This Offering is being conducted pursuant to an exemption from registration under the Securities Act of 1933, as amended (the "Act") provided by Section 3(b) of the Act and Regulation A promulgated thereunder. This Offering is only made to suitable investors, who meet certain requirements.

Offering Summary

The following summary is qualified in its entirety by the more detailed information and the Financial Statements appearing elsewhere in this Offering Circular.

The Company

Newco Fitness, Inc. (the "Company") acquires, develops and operates sports and fitness clubs in Northern Michigan. The Company operates ABC Athletic Club, Superior Athletic Club, Fasttrack Athletic Club, and Newcomb Athletic Club.

On October 12, 2001, and October 25, 2002, the Predecessor was listed by the Detroit Business Journal as respectively the 6th and the 22nd fastest growing privately held company in the Detroit Metropolitan area. In May of 2002 and again in 2003 the Company was listed in the top 100 out of 7,000 fitness businesses in the United States by Club Industry Magazine, and in October 2002 the Company was ranked 386th in the Inc. 500 list of fastest growing privately held companies in America.

 

The Offering
Common Stock Offered by the Company	456,000 Shares
Common Stock Offered by the Selling Shareholders	44,000 Shares
Total Common Stock Offered	500,000 Shares
Common Stock to be Outstanding after the Offering	1,365,948 Shares
Use of Proceeds	Reduction of indebtedness created by acquisition of the Newcomb Club and the Redemption; Acquisition of Athletic Clubs and general corporate purposes.

Investor Suitability Requirements

Risk Factors

The Securities offered hereby involve a high degree of risk, See "Risk Factors."

Summary Financial and Operating Data
(Unaudited)

 

Statement of Operations Data - unaudited
	Fiscal Year Ended December 31				Four Months Ended April 30
	1999	2000	2001	2002	2002	2003
Revenue (Net of deferrals)	$873,896	$2,483,721	$3,385,818	$4,183,596	$1,311,627	$1,002,288
Operating Expenses	1,006,506	2,095,754	3,208,172	4,170,166	1,263,135	924,746
Pre-tax Income (loss)-Operations	(132,610)	387,967	177,646	13,430	48,492	77,542
Interest Expense	37,679	58,378	67,567	123,591	39,361	33,472
Extraordinary Income	0	0	131,434	237,502	0	0
>Net Income (loss)	(102,174)	197,753	147,210	74,812	5,479	26,442
Net Income(loss) Per Share	$ (0.10)	$ 0.19	$ 0.12	$ 0.08	0.01	0.03
Common Shares Outstanding (1)	1,052,002	1,052,002	1,187,251	899,848	810,539	909,948
(1) For the periods ended December 31, 1999, 2000 and 2001 shares held by XYZ Investors, L. P. were deemed not to be outstanding. For the periods ended December 31, 1999 and 2000 shares issued in connection with the Acquisition were deemed not to be outstanding.

 

Balance Sheet Data - unaudited
	December 31, 2002	April 30, 2003
Current Assets	$ 823,364	$ 738,961
Total Assets	3,622,348	3,482,422
Current Liabilities	875,785	923,938
Prepaid Memberships	790,115	703,408
Long-Term Debt	1,447,728	1,383,619
Stockholders' Equity	$ 470,763	$ 555,233

Risk Factors

The following risk factors should be carefully considered in evaluating the Company and its business prospects before purchasing the Securities offered by this Offering Circular. The Shares offered by the Company involve a high degree of risk and should be regarded as a speculative investment. As a result, the purchase of Shares should be considered only by persons who can afford a loss of their entire investment. Prospective investors should carefully consider the following factors in addition to the other information in this Offering Circular and any other information provided to such prospective investors by the Company:

Performance of Recently Acquired Club.   The Company has only recently acquired the Newcomb Athletic Club. This club has not achieved the membership levels of the Company's other clubs, and operates at a lower profit margin than the other clubs. There is no certainty that this club will achieve the level of membership of the Company's other clubs.

Recent Reorganization.   The Predecessor was reorganized as the Company effective January 1, 2002, subject to subsequent regulatory approval. In connection with the Reorganization, the Company succeeded to the assets, liabilities and business of ABC Athletic Clubs, a Michigan General Partnership, the partners of which were Bayshore, a Michigan Limited Partnership and Joe Johnson. In connection with the Reorganization, the Company also succeeded to all of the assets of XYZ Capital, a Michigan Sole Proprietorship and XYZ Investors, LP, a Michigan Limited Partnership. The assets of ABC Athletic Clubs consisted primarily of the leasehold interests, equipment, furniture, fixtures, and business of Superior Athletic Club, Fasttrack Athletic Club and ABC Athletic Club. ABC Athletic Clubs also acquired Newcomb Athletic Club. The primary asset of XYZ Investors-I, LP were promissory notes receivable in the principal amount of $841,957. XYZ Capital fixed and current assets totaled $82,207.

The Acquisition.   On or about July 26, 2001 the Predecessor agreed to acquire substantially all of the assets of the business of Newcomb Athletic Club from Summit Gyms, Inc. (the "Seller") for a package worth approximately $1,487,000 (the "Acquisition"). Mr. John Smith has the primary obligation to repay the last $250,000 of this purchase obligation. The Acquisition includes certain rights of the Company to prepay certain amounts owed, incurred in connection with the Acquisition, at approximately a 25% discount which, if paid immediately upon closing, would have reduced the total purchase price to $1,137,315. In connection with the Acquisition, the Company granted to the Sellers, a first priority security interest in all of the Company's equipment. Since the Acquisition, the membership of Newcomb Athletic Club has increased from 2,104 to 2,630. On or about September 29, 2002 the Acquisition was restructured. The restructuring included characterizing the Acquisition as secured loan payments rather than possible redemption of certain shares of stock issued by the Company in connection with the Acquisition. The restructuring included a $237,502 reduction in aggregate payments to the Seller, a reduction of $6,169 per month in possible monthly payments and the option to skip one payment per year, plus up to a 25% principal discount for certain pre-payments.

Dependance on Single Geographic Area.   All operating or intended clubs of the Company are located in the Detroit Metropolitan area, with the exception of Newcomb Athletic Club, which is located approximately 7 miles from Detroit. In the event of an event which materially adversely affects the economy of the Detroit area (possibly such as a significant earthquake) the Company and its business could be materially adversely affected.

Financial Information.   The unaudited financial statements dated December 31, 1998 through 2001, and for the years then ended and for the four months ending April 30, 2002 and April 30, 2003, have been prepared in accordance with generally accepted accounting principals. These financial statements are unaudited, the Company believes that the Offering Circular contains all information, including financial information, that an investor may need to make an informed investment decision. Any potential investor desiring to see more detailed financial records of the Company is encouraged to ask for them.

Unaudited Financial Statements.  The Company's financial statements are unaudited. The Company believes that the Company's unaudited financial statements for year end for the years presented and the interim financial statements have been prepared in accordance with GAAP and are fairly presented. To complete a full audit now would entail completion of 2000 and 2001 audits plus the further addition of a 2002 audit before the public accounting firm would conclude its audit and allow a statement to be included in an Offering Circular. The Company has been advised that as a small customer, this may take two to three months to accomplish and at an up-front cost that the Company believes is prohibitive, at this time.

The Company

The principal executive offices of the company are located at 1901 South Bascom Avenue, Suite 76, Hillside, Michigan 95008. The telephone number is (408) 371-7144 and the facsimile number is (408) 371-7149. The company is a Michigan Corporation.

The Company operates four athletic clubs in the Detroit Bay Area. The four clubs currently owned and being operated by the Company have an aggregate square footage of 71,500. The Company has an aggregate of 19,100 members and membership turns at a rate of 4,980 members per year. The average monthly membership fee is $25.00 and the Company uses automatic deduction of fees for approximately 10,500 of its members. The Company believes that it appeals to single persons with average income of $42,000.

The Company owns an aggregate of 400 nautilus and 200 cardiovascular machines and operates approximately 140 aerobics classes per week. The Company has approximately 133 employees, of which approximately 21 work in sales and 9 work in management. The Company is structured so that each club has its own manager and sales manager.

Use of Proceeds

The net proceeds to be received by the Company from the sale of the Shares offered hereby are estimated to be $4,195,200, not including costs in connection with the Offering estimated at $60,000. Since there is only a small minimum amount on the Offering, proceeds will be made available to the Company after the first $100,000 is received. In the event that the full amount offered in connection herewith is subscribed for, the Company anticipates using approximately $2,400,000 for acquisitions of existing athletic club facilities, $800,000 for repayment of indebtedness incurred in connection with the Acquisition and the Redemption, $500,000 as reserve for possible celebrity athlete endorsements, and $495,200 for general corporate purposes. In the event that less than the full amount of this Offering is subscribed for, the Company intends to use proceeds of the offering for the same purposes as set forth above, generally on a pro rata basis. Proceeds of this offering will be made available to the Company as received after the $100,000 minimum has been received. The initial $100,000 received by the Company will be escrowed at Third National Bank. In the event that the Company does not receive $100,000 within the first 6 months of this Offering, the Company will return all proceeds still held in escrow at that time. In the event that the Company only receives $100,000 in connection with this Offering, then the Company intends to use all such proceeds for general corporate purposes and to defray the costs of one acquisition.

The Company does not intended to acquire any athletic facilities from affiliates, and any such athletic facilities acquired will be acquired from unrelated parties. In the event that this Offering is fully subscribed, the Company intends to acquire eleven to sixteen athletic facilities. The Company intends to conduct such acquisitions by targeting profitable facilities with good management team, and by acquiring such operations using a small amount of cash and a larger amount of stock. In connection with such acquisitions the Company also intends to try to structure a significant earnout or management incentive contract.

The indebtedness which the Company intends to repay from the proceeds of this Offering, includes portions of the debt associated with the Redemption and Acquisition. See - "Certain Transactions." The debt incurred in connection with these two transactions each bear 10% interest, compounded monthly. Both obligations include a 25% discount for advance prepayment of any or all of the principal through September 29, 2003. In each succeeding year ending September 29th, the Company maintains the right to a discount on prepayment on an annually decreasing scale of 20%, 15%, 10% and 10% in years two through five, respectively. Also, beginning in 2004 the Company may skip one monthly payment per year on each note. The face value of the Acquisition note was renegotiated to $918,566 on September 29, 2002, with payments set at $18,000 per month for approximately sixty-seven months. Mr. John Smith, Chief Executive Officer of the Company has the personal responsibility to pay the last $250,000 of the principal on this note. The face value of the Redemption note was renegotiated to $716,253 on September 29, 2002 with payments set at $12,000 per month for seventy-eight months. The aggregate initial principal amount of these two notes is approximately $1,600,000. The Company intends to apply $800,000 toward repayment of these notes on a pro rata basis.

These two notes represent a cash outflow of almost 9% on sales and there is only a limited minimum on this Offering . Generally, if nothing more than the minimum amount offered in connection herewith, the Company does not believe that more than one acquisition will be possible until the Redemption and Acquisition debts are significantly reduced, recapitalized under more favorable terms or renegotiated. Independent of this offering, the Company is seeking to refinance these debts and capture the 25% prepayment discount and generally more favorable terms. These negotiations with a handful of banks and investment firms are very preliminary and completely uncertain. The Company also may explore using contract factoring or membership discounting to bridge short term operating or capital needs. However, if the offering and refinancing all were unsuccessful, or if the Company received proceeds in connection with this Offering of no more than the minimum amount as set forth on the cover page hereof, the Company would ultimately be forced to operate in a severely restricted service profile under a limited budget. This would mean that the Company would likely be able to advertise less, offer fewer aerobics classes, offer fewer personal trainers, staff the front desks with fewer people, and replace equipment less frequently. In the scenario of continued lack of availability of new capital from all sources, the Company would seek to merge with a strong partner in the industry to meet its capital outflow responsibilities. In this circumstance, such a merger would likely need to be consummated at less than favorable terms to the Company.

Dilution

Investors in the Shares will suffer immediate substantial dilution in the book value of their investment. As of April 30, 2003, the net tangible book value of the Company was $(187,369) or $(0.21) per share of Common Stock. After giving effect to this Offering and assuming full subscription hereof, less possible commissions payable in connection herewith, and deducting expenses in connection with this Offering, the net tangible book value of the Company will be $3,739,159 or $2.74 per share. This represents an immediate increase in net tangible book value of $2.95 per share of Common Stock for the shareholders of the Company prior to this Offering, and an immediate dilution of $7.26 per share of Common Stock for Investors herein. The following table illustrates this dilution.

 

Common Stock Price:			$ 10.00
Net tangible book value per   share prior to Offering		$(0.21)
Increase attributable to Investors:	$ 2.96
Pro forma net tangible book value per share after Offering:			$ 2.74
Dilution to Investors:			$ 7.26 =====

Dividend Policy

The Company has not paid any cash dividends on its Common Stock and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future.

Capitalization

The following table sets forth the capitalization of the Company as of April 30, 2003:

Financial Information

The selected financial and operating information set forth below should be read in conjunction with the unaudited financial statements set forth in an Attachment hereto.

 

Statement of Operations Data - unaudited
	Fiscal Year Ended December 31				Four Months Ended April 30
	1999	2000	2001	2002	2002	2003
Revenue (Net of deferrals)	$873,896	$2,483,721	$3,385,818	$4,183,596	$1,311,627	$1,002,288
Operating Expenses	1,006,506	2,095,754	3,208,172	4,170,166	1,263,135	924,746
Pre-tax Income (loss)-Operations	(132,610)	387,967	177,646	13,430	48,492	77,542
Interest Expense	37,679	58,378	67,567	123,591	39,361	33,472
Extraordinary Income	0	0	131,434	237,502	0	0
>Net Income (loss)	(102,174)	197,753	147,210	74,812	5,479	26,442
Net Income(loss) Per Share	$ (0.10)	$ 0.19	$ 0.12	$ 0.08	0.01	0.03
Common Shares Outstanding (1)	1,052,002	1,052,002	1,187,251	899,848	810,539	909,948
(1) For the periods ended December 31, 1999, 2000 and 2001 shares held by XYZ Investors, L. P. were deemed not to be outstanding. For the periods ended December 31, 1999 and 2000 shares issued in connection with the Acquisition were deemed not to be outstanding.

Balance Sheet Data - unaudited
	December 31, 2002	April 30, 2003
Current Assets	$ 823,364	$ 738,961
Total Assets	3,622,348	3,482,422
Current Liabilities	875,785	923,938
Prepaid Memberships	790,115	703,408
Long-Term Debt	1,447,728	1,383,619
Stockholders' Equity	$ 470,763	$ 555,233

Financial Analysis

General

Newco Fitness, Inc. (the "Company") was founded in 2001 and is the successor to ABC Athletic Clubs, XYZ Capital and XYZ Investors, LP. The Company develops, acquires, owns and operates athletic clubs. Virtually all of the Company's revenue is currently derived from membership fees and dues by persons desiring to use the Company's athletic clubs. The following table sets forth, for the periods indicated, selected statement of operations data expressed as a percentage of revenue.

 

	As a percentage of net sales for the Fiscal Year Ended:				Four Months Ended April 30
	1999	2000	2001	2002	2002	2003
Revenue	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%
Operating Expenses	115.2%	84.4%	91.4%	98.0%	96.3%	92.2%
Pre-tax Income from Operations	(15.2)%	15.6%	8.6%	2.0%	3.7%	7.8%

Four Months Ended April 30, 2003 vs Four Months Ended April 30, 2002

Fiscal 2002 Compared to Fiscal 2001

Fiscal 2002 Revenue increased 20% to $4.2 million from $3.5 million. Substantially all of this increased revenue came from membership fees. 90% of the 20% increase came from the inclusion of the Newcomb club, which was acquired in mid-2001, for an entire fiscal year.

Fiscal 2001 Compared to Fiscal 2000

Fiscal 2001 Revenue increased 40% to $3.5 million from $2.5 million. Substantially all of this increased revenue came from membership fees. One Quarter of the 40% increase came from the addition of the Newcomb club and three quarters of the total 40% increase came from same club sales growth.

Operating expenses rose somewhat as a percentage of revenue to 91.4% in 2001. The Company attributes this to the fact that it pursued an aggressive growth strategy the acquisition of the Newcomb facility in August and the start-up to build out the Philly facility in July. In October it became clear that the redemption of the operating partners' interest would occur in early 2002. At that point, the expansion strategy was put on hold until this transaction was complete and the Company could focus on raising additional funding such as is anticipated under this offering.

Fiscal 2000 Compared to Fiscal 1999

Income Taxes

Seasonality

Liquidity and Capital Resources

The Company has a $100,000 line of credit with Third National Bank which was increased with a related $50,000 term loan from the same bank in January of 2003.

Business

General

Background

Industry Overview

Strategy

Acquisitions

Sales and Marketing

Competition

 

Current Facilities
Athletic Clubs	Square Feet	Date Acquired or Built	Membership
ABC Athletic Club 1405 ABC Athletic Club Avenue Detroit, MI 43118	13,000	November, 1993	4,900
Superior Athletic Club 321 Beach Avenue Detroit, MI 43125	25,000	October, 1999	9,890
2nd Street Athletic Club 98753 S. Third Street Detroit, MI 43112	5,000	August, 2000	1,700
Newcomb Athletic Club 9653 Pine Street Newcomb, MI 94538	28,500	July, 2001	2,610
TOTAL			19,100
Headquarters 1901 S. Bascom Avenue Suite 76 Hillside, MI 43008	3,000	October, 1996

The Newcomb location is the largest at 28,500 square feet and the Company believes has the greatest upside potential. The previous owner operated the facility as a muscle building club. Newco Fitness, Inc. is currently working to transform the facility to a friendly neighborhood athletic club. The club has a complete range of fitness and exercise equipment. The site had a noticeable lack of signage when acquired, and the Company has recently negotiated with the city of Newcomb to install a new marquis sign. The Newcomb club also has a growing aerobics program, matching child care, extensive personal training, rental lockers and association with an on site chiropractic clinic.

Revenue Structure and Recognition

Employees

Programs

Proprietary Rights

Mission Statement

Goal

Government Regulation

Legal Proceedings

The Company is not a party to any legal proceedings which management believes will have a material adverse effect on the financial condition or operations of the Company.

Management

Directors and Officers

Name and Position	Age	Tenure with Company	Position
John Smith	43	(1992-96)	President and Chief Executive Officer, Director
Brian Hanson	53	(1999-96)	Director
Karen Berkshire	34	(1998-96)	Secretary, Chief Financial Officer, Director
William Sholes	34	(2002-96)	Vice President of Operations

John Smith received a congressional appointment to West Point in 1970 and later transferred to Yale University where he was awarded a masters degree in applied Chemistry in 1982. While studying for a graduate degree he also attended classes at Harvard Business School and MIT's nuclear engineering department. Mr. John Smith founded XYZ Capital, a predecessor to the Company in 1992. He has been President, Chief Executive Officer and a member of the Board of directors of the Company since its inception in September, 2002. Mr. John Smith is the husband of Karen Berkshire.

Karen Berkshire has worked for eleven years in accounting and financial headquarters functions since graduating from the University of Iowa's finance program. She first had lead accounting responsibility at a Gannet Newspaper Group subsidiary in 1992. In 1998 she was the founding controller at XYZ Capital, a predecessor to the Company. Ms. Berkshire is the wife of John Smith.

William Sholes has served as Vice President of Operations for the Company since May, 2002. Mr. Sholes served as an electrical Mechanic Technician for Phoenix Engineering Corporation from April, 2001 to May, 2002; as President of Michigan Premier Foods, a company owned and operated by XYZ Investors, L.P., a predecessor to the Company, from August, 1999 until April, 2001; and as President of Motorsports Promotion from January, 1997 until August, 1999. Mr. John Smith studied law enforcement at Lakewood Community College from September, 1993 until March, 1996.

Executive Compensation

Name and Position(1)	Salary
John Smith, President and Chief Executive Officer (2)	$ 104,000
William Sholes, Vice President of Operations	$ 90,000

(1) Mr. John Smith is the only paid director or officer of the Company. Also, he is the only Company employee paid more than $100,000. He has no employment contract or arrangement for future salary.

(2) Since May 1, 2002, Mr. John Smith has, in lieu of salary, agreed to have redeemed by the Company approximately $6,000 worth of his shares of Common Stock in the Company continually reducing his percentage ownership, at the then-current per share fair market value, each month. In total for 2002, Mr. John Smith received $31,146 in salary. Also, the Company redeemed shares were acquired by Mr. John Smith for $6 per share. At the time of this redemption new shares under a Private Placement were being sold at $6 per share which was relied on as a fair market value. There is no agreement for Mr. John Smith to continue to work without compensation. There is no specific redemption agreement or plan. No salary is being accrued for Mr. John Smith for future payment, however the foregone salary is reflected on the financial statements as if paid with an offset to contributed capital (see F-14).

Director Compensation

Compensation Plans

Under the Plan, the Company has commitments to grant options covering an aggregate of 68,300 shares of Common Stock to 15 key employees upon regulatory approval of the Plan. No options have been granted to the Company's officers and directors and no options are exercisable within sixty days.

Certain Transactions

The Predecessor was reorganized as the Company effective January 1, 2002, subject to subsequent regulatory approval. In connection with the Reorganization, the Company succeeded to the assets, substantially all liabilities and business of ABC Athletic Clubs, a Michigan General Partnership, the partners of which were Bayshore, a Michigan Limited Partnership and Joe Johnson. In connection with the Reorganization, the Company also succeeded to all of the assets of XYZ Capital, a Michigan Sole Proprietorship, and XYZ Investors, LP, a Michigan Limited Partnership. The assets of ABC Athletic Clubs consisted primarily of the leasehold interests, equipment, furniture, fixtures, and business of Superior Athletic Club, Fasttrack Athletic Club and ABC Athletic Club Athletic Club. ABC Athletic Clubs also had the right to acquire Newcomb Athletic Club (which was acquired by Newco Fitness, Inc.) and had commenced development of the intended Philly Athletic Club. (Although this development was terminated June 2002). The primary assets of XYZ Capital were fixed and current assets with a book value of $82,207. The primary assets of XYZ Investors, LP were promissory notes receivable with a total principal amount of $841,957 on January 1, 2002. These notes were received in connection with the sale of First Foods, a combination of several businesses, including potato chip and snack food businesses.

The consideration received by the owners of ABC Athletic Clubs and XYZ Investors, L.P. for the Company's purchase of their assets consisted of 1,097,123 shares of common stock and 257,250 shares of common stock respectively, of which 90,128 shares of common stock was received by XYZ Capital, the general partner of XYZ Investors, L.P. Of the shares received by ABC Athletic Clubs, 480,937 were reacquired by the Company in connection with the Redemption as set forth below, and 148,200 were reacquired by the Company in connection with the Acquisition (some prior to the Reorganization) and the restructuring of the Acquisition as set forth below. There were no cash or notes received and the estimated fair market value of the stock at that time was approximately $4.00 per share.

In connection with the Reorganization, and in addition to the shares of Common stock the partners received in connection with the acquisition of their partnership interests, the partners of ABC Athletic Clubs and XYZ Investors, L.P. received rights to purchase an aggregate of 227,529 shares of Common Stock in the Company for a per share's price of $4.00 (the "Rights"). These Rights mature as to one third of such shares each January 9, commencing January 9, 2003, and continuing for the following two years, and is exercisable for three years following such maturity. At the date of this Offering Circular, no such Rights have been exercised.

On or about July 26, 2001 the Predecessor agreed to acquire substantially all of the assets of the business of Newcomb Athletic Club from Summit Gyms, Inc. for a package worth approximately $1,482,000 and consisting of 148,280 shares of Newco Fitness, Inc. common stock which the Company agreed to repurchase at a rate of $19,300 to $25,000 each month if certain financial conditions were met. The Acquisition includes certain rights of the Company to prepay certain amounts owed, incurred in connection with the Acquisition, at a substantial discount, which if paid in total immediately after closing, would reduce the purchase price to $1,137,315. In connection with the Acquisition, the Company granted to the Sellers, a first priority security interest in all of the Company's equipment. On or about September 29, 2002 the Acquisition was restructured. The restructuring included characterizing the Acquisition as secured loan payments rather than possible redemption of certain shares of stock issued by the Company in connection with the Acquisition. The restructuring included a $237,502 reduction in aggregate payments to the Seller, a reduction of $6,169 per month in possible monthly payments (from $24,169 to $18,000 per month) and the option to skip one payment per year, plus up to a 25% principal discount for certain pre-payments. Mr. John Smith has the primary responsibility to pay the last $250,000 of this purchase obligation. Since the Acquisition, the membership of Newcomb Athletic Club has increased from 2,104 to 2,630.

The Company currently has a short term loan with Third National Bank in the amount of $150,000 which matures on July 9, 2004.

The current shareholders in the Company acquired their interests in connection with the Reorganization at a pro forma share price of $4.00 per share. Immediately prior to the Reorganization, Bayshore sold a number of additional limited partnership unit equal to approximately 12,919 shares to six persons at a pro forma per share price equivalent of $4.00, and XYZ Investors I, L.P. sold a number of additional limited partnership units equal to approximately 21,550 shares of common stock to 7 persons at a pro forma per share price equivalent of $4.00.

Between approximately May of 2002 and April, 2003, the Company sold an aggregate of 148,560 shares of Common Stock to 39 persons in private transactions at per share prices averaging approximately $4.75.

From May 1, 2002 to April 30, 2003, Mr. John Smith has, in lieu of salary, agreed to have redeemed by the Company approximately $6,000 worth of his shares of Common Stock in the Company, at the then-current per share fair markets value, each month.

The Company has reserved 300,000 shares of Common Stock for issuance to key employees under an employee stock option plan (the "Plan"). The Company has commitments to grant options covering an aggregate of 68,300 shares of Common Stock to 15 key employees upon regulatory approval of the Plan.

Shareholders

The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of February 1, 2003, and as adjusted to reflect the sale of the shares offered hereby (i) by each person who is known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) by each director of the Company, (iii) by each of the executive officers of the Company, (iv) by all directors and executive officers of the Company as a group, and (v) by each Selling Shareholder. Unless otherwise indicated below, to the knowledge of the Company, all persons listed below have sole voting and investment power with respect to their shares of Common Stock, except to the extent authority is shared by spouses under applicable laws.

 

	Shares Beneficially Owned	Percent Before the Offering	Shares to be sold in Offering	Shares Owned After Offering(1)	Percent After the Offering(1)
John Smith (2)	519,072	57.0%	26,851	492,221	36.0%
Karen Berkshire (3)	519,072	57.0%	26,851	492,221	36.0%
Brian Hanson	34,397	3.8%	-	34,397	2.5%
Ben Siles	20,000	2.2%	12,000	8,000	(4)
Jerome Highland	2,250	4%	225	2,025	(4)
Kevin Wayland	2,490	4%	249	2,241	(4)
David Scorese	9,683	1.1%	969	8,714	(4)
Martin Borden	2,767	(4)	277	2,490	(4)
All directors and officers as a group (3 persons)	553,469	60.8%	26,851	526,618	38.5%

(1) Assuming full subscription hereto.

(2) Including 5,261 shares beneficially held by Ms. Berkshire.

(3) Including 513,811 shares beneficially held by Mr. John Smith.

(4) Less than one percent.

Securities Description

The authorized capital stock of the Company consists of 40,000,000 shares of Common Stock, no par value, and 10,000,000 shares of Preferred Stock, no par value.

Common Stock

As of the date of this Offering Circular, there were 909,948 shares of Common Stock held of record by 90 shareholders. Assuming full subscription to this Offering and giving effect to the issuance of 456,000 shares of Common Stock offered hereby, there will be 1,365,948 shares of Common Stock outstanding upon the close of this Offering.

Holders of the Company's Common Stock are entitled to one vote per each share and may exercise cumulative voting rights under Michigan law. Holders of Common Stock are entitled to receive pro rata such dividends, if any, as may be declared by the Board of directors of the Company, out of funds legally available therefore, subject to any preferential dividend rights of outstanding preferred stock. Upon the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive pro rata the net assets of the Company available after the payment of all creditors and liquidation preferences, if any, of any outstanding Preferred Stock. Holders of Common Stock have no preemptive, subscription, conversion or redemption rights. The outstanding shares of Common Stock are fully paid and non-assessable.

Preferred Stock

The Company's Amended and Restated Articles of Incorporation authorize the issuance of up to 10,000,000 shares of Preferred Stock. To the date of this Offering Circular, no rights, preferences or privileges of any shares of preferred stock have been designated and there are no shares of preferred stock outstanding. Nonetheless, the Company's Articles of Incorporation give the power to the Company's Board of directors may so designate rights, preferences and privileges of series of preferred stock at any time.

Options and Rights

The Company intends to reserve 300,000 shares of Common Stock for issuance to key employees under an employee stock option plan (the "Plan"). As of the date of this Offering Circular, there are outstanding commitments to grant options to purchase up to 68,300, contingent upon finalization of an intended stock option plan, approval of the Plan by the Company's Board of Directors and shareholders, and appropriate regulatory approval. Although the Company eventually intends to issue the committed options, the Option Plan has not yet been drafted and no regulatory approval has been initiated or discussed.

In connection with the Reorganization, and in addition to the shares of Common stock the partners received in connection with the acquisition of their partnership interests, the partners of ABC Athletic Clubs and XYZ Investors, L.P. received rights to purchase an aggregate of 227,529 shares of Common Stock in the Company for a per share's price of $4.00 (the "Rights"). These Rights mature as to one third of such shares each January 9, commencing January 9, 2003, and continuing for the following two years, and is exercisable for three years following such maturity. At the date of this Offering Circular, no such Rights have been exercised.

Michigan Law and Certain Article and Bylaw Provisions

The Articles and Bylaws of the Company contain certain provisions permitted under the Michigan General Corporation Law relating to the liability of directors, officers and agents. These provisions eliminate, to the extent legally permissible, the monetary liability of directors, officers and agents for a breach of fiduciary duty. These provisions also provide for the indemnification of directors, officers and agents to the fullest extent permitted by Michigan law. The Company believes that these provisions will assist the Company in attracting and retaining qualified individuals to serve as directors and officers.

Distribution and Offering Price

The Company is offering an aggregate of 456,000 Shares of Common Stock to suitable investors. The Company may offer Shares through registered broker/dealers, on a best efforts basis. The Company may pay to such selling broker/dealers a commission on such sales as set forth on the cover page of this Offering Circular.

No proceeds of this Offering will be made available to the Company until the Company has received proceeds of $100,000.

The two persons employed by the Company who will primarily be responsible for selling shares in connection with this Offering are John Smith and William Sholes. Messrs. John Smith and William Sholes are the President and Vice President of Operations, respectively. Neither of Messrs. John Smith and William Sholes are registered as brokers or dealers and neither have been involved in selling stock for any entity other than the Company and its predecessors within the four years prior to this Offering.

The Company plans to conduct the offering by first contacting its existing members who are already familiar with the business of the Company. The Company intends to then advertise in financial publications focusing on the Northern Michigan market.

The Company has not entered into any negotiation nor has any plans with any broker-dealer to help sell the offering. If the workload to handle the administration and selling of the offering becomes too great, management will seek out broker-dealers to complete the offering in an expeditious manner.

The Selling Shareholders are selling an aggregate of 44,000 shares of Common Stock in connection with this Offering. The shares offered by the Company and the shares offered by the Selling Shareholders will be sold on a pro rata basis of shares subscribed for. Among the Selling Shareholders, shares will also be sold on a pro rata basis.

The Share price offered hereby for the Common Stock has been determined by the Board of Directors of the Company after consideration of the Company's business and prospects and the intended business of the Company, the absence of a public market for the Company's securities, among other things. The Share price is greater than, and not related to, the book value of the Company, or to the assets or possible future assets, results of operations or other objective criteria of value.

In order to subscribe for Shares, an investor must complete and execute a Subscription Agreement. Any subscription for Shares must be accompanied by full tender of the amount of purchase in the form of a check made payable to Newco Fitness, Inc. Subscriptions will be effective only upon acceptance by the Company and the Company reserves the right to reject any subscription for any reason.

Legal Matters

The Omega Law Partners, Ford City, Michigan, has passed upon certain matters on behalf of the Company in connection with this transaction. Peter Nestle, a principal in The Omega Law Partners, beneficially owns 2,500 shares of Common Stock in the Company.

Experts

The financial statements of the Company dated December 31, 1998 through 2002 and for the years then ended and for April 30, 2002 and April 30, 2003 and the periods then ended, have been prepared in accordance with generally accepted accounting principles. Any potential investor desiring to see more detailed financial records of the Company is encouraged to ask for them.

Additional Information

The Company has filed an offering statement on Form 1-A with the Securities and Exchange Commission (the "Commission"), under Regulation A of the rules and regulations adopted pursuant to the Securities Act of 1933, as amended, with respect to the shares of Common Stock offered hereby. This Offering Circular does not contain all of the information contained in the Offering Statement and reference is made to the Offering Statement and exhibits thereto for further information with respect to the Company and the shares of Common Stock to which this Offering Circular relates. The Offering Statement may be inspected, without charge, at the Commission's Michigan district office, 123 Main St., Detroit, Michigan 43010. Copies of all or any part of it may be obtained from the Commission's Public Reference Room, Washington D.C., 20401, upon payment of the prescribed fees.

Attachment F-1 Financials

Newco Fitness, Inc.

INDEX TO FINANCIAL STATEMENTS

Years ended December 31, 1998, 1999, 2000, 2001 and 2002

Four Months Ended April 30, 2002 and 2003

(unaudited)

Contents

• Balance Sheets F-2
  
• Statements of Operations F-3
  
• Statements of Stockholders Equity (Deficiency) F-4
  
• Statements of Cash Flows F-5
  
• Notes to Financial Statements F-6
  

Balance Sheets

Statements of Operations

Statements of Stockholders Equity (Deficiency)

Statements of Cash Flows

Notes to Financial Statements

Newco Fitness, Inc.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2003

(unaudited) 1.  BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Business and Basis for Presentation

Newco Fitness, Inc. (the "Company"), a Michigan Corporation, owns and operates four health clubs located in the greater Detroit area, as follows: ABC Athletic Club, Superior Athletic Club, Newcomb Athletic Club, and Fasttrack Athletic Club.

The predecessor to the Company was ABC Athletic Club (the "Partnership"), A Michigan General Partnership. At December 31, 2001, the Partnership was owned 50 percent by Bayshore, L.P. ("Bayshore"), a Michigan limited partnership, and 50 percent by Kenneth Singleton. John Smith owned an approximate 82 percent interest in Bayshore. Effective January 1, 2002, the partnership contributed its assets and liabilities to Newco Fitness, Inc., a newly formed Michigan corporation, for which the partners received shares of common stock (see note 6).

The financial statements reflect the operations of the Partnership prior to its acquisition by the Company. The Company has accounted for its reorganization or "merger" with ABC Athletic Club, its predecessor, as the reorganization of entities under common control in a manner similar to a pooling of interest. From its formation on July 29, 2001 through December 31, 2001, the Company had no activity. All athletic club operations were carried on by the Partnership prior to and during that interval.

The Company has accounted for its acquisition of XYZ Capital as a reorganization of entities under common control in a manner similar to a pooling of interests. As of January 1, 1999 , XYZ Capital was newly formed and had no retained earnings nor deficit. All subsequent results are included in the accompanying statements.

The third merger, with XYZ Investors, LP, has been accounted for under purchase accounting. Although the entities were related, the Company, through one of its predecessors, XYZ Capital, had only a 15.5% voting interest and did not have control of the business before the merger. Also, XYZ Investors, LP, which had a invested in pototal chip and snack businesses, sold that business, and had a residual owner carry-back note from the sale, was a business distinct and different from the continuing operations. Consequently, the historic results of the previously discontinued operations are not meaningful. The transaction had the characteristics of a purchase because of the readily defined value of its only asset, the note receivable exchanged, and the purchase accounting method was followed.

Interim Financial Statements

In the opinion of management, all adjustments necessary for a fair statement of results of the interim period have been included and are of a normal and recurring nature.

Risk Factors

The Company is subject to many of the risks common to companies of its size, including: competition from other athletic clubs, including several that are larger and better capitalized; ability to raise capital; and reliance on a limited number of individuals.

Property and Equipment

Property and equipment are stated at cost. Major remodeling and improvements of leased facilities are capitalized as leasehold improvements.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The useful lives of property and equipment are as follows:

Exercise equipment	5-7 years
Leasehold improvements	5-7 years
Office furniture and equipment	3 years

Revenue Recognition and Change in Accounting Method

The company sells memberships to its clubs in the form of one-time processing fees plus monthly service fees for a specified period of time, or by charging a one time amount for a fixed membership period. Prior to 2001, all revenues to be received were recognized on a straight-line basis over the term of the membership.

Effective January 1, 2001, the partnership changed its revenue recognition method for revenues associated with the processing of new members. $77.00 of such revenues are recognized immediately to offset the direct costs related to new members (principally, contract processing, card production, initial gym orientation, and direct commissions) which are also recognized as incurred. Remaining revenues are recognized over the term of the contract on a straight-line basis. The Company is recognizing, up front, only one time separate member processing fees, which are paid initially. The Company excludes any prepaid membership fees paid up front or one time joining fees which are, in effect, membership dues. The change in method was made to (a) more closely match the timing of recognition of revenues with the related expenses which average $77.00, and (b) improve comparability of the Partnership's financial statements with the financial statements of other companies in its industry, and (c) ensure that revenue is recognized in a similar fashion independent of the payment terms. The average up front charge on a membership with recurring monthly payments is also approximately $77.00 and such pricing has been targeted to offset estimated joining costs. In these cases, where members pay monthly fees for a specified period of time, the revenue is recognized as the payments are received and service provided, except for the pre-paid "last month" which is deferred. These typical monthly fees are $19.00 to $35.00 per month. In this determination of revenue recognition methodology, it was noted that, in Michigan, the regulated up front charge that may be assessed by a company to canceling members, prior to computing a straight line refund, averages $75.00.

Installment Contracts Receivable

Under the terms of certain non-cancelable membership agreements, members are obligated to pay monthly service fees, which range from $3 to $85. The revenues to be recognized pursuant to the installment contracts receivable are deferred and accounted for pursuant to the Company's revenue recognition policy.

Notes Receivable

As of April 30 2003 all Long term receivables are current and none have been pre-paid on an accelerated basis. Long-term receivables as of December 31, 2002 and 2001, and April 30, 2003 consist of the following:

	(4/30) 2003	2002	2001
Note receivable bearing interest at 5% with an original face value of $47,539.86 on March 16, 2001. Original payee is XYZ Capital. Secured by certain delivery trucks of Transco, Inc. Monthly payments of $1,424.81 due to be received by the Company through March 15, 2004. Payments on this note are current.	$ 15,288	$ 20,676	$ 36,313
Note receivable bearing interest at 5% with an original face value of $753,979.00 on March 16, 2001. Original payee is XYZ Investors, LP. Secured by the assets of Transco Inc. Monthly payment of $7,809.49 due to be received by the Company from April 15, 2002 through March 15, 2013. Payments on this note are current.	$ 743,562	$ 756,680	$ 791,677
Note receivable bearing interest at 5% with an original face value of $65,000.00 on March 16, 2001. Original payee is XYZ Investors, LP. Secured by the assets of Transco Inc. Monthly payment of $5,564.48 due to be received by the Company from April 15, 2001 through March 15, 2002. This note is paid in full.	$ -	$ -	$ 16,555.36
Note receivable bearing interest at 5% with an original face value of $39,962.00 on March 16, 2001. Original payee is XYZ Investors, LP. Secured by the assets of Transco Inc. Single payment of $71,766.00 due to be received by the Company on March 15,2013. No payments are yet due on this note.	$ 39,962	$ 39,962	$ 39,962
Note Receivable bearing interest at 10% with an original face value of $250,000 on September 29, 2002. John Smith has responsibility to pay the Company monthly payments of $18,000 beginning August 2005 through March 2008. No payments are yet due on this note.	$ 250,000 --------------	$ 250,000 --------------	$ - -------------
TOTAL	$1,048,470 =========	$1,067,318 =========	$884,508 ========

Intangible Assets

Intangible assets consists of customer lists, a covenant not to compete and a leasehold interest. These intangible assets were recorded on July 2001 as a result of the acquisition of the Dyna Fitness location from Summit Gyms, Inc. All intangibles are recorded at cost and are being amortized over the useful life of assets as follows:

 

	Value As Recorded		Basis for Amortization Period
Covenant not to compete	$ 72,048	2 years	Length of non-compete clause
Leasehold interest	$ 387,315	5 years	Length of lease
Customer lists	$ 741,999 --------------	5 years	List value cannot exceed lease term
Total	$1,201,362 ========

Other Income

On September 29, 2002 both the acquisition of Dyna Fitness Gym and the redemption of the operating partners interest were restructured and certain portions of the acquisition and redemption debt were extinguished.

	Prior to Restructuring	After Restructuring	Debt Extinguished
Acquisition Debt	$1,156,059	$918,557	$237,502
Redemption Debt	$788,253 --------------	$716,253 --------------	$72,000 --------------
Total	$1,944,312 ========	$1,634,810 ========	$309,502 ========

Under FASB -76 the amount of extinguishment of the Acquisition debt is accounted for as an extraordinary item. The extinguishment of the Redemption debt involves related parties and is reflected as a contribution of capital.

Lease Expense

The Company leases premises for all of its health clubs. Certain of the leases include free rent periods, as well as scheduled rent increases over their term. The total amount of rent payments, including scheduled increases, is being charged to expense on the straight-line method over the terms of the leases.

Income Taxes

The Company, prior to December 31, 2001, operated as a partnership and therefore did not pay federal or state income taxes; such taxes are generally the responsibility of the partners. The year end restructuring, on December 31,2001, resulted in all earnings being distributed to partners in the final partnership tax return immediately following. (see note 6. Restructuring)

Payment on the 2002 and First quarter 2003 tax liability is pending . The company has filed the appropriate extension and no extraordinary items are anticipated.

Cash and Cash Equivalents

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

2.  ACQUISITION OF Dyna Fitness GYM:

In July 2001, the Company purchased and assigned to the Partnership all the business assets, which consisted of property and equipment and intangible assets, of Dyna Fitness Gym in Newcomb, Michigan. The acquisition has been accounted for under the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets acquired based upon their respective fair market value. The intangible assets acquired consists of customer lists, a covenant not to compete, and a leasehold interest.

In consideration, the seller was issued exactly 148,280 shares of redeemable common stock of Newco Fitness, Inc. which were initially redeemable at 1,930 shares for $19,300 per month for 12 months. No other cash, non-cash assets nor assumption of obligations were conveyed in the purchase. On July 6, 2002, the buyer redeemed the remaining 125,120 shares for $1,250,000, as elected by the seller, and issued a note payable for the redemption price which bears interest at 6 percent and requires monthly payments of $24,169 for five years. The total purchase price is approximately $1,482,000 . Mr. John Smith has the primary responsibility to repay the last $250,000 of the purchase obligation and that requirement is reflected as a note receivable on the Company balance sheet. On September 29, 2002, the acquisition was restructured. The restructuring included characterizing the acquisition as secured loan payments rather than possible redemption of certain shares of stock issued by the company in connection with the acquisition. The restructuring included a $237,502 reduction in the aggregate payments to the seller, a reduction of $6,169 per month in possible monthly payments to $18,000 from $24,169 and the option to skip one payment per year starting 2004 (such skipped payment would be added to the end of the note) plus a 25% principal discount for certain pre-payments.

In particular, the Company is allowed to take a discount for excess payment through September 29th of 2003 through September 29th of 2007, according to the following schedule.

 

Year (through 9/29)	Devisor for Reduction in Principal
2003	Excess Payment / 75%
2004	Excess Payment / 80%
2005	Excess Payment / 85%
2006	Excess Payment / 90%
2007	Excess Payment / 90%

(e.g. If the Outstanding Principal Balance on August 6th, 2003 were to be $800,000, then the Company could retire the entire note for one lump sum payment of $600,000 on that date.

[ $600,000 / .75 = $800,000] )

Any benefit that results from this prepayment discount is the property of Company.

Mr. John Smith has the primary responsibility to repay the last $250,000 of the purchase note. The

Company could prepay this for $187,500 prior to September 29, 2003 and then be owed $250,000 at 10% from Mr. John Smith who receives no matching discount.

Through April 30, 2003 the Company has paid a total of $420,737 to Summit, Inc. under this overall purchase agreement. As of that same date, the Company's remaining principal obligation is $846,836. The company is current on its payment under this note.

In the acquisition of Dyna Fitness from Summit Gyms, Inc. the Company acquired $280,638 in tangible assets and $1,201,362 in intangible assets. The liabilities of the business remained the responsibility of Summit Gyms, Inc. Not-with-standing this statement, the Company did pay approximately $44,268 in equipment lease expenses for leases on equipment in the acquired facility. 100% of these payments were deducted from the purchase payments due and credited as a direct payment to Summit Gyms, Inc. against the outstanding principal balance owed on the acquisition debt.

The accompanying statement of income includes the operations of the acquired club from July 16, 2001 to April 30, 2003.

3.   LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:

Long-term obligations as of December 31, 2002, 2001, and 2000 and as of April 30, 2003 consist of the following:

 

	(4/30) 2003	2002	2001	2000
Note payable bearing interest at 10 percent, secured by the exercise equipment at the various locations, due in monthly installments of $18,000 through March 2008.	$ 846,836	$ 889,096	$ -	$ -
Note payable bearing interest at 10 percent, secured by interest in the Superior location and a Promissory Note, due in monthly installments of $12,000 through April 2009.	$ 648,221	$ 667,690	$ -	$ -
Note payable bearing interest at 12 percent, secured by substantially all of the assets of the ABC Athletic Club location, due in monthly installments of $3,000 through March 2009.	$ 154,177	$ 156,540	$ 172,687	$ 187,015
Note payable bearing interest at 10 percent, secured by leasehold improvements, due in monthly installments of $6,000 through May 1, 2001 and $4,159 from May 1, 2001 to May 1, 2003 . Note paid in full.	$ 4,159	$ 20,286	$ 66,561	$ 115,735
Note payable with interest rate increasing from 5.25 percent to 12.25 percent through the term of the note, secured by substantially all of the assets of the ABC Athletic Club location, due in monthly installments of $2,447 through December 2002. Note paid in full.	$ -	$ -	$ 9,095	$ 17,048
Line of credit of $150,000 with interest rate at 2.5 percent plus bank reference rate (11 percent at annum at December 31, 2001) paid monthly, personally guaranteed by John Smith, and with a promissory note from a related party as collateral (see note 6).	$ 150,000	$ 100,000	$ 75,000	$ -
Non-interest bearing note, due in monthly installments of $1,000 through April 30, 2002. Note paid in full.	$ - -------------	$ - -------------	$ 4,000 -------------	$ - -------------
	$ 1,803,393	$ 1,833,612	$ 327,343	$ 319,798
Less Current portion	$ 419,774 -------------	$ 385,844 -------------	$ 150,000 -------------	$ 72,453 -------------
	$ 1,383,619 =========	$ 1,447,728 =========	$ 177,336 ========	$ 247,345 ========

Maturities of long-term debt for the years ending December 31 are as follows:

 

2002	$ 385,884
2003	251,772
2004	255,448
2005	245,878
2006	221,034
Thereafter	473,596 ------------
	$ 1,833,612 ========

Capital lease obligations (including interest) as of December 31, 2001 and 2002 are as follows:

 

2002	$ 146,477
2003	50,045
2004	30,908
2005	7,733 ------------
	235,163
Less 2001 portion related to interest	(30,851) ------------
	204,312
Less 2001 Current portion	(131,303) ------------
	73,009 ======
Plus 2002 additions and less portion related to interest.	3,299 ---------
	76,308
Less 2002 Current portion	(32,900) ------------
	$ 43,408 ======

As of April 30, 2003 , the total capital lease obligation was $60,005, consisting of a current obligation of $30,698 and a long term obligation of $29,307.

Property and equipment held under capital leases consists of exercise equipment with a net book value of approximately $460,000.


4.  COMMITMENTS:

Operating Leases

The Company leases its facilities under operating leases. Minimum rental for the five years ending December 31 are as follows:

 

2002	$ 672,946
2003	684,114
2004	693,852
2005	567,332
2006	237,716 ------------
	$ 2,855,960

In August 2000, the Company entered into a lease agreement for a club facility. Under this agreement, the monthly rent payment is based on 1/3 of the Company's net cash flow generated net of agreed expenses and equipment which directly related to the club. This lease expired January 2002 and the Company has exercised its renewal option to extend the lease term for another three years. As of December 31, 2002, no rent has been recorded. The Company currently carries less insurance coverage than required under one of the facility operating leases.

5.  RELATED PARTY TRANSACTIONS:

During 2001 and 2000, the Partnership paid a monthly fee to an affiliate of Bayshore for managerial, accounting , and other services. Such costs were allocated among the affiliates based upon management's estimate of the relative effort expended on behalf of each affiliate. Effective September of 2001, all services were transferred to the partnership and are included in the accompanying income statement.

6.  OTHER TRANSACTIONS:

a. Restructuring

Effective January 1, 2002, the ABC Athletic Club Partnership was effectively merged into Newco Fitness, Inc. Athletic Clubs, Inc., a Michigan corporation, through the contribution of substantially all of the Partnership's assets and liabilities. Newco Fitness, Inc. was incorporated July 29, 2001 and its operations prior to January 1, 2002 were immaterial. Coincident with this merger, the Company, on January 2002, succeeded to the assets of XYZ Investors, LP and XYZ Capital. These assets were acquired to strengthen the Company balance sheet with regard to future financing. The assets of XYZ Investors, LP consisted of Promissory Notes Receivable with a principal amount of $841,957 on January 1, 2002 received in connection with the sale of First Foods in March of 2001 (see F - 8). The Company feels the notes, which have been performing for more than two years, are highly collectable. Michigan Premier Foods has very little debt and sales of approximately $16,000,000. Additionally, Mr. James Burt, who guarantees the debt, is a high net worth individual. The fixed and current assets of XYZ Capital had a book value of $82,207 , principally consisting of computer equipment and a Note Receivable for $36,313 (see F - 7). In consideration thereof, the partners received shares of the Company. The partnerships operations comprise substantially all of the operations of the Company.

The Company is a corporation pursuant to which it is subject to income taxes. Accordingly , as of January 1, 2002, The Company will provide income taxes as applicable under SFAS 109. Also, deferred taxes were recorded by the Company at date of contribution to reflect the different bases of assets and liabilities for financial reporting and income tax purposes.

b. Partner Buyout

In January 2002, the Company entered into a purchase agreement for $970,711 with one of the former general partners whereby the Company purchased the partner's interest by issuing a note bearing interest at 10 percent, guaranteed by the assets of the Company and personally guaranteed by the other former general partner. In return, the bought-out partner agreed to enter into a covenant not to compete in future athletic facilities within five miles of the Company's existing or future clubs. The principal value on the note and obligations of the Company as of April 30, 2003 is $648,221. The Company's future commitments relating to the note are $12,000 per month through April, 2009, with the option to skip one payment per year, and with a provision for a maximum 25% discount for prepayment.

In particular, the Company is allowed to take a discount for excess payment through September 29th of 2003 through September 29th of 2007, according to the following schedule.

 

Year (through 9/29)	Devisor for Reduction in Principal
2003	Excess Payment / 75%
2004	Excess Payment / 80%
2005	Excess Payment / 85%
2006	Excess Payment / 90%
2007	Excess Payment / 90%

(e.g. If the Outstanding Principal Balance on August 6th, 2003 were to be $600,000, then the Company could retire the entire note for one lump sum payment of $450,000 on that date.

[ $450,000 / .75 = $600,000] )

Should the Company default on its commitments under the partner buyout note, the seller may obtain the Superior Athletic Club as consideration.

c. Stock Buyback

The Company entered into an agreement to buy back shares from a shareholder who was a former partner in Bayshore. The Company will acquire 500 shares per month for $3,000 each month beginning March 7, 2002 for 4 months. Beginning July 7, 2002, the Company will acquire 309 shares per month for $2,889 each month for 23 months. The total payout will be $78,450 over a 27 month period. The agreement contains an option clause which allows the Company the right to redeem all or some the shares early and take a 10 percent discount on the payoff.

The Company has repurchased 16,065 Shares from Mr. John Smith from January 1, 2002 through April 30, 2003. During this same period Mr. John Smith voluntarily declined to accept $77,187 in compensation. Not-with-standing the foregoing, the financial statements reflect the $77, 187 as paid with an offset to contributed capital. The Company has no contractual obligation, understanding, or arrangement to continue to repurchase shares on an ongoing basis.

d. Cancellation

Effective June 9, 2002, The Company elected not to proceed with the development of its proposed Philly club. Pursuant to this decision, The Company will (1) refund membership fees for those members who elect not to use the other clubs, (2) write-off the development costs incurred to date of approximately $54,000, and (3) resolve remaining obligations, if any, with the landlord of the site.

e. Line of Credit

Effective July 7, 2002, Newco Fitness, Inc. obtained a $100,000 line of credit with a bank. which was increased by $50,000 in January 2003. The line bears interest at the bank's prime rate plus 1.5 percent per annum, and is secured by a note receivable.

f. Internal Control

The CFO's duties are handled by Karen Berkshire with substantial input from the Company Controller, Susan Lowrie. It is the Company's intent to acquire or merge with several larger athletic club companies as part of its plan under this offering. It is anticipated that these acquired entities will have their own CFO in place. It is the Company's intent to utilize one of these existing CFOs' as the overall Company CFO, post merger. It is anticipated that this action may help facilitate the subject merger by placing a known entity in a key position. If a qualified CFO is not found through merger, one will be hired from the outside.

Although the Company has worked with independent accountants, no audited letter has been issued addressing recommendations to the Company. The Company feels it has grown rapidly over the last few years and is now in the process of establishing formal policies and procedures to achieve and maintain the proper level of control in the organization. Cash control is excellent, with bank reconciliations done on a daily basis. Segregation of duties, signature control, management review of expenditures, and control of checks and petty cash is also well managed. Management reporting is less well developed and now focuses on sales and accounting reports rather than on budgets and tailored operation specific reports, as found in a more mature organization. This is the next target for resolution by the Controller.

Although the Controller is recently hired, there is little or no turnover in the accounting staff and no accounting employee has less than three years experience in their position. This stability has helped to maintain the adequacy in the Company's internal controls and ensures a high degree of reliability in its books and records. The Company recognizes that, in part, because of this low staff turnover, the formal organization of the accounting department and documentation thereof is poor. The six persons involved in the accounting department well understand their duties and that of their co-workers, but will need to clarify, codify and document their roles to integrate with other accounting units in the acquisition environment anticipated in the future. The Controller was selected with the career experience to ensure that formalization will happen in a timely fashion as the organization grows. In a similar fashion, for ease and timeliness of anticipated future regular reporting, the company plans to hire or retain appropriately senior technical accounting support. The accompanying financial statements have received lengthy and detailed senior management review, and, in the opinion of management, the Company's unaudited financial statements for year end and interim financial statements have been prepared in accordance with GAAP and are fairly presented.

g. Acquisitions

The Company plans to effect acquisitions of athletic clubs as an integral part of its plan relative to this offering. In preparation for this course of action, the Company has had contact with club owners representing athletic clubs that are available for purchase or merger. At this time, no single acquisition from this pool is probable, and no financial statements are provided herein as could, under more advanced circumstances, be required under part F/S of Form 1-A.

h. Subsequent Events

The existing $150,000 credit facility with Third National Bank, up for renewal on July 9, 2003, was approved for another twelve month period.

Attachment 1 Subscription Agreement

Subscription Agreement

INVESTOR SUBSCRIPTION AGREEMENT
SHARES OF COMMON STOCK OF Newco Fitness, Inc.

This Subscription Agreement (the "Agreement") is made by and between Newco Fitness, Inc., a Michigan corporation (the "Company") and the undersigned prospective investor who is a Michigan resident and who is subscribing for shares of the Company's common stock. Persons subscribing for shares of common stock must complete and return this Agreement along with a check for the full amount of their subscription. The minimum subscription is 50 shares or $500.

The undersigned [___] has a net worth, exclusive of the investors equity in their home, home furnishings and automobiles, of not less than $150,000, [___] has a net worth, exclusive of the investors equity in their home, home furnishings and automobiles, of not less than $75,000 had minimum gross income of $50,000 during the last tax year and anticipates (based on a good faith estimate) having a minimum gross income of at least $50,000 during the current tax year, or [___] is not investing more than $2,500 and has not invested more than $2,500 (including this investment) in an offering of a small business issuer of this type within the twelve months prior to investing herein.

The undersigned investor hereby subscribes for __________ shares of Common Stock of Newco Fitness, Inc. Athletic Clubs, Inc. at $10.00 per share for a total subscription of $___________ and hereby tenders payment in full in the form of a check (the "Payment"). The undersigned understands that this subscription must be accepted by the Company and may be rejected by the Company in its sole discretion for any reason or for no reason.

The Payment will be returned promptly, without interest, in the event that for any reason the purchase and sale of the Stock subscribed for hereby is not consummated within 30 days following the date this Subscription Agreement is duly executed and delivered by the undersigned with the Payment or in the event that the undersigned's subscription is rejected.

The undersigned represents that they are a Michigan resident. The undersigned represents that they have received the Company's Offering Circular dated September 1, 2003 (the "Circular"). The undersigned has not relied upon any representations or other information (whether oral or written) from the Company, or any of its agents other than as set forth in the Circular. The undersigned represents that they fully understand that this is a speculative investment and that there are substantial risks involved with an investment in the Stock. The undersigned have carefully considered and have, to the extent they believe such discussion necessary, discussed with their professional legal, tax and financial advisers the suitability of an investment in the Company for their particular tax and financial situation and have determined that the Stock is a suitable investment for them. The undersigned understands that neither the offering of the Stock, nor the Circular have been reviewed by the Securities and Exchange Commission or any state securities authorities.

Title to the Stock shall be taken as follows: (check one)
(  ) Individual Ownership (one person signs);	(  ) Husband and wife, as community property (both sign);
(  ) Joint Tenants (all sign);	(  ) Tenants in Common (all sign);
(  ) Trust (Trustee signs);	(  ) Corporation (Authorized agent signs);
(  ) Partnership (All partners sign);	(  ) UGMA Custodian (custodian signs);

Please print the exact name you wish to appear on the certificate: ________________________________________

__________________________________________________________________________________________

Address: __________________________________________________________________________________

Telephone Number: Day _____________________________ Evening _________________________________

Social Security Number or Taxpayer Identification Number: __________________________________________

THE UNDERSIGNED REPRESENTS THAT ALL OF THE INFORMATION SET FORTH HEREIN IS TRUE AND CORRECT, THAT THEY ARE AT LEAST 18 YEARS OLD AND THAT THEY ARE Michigan RESIDENTS.

________________________________________ Signature                                          Date	________________________________________ Signature                                          Date
ACCEPTED BY Newco Fitness, Inc.:	________________________________________ Authorized Agent                                    Date

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