the Florida market:

 

•      San Mateo,California- Opened as of April 2005

•      Mamaroneck, NewYork- Opened as of May 2005

•      South Beach,Florida- September 2005

•      Los Angeles,California- November 2005

•      Chicago,Illinois- October 2005

•      Palos Verdes, California- November 2005

 

We are actively prospecting variousadditional sites in existing markets and Florida. Financing for new clubs willbe from cash on hand, as well as cash flows from operations. The Company may,if necessary, draw from its $25.0 million line of credit if it requiresadditional financing.

 

A service agreement was entered into betweenEquinox and Eclipse Development Corporation, a company wholly owned by Mr. PaulBoardman, in February 2001, which prohibits Eclipse and Mr. Boardmanfrom performing any services for anyone that competes with our fitness clubsand spa facilities. Eclipse is thinly capitalized and highly dependent upon ourbusiness. Equinox continues its contractual relationship with Eclipse,exclusively to provide site selection, acquisition, design, construction, andmaintenance services. This arrangement is part of our strategy to keep costs ata minimum. For the years ended December 31, 2004 and 2003, over 90% of ourcapital expenditures were paid to Eclipse. On January 17, 2003, the FASBissued FASB Interpretation No. 46, *Consolidationof Variable Interest Entities* (“FIN 46”). Such Interpretationaddresses the consolidation of variable interest entities (“VIEs”),including special purpose entities (“SPEs”), that arenot controlled through voting interests or in which the equity investors do notbear the residual economic risks and rewards. The provisions of FIN 46were effective immediately for transactions entered into by the Companysubsequent to January 31, 2003 and became effective for all othertransactions as of July 1, 2003. However, in October 2003, the FASBpermitted companies to defer the July 1, 2003 effective date to December 31,2003, in whole or in part. On December 24, 2003, the FASB issued acomplete replacement of FIN 46 (“FIN 46R”), which clarified certaincomplexities of FIN 46 and generally requires adoption no later than December 31,2003 for entities that were considered SPEs underprevious guidance and no later than the beginning of the fiscal year following December 15,2004 for all other entities. Equinox will begin consolidating Eclipse pursuantto FIN 46 as of January 1, 2005. We believe that the impact on theconsolidated balance sheet for 2005 will not be material as a result of thischange in accounting principle since the historical payments made to Eclipsehave been principally for capital expenditures. We anticipate that theconsolidation of this entity will reduce net income in 2005. However, we cannotestimate the impact of this change at this time.

 

*Member retention -*The Company has determined that retaining members is a key component to itsfinancial results. Equinox emphasizes service, value, quality, expertise,innovation and attention to detail in all of its member offerings, and as aresult its retention rate has consistently exceeded the median retention rateof fitness clubs nationwide. Members are encouraged to participate in theCompany’s programs and services and to use its facilities frequently. Webelieve that participating members will get results and will be more likely torenew their memberships and to refer new members. Participating members arealso more likely to use high-margin ancillary programs and services, such aspersonal training and spa services. The typical target member is awell-educated professional between 25 and 55 years of age with significantdiscretionary income and who considers fitness an essential part of theiractive lifestyle.

 

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*Increase revenue per member -*Revenues per member have increased to $2,025 for theyear ended December 31, 2004 from $1,966 and $1,895 for the years ended December 31,2003 and 2002, respectively. The industry average revenue per member was $559and $584 for the years ended December 31, 2003 and 2002, respectively.

* *

**Sales, Membership and Marketing**

 

*Sales*- Our sales strategy, whether for membership, personal training or otherancillary services and products, focuses on value. Membership advisors arerigorously trained in selling the unique benefits of an Equinox membership andare paid a base salary plus commissions. Commissions are tied to unit sales andoverall revenues (both membership and ancillary) generated at thepoint-of-sale. Advisors are also compensated on a commission basis formembership renewals. This policy encourages membership advisors to focus onattracting new members who will take advantage of ancillary programs andservices and ensures that they will maintain contact with members long afterthe initial sale. We currently employ 83 membership advisors at our 24 fitnessclubs as of December 31, 2004. Unlike some fitness club operators, ourmembership advisors are not individually permitted to modify membership prices.By offering our services to all potential individual customers at the same locationat the same price, we are able to carefully control the quality andprofessionalism of the sales process. Moreover, this ensures that membershipadvisors emphasize the value and unique benefits of an Equinox membership overprice, a strategy that we believe translates into increased sales and ancillaryrevenues. Our membership advisors convert approximately 40% of all prospectsinto sales.

 

The sales process further distinguishes us byproviding professional and personalized service. Upon a prospective member’sfirst visit, the membership advisor will invite him or her on a private tour ofthe facility. The membership advisors are trained to tailor the tour and theinformation they provide to the specific interests, goals and concerns of theprospective member. During this process, membership advisors stress ourcommitment to our members achieving results and enjoying the unique benefits ofEquinox, including the complimentary Equifit fitnessassessment, and the advantages of personal training, spa services and otheramenities. The sales process continues after a prospective member’s initialvisit to a club. The membership advisor, following our protocol, diligentlyfollows up with each prospect by phone, mail and e-mail encouraging him or herto join Equinox. Additionally, we encourage the prospect to use the club as aguest and offer three and seven day complimentary guest passes. We

 

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enter each prospect’s name,telephone number and address into our database to assist in the follow-upprocess.

 

In the second half of 2000, we initiated acorporate membership program targeting professional organizations to generateadditional membership growth. This program makes memberships available atdiscounted rates for members affiliated with these organizations. Withinour corporate membership program, no single corporation accounts for more than 2.65%of our gross accounts receivable and 0.4% of total revenue.

 

*Membership -*  Membership advisors offer prospective membersseveral membership options. A Select membership offers access to one club,while an All Access membership allows use of all Equinox facilities. With thegrowth in our club portfolio, we have been diligently up-selling our Selectmembers to All Access memberships, thereby increasing the ratio of All Accessmemberships to total memberships from 17% in 2000 to 37.7% at December 31,2004. Because All Access memberships allow members to take advantage of anational portfolio of clubs, facilities near work and home, and differentlocations with different amenities, we believe that we will be able to furtherincrease this ratio, particularly as we develop more regional urban clustersand expand into suburban markets near these clusters.

 

We offer two payment options: monthly andpaid-in-full. Membership agreements are for a minimum of one year. Paid-in-fullmembers pay an initiation fee and the equivalent of 11 months ofmembership dues upfront; in return, they receive one free month, for a total of12 months of membership. Paid-in-full memberships expire after12 months and need to be renewed annually. We also offer a monthly paymentoption, which also has a one-year minimum duration, but does not expire unlesscancelled. Monthly membership dues are primarily collected through electronicfunds transfer, whereby each customer submits a credit card or bank accountauthorization and is automatically billed each month. As of December 31,2004, approximately 37.7% of our members had paid-in-full memberships, and theremaining 62.3% had monthly memberships.

 

We do not discount monthly dues or offerdifferent prices to individuals for the same individual membership at the samelocation. We do, however, offer certain incentives and or promotions toprospective members, usually in the form of a discount off the initiation fee.Incentives and promotions are approved by management. In general, allindividual members at a specific location pay the same dues, but may have paida different initiation fee at the time they joined based on the approvedpromotions in place. In addition, we offer a corporate membership program,where we waive our annual initiation fee and discount our annual dues. Thetotal discount equates to approximately a 30%-40% discount in total contractvalue, depending on the type of membership (Select vs. All Access) over thetypical individual membership.

 

*Marketing,advertising and public relations -* We maintain anongoing marketing, advertising and public relations program aimed at increasingour brand recognition and generating sales prospects. In 2004 and 2003, wespent approximately $5.0 million and $4.2 million, or 3.5% and 3.6%,respectively of total operating revenues, on marketing and public relations. InJanuary 2004 we launched our new marketing campaign called “It’s notFitness. It’s Life.” We reach prospective and existing customers throughreferrals, direct mail, cable television and print advertisements inpublications such as *The New York Times*,*The Los Angeles Times*, *New York* magazine and *Hamptons**Magazine*, as well as other venues such as outdooradvertising on buses and telephone kiosks. We also use the window space of ourclubs, which are often in high-traffic areas, to create an integrated brandimage.

 

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We believe that member referrals and word ofmouth are our most effective means of marketing. To foster this cost effectiveand efficient source of marketing, we maintain a number of incentives formembers to continuously produce new member leads, including a free month’smembership or Equinox gift cards with monetary credit that can be used topurchase Equinox-branded programs, services or products at our clubs. Severaltimes a year we also target former members by direct mail. We launched an advertisingcampaign in January 2002 around the theme and brand position “Equinoxmakes you feel good.” This integrated campaign is designed to increase brandawareness and highlight the unique benefits of an Equinox membership.

 

A separate but integrated public relationseffort results in extensive press coverage that affirms the Equinox brandstatus and profile. We maintain a public relations department that isresponsible for pitching ideas as well as responding to press inquiries. Webelieve that by leveraging our press relationships, we are able to perpetuatethe Equinox brand and maintain a high profile in local and national media at alow cost. As part of the public relations strategy, we regularly distributepress releases and stage major press events to introduce new and innovativeprogramming. In addition, an integral part of our marketing strategy involvespartnering with premier brands, corporate partners and/or properties that havesimilar member demographics and characteristics and embrace core values similarto ours. We recently launched a partnership with BMW. In the constant attemptto develop innovative programming, we now offer a fitness program that is basedon the competitive BMW driving team’s fitness routine, called the “UltimatePerformance Workout.” In addition to this programming there is a sweepstakesfor a complimentary BMW automobile lease. With such programs, we and ourpartners jointly market our products and services to a group of targetedcustomers. In addition, we are very active in our local communities. Givingback to selected charities is important to our management team, employees andmember base further emphasizing our brand values.

 

**Services**

 

We believe we set the industry standard ofexcellence with our quality and innovative programming. We believe that amember’s experience and loyalty is driven by the results achieved through groupfitness classes, personal training, spa and other service and productofferings. Our core program centers around group fitness, which is included inthe price of membership. We offer additional programming, such as personaltraining, Pilates and spa services, on a fee-for-service basis, therebygenerating ancillary revenues. Because of our fully integrated lifestyleplatform and our broad range of programming at each club, we believe wegenerate some of the highest revenues per member in the industry. For the yearsended December 31, 2004 and 2003, ancillary programs and servicesgenerated approximately 34.0% of our total revenues. We believe ancillaryrevenues will continue to be a significant source of high-margin growth in thefuture.

 

*Group fitness -*  Categories in our group fitness program,which is included in the price of membership, include cardio and dance, yoga,spinning, body sculpting, core training, kickboxing, aquatics, strengthtraining and conditioning, sports training, boxing and martial arts. Our groupfitness program is recognized for its original offerings, quality instructionand comprehensive lifestyle approach. Weekly at each fitness club, we offer onaverage over 100 classes, many characterized as the “best of the best” by *Fitness* (February 2004) and *New York* (March 2005) magazine. Many ofthese classes are offered only at our facilities. We introduce proprietary newclasses each year. We focus on quality, integrity and expertise in theorigination of programming, and average class size ranges from 15 to 60individuals, with participation varying based on the class, location and timeoffered.

 

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Our group fitness team constantly seeks newand innovative programming and instructors to keep Equinox at the forefront offitness programming. Each club location maintains its own selection ofprogramming designed to meet the needs of its local demographics. Instructorsare carefully selected for their knowledge, expertise and ability tocommunicate with and motivate members. We pride ourselves on not onlyidentifying and recruiting talent, but also developing our own instructors. Ourinstructors frequently present at national and international conventions andare often featured in prominent print media such as *GQ*, *Men’s Journal*,*Allure*, *Vogue* and *Self*.

 

*Personaltraining -*  Webelieve personal training is one of the most effective ways to help our membersreach their health and fitness goals. Our personal trainers are highly visiblethroughout each fitness club, assisting members with equipment and providinginformal tips on a complimentary basis. Each of our clubs maintains approximately20-50 personal trainers, depending upon club layout, membership and usagepatterns.

 

Our personal training is customized to meetthe needs of each member within our proprietary training methodology andsystem. Upon enrollment, we give each new member a complimentary 30-minute Equifit fitness assessment and a one-hour personal trainingsession. All personal trainers are instructed to cross sell our offerings,including personal training packages and other services that will help themember achieve his or her goals. This initial contact with the personal traineris designed to motivate our members to actively participate and purchaseadditional services. A portion of new members purchase personal training atthis time. Our personal training pricing is structured to appeal to the widestdemographic. We offer both single- and multi-session packages with pricedependent upon the number of sessions and the certification level andexperience of the personal trainer. Our personal trainers are divided intothree levels based upon education and expertise: Elite, Comprehensive and ElitePlus. All of our personal trainers agree to limit their training activitiesoutside of Equinox, and they earn a commission based on the training revenuesthey generate. The commission payout increases as trainers attain higher levelsof certification, which we believe motivates trainers to sell personal trainingservices and to attain higher levels of certification. As of December 31,2004 we had approximately 600 personal trainers.

 

In addition to having a nationalcertification or a relevant college degree, we require all of our personaltrainers to participate in our proprietary educational program, the EquinoxFitness Training Institute or EFTI. EFTI not only provides a comprehensivecurricula of professional development for our personal trainers but also servesas a primary source of progressive program development. As our trainerscomplete certain classes provided by EFTI, they are eligible to train at ahigher level and earn higher commissions.

 

*The Spa atEquinox -* Our spas complement our integrated lifestyleapproach to health and fitness by offering an environment in which members canreceive massages and facial or body-care services while focusing on relaxationand rejuvenation. We currently operate full-service day spas that have beendesigned to invoke a sense of luxury and comfort. In addition, we maintaintreatment rooms in our other facilities that offer massage services to furtherintegrate the spa concept. Our spas are staffed with knowledgeable andexperienced therapists. Our spas are open to both members and non-members.

 

*The Shop -*TheShop is our retail business that sells Equinox-branded products and other namebrand merchandise that have been carefully selected to complement the Equinoxbrand image. The Shop has been recognized by *Women’sWear Daily* for identifying trends in women’s fitness wear andoffering hard-to-find, lesser-known styles and manufacturers before they becomepopular. Much of The Shop’s product line prominently displays the Equinox logo,providing increased visibility and exposure in

 

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addition to reinforcing the brand image. Equinox-branded apparel hasbeen featured in nationally televised programs, such as HBO’s *Sex and the City,* as well as in prominentconsumer publications. With the exception of one location, The Shop operates inall Equinox facilities and is open to both members and non-members. During2005, we introduced our private label merchandise in our retail shops withinsignificant incremental costs to the Company.

 

#### **Employees**

 

At December 31, 2004, the Company had 2,549 employees, of which372 were employed full-time.  112employees were corporate personnel working in the New York City offices. We arenot a party to any collective bargaining agreement with our employees. We havenot experienced any significant labor shortages and have not had any difficultyin obtaining adequate replacements for departing employees. We consider ourrelations with our employees to be good.

 

**Competition**

 

*Budget clubs* offerlimited services; primarily free weights and strength-training machines with amodest group fitness class schedule, if any, and usually charge a nominalinitiation fee and low monthly membership fees. We do not compete directly withbudget clubs, such as those offered by Bally’s, Gold’s Gyms, and otherindependent clubs, as we do not target customers with the same demographiccharacteristics as the members of budget clubs.

 

*Full-service clubs*offer a combination of workout alternatives, including strength trainingequipment, free weights, cardio equipment, group fitness and personal training.Full-service clubs, such as those operated by Town Sports International,Crunch, New York Health & Racquet, Multiplex and Lake Shore AthleticClubs, generally command a premium to the budget clubs and can be furtherclassified based on price and amenities. Our membership fees are higher thanmany of our full-service competitors. We believe we are able to maintain suchpricing based upon the perceived value of our commitment to the memberexperience combined with our innovative and diverse programming, high-qualitymember services, club design and standards for operating our facilities.

 

*Urban country clubs,*such as the East Bank Club in Chicago and clubs operated by The Sports ClubCompany, are generally larger than 100,000 square feet, with additional sportsfacilities such as basketball courts, swimming pools and tennis courts andfeature non-fitness amenities such as restaurants, salons, laundry/dry-cleaningservices and executive locker rooms. Urban country clubs charge high initiationfees and membership dues. We believe we compare favorably with the urbancountry clubs, based upon price, the convenience of our numerous locations, andservices offered.

 

In addition, employers, residentialbuildings, and public and other not-for-profit organizations (including parks,YMCAs and college clubs) offer fitness facilities. These facilities providealternatives to membership in a commercial fitness club, and constitute acompetitive factor in the industry.

 

We believe several competitive factorsinfluence success in the fitness club business, including convenience, price,customer service, quality of operations, quality programming and ability tosecure prime real estate at economical rates. We believe that our integrated,branded lifestyle offering focused

 

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on enabling our targetedcustomer base to get results and the price-to-value relationship, which is veryattractive compared to that of our competitors.

 

#### **Government Regulation**

 

Our operations and business practices are subject to regulation at thefederal, state and, in some cases, local levels. State and local consumerprotection laws and regulations govern our advertising, sales and other tradepractices.

 

Statutes andregulations affecting the fitness industry have been enacted in states in whichwe conduct business; many other states into which we may expand have adopted orlikely will adopt similar legislation. Typically, these statutes andregulations prescribe certain forms and provisions of membership contracts,afford members the right to cancel a membership contract within a specifiedtime period after signing, require an escrow of funds received from pre-openingsales or the posting of a bond or proof of financial responsibility, and mayestablish maximum prices for membership contracts and limitations on the termof contracts. In addition, we are subject to numerous other types of federaland state regulations governing the sale of memberships. These laws andregulations are subject to varying interpretations by a number of state andfederal enforcement agencies and the courts. We maintain internal reviewprocedures in order to comply with these requirements, and believe that ouractivities are in substantial compliance with all applicable statutes, rules anddecisions.

 

Underso-called state “cooling-off” statutes, a member has the right to cancel his orher membership for a period of three to ten days (depending on the applicablestate law) and, in such event, is entitled to a refund of any initiation feepaid. In addition, our membership contracts provide that a member may cancelhis or her membership at any time for medical reasons or if the memberrelocates a certain distance from the nearest club. The specific procedures forcancellation in these circumstances vary due to differing state laws. In eachinstance, the canceling member is entitled to a refund of prepaid amounts only.Furthermore, where permitted by law, a cancellation fee is due uponcancellation and we may offset such amount against any refunds owed.

 

**Trademarks**

 

We believe that our trademarks and other proprietary rights areimportant to our success and we aggressively protect such trademarks. All ofour trademarks are either registered or have pending registration applicationsin the United States. We are not aware of any current or pending suits inconnection with our trademarks. We currently utilize five differenttrademarks. We have trademark registrations or pending trademarkapplications, principally for Equinox, in an aggregate of 30 countries. Wehave also registered a series of Internet domain names relating to ourbusiness, services and products.

 

There is no pending trademark litigationagainst Equinox Holdings. In January 2005, we received a cease and desistletter from Real Age, Inc., which claimed that the use by Equinox of “Bodyage” infringed its trademark rights in Real Age andthat the “Bodyage” system employed by Equinoxinfringed its patent. The Bodyage system calculates an individual’s physicalage versus their calendar age based on information such as weight, flexibility,blood pressure, etc.  Polar Inc, thelicensor of the technology has agreed to indemnify Equinox in case of a suit.

 

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*Equinox Holdings, Inc. was incorporatedin 1998 under the laws of the State of Delaware. Our principal executiveoffices are located at 895 Broadway, 3rd Floor, New York, New York 10003. Ourtelephone number is (212) 677-0180. We maintain the following web site:www.equinoxfitness.com to provide information about club locations, programofferings and on-line promotions. Our annual report on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K, and amendments to thosereports are available in the Investor Relations section of our website.Information contained on this web site, however, is not incorporated byreference in or otherwise a part of this Form 10-K.*

 

#### **Item 2.     Properties**

 

We operate 24 fitness clubs in four states. We lease all of ourfacilities, generally with initial terms of 15 years with renewal options.We also lease our corporate offices, which are located in New York City. Ourleases generally contain customary terms such as restrictions on transfers andchanges in control and requirements that we pay real estate taxes, insuranceand maintenance costs.

 

The followingtable provides information about our operating fitness clubs as of December 31,2004:

 
| **Location  Name**                      | ** ** | **State**   | ** ** | **Date Opened** |
|-----------------------------------------|------------|-------------|------------|-----------------|
| Equinox 76th Street, Inc.          |       | New York    |       | September, 1991 |
| Broadway Equinox, Inc.             |       | New York    |       | November, 1993  |
| Equinox 92nd Street, Inc.          |       | New York    |       | November, 1995  |
| Equinox 85th Street, Inc.          |       | New York    |       | August, 1996    |
| Equinox 63rd Street, Inc.          |       | New York    |       | December, -1997 |
| Equinox 54th Street, Inc.          |       | New York    |       | May, 1999       |
| Equinox 50th Street, Inc.          |       | New York    |       | February, 2000  |
| Equinox 43rd Street, Inc.          |       | New York    |       | March, 2000     |
| Equinox 44th Street, Inc.          |       | New York    |       | December, 2000  |
| Equinox Wall Street, Inc.          |       | New York    |       | November, 2000  |
| Equinox Greenwich Avenue, Inc.     |       | New York    |       | December, 2001  |
| Equinox White Plains Road, Inc.    |       | New York    |       | April, 1999     |
| Equinox Pasadena, Inc.             |       | California  |       | November, 2001  |
| Equinox Darien, Inc.               |       | Connecticut |       | December, 2002  |
| Equinox Lincoln Park, Inc.         |       | Chicago     |       | December, 2002  |
| Equinox Highland Park, Inc.        |       | Chicago     |       | January, 2004   |
| Equinox West Hollywood, Inc.       |       | California  |       | July, 2003      |
| Equinox Tribeca, Inc.              |       | New York    |       | March, 2003     |
| Equinox Woodbury Inc.                   |       | New York    |       | April, 2003     |
| Equinox Gold Coast, Inc.           |       | Chicago     |       | December, 2003  |
| Equinox Columbus Centre, Inc.      |       | New York    |       | January, 2004   |
| Equinox Greenvale, Inc.            |       | New York    |       | June, 2004      |
| Equinox Pine Street, Inc.          |       | California  |       | December, 2004  |
| Equinox Fitness Santa Monica, Inc. |       | California  |       | December, 2004  |

 

The Company believes its facilities aresuitable and adequate to meet its needs.

 

11

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**Item 3.     LegalProceedings**

 

We are involved in various claims and lawsuits incidental to ourbusiness. However, in the opinion of management, we are adequately insuredagainst such claims and lawsuits involving personal injuries, and any ultimateliability arising out of any proceedings will not individually or in theaggregate have a material adverse effect on our financial condition, cash flowor results of operations.

 

**Item 4.     Submissionof Matters to a Vote of Security Holders**

 

We did not submit any matters to a vote of security holders during thefourth quarter of fiscal year ended December 31, 2004.

 

**PART II**

 

**Item 5.     Marketfor Registrant’s Common Equity and Related Stockholder Matters**

 

Equinox common stock is not listed on any established trading marketand there were no stock repurchases during the fourth quarter of 2004.

 

#### **Item 6.**     Selected Financial Data

 

The following selected financial data should be read in conjunctionwith, and are qualified by reference to, the financial statements and relatednotes and “Management’s Discussion and Analysis of Financial Condition andResults of Operations” included elsewhere in this Form 10-K. We derivedthe historical financial data as of December 31, 2003 and 2004 and for theyears ended December 31, 2002, 2003 and 2004 from our audited consolidatedfinancial statements. We derived the historical financial data as of December 31,2000, 2001 and 2002 and for the years ended December 31, 2000 and 2001from our unaudited consolidated financial statements.  As described in Note 2 to the consolidatedfinancial statements, the Company restated its consolidated financialstatements for the fiscal years ended December 31, 2003, 2002, 2001 and2000, including the interim periods for 2003 and 2004.

 

12

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| ** **                                                      | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                      | ** ** | **2000**                         | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **(Restated)**                   | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| **Statement of Operations ($000’s):**                      |       |                             |       |   |   |   |   |   |   |   |   |
| Revenues:                                                       |       |                             |       |   |   |   |   |   |   |   |   |
| Membership fees                                                 |       | $                                | 43,183     |   | $ | 53,230 |   | $ | 62,220 |   | $ | 76,242 |   | $ | 95,567 |   |
| Personal training                                               |       | 14,133                           |       | 15,024 |   | 17,709 |   | 25,000 |   | 30,851 |   |
| Other revenue                                                   |       | 5,581                            |       | 11,039 |   | 13,455 |   | 14,266 |   | 17,754 |   |
| Total revenues                                                  |       | 62,897                           |       | 79,293 |   | 93,384 |   | 115,508 |   | 144,172 |   |
| Expenses:                                                       |       |                             |       |   |   |   |   |   |   |   |   |
| Compensation and related                                        |       | 25,840                           |       | 31,217 |   | 37,537 |   | 48,251 |   | 58,451 |   |
| Rent and occupancy                                              |       | 7,969                            |       | 8,743 |   | 10,043 |   | 13,534 |   | 17,034 |   |
| General and administrative                                      |       | 11,006                           |       | 14,586 |   | 17,988 |   | 24,240 |   | 35,656 |   |
| Other expenses(1)                                               |       | 8,767                            |       | 2,222 |   | 1,477 |   | 1,042 |   | 817 |   |
| Depreciation and amortization                                   |       | 4,487                            |       | 5,938 |   | 7,159 |   | 10,361 |   | 12,935 |   |
| Total operating expenses                                        |       | 58,069                           |       | 62,706 |   | 74,204 |   | 97,428 |   | 124,893 |   |
| Income from operations                                          |       | 4,828                            |       | 16,587 |   | 19,180 |   | 18,080 |   | 19,279 |   |
| Other income (expense):                                         |       |                             |       |   |   |   |   |   |   |   |   |
| Interest expense                                                |       | (2,423                           | )          | (13,310 | ) | (12,747 | ) | (33,791 | ) | (16,622 | ) |
| Interest income                                                 |       | 122                              |       | 149 |   | 8 |   | 132 |   | 402 |   |
| Other income (expense)(2)                                       |       | —                           |       | 1,188 |   | (2,869 | ) | 900 |   | (3,401 | ) |
| Total other expense                                             |       | (2,301                           | )          | (11,973 | ) | (15,608 | ) | (32,759 | ) | (19,621 | ) |
| Income (loss) before (provision for) benefit  from income taxes |       | 2,527                            |       | 4,614 |   | 3,572 |   | (14,679 | ) | (342 | ) |
| Benefit from (provision for) income taxes                       |       | 3,932                            |       | (1,830 | ) | (3,063 | ) | 6,740 |   | (1,768 | ) |
| Net income (loss)                                               |       | $                                | 6,459      |   | $ | 2,784 |   | $ | 509 |   | $ | (7,939 | ) | $ | (2,110 | ) |
|                                                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Balance Sheet Data ($000’s):**                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and marketable securities                                  |       | $                                | 1,017      |   | $ | 2,869 |   | $ | 1,302 |   | $ | 42,779 |   | $ | 27,506 |   |
|                                                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                                                    |       |                             | 84,946     |   |   | 104,105 |   |   | 119,020 |   |   | 200,555 |   |   | 216,467 |   |
|                                                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total debt                                                      |       |                             | 85,481     |   |   | 90,798 |   |   | 95,700 |   |   | 163,999 |   |   | 162,949 |   |
|                                                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stockholders’ (deficit)                                    |       |                             | (40,398    | ) |   | (35,595 | ) |   | (39,170 | ) |   | (38,340 | ) |   | (40,464 | ) |
|                                                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other Financial Data ($000’s):**                         |       |                             |       |   |   |   |   |   |   |   |   |
|                                                            |       |                             |       |   |   |   |   |   |   |   |   |
| Coverage (deficit) earnings to fixed  charges(3)                |       | 1.57                             |       | 1.28 |   | 1.21 |   | $ | (14,761 | ) | $ | (342 | )  |
| Net cash provided by operating activities                       |       | $                                | 12,113     |   | $ | 18,895 |   | $ | 19,327 |   | $ | 25,824 |   | $ | 26,627 |   |
| Net cash used in investing activities                           |       | $                                | (22,868    | ) | $ | (20,771 | ) | $ | (23,064 | ) | $ | (32,845 | ) | $ | (36,729 | ) |
| Net cash (used in) provided by financing  activities            |       | $                                | 5,850      |   | $ | 3,669 |   | $ | 2,266 |   | $ | 48,485 |   | $ | (5,101 | ) |
| **Club Data:**                                                  |       |                             |       |   |   |   |   |   |   |   |   |
| Number of clubs at end of period                                |       | 11                               |       | 13 |   | 15 |   | 19 |   | 24 |   |
| Members at end of period                                        |       | 37,904                           |       | 45,978 |   | 54,911 |   | 67,400 |   | 77,600 |   |
| Revenues per average member(4)                                  |       | $                                | 1,905      |   | $ | 1,940 |   | $ | 1,895 |   | $ | 1,966 |   | $ | 2,025 |   |
| Ancillary revenues as a % of total revenues                     |       | 31.34                            | %          | 32.87 | % | 33.37 | % | 33.99 | % | 33.71 | % |
| Revenue growth from comparable fitness  clubs(5)                |       | 19.6                             | %          | 7.9 | % | 6.5 | % | 9.6 | % | 9.2 | % |

 

13

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(1)           Includesfees and expenses paid to certain principal stockholders under certaincontractual arrangements. See “Related Party Transactions.”

 

(2)           Consists principally ofnon-cash charges resulting from the mark-to-market adjustments of our commonstock put warrants and our interest rate swap. See “Description of CapitalStock—Common Stock Put Warrants.”

 

(3)           Theratio (deficit) of earnings to fixed charges has been computed by dividingearnings before income taxes and fixed charges before preferred stock dividends(increased to reflect the pre-tax earnings requirement related thereto) by thefixed charges. Fixed charges consist of interest and related charges on debt,preferred stock dividends and the portion of rentals for real and personalproperties in an amount deemed to be representative of the interest factor.

 

(4)           Basedon average number of members for the respective year ended.

 

(5)           Revenuegrowth of clubs that had been open for at least 12 months.

 

### *See “Management’s Discussion and Analysis” for a discussion of EBITDAand Adjusted EBITDA*

### * *

#### **Item 7.**           Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.

 

*The followingdiscussion of our financial condition and results of operations should be readin conjunction with the “Selected Consolidated Financial Data” and ourconsolidated financial statements and related notes included elsewhere in this Form 10-K.*

* *

*This annual reporton Form 10-K contains, in addition to historical information, forward-lookingstatements that include risks and uncertainties. Our actual results may differmaterially from those anticipated in these forward-looking statements.*

 

*The followingdiscussion makes reference to EBITDA and Adjusted EBITDA. EBITDA is defined asearnings before interest, taxes, depreciation and, amortization. We presentEBITDA because we believe it provides investors with useful informationregarding our liquidity. Adjusted EBITDA is defined in our credit agreement asEBITDA adjusted for mark-to-market adjustments for our common stock putwarrants, stock compensation expense, write-off or other receivables,management fees and expenses paid to our principal stockholders, and non-cashdeferred rent. We present Adjusted EBITDA because this measure is a keycomponent in the determination of our compliance with certain covenants underour credit agreement, which may limit the Company’s ability to borrow funds andoperate our business.*

* *

***Investors should be aware that the items excluded from thecalculation of EBITDA, such as depreciation and amortization, are significantcomponents in an accurate assessment of our financial performance. EBITDA andAdjusted EBITDA should not be considered in isolation or as a substitute fornet income, cash flows or other consolidated income or cash flow data preparedin accordance with GAAP or as a measure of our profitability or liquidity. Inaddition, the definitions used by us are unique***

 

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***based on our debt requirements and, therefore, EBITDA maynot be the same as other companies and, therefore, would not be comparable.***

 

***Use ofEstimates and Critical Accounting Policies***

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the dates of the financial statements and the reported amounts of revenuesand expenses during the reporting periods. Actual results could differ fromthose estimates.

 

Our most significant assumptions andestimates relate to estimated membership life, the allocation and fair valueascribed to the useful lives of fixed and intangible assets, recoverability andimpairment of fixed and intangible assets, including goodwill, deferred incometax valuation and valuation of other income and expenses incurred in connectionwith our common stock warrants.

 

*Estimated membership life -*Ourone-time member initiation fees and related direct expenses are deferred, andrecognized in operations over an estimated membership life of 24 months. Thisestimated membership life has been derived from actual membership retentionexperienced by us. Although the average membership life approximated 24 monthsover each of the past several years; this estimated life could increase ordecrease in future periods. Consequently the amount of initiation fees anddirect expenses deferred by us would increase or decrease in similarproportion.

 

*Estimated cancellation life -*Cancellationrefunds are deferred and recognized, as contra revenue, over an estimatedaverage period remaining after a member cancels their contract of five months.This estimated average cancellation period was derived from actual membershipcancellations experiences by us. Although the average cancellation periodapproximated five months over each of the past several years, this estimatedlife could increase or decrease in future periods. Consequently the amount ofrefunded membership revenue deferred by us would increase or decrease insimilar proportion.

 

*Fixed and intangible assets -*Fixedassets are recorded at cost and depreciated on a straight-line basis over theestimated useful lives of the assets, which are over the remaining life of theleases for leasehold improvements, and are five years for club equipment,furniture, fixtures and computer equipment and computer software. Expendituresfor maintenance and repairs are charged to operations as incurred. The cost andrelated accumulated depreciation or amortization of assets retired or sold, areremoved from the respective accounts and any gain or loss is recognized inoperations. The costs related to the implementation and development of webapplications, developing HTML web pages, installing developed applications onthe web servers and software developed for internal use are capitalized andclassified as computer software. In addition, goodwill associated with thepurchase of Energywear is tested annually forimpairment, and monitored periodically for triggering events that may causeimpairment. A third-party valuation specialist performed the annual goodwillimpairment test using discounted estimated future cash flows as the criteriafor determining fair value. Based on this valuation we determined that as of December 31,2004, our annual test date, goodwill was not impaired.

 

15

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*Income taxes -*The Company accounts for income taxes inaccordance with SFAS 109, “Accounting for Income Taxes,” which requiresthat deferred tax assets and liabilities be recognized, using enacted taxrates, for the effect of temporary differences between the book and tax basisof recorded assets and liabilities. SFAS 109 also requires that deferredtax assets be reduced by a valuation allowance if it is more likely than notthat some portion or all of the deferred tax assets will not be realized.

 

*Net operating loss carry forwards -*At December 31, 2004, the Company hadaggregate net operating loss carry forwards of $17.7 million for federal taxpurposes and $8.0 million for state tax purposes, which will be available toreduce future taxable income through 2023. The Company believes that it is morelikely than not that the deferred tax assets generated through December 31,2004 will be realized.

 

*Common stock put warrants -*InDecember 2000, the Company issued common stock put warrants to purchase879,214 shares of its common stock. These are marked to market on an annualbasis, with the adjustment shown as other income (expense). In estimating thefair market value of the warrants prior to 2004, our assumptions includedadjusted EBITDA multiples and other estimates. As of December 31, 2004, a3rd party performed a valuation of our common stock where estimateswere also employed. Future events or circumstances could result in a change tothese estimates which could materially impact the fair value of our commonstock put warrants.

 

**Equinox**

 

Equinox operates upscale, full-servicefitness clubs with spas in the New York City Metropolitan area, with growingoperations in Los Angeles and Chicago. We currently operate twenty-four fitnessclubs: seventeen in the New York City Metropolitan area, two in Los Angeles,one in San Francisco, one in Santa Monica, and three in Chicago. During 2004,the Company opened five new clubs. In addition, we have six new locations underdevelopment, consisting of one in the New York City Metropolitan area, threeCalifornia clubs in San Mateo (opened as of April 2005), Los Angeles, andPalos Verdes, a new Chicago club, and our first clubin South Beach, Florida. As of December 31, 2004, we had approximately77,600 members.

 

As used in this section the terms listedbelow have the following meanings:

 

*Revenue -*As club memberships are sold, each member is charged an initiation fee as wellas membership dues. The initiation fee is due up front and amortized over theestimated membership life, commencing with the first month of the new membercontract. The initial contract period is twelve months. Membership dues formembers who pay annual dues up-front (both new membership sales and membershiprenewals) are amortized over a 12-month period, commencing with the first monthof the new member contract or renewal contract, as applicable. Membership duesfor members who pay monthly are recognized in the period in which facilityaccess is provided.

 

Sales commissions and other directexpenditures paid with regard to deferred membership revenue are amortized overthe period in which the related revenue is recognized as income. Deferred costsdo not exceed related deferred revenue for the periods presented. Such costsare amortized over the life of the membership agreement. Revenues for ancillaryservices, both individual and series sessions, are deferred and recognized asservices are performed. The Company recognizes revenue from merchandise salesat the point of sale. Other income, which consists of license fees paid to theCompany under concession and operating agreements, is recognized on a periodicbasis according to these agreements.

 

16

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*Compensationand Related Expenses -* Compensation and relatedexpenses is comprised of all operations and general and administrativesalaries, bonuses, commissions, recruiting expenses and related payroll taxesand benefits.

 

*Rent andOccupancy -*Rent and occupancy expense is comprised ofrent expense for all of our health clubs and general and administrativeoffices.

 

*General andAdministrative Expense -* General and administrativeexpenses consist primarily of costs for general corporate functions includingaccounting and legal, bad debt expense, club supplies, utilities, marketing andpromotional expenses, utilities and real estate taxes.

 

Our fixed costs include rent, certain payroll expenses, utilities,janitorial expenses and depreciation. Our variable costs include commissionsand other payroll expenses, advertising and supplies. Cost of goods sold forour retail business represents a small portion of our total operating expensesand is included in general and administrative expenses.

 

When we open a new fitness club, our fixedcosts increase, as do our variable costs to a lesser degree, but without themembership revenue base of a mature fitness club. As a new fitness clubincreases its membership base, fixed costs are typically spread over anincreasing revenue base and its club contribution tends to improve. Based onour experience, revenues of a fitness club increase significantly during itsfirst four years of operation. By the end of the first full year of operations,a fitness club has typically achieved modest club contribution. By the end ofthe second full year of operations, a fitness club has typically generatedsignificantly better club contribution as the member base grows with minimalincremental fixed operating costs. By the end of the fourth full year ofoperations, a typical fitness club has matured, with memberships at or nearcapacity. The following table illustrates our fitness club locations, openingdates and months of operations as of December 31, 2004, 2003 and 2002:

 
| **Name**                             | ** ** | **Date  Club  Opened** | ** ** | **Months of  Operation** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------|------------|------------------------|------------|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Equinox 76th Street, Inc.       |       | 09/23/91               |       | 159                      |       | 12       |       | 12       |       | 12       |       |
| Broadway Equinox, Inc.          |       | 11/27/93               |       | 133                      |       | 12       |       | 12       |       | 12       |       |
| Equinox 92nd Street, Inc.       |       | 11/08/95               |       | 110                      |       | 12       |       | 12       |       | 12       |       |
| Equinox 85th Street, Inc.       |       | 08/27/96               |       | 100                      |       | 12       |       | 12       |       | 12       |       |
| Equinox 63rd Street, Inc.       |       | 12/11/97               |       | 84                       |       | 12       |       | 12       |       | 12       |       |
| Equinox White Plains Road, Inc. |       | 04/08/99               |       | 69                       |       | 12       |       | 12       |       | 12       |       |
| Equinox 54th Street, Inc.       |       | 05/03/99               |       | 68                       |       | 12       |       | 12       |       | 12       |       |
| Equinox 50th Street, Inc.       |       | 02/03/00               |       | 59                       |       | 12       |       | 12       |       | 12       |       |
| Equinox 43rd Street, Inc.       |       | 03/09/00               |       | 58                       |       | 12       |       | 12       |       | 12       |       |
| Equinox Wall Street, Inc.       |       | 11/30/00               |       | 49                       |       | 12       |       | 12       |       | 12       |       |
| Equinox 44th Street, Inc.       |       | 12/23/00               |       | 48                       |       | 12       |       | 12       |       | 12       |       |
| Equinox Pasadena, Inc.          |       | 11/28/01               |       | 37                       |       | 12       |       | 12       |       | 12       |       |
| Equinox Greenwich Avenue, Inc.  |       | 12/30/01               |       | 36                       |       | 12       |       | 12       |       | 12       |       |
| Equinox Darien, Inc.            |       | 12/12/02               |       | 24                       |       | 12       |       | 12       |       | —   |       |
| Equinox Lincoln Park, Inc.      |       | 12/30/02               |       | 24                       |       | 12       |       | 12       |       | —   |       |
| Equinox Tribeca, Inc.           |       | 03/22/03               |       | 21                       |       | 12       |       | 9        |       | —   |       |
| Equinox Woodbury Inc.                |       | 04/01/03               |       | 21                       |       | 12       |       | 9        |       | —   |       |
| Equinox West Hollywood, Inc.    |       | 07/02/03               |       | 18                       |       | 12       |       | 6        |       | —   |       |
| Equinox Gold Coast, Inc.        |       | 12/24/03               |       | 12                       |       | 12       |       | —   |       | —   |       |
| Equinox Highland Park, Inc.     |       | 01/29/04               |       | 11                       |       | 11       |       | —   |       | —   |       |
| Equinox Columbus Centre, Inc.   |       | 01/31/04               |       | 11                       |       | 11       |       | —   |       | —   |       |
| Equinox Roslyn, Inc.            |       | 06/22/04               |       | 3                        |       | 6        |       | —   |       | —   |       |
| Equinox Pine Street                  |       | 12/23/04               |       | —                   |       | —   |       | —   |       | —   |       |
| Equinox Santa Monica                 |       | 12/29/04               |       | —                   |       | —   |       | —   |       | —   |       |
|                                 |       |                   |       | Total                    |       | 256      |       | 204      |       | 156      |       |

 

17

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Currently, thirteen of our twenty-four fitness clubs have been inoperation for less than 48 months. Based on the historical performance ofour mature fitness clubs, we expect that, even in difficult economic times, ournewer fitness clubs will grow significantly faster over the first four yearsthan our average mature fitness club, while requiring only a minimal level ofexpenditures for maintenance. We expect growth in revenues to continue asrecently opened fitness clubs continue to mature. In addition, we expect growthin revenues as we implement long-term strategic plans to expand the brand withnew clubs in existing markets and selected new markets and with new programs,services and products. However, we expect significant variability in ourresults as we implement our plans to bring our total fitness clubs up toapproximately 38 by the end of 2006, as our mix of newer and more mature clubsvaries.

 

For purposes of comparison on a “same-storebasis,” we refer to “comparable fitness clubs” as those clubs that wereoperated by us for the entire period presented and for the entire comparableperiod of the preceding year. We use “total months of club operations” as onemeasure of the number of fitness clubs operating in a given period. We define “totalmonths of club operations” as the aggregate number of full months of operationduring a given period for the fitness clubs open at the end of such period.Because new fitness club openings result in a total increase in fixed andvariable costs, an increase in total months of club operations can signalsignificant increases in our operating costs.

 

Under so-called state “cooling off” statutes,a member has the right to cancel his or her membership for a period of threedays after becoming a member and, in such event, is entitled to a refund of anypayment made. In addition, our membership agreements provide that a member maycancel his or her membership at any time for qualified medical reasons or ifthe member relocates a certain distance away from any of our facilities. Thespecified procedures for cancellation in these circumstances vary due todiffering state laws. In each instance, the canceling member is entitled tocancellation of any further obligation and a refund of prepaid amounts only.Furthermore, where permitted by law, we assess a cancellation fee that weoffset against any refunds owed.

 

**Restatement of Previously Issued FinancialStatements**

 

**(a) **On February 7,2005, the Office of the Chief Accountant of the Securities and ExchangeCommission (“SEC”) issued a letter to the American Institute of CertifiedPublic Accountants expressing its views regarding certain operatinglease-related accounting issues and their application under accountingprinciples generally accepted in the United States of America (“GAAP”). Inlight of this letter, the Company’s management initiated a review of its leaseaccounting and determined that its

 

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then-current method of accounting for leasehold improvements funded bylandlord incentives or allowances under operating leases (constructionallowances) was not in accordance with GAAP. As a result, the Company restatedits consolidated financial statements for the fiscal years ended December 31,2003, 2002, 2001 and 2000, including the interim periods for 2003 and 2004.

 

The Company had historically accounted forconstruction allowances as reductions to the related leasehold improvementasset on the consolidated balance sheets and presented construction allowancesreceived as a reduction in capital expenditures in investing activities on theconsolidated statements of cash flows. Management determined that it had notcomplied with Financial Accounting Standards Board (“FASB”) Technical Bulletin No. 88-1,“Issues Relating to Accounting for Leases,” which requires these allowances tobe reclassified to a deferred rent liability in the consolidated balance sheetsand allowances received as a component of operating activities in theconsolidated statements of cash flows. As a result, Management determined thatthe Company had a material weakness in its internal controls over financialreporting at December 31, 2004.  Additionally,this adjustment resulted in a reclassification of the deferred rentamortization from “Depreciation and amortization” to “Rent and occupancy” in theconsolidated statements of income.

 

The correctionof this accounting error required the Company to reclassify additional “Deferredrent” and adjust “Property and equipment, net” in the consolidated balancesheets for the years ended December 31, 2003 and 2002. These adjustmentsresulted in an equal increase in “Property and Equipment, net” and “DeferredRent” of $5,843,133 and $1,674,695, respectively.

 

Theseadjustments resulted in increases to “Purchases of property and equipment” and“Deferred rent” on the consolidated statements of cash flows of $5,843,133 and$1,674,695 for the years ended December 31, 2003 and 2002, respectively.

 

Additionally, these adjustments resulted inthe reclassification of the deferred rent amortization from “Depreciation andamortization” to “Rent and occupancy” costs in the consolidated statements ofincome.  Depreciation expense wasincreased for previously amortized construction allowances and “Rent andoccupancy” expense was decreased by $439,706 and $176,155, for the years ended December 31,2003 and 2002, respectively.

 

**(b) **The Companyalso reviewed its policy with regard to estimating the useful lives of itsfixed assets and discovered that certain capitalized assets were incorrectlybeing assigned longer than appropriate lives. As a result, those assets’ usefullives were decreased accordingly. This adjustment resulted in an increase to “Depreciationand amortization” and a decrease to “Property and equipment, net” ofapproximately $171,028 and $133,094, for the years ended December 31, 2003and 2002, respectively.

 

**(c) **The Companyhad previously not recorded prior state and local sales tax obligations relatedto certain services provided, maintenance supplies purchased and capitalexpenditures. The Company had received advice from outside counsel indicatingthat certain sales tax matters did not exist related to spa services that werebeing provided. This guidance was ultimately determined to be incorrect. Thisresulted in an increase to “Accrued expenses,” “General and administrative,” “Interestexpense,” and “Property and equipment, net.” For the years ended December 31,2003 and 2002, these adjustments resulted in; (i) anincrease to “Accrued expense” of $398,574 and $413,198; (ii) an increaseto “General and administrative” of approximately $286,787 and $361,961; (iii) anincrease to “Interest expense” of $98,610 and $38,964 and; (iv) anincrease to “Property and equipment, net” of $13,177 and $12,273.

 

**(d) **The Companyreviewed its policies and procedures with regard to commission expense anddetermined that commission expense was not previously recognized properly. As aresult the Company changed its policy to recognize actual commission expenseover the associated period. This correction resulted in an increase/(decrease)to “Prepaid and other current assets” and a corresponding

 

19

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increase/(decrease) to “Compensation and related” expense of $49,192and ($34,974), for the years ended December 31, 2003 and 2002,respectively.

 

**(e) **The Companyreviewed its revenue recognition policies and procedures with regard to itsancillary services and determined that certain ancillary services revenue wasprematurely recognized, when billed. As a result of this finding, the Companydetermined that it is appropriate to recognize revenue for services in theperiod the services are provided.  Towardthis end, the Company identified the following revenue recognition errors asthey relate to membership fees and corrected them as follows:

 

The Company reviewed its revenue recognitionpolicies and procedures with regard to its locker rental, childcare, spa andPilates services and determined that such revenues were prematurely recognizedwhen billed. As a result of this finding, the Company determined that it isappropriate to recognize revenue for these services in the period which theservices are provided. This correction resulted in a decrease to “Other revenue”and a corresponding increase to “Deferred Revenue” of $181,205 and $159,645,for the years ended December 31, 2003 and 2002, respectively.

 

The Company reviewed its revenue recognitionpolicies and procedures with regard to members’ contract freezes and therelated contract extension, and determined that the members’ contract periodwas not being extended for the months that were frozen. As a result of thisfinding, the Company determined that it is appropriate to recognize the monthlymembership revenue for the extended contract in the periods that facilityaccess is provided. This correction resulted in a decrease to “Membership fees”and a corresponding increase to “Deferred Revenue” of $19,851 and $98,981, forthe years ended December 31, 2003 and 2002, respectively.

 

The Company reviewed its revenue recognitionpolicies and procedures with regard to membership cancellations (e.g., membersmay cancel contracts for medical conditions and certain other reasons) andshort-term dues and determined that such fees recorded as contra revenue wereincorrectly recognized over a period of 12 months. As a result of this finding,the Company analyzed historical cancellations and short-term dues anddetermined that it is more accurate to offset the contract revenue over theaverage life of the remaining contract which was determined to be five months.This correction resulted in a decrease to “Membership fees” and a correspondingincrease to “Deferred Revenue” of $66,557 and $521,699, for the years ended December 31,2003 and 2002, respectively.

 

The Company reviewed its revenue recognitionpolicies and procedures with regard to renewals of annual membership contractsand determined that in certain cases the contract date used for revenuerecognition purposes was not consistent with the date facility access was firstprovided to the member. As a result of this finding, the Company analyzedmember contracts for facility access start dates and corrected revenuerecognition to coincide with facility access. In addition, in certain cases,the Company offered an additional month of facilities access as an incentive toa member to renew his or her contract. Historically, the Company onlyrecognized the contract value over the life of the contract period, excludingthe additional incentive month. As a result of this finding, the Company addedthe incentive month to the contract period and recognized the revenueaccordingly. This correction resulted in a decrease to “Membership fees” and acorresponding increase to “Deferred Revenue” of $112,504 and $397,581, for theyears ended December 31, 2003 and 2002, respectively.

 

The Company reviewed its revenue recognitionpolicies and procedures with regard to members who transfer to/from residentialand corporate membership types, and determined that revenue for the relatedtransfer membership was improperly recognized when billed. As a result of thisfinding, the Company has corrected this revenue recognition process andrecognized revenue over the

 

20

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periods that facilities accessis provided. This correction resulted in an increase/(decrease) to “Membershipfees” and a corresponding increase/(decrease) to “Deferred Revenue” of $59,281and ($681,188) for the years ended December 31, 2003 and 2002,respectively.

 

The Company reviewed its revenue recognitionpolicies and procedures with regard to gift cards, and determined that complimentarygift cards were not recognized as a liability at the time of issuance. As aresult of this finding, the Company calculated the liability for such cards andadjusted the liability accordingly. This correction resulted in a decrease to “Membershipfees” and a corresponding increase to “Deferred Revenue” of $298,345 and$31,758 for the years ended December 31, 2003 and 2002, respectively.

 

The total corrections to our revenue recognition policies andprocedures resulted in a decrease in “Membership fees” of $437,976 and$1,731,207 for the years ended December 31, 2003 and 2002, respectively,and a corresponding increase to “Deferred revenue” in each of the respectiveperiods. The resulting adjustment to “Other revenue” was a decrease of$181,205, and $159,645 for the years ended December 31, 2003 and 2002,respectively, and a corresponding increase to “Deferred revenue”.

 

**(f) **Theaggregate tax benefit of the above adjustments was $551,274 and $1,075,368 forthe years ended December 31, 2003 and 2002, respectively.

 

The total net effect of all restatement adjustments discussed above wasan increase of  $3,265,476 and $2,590,000to the Company’s accumulated deficit as of December 31, 2003  and December 31, 2002, respectively.

 

21

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***The impact of the restatementsto the Company’s Consolidated Statement of Income for the year ended December 31,2003 is as follows************(amounts in 000’s):***

 
| ** **                              | ** ** | **As  previously  reported** | ** ** | **Adjustments** | ** ** | **Ref.** | ** ** | **Restated** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|-----------------|------------|----------|------------|--------------|------------|
| Membership fees                         |       | $                            | 75,677     |            | $          | (438     | )          | **(e)**      | ** ** | $ | 76,242 |   |
|                                    | ** ** |                         | ** ** | 1,003           |       | **(r)**  | ** ** |         |       |
| Personal training                       |       | 25,000                       |       | —          |       |     | ** ** | 25,000       |       |
| Other revenue                           |       | 15,450                       |       | (181            | )          | **(e)**  | ** ** | 14,266       |       |
|                                    | ** ** |                         | ** ** | (1,003          | )          | **(r)**  | ** ** |         |       |
| Total revenue                           |       | 116,127                      |       | (619            | )          |     | ** ** | 115,508      |       |
| Expenses:                               |       |                         |       |            |       |     | ** ** |         |       |
| Compensation and related                |       | 48,202                       |       | 49              | ** ** | **(d)**  | ** ** | 48,251       |       |
| Rent and occupancy                      |       | 16,646                       |       | (440            | )          | **(a)**  | ** ** | 13,534       |       |
|                                    | ** ** |                         | ** ** | (2,672          | )          | **(r)**  | ** ** |         |       |
| General and administrative              |       | 21,280                       |       | 288             | ** ** | **(c)**  | ** ** | 24,240       |       |
|                                    | ** ** |                         | ** ** | 2,672           |       | **(r)**  | ** ** |         |       |
| Related-party management fees           |       | 1,007                        |       | —          |       |     | ** ** | 1,007        |       |
| Stock compensation                      |       | 35                           |       | —          |       |     | ** ** | 35           |       |
| Depreciation and amortization           |       | 9,750                        |       | 440             | ** ** | **(a)**  | ** ** | 10,361       |       |
|                                    | ** ** |                         | ** ** | 171             |       | **(b)**  | ** ** |         |       |
| Total operating expenses                |       | 96,920                       |       | 508             |       |     | ** ** | 97,428       |       |
| Income from operations                  |       | 19,207                       |       | (1,127          | )          |     | ** ** | 18,080       |       |
| Other income (expense):                 |       |                         |       |            |       |     | ** ** |         |       |
| Interest expense                        |       | (33,693                      | )          | (98             | )          | **(c)**  | ** ** | (33,791      | )          |
| Interest income                         |       | 132                          |       | —          |       |     | ** ** | 132          |       |
| Other income                            |       | 900                          |       | —          |       |     | ** ** | 900          |       |
| Total other expense                     |       | (32,661                      | )          | (98             | )          |     | ** ** | (32,759      | )          |
| Income before benefit from income taxes |       | (13,454                      | )          | (1,225          | )          |     | ** ** | (14,679      | )          |
| Benefit from income taxes               |       | 6,189                        |       | 551             | ** ** | **(f)**  | ** ** | 6,740        |       |
| Net loss                                |       | $                            | (7,265     | )               | $          | (674     | )          |         | ** ** | $ | (7,939 | ) |

 

----

**(r)** Certainreclassifications have been made to prior years to conform to the current yearpresentation.

 

22

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***The impact of the restatementsto the Company’s Consolidated Statement of Income for the year ended December 31,2002 is as follows************(amounts in 000’s):***

 
| ** **                                                      | ** ** | **As  previously  reported** | ** ** | **Adjustments** |   | **Ref.** | ** ** | **Restated** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------|------------|-----------------|--------|----------|------------|--------------|------------|
| Membership fees                                                 |       | $                            | 63,369     |            | $      | (1,731   | )          | **(e)**      | ** ** | $ | 62,220 |   |
|                                                            | ** ** |                         | ** ** | 582             |   | **(r)**  | ** ** |         |       |
| Personal training                                               |       | 17,709                       |       | —          |   |     | ** ** | 17,709       |       |
| Other revenue                                                   |       | 14,196                       |       | (159            | )      | **(e)**  | ** ** | 13,455       |       |
|                                                            |       |                         |       | (582            | )      | **(r)**  | ** ** |         |       |
| Total revenue                                                   |       | 95,274                       |       | (1,890          | )      |     | ** ** | 93,384       |       |
| Expenses:                                                       |       |                         |       |            |   |     | ** ** |         |       |
| Compensation and related                                        |       | 37,572                       |       | (35             | )      | **(d)**  | ** ** | 37,537       |       |
| Rent and occupancy                                              |       | 11,870                       |       | (176            | )      | **(a)**  | ** ** | 10,043       |       |
|                                                            | ** ** |                         | ** ** | (1,651          | )      | **(r)**  | ** ** |         |       |
| General and administrative                                      |       | 15,976                       |       | 361             |   | **(c)**  | ** ** | 17,988       |       |
|                                                            | ** ** |                         | ** ** | 1,651           |   | **(r)**  | ** ** |         |       |
| Related-party management fees                                   |       | 1,164                        |       | —          |   |     | ** ** | 1,164        |       |
| Stock compensation                                              |       | 313                          |       | —          |   |     | ** ** | 313          |       |
| Depreciation and amortization                                   |       | 6,850                        |       | 176             |   | **(a)**  | ** ** | 7,159        |       |
|                                                            | ** ** |                         | ** ** | 133             |   | **(b)**  | ** ** |         |       |
| Total operating expenses                                        |       | 73,745                       |       | 459             |   |     | ** ** | 74,204       |       |
| Income from operations                                          |       | 21,529                       |       | (2,349          | )      |     | ** ** | 19,180       |       |
| Other income (expense):                                         |       |                         |       |            |   |     | ** ** |         |       |
| Interest expense                                                |       | (12,708                      | )          | (39             | )      | **(c)**  | ** ** | (12,747      | )          |
| Interest income                                                 |       | 8                            |       | —          |   |     | ** ** | 8            |       |
| Other expense                                                   |       | (2,869                       | )          | —          |   |     | ** ** | (2,869       | )          |
| Total other expense                                             |       | (15,569                      | )          | (39             | )      |     | ** ** | (15,608      | )          |
| Income (loss) before benefit from (provision  for) income taxes |       | 5,960                        |       | (2,388          | )      |     | ** ** | 3,572        |       |
| Benefit from (provision for) income taxes                       |       | (4,137                       | )          | 1,074           |   | **(f)**  | ** ** | (3,063       | )          |
| Net income (loss)                                               |       | $                            | 1,823      |            | $      | (1,314   | )          |         | ** ** | $ | 509 |   |

 

----

**(r)** Certainreclassifications have been made to prior years to conform to the current yearpresentation.

 

23

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***The impact of the restatements to the Company’s Consolidated Statementsof Changes in Stockholders’ Deficit is as follows************(amounts in 000’s):***

 
| ** **                                  | ** ** | **As previously   reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------|------------|-----------------|------------|
| Accumulated Deficit as of December 31, 2002 |       | $                            | (110,719   | )               | $          | (2,590          | )          | $ | (113,309 | ) |
|                                        |       |                         |       |            |       |            |       |
| Accumulated Deficit as of December 31, 2003 |       | $                            | (118,103   | )               | $          | (3,265          | )          | $ | (121,368 | ) |

 

24

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***The impact of the restatements to theCompany’s Consolidated Balance Sheet as of December 31, 2003 is as follows******(amounts in 000’s):***

 
| ** **                                                   | ** ** | **As  previously reported** | ** ** | **Adjustments** | ** ** | **Ref.**    | ** ** | **Restated** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|-----------------|------------|-------------|------------|--------------|------------|
| **Assets**                                                   | ** ** | ** **                  | ** ** | ** **      | ** ** | ** **  | ** ** | ** **   | ** ** |
| Current assets:                                              |       |                        |       |            |       |        |       |         |       |
| Cash                                                         |       | $                           | 42,709     |            | $          | —      |       |         |       | $ | 42,709 |   |
| Marketable securities                                        |       | 70                          |       | —          |       |        |       | 70           |       |
| Accounts receivable, net of allowance for  doubtful accounts |       | 1,546                       |       | —          |       |        |       | 1,546        |       |
| Deferred income taxes                                        |       | 2,526                       |       | 2,676           |       | (f)         |       | 5,202        |       |
| Prepaid expenses and other current assets                    |       | 8,970                       |       | (200            | )          | (d)         |       | 8,770        |       |
| Total current assets                                         |       | 55,821                      |       | 2,476           |       |        |       | 58,297       |       |
| Property and equipment, net                                  |       | 114,628                     |       | 8,776           |       | (a),(b),(c) |       | 123,404      |       |
| Deferred income taxes                                        |       | 4,375                       |       | —          |       |        |       | 4,375        |       |
| Other assets                                                 |       | 5,015                       |       | —          |       |        |       | 5,015        |       |
| Goodwill, net                                                |       | 2,503                       |       | —          |       |        |       | 2,503        |       |
| Deferred financing costs, net,                               |       | 6,961                       |       | —          |       |        |       | 6,961        |       |
| Total assets                                                 |       | $                           | 189,303    |            | $          | 11,252      |       |         |       | $ | 200,555 |   |
|                                                         |       |                        |       |            |       |        |       |         |       |
| **Liabilities and Stockholders’ Deficit**               |       |                        |       |            |       |        |       |         |       |
| Current liabilities:                                         |       |                        |       |            |       |        |       |         |       |
| Accounts payable                                             |       | $                           | 1,087      |            | $          | —      |       |         |       | $ | 1,087 |   |
| Accrued expenses                                             |       | 4,248                       |       | 1,145           |       | (c)         |       | 5,393        |       |
| Deferred revenue                                             |       | 24,966                      |       | 3,783           |       | (e)         |       | 28,749       |       |
| Current installments of long-term debt                       |       | 123                         |       | —          |       |        |       | 123          |       |
| Current installments of capital lease  obligations           |       | 1,252                       |       | —          |       |        |       | 1,252        |       |
| Due to affiliated entities                                   |       | 787                         |       | —          |       |        |       | 787          |       |
| Total current liabilities                                    |       | 32,463                      |       | 4,928           |       |        |       | 37,391       |       |
| Deferred revenue                                             |       | 495                         |       | —          |       |        |       | 495          |       |
| Long-term debt, excluding current  installments              |       | 161,501                     |       | —          |       |        |       | 161,501      |       |
| Capital lease obligations, net of current  installments      |       | 1,123                       |       | —          |       |        |       | 1,123        |       |
| Deferred rent                                                |       | 16,206                      |       | 9,589           |       | (a)         |       | 25,795       |       |
| Common stock put warrants                                    |       | 9,654                       |       | —          |       |        |       | 9,654        |       |
| Due to founding stockholders                                 |       | 2,936                       |       | —          |       |        |       | 2,936        |       |
| Total long term liabilities                                  |       | 191,915                     |       | 9,589           |       |        |       | 201,504      |       |
| Total liabilities                                            |       | 224,378                     |       | 14,517          |       |        |       | 238,895      |       |
| Commitments and contingencies                                |       |                        |       |            |       |        |       |         |       |
| Stockholders’ deficit:                                  |       |                        |       |            |       |        |       |         |       |
| Common stock                                                 |       | 94                          |       | —          |       |        |       | 94           |       |
| Additional paid-in capital                                   |       | 82,920                      |       | —          |       |        |       | 82,920       |       |
| Accumulated other comprehensive income                       |       | 14                          |       | —          |       |        |       | 14           |       |
| Accumulated deficit                                          |       | (118,103                    | )          | (3,265          | )          | (f)         |       | (121,368     | )          |
| Total stockholders’ deficit                             |       | (35,075                     | )          | (3,265          | )          |        |       | (38,340      | )          |
| Total liabilities and stockholders’ deficit             |       | $                           | 189,303    |            | $          | 11,252      |       |         |       | $ | 200,555 |   |

 

25

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***The impact of the restatements to theCompany’s Consolidated Statements of Cash Flows for the fiscal years endedDecember 31, 2003 and 2002 are as follows******(amounts in 000’s):***

 
| ** **                                                        | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                              |       |     |       |     |       |   |   |
| Net cash provided by operating activities  as previously reported |       | $        | 16,271     |     | $          | 17,641 |   |
| Adjustment:                                                       |       | 5,836    |       | 1,686    |       |
| *Net cash provided by operating activities  as restated*          |       | $        | 22,107     |     | $          | 19,327 |   |
|                                                              |       |     |       |     |       |
| Net cash used in investing activities as  previously reported     |       | $        | (27,009    | )        | $          | (21,377 | ) |
| Adjustment:                                                       |       | (5,836   | )          | (1,687   | )          |
| *Net cash used in investing activities as  restated*              |       | $        | (32,845    | )        | $          | (23,064 | ) |

 

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#### **Resultsof Operations**

#### ** **

The following table sets forth our results ofoperations as a percentage of revenue for the periods indicated:

 
| ** **                                 | ** ** | **For the years ended  December 31,** | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|
| ** **                                 | ** ** | **2004**                              | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                 | ** ** | ** **                            | ** ** | **% of Revenue** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | ** **                            | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| Revenues:                                  |       |                                  |       |   |   |   |   |
| Membership fees                            |       | 66.3                                  | %          | 66.0 | % | 66.6 | % |
| Personal training                          |       | 21.4                                  | %          | 21.6 | % | 19.0 | % |
| Other revenue                              |       | 12.3                                  | %          | 12.4 | % | 14.4 | % |
| Total revenue                              |       | 100.0                                 | %          | 100.0 | % | 100.0 | % |
| Expenses:                                  |       |                                  |       |   |   |   |   |
| Compensation and related                   |       | 40.5                                  | %          | 41.7 | % | 40.2 | % |
| Rent and occupancy                         |       | 11.8                                  | %          | 11.7 | % | 10.8 | % |
| General and administrative                 |       | 24.7                                  | %          | 21.0 | % | 19.3 | % |
| Related-party management fees and expenses |       | 0.6                                   | %          | 0.9 | % | 1.2 | % |
| Stock compensation expense                 |       | 0.0                                   | %          | 0.0 | % | 0.3 | % |
| Depreciation and amortization              |       | 9.0                                   | %          | 9.0 | % | 7.7 | % |
| Total operating expenses                   |       | 86.6                                  | %          | 84.3 | % | 79.5 | % |
| Income from operations                     |       | 13.4                                  | %          | 15.7 | % | 20.5 | % |
| Other income (expense):                    |       |                                  |       |   |   |   |   |
| Interest expense                           |       | -11.5                                 | %          | -29.3 | % | -13.6 | % |
| Interest income                            |       | 0.3                                   | %          | 0.1 | % | 0.0 | % |
| Other income (expense)                     |       | -2.4                                  | %          | 0.8 | % | -3.1 | % |
| Total other expense                        |       | -13.6                                 | %          | -28.4 | % | -16.7 | % |
| Income before provision for income taxes   |       | -0.2                                  | %          | -12.7 | % | 3.8 | % |
| Benefit from (provision for) income taxes  |       | -1.3                                  | %          | 5.8 | % | -3.3 | % |
| Net income (loss)                          |       | -1.5                                  | %          | -6.9 | % | 0.5 | % |

 

Certainreclassifications have been made to the 2002 and 2003 financial statements toconform with the 2004 presentation.

 

27

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***Year Ended December 31, 2004 Comparedto the Year Ended December 31, 2003***

 

*Revenues -* Total revenues were $144.2 million infiscal 2004, as compared to $115.5 million in fiscal 2003, an increase of$28.7 million, or 24.8%. Membership fees increased to $95.6 millionin fiscal 2004, an increase of approximately $19.3 million, or 25.3%, from$76.2 million in the prior year. Personal training revenue increased to$30.9 million in fiscal 2004, an increase of approximately$5.9 million, or 23.4%, from $25.0 million in fiscal 2003. Other revenueincreased to $17.8 million in fiscal 2004, an increase of approximately$3.5 million, or 24.5%, from $14.3 million. These increases in revenue canbe attributed to an increase in our membership base and price increases. Ourmembership base increased to 77,600 as of December 31, 2004, an increaseof approximately 10,200 members, or 15.1% from December 31, 2003. This increasein members predominantly resulted from recently opened clubs. In addition to anoverall increase in our membership base, our pricing structure at all clubs formembers increased by approximately 2.5%, varying by revenue type. Revenue fromnon-members was immaterial.

 

*Compensation and Related Expenses-* Compensation andrelated expenses increased to $58.5 million for the year ended December 31,2004, an increase of $10.2 million, or 21.1%, from $48.3 million in theprior year. This increase is primarily due to an increase in employees to2,549, from 2,128, and a 25.5% increase in total months of club operations to256 months for 2004, from approximately 204 months in 2003. As apercentage of total revenue, compensation and related expenses decreased to40.5% in 2004 from 41.7% in the prior year. This decrease as a percentage ofrevenue is due to a change in our mix of clubs. There are more clubs inoperation in 2004 with mature membership levels than in 2003. The revenue fromthese clubs offsets the compensation expense. Had the mix been more new clubsas a percentage of total clubs than the prior year, compensation as apercentage of revenue could have increased.

 

*Rent and Occupancy -* Rent and occupancy expense increased to$17.0 million for the year ended December 31, 2004, an increase of$3.5 million, or 25.9%, from $13.5 million in the prior year. Thisincrease was primarily due to additional rent and related expenses incurred inconnection with our new clubs opened during 2004, a 25.5% increase in totalmonths of club operations to 256 months for 2004 from approximately204 months in 2003. As a percentage of revenue, rent and occupancy expenseincreased slightly to 11.8% in 2004 from 11.7% in the prior year.

 

*General and AdministrativeExpenses -*Generaland administrative expenses increased to $35.6 million in fiscal 2004, anincrease of $11.4 million, or 47.1%, from $24.2 million in the prior year. Inconnection with a landlord dispute, we incurred $2.2 million in legal costs and$1.0 million in additional parking fees during 2004 as compared to $327,000 forparking incurred in 2003. Parking fees and legal costs were expenses as incurred.On February 25, 2005, a judgment was entered requiring the landlord to provideparking for our customers, and to reimburse Equinox for prior parking costs ofapproximately $1.3 million dollars (this contingent benefit has not yet beenrecorded).  The judgment also contemplates us recovering some or all ofthe legal fees and costs incurred in prosecuting this action. The landlord hasbeen reimbursing us for parking costs since the court issued its tentativedecision in December 2004. The landlord filed post trial motions, which arescheduled for hearing in April 2005. In addition, general and administrativeexpenses increased as a result of: (i) $1.0 million of additional costsassociated with our ancillary products and club supplies, (ii) an increase inutilities by $2.0 million, (iii) a $1.6 million additional investment inmarketing and advertising over the prior year, (iv) a $1.7 million increase inrepairs and maintenance, (v) a $503,000 increase in credit card fees, (vi) an$867,000 increase in office expenses, and (vii) a $358,000 increase in 

 

28

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telecomcosts over the prior year. As a percentage of revenue, general andadministrative expenses increased to 24.7% from 21.0% in the prior year.

 

*Related-Party Management Fees andExpenses -* Relatedparty management fees and expenses decreased to $817,000 from $1.0 millionin the prior year. Related party management fees and expenses representscontractual annual fees of $800,000 for consulting services plus expenses dueto our investors related to our recapitalization agreement. As a percentage ofrevenue, related party management fees and expenses decreased to 0.6% from 0.9%for the prior year.

 

*Stock Compensation Expense -* In connection with the granting of stockoptions to non-employees, we recognized stock compensation expense ofapproximately $35,000 for the year ended December 31, 2003. There was nostock option expense during 2004.

 

*Depreciation and Amortization -* Depreciation and amortization expenseincreased to $12.9 million, an increase of $2.6 million from$10.4 million in the prior year. This increase is due to approximately$36.8 million of fixed asset additions, principally for leaseholdimprovements in connection with our new club openings during 2004 compared to$32.8 million in the prior year.

 

*Total Operating Expenses -*Total operating expenses increased to$124.9 million, an increase of $27.5 million, or 28.2%, from$97.4 million in the prior year. This increase is due primarily to (i) additionalcompensation costs, (ii) rent and occupancy expenses and (iii) other expensesrelated to a 25.5% increase in total months of club operations to256 months for 2004 from approximately 204 months in 2003, whichincludes five new clubs opened during 2004. As a percentage of revenue,operating expenses increased to 86.6% in 2004 from 84.3% in the prior year.This increase as a percentage of revenue is due to higher general andadministrative and depreciation expenses as compared to the prior year.

 

*Other Expense -*Other expense decreased to $19.6 millionfor the year ended December 31, 2004, a decrease of $13.1 million, or40.1%, from $32.7 million in the prior year. This decrease was primarily dueto a decrease in our interest expense during 2004. Interest expense during 2004is predominantly related to our Senior Notes due 2009. In addition, during2004, the Company incurred other expense of approximately $3.5 million inconnection with the mark-to-market of common stock put warrants. Interestexpense during 2003 included (i) the repayment of certain debt in connectionwith our Senior Notes due 2009, (ii) interest expense on our Senior Notes due2009, line of credit, term loan, original issue discount and prepaymentpenalties of $23.4 million, (iii) $5.8 million in deferred financingcosts related to our prior debt that were written-off, and (iv)$3.2 million of accelerated interest that was included in the$5.0 million paid to our founding shareholders. In addition, we incurredapproximately $592,000 of interest costs related to the offering of our SeniorNotes due 2009. Other interest costs including interest under capital leasestotaled approximately $300,000. The 2003 mark-to-market of common stock putwarrants resulted in approximately $900,000 of other income.

 

*Provision for (benefit from)Income Taxes -*Theprovision for income taxes was $1.8 million in fiscal 2004 as compared to abenefit of $6.7 million in fiscal 2003, an increase of $8.5 million.Our effective tax rate in fiscal 2004 increased to 516.9% from (46.0%) infiscal 2003, primarily as the result of the loss before income taxes in 2003,permanent differences relating to mark-to-market adjustment for the commonstock put warrants issued to the holders of our senior subordinated notes andthe impact of state and local taxes in the jurisdictions in which we operateour fitness clubs.

 

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***Year Ended December 31, 2003 Comparedto the Year Ended December 31, 2002***

 

*Revenues -*Total revenues were $115.5 million infiscal 2003 as compared to $93.4 million in fiscal 2002, an increase of$22.1 million, or 23.7% from the prior year. Membership fees increased to$76.2 million in fiscal 2003, an increase of approximately $14.0 million,or 22.5%, from $62.2 million in the prior year. Personal training revenueincreased to $25.0 million in fiscal 2003, an increase of approximately$7.3 million, or 41.2%, from $17.7 million in fiscal 2002. Otherrevenue increased to $14.3 million in fiscal 2003, an increase of approximately$800,000, or 6.0%, from $13.5 million in the prior year. These increasesin revenue are primarily due to an increase in our membership base as well aspricing increases. Our membership base increased to 67,400 at December 31,2003, an increase of approximately 12,500 members, or 22.7% from December 31,2002. This increase in members was predominantly related to recently opened andnew clubs. In addition to an overall increase in our membership base, ourpricing structure increased by approximately 3%. Revenues from non-members wereimmaterial.

 

*Compensation and Related Expenses-*Compensation andrelated expenses increased to $48.3 million for the year endedDecember 31, 2003, an increase of $10.7 million or 28.5% from $37.5million for the prior year. This increase was due to a 31.6% increase inemployees to 2,128 from 1,622, and a 30.8% increase total months of cluboperations to 204 months for 2003 from approximately 156 months in2002. In addition, our personal trainers’ wages increased consistently with theincrease in our personal training revenue. As a percentage of total revenue,compensation and related expenses increased to 41.7% from 40.2% in the prioryear. This increase was due to new clubs added in 2003, which had not reachedmaximum membership capacity and incurred fixed compensation and relatedexpenses. In addition compensation related expenses for general andadministrative staff increased slightly.

 

*Rent and Occupancy -*Rent and occupancy expense increased to$13.5 million for the year ended December 31, 2003, an increase of$3.5 million, or 34.8%, from $10.0 million in the prior year. Thisincrease was due to additional rent and related expenses incurred in connectionwith our four new clubs opened during 2003, a 30.8% increase in total months ofclub operations to 204 months for 2003 from approximately 156 monthsin 2002, which included the four new clubs, additional office space, andincreased property taxes. As a percentage of revenue, rent and occupancyexpense increased to 11.7%, from 10.8% in the prior year. This increase as apercentage of revenue was due to new clubs, which by definition had not reachedmaximum membership capacity and incurred fixed rent and occupancy expenses.

 

*General and AdministrativeExpenses -*Generaland administrative expenses increased to $24.2 million for the year endedDecember 31, 2003, an increase of $6.3 million, or 34.8%, from$18.0 million in the prior year. This increase was due to (i) a $623,000in additional expenses associated with our ancillary products and club supplies,(ii) a $385,000 increase in credit card fees, (iii) $1.9 million increase inutilities, (iv) an $179,000 increase in advertising, (v) a $525,000 increase ininsurance expense; (vi) a $1.1 million increase in legal expense; (vii) a$528,000 increase in telecom costs and a $1.1 million increase in otheroperating expenses. These increases were primarily due to a 30.7% increase intotal months of club operations to 204 months for 2003, from approximately156 months in 2002. In addition, we had $700,000 in expenses associatedwith our refinancing and continued investments in our finance department,information technology and marketing. As a percentage of total revenue, generaland administrative expenses increased to 21.0%, from 19.3%, in the prior year.

 

*Related Party Management Fees andExpenses -*Relatedparty management fees and expenses decreased to $1.0 million from$1.2 million in the prior year. Related management fees and expenses 

 

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representscontractual annual fees of $800,000 for consulting services plus expenses dueto our investors related to our recapitalization agreement.

 

*Stock Compensation Expense -* In connection with the granting of stockoptions to non-employees, we recognized stock compensation expense ofapproximately $35,000 and $313,000 for the years ended December 31, 2003and 2002, respectively. This decrease was due to a decrease in common stockoption grants.

 

*Depreciation and Amortization -*Depreciation and amortization expenseincreased to $10.4 million, an increase of $3.2 million from$7.2 million in the prior year. This increase was due to approximately$32.8 million of fixed asset additions, principally for leaseholdimprovements in connection with our new club openings during 2003 compared to$23.0 million for the prior year.

 

*Total Operating Expenses -* Total operating expenses increased to$97.4 million, an increase of $23.2 million, or 31.3%, from$74.2 million in the prior year. This increase was due primarily to highercompensation costs, rent and occupancy and other expenses related to a 30.8%increase in total months of club operations to 204 months for 2003 fromapproximately 156 months in 2002. As a percentage of revenue, operatingexpenses increased to 84.3% from 79.5% in the prior year. This increase as apercentage of revenue was due to new clubs, which had not reached maximummembership capacity and incurred fixed rent and occupancy expenses upon theclubs opening.

 

*Other Expense -*Other expense increased to $32.7 millionfor the year ended December 31, 2003, an increase of $17.1 million,or 109.9%, from $15.6 million in the prior year. This increase was primarilydue to the interest expense paid in connection with the repayment of certaindebt in connection with our offering of Senior Notes due 2009 at the end of2003, and included interest expense on our senior notes, line of credit, termloan, original issue discount and prepayment penalties of $23.4 million,$5.8 million in deferred financing costs related to our prior debt thatwere written-off, and $3.2 million of accelerated interest that wasincluded in the $5.0 million paid to our founding shareholders. Inaddition we incurred approximately $592,000 of interest costs related to ouroffering of our Senior Notes due 2009. Other interest costs including interestunder capital leases totaled approximately $300,000.

 

*Provision for (benefit from) IncomeTaxes -* The benefitfor income taxes was $6.7 million in fiscal 2003, as compared to a provision of$3.0 million in fiscal 2002, an increase of $9.7 million. Our effectivetax rate in fiscal 2003 decreased to (46.0)% from 85.8% in fiscal 2002,primarily as the result of the loss before income taxes in 2003, permanentdifferences relating to mark-to-market adjustment for the common stock putwarrants issued to the holders of our senior subordinated notes and the impactof state and local taxes in the jurisdictions in which we operate fitnessclubs.

 

**Liquidity and Capital Resources**

 

Historically,we have satisfied our liquidity needs through cash from operations and variousborrowing arrangements. Principal liquidity needs have included the developmentof new fitness clubs, debt service requirements and other capital expendituresnecessary to maintain existing facilities. Our regular cash requirementsconsist principally of scheduled payments of principal and interest onoutstanding indebtedness, capital expenditures and lease expenses. In June andDecember 2004 we made our first semiannual interest payments of approximately$7.2 million each, on our Senior Notes due 2009. In addition to these andother regular liquidity requirements, liquidity requirements include ourobligation to pay up to $15.0 million to our founding stockholders on theearlier of a qualified public offering, a change of control orDecember 15, 2010, if the internal rate of return of our equity sponsorsexceeds a 

 

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specifiedamount, and approximately $800,000 plus expenses, annually to our principalinvestors for consulting services. Based on the Company’s current earnings, itwas highly uncertain as to whether or not this payment will be required. Inaddition, commencing on December 15, 2006, holders of a majority interestin the common stock put warrants will have a right to require us to use ourbest efforts to purchase all of our outstanding warrants at fair market valueif we have not previously consummated a qualifying initial public offering ofour common stock. Although each warrant holder will receive preferred stockequal to the value of its warrant if we fail to purchase the warrants within60 days, such a demand, if made, could result in additional liquidityrequirements. The future value of the warrants cannot presently be predicted,but we expect it to be material. The fair value of the warrants, as marked tomarket at December 31, 2004, was approximately $13.2 million. Basedupon our current level of operations and the anticipated maturation of our immatureclub base, we believe that the proceeds from the offering of our Senior notesdue 2009 and the entering into of our new senior secured revolving creditfacility, our cash flow from operations and available cash will be adequate tomeet our short and long term liquidity requirements, including our plan toexpand to approximately 38 clubs by 2006. We estimate each club openingrequires between $4.0 million and $9.0 million, depending on size andlocation, as well as approximately $100,000 of capitalized expenses annually tomaintain existing clubs. Clubs undergo major renovations every five toseven years which range from $500,000 to $1.0 million.

 

Ourcredit facility was undrawn at December 31, 2004, with availabilitysubject to specified actions with respect to collateral and subject to aborrowing base formula. The revolving credit facility will help enable us tofund our plans to expand and develop new fitness clubs in existing markets andin select new markets. Our revolving credit facility contains restrictiveaffirmative and negative covenants and financial covenants including leverageratios, an interest coverage ratio and capital expenditure and dividend paymentrestrictions. The facility is guaranteed by all of our existing and futuredomestic subsidiaries and secured by substantially all our assets, other thanreal property leases, but including capital stock of our subsidiaries and cashand deposit accounts.

 

Oursignificant contractual obligations, including our obligations to our foundingstockholders, could make it more difficult for us to effect a financingtransaction, including an initial public offering of our common stock. Inaddition, our common stock is not publicly traded and therefore equityfinancing is not available to us on the same basis as it is for companies thathave publicly traded stock.

 

Weincluded the following information with respect to Adjusted EBITDA because itis a key component in the determination of our compliance with certain of thecovenants under our past and current credit agreements. Under the indenture forour Senior Notes Due 2009, we are required to deliver annual and quarterlyfinancial information in the time periods prescribed by the rules of the SEC.As of April 15, 2005, the extended deadline for the filing of our Form 10-K, wehave been in default under those information delivery obligations. Under ourcredit agreement, we are required to deliver financial information within 90days after the end of such fiscal year, quarterly information within 45 daysafter the end of such quarter and monthly information within 30 days of eachmonth. Presently, there are no outstanding borrowings under the CreditAgreement. The filing of this Form 10-K will cure violation under both theindenture and the credit agreement with respect to these information deliveryobligations for the annual information. We are also in violation under both ourindenture and Credit Agreement in the provision of financial information forthe first and second quarters of 2005, for which we expect to cure with thefiling of these quarterly statements.

 

Underthe terms of our current credit agreement, we are required to comply withspecified financial ratios and test, including a maximum leverage ratio.  The maximum leverage ratio specifies that thepro forma ratio of total debt to Adjusted EBITDA must be less than or equal to5.0 to 1.0 at December 31, 2004, which decreases ratably to 3.0 to 1.0 atDecember 31, 2008. If we fail to meet the ratio test, as well as otherratios and tests, our ability to operate our business will be significantly 

 

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limited. Pursuant to our credit agreement,the aggregate amount of capital expenditures (as defined therein) for anyFiscal Year may not exceed $60.0 million. If the entire amount of capitalexpenditures permitted in any period set forth above is not utilized, we maycarry it forward to the immediately succeeding period only: (i) 100% ofsuch unutilized amount up to an aggregate amount of $15.0 million and (ii) 50%of the unutilized amount in excess of $15,000,000 (in each case with capitalexpenditures made in such succeeding period applied last to such carriedforward amount).

 

Underour credit facility, our interest coverage ratio as of the last day of eachfiscal quarter ending during the periods set forth below to be less than theratio set forth below for such period:

 
| **Period**                                           | ** ** | **Ratio** | ** ** |
|------------------------------------------------------|------------|-----------|------------|
| Closing Date through December 31, 2004          |       | 1.55      |       |
| January 1, 2005 through  December 31, 2005 |       | 2.05      |       |
| January 1, 2006 through December 31,  2006 |       | 2.55      |       |
| January 1, 2007 and thereafter                  |       | 3.10      |       |

 

Asof December 31, 2004 our interest coverage ratio is 1.59. Since we have notdrawn on our credit facility, we are not required to comply with thesefinancial covenants.

 

Thefollowing table reconciles net income (loss) to EBITDA, and illustratescomponents of Adjusted EBITDA, as that amount is used in our calculations underthe covenants contained in our credit facility:

 
| ** **                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                    | ** ** | ** **                  | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| Net (loss)/income                             |       | $                           | (2,110     | ) | $ | (7,939 | ) | $ | 509 |   |
| Depreciation and amortization                 |       | 12,935                      |       | 10,361 |   | 7,159 |   |
| Provision for (benefit from) income taxes     |       | 1,768                       |       | (6,740 | ) | 3,063 |   |
| Interest expense, net of interest income      |       | 16,220                      |       | 33,659 |   | 12,739 |   |
| EBITDA(a)                                     |       | 28,813                      |       | 29,341 |   | 23,470 |   |
| Components of Adjusted EBITDA:                |       |                        |       |   |   |   |   |
| Stock compensation expense                    |       | —                      |       | 35 |   | 313 |   |
| Related-party management fees and expenses(b) |       | 817                         |       | 1,007 |   | 1,164 |   |
| Other (income) expense(c)                     |       | 3,526                       |       | (900 | ) | 2,869 |   |
| Non-cash deferred rent                        |       | 2,082                       |       | 2,496 |   | 1,088 |   |
| Adjusted EBITDA                               |       | $                           | 35,238     |   | $ | 31,979 |   | $ | 28,904 |   |
| Total debt as defined                         |       | $                           | 162,949    |   | $ | 163,999 |   | $ | 95,700 |   |
| Ratio of total debt to Adjusted EBITDA        |       | 4.62                        |       | 5.13 |   | 3.31 |   |

 

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(a)                                  We define EBITDA as net (loss)/income beforeinterest expense, income taxes and depreciation and amortization. We presentEBITDA because we believe it provides investors with useful informationregarding our liquidity, including compliance under our 

 

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debt covenants. AdjustedEBITDA is defined in our $25.0 million credit agreement as EBITDA,adjusted for mark-to-market adjustments for our common stock put warrants,stock compensation expense, write-off of other receivables, management fees andexpenses paid to our principal stockholders and non-cash deferred rent. Non-cashdeferred rent expense reflects the difference between accrued rent expense inaccordance with generally accepted accounting principles in the United Statesof America (“GAAP”) and cash rent expense actually paid in a given period,which difference is typically positive in the early years of a lease andnegative in the later years of a lease. EBITDA and Adjusted EBITDA are notmeasures of financial performance under GAAP. We present the components ofAdjusted EBITDA because this measure is a key component in the determination ofour compliance with certain covenants under our credit agreement as more fullydescribed in our liquidity section of our Management’s Discussion and Analysiscontained herein. EBITDA and Adjusted EBITDA should not be considered inisolation, or as a substitute for net income, cash flows, or other consolidatedincome (loss) or cash flow data presented in accordance with GAAP or as ameasure of our liquidity or financial condition. Because EBITDA and AdjustedEBITDA are not measures determined in accordance with GAAP and is thussusceptible to varying calculations, Adjusted EBITDA as discussed may not becomparable to other similarly titled measures of other companies.

 

(b)                                 As discussed under “Related PartyTransactions,” we are contractually obligated to make these cash payments andsuch payments are not subordinated to the notes. However, we are presentingthese adjustments to provide a clearer indication of the EBITDA and AdjustedEBITDA associated with our operations.

 

(c)                                  Consists of non-cash charges resulting fromthe mark-to-market adjustments of our common stock put warrants and ourinterest rate swap. See “Description of Capital Stock—Common Stock Put Warrants.”Under the terms of our credit facility definitions, this line item must beadded back to net income (loss) in calculating Adjusted EBITDA.

 

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Thefollowing table reconciles EBITDA to net cash provided by operating activities(amounts in thousands):

 
| ** **                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                     | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                     | ** ** | ** **                  | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| ** **                                                                     |       |                        |       |   |   |   |   |   |   |   |
| **EBITDA**                                                                     |       | $                           | 28,813     |   | $ | 29,341 |   | $ | 23,470 |   |
| Adjustments to reconcile EBITDA to net cash  provided by operating activities: |       |                        |       |   |   |   |   |
| Allowance for doubtful accounts, net of  write-offs                            |       | (52                         | )          | 23 |   | 11 |   |
| Interest expense                                                               |       | (14,874                     | )          | (18,306 | ) | (10,046 | ) |
| Changes in fair market value of put  warrants                                  |       | 3,526                       |       | (888 | ) | 2,849 |   |
| Write-off of other receivables                                                 |       | —                      |       | — |   | 169 |   |
| Stock compensation expense                                                     |       | —                      |       | 35 |   | 313 |   |
| Accretive interest expense related to  payable to founding stockholders        |       | 562                         |       | 3,723 |   | 677 |   |
| Deferred rent                                                                  |       | 3,948                       |       | 7,925 |   | 2,586 |   |
| Current portion of income taxes                                                |       | (1,395                      | )          | — |   | (1,725 | ) |
| Changes in operating assets and  liabilities:                                  |       |                        |       |   |   |   |   |
| Accounts receivable                                                            |       | (386                        | )          | (59 | ) | 237 |   |
| Due (to) from affiliates                                                       |       | (1,296                      | )          | 787 |   | 176 |   |
| Prepaid expenses and other current assets                                      |       | 268                         |       | (2,373 | ) | (3,024 | ) |
| Other assets                                                                   |       | 168                         |       | 259 |   | (585 | ) |
| Accounts payable                                                               |       | 192                         |       | 160 |   | (527 | ) |
| Accrued expenses                                                               |       | 1,562                       |       | (666 | ) | 759 |   |
| Deferred revenue                                                               |       | 5,591                       |       | 5,863 |   | 3,987 |   |
| **Net cash provided by Operating activities**                                  |       | $                           | 26,627     |   | $ | 25,824 |   | $ | 19,327 |   |

 

*OperatingActivities***-**Net cash provided byoperating activities was $26.6 million for the year ended December 31,2004 as compared to $25.8 million for the year ended December 31, 2003.The increase in cash provided by operating activities was primarily due to areduction in our net loss, an increase in accrued expenses, deferred revenueand improved profitability of our recently opened fitness clubs and five newclubs opened during 2004, partially offset by payments to affiliated entitiesand new fitness clubs opened in fiscal 2004 which are operating at marginslower than those of mature and other recently opened clubs. We receive dues andprogram and services fees either (i) during the month services arerendered, or (ii) when paid-in-full, in advance. As a result, we typicallydo not have significant accounts receivable. We record deferred liabilities forrevenue received in advance in connection with dues and services paid-in-fulland for initiation fees paid at the time of enrollment. Initiation feesreceived are deferred and amortized over a 24 month period, whichrepresents the approximate average life of a member. As we increase the numberof clubs open, we expect we will continue to have deferred revenue balancesthat reflect services and dues that are paid-in-full in advance at levelssimilar to, or greater than, those currently maintained. The deferred revenuebalances represent cash received in advance of services performed, and does notrepresent liabilities that must be funded with cash. If we encounterdifficulties in increasing our membership base, our operating cash flow woulddecrease. We plan to finance operations through operating cash flows.

 

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Net cash provided by operating activitiesincreased to $25.8 million from $19.3 million for the years endedDecember 31, 2003 and 2002, respectively. Non-cash items such as interestand depreciation offset our increase in our net loss.

 

*InvestingActivities -*****Primarilyas a result of our expansion efforts, we invested $36.7 million in capitalexpenditures for new clubs opened or being developed during the year endedDecember 31, 2004 as compared to $32.8 million during fiscal 2003.

 

Net cash used in investing activities was$32.8 million and $23.0 million for the years ended December 31, 2003 and 2002,respectively. We expect to continue investing in capital expenditures inaccordance with our expansion strategy.

 

*Financing Activities***-**  Net cash used by financing activitieswas $5.1 million, which was predominantly used for the repayment ofcapital leases and the funding of restricted cash (related to collateralizationof letters of credit) for the year ended December 31, 2004, as compared to $48.5 millionof net cash provided by financing activities during fiscal 2003. During 2003,we completed our private offering of $160.0 million of 9% Senior Notes due2009, a new lender purchased $25.0 million of senior notes and certainexisting shareholders purchased additional shares of common stock for$10.0 million. We used the net proceeds of approximately$152.0 million from our offering of Senior Notes due 2009 to (i) repay ourexisting revolving credit facility of $16.9 million, (ii) repay the entireoutstanding principal amount plus accrued interest of our senior notes due 2007of $55.7 million, (iii) repay the entire principal amount plus accruedinterest of $53.3 million of senior subordinated notes due 2008, (iv)redeem $1.3 million of our preferred stock and (v) pay our foundingstockholders a contractually required amount of $5.0 million. We used theproceeds to pay down our existing revolving credit facility, leavingapproximately $15.1 million of net proceeds.

 

Net cash provided by financing activities wasapproximately $48.5 million for the year ended December 31, 2003 ascompared to $2.3 million of net cash used in financing activities for theyear ended December 31, 2002. In March 2002, we distributed$4.4 million (representing escrowed proceeds) to the Founding Stockholdersin accordance with the applicable transaction agreements.

 

**Contractual and CommercialCommitments Summary**

 

Our aggregate long-termdebt, capital lease obligations, operating lease obligations and other materialcontractual obligations as of December 31, 2004 are as follows:

 
| ** **                          | ** ** | **Total**   | ** **  | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5 years** | ** ** |
|-------------------------------------|------------|-------------|-------------|-----------------------|------------|--------------------|------------|--------------------|------------|------------------------|------------|
| Long-term debt(1)                   |       | $           | 233,296,487 |                  | $          | 14,512,701         |       | $                  | 29,046,160 |                   | $          | 188,934,822 |   | $ | 802,804 |   |
| Capital lease obligations(2)        |       | 1,786,637   |        | 810,061               |       | 763,328            |       | 213,248            |       | —                 |       |
| Operating lease obligations         |       | 303,917,902 |        | 19,865,479            |       | 39,520,409         |       | 40,787,444         |       | 203,744,570            |       |
| Payment to Founding Stockholders(3) |       | 15,000,000  |        | —                |       | —             |       | —             |       | 15,000,000             |       |
| Common stock put warrants(4)        |       | 13,179,417  |        | —                |       | 13,179,417         |       | —             |       | —                 |       |
| Purchase obligations                |       | —      |        | —                |       | —             |       | —             |       | —                 |       |
|                                |       | $           | 567,180,443 |                  | $          | 35,188,241         |       | $                  | 82,509,314 |                   | $          | 229,935,514 |   | $ | 219,547,374 |   |

 

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(1) The long-term debt contractual cashobligations include principal and interest requirements. Semi-annual interestpayments of $7.2 million commenced on June 15, 2004 and are payableon June 15 and December 15 thereafter until December 15, 2009.

 

(2) Capital lease obligations representprincipal and interest payments.

 

(3) Represents the maximum obligation underthe recapitalization agreement to pay the Founding Stockholders upon theearlier of a qualified public offering, a change of control orDecember 15, 2010, if the internal rate of return of our equity sponsorsexceeds a specified amount, and approximately $800,000 plus expenses, annuallyto our principal investors for consulting services.

 

(4) Includes the obligation to purchase thecommon stock put warrants at fair market value if we have not consummated aqualifying initial public offering of our common stock prior toDecember 15, 2006. The amount presented is the fair market value of thewarrants at December 31, 2004 and has been calculated using a third partyvaluation; the actual fair market value at the time of any purchase will not bebased upon a Black-Scholes calculation and could vary materially from theamount presented.

 

**Factors that May Affect OurOperating Results**

 

This Form 10-K contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act of 1934, including, withoutlimitation, statements regarding our expectations, beliefs, intentions orfuture strategies that are signified by the words “expects”, “anticipates”, “intends”,“believes”, or similar language. All forward-looking statements included inthis document are based on information available to us on the date hereof, andwe assume no obligation to update any such forward-looking statements. Actualresults could differ materially from those projected in the forward-lookingstatements. In evaluating our business, prospective investors should carefullyconsider the following information in addition to the other information setforth herein. We caution investors that our business and financial performanceare subject to substantial risks and uncertainties.

 

**Risks Related to Our SubstantialDebt**

 

*Our substantial indebtednesscould have a material adverse effect on our financial health and our ability toobtain financing in the future and to react to changes in our business.*

 

We have a significant amountof debt. As of December 31, 2004, we had approximately $162.9 million ofdebt outstanding. Our significant amount of debt and other contractualcommitments could have important consequences holders of our Senior Notes due2009. For example, it could:

 

• make it more difficult for us to satisfy ourobligations under our Senior Notes due 2009 and to the lenders under ourrevolving credit facility;

 

• increase our vulnerability to adverseeconomic and general industry conditions;

 

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•require us to dedicate a substantial portionof our cash flow from operations to principal and interest payments on ourdebt, which would reduce the availability of our cash flow from operations tofund capital expenditures or other general corporate purposes;

 

•limit our flexibility in planning for, orreacting to, changes in our business and industry;

 

•place us at a disadvantage compared tocompetitors that have proportionately less debt;

 

•limit our ability to borrow additional fundsin the future, if we need them; and

 

•prevent us from obtaining financing torepurchase the Senior Notes due 2009 upon a change of control or otherwiselimit our ability to make such repurchase.

 

Theterms of the indenture governing the Senior Notes due 2009 and the terms of ourrevolving credit facility limit us from incurring additional indebtedness, andour revolving credit facility will provide for borrowings of up to$25.0 million, subject to certain limitations. Any borrowings under ourcredit facility would be secured and effectively senior to the notes and theguarantees to the extent of the value of the collateral securing suchborrowings. If new debt is added to our and our subsidiaries’ current debtlevels, the related risks that they and we now face would intensify.

 

*Ourability to generate the significant amount of cash needed to make payments onand otherwise satisfy the notes and our other debt and contractual commitmentsand to operate our business depends on many factors beyond our control.*

 

Ourability to make payments on and otherwise satisfy the notes and our other debtand contractual commitments and to fund working capital needs and plannedcapital expenditures and expansion plans will depend on our ability to generatecash and secure financing in the future. Among our contractual commitments are(1) contractual payments to our founding stockholders on the earlier of aqualified public offering, a change of control or December 15, 2010 and(2) a contingent obligation to use our best efforts to purchase commonstock put warrants representing approximately 8% of our fully-diluted equity(as of the date hereof), at their fair market value if a majority of thewarrant holders so require following December 15, 2006 if a qualifyinginitial public offering of our common stock has not previously occurred. Wecannot assure holders of our Senior Notes due 2009 that we will be able tosatisfy our obligations to purchase the warrants or that a dispute relating toour use of “best efforts” will not arise. See “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.”

 

Ourability to meet these obligations is subject to general economic, financial,competitive, legislative, regulatory and other factors beyond our control. Ifour business does not generate sufficient cash flow from operations, andsufficient future borrowings are not available to us under our revolving creditfacility or from other sources of financing, we may not be able to repay thenotes or our other debt or satisfy our other contractual commitments, operateour business or fund our other liquidity needs. We cannot assure holders of ourSenior Notes due 2009 that we will be able to obtain additional financing orcomply with our obligations with respect to our founding stockholders andwarrant holders, particularly because of our anticipated levels of debt and thedebt incurrence restrictions imposed by the agreements governing our debt. Oursignificant contractual obligations, including our obligations to our foundingstockholders, could make it more difficult for us to effect a financingtransaction, including an initial public offering of our common stock. If wecannot meet or refinance our obligations when they are due, we may have to sellassets, reduce capital 

 

38

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expenditures or take other actions that couldhave a material adverse effect on our financial condition and results ofoperations.

 

*Theagreements and instruments governing our debt contain restrictions and couldlimit our ability to operate our business.*

 

Ourrevolving credit facility and the indenture governing our Senior Notes due 2009contain, and any of our future indebtedness could contain a number ofsignificant covenants that will restrict, among other things, our ability andthe ability of our subsidiaries to:

 

•pay dividends or make other distributions;

 

•make certain investments or acquisitions;

 

•enter into transactions with affiliates;

 

•dispose of assets or enter into businesscombinations;

 

•incur or guarantee additional debt;

 

•issue equity;

 

•repurchase or redeem equity interests anddebt;

 

•create or permit to exist certain liens; and

 

•pledge assets.

 

Theserestrictions could limit our ability to obtain future financing, makeacquisitions or needed capital expenditures, withstand a future downturn in ourbusiness or the economy in general, conduct operations or otherwise takeadvantage of business opportunities that may arise. Furthermore, our revolvingcredit facility requires us to meet specified financial ratios and tests. Our abilityto comply with these provisions may be affected by events beyond our control.The breach of any of these covenants would result in a default under ourrevolving credit facility, which could place us in default under the indenturegoverning the notes.

 

**RisksRelated to Our Business**

 

*Our business is geographically concentrated, and adverseregional conditions or events could adversely affect us.*

 

We currently operate inthree metropolitan areas, and our clubs in and around New York City generatedapproximately 87.7% of our revenues for the year ended December 31, 2004.Adverse economic conditions or increased competition in those areas, especiallyin New York City, could have adverse effects on our financial condition andresults of operations. Moreover, a catastrophic event in any of those areas,such as the attacks of September 11, 2001, could adversely affect ourmembers, damage our clubs and harm our business.

 

39

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*We maybe unable to attract and retain members, which could have a negative effect onour business.*

 

Theperformance of our fitness clubs is dependent on our ability to attract andretain members, and we cannot assure you that we will be successful in theseefforts, or that the membership levels at our clubs will not materiallydecline. There are numerous factors that could lead to a decline in membershiplevels at established clubs or that could prevent us from increasing ourmembership levels at newer clubs, including harm to our reputation, a declinein our ability to deliver quality service at a competitive cost, the presenceof direct and indirect competition in the areas in which the clubs are located,the public’s interest in sports and fitness clubs and general economicconditions. As a result of these factors, we cannot assure you that ourmembership levels will be adequate to maintain or permit the expansion of ouroperations. In addition, a decline in membership levels may have a materialadverse effect on our financial condition and results of operations.

 

*We maynot be able to successfully execute our growth strategy or effectively manageour growth.*

 

Weintend to increase our number of fitness clubs from 24 at December 31, 2004 toapproximately 38 by the end of 2006. Currently, we consider nine out of our 24fitness clubs to be mature (i.e., open for 48 months or longer at the beginningof the fiscal year). Successful implementation of this growth strategy willrequire considerable expenditures before any significant associated revenuesare generated. In addition, many of our existing clubs are still relativelynew. We cannot assure you that our existing immature or future fitness clubswill generate revenues and cash flow comparable with those generated by ourexisting mature clubs.

 

Ourexpansion will also place significant demands on our management resources. Wewill be required to identify attractive club locations, negotiate favorablerental terms and open new fitness clubs on a timely and cost-effective basiswhile maintaining a high level of quality, efficiency and performance at bothmature and newly opened fitness clubs. Moreover, we plan to expand into marketswhere we have little or no direct prior experience, and we could encounterunanticipated problems, cost overruns or delays in opening fitness clubs in newmarkets or in the market acceptance for our clubs.

 

Wemay not be able to effectively manage this expansion, and any failure to do socould have a material adverse effect on our business, financial condition andresults of operations.

 

*We may not be able to continue to compete effectively ineach of our markets in the future.*

 

Thefitness industry is highly fragmented. Within each market in which we operate,we compete with other commercial fitness centers, physical fitness andrecreational facilities established by local governments, hospitals andbusinesses for their employees, YMCAs and similar organizations and, to acertain extent, with racquet, tennis and other athletic clubs, country clubs,weight-reducing salons and the home-use fitness equipment industry. Competitiveconditions may limit our ability to maintain or increase initiation fees ormembership dues, attract new members and keep existing members, and couldadversely affect our business, financial condition and results of operation.

 

*We could be subject to personal injury claims related to theuse of our clubs.*

 

Membersor guests could assert claims of personal injury in connection with their useof our services and facilities. If we cannot successfully defend any largeclaim or maintain our general liability 

 

40

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insurance on acceptable terms or maintainadequate coverage against potential claims, our financial results could beadversely affected.

 

*We are subject to government regulation. Changes in theseregulations or a failure to comply with them could have a negative effect onour financial condition.*

 

Ouroperations and business practices are subject to federal, state and localgovernment regulations in the various jurisdictions in which our fitnesscenters are located, including:

 

**•**generalrules and regulations of the Federal Trade Commission, state and local consumerprotection agencies and state statutes that prescribe provisions of membershipcontracts and that govern the advertising, sale, financing and collection ofmembership fees and dues; and

 

•state and local health regulations andbuilding codes.

 

Ifwe were to fail to comply with these statutes, rules and regulations, we couldsuffer fines or other penalties. These may include regulatory or judicialorders enjoining or curtailing aspects of our operations. It is difficult topredict the future development of such laws or regulations, and although we arenot aware of any proposed changes, any changes in such laws could have amaterial adverse effect on our financial condition and results of operations.

 

*If wedo not retain key management personnel and/or fail to attract and retain highlyqualified personnel, our business will suffer.*

 

Thesuccess of our business depends on the leadership of our key managementpersonnel. If any of these persons were to leave, it might be difficult toreplace them, and our business could be harmed. In addition, we cannot assureyou that we can attract and retain sufficient qualified personnel to meet ourbusiness needs.

 

*Our trademarks and trade names may be misappropriated orchallenged by others.*

 

Webelieve our brand name and related intellectual property are important to ourcontinued success. We attempt to protect our trademarks and trade names byexercising our rights under applicable trademark and copyright laws. If we wereto fail to protect our intellectual property rights for any reason, it couldhave an adverse effect on our business, results of operations and financialcondition.

 

*Theinterests of our controlling shareholders may be in conflict with the interestsof holders of our Senior Notes due 2009.*

 

Fundsmanaged by North Castle Partners, L.L.C. and J.W. Childs Associates, L.P.indirectly own approximately 93% of our outstanding common stock and togetherhave the ability to elect a majority of the board of directors and generally tocontrol the affairs and policies of our company. Circumstances may occur inwhich the interests of either North Castle or J.W. Childs, as our shareholders,could be in conflict with the interests of the holders of our Senior Notes due2009. For example, if we encounter financial difficulties or are unable to payour debts as they mature, their interests as equity holders and as counterpartiesto a consulting agreement might conflict with the interests of holders of ourSenior Notes due 2009.

 

41

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**Item 7A.  *Quantitative and Qualitative Disclosures About MarketRisks***

 

Wedo not believe that we have any significant risk related to interest ratefluctuations since we currently only carry fixed-rate debt. We invest ourexcess cash in highly liquid short-term investments. These investments are notheld for trading or other speculative purposes. We do not believe that there isany material market risk exposure with respect to derivative or other financialinstruments that would require disclosure under this item.

 

**Item 8.****                                                          ****Financial Statements andSupplementary Data**

 

**Report of Independent Registered Public Accounting Firm**

 

Tothe Board of Directors

EquinoxHoldings, Inc.:

 

Wehave audited the accompanying consolidated balance sheets of Equinox Holdings,Inc. and subsidiaries as of December 31, 2004 and 2003, and the relatedconsolidated statements of income, stockholders’ equity (deficit) andcomprehensive income, and cash flows for each of the three years in the periodended December 31, 2004. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Equinox Holdings,Inc. and subsidiaries as of December 31, 2004 and 2003, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2004, in conformity with accounting principlesgenerally accepted in the United States of America.

 

Asdiscussed in Note 2 to the accompanying consolidated financial statements,the Company has restated the consolidated balance sheet as of December 31,2003, and the related consolidated statements of income, stockholders’ deficitand comprehensive income, and cash flows for the years ended December 31,2003 and 2002.

 

 

NewYork, New York

August11th, 2005

 

42

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**EQUINOXHOLDINGS, INC.**

**ConsolidatedBalance Sheets**

***(in thousands)***

 
| ** **                                                                                                                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                   | ** ** | **2004**         | ** ** | **2003** | ** ** |
| ** **                                                                                                                                   | ** ** | ** **       | ** ** | **(Restated)** | ** ** |
| **Assets**                                                                                                                                   |       |             |       |   |   |
| Current assets:                                                                                                                              |       |             |       |   |   |
| Cash                                                                                                                                         |       | $                | 27,506     |   | $ | 42,709 |   |
| Marketable securities                                                                                                                        |       | —           |       | 70 |   |
| Accounts receivable—members, less allowance  for doubtful accounts as of December 31, 2004 and 2003 of $60 and $112,  respectively      |       | 1,984            |       | 1,546 |   |
| Deferred income taxes (Note 13)                                                                                                              |       | 10,774           |       | 5,202 |   |
| Due from affiliated entities                                                                                                                 |       | 509              |       | — |   |
| Prepaid expenses and other current assets  (Note 5)                                                                                          |       | 8,502            |       | 8,770 |   |
| Total current assets                                                                                                                         |       | 49,275           |       | 58,297 |   |
| Property and equipment, net                                                                                                                  |       | 150,784          |       | 123,404 |   |
| Deferred income taxes                                                                                                                        |       | —           |       | 4,375 |   |
| Other assets                                                                                                                                 |       | 7,448            |       | 5,015 |   |
| Goodwill, net (Note 3)                                                                                                                       |       | 2,503            |       | 2,503 |   |
| Deferred financing costs, net (Note 9)                                                                                                       |       | 6,457            |       | 6,961 |   |
| Total assets                                                                                                                                 |       | $                | 216,467    |   | $ | 200,555 |   |
|                                                                                                                                         |       |             |       |   |   |
| **Liabilities and Stockholders’ Deficit**                                                                                               |       |             |       |   |   |
| Current liabilities:                                                                                                                         |       |             |       |   |   |
| Accounts payable                                                                                                                             |       | $                | 1,279      |   | $ | 1,087 |   |
| Accrued expenses (Note 7)                                                                                                                    |       | 6,955            |       | 5,393 |   |
| Deferred revenue                                                                                                                             |       | 34,217           |       | 28,749 |   |
| Current installments of long-term debt                                                                                                       |       | 113              |       | 123 |   |
| Current installments of capital lease  obligations                                                                                           |       | 739              |       | 1,252 |   |
| Due to affiliated entities                                                                                                                   |       | —           |       | 787 |   |
| Total current liabilities                                                                                                                    |       | 43,303           |       | 37,391 |   |
| Deferred revenue                                                                                                                             |       | 619              |       | 495 |   |
| Long-term debt, excluding current  installments (Note 9)                                                                                     |       | 161,184          |       | 161,501 |   |
| Capital lease obligations, net of current  installments (Note 8)                                                                             |       | 913              |       | 1,123 |   |
| Deferred rent (Note 16)                                                                                                                      |       | 32,667           |       | 25,795 |   |
| Common stock put warrants (Note 10)                                                                                                          |       | 13,179           |       | 9,654 |   |
| Due to founding stockholders (Note 4)                                                                                                        |       | 3,497            |       | 2,936 |   |
| Deferred income taxes                                                                                                                        |       | 1,569            |       | — |   |
| Total long term liabilities                                                                                                                  |       | 213,628          |       | 201,504 |   |
| Total liabilities                                                                                                                            |       | 256,931          |       | 238,895 |   |
| Commitments and contingencies                                                                                                                |       |             |       |   |   |
| Stockholders’ deficit:                                                                                                                  |       |             |       |   |   |
| Common stock, $0.01 par value. Authorized  20,000,000 shares 9,443,247 shares issued and outstanding as of  December 31, 2004 and 2003. |       | 94               |       | 94 |   |
| Additional paid-in capital                                                                                                                   |       | 82,920           |       | 82,920 |   |
| Accumulated other comprehensive income                                                                                                       |       | —           |       | 14 |   |
| Accumulated deficit                                                                                                                          |       | (123,478         | )          | (121,368 | ) |
| Total stockholders’ deficit                                                                                                             |       | (40,464          | )          | (38,340 | ) |
| Total liabilities and stockholders’ deficit                                                                                             |       | $                | 216,467    |   | $ | 200,555 |   |

 

See accompanying Notes to the ConsolidatedFinancial Statements.

 

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** **

**EQUINOXHOLDINGS, INC.**

**ConsolidatedStatements of Income**

***(in thousands)***

 
| ** **                                                      | ** ** | **For the years ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                      | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                      | ** ** | ** **                           | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| Membership fees                                                 |       | $                                    | 95,567     |   | $ | 76,242 |   | $ | 62,220 |   |
| Personal training                                               |       | 30,851                               |       | 25,000 |   | 17,709 |   |
| Other revenue                                                   |       | 17,754                               |       | 14,266 |   | 13,455 |   |
| Total revenue                                                   |       | 144,172                              |       | 115,508 |   | 93,384 |   |
| Expenses:                                                       |       |                                 |       |   |   |   |   |
| Compensation and related                                        |       | 58,451                               |       | 48,251 |   | 37,537 |   |
| Rent and occupancy                                              |       | 17,034                               |       | 13,534 |   | 10,043 |   |
| General and administrative                                      |       | 35,656                               |       | 24,240 |   | 17,988 |   |
| Related-party management fees                                   |       | 817                                  |       | 1,007 |   | 1,164 |   |
| Stock compensation                                              |       | —                               |       | 35 |   | 313 |   |
| Depreciation and amortization                                   |       | 12,935                               |       | 10,361 |   | 7,159 |   |
| Total operating expenses                                        |       | 124,893                              |       | 97,428 |   | 74,204 |   |
| Income from operations                                          |       | 19,279                               |       | 18,080 |   | 19,180 |   |
| Other income (expense):                                         |       |                                 |       |   |   |   |   |
| Interest expense                                                |       | (16,622                              | )          | (33,791 | ) | (12,747 | ) |
| Interest income                                                 |       | 402                                  |       | 132 |   | 8 |   |
| Other income (expense)                                          |       | (3,401                               | )          | 900 |   | (2,869 | ) |
| Total other expense                                             |       | (19,621                              | )          | (32,759 | ) | (15,608 | ) |
| Income (loss) before (provision for) benefit  from income taxes |       | (342                                 | )          | (14,679 | ) | 3,572 |   |
| (Provision for) benefit from income taxes                       |       | (1,768                               | )          | 6,740 |   | (3,063 | ) |
| Net income (loss)                                               |       | $                                    | (2,110     | ) | $ | (7,939 | ) | $ | 509 |   |

 

See accompanying Notes to the ConsolidatedFinancial Statements.

 

44

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**Consolidated Statements of Changes in Stockholders’Deficit and Comprehensive Income (Loss)**

**Years ended December 31, 2004, 2003 (Restated),and 2002 (Restated)**

***(in thousands)***

 
| ** **                                                  | ** ** | **Preferred  shares** | ** ** | **Preferred  stock** | ** ** | **Common  shares** | ** ** | **Common  stock** | ** ** | **Additional  paid-in  capital** | ** ** | **Accumulated  other  comprehensive  income** | ** ** | **Accumulated  Deficit** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|--------------------|------------|-------------------|------------|----------------------------------|------------|-----------------------------------------------|------------|--------------------------|------------|-----------|------------|
| Balance, December 31, 2001 (as reported)                    |       | 109                   |       | $                    | 1,095      |               | 8,605      |              | $          | 86                               |       | $                                             | 72,530     |                     | $          | 35        |       | $ | (108,065 | ) | $ | (34,319 | ) |
| Adjustments                                                 |       | —                |       | —               |       | —             |       | —            |       | —                           |       |                                          |       | (1,275                   | )          | (1,275    | )          |
| Balance, December 31, 2001 (restated)                       |       | 109                   |       | $                    | 1,095      |               | 8,605      |              | $          | 86                               |       | $                                             | 72,530     |                     | $          | 35        |       | $ | (109,340 | ) | $ | (35,594 | ) |
| Net income (restated)                                       |       | —                |       | —               |       | —             |       | —            |       | —                           |       | —                                        |       | 509                      |       | 509       |       |
| Unrealized loss on available for sale  securities           |       | —                |       | —               |       | —             |       | —            |       | —                           |       | (34                                           | )          | —                   |       | (34       | )          |
| Comprehensive income (restated)                             |       | —                |       | —               |       | —             |       | —            |       | —                           |       | —                                        |       | —                   |       | 475       |       |
| Options granted                                             |       | —                |       | —               |       | —             |       | —            |       | 313                              |       | —                                        |       | —                   |       | 313       |       |
| Accrued dividends on preferred stock                        |       | 11                    |       | 114                  |       | —             |       | —            |       | —                           |       | —                                        |       | (114                     | )          | —    |       |
| Payment of escrowed restricted cash to  former shareholders |       | —                |       | —               |       | —             |       | —            |       | —                           |       | —                                        |       | (4,364                   | )          | (4,364    | )          |
| Balance, December 31, 2002 (restated)                       |       | 120                   |       | $                    | 1,209      |               | 8,605      |              | $          | 86                               |       | $                                             | 72,843     |                     | $          | 1         |       | $ | (113,309 | ) | $ | (39,170 | ) |
| Net loss (restated)                                         |       | —                |       | —               |       | —             |       | —            |       | —                           |       | —                                        |       | (7,939                   | )          | (7,939    | )          |
| Unrealized gain on available for sale  securities           |       | —                |       | —               |       | —             |       | —            |       | —                           |       | 13                                            |       | —                   |       | 13        |       |
| Comprehensive loss (restated)                               |       | —                |       |                 |       |               |       |              |       |                             |       |                                          |       |                     |       | (7,926    | )          |
| Issuance of common stock to investors for  cash             |       | —                |       | —               |       | 833                |       | 8                 |       | 9,992                            |       | —                                        |       | —                   |       | 10,000    |       |
| Options exercised                                           |       | —                |       | —               |       | 5                  |       | —            |       | 50                               |       | —                                        |       | —                   |       | 50        |       |
| Options granted                                             |       | —                |       | —               |       | —             |       | —            |       | 35                               |       | —                                        |       | —                   |       | 35        |       |
| Payment of preferred capital to former  shareholders        |       | (120                  | )          | (1,329               | )          | —             |       | —            |       | —                           |       | —                                        |       | —                   |       | (1,329    | )          |
| Accrued dividends on preferred stock                        |       | —                |       | 120                  |       | —             |       | —            |       | —                           |       | —                                        |       | (120                     | )          | —    |       |
| Balance, December 31, 2003 (restated)                       |       | —                |       | $                    | —     |               | 9,443      |              | $          | 94                               |       | $                                             | 82,920     |                     | $          | 14        |       | $ | (121,368 | ) | $ | (38,340 | ) |
| Net loss                                                    |       | —                |       | —               |       | —             |       | —            |       | —                           |       | —                                        |       | (2,110                   | )     | (2,110    | )          |
| Unrealized gain on available for sale  securities           |       | —                |       | —               |       | —             |       | —            |       | —                           |       | (14                                           | )          | —                   |       | (14       | )          |
| Comprehensive loss                                          |       |                  |       |                 |       |               |       |              |       |                             |       |                                          |       |                     |       | (2,124    | )          |
| Balance, December 31, 2004                                  |       | —                |       | $                    | —     |               | 9,443      |              | $          | 94                               |       | $                                             | 82,920     |                     | $          | —    |       | $ | (123,478 | ) | $ | (40,464 | ) |

 

See accompanying Notes to the Consolidated FinancialStatements.

 

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**EQUINOX HOLDINGS, INC.**

 

**Consolidated Statements of Cash Flows**

 

***(in thousands)***

 
| ** **                                                                          | ** ** | **For the Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                          | ** ** | **2004**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                          | ** ** | ** **                          | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| Cash flows  from operating activities:                                              | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                                                   |       | $                                   | (2,110     | ) | $ | (7,939 | ) | $ | 509 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:  |       |                                |       |   |   |   |   |
| Depreciation and amortization                                                       |       | 12,935                              |       | 10,361 |   | 7,159 |   |
| Allowance for doubtful accounts, net of  write-offs                                 |       | (52                                 | )          | 23 |   | 11 |   |
| Interest expense                                                                    |       | 1,346                               |       | 15,353 |   | 2,693 |   |
| Changes in fair market value of common  stock put warrants                          |       | 3,526                               |       | (888 | ) | 2,849 |   |
| Write-off other receivables                                                         |       | —                              |       | — |   | 169 |   |
| Stock compensation expense                                                          |       | —                              |       | 35 |   | 313 |   |
| Accretive interest expense related to  payable to founding stockholders             |       | 562                                 |       | 3,723 |   | 677 |   |
| Deferred rent                                                                       |       | 3,948                               |       | 7,925 |   | 2,586 |   |
| Deferred income taxes                                                               |       | 373                                 |       | (6,740 | ) | 1,338 |   |
| Changes in operating assets and  liabilities:                                       |       |                                |       |   |   |   |   |
| Accounts receivable – members                                                  |       | (386                                | )          | (59 | ) | 237 |   |
| Due (to) from affiliated entities, net                                              |       | (1,296                              | )          | 787 |   | 176 |   |
| Prepaid expenses and other current assets                                           |       | 268                                 |       | (2,373 | ) | (3,024 | ) |
| Other assets                                                                        |       | 168                                 |       | 259 |   | (585 | ) |
| Accounts payable                                                                    |       | 192                                 |       | 160 |   | (527 | ) |
| Accrued expenses                                                                    |       | 1,562                               |       | (666 | ) | 759 |   |
| Deferred revenue                                                                    |       | 5,591                               |       | 5,863 |   | 3,987 |   |
| Net cash provided by operating activities                                           |       | 26,627                              |       | 25,824 |   | 19,327 |   |
| Cash flows from investing activities:                                               |       |                                |       |   |   |   |   |
| Redemption (purchase) of marketable  securities                                     |       | 56                                  |       | — |   | — |   |
| Purchases of property and equipment                                                 |       | (36,785                             | )          | (32,845 | ) | (23,064 | ) |
| Net cash used in investing activities                                               |       | (36,729                             | )          | (32,845 | ) | (23,064 | ) |
| Cash flows from financing activities:                                               |       |                                |       |   |   |   |   |
| Payment to repurchase and retire preferred  shares pursuant to the recapitalization |       | —                              |       | (1,328 | ) | — |   |
| Proceeds from long-term debt                                                        |       | 205                                 |       | 185,000 |   | — |   |
| Payment of deferred financing costs                                                 |       | (856                                | )          | (9,421 | ) | — |   |
| Proceeds from issuance of common stock to  existing shareholders for cash           |       | —                              |       | 10,051 |   | — |   |
| Distributions to founding shareholder group                                         |       | —                              |       | (5,000 | ) | — |   |
| (Increase) decrease in restricted cash                                              |       | (2,618                              | )          | (3,717 | ) | 4,424 |   |
| Payment of restricted cash to founding  shareholder group                           |       | —                              |       | — |   | (4,364 | ) |
| Repayment of note payable                                                           |       | (520                                | )          | (125,898 | ) | (7,053 | ) |
| Repayment of capital lease obligations                                              |       | (1,312                              | )          | (1,627 | ) | (1,541 | ) |
| Proceeds from notes payable                                                         |       | —                              |       | 425 |   | 10,800 |   |
| Net cash (used) provided by financing  activities                                   |       | (5,101                              | )          | 48,485 |   | 2,266 |   |
| Net (decrease) increase in cash and cash  equivalents                               |       | (15,203                             | )          | 41,464 |   | (1,471 | ) |
| Cash at beginning of year                                                           |       | 42,709                              |       | 1,245 |   | 2,716 |   |
| Cash at end of year                                                                 |       | $                                   | 27,506     |   | $ | 42,709 |   | $ | 1,245 |   |
|                                                                                |       |                                |       |   |   |   |   |   |   |   |
| Supplemental disclosures of cash flow  information:                                 |       |                                |       |   |   |   |   |
| Cash paid for:                                                                      |       |                                |       |   |   |   |   |
| Interest                                                                            |       | $                                   | 14,806     |   | $ | 17,748 |   | $ | 9,956 |   |
| Income taxes                                                                        |       | $                                   | 53         |   | $ | 1,293 |   | $ | 1,718 |   |
| Supplemental disclosure of non-cash  investing and financing activities:            |       |                                |       |   |   |   |   |
| Capital lease obligations entered into for  fitness equipment                       |       | $                                   | 570        |   | $ | 917 |   | $ | 869 |   |
| Deferred rent capitalized during build-out                                          |       | $                                   | 2,924      |   | $ | 2,282 |   | $ | 1,610 |   |

 

See accompanying Notes to the Consolidated FinancialStatements.

 

46

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**EQUINOX HOLDINGS, INC.**

 

**Notes to Consolidated Financial Statements**

 

**(1) Description, Organization and Development of Business**

 

***Description of Business***

 

EquinoxHoldings, Inc. (the Company) is engaged in the operation of full servicefitness clubs under the trade name “Equinox Fitness Club” in New York,California, Illinois and Connecticut.

 

***Organization and Development of Business***

 

TheCompany was formed on January 1, 1999 and consolidates the followingwholly owned subsidiaries: Equinox 76th Street, Inc.;Broadway Equinox, Inc.; Equinox 92nd Street, Inc.;Equinox 85th Street, Inc.; Equinox 63rd Street, Inc.;Equinox White Plains Road, Inc.; Equinox 54th Street, Inc.;Equinox 50th Street, Inc.; Equinox 43rd Street, Inc.;Equinox 44th Street, Inc.; Equinox Wall Street, Inc.;Energy Wear, Inc.; Equinox Greenwich Avenue, Inc.; Equinox FitnessPasadena, Inc.; Equinox Darien, Inc.; Equinox LincolnPark, Inc.; Equinox Tribeca, Inc.; Equinox ColumbusCircle, Inc.; Equinox West Hollywood, Inc.; EquinoxWoodbury, Inc.; Equinox Gold Coast, Inc.; Equinox TribecaOffice, Inc.; Equinox Highland Park, Inc.; Equinox Great Neck, Inc.;Equinox Westwood, Inc.; Equinox Palos Verdes, Inc.; Equinox San Mateo, Inc.;Equinox Newport Beach, Inc.; Equinox South Beach, Inc.; Equinox WellnessCenter; Westchester Health and Fitness, Inc.; Equinox ManagementCompany, Inc.; and The Equinox Group, Inc.

 

During2002, the Company opened fitness clubs in Darien, Connecticut and Lincoln Parkin Chicago, Illinois. Additionally, the Company formed the following companiesfor which related fitness clubs (and corporate office in the case of EquinoxTribeca Office, Inc.) remained unopened as of December 31, 2002:Equinox West Hollywood, Inc.; Equinox Woodbury, Inc.; Equinox GoldCoast, Inc.; Equinox Tribeca Office, Inc.; and Equinox HighlandPark, Inc.

 

During2003, the Company opened fitness clubs in Tribeca (New York City), Woodbury,New York, West Hollywood, California, North Michigan in Chicago, Illinois andthe corporate offices located adjacent to the Tribeca fitness club. The Companyalso formed the following companies for which related fitness clubs remainedunopened as of December 31, 2003: Equinox Roslyn, Inc., Equinox PineStreet, Inc., Equinox Fitness Santa Monica, Inc., and Equinox Mamaroneck, Inc.

 

During2004, the Company opened fitness clubs in Columbus Circle (New York City), HighlandPark, Chicago, Roslyn, New York, and San Francisco and Santa Monica,California.

 

**(2) Restatement of Previously Issued Financial Statements**

 

**(a)** On February 7, 2005, the Office of the ChiefAccountant of the Securities and Exchange Commission (“SEC”) issued a letter tothe American Institute of Certified Public Accountants expressing its viewsregarding certain operating lease-related accounting issues and theirapplication under accounting principles generally accepted in the United Statesof America (“GAAP”). In light of this letter, the Company’s managementinitiated a review of its lease accounting and determined that its then-currentmethod of accounting for leasehold improvements funded by landlord incentives 

 

47

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orallowances under operating leases (construction allowances) was not inaccordance with GAAP. As a result, the Company restated its consolidatedfinancial statements for the fiscal years ended December 31, 2003, 2002, 2001and 2000, including the interim periods for 2003 and 2004.

 

TheCompany had historically accounted for construction allowances as reductions tothe related leasehold improvement asset on the consolidated balance sheets andpresented construction allowances received as a reduction in capitalexpenditures in investing activities on the consolidated statements of cashflows. Management determined that the Company had not complied with FinancialAccounting Standards Board (“FASB”) Technical Bulletin No. 88-1, “IssuesRelating to Accounting for Leases,” which requires these allowances to bereclassified to a deferred rent liability on the consolidated balance sheetsand allowances received as a component of operating activities on theconsolidated statements of cash flows. As a result, Management determined thatthe Company had a material weakness in its internal controls over financialreporting at December 31, 2004.  Additionally,this adjustment resulted in a reclassification of the deferred rentamortization from “Depreciation and amortization” to “Rent and occupancy” onthe consolidated statements of income.

 

 The correction of this accounting errorrequired the Company to reclassify additional “Deferred rent” and adjust “Propertyand equipment, net” on the consolidated balance sheets for the years endedDecember 31, 2003 and 2002. These adjustments resulted in an equal increase in “Propertyand Equipment, net” and “Deferred Rent” of $5,843,133 and $1,674,695,respectively.

 

Theseadjustments resulted in increases to “Purchases of property andequipment” and “Deferred rent” on the consolidated statements of cash flows of$5,843,133 and $1,674,695 for the years ended December 31, 2003 and 2002,respectively.

 

Additionally,these adjustments resulted in the reclassification of the deferred rentamortization from “Depreciation and amortization” to “Rent and occupancy” costson the consolidated statements of income. Depreciation expense was increased for previously amortized constructionallowances and “Rent and occupancy” expense was decreased by $439,706 and$176,155, for the years ended December 31, 2003 and 2002, respectively.

 

**(b)**The Company also reviewed its policy withregard to estimating the useful lives of its fixed assets and discovered thatcertain capitalized assets were incorrectly being assigned longer thanappropriate lives. As a result, certain assets’ useful lives were decreasedaccordingly. This adjustment resulted in an increase to “Depreciation andamortization” and a decrease to “Property and equipment, net” of $172,028 and$133,094, for the years ended December 31, 2003 and 2002, respectively.

 

**(c)** The Company had previously not recordedprior state and local sales tax obligations related to certain servicesprovided, maintenance supplies purchased and capital expenditures. The Companyhad received advice from outside counsel indicating that certain sales taxmatters did not exist related to spa services that were being provided. Thisguidance was ultimately determined to be incorrect. This resulted in anincrease to “Accrued expenses,” “General and administrative,” “Interestexpense,” and “Property and equipment, net.” For the years ended December 31,2003 and 2002, these adjustments resulted in; (i) an increase to “Accruedexpense” of $398,574 and $413,198; (ii) an increase to “General andadministrative” of $286,787 and $361,961; (iii) an increase to “Interestexpense” of $98,610 and $38,964 and; (iv) an increase to “Property andequipment, net” of $13,177 and $12,273, respectively.

 

**(d)**The Company reviewed its policies andprocedures with regard to commission expense and determined that commissionexpense was not previously recognized properly. As a result the Company changedits policy to recognize actual commission expense over the associated period.This correction resulted in an increase/(decrease) to “Prepaid and othercurrent assets” and a corresponding increase/(decrease) to “Compensation andrelated” expense of $49,192 and ($34,974), for the years ended December 31,2003 and 2002, respectively.

 

48

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**(e)** The Company reviewed its revenue recognitionpolicies and procedures with regard to its ancillary services and determinedthat certain ancillary services revenue was prematurely recognized, whenbilled. As a result of this finding, the Company determined that it isappropriate to recognize revenue for services in the period the services areprovided as per Staff Accounting Bulletin No. 104, “*RevenueRecognition, corrected copy*.” Toward this end, the Company identified the following revenuerecognition errors as they relate to membership fees and corrected them asfollows:

 

TheCompany reviewed its revenue recognition policies and procedures with regard toits locker rental, childcare, spa and Pilates services and determined that suchrevenues were prematurely recognized when billed. As a result of this finding,the Company determined that it is appropriate to recognize revenue for these servicesin the period which the services are provided. This correction resulted in adecrease to “Other revenue” and a corresponding increase to “Deferred Revenue”of $181,205 and $159,645, for the years ended December 31, 2003 and 2002,respectively.

 

TheCompany reviewed its revenue recognition policies and procedures with regard tomembers’ contract freezes and the related contract extension, and determinedthat the members’ contract period was not being extended for the months thatwere frozen. As a result of this finding, the Company determined that it isappropriate to recognize the monthly membership revenue for the extendedcontract in the periods that facility access is provided. This correctionresulted in a decrease to “Membership fees” and a corresponding increase to “DeferredRevenue” of $19,851 and $98,981, for the years ended December 31, 2003 and2002, respectively.

 

TheCompany reviewed its revenue recognition policies and procedures with regard tomembership cancellations (e.g., members may cancel contracts for medicalconditions and certain other reasons) and short-term dues and determined that suchfees recorded as contra revenue were incorrectly recognized over a period of 12months. As a result of this finding, the Company analyzed historicalcancellations and short-term dues and determined that it is more accurate tooffset the contract revenue over the average life of the remaining contractwhich was determined to be five months. This correction resulted in a decreaseto “Membership fees” and a corresponding increase to “Deferred Revenue” of$66,557 and $521,699, for the years ended December 31, 2003 and 2002,respectively.

 

TheCompany reviewed its revenue recognition policies and procedures with regard torenewals of annual membership contracts and determined that in certain casesthe contract date used for revenue recognition purposes was not consistent withthe date facility access was first provided to the member. As a result of thisfinding, the Company analyzed member contracts for facility access start datesand corrected revenue recognition to coincide with facility access. Inaddition, in certain cases, the Company offered an additional month offacilities access as an incentive to a member to renew his or her contract.Historically, the Company only recognized the contract value over the life ofthe contract period, excluding the additional incentive month. As a result ofthis finding, the Company added the incentive month to the contract period and recognizedthe revenue accordingly. This correction resulted in a decrease to “Membershipfees” and a corresponding increase to “Deferred Revenue” of $112,504 and$397,581, for the years ended December 31, 2003 and 2002, respectively.

 

TheCompany reviewed its revenue recognition policies and procedures with regard tomembers who transfer to/from residential and corporate membership types, anddetermined that revenue for the related transfer membership was improperlyrecognized when billed. As a result of this finding, the Company has correctedthis revenue recognition process and recognized revenue over the periods thatfacilities access is provided. This correction resulted in anincrease/(decrease) to “Membership 

 

49

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fees”and a corresponding increase/(decrease) to “Deferred Revenue” of $59,281 and($681,188) for the years ended December 31, 2003 and 2002, respectively.

 

TheCompany reviewed its revenue recognition policies and procedures with regard togift cards, and determined that complementary gift cards were not recognized asa liability at the time of issuance. As a result of this finding, the Companycalculated the liability for such cards and adjusted the liability accordingly.This correction resulted in a decrease to “Membership fees” and a correspondingincrease to “Deferred Revenue” of $298,345 and $31,758 for the years endedDecember 31, 2003 and 2002, respectively.

 

Thecorrections to our revenue recognition policies and procedures resulted in a decreasein “Membership fees” of $437,976 and $1,731,207 for the years ended December31, 2003 and 2002, respectively, and a corresponding increase to “Deferredrevenue” in each of the respective periods. The resulting adjustment to “Otherrevenue” was a decrease of $181,205, and $159,645 for the years ended December31, 2003 and 2002, respectively, and a corresponding increase to “Deferredrevenue”.

 

**(f)**The aggregate tax benefit of the aboveadjustments was $551,274 and $1,075,368 for the years ended December 31, 2003and 2002, respectively.

 

Thetotal net effect of all restatement adjustments was an increase of $3,265,476and $2,590,000 to the Company’s accumulated deficit as of December 31,2003  and December 31, 2002,respectively.

 

50

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***The impact of therestatements to the Company’s Consolidated Statements of Income for the yearended December 31, 2003 is as follows************(amounts in 000’s):***

 
| ** **                                               | ** ** | **As  previously   reported** | ** ** | **Adjustments** |   | **Ref.** | ** ** | **Restated** |       |
|----------------------------------------------------------|------------|-------------------------------|------------|-----------------|--------|----------|------------|--------------|------------|
| Membership fees                                          |       | $                             | 75,677     |            | $      | (438     | )          | **(e)**      | ** ** | $ | 76,242 |   |
|                                                     | ** ** |                          | ** ** | 1,003           |   | **(r)**  | ** ** |         |       |
| Personal training                                        |       | 25,000                        |       | —          |   |     | ** ** | 25,000       |       |
| Other revenue                                            |       | 15,450                        |       | (181            | )      | **(e)**  | ** ** | 14,266       |       |
|                                                     | ** ** |                          | ** ** | (1,003          | )      | **(r)**  | ** ** |         |       |
| Total revenue                                            |       | 116,127                       |       | (619            | )      |     | ** ** | 115,508      |       |
| Expenses:                                                |       |                          |       |            |   |     | ** ** |         |       |
| Compensation and related                                 |       | 48,202                        |       | 49              |   | **(d)**  | ** ** | 48,251       |       |
| Rent and occupancy                                       |       | 16,646                        |       | (440            | )      | **(a)**  | ** ** | 13,534       |       |
|                                                     | ** ** |                          | ** ** | (2,672          | )      | **(r)**  | ** ** |         |       |
| General and administrative                               |       | 21,280                        |       | 288             |   | **(c)**  | ** ** | 24,240       |       |
|                                                     | ** ** |                          | ** ** | 2,672           |   | **(r)**  | ** ** |         |       |
| Related-party management fees                            |       | 1,007                         |       | —          |   |     | ** ** | 1,007        |       |
| Stock compensation                                       |       | 35                            |       | —          |   |     | ** ** | 35           |       |
| Depreciation and amortization                            |       | 9,750                         |       | 440             |   | **(a)**  | ** ** | 10,361       |       |
|                                                     | ** ** |                          | ** ** | 171             |   | **(b)**  | ** ** |         |       |
| Total operating expenses                                 |       | 96,920                        |       | 508             |   |     | ** ** | 97,428       |       |
| Income from operations                                   |       | 19,207                        |       | (1,127          | )      |     | ** ** | 18,080       |       |
| Other income (expense):                                  |       |                          |       |            |   |     | ** ** |         |       |
| Interest expense                                         |       | (33,693                       | )          | (98             | )      | **(c)**  | ** ** | (33,791      | )          |
| Interest income                                          |       | 132                           |       | —          |   |     | ** ** | 132          |       |
| Other income                                             |       | 900                           |       | —          |   |     | ** ** | 900          |       |
| Total other expense                                      |       | (32,661                       | )          | (98             | )      |     | ** ** | (32,759      | )          |
| Income before benefit from (provision for)  income taxes |       | (13,454                       | )          | (1,225          | )      |     | ** ** | (14,679      | )          |
| Benefit for income taxes                                 |       | 6,189                         |       | 550             |   | **(f)**  | ** ** | 6,739        |       |
| Net loss                                                 |       | $                             | (7,265     | )               | $      | (675     | )          |         | ** ** | $ | (7,940 | ) |

 

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**(r)** Certain reclassifications have been made toprior years to conform to the current year presentation.

 

51

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***The impact of therestatements to the Company’s Consolidated Statements of Income for the yearended December 31, 2002 is as follows************(amounts in 000’s):***

*** ***
| ** **                                                      | ** ** | **As   previously   reported** | ** ** | **Adjustments** |   | **Ref.** | ** ** | **Restated** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------|------------|-----------------|--------|----------|------------|--------------|------------|
| Membership fees                                                 |       | $                              | 63,369     |            | $      | (1,731   | )          | **(e)**      | ** ** | $ | 62,220 |   |
|                                                            | ** ** |                           | ** ** | 582             |   | **(r)**  | ** ** |         |       |
| Personal training                                               |       | 17,709                         |       | —          |   |     | ** ** | 17,709       |       |
| Other revenue                                                   |       | 14,196                         |       | (159            | )      | **(e)**  | ** ** | 13,455       |       |
|                                                            | ** ** |                           | ** ** | (582            | )      | **(r)**  | ** ** |         |       |
| Total revenue                                                   |       | 95,274                         |       | (1,890          | )      |     | ** ** | 93,384       |       |
| Expenses:                                                       |       |                           |       |            |   |     | ** ** |         |       |
| Compensation and related                                        |       | 37,572                         |       | (35             | )      | **(d)**  | ** ** | 37,537       |       |
| Rent and occupancy                                              |       | 11,870                         |       | (176            | )      | **(a)**  | ** ** | 10,043       |       |
|                                                            | ** ** |                           | ** ** | (1,651          | )      | **(r)**  | ** ** |         |       |
| General and administrative                                      |       | 15,976                         |       | 361             |   | **(c)**  | ** ** | 17,988       |       |
|                                                            | ** ** |                           | ** ** | 1,651           |   | **(r)**  | ** ** |         |       |
| Related-party management fees                                   |       | 1,164                          |       | —          |   |     | ** ** | 1,164        |       |
| Stock compensation                                              |       | 313                            |       | —          |   |     | ** ** | 313          |       |
| Depreciation and amortization                                   |       | 6,850                          |       | 176             |   | **(a)**  | ** ** | 7,159        |       |
|                                                            | ** ** |                           | ** ** | 133             |   | **(b)**  | ** ** |         |       |
| Total operating expenses                                        |       | 73,745                         |       | 459             |   |     | ** ** | 74,204       |       |
| Income from operations                                          |       | 21,529                         |       | (2,349          | )      |     | ** ** | 19,180       |       |
| Other income (expense):                                         |       |                           |       |            |   |     | ** ** |         |       |
| Interest expense                                                |       | (12,708                        | )          | (39             | )      | **(c)**  | ** ** | (12,747      | )          |
| Interest income                                                 |       | 8                              |       | —          |   |     | ** ** | 8            |       |
| Other (expense)                                                 |       | (2,869                         | )          | —          |   |     | ** ** | (2,869       | )          |
| Total other expense                                             |       | (15,569                        | )          | (39             | )      |     | ** ** | (15,608      | )          |
| Income (loss) before benefit from  (provision for) income taxes |       | 5,960                          |       | (2,388          | )      |     | ** ** | 3,572        |       |
| Benefit from (provision for) income taxes                       |       | (4,137                         | )          | 1,074           |   | **(f)**  | ** ** | (3,063       | )          |
| Net income (loss)                                               |       | $                              | 1,823      |            | $      | (1,314   | )          |         | ** ** | $ | 509 |   |

 

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**(r)** Certain reclassifications have been made toprior years to conform to the current year presentation.

 

52

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***The impact of the restatements to the Company’s Consolidated Statementsof Changes in Stockholders’ Deficit is as follows************(amounts in 000’s):***

 
| ** **                                  | ** ** | **As previously   reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------|------------|-----------------|------------|
| Accumulated Deficit as of December 31, 2002 |       | $                            | (110,719   | )               | $          | (2,590          | )          | $ | (113,309 | ) |
|                                        |       |                         |       |            |       |            |       |
| Accumulated Deficit as of December 31, 2003 |       | $                            | (118,103   | )               | $          | (3,265          | )          | $ | (121,368 | ) |

 

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***The impact******of the restatements******tothe Company’s Consolidated Balance Sheets as of December 31, 2003 is as follows******(amounts in 000’s):***

** **
| ** **                                                   | ** ** | **As   previously   reported** | ** ** | **Adjustments** | ** ** | **Ref.**    | ** ** | **Restated** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------|------------|-----------------|------------|-------------|------------|--------------|------------|
| **Assets**                                                   | ** ** | ** **                     | ** ** | ** **      | ** ** | ** **  | ** ** | ** **   | ** ** |
| Current assets:                                              |       |                           |       |            |       |        |       |         |       |
| Cash                                                         |       | $                              | 42,709     |            | $          | —      |       |         |       | $ | 42,709 |   |
| Marketable securities                                        |       | 70                             |       | —          |       |        |       | 70           |       |
| Accounts receivable, net of allowance for  doubtful accounts |       | 1,546                          |       | —          |       |        |       | 1,546        |       |
| Deferred income taxes                                        |       | 2,526                          |       | 2,676           |       | (f)         |       | 5,202        |       |
| Prepaid expenses and other current assets                    |       | 8,970                          |       | (200            | )          | (d)         |       | 8,770        |       |
| Total current assets                                         |       | 55,821                         |       | 2,476           |       |        |       | 58,297       |       |
| Property and  equipment, net                                 |       | 114,628                        |       | 8,776           |       | (a),(b),(c) |       | 123,404      |       |
| Deferred  income taxes                                       |       | 4,375                          |       | —          |       |        |       | 4,375        |       |
| Other assets                                                 |       | 5,015                          |       | —          |       |        |       | 5,015        |       |
| Goodwill,  net                                               |       | 2,503                          |       | —          |       |        |       | 2,503        |       |
| Deferred  financing costs, net                               |       | 6,961                          |       | —          |       |        |       | 6,961        |       |
| Total assets                                                 |       | $                              | 189,303    |            | $          | 11,252      |       |         |       | $ | 200,555 |   |
|                                                         |       |                           |       |            |       |        |       |         |       |
| **Liabilities and Stockholders’ Deficit**               |       |                           |       |            |       |        |       |         |       |
| Current liabilities:                                         |       |                           |       |            |       |        |       |         |       |
| Accounts payable                                             |       | $                              | 1,087      |            | $          | —      |       |         |       | $ | 1,087 |   |
| Accrued expenses                                             |       | 4,248                          |       | 1,145           |       | (c)         |       | 5,393        |       |
| Deferred revenue                                             |       | 24,966                         |       | 3,783           |       | (e)         |       | 28,749       |       |
| Current installments of long-term debt                       |       | 123                            |       | —          |       |        |       | 123          |       |
| Current installments of capital lease  obligations           |       | 1,252                          |       | —          |       |        |       | 1,252        |       |
| Due to affiliated entities                                   |       | 787                            |       | —          |       |        |       | 787          |       |
| Total current liabilities                                    |       | 32,463                         |       | 4,928           |       |        |       | 37,391       |       |
| Deferred  revenue                                            |       | 495                            |       | —          |       |        |       | 495          |       |
| Long-term  debt, excluding current installments (Note 9)     |       | 161,501                        |       | —          |       |        |       | 161,501      |       |
| Capital  lease obligations, net of current installments      |       | 1,123                          |       | —          |       |        |       | 1,123        |       |
| Deferred  rent                                               |       | 16,206                         |       | 9,589           |       | (a)         |       | 25,795       |       |
| Common stock  put warrants                                   |       | 9,654                          |       | —          |       |        |       | 9,654        |       |
| Due to  founding stockholders                                |       | 2,936                          |       | —          |       |        |       | 2,936        |       |
| Total long term liabilities                                  |       | 191,915                        |       | 9,589           |       |        |       | 201,504      |       |
| Total liabilities                                            |       | 224,378                        |       | 14,517          |       |        |       | 238,895      |       |
| Commitments and contingencies                                |       |                           |       |            |       |        |       |         |       |
| Stockholders’ deficit:                                  |       |                           |       |            |       |        |       |         |       |
| Common stock                                                 |       | 94                             |       | —          |       |        |       | 94           |       |
| Additional paid-in capital                                   |       | 82,920                         |       | —          |       |        |       | 82,920       |       |
| Accumulated other comprehensive income                       |       | 14                             |       | —          |       |        |       | 14           |       |
| Accumulated deficit                                          |       | (118,103                       | )          | (3,265          | )          | (f)         |       | (121,368     | )          |
| Total stockholders’ deficit                             |       | (35,075                        | )          | (3,265          | )          |        |       | (38,340      | )          |
| Total liabilities and stockholders’ deficit             |       | $                              | 189,303    |            | $          | 11,252      |       |         |       | $ | 200,555 |   |

 

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***The impact******of the restatements******tothe Company’s Consolidated Cash Flows for the fiscal years ended December 31,2003 and 2002 are as follows******(amounts in 000’s):***

 
| ** **                                                        | ** **   | **2003**     | ** **   | **2002** | ** ** |
|-------------------------------------------------------------------|--------------|--------------|--------------|----------|------------|
| *** ***                                                      | *** *** | *** *** | *** *** |
| Net cash provided by operating activities  as previously reported |         | $            | 16,271       |     | $          | 17,641 |   |
| Adjustment:                                                       |         | 5,836        |         | 1,687    |       |
| *Net cash provided by operating activities  as restated*          |         | $            | 22,107       |     | $          | 19,328 |   |
|                                                              |         |         |         |     |       |
| Net cash used in investing activities as  previously reported     |         | $            | (27,009      | )        | $          | (21,377 | ) |
| Adjustment:                                                       |         | (5,836       | )            | (1,687   | )          |
| *Net cash used in investing activities as  restated*              |         | $            | (32,845      | )        | $          | (23,064 | ) |

 

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**(3) Summary of Significant Accounting Policies**

 

***Principles of Consolidation*** - The consolidated financial statementsinclude the accounts of the Company and its subsidiaries, all of which arewholly-owned. All inter-company accounts and transactions have been eliminatedin consolidation.

 

***Cash and Cash Equivalents*** - The Company considers all highly liquidinvestments purchased with original maturities of three months or less to becash equivalents. Cash and cash equivalents include credit cards in transit of$1,114,656 and $1,022,189 as of December 31, 2003 and 2004, respectively.Credit cards in transit represent member billings processed on or before thelast day of the calendar year. Cash from these billings is received subsequentto the end of the period.

 

***Marketable Investment Securities*** - The Company classifies its investments inmarketable investment securities, which include only mutual fund investments,as available-for-sale in accordance with Statement of Financial AccountingStandards (SFAS) No. 115, *Accountingfor Certain Investments in Debt and Equity Securities*. Suchsecurities are reported at fair value, with unrealized gains and lossesincluded in equity. Gains and losses on the disposition of securities arerecognized in earnings using the specific identification method in the periodin which they occur. A decline, which is deemed to be other than temporary, inthe market value of any available-for-sale security below cost results in areduction in the carrying amount to fair value. Such impairment would becharged to earnings and would establish a new cost basis for the security.

 

***Long-Lived Assets*** - In accordance with SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets,*the Company reviews its long-lived assets forimpairment whenever events or changes in circumstances indicate that thecarrying amount of the assets in question may not be recoverable. The Companyreviews its long-lived assets at the individual fitness club level and groupsits long-lived assets according to asset class (for machinery and equipment),and by location (for facilities) for purposes of assessing potentialimpairment. Impairment is measured based upon a comparison of the expectedundiscounted future cash flows for each location to the carrying amount ofasset groupings. There were no impairment charges recorded on long-livedassets.

 

***Goodwill, Net*** - The Company accounts for goodwill underSFAS No. 142, *Goodwill and OtherIntangible Assets*. Under SFAS No. 142, goodwill and intangibleassets with indefinite lives are no longer amortized but are reviewed annually(or more frequently, if impairment indicators arise) for impairment. Separableintangible assets that are not deemed to have indefinite lives are amortizedover their useful lives (but with no maximum life).

 

TheCompany adopted this standard effective January 1, 2002 and, accordingly,those intangible assets that continue to be classified as goodwill are notamortized. The Company assessed its intangible assets to identify goodwillseparately from other identifiable intangibles during 2002. No adjustment wasdeemed necessary. In accordance with SFAS No. 142, intangible assets,including purchased goodwill, are evaluated periodically for impairment. Priorto the adoption of SFAS No. 142, goodwill was being amortized over15 years. Goodwill, net is $2.5 million at December 31, 2004 and2003.

 

TheCompany performed its annual evaluation for impairment under the guidelines ofSFAS 142 as of December 31, 2004. The evaluation utilized an incomevaluation approach and contains reasonable and supportable assumptions andprojections that reflect management’s best estimate of future cash flows. The Company’scapitalization of cash flow valuation used a range of return rates thatrepresented the Company’s cost of capital and included an

 

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evaluation relative to the value of otherrelevant companies within the reporting unit’s industry. The assumptions utilizedby the Company in these evaluations are consistent with those utilized in theCompany’s annual planning process. If the assumptions and estimates underlyingthe goodwill impairment evaluation are not achieved, the amount of theimpairment could be adversely affected. Future impairment tests will beperformed at least annually in conjunction with the Company’s annual budgetingand forecasting process, with any impairment classified as an operatingexpense.

 

***Restricted Cash*** - At December 31, 2003 and 2004, theCompany has $3,717,258 and $6,334,974, respectively in cash collateral recordedin other assets related to continuing letters of credit.

 

***Derivative Instruments*** - The Company accounts for its derivativefinancial instruments under SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*. SFASNo. 133, as amended by SFAS No. 137, **Accounting for Derivative Instruments andHedging Activities—Deferral of the Effective Date of FASB Statement No. 133—anamendment of FASB Statement No. 133,**and SFAS No. 138, **Accounting forCertain Derivative Instruments and Certain Hedging Activities-an amendment ofFASB Statement No. 133,**became effective for the Company as ofJanuary 1, 2001.

 

InMay 2001, the Company entered into an interest rate swap agreement with acounter party relating to the Company’s term loan and revolving loancommitment. The swap agreement converted $15.0 million from floating ratesto a fixed rate of 4.27% per annum. The net payments or receipts from thisinterest rate swap have been recorded as part of interest expense. The Companyrecorded a loss of $148,615 for the mark-to-market adjustment of the derivativeinstrument in the statement of income for 2001. The agreement expired onApril 5, 2002 and the Company recorded a gain of $148,615 for the mark tomarket adjustment in the Statement of Income for 2002. There were no derivativeinstruments in effect as of December 31, 2003 and 2004.

 

***Property and Equipment*** - Property and equipment, net is stated atcost. Depreciation expense is calculated on a straight-line basis over theestimated useful life, or five years, with the exception of leaseholdimprovements. Amortization expenses for leasehold improvements are calculatedon a straight-line basis over the shorter of the estimated useful life or thelease term of the related asset.

 

Leasedequipment meeting certain criteria is capitalized and the present value of therelated lease payments is recorded as a liability. Amortization of capitalizedleased assets is computed on the straight-line method over the term of thelease. Interest costs and rents incurred during the construction period of theCompany’s facilities are capitalized as leasehold improvements.

 

***Accounting for Leases*** - The Company has entered into variousoperating leases for property and equipment. All leases are payable in monthlyinstallments. Rent expense is accounted for on a straight-line basis over theterm of the lease. For construction allowances, the Company records a deferredrent liability in “Deferred rent” on the consolidated balance sheet andamortizes the deferred rent balance over the terms of the leases, as areduction to “Rent and occupancy” expense on the consolidated statements ofincome. The Company capitalizes rent during the build-out phase of itsfacilities.

 

***Comprehensive Income (Loss)*** - The Company complies with the provisionsof SFAS No. 130, *ReportingComprehensive Income*, which requires companies to report all changesin equity during a period, except those resulting from investments by ownersand distributions to owners. Comprehensive income (loss) is the total of netincome and all other non-owner changes in equity (other comprehensive income),such as unrealized gains or losses on securities classified as available-

 

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for-sale. Comprehensive income (loss) wasapproximately $476,000, ($7.9) million and ($2.1) million for the yearsended December 31, 2002, 2003 and 2004, respectively.

 

***Start-Up Costs*** - The Company complies with the provisionsof Statement of Position (SOP) 98-5, *Reportingon the Costs of Start-Up Activities*. SOP 98-5 requires costs ofstart-up activities and organization costs to be expensed as incurred. Pursuantto this standard, the Company has expensed all start-up costs related to newlyformed clubs.

 

***Deferred Financing Costs*** - Deferred financing costs resulting fromthe Company’s procurement of long-term debt pursuant to the Recapitalization,(see note 4) have been amortized as interest expense over the life of thecredit agreement. In December 2003, upon the private offering (seenote 9), the balance of the Company’s deferred financing costs, of$4.6 million, was expensed. In connection with our 2003 private offeringand new senior secured revolving credit facility, approximately$7.9 million in deferred financing costs were capitalized and will beexpensed through December 2009. The 2003 expense related to theamortization of the new deferred financing costs for the new senior notesissued in December 2003 was $51,000. In 2004 the Company expensed $1,358,777 ofdeferred financing costs.

 

***Revenue and Expense Recognition***

 

*Membership fees -*As club memberships are sold, each member ischarged an initiation fee as well as membership dues. The initiation fee is dueup front and amortized over an estimated membership life of 24 months,commencing with the first month of the new member contract period. The initialcontract period is twelve months. Membership dues for members who pay annualdues up-front (both new membership sales and membership renewals) are amortizedover a 12-month period commencing with the first month of the new membercontract or renewal contract, as applicable. Membership dues for members whopay monthly are recognized in the period in which facility access is provided.

 

Salescommissions and other direct expenditures paid with regard to deferredmembership revenue are amortized over the period in which the related revenueis recognized as income. Deferred costs do not exceed related deferred revenuefor the periods presented. Such costs are amortized over the life of theagreement.

 

*Personal training—*Personal training revenues are recognized asservices are performed. Personal training sessions purchased in advanced arerecorded as deferred revenue and recognized as the services are performed***.***

 

*Other revenue—*Other revenue includes revenue from servicesand retail merchandise sales. Other service revenue includes spa and Pilatesservices revenue, which are recognized as services are performed. Spa and Pilatesservices purchased in advance are recorded as deferred revenue and recognizedas the services are performed***.***The Company recognizes revenue from retail merchandiseat point of sale.

 

*Income Taxes -*The Company accounts for income taxes underthe asset and liability method in accordance with SFAS No. 109, *Accounting for Income Taxes*. Under theasset and liability method, deferred income tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement and tax bases of existing assets and liabilities andoperating loss and tax credit carry-forwards. Deferred tax assets andliabilities are measured using the enacted tax rates expected to apply totaxable income in the years in which those temporary differences are expectedto be recovered or settled. The effect on deferred tax assets and liabilitiesof a 

 

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change in tax rates is recognized in incomein the period that includes the enactment date. Differences between assets andliabilities for financial statement and tax return purposes are principallyrelated to deferred revenue and depreciable lives of assets.

 

***Fair Value of Financial Instruments*** - The Company complies with the provisionsof SFAS No. 107, *Disclosures about FairValue of Financial Instruments*. The carrying value of all financialinstruments reflected in the accompanying consolidated balance sheetsapproximated fair value at December 31, 2004 and 2003.

 

***Stock-Based Compensation*** - In December 2002, the FASB issuedSFAS No. 148, *Accounting for Stock-BasedCompensation-Transition and Disclosure* (SFAS No. 148). SFASNo. 148 provides alternative methods of transition for a voluntary changeto the fair value method of accounting for stock-based employee compensation asoriginally provided by SFAS No. 123, *Accountingfor Stock-Based Compensation*. Additionally, SFAS No. 148 amendsthe disclosure requirements of SFAS No. 123 to require prominentdisclosure in both annual and interim financial statements about the method ofaccounting for stock-based compensation and the effect of the method used onreported results. The transitional requirements of SFAS No. 148 areeffective for all financial statements for fiscal years ending afterDecember 12, 2002. The application of the disclosure portion of thisstandard has had no impact on our consolidated financial position or results ofoperations. As permitted under SFAS No 123, the Company applies the intrinsicvalue-based method prescribed by Accounting Principles Board Opinion (APB)No. 25, *Accounting for Stock Issued toEmployees and Related Interpretations*) including FASB InterpretationNo. 44, *Accounting for CertainTransactions Involving Stock Compensation—an interpretation of APB No. 25*,issued in March 2000, in accounting for its stock compensation plans. Under APBNo. 25, the Company generally does not recognize compensation expense uponthe issuance of its stock options because the exercise price equals theestimated fair market value at grant date.

 

***Concentration of Credit Risk*** - The Company’s mix of accounts receivablefrom members is diverse. Approximately 87.7% and 93.0% of the Company’srevenues are derived from operations in the Metropolitan New York area for theyears ended December 31, 2004 and 2003, respectively. Adverse economicconditions or increased competition in those areas, especially in New YorkCity, could have adverse effects on our financial condition and results ofoperations. Moreover, a catastrophic event in any of those areas, such as theattacks of September 11, 2001, could adversely affect our members, damageour clubs and harm our business.

 

***Use of Estimates*** - The preparation of consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make certain estimates and assumptionsrelating to the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates.

 

***Recently Issued Accounting Pronouncements*** - In December 2004, the FASB issuedSFAS No. 123R, *“Shared-Based Payments.”*SFAS No. 123R is a revision of SFAS No. 123, *“Accounting for Stock Based Compensation,”* and supersedesAPB 25. Among other items, SFAS 123R eliminates the use of APB 25 and theintrinsic value method of accounting, and requires companies to recognize thecost of employee services received in exchange for awards of equityinstruments, based on the grant date fair value of those awards, in thefinancial statements. The effective date of SFAS 123R is the first reportingperiod beginning after December 15, 2005, which is first quarter 2006 forcalendar year companies, although early adoption is allowed. SFAS 123R permitscompanies to adopt its 

 

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requirementsusing either a “modified prospective” method, or a “modified retrospective”method. Under the “modified prospective” method, compensation cost isrecognized in the financial statements beginning with the effective date, basedon the requirements of SFAS 123R for all share-based payments granted afterthat date, and based on the requirements of SFAS 123 for all unvested awardsgranted prior to the effective date of SFAS 123R. Under the “modifiedretrospective” method, requirements are the same as under the “modifiedprospective” method, but also permits entities to restate financial statementsof previous periods based on pro forma disclosures made in accordance with SFAS123.

 

SFAS123R also requires that the benefits associated with the tax deduction inexcess of recognized compensation cost be reported as a financing cash flow,rather than as an operating cash flow as required under current literature.This requirement will reduce net operating cash flows and increase netfinancing cash flows in periods after the effective date. These future amountscannot be estimated, because they depend on, among other things, when employeesexercise stock options.

 

Wecurrently utilize a standard option pricing model (i.e., Black-Scholes) tomeasure the fair value of stock options granted to employees. While SFAS 123Rpermits entities to continue to use such a model, the standard also permits theuse of a “lattice” model. We have not yet determined which model we will use tomeasure the fair value of employee stock options upon the adoption of SFAS123R.

 

We will adopt SFAS 123Reffective January 1, 2006; however, we have not yet determined which ofthe aforementioned adoption methods we will use.

 

InJune 2004, the FASB issued EITF Issue No. 02-14, *Whether an Investor Should Apply the Equity Method ofAccounting to Investments Other Than Common Stock*. EITF IssueNo. 02-14 addresses whether the equity method of accounting applies whenan investor does not have an investment in voting common stock of an investeebut exercises significant influences through other means. EITF IssueNo. 02-14 states that an investor should only apply the equity method ofaccounting when it has investments in either common stock or in-substancecommon stock of a corporation, provided that the investor has the ability toexercise significant influences over the operating and financial policies ofthe investee. The adoption of EITF Issue No. 02-14 had no impact on theCompany’s consolidated financial statements.

 

OnJanuary 17, 2003, the FASB issued FASB Interpretation No. 46, *Consolidation of Variable Interest Entities*(“FIN 46”). Such Interpretation addresses the consolidation of variableinterest entities (“VIE’s”), including special purpose entities (“SPE’s”), thatare not controlled through voting interests or in which the equity investors donot bear the residual economic risks and rewards. The provisions of FIN 46were effective immediately for transactions entered into by the Companysubsequent to January 31, 2003 and became effective for all othertransactions as of July 1, 2003. However, in October 2003, the FASBpermitted companies to defer the July 1, 2003 effective date toDecember 31, 2003, in whole or in part. On December 24, 2003, theFASB issued a complete replacement of FIN 46 (“FIN 46R”), whichclarified certain complexities of FIN 46 and generally requires adoptionno later than December 31, 2003 for entities that were considered SPE’sunder previous guidance and no later than the beginning of the fiscal yearfollowing December 15, 2004 for all other entities.

 

Managementbelieves that upon adoption of FIN 46 in 2005, the Company wouldconsolidate Eclipse Development Inc. (“Eclipse”). Eclipse, wholly owned byMr. Paul Boardman, provides an exclusive service to the Company for thesite selection, acquisition, design, construction and 

 

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maintenance services of its clubs. A masterservice agreement prohibits Eclipse and Mr. Boardman from performingservices for anyone that competes with the Company’s facilities. Eclipse isthinly capitalized and is highly dependent upon the business provided by theCompany. Management believes that the impact on the consolidated balance sheetfor 2005 will not be material as a result of this change in accountingprinciple since the historical payments made to Eclipse have been principallyfor capital expenditures. We expect an impact to operations due to certainoverhead costs which won’t be capitalizable.

 

***Reclassifications*** - Certain reclassifications have been madeto the 2002 and 2003 consolidated financial statements to conform to the 2004presentation. The Company reclassified certain revenues from “Other revenue” to“Membership fees”. In addition utilities related to fitness clubs werereclassified from “Rent and occupancy” to “General and administrative” expense.

 

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**(4) Recapitalization**

 

***Deferred Payment***

 

Inaccordance with the Company’s recapitalization agreement that was completed onDecember 15, 2000, a cash payment of $5.0 million was paid in 2003 to theFounding Stockholders as additional consideration for the repurchase of theirshares.

 

***Exit Payment***

 

Uponthe earlier of a qualified public offering, a change of control, orDecember 15, 2010, the Company will pay $10.0 million as additionalconsideration to the Founding Stockholders provided that the Company hassatisfied its obligations under the Debt Financing (defined as the term loanand revolving loan commitment (see note 9) and the Senior SubordinatedNotes. The Company must pay an additional $5.0 million at the same time ifthe internal rate of return of our equity sponsors exceeds a specified amount.In connection with the 2000 Recapitalization, the Company has recorded thepresent value of its obligation to the Founding Shareholders as a long-termliability as it concluded that the satisfaction of its obligations under theDebt Financing represented a *de facto*subordination and that the obligation to the Founding Stockholders wouldultimately be paid. As such, the Company has recorded the present value of the$10.0 million obligation on the accompanying balance sheets and the accretionin value as non-cash interest expense of $561,749, $471,509, and $395,767 in2004, 2003 and 2002, respectively.  Noobligation was recorded related to the additional $5.0 million payment becausemanagement considers the possibility that the Company may become liable forsuch payment to be remote.  The Companyused a discount rate of 17% to determine the present value of the liability, asthat rate represented the Company’s weighted average cost of capital at thattime.

 

**(5) Prepaid Expenses and Other Current Assets**

 

Prepaidexpenses and other current assets consist of the following at December 31, 2004and 2003, respectively: 

 
| ** **   | ** ** | **December 31,** | ** ** |
|--------------|------------|------------------|------------|
| ** **   | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Commissions  |       | $                | 1,499,827  |   | $ | 1,352,777 |   |
| Insurance    |       | 1,449,980        |       | 1,007,095 |   |
| Inventory    |       | 1,465,807        |       | 695,135 |   |
| Income taxes |       | 3,580,543        |       | 5,008,620 |   |
| Other        |       | 505,783          |       | 706,702 |   |
|         |       | $                | 8,501,940  |   | $ | 8,770,329 |   |

 

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**(6) Property and Equipment, Net**

 

Propertyand equipment, net, consists of the following at December 31, 2004 and 2003,respectively:

 
| ** **                                        | ** ** | **December 31,** | ** **  |
|---------------------------------------------------|------------|------------------|-------------|
| ** **                                        | ** ** | **2004**         | ** **  | **2003** | ** ** |
| ** **                                        | ** ** | ** **       | ** **  | **(Restated)** | ** ** |
| Construction in progress                          |       | $                | 2,658,628   |   | $ | 2,626,907 |   |
| Leasehold Improvements                            |       | 166,848,232      |        | 132,069,315 |   |
| Fitness Equipment                                 |       | 9,585,287        |        | 8,106,446 |   |
| Furniture & Fixtures                          |       | 1,075,577        |        | 2,822,165 |   |
| Computer Equipment                                |       | 6,284,717        |        | 4,758,678 |   |
| Other Equipment                                   |       | 3,490,950        |        | 3,188,007 |   |
| Office Equipment                                  |       | 1,096,996        |        | 988,822 |   |
|                                              |       | 191,040,387      |        | 154,560,340 |   |
| Less accumulated depreciation &  amortization |       | (40,256,192      | )           | (31,156,173 | ) |
|                                              |       | $                | 150,784,195 |   | $ | 123,404,167 |   |

 

Propertyand equipment, net includes amounts acquired under capital leases of $2,091,455and $2,705,844, net of accumulated depreciation of $5,723,103 and $4,594,602 atDecember 31, 2004,and 2003, respectively. Depreciation expense was$12.9 million, $10.4 million and $7.2 million in 2004, 2003 and2002, respectively. Interest costs incurred in the construction of facilitiestotaling $502,735, $561,067, and $314,896 for the years ended December 31,2004, 2003 and 2002, respectively, have been capitalized. Rent incurred duringthe construction period of a facility is capitalized as a leaseholdimprovement.

 

**(7) Accrued Expenses**

 

Accruedexpenses consist of the following at December 31, 2004 and 2003, respectively:

 
| ** **                             | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|------------------|------------|
| ** **                             | ** ** | **2004**         | ** ** | **2003** | ** ** |
| ** **                             | ** ** | ** **       | ** ** | **(Restated)** | ** ** |
| Interest Expense                       |       | $                | 909,646    |   | $ | 719,387 |   |
| Payroll and related benefits and taxes |       | 1,742,638        |       | 924,336 |   |
| Sales tax obligations                  |       | 1,306,848        |       | 1,187,979 |   |
| Other                                  |       | 2,996,345        |       | 2,561,443 |   |
|                                   |       | $                | 6,955,477  |   | $ | 5,393,145 |   |

 

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**(8)Capital Lease Obligations**

 

TheCompany leases fitness equipment under capital leases that expire at variousdates through 2008. The leases require monthly payments of principal andinterest imputed at interest rates ranging from approximately 5% to 9.5% perannum.

 

Futureminimum lease payments under capital leases as of December 31, 2004, areas follows:

 
| Year Ending December 31                               |   |      |    |
|-------------------------------------------------------|--------|-----------|---------|
| 2005                                                  |   | $         | 810,061 |   |
| 2006                                                  |   | 410,284   |    |
| 2007                                                  |   | 353,044   |    |
| 2008                                                  |   | 167,838   |    |
| 2009                                                  |   | 45,410    |    |
| Thereafter                                            |   | —    |    |
| Total                                                 |   | 1,786,637 |    |
| Less amount representing interest                     |   | (134,002  | )       |
|                                                  |   | 1,652,635 |    |
| Less current installments                             |   | (739,154  | )       |
| Capital lease obligations, less current  installments |   | $         | 913,481 |   |

 

**(9) Long-Term Debt**

 

***Senior Subordinated Note and WarrantPurchase Agreement***

 

Pursuantto the 2000 recapitalization, the Company entered into a Senior SubordinatedNote and Warrant Purchase Agreement (the Subordinated Note Agreement) withseveral financial institutions under which borrowings are collateralized bycertain tangible and intangible assets of the Company and are guaranteed byeach wholly owned subsidiary of the Company. The Subordinated Note Agreement ((iii) below)allowed for maximum borrowings of $50,000,000 (plus additional principalaccrued as described in (c) below) and called for maintenance of certaincovenants. The Senior Subordinated Note and Warrant Purchase Agreement wererepaid pursuant to the 2003 $160.0 million debt offering.

 

Inaddition, $5,268,473 of direct costs related to these agreements wascapitalized as deferred financing costs and have been amortized over theremaining terms of the respective agreements. Amortization charged as non-cashinterest expense was approximately $875,000 in 2001 and 2002, respectively, andthe balance was expensed during 2003 upon repayment.

 

Furthermore,the Company is obligated to make cash payments of $10.0 million to $15.0million to the Founding Stockholders as additional consideration, for therepurchase of their shares. As described in Note 4, $5.0 million waspaid in 2003.

 

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InJanuary 2003, a new lender purchased $25.0 million of Senior Notes,which were to mature in December 2007. The Senior Notes were senior to theSenior Subordinated Notes and subordinated to the Company’s other creditfacility. Interest on the Senior Notes was payable quarterly in cash at a rateof the greater of prime rate or 10% per annum. In addition, the Senior Notesaccrued pay-in-kind interest quarterly at a rate of 3.25% per annum. Inaddition to amendment fees paid at closing to existing lenders, the Companyagreed to increase the interest rate payable under the Credit agreement and toincrease the pay-in-kind interest for the Senior Subordinated Notes. Thelenders under the Credit Agreement also agreed to modify the repayment termsfor the Term Loan, reducing the amount due in 2003 from $9.0 million to$3.25 million and the amount due in 2004 from $10.0 million to$7.0 million, with the remaining principal outstanding due in 2005. TheJanuary 2003 Senior Notes were repaid pursuant to the December 2003private offering (see note 9).

 

***9% Senior Notes***

 

InDecember 2003 the Company completed a private offering of $160.0 millionprincipal amount of 9% Senior Notes due 2009. The net proceeds from the SeniorNotes totaled approximately $152.0 million. The transaction fees ofapproximately $7.0 million were accounted for as deferred financing costs.Interest is payable semi-annually in June and December at the annual rate of 9%and the notes mature on December 15, 2009. Prior to December 15,2006, we may redeem up to 35% of the aggregate principal amount of the notes,with the net proceeds of one or more public equity offerings at 109%, so longas at least 65% of the aggregate principal amount of the notes issued remainsoutstanding. Upon a change of control, holders may require us to repurchase allor a portion of their notes at 101% of the principal amount plus accruedinterest.

 

Beginningin December 2006, the notes are redeemable in whole or in part at theoption of the Company, at 104.5% in 2006 with annual reductions to 102.25% in2007 and 100% in 2008 and thereafter, plus accrued and unpaid interest, subjectto certain conditions.

 

TheCompany has consummated the offer to exchange the 9% Senior Notes forregistered notes with substantially identical terms to those notes, except thatthe registered exchange notes are generally freely transferable in certaincircumstances, and to file and cause to become effective a shelf registrationstatement with respect to the resale of the registered exchange notes.

 

TheSenior Notes and the bank credit facility are unsecured and rank equally withour existing and future subordinated obligations and senior in right of paymentto all subordinated obligations.

 

Theproceeds of the private offering were used to:

 

•                  repay the entire principal amount ofapproximately $27.6 million under the prior credit agreement andterminated all related commitments;

 

•                  repay the entire outstanding principal amountof $25.3 million under the existing senior notes due 2007, plus accruedand unpaid interest;

 

•                  repay the entire principal amount of$52.5 million under the existing senior subordinated notes due 2008, plusaccrued and unpaid interest;

 

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•                  redeem approximately $1.3 million of ourpreferred stock and;

 

•                  pay a contractually required amount of$5.0 million to our founding stockholders.

 

Long-termdebt consists of the following outstanding amounts at December 31, 2004 and2003, respectively:

 
| ** **                    | ** ** | **December 31,** | ** **  |
|-------------------------------|------------|------------------|-------------|
| ** **                    | ** ** | **2004**         | ** **  | **2003** | ** ** |
| Notes Payable (i)             |       | $                | 1,296,486   |   | $ | 1,624,022 |   |
| 9% Senior Notes due 2009 (ii) |       | 160,000,000      |        | 160,000,000 |   |
|                          |       | $                | 161,296,486 |   | $ | 161,624,022 |   |

 

(i)    Notespayable consist of two notes payable to unrelated parties. They bear interestat imputed rates ranging from 8.5% to 10% per annum and are payable in monthlyinstallments through 2018.

 

(ii)   The 9% Senior Notes due 2009 and any unpaidaccrued interest thereon mature on December 15, 2009, and, accordingly,have been classified as long-term in the accompanying consolidated balancesheets.

 

Aggregatematurities of long-term debt as of December 31, 2004, are as follows:

 
| Year Ending December, 31:                   |   |        |        |
|---------------------------------------------|--------|-------------|-------------|
|                                        |   |        |        |
| 2005                                        |   | $           | 112,701     |   |
| 2006                                        |   | 123,685     |        |
| 2007                                        |   | 122,474     |        |
| 2008                                        |   | 64,558      |        |
| 2009                                        |   | 160,070,264 |        |
| Thereafter                                  |   | 802,804     |        |
| Total                                       |   | 161,296,486 |        |
| Current installments                        |   | (112,701    | )           |
|                                        |   |        |        |
| Long term debt, net of current installments |   | $           | 161,183,785 |   |

 

The aggregate fair value of the Company’sdebt portfolio at December 31, 2004 was approximately $171,771,000.

 

***Letters of Credit***

 

In December 2004, the Company issued a $1.5million irrevocable standby letter of credit to a landlord in connection with anew fitness club due to open in late 2004. This letter of credit was cancelledin May 2004. During 2004, an additional $4.3 million of standby letters ofcredit were issued to various landlords in 

 

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connection with new fitness clubs.

 

The note indenture under which the SeniorNotes were issued contains certain covenants that, among other things, limitthe Company’s ability to incur additional indebtedness, issue or sell preferredstock, make certain other restricted payments, make investments, engage intransactions with affiliates, incur liens, engage in asset sales and certaindividend payments. Under the indenture for our Senior Notes Due 2009, we arerequired to deliver annual and quarterly financial information in the timeperiods prescribed by the rules of the SEC. As of April 15, 2005, the extendeddeadline for the filing of our Form 10-K, we have been in default under thoseinformation delivery obligations. Under our credit agreement, we are requiredto deliver financial information within 90 days after the end of such fiscalyear, quarterly information within 45 days after the end of such quarter andmonthly information within 30 days of each month. Presently, there are nooutstanding borrowings under the Credit Agreement. The filing of this Form 10-Kwill cure the violation under both the indenture and the Credit Agreement withrespect to these information delivery obligations for the annual information.We are also in violation under both our indenture and credit agreement in theprovision of financial information for the first and second quarters of 2005,which we expect to cure with the filing of those quarterly statements.

 

**(10) Common Stock Put Warrants**

 

Pursuantto the Subordinated Note Agreement, the Company issued, to holders of itssenior subordinated notes, warrants to purchase 879,214 shares of its commonstock at an exercise price of $0.01 per share. The warrants are, under certainconditions, redeemable in cash at the option of the holder or by surrender ofthe Company’s senior subordinated notes due December 15, 2008 (the “SeniorSubordinated Notes”). If the Company does not complete a qualified initialpublic offering of common stock, as defined, by December 2006, then atsuch time or any time thereafter, the warrant holders may put 100% of theirwarrants to the Company, which would have 60 days to redeem the warrantsat fair market value. In the event that the Company does not redeem the warrantwithin 60 days, all of the rights represented by the warrant shall convertautomatically into an unsecured junior subordinated obligation. This obligationwould be payable at the earlier of (i) the maturity of the SeniorSubordinated Notes or (ii) refinancing of senior debt, with interestaccruing quarterly at 14% per annum, increasing by one percent up to 16% foreach quarter that the obligation is not repaid. If the Company does notcomplete a qualified public offering by December 2007, the Company maycall the warrants and repurchase all, but not less than all, of the warrant atfair market value.

 

Thefair value of these warrants at the date of issuance was $9,029,528, whichreduced long-term debt in the accompanying consolidated balance sheet. Thisamount was being accreted as additional interest expense using the effectiveinterest rate over the term of the Senior Subordinated Notes, which mature onDecember 15, 2008. Accretion charged as non-cash interest wasapproximately $1.0 million in fiscal 2001 and 2002 and 2003, and wasexpensed in connection with the repayment of the Senior Subordinated Notes.

 

Basedon the net-cash settlement requirement, the Company has recorded the warrantsas a liability. The fair market value of these warrants is shown as a long-termliability in the accompanying consolidated balance sheets. Changes in the fairmarket value of the warrant are marked to market with the adjustment shown asother income (expense) in the consolidated statement of income as 

 

67

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follows: $(3,525,649), $888,007, and($2,848,652) for the years ended December 31, 2004 and 2003 and 2002,respectively.

 

**(11) Preferred Stock**

 

During2001, the Company sold 100,000 shares of preferred stock to investors for cashof $1.0 million. The preferred stock is cumulative with dividends payable inkind at a rate of 2.5% per quarter, which accordingly have been recognizedperiodically and added to preferred stock in the accompanying financialstatements. The preferred stock has no conversion features and allows for anoptional redemption at face value by the Company at any time. The preferredstock must be redeemed at face value upon an exit event (as defined in therecapitalization agreement), provided that all payments to the foundingstockholders have been satisfied and that such redemption is permitted byappropriate debt agreements. The outstanding preferred stock was redeemed bythe Company in December 2003 for approximately $1.3 million.

 

**(12) Common Stock**

 

InJanuary 2003, the Company completed a financing transaction in which theexisting shareholders purchased 833,334 shares of common stock for$10.0 million.  In addition optionsto purchase 5,000 shares of common stock were exercised during 2003.

 

**(13) Income Taxes**

 

Theprovision for (benefit from) income taxes is comprised of the following:

 
| ** **      | ** ** | **Year Ended December 31,** | ** ** |
|-----------------|------------|-----------------------------|------------|
| ** **      | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **      | ** ** | ** **                  | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
| Current:        |       |                        |       |   |   |   |   |
| Federal         |       | $                           | —     |   | $ | — |   | $ | 1,297,632 |   |
| State and local |       | 1,395,480                   |       | — |   | 426,640 |   |
|            |       | 1,395,480                   |       | — |   | 1,724,272 |   |
|            |       |                        |       |   |   |   |   |
| Deferred:       |       |                        |       |   |   |   |   |
| Federal         |       | 1,335,973                   |       | (5,092,356 | ) | 1,010,645 |   |
| State and Local |       | (963,253                    | )          | (1,647,527 | ) | 326,973 |   |
|            |       |                        |       |   |   |   |   |
|            |       | 372,720                     |       | (6,739,883 | ) | 1,337,618 |   |
| Total           |       | $                           | 1,768,200  |   | $ | (6,739,883 | ) | $ | 3,061,890 |   |

 

68

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Thetax effects of temporary differences that give rise to significant portions ofdeferred tax assets and deferred tax liabilities are as follows:

 
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|------------------|------------|
| ** **                     | ** ** | **2004**         | ** ** | **2003** | ** ** |
| ** **                     | ** ** | ** **       | ** ** | **(Restated)** | ** ** |
| Deferred tax assets:           |       |             |       |   |   |
| Deferred revenue               |       | $                | 808,366    |   | $ | 3,038,656 |   |
| Accrued compensation           |       | 360,941          |       | 142,092 |   |
| Allowance for bad debts        |       | 505,118          |       | 980,585 |   |
| Deferred rent                  |       | 1,409,679        |       | 641,719 |   |
| Net operating loss-Federal     |       | 6,383,027        |       | 6,012,139 |   |
| Net operating loss-States      |       | 480,000          |       | 1,945,104 |   |
| Inventory reserve              |       | 45,000           |       | — |   |
| Use tax and interest reserve   |       | 565,848          |       | 499,424 |   |
| Commission liability           |       | 117,810          |       | 91,669 |   |
| Other                          |       | 98,064           |       | 63,370 |   |
| Total deferred tax assets      |       | 10,773,853       |       | 13,414,758 |   |
|                           |       |             |       |   |   |
| Deferred tax liabilities:      |       |             |       |   |   |
| Depreciation                   |       | 1,569,918        |       | 3,797,366 |   |
| Others                         |       | —           |       | 40,736 |   |
| Total deferred tax liabilities |       | 1,569,918        |       | 3,838,102 |   |
| Net deferred tax assets        |       | $                | 9,203,935  |   | $ | 9,576,656 |   |

 

TheCompany believes that it is more likely than not that the deferred tax assetsgenerated through December 31, 2004 will be realized. The company has losscarry forwards totaling $17.7 million and $8.0 million that will offset pastand future federal and state taxable income respectively.  The carry-forward will begin to expire in2023.

 

Reconciliationof the statutory Federal income tax rate to the Company’s effective tax rate isas follows:

 
| ** **                                                       | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                       | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                       | ** ** | ** **                   | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** |
|                                                             |       |                         |       |   |   |   |   |
| US Federal Statutory rate                                        |       | (34.0                        | )%         | (34.0 | )% | 34.0 | % |
|                                                             |       |                         |       |   |   |   |   |
| Increase(decrease) in taxes resulting from:                      |       |                         |       |   |   |   |   |
| State and local income taxes, net of  federal income tax benefit |       | 127.5                        |       | (11.5 | ) | 10.3 |   |
|                                                             |       |                         |       |   |   |   |   |
| Permanent differences:                                           |       |                         |       |   |   |   |   |
| Changes in fair market value of common  stock put warrants       |       | 349.4                        |       | (2.2 | ) | 27.1 |   |
| Interest expense related to amount due to  founding stockholders |       | 55.7                         |       | 1.7 |   | 6.4 |   |
| Others, net                                                      |       | 18.3                         |       | — |   | 7.9 |   |
|                                                             |       |                         |       |   |   |   |   |
| Effective income tax rate                                        |       | 516.9                        | %          | (46.0 | )% | 85.8 | % |

 

69

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**(14) Related Party Transactions**

 

TheCompany entered into a consulting agreement with certain of its Investors.Under the terms of the consulting agreement, the Company is obligated to pay,in semi-annual installments, an annual fee of $800,000 for consulting servicesrendered (as defined) and to reimburse certain out-of-pocket expenses incurredby the Incoming Investors. This $800,000 annual fee was paid in 2002, 2003 and2004. The Company was further obligated to pay a fee of $200,000 when escrowedshares were distributed in 2001 (see note 3). In addition, the Companypaid approximately $207,000 and $16,579 in 2003 and 2004, respectively, forother related party fees. The consulting agreement expires on the tenth anniversaryof the Closing Date or at the direction of the board of directors. The costs ofthis consulting agreement are included within related party management fees andexpenses in the accompanying consolidated financial statements.

 

Amember of the Board of Directors is a partner in partnerships that lease spaceto the Company at two locations. For the fiscal years ended December 31,2002, 2003 and 2004, the partnerships received approximately $1.0 millionper annum for each location pursuant to their leases.

 

**(15) Stock Option Plans**

 

TheCompany currently maintains two stock option plans: i) the EquinoxHoldings Inc. 1998 Stock Option Plan (the 1998 Plan) and ii) theEquinox Holdings, Inc. 2000 Stock Incentive Plan (the 2000 Plan).

 

***1998 Plan***

 

Underthe terms of the 1998 Plan, options to purchase 1,000,000 shares of authorized,but not issued common stock may be granted. Options may be granted to keyemployees, directors, and consultants who provide services to the Company.Requirements for vesting are set forth by the board of directors when the awardis granted. As part of the Company’s 2000 Recapitalization, all optionsoutstanding under this plan, with exercise prices ranging from $0.01 to $0.90per share, were either exercised, vested in full or cancelled, and any deferredcompensation at the date of the Recapitalization was recognized. There were noadditional grants under this plan subsequent to the Recapitalization. The 1998Plan is closed and there are no further options available for grant. No pro formadisclosures have been provided due to the compensatory nature of the optionsgranted. At December 31, 2003 and 2002, 142,614 of the outstanding optionshad an exercise price of $0.90 per share. As of December 31, 2004, thereare 284,919 outstanding options at a weighted average exercise price of $0.46.No options have been granted, exercised or forfeited since December 31,2000. The 1998 plan terminates on the first to occur of (i) the 10thanniversary of board adoption; (ii) the 10th anniversary of stockholderapproval, and (iii) the date the board terminates the plan. Anyoutstanding options on the termination date will remain outstanding until theyhave been exercised, terminated or expire by their terms.

 

***2000 Plan***

 

Underthe terms of the 2000 Plan, only nonqualified stock options may be granted.Furthermore, the number of options available for grant may not exceed 10% ofthe fully diluted shares of common stock outstanding as of the Closing Dateincluding any outstanding warrants of the Company issued to the holders of thesubordinated notes (see Note 9). Under the provisions of the Plan, optionsto purchase 1,085,450 shares of authorized, but not issued common stock may begranted to key employees, directors, and consultants who provide services tothe Company. Stock options can be

 

70

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granted with an exercise priceless than, equal to or greater than the fair market value of the common stockon the date of the grant. Requirements for vesting are set forth by the boardof directors when the award is granted. All options granted under the 2000 Planhave a term of ten years.

 

As of December 31, 2004, 2003 and 2002, there were, 961,104,961,104 and 975,537 and stock options outstanding under the 2000 Plan,respectively. As of December 31, 2004, the number of shares available tobe granted was 124,346. All of these options were granted at an exercise priceequivalent to fair market value of the underlying common stock and are held bysenior management and outside consultants. All of these outstanding optionsvest only upon the occurrence of certain events, as defined in the 2000 Plan,including a qualified initial public offering or a change of control.Accordingly, no compensation expense has been recorded for options granted toemployees, and no pro forma disclosures have been provided due to thecontingent nature of the vesting of these options.

 

*During the years ended December 31,2004, 2003 and 2002, the Company has granted approximately 0, 5,000, and 55,707stock options, respectively to certain consultants. No pro-forma disclosureshave been provided due to the compensatory nature of the options granted,pursuant to which charges representing the fair value of those options at thetime of issuance of $0, $35,000, and $312,516 were recorded as ofDecember 31, 2004, 2003 and 2002, respectively. The following weightedaverage assumptions were used in the calculation in 2003: stock volatility of42% (representing the average volatility of comparable publicly tradedcompanies), risk free interest rate of 3.5% and no dividends during the expectedterm of 10 years. The Company used the Black-Scholes option-pricing modelto estimate the grant date fair value of its option grants to the outsideconsultants. The following weighted average assumptions were used in thecalculation in 2002: stock volatility of 37% (representing the averagevolatility of comparable publicly traded companies), risk-free interest rate of4% and no dividends during the expected term of 10 years.*

 

Stock option activity under the 2000 Plan during the periods indicatedis as follows:

 
| ** **                            | ** ** | **Number of shares** | ** ** | **Weighted  average  exercise  price** | ** ** |
|---------------------------------------|------------|----------------------|------------|----------------------------------------|------------|
| Balance at December 31, 2001          |       | 812,000              |       | $                                      | 10.28      |   |
| Granted                               |       | 243,537              |       | 10.96                                  |       |
| Forfeited                             |       | (80,000              | )          | 10.28                                  |       |
| Balance at December 31, 2002          |       | 975,537              |       | 10.45                                  |       |
| Granted                               |       | 183,567              |       | 12.00                                  |       |
| Exercised                             |       | (5,000               | )          | 10.28                                  |       |
| Forfeited                             |       | (193,000             | )          | 10.28                                  |       |
| Balance at December 31, 2003 and 2004 |       | 961,104              |       | $                                      | 10.78      |   |
|                                       |            |                      |            |                                        |            |  |  |

 

**(16) Commitments and Contingencies**

 

***Leases***

 

The Company leases space under non-cancelable operating leases, whichexpire at various dates through 2023. The leases contain provisions forscheduled rent increases and in some cases, contain provisions for contingentrentals based on a percentage of sales in excess of a stipulated amount. Theaccompanying consolidated balance sheet at December 31, 2004 includesdeferred rent obligations of $32,667,078, representing accumulated rent expensecharged to operations from the inception of 

 

71

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certain leases in excess of the required lease payments, throughDecember 31, 2004. Minimum future rental obligations under thesenon-cancelable operating leases at December 31, 2004, are as follows:

 
| 2005       |   | $           | 19,865,479  |   |
|------------|--------|-------------|-------------|--------|
| 2006       |   | 19,596,968  |        |
| 2007       |   | 19,923,441  |        |
| 2008       |   | 20,135,590  |        |
| 2009       |   | 20,651,853  |        |
| Thereafter |   | 203,744,570 |        |
|       |   | $           | 303,917,901 |   |

 

Rent expense charged to operations amounted to $17,033,941, $13,534,017and $10,043,396 for the years ended December 31, 2004, 2003, and 2002,respectively. Included in these amounts are $2,082,416, $2,496,492, and$1,087,871, respectively of rent expense in excess of required lease paymentsin those periods.

 

 

***Employment Agreement***

 

The Company has employment agreements with three of its executiveofficers for terms of up to three years. The employment agreements call for abase salary and certain bonus arrangements.

 

***Letters of Credit***

 

As of December 31, 2002, the Company had $2.0 million instandby letters of credit which were released during 2003. The Company has$3.5 million in continuing letters of credit issued during 2003, in connectionwith the new $25.0 million letter of credit as described in Note 9which was released during 2004. At December 31, 2004 the Company has a total ofapproximately $5.8 million in letters of credit issued.

 

***Litigation***

 

In the normal course of business, the Company is a party to variousclaims and/or litigation. Management believes that, based on the advice oflegal counsel, the settlement of all such claims and/or litigation, consideredin the aggregate, will not have a material adverse effect on the Company’sfinancial statements.

 

***Benefit Plans***

 

The Company maintains a defined contribution 401(k) benefit plan foreligible employees. The Company’s discretionary matching contributions to thisplan were $144,446, $121,626, and $110,002 for the years endedDecember 31, 2004, 2003, and 2002, respectively.

 

72

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**(17) Financial Information for Guarantors ofthe Company’s Debt**

 

The Company and all of its domestic subsidiaries have unconditionallyguaranteed the $160.0 million of 9% Senior Notes (See Note 9). Theparent Company has no independent assets or operations, the guarantees are fulland unconditional and joint and several, there are no subsidiaries of theparent other than subsidiary guarantors.

 

**(18)Quarterly Financial Data (Unaudited)**

** **
| ** **                                                      | ** ** | **Quarter Ended**   | ** ** |
|-----------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                      | ** ** | **March 31,  2004** | ** ** | **June 30,  2004** | ** ** | **September 30,  2004** | ** ** | **December 31,  2004** | ** ** |
| ** **                                                      | ** ** | **(Restated)**      | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                       |       |                |       |   |   |   |   |   |   |
| Membership revenue                                              |       | $                   | 22,101     |   | $ | 23,561 |   | $ | 24,653 |   | $ | 25,252 |   |
| Personal training revenue                                       |       | 7,273               |       | 8,088 |   | 7,288 |   | 8,202 |   |
| Other revenue                                                   |       | 4,213               |       | 4,590 |   | 4,231 |   | 4,720 |   |
|                                                            |       |                |       |   |   |   |   |   |   |
| Total revenue                                                   |       | 33,587              |       | 36,239 |   | 36,172 |   | 38,174 |   |
|                                                            |       |                |       |   |   |   |   |   |   |
| Expenses:                                                       |       |                |       |   |   |   |   |   |   |
| Compensation and related                                        |       | 14,477              |       | 14,637 |   | 14,121 |   | 15,216 |   |
| Rent and occupancy                                              |       | 4,058               |       | 4,250 |   | 4,197 |   | 4,529 |   |
| General and administrative                                      |       | 9,535               |       | 8,828 |   | 8,316 |   | 8,977 |   |
| Related-party management fees                                   |       | 402                 |       | 2 |   | 210 |   | 203 |   |
| Depreciation and amortization                                   |       | 3,135               |       | 3,319 |   | 3,277 |   | 3,204 |   |
|                                                            |       |                |       |   |   |   |   |   |   |
| Total operating expenses                                        |       | 31,607              |       | 31,036 |   | 30,121 |   | 32,129 |   |
|                                                            |       |                |       |   |   |   |   |   |   |
| Income from operations                                          |       | 1,980               |       | 5,203 |   | 6,051 |   | 6,045 |   |
|                                                            |       |                |       |   |   |   |   |   |   |
| Other income (expense):                                         |       |                |       |   |   |   |   |   |   |
| Interest expense                                                |       | (3,823              | )          | (4,427 | ) | (4,156 | ) | (4,216 | ) |
| Interest income                                                 |       | 51                  |       | 109 |   | 104 |   | 138 |   |
| Other income (expense)                                          |       | 714                 |       | 853 |   | (231 | ) | (4,737 | ) |
|                                                            |       |                |       |   |   |   |   |   |   |
| Total other expense                                             |       | (3,058              | )          | (3,465 | ) | (4,283 | ) | (8,815 | ) |
| Income (loss) before (provision for)  benefit from income taxes |       | (1,078              | )          | 1,738 |   | 1,768 |   | (2,770 | ) |
|                                                            |       |                |       |   |   |   |   |   |   |
| (Provision for) benefit from income taxes                       |       | 485                 |       | (782 | ) | (796 | ) | (675 | ) |
|                                                            |       |                |       |   |   |   |   |   |   |
| Net income (loss)                                               |       | $                   | (593       | ) | $ | 956 |   | $ | 972 |   | $ | (3,445 | ) |

 

Certain reclassifications have been made to prior periods to conform tothe current period presentation.

 

73

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| ** **                                                      | ** ** | **March 31,  2003** | ** ** | **June 30,  2003** | ** ** | **September 30,  2003** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------------------------------|------------|---------------------|------------|--------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                      | ** ** | **(Restated)**      | ** ** | **(Restated)**     | ** ** | **(Restated)**          | ** ** | **(Restated)**         | ** ** |
| ** **                                                      | ** ** | ** **          | ** ** | ** **         | ** ** | ** **              | ** ** | ** **             | ** ** |
| Revenues:                                                       |       |                |       |               |       |                    |       |                   |       |
| Membership revenue                                              |       | $                   |       | 17,097             |       | $                       | 19,113     |                   | $          | 19,745 |   | $ | 20,287 |   |
| Personal training revenue                                       |       | 6,011               |       | 6,539              |       | 5,538                   |       | 6,912                  |       |
| Other revenue                                                   |       | 3,570               |       | 3,834              |       | 3,492                   |       | 3,370                  |       |
|                                                            |       |                |       |               |       |                    |       |                   |       |
| Total revenue                                                   |       | 26,678              |       | 29,486             |       | 28,775                  |       | 30,569                 |       |
|                                                            |       |                |       |               |       |                    |       |                   |       |
| Expenses:                                                       |       |                |       |               |       |                    |       |                   |       |
| Compensation and related                                        |       | 11,442              |       | 12,087             |       | 12,179                  |       | 12,543                 |       |
| Rent and occupancy                                              |       | 3,303               |       | 3,231              |       | 3,011                   |       | 3,989                  |       |
| General and administrative                                      |       | 5,911               |       | 6,282              |       | 4,828                   |       | 7,219                  |       |
| Related-party management fees                                   |       | 433                 |       | 111                |       | 438                     |       | 25                     |       |
| Stock compensation expense                                      |       | —              |       | —             |       | 35                      |       | —                 |       |
| Depreciation and amortization                                   |       | 2,368               |       | 2,471              |       | 2,745                   |       | 2,777                  |       |
|                                                            |       |                |       |               |       |                    |       |                   |       |
| Total operating expenses                                        |       | 23,457              |       | 24,182             |       | 23,236                  |       | 26,553                 |       |
|                                                            |       |                |       |               |       |                    |       |                   |       |
| Income from operations                                          |       | 3,221               |       | 5,304              |       | 5,539                   |       | 4,016                  |       |
|                                                            |       |                |       |               |       |                    |       |                   |       |
| Other income (expense):                                         |       |                |       |               |       |                    |       |                   |       |
| Interest expense                                                |       | (3,962              | )          | (3,834             | )          | (4,002                  | )          | (21,993                | )          |
| Interest income                                                 |       | 35                  |       | 26                 |       | 48                      |       | 23                     |       |
| Other income (expense)                                          |       | —              |       | (392               | )          | 1,681                   |       | (389                   | )          |
|                                                            |       |                |       |               |       |                    |       |                   |       |
| Total other expense                                             |       | (3,927              | )          | (4,200             | )          | (2,273                  | )          | (22,359                | )          |
| Income/(loss) before (provision for)  benefit from income taxes |       | (706                | )          | 1,104              |       | 3,266                   |       | (18,343                | )          |
|                                                            |       |                |       |               |       |                    |       |                   |       |
| (Provision for)/benefit from income taxes                       |       | 318                 |       | (497               | )          | (1,470                  | )          | 8,389                  |       |
|                                                            |       |                |       |               |       |                    |       |                   |       |
| Net income/(loss)                                               |       | $                   | (388       | )                  | $          | 607                     |       | $                      | 1,796      |   | $ | (9,954 | ) |
|                                                                 |            |                     |            |                    |            |                         |            |                        |            |  |  |  |  |  |

 

Certain reclassifications have been made to prior periods to conform tothe current period presentation.

 

**Restatementof Previously Issued Financial Statements**

 

Thefollowing illustrates the Company’s unaudited quarterly financial data asrestated and discussed in Note 2, contained herein.

 

**(a)**On February 7, 2005, the Office of the Chief Accountant of the Securities andExchange Commission (“SEC”) issued a letter to the American Institute ofCertified Public Accountants expressing its views regarding certain operatinglease-related accounting issues and their application 

 

74

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under accounting principlesgenerally accepted in the United States of America (“GAAP”). In light of thisletter, the Company’s management initiated a review of its lease accounting anddetermined that its then-current method of accounting for leaseholdimprovements funded by landlord incentives or allowances under operating leases(construction allowances) was not in accordance with GAAP. As a result, theCompany restated its consolidated financial statements for the fiscal yearsended December 31, 2003, 2002, 2001 and 2000, including the interim periods for2003 and 2004.

 

The Company had historicallyaccounted for construction allowances as reductions to the related leaseholdimprovement asset on the consolidated balance sheets and presented constructionallowances received as a reduction in capital expenditures in investingactivities on the consolidated statements of cash flows. Management determinedthat the Company had not complied with Financial Accounting Standards Board (“FASB”)Technical Bulletin No. 88-1, “Issues Relating to Accounting for Leases,” which requiresthese allowances to be reclassified to a deferred rent liability in theconsolidated balance sheets and allowances received as a component of operatingactivities in the consolidated statements of cash flows. As a result,Management determined that the Company had a material weakness in its internalcontrols over financial reporting at December 31, 2004.  Additionally, this adjustment resultedin a reclassification of the deferred rent amortization from “Depreciation andamortization” to “Rent and occupancy” in the consolidated statements of income.

 

The correction of thisaccounting error required the Company to reclassify additional “Deferred rent”and adjust “Property and equipment, net” in the consolidated balance sheets aswell as increase “Purchases of property and equipment” and “Deferred rent” onthe consolidated statements of cash flows. This correction resulted in an increase/(decrease)to “Property and equipment, net,” “Purchases of property and equipment” and acorresponding change in “Deferred rent” as follows:

 
| ** **                          | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|------------------------|------------|----------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **March 31,**          | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                          | ** ** | **2004**               | ** ** | **2003**               | ** ** | **2004**             | ** ** | **2003**               | ** ** | **2004**              | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Property and  equipment, net        |       | $                      | 925,105    |                   | $          | 1,872,175            |       | $                      | 1,552,582  |                  | $          | 1,315,536 |   | $ | 2,477,687 |   | $ | 3,187,711 |   | $ | 238,253 |   | $ | 2,029,082 |   | $ | 2,715,940 |   | $ | 5,216,793 |   |
| Deferred rent                       |       | 925,105                |       | 1,872,175              |       | 1,552,582            |       | 1,315,536              |       | 2,477,687             |       | 3,187,711 |   | 238,253 |   | 2,029,082 |   | 2,715,940 |   | 5,216,793 |   |
| Purchases of property and equipment |       | 925,105                |       | 1,872,175              |       | 1,552,582            |       | 1,315,536              |       | 2,477,687             |       | 3,187,711 |   | 238,253 |   | 2,029,082 |   | 2,715,940 |   | 5,216,793 |   |
|                                     |            |                        |            |                        |            |                      |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Additionally, these adjustmentsresulted in the reclassification of the deferred rent amortization from “Depreciationand amortization” to “Rent and occupancy” costs in the consolidated statementsof income.  This correction resulted inan increase/(decrease) to “Depreciation and amortization” and a correspondingchange in “Rent and occupancy” expense as follows:

 
| ** **                     | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------|------------|------------------------|------------|------------------------|------------|----------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **March 31,**          | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                     | ** ** | **2004**               | ** ** | **2003**               | ** ** | **2004**             | ** ** | **2003**               | ** ** | **2004**              | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Depreciation and  amortization |       | $                      | 144,866    |                   | $          | 72,215               |       | $                      | 182,070    |                  | $          | 96,888 |   | $ | 326,936 |   | $ | 169,103 |   | $ | 190,966 |   | $ | 129,052 |   | $ | 517,902 |   | $ | 298,155 |   |
| Rent and occupancy             |       | (144,866               | )          | (72,215                | )          | (182,070             | )          | (96,888                | )          | (326,936              | )          | (169,103 | ) | (190,966 | ) | (129,052 | ) | (517,902 | ) | (298,155 | ) |
|                                |            |                        |            |                        |            |                      |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**(b)**TheCompany also reviewed its policy with regard to estimating the useful lives ofits fixed assets and discovered that certain capitalized assets wereincorrectly being assigned longer than appropriate lives.  As a result, those assets’ useful lives weredecreased accordingly. This adjustment resulted in an increase to “Depreciationand amortization” and a corresponding decrease to “Property and equipment, net”as follows:

 
| ** **                     | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------|------------|------------------------|------------|------------------------|------------|----------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **March 31,**          | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                     | ** ** | **2004**               | ** ** | **2003**               | ** ** | **2004**             | ** ** | **2003**               | ** ** | **2004**              | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Depreciation and  amortization |       | $                      | 53,960     |                   | $          | 43,007               |       | $                      | 53,960     |                  | $          | 43,007 |   | $ | 107,920 |   | $ | 86,014 |   | $ | 53,960 |   | $ | 43,007 |   | $ | 161,880 |   | $ | 129,021 |   |
| Property and  equipment, net   |       | (53,960                | )          | (43,007                | )          | (53,960              | )          | (43,007                | )          | (107,920              | )          | (86,014 | ) | (53,960 | ) | (43,007 | ) | (161,880 | ) | (129,021 | ) |
|                                |            |                        |            |                        |            |                      |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

75

----

 

**(c)**The Company had previously not recorded prior state and local sales taxobligations related to certain services provided, maintenance suppliespurchased and capital expenditures. The Company had received advice fromoutside counsel indicating that certain sales tax matters did not exist relatedto spa services that were being provided. This guidance was ultimatelydetermined to be incorrect. This correction resulted in an increase to “Accruedexpenses,” “General and administrative,” “Interest expense,” and “Property andequipment, net” as follows:

  
| ** **                   | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------|------------|------------------------|------------|------------------------|------------|----------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **March 31,**          | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                   | ** ** | **2004**               | ** ** | **2003**               | ** ** | **2004**             | ** ** | **2003**               | ** ** | **2004**              | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest expense             |       | $                      | 32,583     |                   | $          | 23,127               |       | $                      | 22,447     |                  | $          | 22,005 |   | $ | 55,030 |   | $ | 45,132 |   | $ | 25,664 |   | $ | 26,172 |   | $ | 80,694 |   | $ | 71,304 |   |
| General and administrative   |       | 42,551                 |       | 82,754                 |       | —               |       | 75,039                 |       | 42,551                |       | 157,793 |   | — |   | 64,155 |   | 42,551 |   | 221,948 |   |
| Property and  equipment, net |       | 2,190                  |       | 3,294                  |       | —               |       | 3,294                  |       | 2,190                 |       | 6,588 |   | — |   | 3,294 |   | 2,190 |   | 9,882 |   |
| Accrued expenses             |       | 77,324                 |       | 109,175                |       | 22,447               |       | 100,338                |       | 99,771                |       | 209,513 |   | 25,664 |   | 93,621 |   | 125,435 |   | 303,134 |   |
|                              |            |                        |            |                        |            |                      |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**(d)**TheCompany reviewed its policies and procedures with regard to commission expenseand determined that commission expense was not previously recognized properly.As a result the Company changed its policy to recognize actual commissionexpense over the associated period. This correction resulted in anincrease/(decrease) to “Prepaid and other current assets” and a corresponding changein “Compensation and related” expense as follows:

 
| ** **                        | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------|------------|------------------------|------------|------------------------|------------|----------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **March 31,**          | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                        | ** ** | **2004**               | ** ** | **2003**               | ** ** | **2004**             | ** ** | **2003**               | ** ** | **2004**              | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Compensation and  related         |       | $                      | 14,523     |                   | $          | 12,298               |       | $                      | 14,523     |                  | $          | 12,298 |   | $ | 29,046 |   | $ | 24,596 |   | $ | 14,523 |   | $ | 12,298 |   | $ | 43,569 |   | $ | 36,894 |   |
| Prepaid and other  current assets |       | (14,523                | )          | (12,298                | )          | (14,523              | )          | (12,298                | )          | (29,046               | )          | (24,596 | ) | (14,523 | ) | (12,298 | ) | (43,569 | ) | (36,894 | ) |
|                                   |            |                        |            |                        |            |                      |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**(e)**The Company reviewed its revenue recognition policies and procedures withregard to its ancillary services and determined that certain ancillary servicesrevenue was prematurely recognized, when billed. As a result of this finding,the Company determined that it is appropriate to recognize revenue for servicesin the period the services are provided. Toward this end, the Companyidentified the following revenue recognition errors as they relate tomembership fees and other revenue and corrected them as follows:

 

***Other Revenue***

 

The Company reviewed itsrevenue recognition policies and procedures with regard to its locker rental,childcare, spa and Pilates services and determined that such revenues wereprematurely recognized when billed. As a result of this finding, the Companydetermined that it is appropriate to recognize revenue for these services inthe period which the services are provided. This correction resulted in anincrease/(decrease) to “Other revenue” and a corresponding change to “Deferredrevenue” as follows:

 
| ** **       | ** ** | **Three months ended** | ** **    | **Three months ended** | ** ** | **Six months ended** | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------|------------|------------------------|---------------|------------------------|------------|----------------------|------------|------------------------|------------|-----------------------|------------|
| ** **       | ** ** | **March 31,**          | ** **    | **June 30,**           | ** ** | **June 30,**         | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **       | ** ** | **2004**               | ** **    | **2003**               | ** ** | **2004**             | ** ** | **2003**               | ** ** | **2004**              | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Other revenue    |       | $                      |  (33,553 | )                      | $          | 53,220               |       | $                      | 47,004     |                  | $          |  (131,240 | ) | $ | 13,451 |   | $ |  (78,020 | ) | $ |  (31,093 | ) | $ |  (38,112 | ) | $ |  (17,642 | ) | $ |  (116,132 | ) |
| Deferred revenue |       | 33,553                 |          | (53,220                | )          | (47,004              | )          | 131,240                |       | (13,451               | )          | 78,020 |   | 31,093 |   | 38,112 |   | 17,642 |   | 116,132 |   |
|                  |            |                        |               |                        |            |                      |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Membership Fees***

 

The Company reviewed itsrevenue recognition policies and procedures with regard to members’ contractfreezes and the related contract extension, and determined that the members’contract period 

 

76

----

 

was not being extended for themonths that were frozen. As a result of this finding, the Company determinedthat it is appropriate to recognize the monthly membership revenue for theextended contract in the periods that facility access is provided. Thiscorrection resulted in an increase/(decrease) to “Membership fees” and acorresponding change to “Deferred revenue” as follows:

 
| ** **       | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------|------------|------------------------|------------|------------------------|------------|----------------------|------------|------------------------|------------|-----------------------|------------|
| ** **       | ** ** | **March 31,**          | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **       | ** ** | **2004**               | ** ** | **2003**               | ** ** | **2004**             | ** ** | **2003**               | ** ** | **2004**              | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Membership fees  |       | $                      | 41,634     |                   | $          | 14,192               |       | $                      | (50,166    | )                     | $          | (70,034 | ) | $ | (8,532 | ) | $ | (55,842 | ) | $ | 4,215 |   | $ | (1,998 | ) | $ | (4,317 | ) | $ | (57,840 | ) |
| Deferred revenue |       | (41,634                | )          | (14,192                | )          | 50,166               |       | 70,034                 |       | 8,532                 |       | 55,842 |   | (4,215 | ) | 1,998 |   | 4,317 |   | 57,840 |   |
|                  |            |                        |            |                        |            |                      |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company reviewed itsrevenue recognition policies and procedures with regard to membershipcancellations (e.g., members may cancel contracts for medical conditions andcertain other reasons) and short-term dues and determined that such fees recordedas contra revenue were incorrectly recognized over a period of 12 months. As aresult of this finding, the Company analyzed historical cancellations andshort-term dues and determined that it is more accurate to offset the contractrevenue over the average life of the remaining contract which was determined tobe five months. This correction resulted in an increase/(decrease) to “Membershipfees” and a corresponding change to “Deferred revenue” as follows:

 
| ** **       | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** | **Three months ended** | ** **     | **Nine months ended** | ** ** |
|------------------|------------|------------------------|------------|------------------------|------------|----------------------|------------|------------------------|----------------|-----------------------|------------|
| ** **       | ** ** | **March 31,**          | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **September 30,**      | ** **     | **September 30,**     | ** ** |
| ** **       | ** ** | **2004**               | ** ** | **2003**               | ** ** | **2004**             | ** ** | **2003**               | ** **     | **2004**              | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Membership fees  |       | $                      | 11,499     |                   | $          | (39,487              | )          | $                      |  (187,235 | )                     | $          |  (137,003 | ) | $ |  (175,736 | ) | $ |  (176,490 | ) | $ | 88,600 |   | $ | 122,730 |   | $ | (87,136 | ) | $ | (53,760 | ) |
| Deferred revenue |       | (11,499                | )          | 39,487                 |       | 187,235              |       | 137,003                |           | 175,736               |       | 176,490 |   | (88,600 | ) | (122,730 | ) | 87,136 |   | 53,760 |   |
|                  |            |                        |            |                        |            |                      |            |                        |                |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company reviewed itsrevenue recognition policies and procedures with regard to renewals of annualmembership contracts and determined that in certain cases the contract dateused for revenue recognition purposes was not consistent with the date facilityaccess was first provided to the member. As a result of this finding, theCompany analyzed member contracts for facility access start dates and correctedrevenue recognition to coincide with facility access. In addition, in certain cases,the Company offered an additional month of facilities access as an incentive toa member to renew his or her contract. Historically, the Company onlyrecognized the contract value over the life of the contract period, excludingthe additional incentive month. As a result of this finding, the Company addedthe incentive month to the contract period and recognized the revenueaccordingly. This correction resulted in an increase/(decrease) to “Membershipfees” and a corresponding change to “Deferred revenue” as follows:

 
| ** **        | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------|------------|------------------------|------------|------------------------|------------|----------------------|------------|------------------------|------------|-----------------------|------------|
| ** **        | ** ** | **March 31,**          | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **        | ** ** | **2004**               | ** ** | **2003**               | ** ** | **2004**             | ** ** | **2003**               | ** ** | **2004**              | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Membership  fees  |       | $                      | 16,787     |                   | $          | (8,737               | )          | $                      | 5,178      |                  | $          | (76,679 | ) | $ | 11,609 |   | $ | (85,416 | ) | $ | (54,476 | ) | $ | (29,782 | ) | $ | (42,867 | )  | $ | (115,198 | ) |
| Deferred  revenue |       | (16,787                | )          | 8,737                  |       | (5,178               | )          | 76,679                 |       | (11,609               | )          | 85,416 |   | 54,476 |   | 29,782 |   | 42,867 |   | 115,198 |   |
|                   |            |                        |            |                        |            |                      |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company reviewed itsrevenue recognition policies and procedures with regard to members who transferto/from residential and corporate membership types, and determined that revenuefor the related transfer membership was improperly recognized when billed. As aresult of this finding, the Company has corrected this revenue recognitionprocess and recognized revenue over the periods that facilities access isprovided. This correction resulted in an increase/(decrease) to “Membershipfees” and a corresponding change to “Deferred revenue” as follows:

 
| ** **        | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------|------------|------------------------|------------|------------------------|------------|----------------------|------------|------------------------|------------|-----------------------|------------|
| ** **        | ** ** | **March 31,**          | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **        | ** ** | **2004**               | ** ** | **2003**               | ** ** | **2004**             | ** ** | **2003**               | ** ** | **2004**              | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Membership  fees  |       | $                      | (126,298   | )                      | $          | (19,751              | )          | $                      | (69,507    | )                     | $          | (1,871 | ) | $ |  (195,805 | ) | $ | (21,622 | ) | $ | 48,203 |   | $ | 58,832 |   | $ |  (147,602 | ) | $ | 37,210 |   |
| Deferred  revenue |       | 126,298                |       | 19,751                 |       | 69,507               |       | 1,871                  |       | 195,805               |       | 21,622 |   | (48,203 | ) | (58,832 | ) | 147,602 |   | (37,210 | ) |
|                   |            |                        |            |                        |            |                      |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

77

----

 

The Company reviewed itsrevenue recognition policies and procedures with regard to gift cards, anddetermined that complimentary gift cards were not recognized as a liability atthe time of issuance. As a result of this finding, the Company calculated theliability for such cards and adjusted the liability accordingly. Thiscorrection resulted in an increase/(decrease) to “Membership fees” and acorresponding change to “Deferred revenue” as follows:

 
| ** **        | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------|------------|------------------------|------------|------------------------|------------|----------------------|------------|------------------------|------------|-----------------------|------------|
| ** **        | ** ** | **March 31,**          | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **        | ** ** | **2004**               | ** ** | **2003**               | ** ** | **2004**             | ** ** | **2003**               | ** ** | **2004**              | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Membership  fees  |       | $                      | 168,481    |                   | $          | (17,752              | )          | $                      | 23,629     |                  | $          | (49,513 | ) | $ | 192,110 |   | $ | (67,265 | ) | $ | 84,410 |   | $ | (82,529 | ) | $ | 276,520 |   | $ | (149,794 | ) |
| Deferred  revenue |       | (168,481               | )          | 17,752                 |       | (23,629              | )          | 49,513                 |       | (192,110              | )          | 67,265 |   | (84,410 | ) | 82,529 |   | (276,520 | ) | 149,794 |   |
|                   |            |                        |            |                        |            |                      |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The corrections above resultedin a total increase/(decrease) to “Membership fees” and a total correspondingchange to “Deferred revenue” as follows:

 
| ** **        | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------|------------|------------------------|------------|------------------------|------------|----------------------|------------|------------------------|------------|-----------------------|------------|
| ** **        | ** ** | **March 31,**          | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **        | ** ** | **2004**               | ** ** | **2003**               | ** ** | **2004**             | ** ** | **2003**               | ** ** | **2004**              | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Membership  fees  |       | $                      | 112,103    |                   | $          | (71,535              | )          | $                      | (288,457   | )                     | $          | (335,100 | ) | $ | (176,354 | ) | $ | (406,635 | ) | $ | 170,952 |   | $ | 67,253 |   | $ | (5,402 | ) | $ | (339,382 | ) |
| Deferred  revenue |       | (112,103               | )          | 71,535                 |       | 288,457              |       | 335,100                |       | 176,354               |       | 406,635 |   | (170,952 | ) | (67,253 | ) | 5,402 |   | 339,382 |   |
|                   |            |                        |            |                        |            |                      |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**(f)**The corrections above resulted in a total increase/(decrease) to “Provision forincome taxes” and a total corresponding change to “Accrued expenses” asfollows:

 
| ** **                  | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------|------------|------------------------|------------|------------------------|------------|----------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **March 31,**          | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                  | ** ** | **2004**               | ** ** | **2003**               | ** ** | **2004**             | ** ** | **2003**               | ** ** | **2004**              | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Provision for Income  taxes |       | $                      | 29,280     |                   | $          | 80,776               |       | $                      | 148,997    |                  | $          | 278,408 |   | $ | 178,277 |   | $ | 359,184 |   | $ | (215,057 | ) | $ | 52,420 |   | $ | (36,780 | ) | $ | 411,604 |   |
| Accrued  expenses           |       | 29,280                 |       | 80,776                 |       | 148,997              |       | 278,408                |       | 178,277               |       | 359,184 |   | (215,057 | ) | 52,420 |   | (36,780 | ) | 411,604 |   |
|                             |            |                        |            |                        |            |                      |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The total net effect of allrestatement adjustments discussed above was an increase of $3,265,476 and $3,653,994to the Company’s accumulated deficit as of December 31, 2003  and September 30, 2004, respectively.

 

78

----

 

***The impact of the restatements tothe Company’s Unaudited Consolidated Condensed Statements of Income for thenine months ended September 30, 2004 and 2003 is as follows************(amounts in 000’s):***

 
| ** **                                                      | ** ** | **As  previously  reported** |   | **Adjustments** |   | ** ** | ** ** | **Restated** | ** ** | **As  previously  reported** | ** ** | **Adjustments** |   | ** ** | ** ** | **Restated** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------|--------|-----------------|--------|------------|------------|--------------|------------|------------------------------|------------|-----------------|--------|------------|------------|--------------|------------|
| ** **                                                      | ** ** | **2004**                     |   | **2004**        |   | **Ref.**   | ** ** | **2004**     | ** ** | **2003**                     | ** ** | **2003**        |   | **Ref.**   | ** ** | **2003**     | ** ** |
| Revenues:                                                       |       |                         |   |            |   |       | ** ** |         | ** ** |                         |       |            |   |       | ** ** |         |       |
| Membership fees                                                 |       | $                            | 69,278 |            | $      | (5         | )          | **(e)**      | ** ** | $                            | 70,315     | ** **      | $      | 55,486     |       | $            | (339       | ) | **(e)** | ** ** | $ | 55,955 |   |
|                                                            |       |                         |   | 1,042           |   | **(r)**    | ** ** |         | ** ** |                         |       | 808             |   | **(r)**    | ** ** |         |       |
| Personal training                                               |       | 22,649                       |   | —          |   |       | ** ** | 22,649       | ** ** | 18,088                       |       | —          |   |       | ** ** | 18,088       |       |
| Other revenue                                                   |       | 14,093                       |   | (17             | )      | **(e)**    | ** ** | 13,034       | ** ** | 11,821                       |       | (117            | )      | **(e)**    | ** ** | 10,896       |       |
|                                                            |       |                         |   | (1,042          | )      | **(r)**    | ** ** | ** **   |       |                         |       | (808            | )      | **(r)**    | ** ** |         |       |
| Total revenue                                                   |       | 106,020                      |   | (22             | )      |       | ** ** | 105,998      | ** ** | 85,395                       |       | (456            | )      |       | ** ** | 84,939       |       |
| Expenses:                                                       |       |                         |   |            |   |       | ** ** |         | ** ** |                         |       |            |   |       | ** ** |         |       |
| Compensation and related                                        |       | 43,192                       |   | 43              |   | **(d)**    | ** ** | 43,235       | ** ** | 35,672                       |       | 36              |   | **(d)**    | ** ** | 35,708       |       |
| Rent and occupancy                                              |       | 15,564                       |   | (517            | )      | **(a)**    | ** ** | 12,505       | ** ** | 11,984                       |       | (298            | )      | **(a)**    | ** ** | 9,545        |       |
|                                                            |       |                         |   | (2,542          | )      | **(r)**    | ** ** |         | ** ** |                         |       | (2,141          | )      | **(r)**    | ** ** |         |       |
| General and administrative                                      |       | 24,094                       |   | 2,542           |   | **(r)**    | ** ** | 26,679       | ** ** | 14,657                       |       | 223             |   | **(c)**    | ** ** | 17,021       |       |
|                                                            |       |                         |   | 43              |   | **(c)**    | ** ** |         | ** ** |                         |       | 2,141           |   | **(r)**    | ** ** |         |       |
| Related-party management fees                                   |       | 614                          |   | —          |   | ** ** | ** ** | 614          | ** ** | 982                          |       | —          |   | ** ** | ** ** | 982          |       |
| Stock based compensation                                        |       | —                       |   | —          |   | ** ** | ** ** | —       | ** ** | 35                           |       | —          |   | ** ** | ** ** | 35           |       |
| Depreciation and amortization                                   |       | 9,052                        |   | 517             |   | **(a)**    | ** ** | 9,731        |       | 7,157                        |       | 298             |   | **(a)**    | ** ** | 7,584        |       |
|                                                            |       |                         |   | 162             |   | **(b)**    | ** ** | ** **   |       |                         |       | 129             |   | **(b)**    | ** ** |         |       |
| Total operating expenses                                        |       | 92,516                       |   | 248             |   | ** ** | ** ** | 92,764       |       | 70,487                       |       | 388             |   | ** ** | ** ** | 70,875       |       |
| Income from operations                                          |       | 13,504                       |   | (270            | )      | ** ** | ** ** | 13,234       |       | 14,908                       |       | (844            | )      | ** ** | ** ** | 14,064       |       |
| Other income (expense):                                         |       |                         |   |            |   | ** ** | ** ** |         |       |                         |       |            |   | ** ** | ** ** |         |       |
|                                                            |       |                         |   |            |   | ** ** | ** ** |         |       |                         |       |            |   | ** ** | ** ** |         |       |
| Interest expense                                                |       | (12,327                      | )      | (79             | )      | **(c)**    | ** ** | (12,406      | )          | (11,728                      | )          | (70             | )      | **(c)**    | ** ** | (11,798      | )          |
| Interest income                                                 |       | 264                          |   | —          |   |       | ** ** | 264          |       | 109                          |       | —          |   |       | ** ** | 109          |       |
| Change in fair value of warrants                                |       | 1,336                        |   | —          |   |       | ** ** | 1,336        |       | 1,289                        |       | —          |   |       | ** ** | 1,289        |       |
| Total other expense                                             |       | (10,727                      | )      | (79             | )      | ** ** | ** ** | (10,806      | )          | (10,330                      | )          | (70             | )      | ** ** | ** ** | (10,400      | )          |
| Income (loss) before (provision for) benefit  from income taxes |       | 2,777                        |   | (349            | )      | ** ** | ** ** | 2,428        |       | 4,578                        |       | (914            | )      | ** ** | ** ** | 3,664        |       |
| (Provision for) benefit from income taxes                       |       | (1,056                       | )      | (37             | )      | **(f)**    | ** ** | (1,093       | )          | (2,060                       | )          | 411             |   | **(f)**    | ** ** | (1,649       | )          |
|                                                            |       |                         |   |            |   | ** ** | ** ** |         |       |                         |       |            |   |       | ** ** |         |       |
| Net income (loss)                                               |       | $                            | 1,721  |            | $      | (386       | )          |         | ** ** | $                            | 1,335      |            | $      | 2,518      |       | $            | (503       | ) |   | ** ** | $ | 2,015 |   |

 

----

**(r)**Certainreclassifications have been made to prior periods to conform to the currentperiod presentation.

 

79

----

 

***The impact of the restatements tothe Company’s Unaudited Consolidated Condensed Statements of Income for thethree months ended September 30, 2004 and 2003 is as follows************(amounts in 000’s):***

** **
| ** **                                                      | ** ** | **As  previously  reported** | ** ** | **Adjustments** | ** ** | ** ** | ** ** | **Restated** | ** ** | **As  previously  reported** | ** ** | **Adjustments** | ** ** | ** ** | ** ** | **Restated** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------|------------|-----------------|------------|------------|------------|--------------|------------|------------------------------|------------|-----------------|------------|------------|------------|--------------|------------|
| ** **                                                      | ** ** | **2004**                     | ** ** | **2004**        | ** ** | **Ref.**   | ** ** | **2004**     | ** ** | **2003**                     | ** ** | **2003**        |       | **Ref.**   | ** ** | **2003**     | ** ** |
| Revenues:                                                       |       |                         |       |            |       | ** ** | ** ** |         |       |                         |       |            |       | ** ** | ** ** |         |       |
| Membership fees                                                 |       | $                            | 24,213     |            | $          | 171        |       | **(e)**      | ** ** | $                            | 24,653     |            | $          | 19,439     |       | $            | 68         |   | **(e)** | ** ** | $ | 19,745 |   |
|                                                            |       |                         |       | 269             |       | **(r)**    | ** ** |         |       |                         |       | 238             |       | **(r)**    | ** ** |         |       |
| Personal training                                               |       | 7,288                        |       | —          |       | ** ** | ** ** | 7,288        |       | 5,538                        |       | —          |       |       | ** ** | 5,538        |       |
| Other revenue                                                   |       | 4,531                        |       | (31             | )          | **(e)**    | ** ** | 4,231        |       | 3,769                        |       | (39             | )          | **(e)**    | ** ** | 3,492        |       |
|                                                            |       |                         | ** ** | (269            | )          | **(r)**    | ** ** |         | ** ** |                         |       | (238            | )          | **(r)**    | ** ** |         |       |
| Total revenue                                                   |       | 36,032                       |       | 140             |       | ** ** | ** ** | 36,172       |       | 28,746                       |       | 29              |       |       | ** ** | 28,775       |       |
| Expenses:                                                       |       |                         |       |            |       | ** ** | ** ** |         |       |                         |       |            |       |       | ** ** |         |       |
| Compensation and related                                        |       | 14,106                       |       | 15              |       | **(d)**    | ** ** | 14,121       |       | 12,167                       |       | 12              |       | **(d)**    | ** ** | 12,179       |       |
| Rent and occupancy                                              |       | 5,352                        |       | (191            | )          | **(a)**    | ** ** | 4,197        |       | 3,856                        |       | (129            | )          | **(a)**    | ** ** | 3,011        |       |
|                                                            |       |                         |       | (964            | )          | **(r)**    | ** ** |         |       |                         |       | (716            | )          | **(r)**    | ** ** |         |       |
| General and administrative                                      |       | 7,352                        |       | 964             |       | **(r)**    | ** ** | 8,316        |       | 4,048                        |       | 64              |       | **(c)**    | ** ** | 4,828        |       |
|                                                            |       |                         |       |            |       | ** ** | ** ** |         |       |                         |       | 716             |       | **(r)**    | ** ** |         |       |
| Related-party management fees                                   |       | 210                          |       | —          |       | ** ** | ** ** | 210          |       | 438                          |       | —          |       | ** ** | ** ** | 438          |       |
| Stock based compensation                                        |       |                         |       | —          |       | ** ** | ** ** | —       |       | 35                           |       | —          |       | ** ** | ** ** | 35           |       |
| Depreciation and amortization                                   |       | 3,032                        |       | 191             |       | **(a)**    | ** ** | 3,277        |       | 2,573                        |       | 129             |       | **(a)**    | ** ** | 2,745        |       |
|                                                            |       |                         | ** ** | 54              |       | **(b)**    | ** ** | ** **   |       |                         |       | 43              |       | **(b)**    | ** ** |         |       |
| Total operating expenses                                        |       | 30,052                       |       | 69              |       | ** ** | ** ** | 30,121       |       | 23,117                       |       | 119             |       | ** ** | ** ** | 23,236       |       |
| Income from operations                                          |       | 5,980                        |       | 71              |       | ** ** | ** ** | 6,051        |       | 5,629                        |       | (90             | )          | ** ** | ** ** | 5,539        |       |
| Other income (expense):                                         |       |                         |       |            |       | ** ** | ** ** |         |       |                         |       |            |       | ** ** | ** ** |         |       |
| Interest expense                                                |       | (4,131                       | )          | (25             | )          | **(c)**    | ** ** | (4,156       | )          | (3,976                       | )          | (26             | )          | **(c)**    | ** ** | (4,002       | )          |
| Interest income                                                 |       | 104                          |       | —          |       | ** ** | ** ** | 104          |       | 48                           |       | —          |       |       | ** ** | 48           |       |
| Change in fair value of warrants                                |       | (231                         | )          | —          |       | ** ** | ** ** | (231         | )          | 1,681                        |       | —          |       |       | ** ** | 1,681        |       |
| Total other expense                                             |       | (4,258                       | )          | (25             | )          | ** ** | ** ** | (4,283       | )          | (2,247                       | )          | (26             | )          | ** ** | ** ** | (2,273       | )          |
| Income (loss) before (provision for)  benefit from income taxes |       | 1,722                        |       | 46              |       | ** ** | ** ** | 1,768        |       | 3,382                        |       | (116            | )          | ** ** | ** ** | 3,266        |       |
| (Provision for) benefit from income taxes                       |       | (581                         | )          | (215            | )          | **(f)**    | ** ** | (796         | )          | (1,522                       | )          | 52              |       | **(f)**    | ** ** | (1,470       | )          |
|                                                            |       |                         |       |            |       | ** ** | ** ** |         |       |                         |       |            |       |       | ** ** |         |       |
| Net income (loss)                                               |       | $                            | 1,141      |            | $          | (169       | )          | ** **   | ** ** | $                            | 972        |            | $          | 1,860      |       | $            | (64        | ) |   | ** ** | $ | 1,796 |   |

 

----

**(r)** Certainreclassifications have been made to prior periods to conform to the currentperiod presentation.

 

80

----

 

***The impact of the restatements tothe Company’s Unaudited Consolidated Condensed Statements of Income for the sixmonths ended June 30, 2004 and 2003 is as follows************(amounts in 000’s):***

** **
| ** **                                                      | ** ** | **As  previously  reported** | ** ** | **Adjustments** | ** ** | ** ** | ** ** | **Restated** | ** ** | **As  previously  reported** | ** ** | **Adjustments** | ** ** | ** ** | ** ** | **Restated** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------|------------|-----------------|------------|------------|------------|--------------|------------|------------------------------|------------|-----------------|------------|------------|------------|--------------|------------|
| ** **                                                      | ** ** | **2004**                     | ** ** | **2004**        |       | **Ref.**   | ** ** | **2004**     | ** ** | **2003**                     | ** ** | **2003**        | ** ** | **Ref.**   | ** ** | **2003**     | ** ** |
| Revenues:                                                       |       |                         |       |            |       |       |       |         |       |                         |       |            |       |       | ** ** |         |       |
| Membership fees                                                 |       | $                            | 45,065     |            | $          | (176       | )          | **(e)**      |       | $                            | 45,662     |            | $          | 36,047     |       | $            | (407       | ) | **(e)** | ** ** | $ | 36,210 |   |
|                                                            |       |                         |       | 773             |       | **(r)**    |       |         |       |                         |       | 570             |       | **(r)**    | ** ** |         |       |
| Personal training                                               |       | 15,361                       |       | —          |       |       |       | 15,361       |       | 12,550                       |       | —          |       |       | ** ** | 12,550       |       |
| Other revenue                                                   |       | 9,562                        |       | 14              |       | **(e)**    |       | 8,803        |       | 8,052                        |       | (78             | )          | **(e)**    | ** ** | 7,404        |       |
|                                                            |       |                         |       | (773            | )          | **(r)**    |       |         |       | ** **                   |       | (570            | )          | **(r)**    | ** ** |         |       |
| Total revenue                                                   |       | 69,988                       |       | (162            | )          |       |       | 69,826       |       | 56,649                       |       | (485            | )          |       | ** ** | 56,164       |       |
| Expenses:                                                       |       |                         |       |            |       |       |       |         |       |                         |       |            |       |       | ** ** |         |       |
| Compensation and related                                        |       | 29,086                       |       | 28              |       | **(d)**    |       | 29,114       |       | 23,505                       |       | 24              |       | **(d)**    | ** ** | 23,529       |       |
| Rent and occupancy                                              |       | 10,212                       |       | (326            | )          | **(a)**    |       | 8,308        |       | 8,128                        |       | (169            | )          | **(a)**    | ** ** | 6,534        |       |
|                                                            |       |                         |       | (1,578          | )          | **(r)**    |       |         |       |                         |       | (1,425          | )          | **(r)**    | ** ** |         |       |
| General and administrative                                      |       | 16,742                       |       | 43              |       | **(c)**    |       | 18,363       |       | 10,609                       |       | 159             |       | **(c)**    | ** ** | 12,193       |       |
|                                                            |       |                         |       | 1,578           |       | **(r)**    |       |         |       |                         |       | 1,425           |       | **(r)**    | ** ** |         |       |
| Related-party management fees                                   |       | 404                          |       | —          |       | ** ** |       | 404          |       | 544                          |       | —          |       | ** ** | ** ** | 544          |       |
| Depreciation and amortization                                   |       | 6,020                        |       | 326             |       | **(a)**    |       | 6,454        |       | 4,584                        |       | 169             |       | **(a)**    | ** ** | 4,839        |       |
|                                                            |       |                         | ** ** | 108             |       | **(b)**    |       |         | ** ** |                         |       | 86              |       | **(b)**    | ** ** |         |       |
| Total operating expenses                                        |       | 62,464                       |       | 179             |       | ** ** |       | 62,643       |       | 47,370                       |       | 269             |       | ** ** | ** ** | 47,639       |       |
| Income from operations                                          |       | 7,524                        |       | (341            | )          | ** ** |       | 7,183        |       | 9,279                        |       | (754            | )          | ** ** | ** ** | 8,525        |       |
| Other income (expense):                                         |       |                         |       |            |       | ** ** |       |         |       |                         |       |            |       | ** ** | ** ** |         |       |
| Interest expense                                                |       | (8,196                       | )          | (54             | )          | **(c)**    |       | (8,250       | )          | (7,752                       | )          | (44             | )          | **(c)**    | ** ** | (7,796       | )          |
| Interest income                                                 |       | 160                          |       | —          |       |       |       | 160          |       | 61                           |       | —          |       |       | ** ** | 61           |       |
| Change in fair value of warrants                                |       | 1,567                        |       | —          |       |       |       | 1,567        |       | (392                         | )          | —          |       |       | ** ** | (392         | )          |
| Total other expense                                             |       | (6,469                       | )          | (54             | )          | ** ** |       | (6,523       | )          | (8,083                       | )          | (44             | )          | ** ** | ** ** | (8,127       | )          |
| Income (loss) before (provision for)  benefit from income taxes |       | 1,055                        |       | (395            | )          | ** ** |       | 660          |       | 1,196                        |       | (798            | )          | ** ** | ** ** | 398          |       |
| (Provision for) benefit from income taxes                       |       | (475                         | )          | 178             |       | **(f)**    |       | (297         | )          | (538                         | )          | 359             |       | **(f)**    | ** ** | (179         | )          |
|                                                            |       |                         |       |            |       | ** ** |       |         |       |                         |       |            |       |       | ** ** |         |       |
| Net income (loss)                                               |       | $                            | 580        |            | $          | (217       | )          |         |       | $                            | 363        |            | $          | 658        |       | $            | (439       | ) |   | ** ** | $ | 219 |   |

 

----

**(r)**Certainreclassifications have been made to prior periods to conform to the currentperiod presentation.

 

81

----

 

***The impact of the restatements tothe Company’s Unaudited Consolidated Condensed Statements of Income for thethree months ended June 30, 2004 and 2003 is as follows************(amounts in 000’s):***

 
| ** **                                                      | ** ** | **As  previously  reported** | ** ** | **Adjustments** | ** ** | ** ** | ** ** | **Restated** | ** ** | **As  previously  reported** | ** ** | **Adjustments** | ** ** | ** ** | ** ** | **Restated** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------|------------|-----------------|------------|------------|------------|--------------|------------|------------------------------|------------|-----------------|------------|------------|------------|--------------|------------|
| ** **                                                      | ** ** | **2004**                     | ** ** | **2004**        | ** ** | **Ref.**   | ** ** | **2004**     | ** ** | **2003**                     | ** ** | **2003**        | ** ** | **Ref.**   | ** ** | **2003**     | ** ** |
| Revenues:                                                       |       |                         |       |            |       |       |       |         |       |                         |       |            |       |       | ** ** |         |       |
| Membership fees                                                 |       | $                            | 23,350     |            | $          | (288       | )          | **(e)**      | ** ** | $                            | 23,561     |            | $          | 19,043     |       | $            | (335       | ) | **(e)** | ** ** | $ | 19,113 |   |
|                                                            |       |                         |       | 499             |       | **(r)**    | ** ** |         |       |                         |       | 405             |       | **(r)**    | ** ** |         |       |
| Personal training                                               |       | 8,088                        |       | —          |       |       | ** ** | 8,088        |       | 6,539                        |       | —          |       |       | ** ** | 6,539        |       |
| Other revenue                                                   |       | 5,042                        |       | 47              |       | **(e)**    | ** ** | 4,590        |       | 4,370                        |       | (131            | )          | **(e)**    | ** ** | 3,834        |       |
|                                                            |       |                         |       | (499            | )          | **(r)**    | ** ** |         |       | ** **                   |       | (405            | )          | **(r)**    | ** ** |         |       |
| Total revenue                                                   |       | 36,480                       |       | (241            | )          |       | ** ** | 36,239       |       | 29,952                       |       | (466            | )          |       | ** ** | 29,486       |       |
| Expenses:                                                       |       |                         |       |            |       |       | ** ** |         |       |                         |       |            |       |       | ** ** |         |       |
| Compensation and related                                        |       | 14,623                       |       | 14              |       | **(d)**    | ** ** | 14,637       |       | 12,075                       |       | 12              |       | **(d)**    | ** ** | 12,087       |       |
| Rent and occupancy                                              |       | 5,301                        |       | (181            | )          | **(a)**    | ** ** | 4,250        |       | 3,856                        |       | (97             | )          | **(a)**    | ** ** | 3,231        |       |
|                                                            |       |                         |       | (870            | )          | **(r)**    | ** ** |         |       |                         |       | (528            | )          | **(r)**    | ** ** |         |       |
| General and administrative                                      |       | 7,958                        |       | 870             |       | **(r)**    | ** ** | 8,828        |       | 5,678                        |       | 76              |       | **(c)**    | ** ** | 6,282        |       |
|                                                            |       |                         |       |            |       |       | ** ** |         |       |                         |       | 528             |       | **(r)**    | ** ** |         |       |
| Related-party management fees                                   |       | 2                            |       | —          |       | ** ** | ** ** | 2            |       | 111                          |       | —          |       | ** ** | ** ** | 111          |       |
| Depreciation and amortization                                   |       | 3,084                        |       | 181             |       | **(a)**    | ** ** | 3,319        |       | 2,331                        |       | 97              |       | **(a)**    | ** ** | 2,471        |       |
|                                                            |       |                         |       | 54              |       | **(b)**    | ** ** |         |       | ** **                   |       | 43              |       | **(b)**    | ** ** |         |       |
| Total operating expenses                                        |       | 30,968                       |       | 68              |       | ** ** | ** ** | 31,036       |       | 24,051                       |       | 131             |       | ** ** | ** ** | 24,182       |       |
| Income from operations                                          |       | 5,512                        |       | (309            | )          | ** ** | ** ** | 5,203        |       | 5,901                        |       | (597            | )          | ** ** | ** ** | 5,304        |       |
| Other income (expense):                                         |       |                         |       |            |       | ** ** | ** ** |         |       |                         |       |            |       | ** ** | ** ** |         |       |
| Interest expense                                                |       | (4,405                       | )          | (22             | )          | **(c)**    | ** ** | (4,427       | )          | (3,812                       | )          | (22             | )          | **(c)**    | ** ** | (3,834       | )          |
| Interest income                                                 |       | 109                          |       | —          |       |       | ** ** | 109          |       | 26                           |       | —          |       |       | ** ** | 26           |       |
| Change in fair value of warrants                                |       | 853                          |       | —          |       |       | ** ** | 853          |       | (392                         | )          | —          |       |       | ** ** | (392         | )          |
| Total other expense                                             |       | (3,443                       | )          | (22             | )          | ** ** | ** ** | (3,465       | )          | (4,178                       | )          | (22             | )          | ** ** | ** ** | (4,200       | )          |
| Income (loss) before (provision for)  benefit from income taxes |       | 2,069                        |       | (331            | )          | ** ** | ** ** | 1,738        |       | 1,723                        |       | (619            | )          | ** ** | ** ** | 1,104        |       |
| (Provision for) benefit from income taxes                       |       | (931                         | )          | 149             |       | **(f)**    | ** ** | (782         | )          | (775                         | )          | 278             |       | **(f)**    | ** ** | (497         | )          |
|                                                            |       |                         |       |            |       | ** ** | ** ** |         |       |                         |       |            |       |       | ** ** |         |       |
| Net income (loss)                                               |       | $                            | 1,138      |            | $          | (182       | )          |         | ** ** | $                            | 956        |            | $          | 948        |       | $            | (341       | ) |   | ** ** | $ | 607 |   |

 

----

**(r)**Certainreclassifications have been made to prior periods to conform to the currentperiod presentation.

 

82

----

 

***The impact of the restatements tothe Company’s Unaudited Consolidated Condensed Statements of Income for thethree months ended March 31, 2004 and 2003 is as follows************(amounts in 000’s):***

*** ***
| ** **                                                     | ** ** | **As previously reported****2004** | ** ** | **Adjustments  2004** | ** ** | **Ref.**   | ** ** | **Restated  2004** | ** ** | **As previously reported****2003** | ** ** | **Adjustments  2003** | ** ** | **Ref.**   | ** ** | **Restated  2003** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------|------------|-----------------------|------------|------------|------------|--------------------|------------|------------------------------------|------------|-----------------------|------------|------------|------------|--------------------|------------|
| Revenues:                                                      |       |                               |       |                  |       | ** ** |       |               |       |                               |       |                  |       | ** ** |       |               |       |
| Membership fees                                                |       | $                                  | 21,715     |                  | $          | 112        |       | **(e)**            |       | $                                  | 22,101     |                  | $          | 17,004     |       | $                  | (72        | ) | **(e)** |   | $ | 17,097 |   |
|                                                           |       |                               |       | 274                   |       | **(r)**    |       |               |       |                               |       | 165                   |       | **(r)**    |       |               |       |
| Personal training                                              |       | 7,273                              |       | —                |       | ** ** |       | 7,273              |       | 6,011                              |       | —                |       | ** ** |       | 6,011              |       |
| Other revenue                                                  |       | 4,520                              |       | (33                   | )          | **(e)**    |       | 4,213              |       | 3,682                              |       | 53                    |       | **(e)**    |       | 3,570              |       |
|                                                           |       |                               |       | (274                  | )          | **(r)**    |       |               |       |                               |       | (165                  | )          | **(r)**    |       |               |       |
| Total revenue                                                  |       | 33,508                             |       | 79                    |       | ** ** |       | 33,587             |       | 26,697                             |       | (19                   | )          | ** ** |       | 26,678             |       |
| Expenses:                                                      |       |                               |       |                  |       | ** ** |       |               |       |                               |       |                  |       | ** ** |       |               |       |
| Compensation and related                                       |       | 14,463                             |       | 14                    |       | **(d)**    |       | 14,477             |       | 11,430                             |       | 12                    |       | **(d)**    |       | 11,442             |       |
| Rent and occupancy                                             |       | 4,911                              |       | (145                  | )          | **(a)**    |       | 4,058              |       | 4,272                              |       | (72                   | )          | **(a)**    |       | 3,303              |       |
|                                                           |       |                               |       | (708                  | )          | **(r)**    |       |               |       |                               |       | (897                  | )          | **(r)**    |       |               |       |
| General and administrative                                     |       | 8,784                              |       | 43                    |       | **(c)**    |       | 9,535              |       | 4,931                              |       | 83                    |       | **(c)**    |       | 5,911              |       |
|                                                           |       |                               |       | 708                   |       | **(r)**    |       |               |       |                               |       | 897                   |       | **(r)**    |       |               |       |
| Related-party management fees                                  |       | 402                                |       | —                |       | ** ** |       | 402                |       | 433                                |       | —                |       | ** ** |       | 433                |       |
| Depreciation and amortization                                  |       | 2,936                              |       | 145                   |       | **(a)**    |       | 3,135              |       | 2,253                              |       | 72                    |       | **(a)**    |       | 2,368              |       |
|                                                           |       |                               |       | 54                    |       | **(b)**    |       |               |       |                               |       | 43                    |       | **(b)**    |       |               |       |
| Total operating expenses                                       |       | 31,496                             |       | 111                   |       | ** ** |       | 31,607             |       | 23,319                             |       | 138                   |       | ** ** |       | 23,457             |       |
| Income from operations                                         |       | 2,012                              |       | (32                   | )          | ** ** |       | 1,980              |       | 3,378                              |       | (157                  | )          | ** ** |       | 3,221              |       |
| Other income (expense):                                        |       |                               |       |                  |       | ** ** |       |               |       |                               |       |                  |       | ** ** |       |               |       |
| Interest expense                                               |       | (3,791                             | )          | (32                   | )          | **(c)**    |       | (3,823             | )          | (3,940                             | )          | (22                   | )          | **(c)**    |       | (3,962             | )          |
| Interest income                                                |       | 51                                 |       | —                |       | ** ** |       | 51                 |       | 35                                 |       | —                |       | ** ** |       | 35                 |       |
| Change in fair value of warrants                               |       | 714                                |       | —                |       | ** ** |       | 714                |       | —                             |       | —                |       | ** ** |       | —             |       |
| Total other expense                                            |       | (3,026                             | )          | (32                   | )          | ** ** |       | (3,058             | )          | (3,905                             | )          | (22                   | )          | ** ** |       | (3,927             | )          |
| Income (loss) before (provision for) benefit from income taxes |       | (1,014                             | )          | (64                   | )          | ** ** |       | (1,078             | )          | (527                               | )          | (179                  | )          | ** ** |       | (706               | )          |
| (Provision for) benefit from income taxes                      |       | 456                                |       | 29                    |       | **(f)**    |       | 485                |       | 237                                |       | 81                    |       | **(f)**    |       | 318                |       |
|                                                           |       |                               |       |                  |       | ** ** |       |               |       |                               |       |                  |       | ** ** |       |               |       |
| Net income (loss)                                              |       | $                                  | (558       | )                     | $          | (35        | )          | ** **         |       | $                                  | (593       | )                     | $          | (290       | )          | $                  | (98        | ) | ** ** |   | $ | (388 | ) |

 

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**(r)**Certainreclassifications have been made to prior periods to conform to the currentperiod presentation.

 

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**EQUINOX HOLDINGS, INC.**

**Schedule II.—Valuationand Qualifying Accounts**

** **
| ** **                                                           | ** ** | **Balance at   beginning  of period** | ** ** | **Charges to  costs and  expenses** | ** ** | **Deductions** | ** ** | **Balance   at end of  period** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|----------------|------------|---------------------------------|------------|
| Allowance for Doubtful Accounts  (deducted from Accounts Receivable) |       |                                  |       |                                |       |           |       |                            |       |
|                                                                 |       |                                  |       |                                |       |           |       |                            |       |
| fiscal year ended:                                                   |       |                                  |       |                                |       |           |       |                            |       |
| December 31, 2002                                               |       | $                                     | 99,952     |                                | $          | 840,204        |       | $                               | (850,757   | ) | $ | 89,399 |   |
| December 31, 2003                                               |       |                                  | 89,399     |                                | 866,757    |           | (843,736   | )                               |       | 112,420 |   |
| December 31, 2004                                               |       |                                  | 112,420    |                                | 202,946    |           | (255,282   | )                               |       | 60,084 |   |
|                                                                      |            |                                       |            |                                     |            |                |            |                                 |            |  |  |  |  |

 

**Item 9.****                   Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

 

None.

 

**Item 9A.****                Controls and Procedures**

 

As of the end of the periodcovered by this report the Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Chief Executive Officer and the Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures pursuant to Exchange Act Rule 13a-15. Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures (1) were ineffectivein timely alerting them to material information relating to the Company(including its consolidated subsidiaries) required to be included in theCompany’s periodic SEC filings and (2) were inadequate to ensure thatinformation required to be disclosed by the Company in the reports filed orsubmitted by the Company under the Exchange Act is recorded, processed,summarized and reported within the time period specified in the SEC’s rules andforms.

 

There have been changes in theCompany’s internal control over financial reporting during the fourth fiscalquarter of the year covered by this report that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting as follows:

 

In connection with the audit ofour financial statements for the year ended December 31, 2004 we determinedbased on consultations with our auditors, KPMG LLP, that as of December 31,2004, the Company’s internal control over financial reporting was not effectiveto provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles due to materialweaknesses in our internal controls.  Thethree material weaknesses identified were (i) a lack of appropriate controlssurrounding accounting for leases and landlord allowances;  (ii) a lack of adequate and appropriatelytrained accounting staff; and (iii) a lack of an integrated financial systemfor recording revenue transactions.  Amaterial weakness is a significant deficiency or combination of significantdeficiencies, that results in a more than remote likelihood that a materialmisstatement of the annual or interim financial statements will not beprevented or detected.  In addition, webecame aware of three significant deficiencies in our internal controls overfinancial reporting that had not been previously identified.  A significant deficiency is a controldeficiency, or combination of control deficiencies, that adversely affect theCompany’s ability to initiate, authorize, record, process or report externalfinancial data reliably in accordance with generally accepted accountingprinciples such that there is a more than remote likelihood that a misstatementof the Company’s annual or interim financial statements that is more thaninconsequential will not be prevented or detected.  These significant deficiencies are: (i) lackof supporting detail and evidence of review regarding fixed asset additions;(ii) lack of evidence of review and/or authorization over financial reporting;and (iii) lack of supporting documentation regarding manual journalentries.  These internal control weaknessesled to several misstatements in our financial statements.  Accordingly, and as described in Notes 2 and18 to the consolidated financial statements, all periods presented in thisreport have been corrected and restated.

 

 

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While the impact of thematerial weaknesses and other significant deficiencies on the financialstatements presented has been corrected, we understand that, if unaddressed, thesedeficiencies could adversely affect our ability to record, process and reportfinancial data consistent with our assertions in the financial statements inthe future.  Since October of 2003, wehave taken steps to strengthen our internal control structure and proceduresfor financial reporting and our disclosure controls and procedures. InSeptember of 2004, we established a formal disclosure committee that meets at leastonce a quarter and is responsible for establishing and reviewing our disclosurecontrols and procedures for ensuring the accuracy and completeness of theinformation contained in our financial statements, books and records.  In the first quarter of 2005, we hired a newchief financial officer who, who is currently in transition, and hassignificant public company accounting experience.  In the first half of 2005, the Companyretained a consultant to examine its internal controls over financial reporting,management information and accounting systems. The consultant is currently assisting the Company in creating processesand controls that will address the weaknesses described above and those thathave been described in our Form 10-Q for the quarter ended September 30, 2004.  We also anticipate further accounting staffhires, a more formal financial quality review process and other process andsystem control improvements.  We believethat we are appropriately addressing each of these internal control issues, butthere can be no assurance that similar or other issues will not arise in thefuture.

 

**Item 9B.****                                                OtherInformation**

 

None.

 

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**PART III**

 

**Item 10.                 Directorsand Executive Officers of the Registrant**

 

The names,ages and positions of the current directors and executive officers of Equinoxas of June 1, 2005 are set forth below. Directors are elected annually and holdoffice until their successors are elected and qualified, or until their earlierremoval or resignation.

 
| **Name**                   | ** ** | **Age** | ** ** | **Position**                                                                      |
|----------------------------|------------|---------|------------|-----------------------------------------------------------------------------------|
| Charles F. Baird, Jr. |       | 51      |       | Director, Chairman                                                                |
| Harvey Spevak              |       | 40      |       | Director, President, Chief  Executive Officer and interim Chief Operating Officer |
| Scott Rosen                |       | 46      |       | Executive Vice President  and Chief Financial Officer                             |
| Jeff Grayson               |       | 35      |       | Vice President and Chief  Technology Officer                                      |
| Judy Taylor                |       | 44      |       | Vice President of Public  Relations                                               |
| Glenn Hopkins              |       | 39      |       | Director                                                                          |
| John Richards              |       | 54      |       | Director                                                                          |
| Douglas W. Lehrman(1)(2)   |       | 49      |       | Director                                                                          |
| Stephen M. Ross            |       | 65      |       | Director                                                                          |
| William E. Watts(1)        |       | 50      |       | Director                                                                          |
| Edward D. Yun(2)           |       | 36      |       | Director                                                                          |
| Mark Tricolli              |       | 33      |       | Director                                                                          |
| Irwin Cohen (3)            |       | 64      |       | Director                                                                          |

 

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(1)   Member, Compensation Committee.

(2)   Member, Audit Committee.

(3)   Audit Committee Chairman.

 

Each of ourofficers is elected by the Board of Directors to hold office until the nextsucceeding annual meeting of the Board of Directors. None of our directors orofficers has any family relationship with any director or other officer.“Family relationship” for this purpose means any relationship by blood,marriage or adoption, not more remote than first cousin.

 

The business experience of each of the directors and executive officerslisted above is as follows:

 

*Charles F. Baird, Jr.*was elected Chairman of Equinox in December 2000. Mr. Baird is thefounder and a Managing Director of North Castle. Prior to founding North Castlein 1997, Mr. Baird served as a Managing Director of AEAInvestors, Inc., and from 1978 to 1989 he worked at Bain & 

 

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Company as anExecutive Vice President and North American Management Committee member.Mr. Baird is a trustee of the Alger Fund. He currently serves as chairmanof the Board of Directors for Leiner Health Products, Grand Expeditions, EASand Elizabeth Arden Salon Holdings, Inc., corporations in which investmentpartnerships managed by North Castle have investments. Mr. Baird alsoserves on the Boards of Directors of the Ultimate Juice Company, EnzymaticTherapy, Inc., and CRC Health Group, Inc., corporations in whichinvestment partnerships managed by North Castle have investments.

 

*Harvey Spevak* hasbeen President and Chief Executive Officer of Equinox since December 1999after joining Equinox as President and Chief Operating Officer inJanuary 1999. He became a member of the Board of Directors in January1999. Upon Christopher Peluso’s resignation in January 2005, Mr. Spevak hasbeen acting as interim Chief Operating Officer, and will continue in thisposition until Scott Rosen becomes our Chief Operating Officer, which isexpected to occur no later than May 1, 2005 upon Larry Segall’s becoming ourChief Financial Officer (as previously reported on Form 8-K filed with theSecurities and Exchange Commission on April 1, 2005). Prior to joining Equinox,he served as Vice President of Chelsea Piers. Mr. Spevak is on the Boardof Directors of Elizabeth Arden Salon Holdings, Inc. and is a member ofthe Young Presidents Organization and the Council for the Fresh Air Fund.

 

*Scott Rosen* servedas Executive Vice President and Chief Financial Officer since joining Equinoxin August 2003. Upon Christopher Peluso’s resignation in January 2005, Mr.Rosen was appointed Executive Vice President and Chief Operating Officer, whichis expected to become effective upon Larry Segall’s becoming our ChiefFinancial Officer (as previously reported on Form 8-K filed with the Securitiesand Exchange Commission on April 1, 2005). Prior to joining Equinox,Mr. Rosen served as Executive Vice President and Chief Financial Officerfor J. Crew Group from 1994 to 2003. Prior to J. Crew, Mr. Rosenwas Vice President and Divisional Controller for the Women’s Sportswear Group,a division of Liz Claiborne, Inc.

 

*Jeff Grayson* hasbeen Vice President and Chief Technology Officer of Equinox since May 2002.  Prior to joining Equinox, Jeff was ChiefTechnology Officer of ReferralNetworks where he managed the InformationTechnology department, defined product strategy and was instrumental in thatcompany’s successful sale. In previous roles, Jeff has led teams oftechnologists for Deutsch Bank, Keyspan Energy, Lucent Technologies, Sputnik7Media, RadioShack, Wit Capital and SportsYA! Media.

 

*Judy Taylor*joinedEquinox in 1994 and has served as Vice President of Public Relations sinceJanuary 2003, and has been employed by Equinox in 1994 in various capacities.In previous roles Ms. Taylor was an account manager with Berman Communicationsand an account executive with Lancome Cosmetics. She currently serves on theDevelopment Board of God’s Love We Deliver and the Event Committees of theRainforest Foundation and the Fresh Air Fund.

 

*Glenn Hopkins* becamea member of the Board of Directors in December 2000. He is a Partner ofJ.W. Childs and has been at J.W. Childs since 1995.

 

*John Richards* becamea member of the Board of Directors in February 2003. He is the Presidentand Chief Executive Officer of Elizabeth Arden Salon Holdings, Inc. Beforejoining Elizabeth Arden Salon Holdings, Inc. in October 2001,Mr. Richards served as the President and Chief Executive Officer ofDean & Deluca after serving as President of North American Operationsfor Starbucks Coffee Company.

 

*Douglas W.Lehrman*became a member of the Board of Directors anda member of the audit committee and compensation committee, on May 18, 2005. Mr.Lehrman is a Managing Director of North 

 

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Castle Partners, one of ourprincipal stockholders. Prior to joining North Castle, Mr. Lehrman was amanaging director and head of the Financial Sponsor Group at investment bankWarburg Dillon Read, LLC. He also served as managing director in the high yieldgroup of Nomura Securities International, Inc. and has held positions at LazardFrères & Co., LLC, Drexel Burnham Lambert Incorporated and Oppenheimer &Co., Inc.  Mr. Lehrman received a B.A. in economics from WashingtonUniversity in St. Louis and an M.B.A. from the Stern School of Business at NewYork University.

 

*Stephen M.Ross*became a member of the Board of Directors on May18, 2005. Mr. Ross is Chairman and Chief Executive Office and founder of TheRelated Companies. He is a founder and director of Charter MunicipalMortgage Acceptance Company and a director of Insignia Financial Group, Inc.,the Real Estate Board of New York and the Juvenile Diabetes Foundation. Mr. Ross is also a trustee of the Jackie Robinson Foundation and the JewishAssociation for Services for the Aged.  Mr. Ross graduated from theUniversity of Michigan School of Business Administration with a Bachelor ofScience degree, from Wayne State School of Law with a Juris Doctorate degreeand from New York University School of Law with a Master of Law degree inTaxation.

 

*William E. Watts*became a member of the Board of Directors in January 2001. He is anOperating Partner of J.W. Childs and has been at J.W. Childs since 2001.Previously, he was President and Chief Executive Officer of General NutritionCompanies, Inc. from 1991 until 2001. Prior to being named President andChief Executive Officer in 1991, he held the positions of President and ChiefOperating Officer of General Nutrition, Inc., President and ChiefOperating Officer of General Nutrition Center, Inc., Senior Vice Presidentof Retailing and Vice President of Retail Operations.

 

*Edward D. Yun* becamea member of the Board of Directors in December 2000. He is a Partner ofJ.W. Childs and has been at J.W. Childs since 1996. Mr. Yun is also adirector of InSight Holdings Corp. and Universal Hospital Services, Inc.,corporations in which investment partnerships managed by J.W. Childs have aninvestment.

 

*Mark Tricolli* becamea member of the Board of Directors in 2003. He is a Vice President of J.W.Childs and has been at J.W. Childs since 2000. Previously, he was an associatein the Merchant Banking Division of Goldman Sachs from 1999 to 2000.Mr. Tricolli is also a director of InSight Holdings Corp., a corporationin which an investment partnership managed by J.W. Childs has an investment.

 

*IrwinCohen*was appointed member of the Board of Directors and AuditCommittee Chairman in January 2005.  Mr.Cohen is a retired partner of Deloitte & Touche LLP (a professionalservices firm, providing audit, tax, financial advisory and consultingservices), a position he held from 1972 to 2003. Between 1997 and 2003 Mr.Cohen was Global Managing Partner of the Consumer Products, Retail and ServicesPractice of Deloitte & Touche, LLP. From 1980 through 2002 he served asDeloitte & Touche, LLP.’s Managing Partner of their U.S Retail Practice.Mr. Cohen has been elected to the Boards of various companies such asSuper-Valu, Inc., Beall’s, Inc., and Phoenix House Foundation.

 

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#### **Audit Committee Independenceand Financial Expert**

 

The AuditCommittee currently consists of Messrs. Cohen (Chairman) and Yun. TheBoard has determined that Mr. Cohen is independent in accordance withapplicable rules promulgated by the Securities and Exchange Commission (“SEC”).The Board of Directors has also determined that Messrs. Cohen qualifies asan “audit committee financial expert” as defined in Section 401(h) ofRegulation S-K promulgated by the SEC.

 

**Compensation of Directors**

 

Members of the Board of Directors of Equinox are not compensated,except for Mr. Cohen; however, all directors are reimbursed for travel andreasonable expenses incurred in performing their duties as directors. Mr.Cohen’s compensation is based on an agreed upon annual fee plus additional feesfor meetings attended.

 

**Item 11.                 ExecutiveCompensation**

 

The following table sets forth the compensation earned by our ChiefExecutive Officer and each of the four additional most highly compensatedexecutive officers (each, a “Named Executive Officer”) during or with respectto the last three fiscal years.

 
| ** **                                              | ** ** | ** ** | ** ** | ** **              | ** ** | ** **                 | ** ** | **Long-Term Compensation**  | ** ** |
|---------------------------------------------------------|------------|------------|------------|-------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Securities  Underlying** | ** ** | **All Other  Compensation** | ** ** |
| **Name and Principal Position**                         | ** ** | **Year**   | ** ** | **Salary($)**           | ** ** | **Bonus($)**               | ** ** | **Options(#)**              | ** ** | **($)(2)** | ** ** |
| Harvey Spevak                                           | * *   |       |       |                    |       |                       |       |                        |       |   |   |
| *President  and Chief Executive Officer*                | * *   | 2004       |       | 369,346                 |       | 185,188                    |       | —                      |       | 24,000 |   |
|                                                    |       | 2003       |       | 373,962                 |       | 288,235                    |       | —                      |       | 24,000 |   |
|                                                    |       | 2002       |       | 350,000                 |       | 201,250                    |       | 34,397                      |       | 24,000 |   |
|                                                    |       |       |       |                    |       |                       |       |                        |       |   |   |
| Scott Rosen(1)(3)                                       | * *   |       |       |                    |       |                       |       |                        |       |   |   |
| *Executive  Vice President and Chief Financial Officer* | * *   | 2004       |       | 300,000                 |       | 76,000                     |       | —                      |       | — |   |
|                                                    |       | 2003       |       | 103,846                 |       | 25,000                     |       | 100,000                     |       | — |   |
|                                                    |       |       |       |                    |       |                       |       |                        |       |   |   |
| Chris Peluso                                            |       |       |       |                    |       |                       |       |                        |       |   |   |
| *Chief Operating Officer*(3)                            |       | 2004       |       | 277,462                 |       | 55,200                     |       | —                      |       | — |   |
|                                                    |       | 2003       |       | 238,846                 |       | —                     |       | 15,000                      |       | — |   |
|                                                    |       | 2002       |       | 8,846                   |       | —                     |       | 35,000                      |       | — |   |
|                                                    |       |       |       |                    |       |                       |       |                        |       |   |   |
| Jeff Grayson                                            |       |       |       |                    |       |                       |       |                        |       |   |   |
| *Vice President and Chief Technology Officer*           |       | 2004       |       | 163,692                 |       | 30,500                     |       |                        |       | — |   |
|                                                    |       | 2003       |       | 166,154                 |       | 19,200                     |       | 5,000                       |       | — |   |
|                                                    |       | 2002       |       | 91,154                  |       | 19,200                     |       | 10,000                      |       | — |   |
|                                                    |       |       |       |                    |       |                       |       |                        |       |   |   |
| Judy Taylor                                             |       |       |       |                    |       |                       |       |                        |       |   |   |
| *Vice President of Public Relations*                    |       | 2004       |       | 156,129                 |       | 17,424                     |       | —                      |       | — |   |
|                                                    |       | 2003       |       | 176,131                 |       | 25,854                     |       | 5,000                       |       | — |   |
|                                                    |       | 2002       |       | 132,872                 |       | —                     |       | 5,000                       |       | — |   |

 

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(1)   Mr. Rosen joined the Companyin August 2003 as Executive Vice President and Chief Financial Officer.

(2)   During 2004, Mr. Spevakreceived a travel and expense allowance of $2,000 per month.

(3)   Mr. Peluso resigned inJanuary 2005 and his underlying options were cancelled pursuant to a separationagreement entered into in April 2005. See “Christopher Peluso SeparationAgreement” below. Mr. Rosen was appointed Chief Operating Officer uponretaining a replacement for him as Chief Financial Officer.

 

**Fiscal Year-End Option Value Table**

 

The following table sets forth information for each named executiveofficer with regard to the aggregate value of options held at December 31,2004. No options were exercised by such executive officers during the yearended December 31, 2004.

 
| ** **       | ** ** | **Number of  Securities Underlying  Unexercised Options  at December 31, 2004** | ** ** | **Value of Unexercised  In-the-Money Options  at December 31, 2004(1)** | ** ** |
|------------------|------------|--------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| **Name**         | ** ** | **Exercisable**                                                                      | ** ** | **Unexercisable**                                                            | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Harvey Spevak    |       | 95,123                                                                               |       | 380,397                                                                      |       | $ | 1,426,845 |   | $ | 1,795,474 |   |
| Scott Rosen      |       | —                                                                               |       | 100,000                                                                      |       | — |   | — |   |
| Judy Taylor      |       | 190                                                                                  |       | 25,000                                                                       |       | 2,850 |   |   | 118,000 |   |
| Chris Peluso (2) |       | —                                                                               |       | 100,000                                                                      |       | — |   |   | 472,000 |   |
| Jeff Grayson     |       | —                                                                               |       | 20,000                                                                       |       | — |   |   | 94,400 |   |
|                  |            |                                                                                      |            |                                                                              |            |  |  |  |  |  |  |

 

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(1)           Thefair market value of our common stock used to calculate the value ofunexercised in-the-money options is based on the per share price set by ourboard of directors.

 

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(2)           In April 2005 Mr. Pelusoexecuted a separation agreement with the Company. All vested and unvested stockoptions previously granted to him were cancelled.

 

**Employment and Other Agreements with ourNamed Executive Officers**

 

*Harvey Spevak*.    During December 2000, Equinox enteredinto an employment agreement with Mr. Spevak, whereby he agreed tocontinue as our Chief Executive Officer and a member of our board of directors.This employment agreement had an initial term of three years and currentlyrenews automatically for successive one-year periods (unless either party givesprior written notice). Pursuant to this employment agreement, Mr. Spevakcurrently receives an annual base salary of $372,000, and is entitled to anannual bonus based upon the satisfaction of certain performance targets asdetermined by our board of directors and to participate in benefit andperquisite programs of Equinox to the same extent as other senior executives ofEquinox. Also, Mr. Spevak received a commencement grant of options topurchase 380,397 shares of our common stock pursuant to our Stock IncentivePlan.

 

If Equinox terminates Mr. Spevak’s employment other than for Cause(as defined in the employment agreement), or Mr. Spevak terminates hisemployment for Good Reason (as defined in the employment agreement), thenEquinox will pay Mr. Spevak his full salary through the date oftermination, a pro-rata bonus through the date of termination and all otherearned but unpaid amounts, if any, to which Mr. Spevak is entitled. Further,Equinox will pay Mr. Spevak an amount equal to Mr. Spevak’s basesalary for 18 months following the expiration of the term of the employmentagreement and will continue to provide Mr. Spevak the welfare benefitsprovided to him prior to his termination. If Mr. Spevak’s employment isterminated by Equinox for Cause or by Mr. Spevak other than for GoodReason, Equinox will pay to Mr. Spevak his full salary through the date oftermination in addition to any other amounts owed to Mr. Spevak under anycompensation or benefit plan or program of Equinox excluding, in the case of atermination by Mr. Spevak for Cause, any accrued but unpaid incentivebonus. Upon termination of Mr. Spevak’s employment for any reason, Mr. Spevakwill also be subject to customary 18-month post-termination non-compete,non-solicitation and non-disparagement provisions.

 

*Scott Rosen.   *During September 2003,Equinox entered into an employment agreement with Mr. Rosen, whereby hebecame our Executive Vice President and Chief Financial Officer. Thisemployment agreement has an initial term of three years and will renewautomatically for successive one-year periods (unless either party gives priorwritten notice). Pursuant to this employment agreement, Mr. Rosencurrently receives an annual base salary of $300,000, which will be reviewedannually beginning in 2005. Mr. Rosen is entitled to an annual bonus basedupon the satisfaction of certain performance targets as determined by our boardof directors, subject to a maximum annual bonus of $210,000. For 2003, Mr. Rosenwas also paid a pro-rata incentive bonus, and a signing bonus in the amount of$55,000. Mr. Rosen is eligible to participate in benefit and perquisiteprograms of Equinox to the same extent as other senior executives of Equinox.Also, Mr. Rosen received a commencement grant of options to purchase up to100,000 shares of our common stock pursuant to our Stock Incentive Plan. IfEquinox terminates Mr. Rosen’s employment other than for Cause (as definedin the employment agreement), or Mr. Rosen shall terminate his employmentfor Good Reason (as defined in the employment agreement), then Equinox will payMr. Rosen his full salary through the date of termination, a pro-ratabonus through the date of termination and all other earned but unpaid amounts,if any, to which Mr. Rosen is entitled. Further, following the expirationof the term of the employment agreement, Equinox will pay Mr. Rosen anamount equal to Mr. Rosen’s base salary for six months, plus oneadditional month for each year Mr. Rosen had been employed with Equinoxprior to his termination, subject to a maximum of 15 months total, and willcontinue to provide Mr. Rosen the welfare benefits provided to him priorto his termination. If Mr. Rosen’s employment is

 

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terminated by Equinox for Cause or by Mr. Rosen other than forGood Reason, Equinox will pay to Mr. Rosen his full salary through thedate of termination in addition to any other amounts owed to Mr. Rosen underany compensation or benefit plan or program of Equinox excluding, in the caseof a termination by Mr. Rosen for Cause, any accrued but unpaid incentivebonus. Upon termination of Mr. Rosen’s employment for any reason, Mr. Rosenwill also be subject to customary nine-month post-termination non-compete,non-solicitation and non-disparagement provisions.

 

*Jeff Grayson*.    During April 2002, Equinox enteredinto an employment agreement with Mr. Grayson, whereby he became our ChiefTechnology Officer during May 2002. Pursuant to this employment agreement,Mr. Grayson currently receives an annual base salary of $165,000 and isentitled to an annual bonus based upon the satisfaction of certain performancetargets as determined by our board of directors. Also, Mr. Graysonreceived a commencement grant of options to purchase 10,000 shares of ourcommon stock and a $5,000 bonus. If Mr. Grayson’s employment is terminatedby Equinox other than for Cause (as defined in the employment agreement), hewill be entitled to receive severance pay equal to one week’s salary for eachsix months of service to Equinox at the time of his termination. The amount of Mr. Grayson’sseverance will not exceed more than one-half of his base salary at the time oftermination. Upon termination of Mr. Grayson’s employment for any reason, Mr. Graysonwill also be subject to customary 12-month post-termination non-compete, 18-monthnon-solicitation and 18-month non-disparagement provisions.

 

*Christopher Peluso Separation Agreement*.  Christopher J. Peluso resigned from hisposition as Equinox Holdings’ Executive Vice President and Chief OperatingOfficer on January 7, 2005.  Inconnection therewith, on April 5, 2005, Mr. Peluso executed aSeparation Agreement with Equinox Holdings. Pursuant to this agreement, Mr. Peluso will receive lump sumpayment of $125,000 within 5 business days after the expiration a 7-dayrevocation period, and has agreed to the cancellation of all of his outstandingstock options.  In addition, Mr. Pelusohas received and will continue to receive salary continuation payments throughapproximately July 7, 2005, which in the aggregate will total$150,000.  This agreement also contains amutual general release of claims and mutual non-disparagement provisions, and Mr. Pelusocontinues to be bound by 12-month post-termination non-compete and an 18-monthpost-termination non-solicitation provisions.

 

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**Item 12.****                                                  SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters**

 

The following table sets forth certain information regarding thebeneficial ownership of Equinox common stock as of June 1, 2005, by (i) eachperson or entity who owns of record or beneficially more than 5% or more of anyclass of our voting securities; (ii) each director and each of NamedExecutive Officer of Equinox; and (iii) all directors and Named ExecutiveOfficers of Equinox as a group.

 
| **Name and Address of Beneficial  Owner(1)**                                                              | ** ** | **Number of Shares of  Common Stock  Beneficially Owned****(1)** | ** ** | **Percent of Class****(1)** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------|------------|
| Equinox Holdings, L.P.(2)  c/o North Castle Partners, L.L.C.  183 East Putnam Avenue  Greenwich, CT 06830 |       | 8,773,075                                                        |       | 92.90                       | %          |
| **Executive Officers and Directors**                                                                      |       |                                                             |       |                        |       |
| Charles F. Baird, Jr.(2)                                                                             |       | —                                                           |       | —                      |       |
| Glenn A. Hopkins(2)                                                                                       |       | —                                                           |       | —                      |       |
| Benjamin B. James(2)                                                                                      |       | —                                                           |       | —                      |       |
| Christopher J. Peluso                                                                                     |       | —                                                           |       | —                      |       |
| John Richards                                                                                             |       | —                                                           |       | —                      |       |
| Scott Rosen                                                                                               |       | —                                                           |       | —                      |       |
| Harvey Spevak(3)                                                                                          |       | 96,406                                                           |       | 1.02                        | %          |
| Mark J. Tricolli(2)                                                                                       |       | —                                                           |       | —                      |       |
| William E. Watts(2)                                                                                       |       | —                                                           |       | —                      |       |
| Edward D. Yun(2)                                                                                          |       | —                                                           |       | —                      |       |
| Jeff Grayson                                                                                              |       | —                                                           |       | —                      |       |
| **Executive Officers and Directors as a Group**                                                           |       |                                                             |       |                        |       |
| (12 persons)                                                                                         |       | 96,406                                                           |       | 1.02                        | %          |

 

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(1)           “Beneficialowner” refers to a person who has or shares the power to vote or direct thevoting of a security or the power to dispose or direct the disposition of thesecurity or who has the right to acquire beneficial ownership of a securitywithin 60 days. More than one person may be deemed to be a beneficialowner of the same securities. In computing the number of shares beneficiallyowned by a person and the percentage ownership of that person, shares subjectto options and warrants held by that person that are currently exercisable orexercisable within 60 days of December 31, 2004 are deemedoutstanding. Such shares, however, are not deemed outstanding for the purposeof computing the percentage ownership of any other person.

 

(2)           NCP-EHGP, L.L.C. is one of the general partners of Equinox Holdings, L.P. The solemember of NCP-EH GP, L.L.C. is North Castle Partners II, L.P., a privateinvestment fund managed by North Castle Partners LLC. JWC-EH, LLC is the secondgeneral partner of Equinox Holdings, L.P. The sole member of JWC-EH, LLC isJ.W. Childs Equity Partners II, L.P., a private investment fundmanaged by J.W. Childs Associates, L.P. By virtue of their status, NorthCastle and J.W. Childs may be deemed to be beneficial owners of the sharesowned by Equinox Holdings, L.P. Mr. Baird and Mr. James are partnersof North Castle and Mr. Saltzman is a vice president of North Castle andby virtue of their status may be deemed to share voting and investment powerwith respect to the shares in which North Castle has direct

 

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or indirect beneficial ownership; Mr. Baird,Mr. James and Mr. Saltzman disclaim beneficial ownership of suchshares. Mr. Hopkins, Mr. Watts and Mr. Yun are partners ofJ. W. Childs Associates, L.P. and Mr. Tricolli is a vicepresident of J.W. Childs Associates, L.P. By virtue of their status, Mr. Hopkins,Mr. Watts, Mr. Yun and Mr. Tricolli may be deemed to sharevoting and investment power with respect to the shares in whichJ.W. Childs Associates, L.P. has direct or indirect beneficial ownership; Mr. Hopkins,Mr. Watts, Mr. Yun and Mr. Tricolli disclaim beneficialownership of such shares. 97,263 of these shares are held indirectly throughEquinox Holdings, L.P. by a third party financial institution.

 

(3)           Consistsof (i) 1,283 shares held of record and (ii) 95,123 shares issuableupon exercise of rollover options that have already vested or will vest within60 days.

 

**Equity Compensation Plan Information**

 

The following table sets forth information, as of December 31,2004, concerning compensation plans (including individual compensationarrangements) under which our equity securities are authorized for issuance,aggregated as follows:

 
| ** **                                                  | ** ** | **(a)**                                                                                             | ** ** | **(b)**                                                                             | ** ** | **(c)**                                                                                                                                                | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                           | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding  options, warrants  and rights** | ** ** | **Number of securities remaining  for available for future issuance  under equity compensation  plans (excluding securities  reflected in column (a)** | ** ** |
| Equity compensation plans approved by  security holders     |       | 2,125,237                                                                                           |       | $                                                                                   | 4.88       |                                                                                                                                                   | 124,346    |   |
| Equity compensation plans not approved by  security holders |       | —                                                                                              |       | —                                                                              |       | —                                                                                                                                                 |       |
| Total                                                       |       | 2,125,237                                                                                           |       | $                                                                                   | 4.88       |                                                                                                                                                   | 124,346    |   |

 

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**Item 13.****                                                  CertainRelationships and Related Transactions**

 

**North Castle Partners, L.L.C. and J.W. ChildsAssociates, L.P.**

 

Equinox Holdings, L.P. currently holds 91% ofthe outstanding common stock of Equinox. One of the two general partners ofEquinox Holdings, L.P. is NCP-EH GP, L.L.C., whose sole member is North CastlePartners II, L.P., a private investment fund managed by North CastlePartners, L.L.C. (“North Castle”). Charles F. Baird, Jr., a Partnerof North Castle, is a Director of Equinox and has served as Chairman since December 2000.Benjamin B. James is a Partner of North Castle and a Director of Equinox.

 

The second general partner of Equinox Holdings, L.P. is JWC-EH, LLC,whose sole member is J.W. Childs Equity Partners II, L.P. The generalpartner of J.W. Childs Equity Partners II, L.P. is J.W. ChildsAdvisors II, L.P. J.W. Childs Equity Partners II, L.P. is a private investmentfund managed by J.W. Childs Associates, L.P. (“J.W. Childs”). Glenn A. Hopkins,William E. Watts and Edward D. Yun are Partners of J.W. Childs and Directors ofEquinox. Mark J. Tricolli is a Vice President of J.W. Childs and a Director ofEquinox.

 

**Consulting Agreement**

 

Pursuant to a consulting agreement dated asof December 15, 2000, North Castle and J.W. Childs receive from Equinox (1) anannual fee for business, management and financial consulting services providedto Equinox and (2) reimbursement of out-of-pocket expenses. Suchconsulting services include helping Equinox establish and maintain banking,legal and other business relationships, and assisting management in developingand implementing corporate and business strategies for improving ouroperational, marketing and financial performance. The annual fee wasestablished by means of an arms length negotiation among us and North Castleand J.W. Childs at the time of their initial investment in Equinox during our December 2002recapitalization, at levels they believed were appropriate to the nature andtypes of services being performed. The consulting agreement currently providesfor an annual fee of $0.8 million, payable semi-annually, which we mayincrease, but not decrease without the consent of both North Castle and J.W.Childs. However, any increase in the annual fee is subject to applicablelimitations under the terms of our existing and future debt. The consultingagreement also provides that Equinox will indemnify North Castle, J.W. Childs,certain affiliates and their respective directors, officers, partners, members,managers, employees, agents and controlling persons against certain liabilitiesarising under the federal securities laws, other laws regulating our businessand certain other claims and liabilities. The consulting agreement alsoprovides that North Castle and J.W. Childs will perform financial advisory,investment banking and similar services with respect to proposals for anyacquisition (by merger, asset acquisition or otherwise) by Equinox and itssubsidiaries. The fee for such services in connection with future transactionswould be an amount equal to 1% of the transaction value for the applicabletransaction. North Castle and J.W. Childs will not be paid a fee for thistransaction.

 

**Stockholders Agreement**

 

Equinox is party to a stockholders agreement,dated as of December 15, 2000, as amended, under which the parties theretohave made certain agreements regarding matters further described below,including the voting of their shares and the governance of Equinox.

 

*Board of Directorand Designation Rights.*  The stockholders agreement provides that theboard of directors of Equinox will consist of ten members, each nominated byEquinox Holdings, L.P.

 

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including one managementdirector. At any time at which a vacancy is created on the board as a result ofthe death, disability, retirement, resignation or removal before the expirationof his or her term as director, then the party that nominated such directorwill have the right to nominate a replacement.

 

*Actions of theBoard; Affiliate Agreements.*  The stockholders agreement provides thatactions of the board will require the affirmative vote of at least a majorityof the directors present at a duly convened meeting at which a quorum ispresent or the unanimous written consent of the board. The affirmative vote ofat least seven directors is required to take certain actions.

 

*Board Committees.*  The stockholders agreement provides forEquinox to have an audit committee and a compensation committee. Each committeemust have two directors, consisting of members nominated by Equinox Holdings,L.P.’s nominees.

 

*Observation andInformation Rights.* The stockholders agreement provides that a certain stockholder will havethe right to designate a representative to attend meetings of the board ofdirectors and to receive copies of all written materials provided to the board.The representative will not have any right to vote on any matter presented tothe board. The representative may be obliged to maintain the confidentiality ofinformation received in connection with the exercise of their respectiverights.

 

*TransferRestrictions.* Subject to certain exceptions, the stockholder parties to thestockholders agreement may not transfer any shares of Equinox’s common stockprior to an initial public offering.

 

**Registration Rights Agreement**

 

In connection with our recapitalization in2000, we entered into a registration rights agreement, dated as of December 15,2000, with Equinox Holdings, L.P., NCP Co-Investment Fund, L.P., certainholders of our common stock put warrants, certain members of management andother Equinox shareholders. Pursuant to the terms of the registration rightsagreement, Equinox Holdings, L.P. may, at any time, request that Equinox effectthe registration under the Securities Act of all or part of its registrablesecurities (as defined below). After an initial public offering, holders of 51%or more of the warrants relating to Equinox’s common stock may also requestthat we effect the registration under the Securities Act of all or part of suchholder’s registrable securities. Upon receipt of such a request, Equinox isrequired to promptly give written notice of such requested registration to allholders of registrable securities and, thereafter, to use its reasonable bestefforts to effect the registration under the Securities Act of all registrablesecurities which it has been requested to register pursuant to the terms of theregistration rights agreement. Equinox will pay all expenses in connection withthe first four successfully effected registrations requested by EquinoxHoldings, L.P. and up to two successfully effected registrations requested bythe warrant holders.

 

“Registrable securities” means:

 

•                  shares of Equinox common stock issued inconnection with the recapitalization to members of management or directors ofEquinox for so long as any such shares constitute restricted securities;

 

•                  shares of Equinox common stock issuablepursuant to any stock subscription agreement;

 

•                  shares of Equinox common stock issued uponexercise of the common stock put warrants; and

 

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•                  any securities issued or issuable with respectto Equinox common stock referred to above as a result of a conversion,exchange, stock dividend or distribution, stock split or reverse stock split,combination, recapitalization, merger, consolidation or other reorganizationthereof.

 

The registration rights agreement alsoprovides that, with certain exceptions, the parties thereto will have certainincidental registration rights in the event that the company at any timeproposes to register any of its equity securities and the registration form tobe used may be used for the registration of securities otherwise registrableunder the registration rights agreement.

 

In addition to the provisions set forthabove, the registration rights agreement contains other terms and conditionsincluding those customary to agreements of this kind.

 

**Related Party Leases**

 

Donato Errico, Jr., a former member ofour Board of Directors during 2003 and current shareholder, is a partner inpartnerships that lease space to us at two locations. The partnerships receivedapproximately $1.0 million for each location pursuant to the leases andrelated agreements for the fiscal years ending December 31, 2004 and 2003.

 

**Exit Payment**

 

Under our Amended and Restated Stock PurchaseAgreement and Plan of Merger as amended as of December 14, 2000, we mustpay our founding stockholders $10.0 million on the earlier of an initialpublic offering, a change of control or December 15, 2010. We must pay anadditional $5.0 million at the same time if the internal rate of return ofour equity sponsors exceeds a specified amount.

 

**Stock Option Plans**

 

Under the terms of the Equinox Holdings, Inc.1998 Stock Incentive Plan (the “1998 Plan”), options to purchase 1,000,000shares of common stock may be granted. The 1998 Plan is closed and there are nofurther options available for grant. As of December 31, 2004, there were284,919 outstanding options granted under the 1998 Plan. As of December 31,2004, 1,085,450 options were authorized under the Equinox Holdings, Inc.2000 Stock Incentive Plan and options to purchase 961,104 shares of Equinoxcommon stock were outstanding.

 

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**Item 14.****                                                  PrincipalAccountant Fees and Services**

 

The following table sets forth the aggregatefees billed to the Company for the years ended December 31, 2004 and 2003by the Company’s principal accounting firm, KPMG LLP:

 

| ** **                         | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Audit fees (a)                     |       | $        | 512,525    |     | $          | 430,200 |   |
| Total audit and audit-related fees |       | 512,525  |       | 430,200  |       |
| Tax fees(b)                        |       | —   |       | 20,100   |       |
| Total fees                         |       | $        | 512,525    |     | $          | 450,300 |   |

 

(a) Includesfees for review services in connection with quarterly reports and ourregistration statement on Form S-4

 

(b) Includestax preparation services for 2002 tax returns

 

In 2003 and 2004 all services included on the Service List were pre-approvedfollowing the policies and procedures of the Audit Committee.

 

Any requestsfor audit, audit-related, and non-audit related (tax) services not includedpre-approved services must be submitted to the Audit Committee for specificpre-approval. Generally, pre-approval is provided at regularly scheduledmeetings of the Audit Committee. However, the authority to grant specificpre-approval between meetings, as necessary, has been delegated to the Chairmanof the Audit Committee, or any member of the Committee in the absence of theChairman. In the event any of the audit-related services or non-audit related(tax) services are authorized by less than all members of the Audit Committee,the Chief Accounting Officer of the Company shall notify any members of theAudit Committee who did not participate in such determination of the servicesand fees authorized.

 

On a quarterlybasis, the Audit Committee reviews the status of services and fees incurredyear-to-date against the original Service List and the forecast of remainingservices and fees for the fiscal year.

 

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**Item 15.****                                                  Exhibitsand Financial Statement Schedules.**

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.1                 |       | Amended and Restated Stock Purchase Agreement and Plan of Merger,  dated as of October 16, 2000, as amended as of December 14, 2000,  by and among the holders of shares of Common Stock listed on Annex I to the  agreement, Equinox Holdings, Inc., NCP-EH Recapitalization Corp., and NCP-EH,  L.P. (Filed on July 15, 2004 as Exhibit 2.1 to Amendment #1 to the  Company’s Registration Statement on Form S-4, Registration  No. 333-112531, and incorporated herein by reference). |
| 3.1.1               |       | Certificate of Incorporation of Equinox Holdings, Inc., amended.  (Filed on July 15, 2004 as Exhibit 3.1.1 to Amendment #1 to the  Company’s Registration Statement on Form S-4, Registration  No. 333-112531, and incorporated herein by reference).                                                                                                                                                                                                                                              |
| 3.1.2               |       | Certificate of Incorporation of Equinox-92nd Street Inc.  (Filed on July 15, 2004 as Exhibit 3.1.2 to Amendment #1 to the  Company’s Registration Statement on Form S-4, Registration  No. 333-112531, and incorporated herein by reference).                                                                                                                                                                                                                                                           |
| 3.1.3               |       | Certificate of Incorporation of Equinox-85th Street Inc.  (Filed on July 15, 2004 as Exhibit 3.1.3 to Amendment #1 to the  Company’s Registration Statement on Form S-4, Registration  No. 333-112531, and incorporated herein by reference).                                                                                                                                                                                                                                                           |
| 3.1.4               |       | Certificate of Incorporation of Equinox—76th Street  Inc. (Filed on July 15, 2004 as Exhibit 3.1.4 to Amendment #1 to  the Company’s Registration Statement on Form S-4, Registration  No. 333-112531, and incorporated herein by reference).                                                                                                                                                                                                                                                 |
| 3.1.5               |       | Certificate of Incorporation of Equinox 63rd Street Inc.  (Filed on July 15, 2004 as Exhibit 3.1.5 to Amendment #1 to the  Company’s Registration Statement on Form S-4, Registration  No. 333-112531, and incorporated herein by reference).                                                                                                                                                                                                                                                           |
| 3.1.6               |       | Certificate of Incorporation of Equinox-54th  Street, Inc. (Filed on July 15, 2004 as Exhibit 3.1.6 to  Amendment #1 to the Company’s Registration Statement on Form S-4,  Registration No. 333-112531, and incorporated herein by reference).                                                                                                                                                                                                                                                     |
| 3.1.7               |       | Certificate of Incorporation of Equinox-50th  Street, Inc. (Filed on July 15, 2004 as Exhibit 3.1.7 to  Amendment #1 to the Company’s Registration Statement on Form S-4,  Registration No. 333-112531, and incorporated herein by reference).                                                                                                                                                                                                                                                     |
| 3.1.8               |       | Certificate of Incorporation of Equinox 44th Street Inc.  (Filed on July 15, 2004 as Exhibit 3.1.8 to Amendment #1 to the  Company’s Registration Statement on Form S-4, Registration  No. 333-112531, and incorporated herein by reference).                                                                                                                                                                                                                                                           |
| 3.1.9               |       | Certificate of Incorporation of Equinox-43rd Street Inc.  (Filed on July 15, 2004 as Exhibit 3.1.9 to Amendment #1 to the  Company’s Registration Statement on Form S-4, Registration  No. 333-112531, and incorporated herein by reference).                                                                                                                                                                                                                                                           |
| 3.1.10              |       | Certificate of Incorporation of Equinox Columbus Centre, Inc.  (Filed on July 15, 2004 as Exhibit 3.1.10 to Amendment #1 to the  Company’s Registration Statement on Form S-4, Registration  No. 333-112531, and incorporated herein by reference).                                                                                                                                                                                                                                                |
| 3.1.11              |       | Certificate of Incorporation of Equinox Greenwich Avenue, Inc.  (Filed on July 15, 2004 as Exhibit 3.1.11 to Amendment #1 to the  Company’s Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).                                                                                                                                                                                                                                               |
| 3.1.12              |       | Certificate of Incorporation of Broadway Equinox Inc., amended.  (Filed on July 15, 2004 as Exhibit 3.1.12 to Amendment #1 to the  Company’s Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).                                                                                                                                                                                                                                                   |
| 3.1.13              |       | Certificate of Incorporation of Equinox Tribeca, Inc. (Filed on  July 15, 2004 as Exhibit 3.1.13 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).                                                                                                                                                                                                                                                        |
| 3.1.14              |       | Certificate of Incorporation of Equinox Tribeca Office, Inc.  (Filed on July 15, 2004 as Exhibit 3.1.14 to Amendment #1 to the  Company’s Registration Statement on Form S-4, Registration                                                                                                                                                                                                                                                                                                              |

 

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| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                                                                                                                         |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                          |
|                |       | No. 333-112531, and incorporated herein by reference).                                                                                                                                                                                                                         |
| 3.1.15              |       | Certificate of Incorporation of Equinox Wall Street Inc. (Filed on  July 15, 2004 as Exhibit 3.1.15 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).             |
| 3.1.16              |       | Certificate of Incorporation of Equinox White Plains Road, Inc.  (Filed on July 15, 2004 as Exhibit 3.1.16 to Amendment #1 to the  Company’s Registration Statement on Form S-4, Registration  No. 333-112531, and incorporated herein by reference). |
| 3.1.17              |       | Certificate of Incorporation of Equinox Woodbury, Inc. (Filed on  July 15, 2004 as Exhibit 3.1.17 to Amendment #1 to the Company’s Registration  Statement on Form S-4, Registration No. 333-112531, and  incorporated herein by reference).          |
| 3.1.18              |       | Certificate of Incorporation of Equinox Greenvale, Inc. (Filed  on July 15, 2004 as Exhibit 3.1.18 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).         |
| 3.1.19              |       | Certificate of Incorporation of The Equinox Group, Inc. (Filed  on July 15, 2004 as Exhibit 3.1.19 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).         |
| 3.1.20              |       | Certificate of Incorporation of Energy Wear Inc. (Filed on  July 15, 2004 as Exhibit 3.1.20 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).                     |
| 3.1.21              |       | Certificate of Incorporation of Equinox Darien, Inc. (Filed on  July 15, 2004 as Exhibit 3.1.21 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).            |
| 3.1.22              |       | Articles of Incorporation of Equinox Lincoln Park, Inc. (Filed  on July 15, 2004 as Exhibit 3.1.22 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).         |
| 3.1.23              |       | Articles of Incorporation of Equinox Highland Park, Inc. (Filed  on July 15, 2004 as Exhibit 3.1.23 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).        |
| 3.1.24              |       | Articles of Incorporation of Equinox Gold Coast, Inc. (Filed on  July 15, 2004 as Exhibit 3.1.24 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).           |
| 3.1.25              |       | Articles of Incorporation of Equinox West Hollywood, Inc. (Filed  on July 15, 2004 as Exhibit 3.1.25 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).       |
| 3.1.26              |       | Articles of Incorporation of Equinox Fitness Pasadena, Inc.  (Filed on July 15, 2004 as Exhibit 3.1.26 to Amendment #1 to the  Company’s Registration Statement on Form S-4, Registration  No. 333-112531, and incorporated herein by reference).     |
| 3.1.27              |       | Articles of Incorporation of Equinox Pine Street, Inc. (Filed on  July 15, 2004 as Exhibit 3.1.27 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).          |
| 3.1.28              |       | Certificate of Incorporation of Equinox Mamaroneck, Inc. (Filed  on July 15, 2004 as Exhibit 3.1.28 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).        |
| 3.1.29              |       | Articles of Incorporation of Equinox Fitness Santa Monica, Inc.  (Filed on July 15, 2004 as Exhibit 3.1.29 to Amendment #1 to the  Company’s Registration Statement on Form S-4, Registration  No. 333-112531, and incorporated herein by reference). |
|   3.1.30  |       | Certificate of Incorporation of Equinox Wooster, Inc                                                                                                                                                                                                                                |
|   3.1.31  |       | Articles of Incorporation of Equinox Fitness San Mateo, Inc.                                                                                                                                                                                                                   |
|   3.1.32  |       | Articles of Incorporation of Equinox Fitness Newport Beach, Inc.                                                                                                                                                                                                               |
|   3.1.33  |       | Articles of Incorporation of Equinox Fitness Westwood, Inc.                                                                                                                                                                                                                    |
|   3.1.34  |       | Certificate of Incorporation of Equinox Great Neck, Inc                                                                                                                                                                                                                             |

 

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| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                                                                                                               |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                |
| 3.1.35              |       | Articles of Incorporation of Equinox South Beach, Inc.                                                                                                                                                                                                               |
| 3.1.36              |       | Articles of Incorporation of Equinox Fitness Palos Verdes, Inc.                                                                                                                                                                                                      |
| 3.1.37              |       | Articles of Incorporation of Equinox Monroe Street, Inc.                                                                                                                                                                                                             |
| 3.1.38              |       | Public Records Filing for New Business Entity for Equinox Englewood  Cliffs, Inc.                                                                                                                                                                                    |
| 3.1.39              |       | Corrected Certificate of Formation of Equinox Holdings, LLC                                                                                                                                                                                                               |
| 3.2.1               |       | Amended and Restated By-laws of Equinox Holdings, Inc. (Filed on  July 15, 2004 as Exhibit 3.2.1 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference). |
| 3.2.2               |       | By-laws of Equinox-92nd Street Inc. (Filed on  July 15, 2004 as Exhibit 3.2.2 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).                         |
| 3.2.3               |       | By-laws of Equinox-85th Street Inc. (Filed on  July 15, 2004 as Exhibit 3.2.3 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).                         |
| 3.2.4               |       | By-laws of Equinox Fitness Club Inc. (Filed on July 15, 2004 as  Exhibit 3.2.4 to Amendment #1 to the Company’s Registration Statement on  Form S-4, Registration No. 333-112531, and incorporated herein by  reference).                        |
| 3.2.5               |       | By-laws of Equinox 63rd Street Inc. (Filed on  July 15, 2004 as Exhibit 3.2.5 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).                         |
| 3.2.6               |       | By-laws of Equinox-54th Street, Inc. (Filed on  July 15, 2004 as Exhibit 3.2.6 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).                   |
| 3.2.7               |       | By-laws of Equinox-50th Street, Inc. (Filed on  July 15, 2004 as Exhibit 3.2.7 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).                   |
| 3.2.8               |       | By-laws of Equinox 44th Street Inc. (Filed on  July 15, 2004 as Exhibit 3.2.8 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).                         |
| 3.2.9               |       | By-laws of Equinox-43rd Street Inc. (Filed on  July 15, 2004 as Exhibit 3.2.9 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).                         |
| 3.2.10              |       | By-laws of Equinox Columbus Centre, Inc. (Filed on July 15,  2004 as Exhibit 3.2.10 to Amendment #1 to the Company’s Registration  Statement on Form S-4, Registration No. 333-112531, and  incorporated herein by reference).              |
| 3.2.11              |       | By-laws of Equinox Greenwich Avenue, Inc. (Filed on  July 15, 2004 as Exhibit 3.2.11 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).             |
| 3.2.12              |       | By-laws of Broadway Equinox Inc. (Filed on July 15, 2004 as  Exhibit 3.2.12 to Amendment #1 to the Company’s Registration Statement  on Form S-4, Registration No. 333-112531, and incorporated herein  by reference).                           |
| 3.2.13              |       | By-laws of Equinox Tribeca, Inc. (Filed on July 15, 2004 as  Exhibit 3.2.13 to Amendment #1 to the Company’s Registration Statement  on Form S-4, Registration No. 333-112531, and incorporated herein  by reference).                      |
| 3.2.14              |       | By-laws of Equinox Tribeca Office, Inc. (Filed on July 15,  2004 as Exhibit 3.2.14 to Amendment #1 to the Company’s Registration  Statement on Form S-4, Registration No. 333-112531, and  incorporated herein by reference).               |
| 3.2.15              |       | By-laws of Equinox Wall Street Inc. (Filed on July 15, 2004 as  Exhibit 3.2.15 to Amendment #1 to the Company’s Registration Statement  on Form S-4, Registration No. 333-112531, and incorporated herein  by reference).                        |
| 3.2.16              |       | By-laws of Equinox White Plains Road, Inc. (Filed on  July 15, 2004 as Exhibit 3.2.16 to                                                                                                                                                                   |

 

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| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                                                                                                       |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                        |
|                |       | Amendment #1 to the Company’s Registration Statement on  Form S-4, Registration No. 333-112531, and incorporated herein by  reference).                                                                                                            |
| 3.2.17              |       | By-laws of Equinox Woodbury, Inc. (Filed on July 15, 2004  as Exhibit 3.2.17 to Amendment #1 to the Company’s Registration  Statement on Form S-4, Registration No. 333-112531, and  incorporated herein by reference).             |
| 3.2.18              |       | By-laws of Equinox Greenvale, Inc. (Filed on July 15, 2004  as Exhibit 3.2.18 to Amendment #1 to the Company’s Registration  Statement on Form S-4, Registration No. 333-112531, and  incorporated herein by reference).            |
| 3.2.19              |       | By-laws of The Equinox Group, Inc. (Filed on July 15, 2004  as Exhibit 3.2.19 to Amendment #1 to the Company’s Registration  Statement on Form S-4, Registration No. 333-112531, and incorporated  herein by reference).            |
| 3.2.20              |       | By-laws of Energy Wear Inc. (Filed on July 15, 2004 as  Exhibit 3.2.20 to Amendment #1 to the Company’s Registration Statement  on Form S-4, Registration No. 333-112531, and incorporated herein  by reference).                        |
| 3.2.21              |       | By-laws of Equinox Darien, Inc. (Filed on July 15, 2004 as  Exhibit 3.2.21 to Amendment #1 to the Company’s Registration Statement  on Form S-4, Registration No. 333-112531, and incorporated herein  by reference).               |
| 3.2.22              |       | By-laws of Equinox Lincoln Park, Inc. (Filed on July 15,  2004 as Exhibit 3.2.22 to Amendment #1 to the Company’s Registration  Statement on Form S-4, Registration No. 333-112531, and  incorporated herein by reference).         |
| 3.2.23              |       | By-laws of Equinox Highland Park, Inc. (Filed on July 15,  2004 as Exhibit 3.2.23 to Amendment #1 to the Company’s Registration  Statement on Form S-4, Registration No. 333-112531, and  incorporated herein by reference).        |
| 3.2.24              |       | By-laws of Equinox Gold Coast, Inc. (Filed on July 15, 2004  as Exhibit 3.2.24 to Amendment #1 to the Company’s Registration  Statement on Form S-4, Registration No. 333-112531, and  incorporated herein by reference).           |
| 3.2.25              |       | By-laws of Equinox West Hollywood, Inc. (Filed on July 15,  2004 as Exhibit 3.2.25 to Amendment #1 to the Company’s Registration  Statement on Form S-4, Registration No. 333-112531, and  incorporated herein by reference).       |
| 3.2.26              |       | By-laws of Equinox Fitness Pasadena, Inc. (Filed on  July 15, 2004 as Exhibit 3.2.26to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference).      |
| 3.2.27              |       | By-laws of Equinox Pine Street, Inc. (Filed on July 15,  2004 as Exhibit 3.2.27 to Amendment #1 to the Company’s Registration  Statement on Form S-4, Registration No. 333-112531, and incorporated  herein by reference).          |
| 3.2.28              |       | By-laws of Equinox Mamaroneck, Inc. (Filed on July 15, 2004  as Exhibit 3.2.28 to Amendment #1 to the Company’s Registration  Statement on Form S-4, Registration No. 333-112531, and  incorporated herein by reference).           |
| 3.2.29              |       | By-laws of Equinox Fitness Santa Monica, Inc. (Filed on  July 15, 2004 as Exhibit 3.2.29 to Amendment #1 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531,  and incorporated herein by reference). |
| 3.2.30              |       | By-laws of Equinox Fitness San Mateo, Inc.                                                                                                                                                                                                                   |
| 3.2.31              |       | By-laws of Equinox Fitness Newport Beach, Inc.                                                                                                                                                                                                               |
| 3.2.32              |       | By-laws of Equinox Fitness Westwood, Inc.                                                                                                                                                                                                                    |
| 3.2.33              |       | By-laws of Equinox Great Neck, Inc                                                                                                                                                                                                                                |
| 3.2.34              |       | By-laws of Equinox South Beach, Inc.                                                                                                                                                                                                                         |
| 3.2.35              |       | By-laws of Equinox Fitness Palos Verdes, Inc.                                                                                                                                                                                                                |
| 3.2.36              |       | By-laws of Equinox Monroe Street, Inc.                                                                                                                                                                                                                       |
| 3.2.37              |       | By-laws of Equinox Englewood Cliffs, Inc.                                                                                                                                                                                                                    |
| 3.2.38              |       | Limited Liability Company Agreement of EQX Holdings, LLC                                                                                                                                                                                                          |
| 4.1                 |       | Indenture, dated as of December 16, 2003 among Equinox Holdings, Inc.,  the Guarantors named                                                                                                                                                            |

 

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| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                |       | therein and U.S. Bank National Association with respect to Equinox  Holdings, Inc.’s 9% Senior Notes due 2009. (Filed on July 15, 2004  as Exhibit 4.1 to Amendment #1 to the Company’s Registration Statement  on Form S-4, Registration No. 333-112531, and incorporated herein  by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.2                 |       | Registration Rights Agreement, dated as of December 16, 2003,  among Equinox Holdings, Inc., the Guarantors named therein, Merrill  Lynch & Co., UBS Securities LLC. and Wachovia Capital Markets, LLC.  (Filed on February 5, 2004 as Exhibit 4.2 to the Company’s  Registration Statement on Form S-4, Registration No. 333-112531).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.3                 |       | Form of Exchange Note (Filed on July 15, 2004 as  Exhibit 4.3 to Amendment #1 to the Company’s Registration Statement on  Form S-4, Registration No. 333-112531, and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.5                 |       | Form of Common Stock Purchase Warrant. (Filed on July 15,  2004 as Exhibit 4.5 to Amendment #1 to the Company’s Registration  Statement on Form S-4, Registration No. 333-112531, and  incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.1                |       | Master Services Agreement, dated February 22, 2001, among  Equinox Holdings, Inc., Eclipse Development Corporation, and Paul  Boardman. (Filed on July 15, 2004 as Exhibit 10.1 to Amendment #1  to the Company’s Registration Statement on Form S-4, Registration  No. 333-112531, and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.3                |       | Registration Rights Agreement, dated December 15, 2000, among  Equinox Holdings, Inc., Equinox Holdings, L.P., NCP Co-Investment Fund,  L.P. and certain holders of common stock put warrants, certain members of  management and other Equinox shareholders. (Filed on July 15, 2004 as  Exhibit 10.3 to Amendment #1 to the Company’s Registration Statement on  Form S-4, Registration No. 333-112531, and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.4                |       | Consulting Agreement, dated as of December 15, 2000, among  Equinox Holdings, Inc., North Castle Partners, L.L.C., J.W. Childs  Associates, L.P. and J.W. Childs Advisors II, L.P. (Filed on July 15,  2004 as Exhibit 10.4 to Amendment #1 to the Company’s Registration  Statement on Form S-4, Registration No. 333-112531, and  incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.5                |       | Stockholders Agreement, dated as of December 15, 2000, as  amended as of February 21, 2003, among Equinox Holdings, Inc.,  NCP-EH, L.P., NCP Co-Investment Fund, L.P., each of the stockholders listed  on Schedule I to the agreement, each of the rollover optionholders listed  on Schedule II to the agreement, Albion Alliance Mezzanine Fund, L.P.,  Albion Alliance Mezzanine Fund II, L.P., Deutsche Bank Securities Inc.,  Exeter Capital Partners IV, L.P., Exeter Equity Partners, L.P., Bill and  Melinda Gates Foundation, Arrow Investment Partners, and each other person  who is, or becomes, a party to the Agreement pursuant to Section 4.14 of  the Agreement, North Castle Partners II, L.P. and Friends of North Castle  Fund, L.P. (Filed on July 15, 2004 as Exhibit 10.5 to Amendment #1  to the Company’s Registration Statement on Form S-4, Registration  No. 333-112531, and incorporated herein by reference). |
| 10.6                |       | Employment Agreement by and between Equinox Holdings, Inc. and  Harvey Spevak. (Filed on July 15, 2004 as Exhibit 10.6 to Amendment  #1 to the Company’s Registration Statement on Form S-4, Registration  No. 333-112531, and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.7                |       | Employment Agreement by and between Equinox Holdings, Inc.,  Scott Rosen and the Company. (Filed on August 9, 2004 as Exhibit 10.7  to Amendment #2 to the Company’s Registration Statement on Form S-4,  Registration No. 333-112531, and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.8                |       | Termination Agreement by and between Equinox Holdings, Inc. and  Kenneth P. Fleischer. (Filed on August 9, 2004 as Exhibit 10.8 to  Amendment #2 to the Company’s Registration Statement on Form S-4,  Registration No. 333-112531, and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.9                |       | Employment Agreement by and between Equinox Holdings, Inc. and  Chris Peluso. (Filed on August 9, 2004 as Exhibit 10.9 to Amendment  #2 to the Company’s Registration Statement on Form S-4, Registration  No. 333-112531, and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.10               |       | Employment Agreement by and between Equinox Holdings, Inc. and  Jeff Grayson. (Filed on                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

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| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                     |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                      |
|                |       | August 9, 2004 as Exhibit 10.10 to Amendment #2 to the  Company’s Registration Statement on Form S-4, Registration  No. 333-112531, and incorporated herein by reference).                                                                                                                                                             |
| 10.11               |       | Credit Agreement by and among Equinox Holdings, Inc., Merrill  Lynch Capital, UBS Securities, Inc., and Wachovia Securities, Inc.  (Filed on August 9, 2004 as Exhibit 10.11 to Amendment #2 to the  Company’s Registration Statement on Form S-4, Registration  No. 333-112531, and incorporated herein by reference). |
| 10.12               |       | Equinox Holdings, Inc. 1998 Stock Option Plan                                                                                                                                                                                                                                                                                                                   |
| 10.13               |       | Equinox Holdings, Inc. 2000 Stock Incentive Plan                                                                                                                                                                                                                                                                                                                |
| 10.14               |       | Form of Option Agreement under the Equinox Holdings, Inc. 2000 Stock  Incentive Plan                                                                                                                                                                                                                                                                            |
| 10.15               |       | Form of Stock Subscription agreement under the Equinox Holdings, Inc.  2000 Stock Incentive Plan.                                                                                                                                                                                                                                                               |
| 12.1                |       | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                              |
| 21.1                |       | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                           |
| 31.1                |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                             |
| 31.2                |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                             |
| 32.1                |       | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                            |
| 32.2                |       | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                            |

 

 

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###### ***SIGNATURES***

 

 Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized on August 15, 2005.

 
|   | EQUINOX HOLDINGS,  INC.                               |
|--------|-------------------------------------------------------|
|   | (Registrant)                                          |
|   |                                                  |
|   | By: /s/ SCOTT  ROSEN                             |
|   | Scott Rosen                                           |
|   | Executive Vice  President and Chief Financial Officer |
|   | (Principal  financial, accounting officer)            |
|   |                                                  |
|   | By: /s/ HARVEY  SPEVAK                           |
|   | Harvey Spevak                                         |
|   | Director, President  and Chief Executive Officer      |

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities indicated on August 15, 2005.

 
|                                                     |     |                                     |   |
|----------------------------------------------------------|----------|------------------------------------------|--------|
| /s/ HARVEY SPEVAK                                        |     | /s/ JOHN RICHARDS                   |   |
| Harvey Spevak                                            |     | John Richards                            |   |
| *Director, President and Chief Executive  Officer*       |     | *Director*                               |   |
| * *                                                 | * * |                                     |   |
| * *                                                 | * * |                                     |   |
| /s/ SCOTT ROSEN                                          |     | /s/ STEPHEN M. ROSS                      |   |
| Scott Rosen                                              |     | Stephen M. Ross                          |   |
| *Executive Vice President and Chief  Financial  Officer* |     | *Director*                               |   |
|                                                     |     |                                     |   |
|                                                     |     |                                     |   |
| /s/ CHARLES F. BAIRD, JR.                                |     | /s/ MARK TRICOLLI                        |   |
| Charles F. Baird                                         |     | Mark Tricolli                            |   |
| *Director, Chairman*                                     |     | *Director, Vice President and Secretary* |   |
| * *                                                 | * * |                                     |   |
| * *                                                 | * * |                                     |   |
| /s/ IRWIN COHEN                                          |     | /s/ WILLIAM E. WATTS                     |   |
| Irwin Cohen                                              |     | William E. Watts                         |   |
| *Director*                                               |     | *Director*                               |   |
| * *                                                 | * * |                                     |   |
| * *                                                 | * * |                                     |   |
| /s/ GLENN HOPKINS                                        |     | /s/ EDWARD D. YUN                        |   |
| Glenn Hopkins                                            |     | Edward D. Yun                            |   |
| *Director*                                               |     | *Director*                               |   |
| * *                                                 | * * |                                     |   |
| /s/ DOUGLAS W. LEHRMAN                                   |     |                                     |   |
| Douglas W. Lehrman                                       |     |                                     |   |
| *Director*                                               |     |                                     |   |
| * *                                                 |     |                                     |   |

 

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