UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

FOR THE QUARTERLY PERIOD ENDED ~~JUNE~~SEPTEMBER 30, 2004

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NUMBER 333-112531

EQUINOX HOLDINGS, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE		13-4034296
(STATE OR OTHER JURISDICTION OF INCORPORATION)		(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
895 BROADWAYNEW YORK, NEW YORK 10003 TELEPHONE: (212) 677-0181
(ADDRESS, ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANTS PRINCIPAL EXECUTIVE OFFICE.)

895 BROADWAY
NEW YORK, NEW YORK 10003
TELEPHONE: (212) 677-0181

(ADDRESS, ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANTS PRINCIPAL EXECUTIVE OFFICE.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

o Yes ý No

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

o Yes ý No

As of ~~August~~November 3, 2004 there were 9,438,247 shares of Common Stock outstanding.

EQUINOX HOLDINGS, INC.

FORM 10-Q

FOR THE QUARTER ENDED ~~JUNE~~SEPTEMBER 30, 2004

INDEX

PART I. FINANCIAL INFORMATION Item 1. Financial Statements a) Consolidated Condensed Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003 b) Unaudited Consolidated Condensed Statements of Income for the three and six month periods ended June 30, 2004 and 2003 c) Unaudited Consolidated Condensed Statements of Cash Flows for the six month periods ended June 30, 2004 and 2003 d) Notes to Consolidated Condensed Financial Statements (unaudited) Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form-8-K SIGNATURES Section 302 certification Section 302 certification Section 906 certification Section 906 certification

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
a) Unaudited Consolidated Condensed Balance Sheets as of September 30, 2004 and December 31, 2003

b) Unaudited Consolidated Condensed Statements of Income for the three and nine month periods ended September 30, 2004 and 2003

c) Unaudited Consolidated Condensed Statements of Cash Flows for the nine month periods ended September 30, 2004 and 2003

d) Notes to Unaudited Consolidated Condensed Financial Statements

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II. OTHER INFORMATION
Item 1. Legal Proceedings

Item 6. Exhibits

SIGNATURES
	Section 302 certification
	Section 302 certification
	Section 906 certification
	Section 906 certification

EQUINOX HOLDINGS, INC.

Unaudited Consolidated ~~Condensed~~ Condensed Balance Sheets

(in thousands)

	June 30, 2004			December 31, 2003
	September 30, 2004			December 31, 2003
	(unaudited)
Assets
Current assets:
Cash	$	3738,~~485~~440		$	42,709
Marketable securities	—			70
Accounts receivable - members, less allowance for doubtful accounts of $104 and $89, respectively	1,675			1,546
Accounts receivable - members, less allowance for doubtful accounts of $83 and $112, respectively	2,288			1,546
Due from affiliated entities	~~463~~636			—
Deferred income taxes	2,~~319~~527			2,526
Prepaid expenses and other current assets	98,~~045~~713			8,970
Total current assets	5052,~~987~~604			55,821
Property and equipment, net	126,435			114,628
Property and equipment, net of accumulated depreciation of $4,480 and $3,316, respectively	130,559			114,628
Deferred income taxes	45,~~375~~695			4,375
Other assets	5,~~143~~078			5,015
Goodwill, net	2,503			2,503
Deferred financing costs, net	6,~~954~~630			6,961
Total assets	$	~~196~~203,~~397~~069		$	189,303
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	~~1,000~~880		$	1,087
Accrued expenses	710,~~948~~151			4,248
Due to affiliated entities	—			787
Deferred revenue	2730,~~885~~142			24,966
Current installments of long-term debt	5956			123
Current installments of capital lease obligations	~~1,125~~848			1,252
Total current liabilities	3842,~~017~~077			32,463
Deferred revenue	~~598~~656			495
Long-term debt, excluding current installments	161,~~416~~385			161,501
Capital lease obligations, net of current installments	~~898~~877			1,123
Deferred rent	1819,~~685~~775			16,206
Common stock put warrants	8,~~088~~319			9,654
Due to founding stockholders	3,~~204~~347			2,936
Total long term liabilities	~~192~~194,~~889~~359			191,915
Total liabilities	~~230~~236,~~906~~436			224,378
Stockholders’ deficit:
Common stock	94			94
Additional paid-in capital	82,920			82,920
Accumulated other comprehensive income	—			14
Accumulated deficit	(~~117~~116,~~523~~381		)	(118,103		)
Total stockholders’ deficit	(3433,~~509~~367		)	(35,075		)
Total liabilities and stockholders’ deficit	$	~~196~~203,~~397~~069		$	189,303

See accompanying notes to unaudited consolidated condensed financial statements.

EQUINOX HOLDINGS, INC.

Unaudited Consolidated Condensed Statements of Income

(in thousands)

	Three months ended June 30,						Six months ended June 30,
	Three months ended September 30,					Nine months ended September 30,
	2004			2003		2004	~~2004~~	2003		~~2003~~
Revenues:
Membership fees	$	2324,~~350~~213		$19,439	~~19,043~~	69,278	$	4555,~~065~~486		$	~~36,047~~
Personal training	87,~~088~~288			65,~~539~~538		22,649	~~15,361~~	18,088		~~12,550~~
Other revenue	54,~~042~~531			43,~~370~~769		14,094	~~9,562~~	11,821		~~8,052~~
Total revenue	36,~~480~~032			2928,~~952~~746		106,021	~~69,988~~	85,395		~~56,649~~
Expenses:
Compensation and related expenses	14,~~623~~106			12,~~075~~167		43,192	~~29,085~~	35,671		~~23,504~~
Rent and occupancy	5,~~301~~352			3,856		15,566	~~10,213~~	11,986		~~8,129~~
General and administrative	7,~~958~~352			54,~~678~~048		24,093	~~16,742~~	14,657		~~10,609~~
Related-party management fees and expenses	2210			~~111~~438		614	~~404~~	981		~~544~~
Depreciation and amortization	3,084			2,331			6,020			4,584
Stock based compensation	—			35		—		35
Total operating expenses	30,968			24,051			62,464			47,370
Depreciation and amortization	3,032			2,573		9,052		7,157
Income from operations	5,512			5,901			7,524			9,279
Total operating expenses	30,052			23,117		92,517		70,487
Other income (expense):
Income from operations	5,980			5,629		13,504		14,908
Interest expense	(4,405		)	(3,812		)	(8,196		)	(7,753		)
Other income (expense):
Interest income	109			26			160			62
Interest expense	(4,131		)	(3,976	)	(12,327	)	(11,728	)
Other income (expense)	853			(392		)	1,567			(392		)
Interest income	104			48		265		109
Total other expense	(3,443		)	(4,178		)	(6,469		)	(8,083		)
Change in fair value of warrants	(231		)	1,681		1,337		1,289
Income before provision for income taxes	2,069			1,723			1,055			1,196
Total other expense	(4,258		)	(2,247	)	(10,725	)	(10,330	)
Provision for income taxes	(931		)	(775		)	(475		)	(538		)
Income before provision for income taxes	1,722			3,382		2,779		4,578
Net income	$	1,138		$	948		$	580		$	658
Provision for income taxes	(581		)	(1,522	)	(1,056	)	(2,060	)
Net income	$	1,141		1,860		1,723		2,518

See accompanying notes to unaudited consolidated condensed financial statements.

EQUINOX HOLDINGS, INC. ~~Unaudited Consolidated Condensed Statements of Cash Flows (in thousands)~~

	For the Six Months ended June 30,
	2004			2003
Cash flows from operating activities:
Net income	$	580		$	658
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	6,020			4,584
Allowance for doubtful accounts, net of write-offs	(8		)	21
Interest expense	663			1,900
Changes in fair market value of common stock put warrants	(1,566		)	404
Accretive interest expense related to payable to founding stockholders	269			385
Deferred rent	1,216			1,240
Deferred income taxes	207			(1,640		)
Changes in operating assets and liabilities:
Accounts receivable - members	(121		)	(42		)
Due (to) from affiliated entities, net	(1,249		)	474
Prepaid expenses and other current assets	(76		)	572
Other assets	(128		)	757
Accounts payable	(86		)	(345		)
Accrued expenses	3,733			2,361
Deferred revenue	3,021			3,332
Net cash provided by operating activities	12,475			14,661
Cash flows from investing activities:
Redemption (purchase) of marketable securities	56			(5		)
Purchases of property and equipment	(16,151		)	(11,810		)
Net cash used in investing activities	(16,095		)	(11,815		)
Cash flows from financing activities:
Proceeds from long-term debt	—			25,000
Payment of deferred financing costs	(659		)	(2,430		)
Proceeds from issuance of common stock to existing shareholders for cash	—			10,000
Repayment of note payable	(184		)	(17,840		)
Repayment of capital lease obligations	(761		)	(902		)
Net cash (used) provided by financing activities	(1,604		)	13,828
Net (decrease) increase in cash and cash equivalents	(5,224		)	16,674
Cash at beginning of year	42,709			1,245
Cash at end of year	$	37,485		$	17,919
Supplemental disclosures of cash flow information:
Cash paid for:
Interest	$	7,304		$	2,977
Income taxes	5			1,256
Supplemental disclosure of non-cash investing and financing activities:
Capital lease obligations entered into for fitness equipment	410			824
Deferred rent capitalized during build-out	1,263			962

Unaudited Consolidated Condensed Statements of Cash Flows

(in thousands)

	For the Nine Months ended September 30,
	2004			2003
Cash flows from operating activities:

Net income	$	1,723		$	2,518
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	9,052			7,157
Allowance for doubtful accounts, net of write-offs	(29		)	(43		)
Non-cash interest expense	996			3,202
Stock based compensation				35
Changes in fair value of common stock put warrants	(1,337		)	(1,289		)
Accretive interest expense related to payable to founding stockholders	412			591
Deferred rent	1,524			1,421
Deferred income taxes	(1,321		)	1,946
Changes in operating assets and liabilities:
Accounts receivable - members	(713		)	(207		)
Due (to) from affiliated entities, net	(1,423		)	347
Prepaid expenses and other current assets	256			(316		)
Other assets	(85		)	234
Accounts payable	(206		)	(502		)
Accrued expenses	5,903			(516		)
Deferred revenue	5,336			4,143
Net cash provided by operating activities	20,088			18,721
Cash flows from investing activities:
Redemption of marketable securities	56			—
Purchases of property and equipment	(22,505		)	(15,505		)

Net cash used in investing activities	(22,449		)	(15,505		)
Cash flows from financing activities:
Proceeds from long-term debt	—			25,000
Payment of deferred financing costs	(664		)	(2,429		)
Proceeds from note payable	—			425
Proceeds from issuance of common stock to existing shareholders for cash	—			10,000
Repayment of note payable	(184		)	(19,337		)
Repayment of capital lease obligations	(1,060		)	(1,199		)

Net cash (used) provided by financing activities	(1,908		)	12,460

Net (decrease) increase in cash and cash equivalents	(4,269		)	15,676
Cash at beginning of year	42,709			1,245

Cash at end of year	$	38,440		$	16,921
Supplemental disclosures of cash flow information:
Cash paid for:
Interest	$	7,483		$	6,216
Income taxes	53			1,284
Supplemental disclosure of non-cash investing and financing activities:
Capital lease obligations entered into for fitness equipment	410			891
Deferred rent capitalized during build-out	2,046			1,639

See accompanying notes to unaudited consolidated condensed financial statements.

EQUINOX HOLDINGS, INC.

Notes to Consolidated Condensed Financial Statements

(unaudited)

(1) Description, Organization and Development of Business

(a) Description of Business

Equinox operates upscale, full-service fitness clubs that offer an integrated selection of Equinox-branded programs, services and products. We currently operate twenty-two fitness clubs: seventeen in the New York City metropolitan area, two in Los Angeles and three in the Chicago area. In addition, we have seven new locations under development, ~~consisting~~including of two in the New York City ~~metropolitan~~ metropolitan area in Mamaroneck and Great Neck. Mamaroneck is scheduled to ~~be opened~~open in ~~early~~mid 2005 and Great Neck is scheduled for early 2006. The other five clubs under development are located in California ~~are~~ in Santa Monica, ~~two~~San inMateo, San Francisco, Newport Beach and Westwood. The Santa Monica and San Francisco fitness clubs are scheduled to open in December 2004, ~~California~~San ~~projected~~Mateo is scheduled for early to bemid ~~opened~~2005 ~~during~~and ~~late~~Newport ~~2004~~Beach and ~~early~~Westwood are scheduled between late 2005 and early 2006. We cluster clubs near the highest concentrations of our target members’ areas of both employment and residence, typically in densely populated major metropolitan regions. Our target member is a well-educated professional between 25 and 55 years of age with significant discretionary income and who considers fitness an essential part of their active lifestyle.

(b) Basis of Presentation

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of ~~the Company~~management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods except that the results of operations for the three and nine month periods ended September 30, 2003 included $200,000 of expenses that should have been recorded in the three month period ended December 31, 2003. The results of operations for the ~~six~~ nine months ended ~~June~~ September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. The balance sheet at ~~December~~ December 31, 2003 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Registration Statement ~~pursuant to Rule 424(b)(3)~~ on Form S-4, File No. 333-112531, for the year ended December 31, 2003 filed with the Securities and Exchange Commission on August 12, 2004.

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which require the Company’s management to make estimates and assumptions that affect the amounts reported therein. Actual results could vary from such estimates. In addition, certain reclassifications have been made to prior period financial statements to conform with the 2004 presentation.

The consolidated condensed financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.

(2) Comprehensive Income

The Company complies with the provisions of SFAS No. 130, Reporting Comprehensive Income, which requires companies to report all changes in equity during a period, except those resulting from investments by owners and distributions to owners. Comprehensive income is the total of net income and all other non-owner changes in equity (other comprehensive income) such as unrealized gains or losses on ~~securities~~ securities classified as available-for-sale. Comprehensive income was $~~986~~1,~~954~~860,536, $~~662~~2,~~769~~524,760, $1,~~137~~141,~~811~~143 and $~~566~~1,~~369~~708,511 for the three and ~~six~~nine months ended ~~June~~ September 30, 2003 and 2004, respectively.

(3) Long-Term Debt

The Company is filing its September 30, 2004 quarterly report on Form 10-Q twenty-one days (not inclusive of five extra days pursuant to Rule 12b-25) past the required forty-five days after quarter’s end, due to additional time needed to analyze its tax accounts in light of the preparation of amended tax returns for the period ended December 31, 2000 and the years ended December 31, 2001 and 2002. This resulted in a violation of Section 4.3 of Article IV, “Reports to Holders”, of the Indenture governing the Company’s $160.0 million Senior Notes due 2009, which is cured with the filing of this report.

(4) Income Taxes

The estimated annual effective tax rate for fiscal 2004 and fiscal 2003 were 38% and 45%, respectively, including state and local income taxes. The differences between the effective rate and the statutory rate of 45% are due to permanent differences.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Equinox

Equinox operates upscale, full-service fitness clubs with spas in the New York City metropolitan area, with growing operations in Los Angeles and Chicago. We currently we operate twenty-two fitness clubs: seventeen in the New York City metropolitan area, two in Los Angeles and three in Chicago. During 2003 ~~the~~we ~~Company~~ opened four new clubs.

During the first ~~six~~nine months of 2004, we opened three of our twenty-two clubs currently in operation. In January 2004, we opened two, one in New York City and the other in Chicago and in late June 2004 we opened an additional club in the New York City metropolitan area. In addition, we have seven new locations under development, ~~consisting~~including of two in the New York City metropolitan area in Mamaroneck and Great Neck. Mamaroneck ~~and~~is ~~Great Neck are~~ scheduled to beopen in ~~opened~~mid into ~~early~~late 2005 and Great Neck is scheduled for early 2006~~, respectively~~. The other five clubs under development are located in California in Santa Monica, ~~two~~San inMateo, San Francisco, Newport Beach and Westwood,. The Santa Monica and San Francisco fitness clubs are ~~projected~~scheduled to beopen ~~opened~~in ~~during~~December 2004, ~~late~~San ~~2004~~Mateo ~~and~~is scheduled for early to mid 2005 and Newport Beach and Westwood are scheduled between late 2005 and early 2006. As of ~~June~~September 30, 2004 we had approximately 7175,000 members. We will begin consolidating the results of Eclipse Development Corporation, a variable interest entity as defined by FASB Interpretation No. 46, for the year ended December 31, 2005. The consolidation of Eclipse Development Corporation will not materially effect our results ~~statement~~ of operations or financial position.

We are filing our September 30, 2004 quarterly report on Form 10-Q twenty-one days (not inclusive of five extra days pursuant to Rule 12b-25) past the required forty-five days after our quarter’s end, due to additional time needed to analyze our tax accounts in light of the preparation of amended tax returns for the period ended December 31, 2000 and the years ended December 31, 2001 and 2002.

As used in this section the terms listed below have the following meanings:

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

Sales commissions and other direct expenditures paid with regard to deferred membership revenue are amortized over the period in which the related revenue is recognized as income. Deferred costs do not exceed related deferred revenue for the periods presented. ~~Such costs are amortized over the life of the membership agreement.~~ Revenues for ancillary services are recognized as services are performed. The Company recognizes revenue from merchandise sales upon delivery to the customer. Other income, which consists of license fees paid to the Company under concession and operating agreements, is recognized on a periodic basis according to these agreements.

Compensation and Related Expenses. Compensation and related expenses is comprised of all operations and general and administrative salaries, bonus, commissions, recruiting expenses and related payroll taxes, and benefits. Compensation and related expenses, ~~are~~excluding commissions, are expensed as incurred.

Rent and Occupancy. Rent and occupancy expense is comprised of rent, real estate taxes and other facilities costs for all of our health clubs and general and administrative offices. Rent is recorded on a straight-line basis and all other occupancy expenses are expensed as incurred, except for those costs that are capitalized during the build-out of each respective fitness club.

General and Administrative Expense. General and administrative expenses consist primarily of costs for general corporate functions including accounting and legal, bad debt expense, club supplies, utilities, marketing and promotional expenses comprised of professional fees~~, utilities, and club supplies~~. General and administrative expenses are expensed as incurred.

Our fixed costs include rent, certain payroll expenses, utilities, janitorial expenses and depreciation. Our variable costs include commissions and other payroll expenses, advertising and supplies. Cost of goods sold for our retail business represents a small portion of our total operating expenses and is included in general and administrative expenses. We refer to “club contribution” as the excess of a club’s revenues over its operating expenses (operating income before depreciation and other non-cash expenses and allocation of corporate expenses).

When we open a new fitness club, our fixed costs increase (as do our variable costs to some degree), but without the membership revenue base of a mature fitness club. As a new fitness club increases its membership base, fixed costs are typically spread over an increasing revenue base and its club contribution tends to improve. Based on our experience, revenues of a fitness club increase significantly during its first 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 of the second full year of operations, a fitness club has typically generated significantly better club contribution as the member base grows with minimal incremental fixed operating costs. By the end of the fourth full year of operations, a typical fitness club has matured, with memberships at or near capacity.

The following table illustrates our fitness club locations, opening dates and months of operations for the three and ~~six~~nine months ended ~~June~~ September 30, 2004 and 2003:

	Date Club	Three Months Ended June 30,		Six Months Ended June 30,
Name	Date Club Opened	Three Months Ended September 30,		Nine Months Ended September 30,
Name	Opened	2003	2004	2003	2004
		2003	2004	2003	2004
Equinox 76th Street, Inc.	09/23/91	3	3	69	69
Broadway Equinox, Inc.	11/27/93	3	3	69	69
Equinox 92nd Street, Inc.	11/08/95	3	3	69	69
Equinox 85th Street, Inc.	08/27/96	3	3	69	69
Equinox 63rd Street, Inc.	12/11/97	3	3	69	69
Equinox White Plains Road, Inc.	04/08/99	3	3	69	69
Equinox 54th Street, Inc.	05/03/99	3	3	69	69
Equinox 50th Street, Inc.	02/03/00	3	3	69	69
Equinox 43rd Street, Inc.	03/09/00	3	3	69	69
Equinox Wall Street, Inc.	11/30/00	3	3	69	69
Equinox 44th Street, Inc.	12/23/00	3	3	69	69
Equinox Pasadena, Inc.	11/28/01	3	3	69	69
Equinox Greenwich Avenue, Inc.	12/30/01	3	3	69	69
Equinox Darien, Inc.	12/12/02	3	3	69	69
Equinox Lincoln Park, Inc.	12/30/02	3	3	69	69
Equinox Tribeca, Inc.	03/22/03	3	3	6	69
Equinox Woodbury Inc.	04/01/03	3	3	6	69
Equinox West Hollywood, Inc.	07/02/03	—3	3	—3	69
Equinox Gold Coast, Inc. (900N Michigan)	12/24/03	—	3	—	69
Equinox Highland Park, Inc.	01/29/04	—	3	—	58
Equinox Columbus Centre, Inc.	01/31/04	—	3	—	58
Equinox Roslyn, Inc.	06/22/04	—	—3	—	—3
Total Months of club operations		5154	6366	~~102~~150	~~124~~190

Currently, thirteen of our twenty-two fitness clubs have been in operation for less than 48 months. Based on the historical performance of our mature fitness clubs, we expect that, even in difficult economic times, our newer fitness clubs will grow significantly faster over the first four years than our average mature fitness club, while requiring only a minimal level of maintenance capital expenditures. We expect growth in revenues to continue as recently opened fitness clubs continue to mature. In addition, we expect growth in revenues as we implement long-term strategic plans to expand the brand with new clubs in existing markets and selected new markets and with new programs, services and products. However, we expect significant variability in our results as we implement our plans to bring our total fitness clubs up to approximately 40 by the end of 2006, as our mix of newer and more mature clubs varies.

For purposes of comparison on a “same-store basis,” we refer to “comparable fitness clubs” as those clubs that were operated by us for the entire period presented and for the entire comparable period of the preceding year. We use “total months of club operations” as one measure of the number of fitness clubs operating in a given period. We define “total months of club operations” as the aggregate number of full months of operation during 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 and variable costs, an increase in total months of club operations can signal significant increases in our operating costs.

Results of Operations

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

	Three Months Ended June 30,				Six Months Ended June 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
	% of Revenue				% of Revenue
Revenues:
Membership fees	6467.020	%	6367.662	%	6465.434	%	6364.698	%
Personal training	2220.222	%	2119.827	%	21.936	%	2221.218	%
Other revenue	1312.858	%	1413.611	%	13.730	%	1413.284	%
Total revenue	100.000	%	100.000	%	100.000	%	100.000	%
Expenses:
Compensation and related expenses	4039.115	%	4042.333	%	4140.674	%	41.577	%
Rent and occupancy	14.585	%	1213.941	%	14.668	%	14.404	%
General and administrative	21.8	%	19.0	%	23.9	%	18.7	%
General and Administrative	20.40	%	14.08	%	22.73	%	17.16	%
Related-party management fees and expenses	0.058	%	01.452	%	0.658	%	1.015	%
Depreciation and amortization	8.5	%	7.8	%	8.6	%	8.1	%
Stock based compensation	0.00	%	0.12	%	0.00	%	0.04	%
Total operating expenses	84.9	%	80.3	%	89.2	%	83.6	%
Depreciation and amortization	8.42	%	8.95	%	8.54	%	8.38	%
Income from operations	15.1	%	19.7	%	10.8	%	16.4	%
Total operating expenses	83.40	%	80.41	%	87.27	%	82.54	%
Income from operations	16.60	%	19.59	%	12.73	%	17.46	%
Other income (expense):
Interest expense	-1211.046	%	-1213.783	%	-11.763	%	-13.773	%
Interest income	0.329	%	0.117	%	0.225	%	0.113	%
Other income (expense)	2.3	%	-1.3	%	2.2	%	-0.7	%
Fair value of warrants income (expense)	-0.64	%	5.85	%	1.26	%	1.51	%
Total other expense	-911.481	%	-137.981	%	-910.312	%	-1412.309	%
Income before provision for income taxes	54.779	%	511.878	%	12.561	%	25.137	%
Provision for income taxes	-21.661	%	-25.630	%	-01.700	%	-02.941	%
Net income	3.118	%	36.248	%	01.861	%	1.2.96	%

Three Months Ended JuneSeptember 30, 2004 Compared to the Three Months Ended JuneSeptember 30, 2003

Revenues. Total revenues were $36.50 million for the three months ended ~~June~~September 30, ~~2004~~ 2004 compared to $3028.07 million for the three months ended ~~June~~September 30, 2003, an increase of $67.53 million or 2125.84%. Membership fees increased to $2324.32 million for the three months ended ~~June~~September 30, 2004, an increase of $4.38 million or 2224.6% from $19.04 million for the prior year’s ~~second~~third quarter. Personal training revenue increased to $87.13 million for the three months ended ~~June~~September 30, 2004, an increase of $1.57 million or 2331.76% from $65.5 million for the prior year’s ~~second~~third quarter. Other revenue, which includes spa, retail and other ancillary services, increased to $54.05 million for the three months ended ~~June~~September 30, 2004, an increase of $~~672~~762,000 or 1520.42% from $43.48 million for the prior year’s ~~second~~ third quarter. These increases in revenue are due to an increase in membership base and a slight increase in our monthly dues and personal training fees. Our membership base of 7174,~~000~~590 at ~~June~~September 30, 2004 represented an increase of approximately 1211,~~000~~640 or 2018.35% from 5962,~~000~~950 as of ~~June~~September 30, 2003. This increase in members is predominantly from new and recently opened clubs. There are ~~were~~ twenty-two clubs open as of ~~June~~September 30, 2004 compared to ~~seventeen~~ aseighteen as of ~~June~~September 30, 2003.

Compensation and Related Expenses. Compensation and related expenses increased to $14.61 million for the three months ended ~~June~~ September 30, 2004, an increase of $21.59 million or 2115.19% from $12.12 million for the prior year’s ~~second~~third quarter. This increase was due to a 1615.94% increase in employees to 2,~~324~~447 at ~~June~~September 30, 2004 from 12,~~988~~120 at ~~June~~ September 30, 2003 and a 2322.52% increase in total months of club operations to 63 66 months for the three months ended ~~June~~September 30, 2004 from 51 54 months for the prior year’s ~~second~~third quarter. In addition, our personal trainer’s wages increased consistently with the increase in our personal training revenue. As a percentage of total revenue, compensation and related expenses decreased ~~slightly~~ to 4039.12% from 40 42.3%.

Rent and Occupancy. Rent and occupancy expense increased to $5.34 million for the three months ended ~~June~~September 30, 2004, an increase of $1.4 5 million or 3738.58% from $3.9 million for the prior year’s ~~second~~third quarter. This increase was due to our ~~five~~four new ~~clubs~~ clubs opened between ~~July~~October 2003 and ~~June~~September 2004, which represents a 2322.52% increase in total months of club operations to 6366 for the three months ~~ended~~ ~~June~~ended September 30, 2004 from 5154 months of club operations for the prior year’s ~~second~~third quarter. ~~In addition we experienced an increase in property taxes.~~ As a percentage of total revenue, rent and occupancy expenses increased to 14.59% from 1213.94% for the prior year’s ~~second~~ third quarter. This increase as a percentage of revenue is due to ~~recently~~new ~~opened~~ clubs ~~that~~which incur ~~fixed~~certain fixed rent and occupancy ~~expense~~expenses ~~and~~without ~~have~~corresponding ~~not~~revenue ~~yet~~from ~~reached~~a ~~maximum membership~~mature ~~capacity~~membership base.

General and Administrative Expenses. General and administrative expenses increased to $87.04 million for the three months ended ~~June~~September 30, 2004, an increase of 4081.16% from $54.70 million for ~~the~~ the prior year’s ~~second~~third quarter. This increase is due to a number of factors including $~~171~~95,000 in additional expense associated with our ancillary products, an increase in utilities of $~~239~~514,000 an increase of $~~341~~305,000 for professional fees, a $~~349~~681,000 increase in repairs and maintenance and supplies, marketing and advertising increased by $63215,000, credit card fees increased by $~~101~~107,000, and insurance increased by $97512,000. In addition we experienced an increase in supplies, and weother general corporate expenses of approximately $260,000. We incurred $~~920~~613,000 in connection with a legal dispute with a landlord ~~regarding~~ regarding customer parking which includes approximately $300,000 of legal costs. For the fourth ~~third~~ quarter we anticipate an additional $~~800~~600,000 to $1.0 million of legal and other expenses in connection with our landlord dispute. These increases are

due primarily to our ~~five~~four new clubs opened between ~~July~~October 2003 and ~~June~~ September 2004, which represents a 2322.52% increase in total months of club operations to 6366 for the three months ended ~~June~~September 30, 2004 from 5154 for the prior year’s third ~~second~~ quarter. As a percentage of total revenue, general and ~~administrative~~ administrative expenses increased to 2120.84% for the three months ended ~~June~~ September 30, 2004 from 1914.01% for the prior year’s ~~second~~third quarter. This increase as a percentage of total revenue is primarily due to approximately $~~920~~613,000 incurred in legal and professional fees and ~~rents~~parking fees related to a landlord dispute in the ~~second~~ third quarter of 2004, additional marketing expense and new clubs. New clubs have not reached maximum member capacity and incur general and administrative expenses.

Related-Party Management Fees and Expenses. Related-party management fees and expenses decreased to $2210,000 for the three months ended ~~June~~ September 30, 2004 from $~~111~~438,000 for the prior year’s ~~second~~third quarter. The results of operations for the three and nine month periods ended September 30, 2003 included $200,000 of expenses that should have been recorded in the three month period ended December 31, 2003. Related-party management fees and expenses represent contractual fees of $800,000 per annum for consulting services plus expenses due to our investors as ~~per~~pursuant to our recapitalization agreement.

Depreciation and Amortization. Depreciation and amortization expense increased to $3.10 million for the three months ended ~~June~~September 30, 2004, an ~~increase~~ increase of 3217.39% from $2.36 million for the prior year’s ~~second~~third quarter. ~~This~~ This increase is due to an increase of approximately $3136.59 million of ~~fixed~~ fixed asset additions principally for leasehold improvements in connection with ~~our~~ our new club openings during the twelve months ended ~~June~~September 2004.

Total Operating Expenses. Total operating expenses increased to $3130.0 million for the three months ended ~~June~~ September 30, 2004, an increase of $6.9 million or 2830.80% from $2423.1 million for the prior year’s ~~second~~third quarter. This increase is primarily due to higher compensation, rent and occupancy, general and administrative and depreciation and amortization expense. We experienced these increases in connection with our four ~~five~~ new clubs opened between ~~July~~October 2003 and ~~June~~September 2004, which represents a 2322.52% increase in total months of club operations to 6366 for the three months ended ~~June~~September 30, 2004 from 5154 for the prior year’s ~~second~~ third quarter. As a percentage of total revenue, total operating expenses increased to 8483.94% from 80.34% for the prior year’s ~~second~~third quarter. This increase as a percentage of revenue is due to new clubs which have not ~~reached~~ reached maximum membership capacity and incur fixed costs and additional fixed ~~asset~~ asset additions resulting in higher depreciation expense, ~~additional~~as ~~marketing~~well as additional marketing and legal and professional fees and ~~rents~~parking fees in connection with our landlord dispute.

Other Expense. Other expense ~~decreased~~increased to $3.4.3 million or 1789.65% for the three months ended ~~June~~ September 30, 2004, from $42.2 million for prior year’s ~~second~~third quarter. The ~~decrease~~ isincrease is primarily due to our marking our warrants to market resulting in other ~~income~~ expense in the ~~second~~third quarter of 2004 and an increase in interest expense related to our $160.0 million 9.0% Senior notes due 2009 that were issued in December 2003.

SixNine Months Ended JuneSeptember 30, 2004 Compared to the SixNine Months Ended JuneSeptember 30, 2003

Revenues. Total revenues were $70106.0 million for the ~~six~~nine months ended ~~June~~September 30, 2004 compared to to $5685.64 million for the ~~six~~nine months ended ~~June~~September 30, 2003, an increase of $1320.36 million or 2324.62%. Membership fees increased to $4569.13 million for the ~~six~~nine months ended ~~June~~September 30, 2004, an increase of $913.08 million or 2524.09% from $3655.05 million for the ~~six~~nine months ended ~~June~~September 30, 2003. Personal training revenue increased to $1522.46 million for the ~~six months~~nine months ended ~~June~~September 30, 2004, an increase of $24.86 million or 2225.42% ~~from~~ from $1218.51 million for the ~~six~~nine months ended ~~June~~September 30, 2003. Other revenue, which includes spa, retail and other ancillary services, increased to $914.61 million for the ~~six~~nine months ended ~~June~~September 30, 2004, an increase of $12.5 3 million or 1819.82% from $811.18 million for the nine ~~six~~ months ended ~~June~~September 30, 2003. These increases in revenue are due to an increase in membership base and a slight increase in our monthly dues. Our membership base of 7174,~~000~~590 at ~~June~~September 30, 2004 represented an increase of approximately 1211,~~000~~ 600 or 2018.35% from 5962,~~000~~950 as of ~~June~~September 30, 2003. This increase in members is predominantly from new and recently opened clubs. There were twenty-two clubs open as of ~~June~~September 30, 2004 compared to ~~seventeen~~ eighteen as of ~~June~~September 30, 2003.

Compensation and Related Expenses. Compensation and related expenses increased to $2943.12 million for the ~~six~~nine months ended ~~June~~ September 30, 2004, an increase of $57.65 million or 2321.81% from $2335.57 million for the nine ~~six~~ months ended ~~June~~September 30, 2003. This increase was due to a 1615.94% increase in employees to 2,~~324~~447 atas ~~June~~of September 30, 2004 from 1 2,~~988~~120 atas ~~June~~of September 30, 2003 and a 2126.67% increase in total months of club operations to ~~124~~190 months for the ~~six~~nine months ended ~~June~~September 30, 2004 from ~~102~~ 150 months for the nine ~~six~~ months ended ~~June~~September 30, 2003. In addition, our personal trainer’s wages increased consistently with the increase

in our personal training revenue. As a percentage of total revenue compensation and related expenses ~~increased~~decreased ~~slightly~~ to 4140.67% from 41.58% for the ~~six~~nine months ended ~~June~~September 30, 2003.

Rent and Occupancy. Rent and occupancy expense increased to $1015.26 million for the ~~six~~nine months ended ~~June~~September 30, 2004, an increase of $23.1 6 million or 2529.69% from $812.10 million for the nine ~~prior~~months ~~year’s first~~ended ~~quarter~~September 30, 2003. This increase was due to our ~~five~~ four new clubs opened between ~~July~~ October 2003 and ~~June~~September 2004, which represents a 2126.67% increase in total months of club operations to ~~124~~190 months for the ~~six~~nine months ended ~~June~~September 30, 2004 from ~~102~~150 for the ~~six~~nine months ended ~~June~~September 30, 2003. ~~In addition we experienced an increase in property taxes.~~ As a percentage of total revenue, rent and occupancy expenses increased ~~slightly~~ to 14.67% from 14.40% for the ~~six~~nine months ended ~~June~~September 30, 2003. This increase as a percentage of revenue is due to new clubs which incur certain fixed rent and occupancy expenses without corresponding revenue from a mature membership base.

General and Administrative Expenses. General and administrative expenses increased to $1624.71 million for the ~~six~~nine months ended ~~June~~September 30, 2004, an ~~increase~~ increase of 5764.84% from $1014.67 million for the ~~six~~nine months ended ~~June~~September 30, 2003. This increase is due to $~~316~~411,000 in additional expense associated with ~~our~~ our ancillary products, an increase in utilities of $~~714,000 an increase of $766,000 for professional fees, a $954,000 increase in repairs and maintenance and supplies, marketing and advertising increased by $~~1.4 2 million, ~~credit card fees increased by $248,000, and we incurred $1.7 million in connection with a legal dispute with a landlord regarding customer parking. For the third quarter we anticipate~~ an ~~additional $800,000 of legal and other expenses in connection~~ ~~with our landlord dispute. These increases are due primarily to our five new clubs opened between July 2003 and June 2004, which represents a 21.6%~~ increase ~~in total months~~ of club operations to 124 for the six months ended June 30, 2004 from 102 for the six months ended June 30, 2003. As a percentage of total revenue, general and administrative expenses increased to 23.9% for the six months ended June 30, 2004 from 18.7% for the six months ended June 30, 2003. This increase as a percentage of total revenue is due to approximately $~~1.7 million incurred in our landlord dispute and a $1.4 million increase in marketing and advertising expense. Excluding these additional expenses~~500, general and administrative expense is 19.4% of total revenue. This increase as a percentage of total revenue, excluding expenses for our legal dispute and marketing, is due to new clubs. By definition, new clubs have not reached maximum member capacity and incur certain general and administrative expenses.000

~~Related-Party~~ for professional fees, a $1.6 million ~~Management~~increase ~~Fees~~in repairs and ~~Expenses~~maintenance and supplies, marketing and advertising increased by $1. ~~Related-party~~7 million, credit card fees increased by $355,000, general ~~management~~liability insurance increased by $448,000, bank charges and other fees increased by $165,000, and general corporate expenses ~~decreased~~increased toby $~~404~~670,000. ~~for~~We incurred $2.3 million in connection with a legal dispute with a landlord regarding customer parking which includes $1.7 million of legal costs. For the fourth ~~six~~quarter we anticipate an additional $600,000 to $1.0 million of legal and other expenses in connection with our landlord dispute. These increases are due primarily to our four new clubs opened between October 2003 and September 2004, which represents a 26.7% increase in total months ~~ended~~of club operations to 190 for ~~June~~the nine months ended September 30, 2004 from ~~$544~~150 for the nine months ended September 30,~~000~~ 2003. As a percentage of total revenue, general and administrative expenses increased to 22.7% for the ~~six~~nine months ended ~~June~~September 30, 2004 from 17.2% for the nine months ended September 30, 2003. This ~~Related-party~~increase ~~management~~as a percentage of total revenue is due to approximately $2.3 million incurred in our landlord dispute which consists of parking and legal fees and a $1.6 million increase in marketing and advertising expense. Excluding these additional expenses, ~~represent~~general ~~contractual~~and ~~fees~~administrative expense is 19.0% of total ~~$800~~revenue. This increase as a percentage of total revenue,~~000~~ ~~per~~excluding ~~annum~~expenses for our ~~consulting~~legal ~~services~~dispute ~~plus~~and ~~expenses~~marketing, is due to ~~our~~new ~~investors~~clubs. New clubs have not asreached ~~per~~maximum ~~our~~member ~~recapitalization~~capacity ~~agreement~~and incur general and administrative expenses.

~~Depreciation~~Related-Party Management Fees and ~~Amortization~~Expenses. ~~Depreciation~~Related-party ~~and~~management ~~amortization~~fees ~~expense~~and ~~increased~~expenses decreased to $~~6.0 million~~614,000 for the ~~six~~nine months ended ~~June~~September 30, 2004, ~~an increase of 31.3%~~ from $~~4.6 million~~981,000 for the ~~six~~ nine months ended ~~June~~September 30, 2003. ~~This~~The results ~~increase~~of isoperations ~~due~~for tothe anthree ~~increase~~and ofnine month period ended September 30, ~~approximately~~2003 included $~~31.5 million~~200,000 of ~~fixed~~expenses ~~asset~~that ~~additions~~should ~~principally~~have ~~for leasehold~~been ~~improvements~~recorded in ~~connection~~the ~~with~~three month ~~our~~periods ~~new~~ended ~~club~~December 31, ~~openings~~2003. ~~during~~Related-party ~~the~~management fees and ~~twelve~~expenses ~~months~~represent ~~ended~~contractual ~~June 2004~~fees of $800,000 per annum for consulting services plus expenses due to our investors pursuant to our recapitalization agreement.

~~Total~~Depreciation ~~Operating~~and ~~Expenses~~Amortization. ~~Total~~Depreciation and ~~operating~~amortization ~~expenses~~ expense increased to $629.50 million for the ~~six~~nine months ended ~~June~~September 30, 2004, an increase of ~~$15~~26.~~1 million or 31.9~~5% from $477.42 million for the ~~six~~ nine months ended ~~June~~September 30, 2003. This increase is ~~primarily~~ due to ~~higher~~an ~~compensation,~~increase ~~rent~~of ~~and~~approximately ~~occupancy,~~$36.9 million ~~general~~of ~~and~~fixed ~~administrative~~asset ~~and depreciation~~additions ~~and~~principally ~~amortization.~~for Weleasehold ~~experienced~~improvements ~~these increases~~ in connection with our ~~five~~ new ~~clubs opened between July 2003 and June 2004, which represents a 21.6% increase in total months of~~ club ~~operations to 124 for the six months~~openings ~~ended~~during ~~June 30, 2004 from 102 for~~ the ~~six~~twelve months ended ~~June~~September ~~30, 2003~~2004. As a percentage of total revenue, operating expenses increased to 89.2% from 83.6% for the six months ended June 30, 2003. This increase as a percentage of revenue is due to new clubs which have not reached maximum membership capacity and incur fixed costs and additional fixed asset additions resulting in higher depreciation expense, additional marketing and legal and professional fees and rents in connection with our landlord dispute.

~~Other~~Total Operating ~~Expense~~Expenses. ~~Other expense~~Total ~~decreased~~operating expenses increased to $692.5 million ~~or 20.0%~~ for the ~~six~~nine months ended ~~June~~ September 30, 2004, an increase of $22.0 million or 31.3% from $870.15 million for the ~~six~~nine months ended ~~June~~ September 30, 2003. This ~~decrease~~increase is primarily due to higher ~~our~~compensation, ~~marking~~rent ~~our~~and ~~warrants~~occupancy, general and administrative and todepreciation ~~market~~and ~~resulting~~amortization. inWe ~~other~~experienced ~~income~~these increases in connection with our four new clubs opened between October 2003 and September 2004, which ~~offset~~represents bya an26.7% increase in ~~interest expense~~total ~~related~~months of club operations to ~~our~~190 ~~$160~~for the nine months ended September 30, 2004 from 150 for the nine months ended September 30, 2003.0 ~~million~~As 9a percentage of total revenue, operating expenses increased to 87.3% ~~Senior~~from ~~notes~~82.5% for the nine months ended September 30, 2003. This increase as a percentage of revenue is due ~~2009~~to ~~that~~new ~~were~~clubs ~~issued~~which have not reached maximum membership capacity and incur fixed costs and additional fixed asset additions resulting in ~~December 2003~~higher depreciation expense, additional marketing and legal and professional fees and parking fees in connection with our landlord dispute.

13Other Expense. Other expense increased to $10.7 million or 3.8% for the nine months ended September 30, 2004, from $10.3 million for the nine months ended September 30, 2003. This increase is primarily due to interest expense related to our $160.0 million 9% Senior notes due 2009 that were issued in December 2003 offset by our marking our warrants to market resulting in an increase in other income in 2004.

~~Liquidity and Capital Resources~~13

~~Historically,~~Liquidity ~~we have satisfied our liquidity needs through cash from operations~~ and ~~various~~Capital borrowing arrangements. Principal liquidity needs have included the development of new fitness clubs, debt service requirements and other capital expenditures necessary to maintain existing facilities. Our regular cash requirements consist principally of scheduled payments of principal and interest on outstanding indebtedness, capital expenditures and lease expenses. In June 2004, we made our first semiannual interest payment of approximately $7.2 million on our senior notes. In addition to these and other regular liquidity requirements, future commitments include our obligation to pay up to $15 million to our founding stockholders on the earlier of a qualified public offering, a change of control or December 15, 2010 and approximately $800,000 plus expenses, annually to our principal investors for consulting services. In addition, commencing on December 15, 2006, holders of a majority interest in the common stock put warrants will have a right to require us to use our best efforts to purchase all of our outstanding warrants at fair market value if we have not previously consummated a qualifying initial public offering of our common stock. Although each warrant holder will receive preferred stock equal to the value of its warrant if we fail to purchase the warrants within 60 days, such a demand, if made, could result in additional liquidity requirements. The future value of the warrants cannot presently be predicted but we expect it to be material. The value of the warrants, as marked to market at June 30, 2004, was approximately $8.1 million. Based upon our current level of operations and the anticipated maturation of our immature club base, we believe that the proceeds from the offering of our 9% senior notes due 2009 and the entering into of our new senior secured revolving credit facility, our cash flow from operations and available cash will be adequate to meet our short and long term liquidity requirements including our plan to expand to approximately 40 clubs by 2006. We estimate each club opening requires between $4.0 million and $9.0 million, depending on size and location as well as approximately $100,000 capitalized expenses to maintain existing clubs. Clubs undergo major renovations every 5-7 years which range from $500,000 to $1.0 million.Resources

~~Our~~Historically, ~~credit~~we ~~facility~~have ~~was~~satisfied ~~undrawn~~our atliquidity ~~June 30,~~needs ~~2004,~~through ~~with~~cash from ~~availability~~operations ~~subject~~and tovarious ~~specified~~borrowing ~~actions~~arrangements. ~~with~~Principal ~~respect~~liquidity toneeds ~~collateral and~~have ~~subject~~included tothe adevelopment ~~borrowing~~of ~~base~~new ~~formula~~fitness ~~(except~~clubs, ~~for~~debt upservice requirements and other capital expenditures necessary to $3maintain existing facilities.~~5 million~~ ofOur regular cash ~~collateralized~~ ~~standby~~requirements ~~letters~~consist principally of ~~credit~~scheduled ~~under~~payments ~~this~~of principal ~~facility~~and orinterest ~~issued~~on ~~by another~~outstanding ~~financial~~indebtedness, ~~institution)~~capital expenditures and lease expenses. ~~The~~In ~~revolving~~June 2004, ~~credit~~we ~~facility~~made ~~will~~our ~~help~~first ~~enable~~semiannual interest uspayment toof ~~fund~~approximately $7.2 million on our ~~plans~~senior tonotes. ~~expand~~In addition to these and ~~develop~~other ~~new~~regular ~~fitness~~liquidity ~~clubs~~requirements, infuture ~~existing~~commitments include our ~~markets~~obligation ~~and~~to inpay ~~select~~up ~~new~~to ~~markets~~(i) $10.0 million ~~Our~~to ~~revolving~~our ~~credit~~founding ~~facility~~stockholders ~~contains~~on ~~restrictive~~the ~~affirmative~~earlier ~~and~~of ~~negative~~a ~~covenants~~qualified public offering, a change of control or December 15, 2010 and ~~financial~~(ii) ~~covenants~~approximately $800,000 plus expenses, annually to our principal ~~including~~investors ~~leverage~~for ~~ratios~~consulting services. In addition, ancommencing on December 15, 2006, holders of a majority interest ~~coverage~~in ~~ratio~~the ~~and~~common ~~capital~~stock ~~expenditure~~put warrants will have ~~and~~a ~~dividend~~right ~~payment~~to ~~restrictions.~~require ~~The~~us ~~facility~~to isuse ~~guaranteed~~our bybest efforts to purchase all of our ~~existing~~outstanding ~~and~~warrants ~~future~~at ~~domestic~~fair ~~subsidiaries~~market ~~and~~value ~~secured~~if bywe ~~substantially~~have ~~all~~not ~~our~~previously consummated ~~assets,~~a ~~other~~qualifying ~~than~~initial ~~real~~public ~~property~~offering ~~leases,~~of ~~but~~our ~~including~~common ~~capital~~stock. Although each warrant holder will receive preferred stock equal to the value of ~~our~~its warrant if we ~~subsidiaries~~fail ~~and~~to ~~cash~~purchase ~~and~~the ~~deposit~~warrants ~~accounts.~~within ~~Our~~60 days, ~~significant~~such ~~contractual obligations~~a demand, ~~including~~if ~~our~~made, could ~~obligations~~result toin ~~our~~additional ~~Founding~~liquidity ~~Stockholders~~requirements. ~~and~~The future value of the ~~potential~~warrants ~~issuance~~cannot ofpresently ~~our~~be ~~preferred~~predicted ~~stock,~~but ~~could~~we ~~make~~expect it ~~more~~to ~~difficult~~be ~~for~~material. usThe value of the warrants, as marked to ~~effect~~market aat ~~financing~~September 30, ~~transaction~~2004, ~~including~~was approximately an$8.3 million. ~~initial~~Based ~~public~~upon ~~offering~~our current level of operations and the anticipated maturation of our immature club base, we believe that the ~~common~~proceeds ~~stock~~from the offering of our 9.0% Insenior ~~addition~~notes due 2009 and the entering into of our senior secured revolving credit facility, our ~~common~~cash ~~stock~~flow isfrom operations ~~not~~and ~~publicly~~available ~~traded~~cash will be adequate to meet our short and long term ~~therefore~~liquidity ~~equity~~requirements ~~financing~~including isour ~~not~~plan ~~available~~to expand to usapproximately 40 clubs by 2006. We estimate each club opening requires between $4.0 million and $9.0 million, depending on ~~the~~size ~~same~~and ~~basis~~location as itwell isas approximately ~~for~~$100,000 ~~companies~~per ~~that~~club ~~have~~of ~~publicly~~capitalized ~~traded~~expenses ~~stock~~to maintain existing clubs. Clubs undergo major renovations every 5-7 years which range from $500,000 to $1.0 million.

~~The~~Our ~~following~~credit ~~discussion~~facility ~~makes~~was ~~reference~~undrawn at September 30, 2004, with availability subject to ~~EBITDA~~specified actions with respect to collateral and subject ~~Adjusted~~to ~~EBITDA~~a borrowing base formula (except for up to $3.9 million of cash ~~EBITDA~~collateralized isstandby ~~defined~~letters asof ~~earnings~~credit ~~before~~under ~~interest,~~this ~~taxes,~~facility ~~depreciation~~or ~~and,~~issued by ~~amortization~~another financial institution). ~~Adjusted~~The ~~EBITDA~~revolving iscredit ~~defined~~facility inwill help enable us to fund our ~~credit~~plans ~~agreement~~to asexpand ~~EBITDA~~and develop new fitness clubs in existing ~~adjusted~~markets ~~for~~and ~~mark-to-market~~in ~~adjustments~~select ~~for~~new ~~our~~markets. ~~common~~Our ~~stock~~revolving ~~put~~credit ~~warrants,~~facility contains ~~stock~~restrictive ~~compensation~~affirmative ~~expense~~and negative covenants which may restrict our operations, ~~write-off~~including offinancial ~~other~~covenants ~~receivables~~such as leverage ratios, ~~management~~an ~~fees~~interest coverage ratio and capital expenditure and dividend payment restrictions. The ~~expenses~~facility ~~paid~~is toguaranteed by all of our ~~principal~~existing ~~stockholders,~~and future domestic subsidiaries and ~~non-cash~~secured ~~deferred~~by ~~rent.~~substantially Weall our assets, other than real property leases, ~~present~~but ~~Adjusted~~including ~~EBITDA~~capital instock ~~this~~of ~~report~~our onsubsidiaries ~~Form~~and ~~10-Q~~cash ~~because~~and ~~this~~deposit ~~measure~~accounts. Our issignificant acontractual obligations, including our obligations to our ~~key~~Founding ~~component~~Stockholders inand the ~~determination~~potential issuance of our ~~compliance~~preferred ~~with~~stock, ~~certain~~could make ~~covenants~~it more difficult for us to effect a financing transaction, including an ~~under~~initial public offering of our ~~credit~~common ~~agreement~~stock. In addition, ~~which~~our ~~may~~common ~~limit~~stock ~~our~~is not ~~ability~~publicly traded and therefore equity financing is not available to ~~incur~~us ~~additional~~on ~~indebtedness~~the same basis as it is for companies that have publicly traded stock.

~~Investors~~The ~~should~~following bediscussion ~~aware~~makes ~~that~~reference ~~the~~to ~~items~~EBITDA and Adjusted EBITDA. ~~excluded~~EBITDA ~~from~~is ~~the~~defined ~~calculation~~as ofearnings ~~EBITDA~~before interest, ~~such~~taxes, as depreciation and ~~amortization~~, ~~are~~amortization. ~~significant~~Adjusted ~~components~~EBITDA inis andefined ~~accurate~~in ~~assessment~~our ofcredit ~~our~~agreement ~~financial performance.~~as EBITDA adjusted ~~and~~for ~~Adjusted~~mark-to-market ~~EBITDA~~adjustments ~~should~~for ~~not~~our becommon ~~considered~~stock input ~~isolation~~warrants, orstock ascompensation aexpense, ~~substitute~~management ~~for~~fees ~~net~~and ~~income~~expenses paid to our principal stockholders, and non-cash ~~flows~~deferred orrent. ~~other~~We ~~consolidated~~present ~~income~~Adjusted ~~or cash~~EBITDA ~~flow~~in ~~data~~this report ~~prepared~~on inForm ~~accordance~~10-Q ~~with~~because ~~GAAP~~this ormeasure asis a ~~measure~~key component in the determination of our compliance with certain covenants under our credit ~~profitability~~agreement, orwhich ~~liquidity~~may limit our ability to incur additional indebtedness.

~~Under~~Investors ~~the~~should ~~terms~~be ofaware ~~our~~that ~~current~~the ~~credit agreement, we may incur~~items ~~additional~~excluded ~~debt~~from ~~so long as~~ the ~~pro~~calculation ~~forma ratio~~ of ~~total debt to Adjusted~~ EBITDA ~~is less than or equal to 5.25 to 1.0 through June 30~~, ~~2004,~~such ~~which decreases~~as ~~ratably~~depreciation toand ~~3.0 to 1.0 at December 31~~amortization, ~~2008. If we fail to meet~~ ~~the~~are ~~ratio~~significant ~~test,~~components asin ~~well~~an asaccurate ~~other~~assessment ~~ratios,~~of our ~~ability to incur new debt will be~~financial ~~significantly limited~~performance. ~~Pursuant~~EBITDA toand ~~our~~Adjusted ~~credit~~EBITDA ~~agreement,~~should ~~the aggregate amount of Capital Expenditures for any Fiscal Year may~~ not ~~exceed~~be ~~the~~considered ~~sum~~in ~~of $60.0~~isolation ~~million for~~or ~~the~~as ~~fiscal~~a ~~year~~substitute ~~ending~~for ~~December 31~~net income, ~~2004~~cash ~~and~~flows ~~thereafter. If~~or ~~the~~other ~~entire~~consolidated ~~amount~~income ofor cash ~~Capital~~flow ~~Expenditures~~data ~~permitted~~prepared in ~~any~~accordance ~~period~~with ~~set~~GAAP ~~forth above~~or isas ~~not~~a ~~utilized,~~measure ~~we may carry forward to the immediately succeeding period only: (i) one hundred percent (100%)~~ of ~~such unutilized amount up~~our toprofitability anor ~~aggregate amount of~~liquidity.

14Under the terms of our current credit agreement, we may incur additional debt so long as the pro forma ratio of total debt to Adjusted EBITDA is less than or equal to 5.25 to 1.0 through September 30, 2004, which decreases ratably to 3.0 to 1.0 at December 31, 2008. If we fail to meet the ratio test, as well as other ratios, our ability to incur new debt will be significantly limited. Pursuant to our credit agreement, the aggregate amount of Capital Expenditures for any Fiscal Year may not exceed the sum of $60.0 million for the fiscal year ending December 31, 2004 and thereafter. If the entire amount of Capital Expenditures permitted in any period set forth above is not utilized, we may carry forward to the immediately succeeding period only: (i) one hundred percent (100%) of such unutilized amount up to an aggregate amount of

$15,000,000 and (ii) fifty percent (50%) of the unutilized amount in excess of $15,000,000 (in each case with capital expenditures made in such succeeding period applied last to such carried forward amount).14

~~Our~~$15,000,000 ~~Interest~~and ~~Coverage~~(ii) fifty ~~Ratio~~percent as(50%) of the ~~last~~unutilized ~~day~~amount in excess of ~~each~~$15,000,000 ~~fiscal~~(in ~~quarter ending~~each ~~during~~case ~~the~~with ~~periods~~capital ~~set~~expenditures ~~forth~~made ~~below~~in tosuch succeeding beperiod ~~less~~applied ~~than~~last ~~the~~to ~~ratio~~such ~~set~~carried ~~forth below~~forward ~~for such period:~~amount).

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

Our Interest Coverage Ratio as of the last day of each fiscal quarter ending during the periods set forth below to be less than the ratio set forth below for such period:

The Company is in compliance with its covenants at June 30, 2004.

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

The following provides a reconciliation of Adjusted EBITDA to EBITDA and ~~Net~~net ~~Income~~loss ~~(Loss)~~ and illustrates our total debt and ratio of total debt to ~~Adjusted~~ Adjusted EBITDA:

	Twelve Months Ended June 30, 2004
	Twelve Months Ended September 30, 2004
Net (loss)	$	(7,342,155	)
Net loss	$	(8,060,545	)
Depreciation and amortization	11,~~185~~645,~~707~~097
Provision for (benefit from) income taxes	(67,~~251~~193,~~828~~213		)
Interest expense, net of interest income	3334,~~906~~004,~~131~~393
EBITDA	$	3130,~~497~~395,~~855~~732
Stock compensation expense	~~35,000~~—
Other expense (income)	(2,860,061		)
Change in fair value of warrants	(948,182		)
Related-party management fees and expenses	~~867~~639,~~461~~782
Non-cash deferred rent	2,~~331~~362,~~043~~113
Adjusted EBITDA	$	3132,~~871~~449,~~298~~445
Total debt as defined	$	163,~~498~~165,~~150~~830
Ratio of total debt to Adjusted EBITDA	5.1303

Pursuant to our credit agreement, Adjusted EBITDA is calculated for the twelve months then ended.

Operating Activities. Net cash provided by operating activities iswas $1220.51 million for the ~~six months~~nine months ended ~~June~~September 30, 2004 as compared to $1418.7 million for the nine ~~six~~ months ended ~~June~~September 30, 2003. The ~~decrease~~increase in cash provided by operating activities was primarily due to ~~payments~~net ~~due~~income, toaccrued ~~affiliated~~expenses, ~~entities~~deferred revenue and improved profitability of our recently opened fitness clubs, partially offset by payments to affiliated entities and new fitness clubs opened in fiscal ~~2002~~2003 or ~~2003~~2004 which are operating at margins lower than those of mature and recently opened clubs. Within our corporate membership program, no single corporation accounts for more than 714% of our gross accounts receivable. We currently have a working capital surplus and plan to finance operations through operating cash flows.

Investing Activities. Primarily as a result of our expansion efforts, we invested $1622.15 million in capital expenditures, net of landlord contributions of $2.5 7 million, and asset purchases in the first ~~six~~nine months of fiscal 2004 as compared to $1115.85 million during the same period in fiscal 2003, net of landlord contributions of approximately $35.20 million. We estimate that for the year ended December 31, 2004, we will invest aapproximately ~~total of~~ $30.0 million in capital expenditures, primarily to build new clubs and maintain existing fitness clubs. These expenditures will be funded by cash flow generated from operations and available cash. We expect to continue investing in capital expenditures in accordance with our expansion strategy.

Financing Activities. Net cash (used) by financing activities was $(1.6)9 million in the first ~~six~~nine months of fiscal 2004 as compared to $1312.85 million of net cash provided by financing activities during the same period in fiscal 2003. In January 2003, some existing shareholders purchased additional shares of common stock for $10.0 million and a new lender purchased $25.0 million of senior notes. We used the proceeds to pay down our existing revolving credit facility, leaving approximately $15.1 million of net proceeds.

Contractual and Commercial Commitments Summary

Our aggregate long-term debt, capital lease obligations, operating lease obligations and other material contractual obligations ashave ofnot ~~March 31,~~materially ~~2004,~~changed ~~are~~during ~~as follows:~~2004.

	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Long-term debt(1)	$	161,642,988	126,625		318,633		80,338		$	161,117,392
Capital lease obligations(2)	2,342,716		982,230		1,019,475		341,011		—
Operating lease obligations	304,992,639		17,079,478		37,926,623		38,540,036		211,446,502
Payment to Founding Stockholders(3)	15,000,000		—		—		—		15,000,000
Common stock put warrants(4)	8,941,605		—		8,941,605		—		—
	$	492,919,948	$	18,188,333	$	48,206,336	$	38,961,385	$	387,563,894

Our Recapitalization

~~There~~In December 2000, as part of a recapitalization, we repurchased shares of our then outstanding common stock from the founding stockholder group (the “Founding Stockholders”). We then issued new shares to North Castle, J.W. Childs and other shareholders (the “Incoming Investors”) to complete the initial recapitalization transaction. We funded the recapitalization with a combination of cash from Incoming Investors, a credit facility consisting of a $37 million term loan and up to $23 million of available revolving credit commitments and a $50 million investment by institutional investors in senior subordinated notes, which were issued with common stock put warrants representing approximately 8% of our common equity on a fully diluted basis (as of the date hereof). Commencing on December 15, 2006, holders of a majority interest in the warrants will have ~~been~~a noright ~~material~~to ~~changes~~require us to use our ~~contractual~~best efforts to purchase the warrants at fair market value unless we have previously consummated a qualifying initial public offering of our common stock. Our net income will also be affected by our continuing need to mark-to-market our common stock put warrant obligations. In accordance with a cash escrow agreement under the recapitalization agreement, we retained restricted cash in the amount of $4.4 million to secure indemnification obligations of the Founding Stockholders. In early 2002, these indemnification obligations expired, and ~~commercial~~the ~~commitments~~restricted ~~since~~cash ~~March~~was 31remitted to the Founding Stockholders, with a corresponding charge to equity. At September 30, 2004, the Founding Stockholders held 7% of the outstanding common stock and the Incoming Investors held 93% of the outstanding common stock of Equinox. As a result of the repayment of the existing credit facility and the senior subordinated notes, we had an obligation under the recapitalization agreement to pay the Founding Stockholders $5.0 million. This was paid in 2003 in connection with our private offering of $160 million in 9.0% senior notes due 2009. We have an obligation under the recapitalization agreement to pay the Founding Stockholders up to $10.0 million in cash upon the earlier of an initial public offering, a change of control or December 15, 2010.

(1)	The long-term debt contractual cash obligations include principal payment requirements only. Semi-annual interest payments of $7.2 million commenced on June 15, 2004 and will be payable on June 15 and December 15 thereafter until December 15, 2009.
(2)	Capital lease obligations represent principal and interest payments.
(3)	Represents the maximum obligation under the recapitalization agreement to pay the Founding Stockholders upon the earlier of a qualified public offering, a change of control or December 15, 2010.
(4)	Includes the obligation to purchase the common stock put warrants at fair market value if we have not consummated a qualifying initial public offering of our common stock prior to December 15, 2006. The amount presented is the fair market value of the warrants at March 31, 2004 and has been calculated using the Black-Scholes option pricing model; the actual fair market value at the time of any purchase will not be based upon a Black-Scholes calculation and could vary materially from the amount presented.

Factors that May Affect Our Operating Results

~~Our~~This ~~Recapitalization~~report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expects”, “anticipates”, “intends”, “believes”, or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, prospective investors should carefully consider the following information in addition to the other information set forth herein. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

InYou ~~December 2000,~~should ascarefully ~~part~~consider ~~of a recapitalization, we repurchased shares of our then outstanding common stock from~~ the ~~founding~~risks ~~stockholder~~described ~~group (the “Founding Stockholders”)~~below. ~~We then issued new shares to North Castle, J.W.~~Any ~~Childs~~of ~~and other shareholders (~~the ~~“Incoming~~following ~~Investors”)~~risks tocould ~~complete~~materially ~~the initial recapitalization transaction. We funded the recapitalization with a combination of cash from Incoming Investors, a credit facility consisting of a $37 million term loan~~ and upadversely toaffect $23 million of available revolving credit commitments and a $50 million investment by institutional investors in senior subordinated notes, which were issued with common stock put warrants representing approximately 8% of our ~~common equity on a fully diluted basis (as~~financial ofcondition ~~the~~or ~~date~~results ~~hereof). Commencing on December 15, 2006, holders~~ of a majority interest in the warrants will have a right to require us to use our best efforts to purchase the warrants at fair market value unless we have previously consummated a qualifying initial public offering of our common stockoperations. ~~Our net income will also be affected by our continuing need to mark-to-market our common stock put warrant obligations.~~ In ~~accordance~~such ~~with a cash escrow agreement under the recapitalization agreement~~case, weyou ~~retained restricted~~may ~~cash~~lose inall ~~the~~or ~~amount~~part of ~~$4.4 million to secure indemnification~~ ~~obligations~~your oforiginal ~~the Founding Stockholders~~investment. In early 2002, these indemnification obligations expired, and the restricted cash was remitted to the Founding Stockholders, with a corresponding charge to equity. At June 30, 2004, the Founding Stockholders held 7% of the outstanding common stock and the Incoming Investors held 93% of the outstanding common stock of Equinox. As a result of the repayment of the existing credit facility and the senior subordinated notes, we had an obligation under the recapitalization agreement to pay the Founding Stockholders $5.0 million. This was paid in 2003 in connection with our private offering of $160 million in 9.0% senior notes due 2009. We have an obligation under the recapitalization agreement to pay the Founding Stockholders up to $15.0 million in cash upon the earlier of an initial public offering, a change of control or December 2010.

~~Factors~~Risks ~~that~~Related ~~May~~to ~~Affect~~ Our ~~Operating~~Substantial ~~Results~~Debt

~~This~~Our ~~report~~substantial ~~contains~~indebtedness ~~forward-looking~~could ~~statements~~have ~~within the meaning of~~a ~~Section 27A~~material ofadverse ~~the~~effect ~~Securities~~on ~~Act~~our offinancial ~~1933~~health and ~~Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding~~ our ~~expectations,~~ability ~~beliefs,~~to ~~intentions or future strategies that are~~obtain ~~signified~~financing ~~by the words “expects”, “anticipates”, “intends”, “believes”, or similar language. All forward-looking statements included~~ in ~~this document are based on information available to us on~~ the ~~date~~future ~~hereof,~~ and weto ~~assume~~react ~~no obligation~~ to ~~update~~changes ~~any such forward-looking statements. Actual results could differ materially from those projected~~ in ~~the forward-looking statements. In evaluating~~ our business~~, prospective investors should carefully consider the following information in addition to the other information set forth herein~~. ~~We caution investors that our business and financial performance are subject to substantial risks and uncertainties.~~

~~You~~We have ~~should~~a ~~carefully~~significant ~~consider~~amount ~~the~~of ~~risks described below~~debt. ~~Any~~ As of ~~the~~September 30, ~~following~~2004, ~~risks~~we ~~could~~had approximately ~~materially~~$163.2 million ~~and~~of ~~adversely~~debt ~~affect~~outstanding. ~~our~~Our ~~financial condition~~significant ~~or results~~ amount of ~~operations.~~debt Inand ~~such~~other ~~case,~~contractual ~~you~~commitments ~~may~~could ~~lose~~have ~~all~~important orconsequences ~~part of~~to ~~your~~you. ~~original~~For ~~investment.~~example, it could:

~~Risks Related to Our Substantial Debt~~16

~~Our~~• make ~~substantial~~it ~~indebtedness~~more ~~could~~difficult ~~have~~for ~~a material~~us ~~adverse~~to ~~effect~~satisfy on our obligations ~~financial~~under ~~health and~~ our ~~ability~~$160.0 million to9.0% ~~obtain financing~~senior innotes ~~the~~due ~~future~~2009 and to ~~react~~the lenders tounder ~~changes~~our inrevolving ~~our~~credit ~~business.~~facility;

~~We have~~• increase aour ~~significant~~vulnerability ~~amount~~to ofadverse ~~debt. As of June 30, 2004, we had~~economic ~~approximately $163.5 million of debt outstanding. Our significant amount of debt~~ and ~~other~~general ~~contractual~~industry ~~commitments could have important consequences to you. For example, it could:~~conditions;

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

• ~~make~~limit itour ~~more~~flexibility ~~difficult~~in planning for, usor reacting to, ~~satisfy~~changes ~~our obligations~~in ~~under~~ our ~~$160.0~~business ~~million 9.0% senior notes due 2009~~ and ~~to the lenders under our new revolving credit facility~~industry;

• ~~increase~~place ~~our~~us ~~vulnerability~~at toa ~~adverse~~disadvantage ~~economic~~compared to ~~and~~competitors ~~general~~that ~~industry~~have ~~conditions~~proportionately less debt;

• ~~require~~limit ~~us to dedicate a substantial portion of~~ our ~~cash~~ability ~~flow from operations~~ to ~~principal~~borrow ~~and~~additional ~~interest payments on our~~funds ~~debt,~~in ~~which would reduce~~ the ~~availability~~future, ofif ~~our~~we ~~cash~~need ~~flow from operations to fund capital expenditures or other general corporate purposes~~them; and

• ~~limit~~prevent ~~our~~us ~~flexibility~~from inobtaining ~~planning~~financing ~~for,~~to repurchase orthe $160.0 million 9.0% senior notes due 2009 upon a change of ~~reacting~~control ~~to,~~or ~~changes~~otherwise inlimit our ~~business~~ability ~~and~~to ~~industry;~~make such repurchase.

~~• place~~Despite current indebtedness levels, we may be able to incur substantial additional indebtedness in the future. The terms of the indenture governing the $160.0 million 9.0% senior notes due 2009 and the terms of our revolving credit facility limit, but do not prohibit, us atfrom aincurring ~~disadvantage~~additional ~~compared~~indebtedness, and our revolving credit facility will provide for borrowings of up to $25.0 million, ~~competitors~~subject ~~that~~to ~~have~~certain ~~proportionately~~limitations. ~~less~~Any borrowings under our credit facility would be secured and effectively senior to the notes and the guarantees to the extent of the value of the collateral securing such borrowings. If new debt; is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face would intensify.

~~• limit~~Our ~~our~~ ability to ~~borrow~~generate ~~additional~~the ~~funds~~significant inamount of cash needed to make payments on and otherwise satisfy the ~~future,~~notes ifand our weother ~~need~~debt ~~them;~~and contractual commitments and to operate our business depends on many factors beyond our control.

~~• prevent~~Our ability usto ~~from~~make ~~obtaining~~payments ~~financing~~on and otherwise satisfy the notes and our other debt and contractual commitments and to fund working capital needs and planned ~~repurchase~~capital expenditures and expansion plans will depend on our ability to generate cash and secure financing in the ~~$160~~future.0 ~~million~~Among ~~9.0%~~our ~~senior~~contractual ~~notes~~commitments ~~due~~are (1) contractual ~~2009~~payments ~~upon~~to our founding stockholders on the earlier of a qualified public offering, a change of control or ~~otherwise~~December 15, ~~limit~~2010 and (2) a contingent obligation to use our ~~ability~~best efforts to ~~make~~purchase ~~such~~common stock ~~repurchase~~put warrants representing approximately 8% of our fully-diluted equity (as of the date hereof), at their fair market value if a majority of the warrant holders so require following December 15, 2006 if a qualifying initial public offering of our common stock has not previously occurred. We cannot assure you that we will be able to satisfy our obligations to purchase the warrants or that a dispute relating to our use of “best efforts” will not arise. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

~~Despite~~Our ~~current~~ability ~~indebtedness~~to ~~levels,~~meet wethese ~~may~~obligations beis ~~able~~subject to ~~incur~~general ~~substantial~~economic, ~~additional~~financial, ~~indebtedness~~competitive, inlegislative, ~~the~~regulatory ~~future.~~and ~~The~~other ~~terms~~factors ofbeyond ~~the~~our ~~indenture governing the $160~~control.0 If ~~million~~our ~~9.0%~~business ~~senior~~does ~~notes~~not ~~due~~generate ~~2009~~sufficient ~~and~~cash ~~the~~flow ~~terms~~from ofoperations, ~~the new revolving credit~~and ~~facility~~sufficient ~~will~~future ~~limit,~~borrowings ~~but~~are not ~~prohibit,~~available to us ~~from~~under ~~doing so, and~~ our ~~new~~ revolving ~~credit~~ credit facility ~~will~~or ~~provide~~from ~~for~~other ~~borrowings~~sources of upfinancing, towe ~~$25.0 million,~~may ~~subject to~~not ~~certain~~be ~~limitations.~~able ~~Those~~to ~~borrowings~~repay ~~would~~the notes beor ~~secured~~our ~~and~~other ~~effectively senior~~debt toor ~~the~~satisfy ~~notes~~our ~~and~~other ~~the~~contractual ~~guarantees~~commitments, tooperate our ~~the~~business ~~extent~~or offund ~~the~~our ~~value~~other ofliquidity ~~the collateral~~needs. ~~securing~~We ~~such~~cannot ~~borrowings.~~assure Ifyou ~~new~~that ~~debt~~we will isbe ~~added~~able to ~~our~~obtain ~~and~~additional ~~our subsidiaries’~~financing ~~current~~or ~~debt~~comply ~~levels,~~with ~~the~~our ~~related~~obligations ~~risks~~with respect ~~that~~to weour founding stockholders and ~~they~~warrant ~~now~~holders, ~~face~~particularly because ~~would~~of ~~intensify.~~our anticipated

Our ability to generate the significant amount of cash needed to make payments on and otherwise satisfy the notes and our other debt and contractual commitments and to operate our business depends on many factors beyond our control.17

~~Our~~levels ~~ability~~of todebt ~~make payments on~~ and ~~otherwise satisfy~~ the ~~notes and our other~~ debt ~~and~~ ~~contractual~~incurrence ~~commitments~~restrictions ~~and~~imposed toby ~~fund~~the ~~working capital needs and planned~~agreements ~~capital~~governing ~~expenditures and expansion plans will depend on~~ our ~~ability to generate cash and secure financing in the future~~debt. ~~Among~~Our ~~our~~significant contractual ~~commitments~~obligations, ~~are~~including our ~~(1) contractual~~obligations ~~payments~~ to our founding stockholders onand the ~~earlier~~potential issuance of aour ~~qualified~~preferred ~~public offering~~stock, acould ~~change~~make ofit ~~control~~more ordifficult ~~December 15,~~for ~~2010~~us ~~and (2) a contingent obligation~~ to ~~use~~effect ~~our best efforts to purchase common stock put warrants representing approximately 8% of our fully-diluted equity (as of the date hereof), at their fair market value if~~ a ~~majority of the~~financing ~~warrant holders so require following December 15~~transaction, ~~2006~~including ifan ~~a qualifying~~ initial public offering of our common stock ~~has not previously occurred~~. WeIf we cannot ~~assure~~meet ~~you~~or ~~that~~refinance weour ~~will~~obligations bewhen ~~able~~they toare ~~satisfy~~due, ~~our~~we ~~obligations~~may have to ~~purchase~~sell ~~the~~assets, ~~warrants~~reduce orcapital ~~that~~expenditures aor ~~dispute~~take ~~relating~~other toactions ~~our~~that ~~use~~could ofhave ~~“best~~a material ~~efforts”~~adverse ~~will~~effect ~~not arise.~~on ~~See~~our ~~“Management’s~~financial ~~Discussion~~condition and ~~Analysis~~results of ~~Financial Condition and Results of Operations~~operations.”

~~Our ability~~The toagreements ~~meet these obligations is subject to general economic, financial, competitive, legislative, regulatory~~ and ~~other~~instruments ~~factors beyond our control. If~~governing our ~~business~~debt ~~does~~contain ~~not~~restrictions ~~generate sufficient cash flow from operations,~~ and ~~sufficient~~ ~~future~~could ~~borrowings~~limit ~~are not available to us under~~ our ~~new~~ability ~~revolving credit facility or from other sources of financing, we may not be able~~ to ~~repay the notes or our other debt or satisfy our other contractual commitments,~~ operate our business ~~or fund our other liquidity needs~~. We cannot assure you that we will be able to obtain additional financing or comply with our obligations with respect to our founding stockholders and warrant holders, particularly because of our anticipated

17Our revolving credit facility and the indenture governing our $160.0 million 9.0% senior notes due 2009 contain, and any of our future indebtedness could contain a number of significant covenants that will restrict, among other things, our ability and the ability of our subsidiaries to:

~~levels of~~• pay ~~debt~~dividends ~~and~~or the debt incurrence restrictions imposed by the agreements governing our debt. Our significant contractual obligations, including our obligations to our founding stockholders and the potential issuance of our preferred stock, could make it more difficult for us to effect a financing transaction, including an initial public offering of our common stock. If we cannot meet or refinance our obligations when they are due, we may have to sell assets, reduce capital expenditures or take other ~~actions that could have a material adverse effect on our financial condition and results of operations.~~distributions;

~~The~~• make ~~agreements~~certain ~~and~~investments ~~instruments~~or ~~governing our debt contain restrictions and could limit our ability to operate our business.~~acquisitions;

~~Our new~~• enter ~~revolving~~into ~~credit~~transactions ~~facility~~with and the indenture governing our $160.0 million 9.0% senior notes due 2009 contain, and any of our future indebtedness could contain a number of significant covenants that will restrict, among other things, our ability and the ability of our subsidiaries to:affiliates;

• ~~pay~~ dispose ~~dividends~~of assets or ~~make~~enter ~~other~~into ~~distributions~~business combinations;

• ~~make~~ incur ~~certain~~or ~~investments~~guarantee oradditional ~~acquisitions~~debt;

• ~~enter~~ issue ~~into transactions with affiliates~~equity;

• ~~dispose~~ repurchase ~~of assets~~ or ~~enter~~redeem ~~into~~equity ~~business~~interests and ~~combinations~~debt;

• ~~incur~~ create or ~~guarantee~~permit ~~additional~~to ~~debt~~exist certain liens; and

• ~~issue~~ pledge ~~equity;~~assets.

~~• repurchase~~These restrictions could limit our ability to obtain future financing, make acquisitions or ~~redeem~~needed ~~equity~~capital ~~interests~~expenditures, withstand a future downturn in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise. Furthermore, our revolving credit facility requires us to meet specified financial ratios and tests. Our ~~debt;~~ability to 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 our revolving credit facility, which could place us in default under the indenture governing the notes.

~~• create~~Risks orRelated ~~permit~~ to ~~exist~~Our ~~certain liens; and~~Business

~~• pledge~~Our ~~assets~~business is geographically concentrated, and adverse regional conditions or events could adversely affect us.

These restrictions could limit our ability to obtain future financing, make acquisitions or needed capital expenditures, withstand a future downturn in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise. Furthermore, our new revolving credit facility requires us to meet specified financial ratios and tests. Our ability to 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 our new revolving credit facility, which could place us in default under the indenture governing the notes.18

~~Risks~~We currently ~~Related~~operate toin ~~Our~~three ~~Business~~metropolitan areas, and our clubs in and around New York City generated approximately 87.7% of our revenues for the nine months ended September 30, 2004. Adverse economic conditions or increased competition in those areas, especially in New York City, could have adverse effects on our financial condition and results of operations. Moreover, a catastrophic event in any of those areas, such as the attacks of September 11, 2001, could adversely affect our members, damage our clubs and harm our business.

~~Our~~We ~~business~~may isbe ~~geographically~~unable to attract and retain ~~concentrated~~members, ~~and~~which ~~adverse~~could ~~regional~~have ~~conditions~~a ornegative ~~events~~effect ~~could~~on ~~adversely~~our ~~affect us~~business.

18The performance of our fitness clubs is dependent on our ability to attract and retain members, and we cannot assure you that we will be successful in these efforts, or that the membership levels at our clubs will not materially decline. There are numerous factors that could lead to a decline in membership levels at established clubs or that could prevent us from increasing our membership levels at newer clubs, including harm to our reputation, a decline in our ability to deliver quality service at a competitive cost, the presence of direct and indirect competition in the areas in which the clubs are located, the public’s interest in sports and fitness clubs and general economic conditions. As a result of these factors, we cannot assure you that our membership levels will be adequate to maintain or permit the expansion of our operations. In addition, a decline in membership levels may have a material adverse effect on our financial condition and results of operations.

We ~~currently~~ ~~operate~~may innot ~~three~~be ~~metropolitan~~able ~~areas,~~to ~~and~~successfully ~~our clubs in and around New~~execute ~~York City generated approximately 88.0% of~~ our ~~revenues~~growth ~~for~~strategy ~~the six months ended June 30, 2004. Adverse economic conditions~~ or ~~increased~~effectively ~~competition in~~manage ~~those areas, especially in New York City, could have adverse effects on~~ our ~~financial~~ ~~condition and results of operations~~growth. ~~Moreover, a catastrophic event in any of those areas, such as the attacks of September 11, 2001, could adversely affect our members, damage our clubs and harm our business.~~

We intend ~~may~~to beincrease ~~unable~~our number of fitness clubs from 22 today to ~~attract~~approximately 40 ~~and~~by ~~retain~~the end of 2006. Currently, we consider nine out of our 22 fitness clubs ~~members~~to be mature (i.e., ~~which~~open ~~could~~for ~~have~~48 amonths ~~negative~~or ~~effect~~longer onat the beginning of the fiscal year). Successful implementation of this growth strategy will require considerable expenditures before any significant associated revenues are generated. In addition, many of our ~~business~~existing clubs are still relatively new. We cannot assure you that our existing immature or future fitness clubs will generate revenues and cash flow comparable with those generated by our existing mature clubs.

~~The~~Our ~~performance~~expansion ofwill ~~our~~also ~~fitness~~place ~~clubs~~significant isdemands ~~dependent~~ on our ~~ability~~management toresources. ~~attract and~~We ~~retain members, and we cannot assure you that we~~ will be ~~successful~~required into ~~these efforts,~~identify orattractive ~~that~~club ~~the~~locations, ~~membership~~negotiate ~~levels at our clubs will not materially~~favorable ~~decline.~~rental ~~There~~terms ~~are~~and ~~numerous~~open ~~factors~~new ~~that~~fitness ~~could~~clubs ~~lead~~on to a ~~decline~~timely inand ~~membership levels~~cost-effective ~~at established clubs or that could prevent us from increasing our~~basis ~~membership~~while ~~levels~~maintaining ~~at newer clubs, including harm to our reputation,~~ a ~~decline in~~high ~~our~~level ~~ability~~of ~~to deliver~~ quality ~~service at a competitive cost~~, ~~the~~efficiency ~~presence of direct~~ and ~~indirect~~performance ~~competition~~at ~~in the areas in which the clubs are located,~~both ~~the~~mature ~~public’s~~and ~~interest~~newly inopened ~~sports and~~ fitness clubs ~~and general economic conditions~~. ~~As a result of these factors~~Moreover, we ~~cannot~~plan ~~assure~~to ~~you~~expand ~~that~~into ~~our~~markets ~~membership~~where ~~levels~~we ~~will~~have belittle ~~adequate~~or tono ~~maintain~~direct orprior ~~permit~~experience, ~~the~~and ~~expansion~~we ofcould ~~our~~encounter ~~operations.~~unanticipated ~~In addition~~problems, acost ~~decline~~overruns inor ~~membership~~delays ~~levels~~in ~~may~~opening ~~have~~fitness aclubs ~~material~~in new ~~adverse~~markets ~~effect~~or onin ~~our~~the ~~financial~~market ~~condition~~acceptance ~~and~~for ~~results~~our ~~of operations~~clubs.

We may not be able to ~~successfully~~effectively ~~execute~~manage this expansion, and any failure to do so ~~our~~could ~~growth~~have ~~strategy~~a ormaterial ~~effectively~~adverse ~~manage~~effect on our ~~growth~~business, financial condition and results of operations.

We ~~intend~~ tomay ~~increase~~not ~~our~~be ~~number~~able ofto ~~fitness~~continue ~~clubs from 22 today~~ to ~~approximately~~compete 40effectively byin ~~the~~each ~~end~~ of ~~2006. Currently, we consider nine out of~~ our 22markets ~~fitness~~in ~~clubs to be mature (i.e., open for 48 months or longer at~~ the beginning of the fiscal year). Successful implementation of this growth strategy will require considerable expenditures before any significant associated revenues are generated. In addition, many of our existing clubs are still relatively new. We cannot assure you that our existing immature or future ~~fitness clubs will generate revenues and cash flow comparable with those generated by our existing mature clubs~~.

~~Our~~The ~~expansion~~fitness ~~will~~industry ~~also~~is ~~place~~highly ~~significant~~fragmented. ~~demands~~Within oneach ~~our~~market ~~management~~in ~~resources.~~which Wewe operate, ~~will~~we becompete ~~required~~with toother ~~identify~~commercial ~~attractive~~fitness ~~club locations~~centers, ~~negotiate~~physical ~~favorable rental~~fitness ~~terms~~ and recreational ~~open~~facilities ~~new~~established ~~fitness~~by ~~clubs~~local ongovernments, ahospitals ~~timely~~ and businesses ~~cost-effective~~for ~~basis while~~their ~~maintaining~~employees, aYMCAs ~~high~~and ~~level~~similar oforganizations ~~quality~~and, ~~efficiency~~to ~~and~~a certain ~~performance~~extent, atwith ~~both mature~~racquet, tennis and ~~newly~~other ~~opened~~athletic ~~fitness~~ clubs., ~~Moreover~~country clubs, weight-reducing wesalons ~~plan~~and tothe ~~expand~~home-use ~~into~~fitness ~~markets where~~equipment weindustry. ~~have~~Competitive conditions ~~little~~may orlimit noour ~~direct~~ability ~~prior~~to ~~experience,~~maintain ~~and~~or weincrease ~~could~~initiation ~~encounter~~fees or ~~unanticipated~~membership ~~problems~~dues, ~~cost~~attract ~~overruns~~new ormembers ~~delays~~and inkeep ~~opening~~existing ~~fitness~~members, ~~clubs~~and ~~in new~~could ~~markets~~adversely oraffect inour ~~the~~business, ~~market~~financial ~~acceptance~~condition ~~for~~and ~~our~~results ~~clubs~~of operation.

We ~~may~~ ~~not~~could be ~~able~~subject to ~~effectively~~personal ~~manage~~injury claims ~~this~~related ~~expansion, and any failure~~ to dothe ~~so could~~use ~~have~~of ~~a material adverse effect on~~ our ~~business, financial condition and results of operations~~clubs.

WeMembers or ~~may~~guests ~~not~~could beassert ~~able~~claims toof ~~continue~~personal toinjury ~~compete effectively~~ in ~~each~~connection with their use of our ~~markets~~services inand ~~the~~facilities. ~~future~~If we cannot successfully defend any large claim or maintain our general liability insurance on acceptable terms or maintain adequate coverage against potential claims, our financial results could be adversely affected.

The fitness industry is highly fragmented. Within each market in which we operate, we compete with other commercial fitness centers, physical fitness and recreational facilities established by local governments, hospitals and businesses for their employees, YMCAs and similar organizations and, to a certain extent, with racquet, tennis and other athletic clubs, country clubs, weight-reducing salons and the home-use fitness equipment industry. Competitive conditions may limit our ability to maintain or increase initiation fees or membership dues, attract new members and keep existing members, and could adversely affect our business, financial condition and results of operation.19

We ~~could~~are be subject to ~~personal~~government ~~injury~~regulation. ~~claims~~Changes ~~related~~in these regulations or a failure to ~~the~~comply ~~use~~with ofthem could have a negative effect on our ~~clubs~~financial condition.

~~Members~~Our oroperations ~~guests~~and ~~could~~business ~~assert~~practices ~~claims~~are ofsubject ~~personal~~to ~~injury~~federal, instate ~~connection~~and ~~with their use~~local ofgovernment ~~our~~regulations ~~services~~in ~~and~~the ~~facilities.~~various Ifjurisdictions wein ~~cannot~~which ~~successfully defend any large claim or maintain~~ our ~~general liability insurance on acceptable terms or~~fitness ~~maintain~~centers ~~adequate~~are ~~coverage against potential claims~~located, ~~our financial results could be adversely affected.~~including:

19• general rules and regulations of the Federal Trade Commission, state and local consumer protection agencies and state statutes that prescribe provisions of membership contracts and that govern the advertising, sale, financing and collection of membership fees and dues; and

We• state ~~are~~and ~~subject~~local tohealth ~~government regulation. Changes in these~~ regulations ~~or a failure to comply with them could have a~~and ~~negative~~building ~~effect on our financial condition~~codes.

~~Our~~If ~~operations~~we ~~and~~were ~~business~~to ~~practices~~fail ~~are~~to ~~subject~~comply towith ~~federal~~these statutes, ~~state~~rules and ~~local~~regulations, we could ~~government~~suffer ~~regulations~~fines inor ~~the~~other ~~various~~penalties. ~~jurisdictions~~These inmay ~~which~~include regulatory or judicial orders enjoining or curtailing aspects of our ~~fitness~~operations. It is difficult to ~~centers~~predict the future development of such laws or regulations, and although we are not ~~located~~aware of any proposed changes, ~~including:~~any changes in such laws could have a material adverse effect on our financial condition and results of operations.

~~• general~~If ~~rules~~we ~~and~~do ~~regulations~~not ofretain ~~the~~key ~~Federal~~management ~~Trade~~personnel ~~Commission, state~~ and/or ~~local~~fail ~~consumer~~to ~~protection~~attract ~~agencies~~ and ~~state statutes~~retain ~~that~~highly ~~prescribe~~qualified ~~provisions~~personnel, ~~of membership contracts and that govern the~~our ~~advertising,~~business ~~sale,~~will ~~financing and collection of membership fees and dues; and~~suffer.

~~• state~~The success of our business depends on the leadership of our key management personnel. If any of these persons were to leave, it might be difficult to replace them, and ~~local~~our ~~health~~business ~~regulations~~could be harmed. In addition, we cannot assure you that we can attract and retain sufficient qualified personnel to meet our ~~building~~business ~~codes~~needs.

~~If we~~Our ~~were~~trademarks ~~to fail to comply with these statutes, rules~~ and ~~regulations,~~trade wenames ~~could suffer fines or other penalties. These~~ may ~~include regulatory or judicial~~be ~~orders~~misappropriated ~~enjoining~~ or ~~curtailing~~challenged ~~aspects~~by ~~of our operations~~others. It is difficult to predict the future development of such laws or regulations, and although we are not aware of any proposed changes, any changes in such laws could have a material adverse effect on our financial condition and results of operations.

IfWe believe weour dobrand ~~not~~name ~~retain~~and ~~key~~related ~~management~~intellectual property are important to our ~~personnel~~continued success. We attempt to protect our trademarks and~~/or~~ trade names by exercising our rights under applicable trademark and copyright laws. If we were to fail to ~~attract~~protect ~~and~~our ~~retain~~intellectual ~~highly~~property ~~qualified~~rights ~~personnel~~for any reason, ~~our~~it could have an adverse effect on our business, ~~will~~results ~~suffer~~of operations and financial condition.

The ~~success~~ ofinterests ~~our business depends on the leadership~~ of our ~~key management~~controlling ~~personnel.~~shareholders Ifmay ~~any of these persons were to leave, it might~~ be ~~difficult~~in ~~to replace~~conflict ~~them,~~with ~~and~~your ~~our~~interests ~~business~~as ~~could~~a beholder ~~harmed.~~of ~~In addition, we cannot assure you that we can attract and retain sufficient qualified personnel to meet our business needs~~notes.

~~Our~~Funds managed ~~trademarks~~by North Castle Partners, L.L.C. and ~~trade~~J.W. ~~names~~Childs Associates, L.P. indirectly own approximately 93% of our outstanding common stock and together have the ability to elect a majority of the board of directors and generally to control the affairs and policies of our company. Circumstances may occur in which the interests of either North Castle or J.W. Childs, as our shareholders, could be in conflict with the interests of the holders of the notes. For ~~misappropriated~~example, if we encounter financial difficulties or ~~challenged~~are byunable ~~others~~to pay our debts as they mature, their interests as equity holders and as counterparties to a consulting agreement might conflict with your interests as a holder of notes.

~~We believe~~Item ~~our brand name and related intellectual property are important to our continued success~~3. Quantitative ~~We attempt to protect our trademarks~~ and ~~trade names by~~Qualitative ~~exercising~~Disclosures ~~our~~About ~~rights~~Market under applicable trademark and copyright laws. If we were to fail to protect our intellectual property rights for any reason, it could have an adverse effect on our business, results of operations and financial condition.Risk

~~The~~We ~~interests~~do ofnot ~~our~~believe ~~controlling~~that we have any significant risk related to interest ~~shareholders~~rate ~~may~~fluctuations besince we currently only carry fixed-rate debt. We invest our excess cash in ~~conflict~~highly ~~with~~liquid ~~your~~short-term ~~interests~~investments. asThese ainvestments ~~holder~~are ofnot held ~~notes~~for trading or other speculative purposes.

Funds managed by North Castle Partners, L.L.C. and J.W. Childs Associates, L.P. indirectly own approximately 93% of our outstanding common stock and together have the ability to elect a majority of the board of directors and generally to control the affairs and policies of our company. Circumstances may occur in which the interests of either North Castle or J.W. Childs, as our shareholders, could be in conflict with the interests of the holders of the notes. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, their interests as equity holders and as counterparties to a consulting agreement might conflict with your interests as a holder of notes.20

Item 34. Controls ~~Quantitative~~ and ~~Qualitative Disclosures About Market Risk~~Procedures

WeAs of dothe ~~not~~end ~~believe~~of ~~that~~the weperiod ~~have~~covered ~~any~~by ~~significant~~this ~~risk~~report ~~related~~the toCompany ~~interest~~carried out an ~~rate~~evaluation, ~~fluctuations~~under ~~since~~the wesupervision ~~currently~~and ~~only~~with ~~carry~~the ~~fixed-rate~~participation ~~debt~~of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based Weon ~~invest~~that evaluation, our Chief Executive Officer and Chief Financial ~~excess~~Officer ~~cash~~concluded that the Company’s disclosure controls and procedures (1) were effective in ~~highly~~timely ~~liquid~~alerting ~~short-term~~them ~~investments.~~to ~~These~~material ~~investments~~information relating ~~are~~to ~~not~~the Company (including its consolidated subsidiaries) required to ~~held~~be ~~for~~included ~~trading~~in the Company’s periodic SEC filings and (2) were adequate to ensure that information required to be disclosed by the Company in the reports filed or ~~other~~submitted ~~speculative~~by ~~purposes~~the Company under the Exchange Act is reported within the time period specified in the SEC’s rules and forms.

20There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting other than explained below.

~~Item~~The 4Company has established a formal Disclosure Committee and held its first quarterly meeting in September 2004. ~~Controls~~In connection with the audit of our financial statements for the year ended December 31, 2003 and ~~Procedures~~for the three month period ended March 31, 2004, we were advised by our auditors, KPMG LLP, of significant deficiencies concerning our internal controls and their operation during the year. The significant deficiencies are as follows: (1) we did not complete timely formal reconciliations between subsidiary records and the general ledger for certain of our balance sheet accounts; and (2) we had clerical and accounting errors that could have been averted through greater management review and approval of reports, statements and reconciliations. In addition, we were advised by our auditors that the Company should hire at least one new director who is considered to be “financially literate” so this person could serve on the audit committee of the Company.

AsWe understand that these significant deficiencies, if unaddressed, ofcould ~~the~~adversely ~~end~~affect ofour ~~the~~ability ~~period~~to ~~covered~~record, byprocess ~~this~~and report financial data consistent with our assertions in the ~~Company~~financial ~~carried~~statements. ~~out~~Since anOctober of ~~evaluation~~2003, ~~under~~we ~~the~~have ~~supervision~~taken ~~and~~steps ~~with~~to ~~the~~strengthen ~~participation~~our ofinternal ~~the~~control ~~Company’s~~structure and ~~management,~~procedures ~~including~~for ~~the~~financial ~~Chief~~reporting ~~Executive~~and ~~Officer~~our disclosure controls and procedures. In the ~~Chief~~third ~~Financial Officer,~~quarter of ~~the~~2003, ~~effectiveness~~we ofhired ~~the~~a ~~design~~new ~~and~~chief ~~operation~~financial ofofficer ~~the~~who ~~Company’s~~has ~~disclosure~~significant ~~controls~~public ~~and~~company ~~procedures~~accounting ~~pursuant~~experience. toWe ~~Exchange~~established ~~Act~~a ~~Rule 13a-15.~~formal ~~Based~~disclosure oncommittee that ~~evaluation,~~will ~~our~~meet ~~Chief~~at ~~Executive~~least ~~Officer~~once a quarter and ~~Chief~~will ~~Financial~~be ~~Officer~~responsible ~~concluded~~for ~~that~~establishing ~~the~~and ~~Company’s~~reviewing our disclosure controls and ~~procedures~~ ~~(1) were~~procedures ~~effective~~for inensuring ~~timely~~the ~~alerting~~accuracy ~~them~~and tocompleteness ~~material~~of the information ~~relating~~contained toin ~~the~~our ~~Company~~financial ~~(including~~statements, ~~its~~books ~~consolidated~~and ~~subsidiaries)~~records. ~~required~~We toalso anticipate befurther ~~included~~accounting instaff ~~the~~hires, ~~Company’s~~a ~~periodic~~more ~~SEC~~formal ~~filings~~financial quality review process and ~~(2) were~~other ~~adequate~~process ~~to ensure~~and system control improvements. We believe that ~~information~~we ~~required~~are appropriately toaddressing each of these internal control issues, but there can be ~~disclosed~~no byassurance ~~the~~that ~~Company~~similar or other issues will not arise in the ~~reports~~future. As ~~filed~~of orSeptember 30, ~~submitted~~2004 by the Company ~~under~~has ~~the~~completed ~~Exchange~~timely ~~Act~~formal reconciliations isbetween ~~reported~~subsidiary ~~within~~records and the general ledger and ~~time~~significantly ~~period~~reduced ~~specified~~clerical inerrors ~~the~~as ~~SEC’s~~a ~~rules~~result ~~and~~of ~~forms~~greater management review.

~~There~~PART ~~have~~II. ~~been~~OTHER no changes in the Company's internal control over financial reporting during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.INFORMATION

~~The~~Item Company has established a formal Disclosure Committee and held its first quarterly meeting in September, 2004. In connection with the audit of our financial statements for the year ended December 31, 2003 and for the three month period ended March 31, 2004, we were advised by our auditors, KPMG LLP, of significant deficiencies concerning our internal controls and their operation during the year. The significant deficiencies are as follows: (1) we did not complete timely formal reconciliations between subsidiary records and the general ledger for certain of our balance sheet accounts; and (2) we had clerical and accounting errors that could have been averted through greater management review and approval of reports, statements and reconciliations. Legal In addition, we were advised by our auditors that the Company should hire at least one new director who is considered to be "financially literate" so this person could serve on the audit committee of the Company.Proceedings

We ~~understand that these significant deficiencies, if unaddressed,~~ ~~could~~are ~~adversely~~involved ~~affect~~in ~~our~~various ~~ability~~claims ~~to record, process~~ and ~~report~~lawsuits ~~financial~~arising ~~data consistent with our assertions~~ in the ~~financial~~normal ~~statements.~~course ~~Since October~~ of ~~2003,~~business. weWe ~~have~~believe ~~taken~~that ~~steps to strengthen our internal control structure and procedures for financial reporting and our disclosure controls and procedures. In~~ the ~~third~~ultimate ~~quarter~~outcome of ~~2003,~~these wematters ~~hired a new chief financial officer who has significant public company accounting experience. We established a formal disclosure committee that~~ will ~~meet~~not athave ~~least once~~ a ~~quarter and will be~~ ~~responsible~~material ~~for~~adverse ~~establishing~~affect ~~and~~on ~~reviewing~~ our ~~disclosure controls and procedures for ensuring the accuracy and completeness of the information contained in our financial statements~~business, ~~books~~results and records. We also anticipate further accounting staff hires, a more formal financial quality review process and other process and system control improvements. We believe that we are appropriately addressing each of ~~these internal control issues~~operations, ~~but~~cash ~~there~~flows ~~can be no assurance that similar~~ or ~~other issues will not arise in the future. As~~ offinancial June 30, 2004 the Company has completed timely formal reconciliations between subsidiary records and the general ledger and significantly reduced clerical errors as a result of greater management reviewcondition. The Company continues to make improvements in its internal control structure and is also actively conducting a search for a new director who is considered to be “financially literate” to serve on the audit committee.

~~PART II.~~Item ~~OTHER INFORMATION~~6. Exhibits

~~Item~~(a) 1Exhibits Exhibit 31.1 ~~Legal~~Certification ~~Proceedings~~by Harvey Spevak pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

We are involved in various claims and lawsuits arising in the normal course of business. We believe that the ultimate outcome of these matters will not have a material adverse affect on our business, results of operations, cash flows or financial condition.21

Item 6. Exhibits and Reports on Form 8-K.

Exhibit 31.2		Certification by Scott Rosen pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(a) Exhibits Exhibit 31.1 Certification by Harvey Spevak pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.SIGNATURES

21Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Exhibit 31.2	Certification by Scott Rosen pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	EQUINOX HOLDINGS, INC.
	Exhibit 32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	(Registrant)
	Exhibit 32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
DATE: December 13, 2004	By: /s/ SCOTT ROSEN
(b) Reports
	Scott Rosen
	Executive Vice President and Chief Financial Officer
	(Principal financial, accounting officer)
DATE: December 13, 2004	By: /s/ HARVEY SPEVAK
	Harvey Spevak
	Director, President and Chief Executive Officer

On August 19, 2004, the Company filed a Form 8-K and furnished to the Securities and Exchange Commission a press release issued by the Company in connection with the announcement of its second quarter 2004 earnings results.22

SIGNATURES

Pursuant to requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	EQUINOX HOLDINGS, INC.
	(Registrant)
DATE: September 27, 2004	By: /s/ SCOTT ROSEN
	Scott Rosen
	Executive Vice President and Chief Financial Officer
	(principal financial, accounting officer)
DATE: September 27, 2004	By: /s/ HARVEY SPEVAK
	Harvey Spevak
	Director, President and Chief Executive Officer

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