<PAGE>
As filed with the Securities and Exchange Commission on _____, 1997
Registration No. 33-___________
- ----------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------------------
PHYSICAL SPA & FITNESS INC.
(Name of small business issuer in its charter)
------------------------
Delaware 7997 13-102699
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification code Number) Identification No.)
incorporation or
organization)
------------------------
12/F-15F Lee Theatre Plaza 12/F-15F Lee Theatre Plaza
99 Percival St., Causeway Bay 99 Percival St., Causeway Bay,
Hong Kong Hong Kong
(852) 2572-8888 (852) 2572-8888
(Address and telephone number of (Address of principal place
principal executive office) of business)
Jill Bodnar
President
12/F - 15/F Lee Theatre Plaza
99 Percival St., Causeway Bay Hong Kong
(852) 2572-8888
(Name, address and telephone number of agent for service)
------------------------
COPIES TO:
Iwona J. Alami, Esq. Robert P. Abdo, Esq.
Law Offices of Iwona J. Alami Abdo & Abdo P.A.
120 Newport Center Drive, Suite 200 710 N. Star West, 625 Marquette
Newport Beach, CA 92660 Minneapolis, MN 55402
-------------------------
Approximate Date of Proposed Sale to the Public.
As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933 (the "Securities
Act"), please check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
If delivery of the Prospectus is expected to be made pursuant to Rule
343, please check the following box.
<PAGE>
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
Title of Each Class of Dollar amount Proposed Maximum Proposed Maximum Amount of
Securities to be to be Offering Price Aggregate Offering Registration
Registered Registered(1)(2)(3) Per Share (1) Price (1)(2)(3) Fee
- --------------------- ------------------- ---------------- ------------------ ------------
<S> <C> <C> <C> <C>
Common Stock, $0.001
par value $1,725,000.00 $4.00 $1,725,000.00 $594.83
Common Stock, $0.001 par
value offered by selling
shareholders $750,000.00 $4.00 $750,000.00 $258.62
Common Stock Purchase
Warrants $143,750.00 $0.33 $143,750.00 $49.57
Common Stock, $0.001 par
value, underlying Common
Stock Purchase Warrants,
$6.00 exercise price $2,587,500.00 $6.00 $2,587,500.00 $892.24
Representative's Common
Stock Purchase Warrants (4) $43.125 $0.001 $43.125 $0.02
Common Stock, $0.001 par
value, underlying
Representative's Common
Stock Purchase Warrants,
$4.80 exercise price (5) $207,000.00 $4.80 $207,000.00 $71.38
Representative's Common
Stock Purchase Warrants (6) $17,250.00 $0.40 $17,250.00 $5.95
Common Stock, $0.001 par
value, underlying Common
Stock Purchase Warrants,
$6.00 exercise price(7) $258,750.00 $6.00 $258,750.00 $89.22
Total $5,689,293.125 1,961.83
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457.
(2) Includes 56,250 shares of Common Stock that Global Financial Group
(the "Selling Agent" or "Representative") has the option to purchase to
cover over-allotments, if any.
(3) Includes 56,250 Common Stock Purchase Warrants that the Representative
has the option to purchase to cover over-allotments, if any.
(4) Represents Common Stock Purchase Warrants issuable to the
Representative ("Representative Warrants (I)") as an additional compensation
for the Representative in connection with the sale of 375,000 shares of
Common Stock (including over-allotments) in this Offering. See "Plan of
Distribution".
(5) Represents Common Stock issuable upon exercise of the Representative
Warrants (I). Pursuant to Rule 416 promulgated under the Securities Act of
1933, this Registration Statement also covers any additional shares of
Common Stock which may become issuable by reason of the antidilution
provisions of the Representative Warrants (I).
(6) Represents Common Stock Purchase Warrants issuable to the
Representative ("Representative Warrants (II)") as an additional
compensation for the Representative in connection with the sale of 375,000
Common Stock Purchase Warrants (including over-allotments) in this Offering.
Such Representative's Warrants (II) shall be issuable to the Representative
upon an exercise by the Representative of the warrant to purchase
Representative Warrants (II). See "Plan of Distribution".
(7) Represents Common Stock issuable upon exercise of the Representative
Warrants (II). Pursuant to Rule 416 promulgated under the Securities Act of
1933, this Registration Statement also covers any additional shares of
Common Stock which may become issuable by reason of the antidilution
provisions of the Representative Warrants (II).
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
<TABLE>
Physical Spa & Fitness Inc.
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulations S-B
<CAPTION>
Showing Location in the Prospectus
of Information Required by Items of Form SB-2
<S> <C>
Form SB-2 Item Number and Caption Prospectus
1. Forepart of Registration Statement and Facing page of Registration Statement:
Outside Front Cover Page of Prospectus .........Outside Front Cover Page of Prospectus
2. Inside Front and Outside back Cover Available Information: Incorporation of
Pages of Prospectus ............................Certain Documents by Reference: Table of
Contents
3. Summary Information; Risk Factors ..............Prospectus Summary; Risk Factors
4. Use of Proceeds ................................Prospectus Summary; The Company; Use of
Proceeds
5. Determination Offering Price ...................Risk Factors; Plan of Distribution
6. Dilution .......................................Dilution
7. Selling Security Holders .......................Principal and Selling Shareholders
8. Plan of Distribution ...........................Plan of Distribution
9. Legal Proceedings ..............................Not Applicable
10. Directors, Executive Officers, Promoters
and Control Persons ............................Management and Principal Shareholders
11. Security Ownership of Certain Beneficial
Owners and Management ..........................Principal and Selling Shareholders
12. Description of Securities to be Registered .....Description of Securities
13. Interests of Named Experts and Counsel .........Not Applicable
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities ....................................Indemnification of Directors and Officers
15. Organization Within Last Five Years ............The Company
16. Description of Business ........................The Company
17. Management's Discussion and Analysis of
Plan of Operation ..............................Management's Discussion and Analysis of
Financial Condition and Results of Operations
18. Description of Property ........................The Company (Properties)
19. Certain Relationships and Related Transactions .Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters ............................Risk Factors; Plan of Distribution
21. Executive Compensation .........................Executive Compensation
22. Consolidated Financial Statements ..............Consolidated Financial Statements
23. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure .........Not Applicable
</TABLE>
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION, DATED __________, 1997
PHYSICAL SPA & FITNESS INC.
562,500 SHARES COMMON STOCK
375,000 COMMON STOCK PURCHASE WARRANTS
Physical Spa & Fitness Inc., a Delaware corporation ("the Company,"
includes the Company's operating subsidiaries unless otherwise noted) is
offering on a "best efforts" and "all or nothing" offering basis, 375,000
shares of its Common Stock (the "Shares"), for $4.00 per share and 375,000
warrants to purchase the Company's Common Stock for $0.33 per warrant (the
"Common Stock Purchase Warrants" or "Warrants"); the 187,500 shares of
Common Stock of the Company are being offered by certain selling
shareholders (the "Selling Shareholders"; see "Principal and Selling
Shareholders") for $4.00 per share (collectively, the "Offering"). Each
Warrant entitles the holder to purchase one share of Common Stock until
______, 2002 at an exercise price of $6.00 per share, subject to certain
adjustments and subject to the Company's right to redeem. Commencing one
year after the date hereof, the Warrants will be redeemable, in whole but
not in part, for $0.05 per Warrant (the "Redemption Price"), at the option
of the Company, upon 30 days' written notice at any time after the closing
bid price of the Company's Common Stock is at least $8.00 per share for 30
consecutive business days ending within 15 days of the date of the notice of
redemption. If Warrants are not exercised by the holder(s) thereof within
such 30-day period, then they may be redeemed by the Company at the
Redemption Price. See "Description of Securities-Common Stock." The
Company will not receive any of the proceeds from the sale of the shares by
Selling Shareholders. Selling Shareholders will be responsible for their
own selling expenses. No shares of Common Stock of Selling Shareholders
will be sold to the public in this Offering until a maximum of 375,000
shares of Common Stock and a maximum of 375,000 Warrants offered hereby by
the Company are first sold.
Only a limited public securities market with sporadic trading existed for
the Company's Common Stock prior to this Offering. Although the Company has
applied for listing on The Nasdaq SmallCap Market for its Common Stock and
its Common Stock Purchase Warrants under the proposed symbols: "PFIT"
(Common Stock) and "PFITW" (Warrants), there can be no assurance that an
active public trading market for such securities will be developed or
sustained.
INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. POTENTIAL INVESTORS SHOULD NOT INVEST IN THESE SECURITIES UNLESS THEY
CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" FOR CERTAIN
CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Price to Public Selling Agent's Proceeds to Issuer Proceeds to Selling
Discount (1) (2)(3) Shareholders (1)(2)(3)
--------------- --------------- ------------------ ------------------------
<S> <C> <C> <C> <C>
Per Share $4.00 $.40 $3.60 $3.60
Per Warrant $0.33 $.033 $0.300 _____
Total (3) $2,375,000 $237,500 $1,462,500 $675,000
(Footnotes continued on the following page)
</TABLE>
<PAGE>
GLOBAL FINANCIAL GROUP
The Date of this Prospectus is __________, 1997
(1) Does not include (i) additional compensation to Global Financial
Group (the "Selling Agent" or "Representative") in the form of a non-
accountable expense allowance equal to 3% of the gross proceeds of the
Offering (including proceeds from the sale of the Shares by Selling
Shareholders), of which $25,000 has been prepaid; (ii) reimbursement by the
Company to the Representative of $20,000 of legal fees and expenses incurred
by the Representative; (iii) additional compensation to the Representative
through the sale to the Representative, for nominal consideration of $0.001
per warrant, of warrants (the "Representative Warrants I") entitling the
holder thereof to purchase certain number of shares of Common Stock equal to
10% of the Common Stock sold by the Representative in this Offering, at a
price of $4.80 (120% of the $4.00 per share offering price) for a period of
five years commencing one year from the date of this Prospectus; (iv)
additional compensation to the Representative through the sale to the
Representative, for nominal consideration of $0.001 of a warrant to purchase
certain number of warrants equal to 10% of the Warrants sold by the
Representative in this Offering, at a price of $0.40 (120% of the $0.33 per
warrant offering price) entitling the holder thereof to purchase certain
number of shares of Common Stock at an exercise price of $6.00 per share for
a period of five years commencing one year from the date of this Prospectus
(the "Representative Warrants II") ("Representative Warrants I" and
"Representative Warrants II" shall be referred to collectively as
"Representative Warrants") . See "Plan of Distribution."
(2) Before deduction of estimated expenses of $131,672 payable by the
Company, not including the 3% non-accountable expense allowance, including
among others, registration and filing fees (including blue sky filing fees),
professional fees and printing expenses. Total expenses of the Offering by
the Company, including Selling Agent's discounts and commissions, should
approximate $342,922 ($374,610 if the Representative's over-allotment
options for the Shares and the Warrants, respectively, are exercised in
full), for estimated net proceeds to the Company of $1,282,078 ($1,494,140
if the Representative's over-allotment options are exercised in full).
Total expenses of the Selling Shareholders in this Offering should
approximate $97,500, for the estimated net proceeds to the Selling
Shareholders of $652,500.
(3) Assumes sale of the maximum offering of 375,000 Shares and 375,000
Warrants ("Maximum Offering"). The Company has granted the Representative
an option, exercisable within 45 days of the effective date of this
registration statement, to purchase up to an additional 56,250 shares of the
Common Stock and 56,250 Warrants at the public offering price, less Selling
Agent's discounts and commissions, solely for the purpose of covering over-
allotments, if any. In the foregoing table, the amounts shown assume the
over-allotment options for the shares of Common Stock and Warrants,
respectively, will not be exercised. If the over-allotment options are
exercised in full, the price of the Common Stock to the public would be
$1,868,750; the Selling Agent's discounts to the Company would be $186,875;
the Proceeds to the Issuer would be $1,681,875 and the Proceeds to Selling
Shareholders would be $675,000. If the over-allotment options for the
shares of Common Stock and Warrants, respectively, are exercised, the
Representative shall be entitled to additional compensation of
Representative Warrants I and Representative Warrants II. See "Plan of
Distribution".
The Shares and Warrants offered hereby, are being offered by the Selling
Agent on behalf of the Company, on a "best efforts" and "all or nothing"
offering basis. The Offering will be completed only if the maximum of
375,000 shares of Common Stock and 375,000 Warrants ("Maximum Offering") are
sold herein by January 15, 1998, which period may be extended for up to an
additional 30 days by the Company and the Selling Agent (the "Offering
Period"). In the event the Maximum Offering is not achieved prior to the
expiration of the Offering Period, this Offering will terminate and all
funds will be returned promptly to the subscribers without deduction
therefrom or interest thereon. The Selling Shareholders will be responsible
for their own selling expenses. The Selling Agent reserves the right to
withdraw, cancel or modify such offer and to reject orders in whole or in
part. It is expected that the certificates representing the shares of
Common Stock will be ready for delivery at the offices of Abdo & Abdo, P.A.,
Minneapolis, Minnesota, within 10 business days after the date the
Registration Statement is declared effective by the Securities and Exchange
Commission (the "Commission").
<PAGE>
AVAILABLE INFORMATION
The Company is not presently subject to the reporting requirements of the
Securities Exchange Act of 1934. The Company has filed with the Securities
and Exchange Commission a Registration Statement on Form SB-2 (together with
all amendments and exhibits thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act") with respect to
the securities offered hereby. This Prospectus, which constitutes a part of
the Registration Statement, omits certain information contained in the
Registration Statement on file with the Commission pursuant to the
Securities Act and the rules and regulations of the Commission thereunder.
The Registration Statement, including the exhibits thereto, may be inspected
and copied at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the
Commission's regional offices located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and Northwest Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60611. Copies of such material may be
obtained by mail at prescribed rates from the Public Reference Branch of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates, and via Commission's address on the World Wide Web at http://
www.sec.gov. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SYSTEM OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ SYSTEM IN ACCORDANCE WITH RULE 10-BA UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY ......................................................1
RISK FACTORS ............................................................7
USE OF PROCEEDS ........................................................16
DILUTION ...............................................................19
PRICE RANGE OF SECURITIES ..............................................20
DIVIDEND POLICY ........................................................20
CAPITALIZATION .........................................................21
SELECTED FINANCIAL DATA ................................................22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ...................................23
BUSINESS OF THE COMPANY ................................................30
GENERAL .........................................................30
ORGANIZATION ....................................................30
OWNERSHIP STRUCTURES IN CHINA ...................................33
OVERVIEW OF THE COMPANY'S MARKETS ...............................34
HISTORY .........................................................36
BUSINESS STRATEGY ...............................................38
COMPETITION .....................................................42
TRADEMARKS AND TRADE NAMES ......................................45
SEASONALITY .....................................................45
INSURANCE .......................................................45
RESEARCH AND DEVELOPMENT ........................................45
EMPLOYEES .......................................................45
PROPERTIES ......................................................46
GOVERNMENT REGULATIONS ..........................................48
MANAGEMENT .............................................................51
DIRECTORS AND EXECUTIVE OFFICERS ................................51
EXECUTIVE COMPENSATION ..........................................52
INDEMNIFICATION OF DIRECTORS AND OFFICERS .......................53
EMPLOYMENT AND RELATED AGREEMENTS ...............................53
1997 STOCK OPTION PLAN ..........................................53
CERTAIN TRANSACTIONS ............................................54
PRINCIPAL AND SELLING STOCKHOLDERS .....................................55
DESCRIPTION OF SECURITIES ..............................................57
SHARES ELIGIBLE FOR FUTURE SALE ........................................58
TAXATION ...............................................................59
PLAN OF DISTRIBUTION ...................................................61
LEGAL MATTERS ..........................................................63
EXPERTS ................................................................63
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ............................F-1
<PAGE>
PROSPECTUS SUMMARY
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. REFERENCE IS MADE IN PARTICULAR TO THE DESCRIPTION OF THE
COMPANY'S PLANS AND OBJECTIVES FOR FUTURE OPERATIONS, ASSUMPTIONS UNDERLYING
SUCH PLANS AND OBJECTIVES AND OTHER FORWARD-LOOKING STATEMENTS INCLUDED IN
"PROSPECTUS SUMMARY", "USE OF PROCEEDS", MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" IN
THIS PROSPECTUS. SUCH STATEMENTS ARE BASED ON MANAGEMENT'S CURRENT
EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF FACTORS AND UNCERTAINTIES WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS WHICH COULD CAUSE SUCH RESULTS TO
DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS
INCLUDE THOSE SET FORTH IN THE RISK FACTORS BELOW.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE
CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING
ELSEWHERE IN THIS PROSPECTUS. THE COMPANY PUBLISHES ITS FINANCIAL
STATEMENTS IN HONG KONG DOLLARS, THE LAWFUL CURRENCY OF HONG KONG ("HK$").
IN THIS PROSPECTUS, REFERENCES TO "US$" OR "US DOLLARS" ARE TO UNITED STATES
DOLLARS. TRANSLATIONS OF AMOUNTS FROM HONG KONG DOLLARS, TO US DOLLARS ARE
FOR THE CONVENIENCE OF THE READER AND FOR REFERENCE ONLY. NO REPRESENTATION
IS MADE THAT THE HONG KONG DOLLAR AMOUNTS COULD HAVE BEEN, OR COULD BE,
CONVERTED INTO U.S. DOLLARS AT ANY CERTAIN RATE. SEE "RISK FACTORS RELATING
TO OPERATIONS IN CHINA AND HONG KONG - FOREIGN CURRENCY EXCHANGE".
THE COMPANY
Physical Spa & Fitness, Inc. (the "Company"), through its subsidiaries,
operates fitness and spa centers in Hong Kong and the People's Republic of
China ("China" or the "PRC"). The Company currently operates nine
facilities: six in Hong Kong and three in China under the name "Physical
Ladies' Club", with the exception of two centers (Mei Foo and Renaissance
Beauty Centre - see "Company - Organization"). All of the Company's
operations, including the operating of the fitness and spa centers, property
holding, investment holding and other corporate activities are conducted
through the Company's wholly-owned or majority-owned subsidiaries or joint
ventures. See "Business of the Company - Organization". The fitness and
spa centers in Hong Kong are operated by two of the Company's subsidiaries.
Physical Health Centre Hong Kong Limited, a Hong Kong corporation and a
majority (91.4%) owned subsidiary of the Company, operates the following
centers in Hong Kong: Causeway Bay, Tsimshatsui, Shatin, Mei Foo and Kowloon
City. The sixth center, Renaissance Beauty Centre, is operated by the
Company's majority (70%) owned subsidiary, Supreme Resources Limited, a Hong
Kong corporation.
The Company's facilities in China are operated by two joint ventures:
Shanghai Physical Ladies' Club Co., Ltd. ("Shanghai Joint Venture"), which
operates two centers in the city of Shanghai, and Dalian Physical Ladies'
Club Co., Ltd. ("Dalian Joint Venture"), which operates fitness and spa
facility in the city of Dalian. The Company, through its subsidiaries,
holds a 88.5% interest in the Shanghai Joint Venture and a 90% interest in
the Dalian Joint Venture. The minority interest in the respective joint
ventures is held by the joint venture's Chinese partner. China regulations
of the fitness and spa facilities encourage joint ventures with a foreign
company and provide less restrictive regulations of such form of business
entities. See "Government Regulation - China".
The Company provides its customers, at each location, with access to a
wide range of U.S.- styled fitness and spa services. The Company offers
to its customers a membership for the use of its fitness facilities, which
include extensive aerobics programs, personalized training, cardiovascular
conditioning and strength training. The facilities are equipped with the
latest in Western exercise equipment, including LifeFitness, Cybex, Flex and
Reebok Skywalker. Spa and beauty treatment services are provided to both
members and visitors, and include skin care and facial treatments, massage,
relaxation programs, weight-management programs and personalized make-up
consultations. The Company also sells at the facilities a variety of
exercise clothing and European beauty products and cosmetics. Management
believes that the Company is among the top providers of fitness, exercise,
and spa/beauty treatment services in Hong Kong and China, with approximately
55,000 members.
1
<PAGE>
The Company's strategy is to provide a one-stop fitness and beauty center
for women. With the exception of the Mei Foo location in Hong Kong, all
other facilities in Hong Kong and China are exclusively for women.
Management believes that the Company's market leading position in Hong Kong
and its successful entrance into China's market is a result of its strategy
of combining fitness and beauty services in a single facility that offers
state-of-the art exercise equipment, superior quality beauty treatments and
professional staff.
The Company believes that it is one of the first companies to provide
Western fitness and spa services in China. In 1994, the predecessor
companies of Physical Beauty & Fitness Holdings Limited, a British Virgin
Islands corporation ("Physical Limited"), the holding company of the
Company's subsidiaries, began a process of expansion into targeted market
segments in China. In 1994, the Company through Shanghai Joint Venture
opened the Company's first China operation in Huangpu, Shanghai, with a
fitness center comprising of approximately 15,000 square feet to provide
fitness and spa treatment facilities. Since then the center has been
operating profitably, and another center of similar size was opened in
Hongqiao, Shanghai in September 1995, through Shanghai Joint Venture. A
third China operation in Dalian commenced in April 1996 and is conducted
through Dalian Joint Venture. See "Business of the Company - Organization".
The Company's facilities in China are operated under the name 'Physical
Ladies' Club", and the Company registered a servicemark under that name in
Chinese language, which precludes others from the use of the same name. See
"Business of the Company - Trademarks and Trade Names".
In the opinion of the Company's management, current competition in China
is, in general, comprised mainly of government operated facilities that
offer either fitness or beauty services, in small facilities that lack
modern equipment. The Company is aware of no Western quality facilities of
comparable size to that of the Company's facilities currently operating in
China. The Company expects that rising consumer incomes, increasing health
awareness and growing access to foreign goods and trends, should continue to
create increased demand for fitness and spa services in China. In 1996, the
Company (through its subsidiaries) entered into two additional joint
ventures to open fitness and spa facilities in Zhongshan (Zhongshan Joint
Venture) and Shenzhen (Shenzhen Joint Venture), China, however, such joint
ventures have not commenced any operations yet. The Company plans to open
the centers in Zhongshan and Shenzhen in 1998, however, there can be no
assurances given that such joint ventures will start operations or that such
centers will be opened as currently planned by the management. See
"Business of the Company - Business Strategy".
The Company's strategy for maintaining its dominant position in Hong Kong
is to continue to provide existing and new members with high quality
services at an affordable price and by periodically upgrading the facilities
as new developments and technology emerge in the industry. The Company's
objective is to add new services and treatments to keep the Company current
with market trends and to promote and enhance the Company's reputation of
providing value-driven services to its customers. The Company places heavy
emphasis on staff training which is supported by an in-house training
department and on-going classes. The Company also plans to open additional
facilities in Hong Kong and Macau in early 1998. The Company signed an offer
to lease agreement, pending the execution of a formal lease agreement, with
respect to a new center in Tsuen Wan, a major district of the Western
Kowloon province of Hong Kong. The proposed new facilities are planned to
be operated in an approximately 50,000 sq. ft. space. The Company is also
in the process of negotiating the lease for a Macau center. The proposed
new facilities in Macau are planned to be operated in an approximately
36,000 sq. ft. space. See "Business of the Company - Properties". The
Company plans to use a portion of the proceeds from this Offering to provide
certain lease improvements to set up the center in Tsuen Wan and to pay the
initial lease deposit for the Macau center. There can be no assurance that
the two proposed new centers will be opened as currently planned by the
Company or if opened, that they will operate profitably.
2
<PAGE>
The Company was incorporated on September 21, 1988 in the state of
Delaware under the name of "Foreclosed Realty Exchange, Inc", a development
stage company seeking acquisitions. Prior to acquisition of Physical
Limited, the Company had no revenue producing operations, but planned to
enter into joint ventures and/or acquisitions originally in the area of real
estate to expand its operations. In October, 1996, the Company closed a
transaction with Ngai Keung Luk (Serleo), a 100% shareholder of Physical
Limited, whereby the Company entered into a Share Exchange Agreement with
Ngai Keung Luk (Serleo), pursuant to which the Company issued 8,000,000 pre-
split (6,000,000 post-split) shares of its Common Stock to Ngai Keung Luk
(Serleo) in exchange for all of the outstanding shares of Physical Limited
(the "Closing"). Subsequently, the Company changed its name to "Physical
Spa & Fitness Inc." in November, 1996, to reflect the new business
operations of the Company. As a part of the above transaction, certain
shareholders of the Company also transferred 990,000 pre-split (742,500
post-split) shares of Common Stock to Goodchild Investments Limited, a
British Virgin Islands corporation ("Goodchild"). See "Certain
Transactions". Neither Ngai Keung Luk (Serleo) nor Goodchild were parties
affiliated with the Company prior to or at the time of the acquisition of
Physical Limited. At the Closing the then current management of the
Company resigned and was replaced by the current management of the Company.
See "Management." The Company effected a 1.33-for-1 reverse split of its
common stock in October, 1997.
The Company maintains its executive and administrative office Hong Kong
at:
Lee Theatre Plaza 12/F - 15/F
99 Percival St., Causeway Bay, HONG KONG
The telephone number of the Company in Hong Kong is (852) 2572-8888.
Unless the context requires otherwise, as used herein, any reference to the
Company includes the Company's subsidiaries Physical Beauty & Fitness
Holdings Limited, Physical Health Centre Hong Kong, Ltd., Regent Town
Holdings Ltd., Mighty System Ltd., Supreme Resources Ltd., Physical Health
Centre (Zhong Shan) Ltd., Zhongshan Physical Ladies' Club, Ltd., Ever Growth
Ltd., Proline Holdings Ltd., Shanghai Physical Ladies' Club Company Ltd.,
Shanghai Physical Ladies' Club Co., Ltd., Jade Regal Holdings Ltd., Physical
Health Centre( Dalian) Ltd., Dalian Physical Ladies' Club Co. Ltd., Star
Perfection Holdings Ltd., Physical Health Centre (Shenzhen) Ltd., and
Shenzhen Physical Ladies' Club Company Ltd., Physical Health Centre (Tsuen
Wan) Limited, Physical Health Centre (Macau) Limited. See also "Business of
the Company - Organization".
3
<PAGE>
THE OFFERING
SECURITIES OFFERED BY THE COMPANY
375,000 shares of Common Stock and 375,000 Common Stock Purchase Warrants.
In addition, the Selling Agent has been granted an over-allotment option for
an additional 56,250 shares and 56,250 Warrants. See "Description of
Securities-Common Stock."
SECURITIES OFFERED BY SELLING SHAREHOLDERS
187,500 shares of Common Stock. The Company will not receive any proceeds
from the sale of Common Stock by the Selling Shareholders. See "Principal
and Selling Shareholders." Selling Shareholders will be responsible for
their own selling expenses. No shares of Common Stock of Selling
Shareholders will be sold to the public in this Offering until a maximum of
375,000 shares of Common Stock and a maximum of 375,000 Warrants offered
hereby by the Company are first sold.
OFFERING PRICE OF COMMON STOCK
4.00 per share
COMMON STOCK PURCHASE WARRANTS
The Common Stock Purchase Warrants are offered at $0.33 per warrant. The
Common Stock Purchase Warrants are exercisable at any time after their
issuance until _______, 2002, at an exercise price of $6.00 per share,
subject to certain adjustments. Commencing one year after the date hereof,
the Warrants will be redeemable, in whole but not in part, for $0.05 per
Warrant (the "Redemption Price"), at the option of the Company, upon 30
days' written notice at any time after the closing bid price of the
Company's Common Stock is at least $8.00 for 30 consecutive business days
ending within 15 days of the date of the notice of redemption. If Warrants
are not exercised by the holder(s) thereof within such 30-day period, then
they may be redeemed by the Company at the Redemption Price. The
Representative is also entitled to an additional compensation in a form of
Representative's Warrants. See "Description of Securities-Common Stock" and
"Plan of Distribution".
COMMON STOCK OUTSTANDING PRIOR TO OFFERING
7,500,000 shares as of October 23, 1997. See "Description of Securities."
COMMON STOCK OUTSTANDING AFTER THE OFFERING
7,875,000 shares. Excludes (i) 56,250 shares of Common Stock included in
the Representative's over-allotment option for the Shares and 56,250 shares
of Common Stock underlying 56,250 Warrants issuable under the
Representative's over-allotment option for the Warrants; (ii) the number of
shares of Common Stock issuable upon exercise of the Representative's
Warrants I and Representative's Warrants II to be issued in connection with
this Offering, equal to 10% of the Shares and 10% of the Warrants,
respectively, sold by the Representative in this Offering, and (iii) 375,000
shares issuable upon exercise of the Warrants offered in this Offering. See
"Description of Securities" and "Plan of Distribution."
WARRANTS TO BE OUTSTANDING AFTER THE OFFERING
375,000 Warrants. Excludes Representative's Warrants. Excludes Warrants
issued under the over-allotment option for the Warrants. See "Plan of
Distribution".
4
<PAGE>
USE OF PROCEEDS
The estimated net proceeds of $1,282,078, assuming that the maximum of
375,000 Shares and the maximum of 375,000 Warrants are sold in this Offering
("Maximum Offering"), are intended to be used for general corporate
purposes, including (i) contribution towards tenant improvement costs for
the Tsuen Wan center and initial lease deposit for the Macau center; (ii)
corporate public relations, and (iii) purchase of exercise equipment. In
the event the Maximum Offering is not achieved, the Offering will be
terminated and the Company will not receive any proceeds therefrom. See
"Use of Proceeds"
PROPOSED NASDAQ SYMBOL
Common Stock: PFIT. Common Stock Purchase Warrants: PFITW.
RISK FACTORS
The securities offered hereby involve a high degree of risk and immediate
substantial dilution. See "Risk Factors."
5
<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data are qualified by reference to, and
should be read in conjunction with, the Consolidated Financial Statements,
related Notes to Consolidated Financial Statements and Report of Independent
Public Accountants, and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained elsewhere herein. The
following tables summarize certain selected financial data of the Company
for the fiscal years/period ended September 30, 1994, December 31, 1995,
December 31, 1996 and six month periods ended June 30, 1996 and 1997. The
data has been derived from Consolidated Financial Statements included
elsewhere in this Prospectus that were audited by Arthur Andersen & Co.,
independent public accountants, except for the information relating to the
six months ended June 30, 1996 and 1997, which is unaudited but in the
opinion of the Company's management reflects all adjustments, consisting
only of normal recurring adjustments that the Company considers necessary
for a fair presentation of the information in accordance with generally
accepted accounting principles. Physical Health Center Hong Kong Limited
paid dividends in fiscal year 1995.
<TABLE>
<CAPTION>
Year ended Year ended
September 30, December 31,
1994 1995 1996 1996
---- ---- ---- ----
HK$ HK$ HK$ US$
(audited) (audited) (audited)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Operating Revenues $69,651 $85,262 $113,215 $14,608
Operating Expenses 55,625 60,827 79,553 10,265
Provision for income taxes 1,779 4,434 8,699 1,122
Net income 10,820 17,533 22,796 2,942
----------- ----------- ----------- -----------
Net income per share (2)(3) $ 1.08 $ 1.75 $ 2.28 $ 0.29
=========== =========== =========== ===========
Weighted average number of
shares outstanding (3) 10,000,000 10,000,000 10,000,000 10,000,000
=========== =========== =========== ===========
<CAPTION>
As of June 30, 1997
1996 1997 1997
---- ---- ----
HK$ HK$ US$
(unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <c.
Operating Revenues $54,176 $65,945 8,509
Operating Expenses 40,554 49,600 6,400
Provision for income taxes 4,143 3,346 431
Net income 8,726 11,790 1,522
----------- ----------- ------------
Net income per share (2)(3) $ 0.87 $ 1.18 $ 0.15
=========== =========== ============
Weighted average number of
shares outstanding (3) 10,000,000 10,000,000 10,000,000
=========== =========== ===========
</TABLE>
(1) Translation of amounts from Hong Kong Dollars into United States
Dollars (US$) for the convenience of the reader has been made at the
exchange rate quoted by the South China Morning Post on June 30, 1997 of
US$1.00 = HK$7.75. No representation is made that the Hong Kong Dollar
amounts could have been, or could be, converted into United States Dollars,
at that rate on June 30, 1997 or at any other certain rate.
(2) The earnings per share are calculated using the common stock and
common stock equivalents, as if the shares existing as of the date of this
Registration Statement had been outstanding throughout periods presented.
(3) 1994 and 1995 pro-formas. The results were stated as if Physical
Limited were a holding company.
<TABLE>
<CAPTION>
Year ended As of As Adjusted
December 31, June 30, 1997 (1)(2)(3)
----------------- ------------- --------------
1995 1996 1996 Actual Actual
---- ---- ---- ------ ------
HK$ HK$ US$ HK$ US$ US$
(audited) (audited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets $30,403 $40,336 $ 5,205 $ 40,090 $ 5,173 $6,455
Total assets 71,534 110,149 14,214 144,585 18,656 19,938
Current liabilities 41,645 54,549 7,039 62,990 8,127 8,127
Long-term obligations 24,817 27,624 3,565 41,799 5,394 5,394
Working capital (11,242) (14,213) (1,834) (22,900) (2,954) (1,672)
Obligations under finance
leases 181 3,955 511 15,242 1,966 1,966
Deferred income taxes - 1,753 226 2,422 313 313
Minority interest 4,540 4,857 627 6,074 784 784
Shareholders' equity 5,072 27,976 3,610 39,796 5,135 6,417
</TABLE>
____________________
(1) Assumes receipt of net proceeds from the Offering of $1,282,078.
(2) Excludes (i) 56,250 shares of Common Stock included in the
Representative's over-allotment option and 56,250 shares underlying the
56,250 Warrants issuable under the Representative's over-allotment option
for the Warrants; (ii) the shares of Common Stock issuable upon exercise of
the Representative's Warrants to be issued in conjunction with this
Offering; and (iii) 375,000 shares of Common Stock reserved for issuance
under the Company's stock option plans. See "Description of Securities"
and "Plan of Distribution".
(3) Excludes 375,000 shares issuable upon exercise of the Warrants
offered hereby.
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED IN THIS PROSPECTUS INVOLVES A
HIGH DEGREE OF RISK AND SHOULD ONLY BE MADE BY PERSONS WHO CAN AFFORD THE
LOSS OF THEIR ENTIRE INVESTMENT. ACCORDINGLY, PROSPECTIVE INVESTORS SHOULD
CONSIDER CAREFULLY THE FOLLOWING FACTORS, IN ADDITION TO THE OTHER
INFORMATION CONCERNING THE COMPANY AND ITS BUSINESS CONTAINED IN THIS
PROSPECTUS, BEFORE PURCHASING THE SECURITIES OFFERED HEREBY.
RISKS RELATING TO OPERATIONS IN CHINA AND HONG KONG
---------------------------------------------------
The Company provides its services exclusively to residents of Hong Kong
and China. The Company expects to continue to focus its expansion efforts
in the Chinese markets. As such, there are risks involved with the conduct
of the Company's business in China and Hong Kong, including the following:
INTERNAL POLITICAL RISKS. The Company's interests may be adversely
affected by the political environment in China. China is a communist
country which since 1949 has been, and is expected to continue to be,
controlled by the Communist Party of China. Changes in the top political
leadership of the Chinese government may have a significant impact on policy
and the political and economic environment in China. Moreover, economic
reforms and growth in China have been more successful in certain provinces
than in others, and the continuation or increase of such disparities could
affect political or social stability. China only recently has permitted
greater flexibility in its economic sector, however, the government of China
has exercised and continues to exercise substantial control over virtually
every section of the Chinese economy through regulation and state ownership.
Accordingly, government actions in the future, including any decision not to
continue to support the economic reform program that commenced in the late
1970's and possibly to return to the more centrally-planned economy that
existed prior thereto, could have a significant effect on economic
conditions in China and on the operations of the Company.
INTERNAL ECONOMIC RISKS. The Company's interests may be adversely
affected by the economic environment in China. The economy of China differs
significantly from the economies of the United States and Western Europe in
such respects as structure, level of development, gross national product,
growth rate, capital reinvestment, resource allocation, self-sufficiency,
rate of inflation (see "Inflation" below), and balance of payments position,
among others. Only recently has the Chinese government encouraged
substantial private economic activities.
The Chinese economy has experienced significant growth in the past five
years, but such growth has been uneven among various sectors of the economy
and geographic regions. Actions by the Chinese central government to
control inflation have significantly restrained economic expansion recently.
Similar actions by the central government of China in the future could have
a significant adverse effect on economic conditions in China and the
economic prospects of the Company.
INFLATION. Over the last few years, China's economy has registered a
high growth rate and there have been recent indications that rates of
inflation have increased. In 1996, China's overall inflation rate was
estimated to be 6.3%, compared to 14.8% in 1995 and 21.7% in 1994. In
response, the Chinese government recently has taken measures to curb the
excessive expansion of the economy. These measures have included
devaluations of the Chinese currency, the Renminbi, restrictions on the
availability of domestic credit (reducing the discretionary speeding
capability of certain of the Company's customers) and limited
recentralization of the approval process for purchases of some foreign
products. There can be no assurance that these austerity measures alone
will succeed in slowing down the economy's excessive expansion or control
inflation, nor that they will not result in severe dislocations in the
Chinese economy in general. To further combat inflation, the Chinese
government may adopt additional measures, including the establishment of
freezes or restraints on certain projects or markets, which may have an
adverse effect on the Company's operations. See "Business China."
LEGAL SYSTEM. China's legal system is a civil law system which is based
on written statutes and in which decided legal cases have little
precedential value. China does not have a well developed, consolidated
body of laws governing enterprises with foreign investments. As a result,
the administration of laws and regulations by government agencies may be
subject to considerable discretion. As legal systems in China develop,
foreign business entities may be adversely affected by new laws, changes to
existing laws (or interpretations thereof) and preemption of provincial or
local laws by national laws. In circumstances where adequate laws exist,
it may not be possible to obtain swift and equitable enforcement thereof.
See "Business - China".
7
<PAGE>
FOREIGN CURRENCY EXCHANGE. Substantially all of the Company's revenues,
expenses and liabilities are denominated in Renminbi ("Rmb"), the currency
of China, Hong Kong dollars or U.S. dollars. The Company is therefore
subject to the effects of exchange rate fluctuations between these
currencies. The Company does not expect, however, to be subject to
specific fluctuations in the Hong Kong dollar/U.S. dollar exchange rate, as
the Hong Kong dollar has been officially linked to the U.S. dollar since
October, 1983. However, there can be no assurances this situation will
continue. Rmb is not a freely convertible currency. Both conversion of
Rmb into foreign currencies and the remittance of Rmb abroad are subject to
PRC government approval. The Company earns its revenues, and incurs the
majority of its costs, in Rmb, through its operations in China. Prior to
January 1, 1994 Rmb that were earned within the PRC were not freely
convertible into foreign currencies except with government permission, at
rates determined in place at swap centers, where the exchange rates often
differed substantially from the official rates quoted by the People's Bank
of China. On January 1, 1994, the People's Bank of China introduced a
managed floating exchange rate system based on the market supply and demand
and proposed to establish a unified foreign exchange, inter-bank market
among designated banks. As a result of the unitary exchange rate system
introduced on January 1, 1994, the official bank exchange rate for
conversion of Rmb to U.S. dollar experienced a devaluation of approximately
50%. In place of the official rate and the swap center rate, the People's
Bank of China publishes a daily exchange rate for Rmb based on the previous
day's dealings in the inter-bank market ("PBOC Rate"). It is expected that
swap centers will be phased out in due course. However, the unification of
exchange rates does not imply full convertibility of Rmb into US Dollars or
other foreign currencies. While conversion of Rmb into US Dollars or other
foreign currencies can generally be effected at the swap center, there is no
guarantee that it can be effected at all times.
The Company's operations in China conducted through Shanghai Joint Venture
and Dalian Joint Venture, and their financial performance and condition are
measured in terms of Rmb. The revenues and profits of Shanghai and Dalian
Joint Ventures are predominantly denominated in Rmb, and require conversion
into US Dollars or HK Dollars. Should the Rmb devalue against these
currencies, such devaluation would have a material adverse effect on the
Company's profits and the foreign currency equivalent of such profits
contributed by the Shanghai and Dalian Joint Ventures to the Company. The
Company currently is not able to hedge its exchange rate exposure in China,
because neither the banks in China nor any other financial institution
authorized to engage in foreign exchange transactions offer forward exchange
contracts.
The following table sets forth certain information concerning exchange rates
between Renminbi ("Rmb") and U.S. dollars for the periods indicated:
8
<PAGE>
Noon Buying Rate (1)
--------------------
Period Period End (2) Average (2)(3) High (2) Low (2)
- ------ -------------- -------------- -------- -------
1991 5.4478 5.3343 5.4478 5.2352
1992 5.7662 5.5214 5.9007 5.4124
1993 5.8145 5.7769 5.8245 5.7076
1994 8.4662 8.6303 8.7409 8.4662
1995 8.3374 8.3685 8.4584 8.3203
1996 8.2982 8.3139 8.3338 8.2970
1997 through 8/29 8.3184 8.3225 8.3290 8.2911
Source: Federal Reserve Bank of New York
(1) Prior to the adoption of the PBOC Rate in 1994, there was
significant variation between the Official Rate and the rates obtainable at
Swap Centers, such as the Shanghai Swap Center. After January 1, 1994,
there have not been significant differences between the Noon Buying Rate,
the PBOC Rate and the Shanghai Swap Center Rate.
(2) Rmb per US dollar
(3) Determined by averaging the rates on the last business day of each
month.
The Hong Kong dollar is freely exchangeable into other currencies
(including the U.S. dollar). Since October 17, 1983, the Hong Kong dollar
has been officially linked to the U.S. dollar at the rate of
US$1.00=HK$7.80. However, the market exchange rate of the Hong Kong dollar
against the U.S. dollar continues to be determined by the forces of supply
and demand in the foreign exchange rates market. Exchange rates between the
Hong Kong dollar and other currencies are influenced by the rate between the
U.S. dollar and the Hong Kong dollar.
Pursuant to the Sino-British Joint Declaration, with effect from July 1,
1997, Hong Kong became a Special Administrative Region of China ("SAR").
The Basic Law of the Hong Kong SAR provides that the Hong Kong dollar will
remain the legal tender in the Hong Kong SAR after June 30, 1997. The Basic
Law also provides that no exchange control policies shall be applied in the
Hong Kong SAR and that the Hong Kong dollar shall be freely exchangeable.
The following table sets forth certain information concerning exchange
rates between the Hong Kong dollar ("HK$") and U.S. dollars for the periods
indicated:
Noon Buying Rate
----------------
Period Period End (1) Average (1)(2) High (1) Low (1)
- ------ -------------- -------------- -------- -------
1991 7.7800 7.7712 7.8025 7.7155
1992 7.7430 7.7402 7.7767 7.7237
1993 7.7280 7.7357 7.7650 7.7230
1994 7.7375 7.7290 7.7530 7.7225
1995 7.7345 7.7357 7.7665 7.7268
1996 7.7345 7.7342 7.7444 7.7160
1997 through 7/31 7.7430 7.7449 7.7550 7.7340
Source: Federal Reserve Bank of New York
(1) HK$ per US$
(2) Determined by averaging the rates on the last business day of each
month.
9
<PAGE>
HONG KONG. The Company is headquartered in Hong Kong and currently
operates six fitness and spa facilities there. Accordingly, the Company
may be materially adversely affected by factors affecting Hong Kong's
political situation and its economy or in its international political and
economic relations. Hong Kong was a British Crown Colony, but sovereignty
over Hong Kong was transferred to China on July 1, 1997 and Hong Kong
became a Special Administrative Region ("SAR") of the PRC. As provided in
the Sino-British Joint Declaration on the Question of Hong Kong and the
Basic Law of the Hong Kong SAR of the PRC (the "Basic Law"), the Hong Kong
SAR shall have a high degree of autonomy except in foreign affairs and
defense. Under the Basic Law, the Hong Kong SAR is to have its own
legislature, legal and judicial system and economic autonomy for 50 years.
Although, based on the current political conditions and the Company's
understanding of the Basic Law, the Company does not believe that the
transfer of sovereignty over Hong Kong will have a material adverse effect
on the Company's business, financial condition or results of operations of
the Company in the future, there can be no assurance as to the continued
stability of political, economic or commercial conditions in Hong Kong.
ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES. The directors and officers
of the Company reside outside of the United States and all of the assets of
such persons are located outside the United States. As a result, it may
not be possible for investors to effect service of process within the United
States upon such persons, or to enforce against the Company's assets or such
persons judgments obtained in United States courts predicated upon the
liability provisions of the United States securities laws. There is
substantial doubt as to the enforceability against a substantial portion of
the Company's assets or any of its directors and officers located outside
the United States in original actions or in actions for enforcement of
judgments of United States courts of liabilities predicated solely on the
civil liability provisions of the Federal securities laws.
The Company has been advised that no treaty exists between Hong Kong and
the United States providing for the reciprocal enforcement of foreign
judgments. However, the courts of Hong Kong are generally prepared to
accept a foreign judgment as evidence of a debt due. An action may then be
commenced in Hong Kong for recovery of this debt. A Hong Kong court will
only accept a foreign judgment as evidence of a debt due if: (i) the
judgment is for a liquidated amount in a civil matter; (ii) the judgment is
final and conclusive and has not been stayed or satisfied in full; (iii) the
judgment is not directly or indirectly for the payment of foreign taxes,
penalties, fines or charges of a like nature (in this regard, a Hong Kong
court is unlikely to accept a judgment for an amount obtained by doubling,
trebling or otherwise multiplying a sum assessed as compensation for the
loss or damage sustained by the person in whose favor the judgment was
given); (iv) the judgment was not obtained by actual or constructive fraud
or duress; (v) the foreign court has taken jurisdiction on grounds that are
recognized by the common lay/ rules as to conflict of laws in Hong Kong (vi)
the proceedings in which the judgment was obtained were not contrary to
natural justice (i.e., the concept of fair adjudication); (vii) the
proceedings in which the judgment was obtained, the judgment itself and the
enforcement of the judgment are not contrary to the public policy of Hong
Kong; (viii) the person against whom the judgment is given is subject to the
jurisdiction of the Hong Kong court; and (ix) the judgment is not on a claim
for contribution in respect of damages awarded by a judgment which does not
satisfy the foregoing. Enforcement of a foreign judgment in Hong Kong may
also be limited or affected by applicable bankruptcy, insolvency,
liquidation, arrangement, moratorium or similar laws relating to or
affecting creditors' rights generally and will be subject to a statutory
limitation of time within which proceedings may be brought..
COMPLIANCE WITH GOVERNMENT REGULATIONS. The Company is required to
comply with strict government regulations in operation of its fitness and
spa facilities in Hong Kong and China (see "Company - Government
Regulation"). The non-compliance with such regulations may have an adverse
negative effect on the Company's operations.
10
<PAGE>
RISKS RELATING TO THE COMPANY
- -----------------------------
DEPENDENCE ON KEY PERSONNEL. The Company's success depends, to a
significant extent, upon a number of key employees. The loss of services
of one or more of these employees could have a material adverse effect on
the business of the Company. The Company believes that its future success
will also depend in part upon its ability to attract, retain and motivate
qualified personnel, and the maintenance of employment agreements with
certain key officers. Competition for such personnel is intense. There
can be no assurance that the Company will be successful in attracting and
retaining such personnel. The Company does not have "key person" life
insurance on any of its key employees. The Company's success, to a large
extent, depends upon the continued services of certain executive officers,
particularly Mr. Luk, Chairman of the Board of Directors and Chief Executive
Officer and Ms. Jill Bodnar, President. See "Management"
The Company intends to continue to hire additional personnel as necessary
to meet its management, marketing, operating and administrative service
needs from time to time. Although the Company believes that, as of this
date, it has been successful in attracting and retaining highly qualified
professionals and other personnel as required by its business, there can be
no assurance that the Company will continue to be successful in this regard.
The Company believes that the future success and development of its business
is dependent to a significant degree on its ability to continue to attract
such individuals. See "Business - - Employees"
DEPENDENCE ON QUALIFIED FITNESS AND SPA PROFESSIONALS. The success of
the Company is dependent upon its continuing ability to recruit, train and
retain qualified fitness and spa professionals in Hong Kong and China. The
Company faces competition for these personnel from other fitness and spa
service providers, and other organizations throughout the world. The
availability of such personnel is limited, and the inability to recruit and
maintain relationships with these individuals in China could have a material
adverse effect on the Company's future growth and operations. This fact is
particularly significant for the Company, since qualified Western or similar
fitness and spa professionals may have to be recruited from outside China
and replacing any such professionals may require significant recruiting
efforts and lead time. In addition, the costs of housing and otherwise
compensating such professionals may be relatively high in light of the
housing costs in certain cities in China. There can be no assurance that
the Company will be successful in attracting, hiring and retaining these
qualified fitness and spa professionals. The unavailability of sufficient
numbers of qualified personnel could have a material adverse effect on the
Company's operations. In addition, a shortage of skilled personnel or the
delay resulting from a need to train personnel could have a material adverse
effect on the Company's results of operations.
COMPETITION. The Company is among the largest commercial operators of
fitness/spa centers in Hong Kong in terms of revenues, number of members and
number and square footage of facilities. The Company is also among the
largest operators of fitness centers in China. The Company believes its
fitness centers generally offer a high level of amenities to its primary
target market, the 18 to 34-year old women, middle income segment of the
population in Hong Kong and China. Within each market, the Company competes
with other fitness centers, physical fitness and recreational facilities
established by local governments and similar organizations, and, to a
certain extent, with athletic clubs, weight reducing salons and the home-use
fitness equipment industry and beauty salons. However, the Company
believes that its operating experience and expertise, its ability to recover
advertising and administration costs over all its fitness centers, the scope
of its operations and its account processing infrastructure provide an
advantage over its competitors.
The Company believes that competition has increased in certain areas of
Hong Kong. The Company believes that this increase reflects the public's
enthusiasm for fitness and the decrease in the cost of entering the market
due to financing available from leasing arrangements for the premises and
equipment. The Company believes that its membership plans are affordable
and have the flexibility to be responsive to economic conditions. However,
the Company also competes with other entertainment and retail business for
the discretionary income of its target market. In the Company's opinion,
fitness and spa facilities in China do not currently provide specialized
Western standard fitness and spa services of the standard the Company
provides. There can be no assurance that existing or new facilities will
not commence such operations and compete with the Company. Further, there
can be no assurance that a qualified Western, or other fitness and spa
organizations, with greater resources or more experience than the Company in
the provision of these services, will not decide to engage in operations
similar to those offered by the Company. See "Business - Competition".
11
<PAGE>
RELATED PARTY TRANSACTIONS. In the past, the Company has entered into
business transactions with certain affiliates and may continue to enter into
such transactions in the future, however, the policy of the Company is that
such transactions with related persons shall have the terms thereof are at
least as favorable to the Company as those that could be obtained from
unaffiliated third parties. Ngai Keung Luk (Serleo), the Company's Chairman
and Chief Executive Officer, received certain loans from the Company which
have been extended to Mr. Luk over a period of time prior to December 31,
1996 in the original principal amount of HK$16.5 million (US$2.1 million)
(the "Loan"). Mr. Luk agreed to repay the Loan in eight installments by
March 31, 1999, at a prime interest rate, together with the accrued interest
thereon. Mr. Luk has already repaid HK$2.3 million (US$297,000) of the
outstanding amount of the Loan. The current outstanding principal amount of
the Loan and accrued interest, as of September 30, 1997, is HK$14.9 million
(US$1,900,000). The remaining outstanding principal amount of the Loan is
secured by a pledge of 1,500,000 pre-split shares of common stock of the
Company by Mr. Luk, as collateral for the Loan. Mr. Luk does not have any
other outstanding loans from the Company. Although there can be no
assurance given that the Loan will be repaid in full by Mr. Luk, the Company
does not expect that Mr. Luk would default on the Loan (based on his past
performance) or that such potential default on the Loan would have a
material negative effect on the Company. See "Certain Transactions."
CERTAIN TAX CONSEQUENCES. The Company is predominantly invested in
foreign subsidiaries. Those subsidiaries are subject to taxes imposed on
them in the foreign jurisdictions in which they operate and in which they
are organized. Further, their income is subject to US federal and state
income taxes when distributed, deemed distributed or otherwise attributed
to, the Company, which is a US corporation. Complex US tax rules apply for
purposes of determining the calculation of those US taxes, the availability
of a credit for any foreign taxes imposed on the foreign subsidiaries or the
Company and the timing of the imposition of US tax. Normally, all foreign
income earned by a US multinational eventually will be subject to US tax.
Income earned by a foreign branch of a US company is taxable currently in
the United States, and income earned by a foreign subsidiary will be subject
to US tax either in the year distributed to the US as a dividend or in the
year earned by means of Subpart F, foreign personal holding company or other
federal tax rules requiring current recognition of certain income earned by
foreign subsidiaries. All of the Company's direct and indirect foreign
subsidiaries constitute "controlled foreign corporations" ("CFCs") for
purposes of the Subpart F rules of the federal Internal Revenue Code. Among
other consequences of CFC states, "Subpart F income", as defined, of the
profitable foreign subsidiaries will be directly taxable to the Company,
whether or not distributed to the Company. In general, Subpart F income is
defined as the income and gains of the foreign subsidiary from its more
passive investment-type activities. Subpart F income extends, in general,
however, to include intercompany payments (e.g., payments of dividends,
interest, royalties, etc.) between related foreign group members. Thus, for
example, dividend distributions from the Company's indirect PRC and Hong
Kong subsidiaries to the Company's British Virgin Island subsidiary, Regent
Town Holdings Limited, would cause the subsidiary to be directly taxable to
the Company, notwithstanding that the British Virgin Islands does not tax
such dividend income, and the British Virgin Island subsidiary does not
distribute that dividend income to the Company, but retains it. Income
earned in foreign countries often is subject to Foreign income taxes. In
order to relieve double taxation, the US federal tax law generally allows US
corporations a credit against their US tax liability in the year the foreign
earnings become subject to US tax in the amount of the foreign taxes paid on
those earnings. The credit is limited, however, under complex limitation
rules, to, in general, the US (pre-credit) tax imposed on the US
corporation's foreign source income. Further, complex rules exist for
allocating and apportioning interest, research and development expenses and
certain other expense deductions between US and foreign sources. Limiting
provisions of the source rules decrease the amount of foreign source income
many US multinationals can generate. Reduced foreign source income results
in a smaller foreign tax credit limitation, as the limitation is based on
the ratio of foreign source net income to total net income. Further,
separate income baskets exist for purposes of the foreign tax credit
limitation, which makes it nearly impossible to reduce the effective foreign
tax rate on higher-taxed foreign operating income by diluting income in the
overall basket with relatively low-taxed foreign investment income. These
rules can prevent US multinationals from crediting all of the foreign taxes
they pay. To the extent that foreign taxes are not creditable, foreign
source income bears a tax burden higher than the US tax rate. See
"Taxation".
LACK OF DIVIDENDS. The Company has never paid any cash dividends on its
Common Stock and does not anticipate paying any cash dividends in the
future. Physical Health Centre Hong Kong Limited, the subsidiary of the
company acquired by the Company in October, 1996, paid dividends of
HK$32,800,000 (US$4,200,000) in 1995. The Company currently intends to
retain future earnings, if any, to fund the development and growth of its
business. See "Price Range of Securities and Dividend Policy."
12
<PAGE>
LACK OF PRODUCT LIABILITY INSURANCE. The Company does not maintain
product liability insurance with respect to the cosmetics/spa products used
in its centers. Users of the products used in the Company's centers could
suffer, or could claim to suffer, adverse effects from the products used in
the Company's centers. There can be no assurances given that the Company
(i) will not be named as a defendant in products liability litigation, (ii)
will be able to obtain product liability insurance for such products when it
seeks to do so or (iii) will be able to pay the premiums required to
maintain coverage on any such policies obtained. A recovery by a potential
claimant in excess of the liability coverage could have a material adverse
effect on the Company.
LIMITATIONS OF SINO-FOREIGN JOINT VENTURES. The Company operates three
fitness and spa centers in China through joint ventures with the Chinese
partners, as such form of business entity is preferred by the Chinese
authorities. The term of Shanghai Joint Venture expires in 2003, and the
term of Dalian Joint Venture expires in 2007 (see "Company-Organization" ).
There can be no assurances given that the joint ventures will be extended to
continue their operations. The Company also entered into joint venture
contracts with two additional joint venture partners, however, those joint
ventures have not commenced operations yet, and have not received necessary
business permits. According to the laws in the PRC and the terms of the
joint venture contracts, both joint venture partners are obliged to fulfill
their capital contribution requirements into the joint venture within a
specified period of time after the issue of the business license. As of the
date of this Prospectus, however, both joint venture partners have not
contributed the required capital according to the requirements of the
contract. Such default in the funding obligations will require
renegotiations between the two partners and may also trigger default
remedies as specified in the joint venture contract. Further, a failure to
meet regulatory time limits set by the State Administration of Industry and
Commerce for capital contributions could result in the cancellation of the
approval of the joint venture's business license. Both joint venture
partners are in the process of applying to the relevant authorities for an
extension of such time limits. There can be no assurances given that the
new joint ventures partners will satisfy the above obligations or that the
joint ventures will commence operations as planned. See "Company-
Organization".
INSUFFICIENT SERVICEMARK PROTECTION. The Company registered a
servicemark under its trade name "Physical Ladies' Club" in Hong Kong and
its Chinese equivalent name in China. In the opinion of the Company's
trademark counsel in Hong Kong, the registration enables the mark to
distinguish the Company's services from similar services of others, although
it gives Company no right to the exclusive use of the words. The
servicemark gives the Company a priority over the use of the servicemark by
others and the right to reject others from the use of the same name. In
China, the Company was only able to register the name in Chinese language
pursuant to the Chinese Trademark Law. Although the registration of the
Company's business name offers some proprietary protection to the Company,
there can be no assurances given that the Company's name will not be
infringed upon by another company or that the registration offers sufficient
protection for the Company's name, which may have an adverse effect on the
Company's operations. Furthermore, in case of such infringement,
enforcement of existing laws may be uncertain and sporadic and
implementation and interpretation thereof inconsistent. The Chinese
judiciary is relatively inexperienced in enforcing the laws that exist,
leading to a higher than usual degree of uncertainty as to the outcome of
any litigation.
NO ASSURANCE OF SUCCESS OF PLANNED BUSINESS EXPANSION. The Company is
engaged in an effort to effectuate an opening of additional fitness and spa
centers to expand its operations. There is, and can be, no assurance that
this business expansion will be realized. A considerable part of the
capital expenditures required for this business expansion have been obtained
or made available by the Company's cash flow, lines of credit and partially
will be provided through the proceeds of this Offering. There can be no
assurances given that these additional funds will be obtained. Further, the
success of this planned business expansion may be affected by many other
factors which are not in the Company's control, such as political and
economic decisions made by the Chinese government and economic developments
affecting the Company's business. The Company needs to obtain new leases or
extend the existing ones to secure new or existing centers, and there can be
no assurances given that such leases will be obtained or that the Company
can secure suitable locations for the new centers. Furthermore, no
assurances can be given that the new fitness and spa centers, if opened,
will operate profitably. See "Company - Properties".
13
<PAGE>
RISKS PERTAINING TO THIS OFFERING
- ---------------------------------
CONTROL BY EXISTING SHAREHOLDER, OFFICER AND DIRECTOR. Upon completion
of this Offering, the Company's existing shareholder, Mr. Luk Ngai Keung,
will beneficially own approximately 76.19% of the outstanding Common Stock
(approximately 75.65% if the Underwriters' overallotment options are
exercised in full). Mr. Luk is also the Company's Chairman of the Board of
Directors and Chief Executive Officer. See "Principal Shareholders."
Investors purchasing shares pursuant to this Offering (including the shares
offered by the Selling Shareholders and based on 7,875,000 shares
outstanding after the Offering) will beneficially own approximately 7.14% of
the outstanding Common Stock (approximately 7.80% if the Underwriters'
overallotment options are exercised in full). As a result, Mr. Luk will
have the ability to control the Board of Directors and policies of the
Company. The Company has appointed two independent directors to its Board
of Directors who will be heading its proposed audit committee. See
"Management" and "Certain Transactions."
NO ASSURANCE OF PUBLIC MARKET FOR SECURITIES; POSSIBLE VOLATILITY OF
SHARE PRICE. Limited public securities market existed prior to this
Offering for the Company's Common Stock. The Company's Common Stock trades
sporadically on the National Association of Securities Dealers' ("NASD")
over-the-counter market, however, the trading volume was negligible for the
past three months. Although the Company intends to apply to have the Common
Stock included on the Nasdaq System, there can be no assurance that an
active public trading market for such securities will be developed or
sustained. Accordingly, purchasers of the Securities may experience
substantial difficulty selling such securities. The offering price of the
shares of Common Stock has been determined by negotiations between the
Company and the Representative and are not necessarily related to the
Company's existing market price, asset value, net worth, or other
established criteria of value. See "Price Range of Common Stock" and
"Underwriting."
IMMEDIATE SUBSTANTIAL DILUTION. The shares of Common Stock held by the
Company's current shareholders were acquired at a cost per share
substantially less than that at which the Company intends to sell the Common
Stock to investors in this Offering. As of June 30, 1997, the Company's net
tangible book value per share of Common Stock was $0.68 (based on 7,500,000
post-reverse split outstanding shares). Based on certain assumptions,
purchasers of shares of the Company's Common Stock in the Offering will
experience immediate dilution of $3.18 per share. See "Dilution."
LACK OF FIRM UNDERWRITING. The Shares and the Warrants are offered
hereby on a "best efforts" and "all or nothing" basis. Since no person has
undertaken to purchase all or any part of this Offering, this Offering is
not a firm underwriting, and there can be no assurance that any Shares or
Warrants will be sold. If the Maximum Offering is not achieved, this
Offering will be terminated and the Company will not receive any proceeds
from the Offering, and the funds will be returned to the subscribers. See
"Plan of Distribution".
USE OF PROCEEDS. The proceeds of this Offering have been allocated only
generally and the Board of Directors has the discretion to vary the actual
application of the funds. Accordingly, investors will entrust their funds
with Company's management on whose judgment the investors must depend, with
only limited information about management's specific intention.
DETERMINATION OF OFFERING PRICE. The offering price of the Common Stock
has been arbitrarily determined through negotiation between the Company and
the Representative. The offering price of the Common Stock does not
necessarily bear any relationship to the assets, operating results, book
value, shareholders' equity of the Company, limited public trading market
of the Company's Common Stock or any other statistical criterion of value.
There can be no assurance that the Common Stock will trade in the future at
market prices in excess of, or equal to, the offering price herein.
SELLING AGENT'S INFLUENCE ON THE MARKET. It is anticipated that all of
the securities offered hereby will be sold to customers of the Selling
Agent. Such customers subsequently may engage in transactions for the sale
or purchase of such securities through or with the Selling Agent. Although
they have no legal obligation to do so, the Selling Agent, from time to
time, may become market makers and may otherwise effect transactions in such
securities. To the extent the Selling Agent do so, they may be influential
in any market that might develop and the degree of participation by the
Selling Agent may significantly affect the price and liquidity of the
Company's securities. Such market making activities, if commenced, may be
discontinued at any time or from time to time by the Selling Agent without
obligation or prior notice. Depending on the nature and extent of the
Selling Agent's market making activities and retail support of the Company's
securities at such time, the Selling Agent's discontinuance could adversely
affect the price and liquidity of the securities.
14
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE. Immediately following the successful
completion of this Offering but without giving effect to the exercise of the
over-allotment options, exercise of the Representative's Warrants or the
issuance of any shares of Common Stock reserved for issuance under the
Company's Stock Option Plans, there will be an aggregate of 7,875,000 post-
split (10,500,000 pre-split) shares of Common Stock issued and outstanding.
1,875,000 post-split (2,500,000 pre-split) of such shares will be freely
tradeable in the public market (except by affiliates of the Company) and
6,000,000 post-split (8,000,000 pre-split) shares will be "restricted" as
that term is defined under the Securities Act, and in the future may be sold
in compliance with Rule 144 under the Securities Act or pursuant to a
Registration Statement filed under the Securities Act. Of the 1,875,000
post-split (2,500,000 pre-split) freely tradable shares, 375,000 are being
issued pursuant to this Offering and 187,500 are being offered hereby by the
Selling Shareholders. The remaining 1,312,500 post-split (1,750,000 pre-
split) shares were issued previously by the Company and are held by
approximately 624 beneficial owners. Representative has obtained lock-up
agreements from certain principal shareholders restricting the sale of their
respective free trading shares. Pursuant to terms of the lock-up agreements,
certain principal shareholders agreed not to sell or transfer any securities
of the Company held by them for a period of 365 days after the effective
date of this Registration Statement. See "Plan of Distribution".
Rule 144 generally provides that a person holding restricted securities
for a period of one year may sell every three months in brokerage
transactions and/or market-maker transactions an amount equal to the greater
of one percent (l %) of (a) the Company's issued and outstanding Common
Stock or (b) the average weekly trading volume of the Common Stock during
the four calendar weeks prior to such sale. Rule 144 also permits, under
certain circumstances, the sale of shares without any quantity limitation by
a person who is not an affiliate of the Company and who has satisfied a two-
year holding period. However, all of the current shareholders of the
Company owning 1% or more of the issued and outstanding Common Stock are
subject to Rule 144 limitations on selling.
REQUIREMENTS FOR LISTING SECURITIES ON THE NASDAQ SYSTEM; POSSIBLE
DELISTING OF COMMON STOCK FROM NASDAQ SYSTEM; RISKS RELATING TO LOW-PRICE
STOCKS. The Securities and Exchange Commission has approved rules imposing
stringent criteria for listing securities on the National Association of
Securities Dealers Automated Quotation System ("Nasdaq System"), as well as
standards for maintenance of such listing. The Company has applied for
inclusion of the Common Stock on the Nasdaq System upon the completion of
this Offering. If the Company is unable to meet these criteria for initial
listing, this Offering may be terminated. In addition, if the Company is
unable to satisfy Nasdaq's maintenance criteria in the future, its
securities will be subject to being delisted, and trading, if any, in the
Company's securities would thereafter be conducted in the non-Nasdaq over-
the-counter market. Currently, the Company's Common Stock trades on NASD's
over-the-counter market on Bulletin Board. As a consequence of such
delisting, an investor could find it more difficult to dispose of, or to
obtain accurate quotations as to the market value of, the Company's
securities. In addition, in the absence of the securities being quoted on
Nasdaq, the Company having $2,000,000 in net tangible assets, or the Common
Stock having a market price of at least $5.00 per share, trading in the
Common Stock would be covered by Rule 15c2-6 promulgated under the
Securities Exchange Act of 1934 for non-Nasdaq and non-exchange listed
securities. Under this rule, broker-dealers who recommend such securities
must satisfy burdensome sales practice requirements. The Securities
Enforcement and Penny Stock Reform Act of 1990 (the "Reform Act") also
requires additional disclosure in connection with any trades involving a
stock defined as a "penny stock" (generally, according to recent regulations
adopted by the Commission, any equity security that has a market price of
less than $5.00 per share, subject to certain exceptions), including the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith. In
the event that the Common Stock were delisted subsequently to becoming
characterized as either a low-priced or penny stock, the market liquidity
for the Company's securities would be severely affected. The regulations
governing low-priced or penny stocks could limit the ability of broker-
dealers to sell the Company's securities and thus the ability of the
purchasers of this Offering to sell their securities in the secondary
market.
15
<PAGE>
MAINTENANCE CRITERIA FOR NASDAQ SMALL CAP MARKET. The Company has
applied for inclusion of the Common Stock on The Nasdaq SmallCap Market
("NASDAQ"). In order to continue to be included on NASDAQ, a company must
maintain a minimum $2 million in net tangible assets or $35,000,000 market
capitalization or net income of $500,000 for the last two years of
operations, $4,000,000 market value of public float, 300 shareholders and a
minimum bid price of $1.00 per share. The failure to meet these maintenance
criteria in the future would result in the discontinuance of the inclusion
of the Company's securities on NASDAQ, which could adversely affect the
market price of the Company's securities and the ability of shareholders of
the Company to dispose of their securities.
RISK OF REDEMPTION OF WARRANTS. Commencing one year from the date of
this Prospectus, the Company may redeem the Warrants for $0.05 per Warrant
at any time on thirty (30) days prior written notice, provided the closing
bid price of the Company's Common Stock is at least $8.00 per share for
thirty (30) consecutive business days ending within 15 days of the notice of
redemption. Notice of redemption could force the holders to exercise the
warrants and pay the exercise price at a time when it might be
disadvantageous or difficult for the holder to do so, sell the Warrants at
current market price when they might have otherwise wish to hold the
Warrants, or accept the redemption price, which is likely to be less than
the market price of the Warrants at the time of redemption.
REPRESENTATIVE'S WARRANTS; RISK OF FURTHER DILUTION. The Company has
agreed to sell to the Representative, for nominal consideration, warrants to
purchase up to 10% of the Shares and Warrants, respectively, offered hereby,
at an exercise price equal to 120% of the price at which the Shares and the
Warrants, respectively, are initially offered to the public. The Company
has agreed to register under the Securities Act, and applicable state
securities laws, the Securities issuable upon exercise of the
Representative's Warrants at the expense of the Company. The
Representative's Warrants and any profits realized by the Representative on
the sale of the Securities underlying the Warrants could be considered
additional selling agent's compensation. For the term of the
Representative's Warrants, the holders are given, at nominal cost, the
opportunity to profit from the difference, if any, between the exercise
price of the Representative's Warrants and the value of or market price (if
any) for the Securities, with a resulting dilution in the interest of
existing shareholders. The Representative's Warrants may be exercised at a
time when in all likelihood, the Company would be able to obtain any needed
capital by a new placement of securities on terms more favorable than those
provided for by the Representative's Warrants. See "Plan of Distribution".
USE OF PROCEEDS
The gross proceeds from the sale of the Shares and Warrants described
herein will be $1,625,000 ($1,868,750, if the over-allotment options for the
Shares and the Warrants, respectively, are exercised) if the Maximum
Offering amount is obtained. The net proceeds to the Company (at an initial
public offering price of $4.00 per share and $0.33 per warrant) from the
sale of the Common Stock and Warrants offered hereby, less the underwriting
discount of 10% ($162,500; $186,875 if the over-allotment options are
exercised), the Representative's non-accountable expense allowance of 3%
($48,750; $56,063, if the over-allotment options are exercised) and expenses
of this Offering (estimated at $131,672) for the total estimated Offering
expenses at $342,922, are estimated to be approximately $1,282,078
($1,494,140 if the over-allotment Options for the Shares and the Warrants,
respectively, exercised in full). Based on the Company's present plans
which represent the existing and anticipated business conditions, the
Company intends to apply the estimated net proceeds as follows:
USE OF PROCEEDS
Amount if Amount if
over- over-
allotment allotment
option is not option is
exercised exercised
% %
- ----------------------------------------------------------------------------
Exercise equipment $100,000 7.80% $100,000 6.69%
Marketing and investor relations $500,000 39.00% $500,000 33.46%
Lease deposit $125,000 9.75% $125,000 8.37%
Hardware and related software $ 50,000 3.90% $ 50,000 3.34%
Contribution toward tenant
improvement costs for
Tsuen Wan center $507,078 39.55% $719,140 48.14%
-------- ------ -------- ------
TOTAL USE OF NET PROCEEDS $1,282,078 100% $1,494,140 100%
16
<PAGE>
The Company plans to open new facilities in Tsuen Wan, Hong Kong and
Macau at the beginning of fiscal year 1998. The Company signed an offer to
lease agreement (subject to the formal lease agreement to be signed later on
this year) with respect to Tsuen Wan center. The lease terms for Macau
center are currently being reviewed by the Company and the lease agreement
is expected to be signed after final terms are negotiated. The Company
plans to apply the portion of the proceeds received under this Offering
towards the purchase of exercise equipment for these two proposed centers
and for the payment of the lease deposit for the Macau center. The Company
expects that the tenant improvement costs for each new center will be
approximately HK$19,375,000 (US$2,500,000) each, and the Company intends to
finance them primarily by the internally generated cashflow of the Company,
with the exception of the contribution from the use of proceeds towards the
improvement of the Tsuen Wan center, as set forth above. There can be no
assurances given that the lease agreements for the two proposed centers will
be signed, nor that the Company will open the two proposed centers as
currently planned. In the event the Maximum Offering is not obtained, the
Company may have to use its alternative sources of financing (see
"Management Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources") or seek an additional
financing, and consequently there is a possibility that the opening of the
new centers may be delayed or postponed by the Company, if such financing
sources are not readily available.
The Company believes that the net proceeds of this Offering, available
sources (such as the existing cash balance) and cash flow from operations,
bank lines of credit and other external sources of debt and equity
financing, are adequate to finance the Company's operating and debt service
requirements for the next twelve months. The amounts actually expended for
the proposed purposes described above could vary significantly depending on
the Company's assessment of the various proposed financing initiatives and
expansion of facilities. Pending such uses, the Company intends to invest
the net proceeds from this Offering in short-term interest-bearing
securities.
The allocation of net proceeds set forth above represents the Company's
current estimates based upon its current plans and upon certain assumptions
regarding its existing facilities and changing competitive conditions, the
ongoing evaluation and determination of the commercial potential of the
Company's services and the Company's ability to establish additional
facilities. If any of these factors change, the Company may reallocate some
of the net proceeds within or between the above-described categories. The
Company believes that the funds generated by this Offering, together with
current resources, will be sufficient to fund working capital and capital
requirements for at least 12 months from the date of this Prospectus.
The foregoing represents the Company's best estimate as to how the
proceeds of the Offering will be expended. The Company reserves the right
to redirect any portion of the funds either amongst the items referred to
above, or such other projects of the Company as management considers to be
in the best interest of the Company.
17
<PAGE>
DILUTION
As of June 30, 1997, the Company had the historical net tangible book
value of $5,135,000 or $0.68 per share of issued and outstanding Common
Stock (based on 7,500,000 post-split shares of Common Stock outstanding).
After giving effect to the sale of the Securities offered hereby at an
offering price of $4.00 per share and $0.33 per warrant (less underwriting
discounts and estimated expenses of this Offering) and the application of
the net proceeds therefrom, the pro forma net tangible book value at that
date would have been $6,417,000 or $0.82 per share (based on 7,875,000 post-
split shares of Common Stock outstanding). This represents an immediate
increase in net tangible book value of $0.14 per share to existing
stockholders and an immediate dilution of $3.18 per share or 79.50% to new
investors in this Offering. If the public offering price is higher or lower,
the dilution of the investors in this Offering will be, respectively,
greater or lower.
The difference between the public offering price per share of Common
Stock in this Offering and the net tangible book value per share of Common
Stock after this Offering constitutes the dilution to investors in this
Offering. Net tangible book value per share is determined by dividing the
net tangible book value (total assets less intangible assets and total
liabilities) by the number of outstanding shares of Common Stock.
The following table illustrates such per share dilution:
Assumed initial public offering price (per share) $4.00
Net tangible book value per share at
June 30, 1997 $0.68
Increase in net tangible book value per share
after the Offering, attributable to the proceeds
of the Offering(1) $0.14
------
Pro forma net tangible book value per share after
the Offering (1) $0.82
-------
Dilution per share to new investors $3.18
=======
Sales by Selling Stockholders in this Offering will reduce the number of
shares held by the existing stockholders to 7,312,500 or 93% of the total
shares of Common Stock to be outstanding after the Offering (based on the
total of 7,875,000 shares of Common Stock to be outstanding after the
Offering). Sales by Selling Stockholders in this offering will also
increase the number of shares held by new investors to 562,500 or 7.14% of
the total shares of Common Stock to be outstanding after the offering
(excluding the shares of Common Stock issuable upon the exercise of 375,00
Warrants offered hereby or the shares of Common Stock issuable upon exercise
of the Representative's Warrants) (7.8% if the Underwriters' over-allotment
options are exercised in full). See "Principal and Selling Shareholders."
18
<PAGE>
PRICE RANGE OF SECURITIES
The Company's Common Stock has been listed on the Bulletin Board of the
NASD's over-the-counter market under the symbol PFIT, since December 1996,
but has been traded only sporadically, so there are no historical quotes
available. The Company has applied for inclusion of the Common Stock on the
NASDAQ Small Cap Market ("NASDAQ").
The last reported closing bid price of Common Stock reported by NASD was
on August 26, 1997 at $3.25 per share of Common Stock. There has been no
trading activity since that time. As of October 1, 1997, there were
approximately 624 record holders of the Company's Common Stock. The Company
effected a 1.33-for-1 reverse split of its Common Stock in October, 1997.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock and
does not anticipate paying any cash dividends in the future. Physical
Health Centre Hong Kong Limited, the subsidiary of the company acquired by
the Company in October, 1996, paid dividends out in 1995. The Company
currently intends to retain future earnings, if any, to fund the development
and growth of its business.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1997 and as adjusted to give effect to the sale by the Company of
375,000 shares at an offering price of $4.00 per share and 375,000 Warrants
at an offering price of $0.33 per Warrant, and the application of the net
proceeds of $1,282,078 therefrom.
(In thousands)
At June 30, 1997
----------------
Actual Actual As Adjusted (1) (2)
------ ------ -------------------
HK$ US$ US$
(unaudited)
SHORT-TERM DEBT:
Short-term bank borrowings $6,968 $899 $899
Current portion of long-term
bank loan 7,468 964 964
Current portion of capital
lease obligations 4,909 633 633
------ ------ ------
Total short-term debt 19,345 2,496 2,496
------ ------ ------
LONG-TERM DEBT:
Long-term bank loans 3,894 502 502
Long-term loans from
third parties 13,916 1,796 1,796
Loans from minority shareholders
of subsidiaries 5,160 666 666
Capital lease obligations -
non current portion 10,333 1,333 1,333
------- ------ ------
Total long-term debt 33,303 4,297 4,297
MINORITY INTEREST: 6,074 784 784
SHAREHOLDERS' EQUITY:
Common stock, $0.001 par value
100,000,000 shares authorized
Issued and outstanding:
10,000,000 shares outstanding,
and 10,375,000 shares as
adjusted for the Offering 78 10 10
Additional paid-in capital 0 0 1,282
Cumulative currency translation
adjustments 101 13 13
Retained earnings 39,617 5,112 5,112
------- ------- -------
Total shareholders' equity 39,796 5,135 6,417
------- ------- --------
Total capitalization $79,173 $10,216 $11,499
======= ======= =======
(1) Adjusted to give effect to the sale of 375,000 shares in this Offering
(not including the 56,250 shares underlying the Representative's over-
allotment option and 56,250 shares issuable upon the exercise of the
Representative's over-allotment option to purchase additional 56,250
Warrants; also excludes any shares of Common stock issuable upon exercise of
the Representative's Warrants. See "Plan of Distribution").
(2) Excludes 375,000 shares issuable upon the exercise of the Warrants
offered in this Offering.
20
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except per share data)
The following selected financial data are qualified by reference to, and
should be read in conjunction with, the Consolidated Financial Statements,
related Notes to Consolidated Financial Statements and Report of Independent
Public Accountants, and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained elsewhere herein. The
following tables summarize certain selected financial data of the Company
for the fiscal years/period ended September 30, 1994, December 31, 1995,
December 31, 1996 and six months periods ended June 30, 1996 and 1997. The
data has been derived from Consolidated Financial Statements included
elsewhere in this Prospectus that were audited by Arthur Andersen & Co.,
independent public accountants, except for the information relating to the
six months ended June 30, 1996 and 1997, which is unaudited but in the
opinion of the Company's management reflects all adjustments, consisting
only of normal recurring adjustments that the Company considers necessary
for a fair presentation of the information in accordance with generally
accepted accounting principles.
<TABLE>
<CAPTION>
Year ended Year ended Six months Six months
December 31, ended June 30, ended June 30,
---------- ------------- ------------- -------------------
9/30/1994 12/31/1995 1996 1996 1996 1997 1997
HK$ HK$ HK$ US$ HK$ HK$ US$
(audited) (audited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Operating Revenues:
Fitness services $24,229 $28,075 $39,054 $5,039 $16,817 $30,849 $3,981
Beauty treatments 42,463 53,059 72,260 9,324 35,551 35,033 4,520
Others 2,959 4,128 1,901 245 1,808 63 8
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
revenues 69,651 85,262 113,215 14,608 54,176 65,945 8,509
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating Expenses:
Salaries &
commissions 17,787 18,609 23,797 3,071 10,914 16,083 2,075
Rent & related
expenses 16,947 18,250 21,185 2,734 10,313 13,108 1,691
Depreciation 6,877 8,885 11,393 1,470 5,499 6,091 786
Other selling &
administrative
expenses 14,014 15,083 23,178 2,990 13,828 14,318 1,847
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Operating
Expenses 55,625 60,827 79,553 10,265 40,554 49,600 6,400
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (Loss)
from operations 14,026 24,435 33,662 4,343 13,622 16,345 2,109
---------- ---------- ---------- ---------- ---------- ---------- ----------
Other expenses
(income), net (879) (790) (885) (114) (389) (1,254) (162)
Interest expenses 1,157 1,158 841 108 377 1,249 161
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total non-operating
(income)
expenses 278 368 (44) (6) (12) (5) (1)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before
income taxes
and minority
interests 13,748 24,067 33,706 4,349 13,634 16,350 2,110
Provision for
income taxes 1,779 4,434 6,946 896 3,266 2,677 345
Provisions for
deferred taxes - - 1,753 226 877 669 86
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss)
before minority
interests 11,969 19,633 25,007 3,227 9,491 13,004 1,679
Minority interests 1,149 2,100 2,211 285 765 1,214 157
Net Income 10,820 17,533 22,796 2,942 8,726 11,790 1,522
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income
per share (2)(3) $1.08 $1.75 $2.28 $0.29 $0.87 $1.18 $0.15
========== ========== ========== ========== ========== ========== ==========
Weighted average
number of shares
outstanding 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000
========== ========== ========== ========== ========== ========== ==========
</TABLE>
21
<PAGE>
(1) Translation of amounts from Hong Kong Dollars into United States
Dollars (US$) for the convenience of the reader has been made at the
exchange rate quoted by the South China Morning Post on June 30, 1997 of
US$1.00 = HK$7.75. No representation is made that the Hong Kong Dollar
amounts could have been, or could be, converted into United States Dollar,
at that rate on June 30, 1997 or at any other certain rate.
(2) The earnings per share is calculated using the common stock and common
stock equivalents, as if the shares existing as of this Registration
Statement had been outstanding throughout periods presented.
(3) 1994 and 1995 pro-formas. The results were stated as if Physical
Limited were a holding company.
<TABLE>
<CAPTION>
Year ended Six months As Adjusted
December 31, ended June 30, (1) (2) (3)
------------ -------------- -----------
1995 1995 1996 1996 1997 1997
---- ---- ---- ---- ---- ----
HK$ US$ HK$ US$ HK$ US$ US$
(audited) (audited) (unaudited)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Current assets $30,403 $3,923 $40,336 $5,205 $40,090 $5,173 $6,455
Total assets 71,534 9,230 110,149 14,214 144,585 18,656 19,938
Current liabilities 41,645 5,374 54,549 7,039 62,990 8,127 8,127
Long-term
obligations 24,817 3,202 27,624 3,565 41,799 5,394 5,394
Working capital (11,242) (1,451) (14,213) (1,834) (22,900) (2,954) (1,672)
Obligations under
finance leases 181 23 3,955 511 15,242 1,966 1,966
Deferred income taxes - - 1,753 226 2,422 313 313
Minority interest 4,540 586 4,857 627 6,074 784 784
Shareholders' equity 5,072 654 27,976 3,610 39,796 5,135 6,417
_____________________
</TABLE>
(1) Assumes receipt of net proceeds from the offering of $1,282,078
(2) Excludes (i) 56,250 shares of Common Stock included in the
Representative's over-allotment option for the Shares and the 56,250 shares
of Common Stock issuable upon the exercise of the Representative's over-
allotment option with respect to the Warrants; (ii) the shares of Common
Stock issuable upon exercise of the Representative's Warrants to be issued
in conjunction with this Offering; and (iii) 375,000 shares of Common Stock
reserved for issuance under the Company's stock option plans. See
"Description of Securities" and "Plan of Distribution".
(3) Excludes 375,000 shares issuable upon exercise of the Warrants offered
hereby.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with "Selected
Consolidated Financial Data" and the Consolidated Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.
OVERVIEW
- --------
The Company, through its predecessor companies and its subsidiaries, has
been an established commercial operator of fitness and spa centers in Hong
Kong and China since 1986 (see "Company - History"). The Company currently
operates nine facilities: six in Hong Kong and three in China. Management
believes that the Company is one of the top providers of fitness facilities
and spa and beauty treatment services in Hong Kong and China, with
approximately 55,000 members. The Company offers to its customers, at each
location, access to a wide range of U.S.- styled fitness and spa services.
22
<PAGE>
The Company was incorporated on September 21, 1988 in the state of
Delaware under the name of "Foreclosed Realty Exchange, Inc", a development
stage company seeking acquisitions with no material assets or liabilities.
Prior to acquisition of Physical Beauty & Fitness Holdings Limited, a
British Virgin Islands corporation ("Physical Limited"), the Company had no
revenue producing operations, but planned to enter into joint ventures
and/or acquisitions originally in the area of real estate, to expand its
operations. In October, 1996, the Company closed a transaction with Ngai
Keung Luk (Serleo), a 100% shareholder of Physical Limited, whereby the
Company entered into a Share Exchange Agreement with Ngai Keung Luk
(Serleo), pursuant to which the Company issued 8,000,000 pre-split
(6,000,000 post-split) shares of its Common Stock to Ngai Keung Luk (Serleo)
in exchange for all of the outstanding shares of Physical Limited (the
"Closing"). At the Closing, the then current management of the Company
resigned and was replaced by the current management of the Company. See
"Management."
The Company derives its revenues from two main lines of business: fitness
and spa services. The revenues derived from fitness services steadily
increased from HK$28,075,000 (US$3,623,000) in the fiscal year ended
December 31, 1995 to HK$39,054,000 (US$5,039,000) in the fiscal year ended
December 31, 1996. The revenue from beauty treatment also increased
steadily from HK$53,059,000 (US$6,846,000) in the year ended December 31,
1995 to HK$72,260,000 (US$9,324,000) in the fiscal year ended December 31,
1996. The increase in total operating revenues in fiscal 1996 amounted to
33%.
RESULTS OF OPERATIONS
The Company's revenues are derived from its two main lines of business of
fitness and spa services in three principal ways: sale of memberships to
fitness facilities, monthly membership fees and the sale of beauty
treatments . The sale of beauty products and exercise clothing also
contributes an insignificant amount to the total revenues. In respect to
fitness services, customers are invited to join as a member at a fee
currently set at HK$2,000(US$258) for one person. (A current promotion
allows two people for one joining fee.) A monthly subscription fee of
HK$280(US$36) is charged to each customer for the usage of the fitness
center and spa area.
In respect to beauty treatments, the customers may purchase single
treatments, or in packages of ten or more treatments, with quantity
discounts available. There is a wide range of beauty treatments available
at prices ranging from HK$200 (US$26) to HK$3,000 (US$388).
The following table sets forth selected income data as a percentage of
total operating revenue for the periods indicated.
<TABLE>
RESULTS OF OPERATIONS
<CAPTION>
Years Ended Six Months Ended
----------- ----------------
September 30, December 31, June 30,
------------- ------------ --------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C>
Operating Revenues 100.00% 100.00% 100.00% 100.00% 100.00%
Total operating expenses 79.86% 71.34% 70.27% 74.86% 75.21%
Operating income 20.13% 28.66% 29.73% 25.14% 24.79%
Income before income taxes
and minority interests 19.73% 28.23% 29.77% 25.17% 24.79%
Provision for income and
deferred taxes 2.55% 5.20% 7.68% 7.65% 5.07%
Minority interests 1.65% 2.46% 1.95% 1.41% 1.84%
Net income 15.53% 20.56% 20.14% 16.11% 17.88%
====== ====== ====== ====== ======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) COMPARED
---------------------------------------------------
TO SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED).
---------------------------------------------
OPERATING REVENUES. The Company's operating revenues enjoyed strong
growth in the first six months of 1997 as compared to the first six months
of 1996. Operating revenues for the first six months of 1997 totaled
HK$65,945,000 (US$8,509,000) compared to HK$54,176,000 (US$6,990,000) in the
first six months of 1996, representing an increase of 22%. Operating
revenues derived by the Company's fitness services increased 83% to
HK$30,849,000 (US$3,981,000) compared to HK$16,817,000 (US$2,170,000) in the
first six months of 1996. Fitness revenues as a percentage of total
revenues were 47% in the first six months of 1997 as compared to 31% in the
first six months of 1996.
23
<PAGE>
Operating revenues from the Company's beauty treatment business totaled
HK$35,033,000 (US$4,520,000) compared to HK$35,551,000 (US$4,587,000) in the
first six months of 1996, representing a decrease of 1%. This was mainly
due to the Company's focus on the fitness business during that period of
time, which resulted from the relocation of the Company's two largest
centers in Hong Kong to larger locations and Company's advertising of such
relocation and new premises. The Company also advertised the change in its
membership system, which drew more attention to the fitness business.
Beauty treatment revenues as a percentage of total revenues were 53% in the
first six months of 1997 as compared to 66% in the first six months of 1996.
Operating revenues derived from the Company's Hong Kong locations remain
an important contributor to the Company's business, generating HK$53,495,000
(US$6,903,000), or 81% of total operating revenues in the first six months
of 1997 as compared to HK$40,836,000 (US$5,269,000) or 75% of total
operating revenues in the first six months of 1996.
Operating revenues derived from the Company's China locations generated
HK$12,450,000 (US$1,606,000) or 19% of total operating revenues in the first
six months of 1997 as compared to HK$13,340,000 (US$1,721,000) or 25% of
total operating revenues in the first six months of 1996.
OPERATING EXPENSES. The Company's operating expenses for the first six
months of 1997 totaled HK$49,600,000 (US$6,400,000) compared to
HK$40,554,000 (US$5,233,000) in the first six months of 1996, representing
an increase of 22%. Total operating expenses, after taking into account all
corporate expenses, were effectively controlled at 75% of total operating
revenue, the same level as last year. This reflects the Company benefiting
from the economies of scale in connection with the expansion of its business
in China.
Operating expenses associated with the Company's Hong Kong locations were
HK$40,734,000 (US$5,256,000), representing an increase of 33% as compared to
HK$30,596,000 (US$3,948,000) in the first six months of 1996. Hong Kong
operating expenses represented 82% of total operating expenses in the first
six months of 1997 as compared to 75% of total operating expenses in the
first six months of 1996. The increase in operating expenses was primarily
due to inflation and additional marketing, administrative and salary costs
as a result of increased revenues.
Operating expenses associated with the Company's China locations were
HK$8,866,000 (US$1,144,000), representing a decrease of 11% as compared to
HK$9,958,000 (US$1,285,000) in the first six months of 1996. Operating
expenses in China represented 18% of total operating expenses in the first
six months of 1997 as compared to 25% of total operating expenses in the
first six months of 1996.
TOTAL NON-OPERATING EXPENSES (INCOME). Total non-operating expenses
(income) for the first six months of 1997 totaled net income of HK$5,000
(US$600) compared to HK$12,000 (US$1,500) in the first six months of 1996,
representing a decrease of HK$7,000 (US$900) or 58%.
PROVISION FOR INCOME TAXES. Provision for income taxes for the first six
months of 1997 totaled HK$3,346,000 (US$431,000) compared to HK$4,143,000
(US$534,000) in the first six months of 1996, representing a decrease of
19%. The effective tax rate of operating income was 20% and 30%
respectively. The decrease in the effective tax rate of operating income
was due to the increasing contribution from Hong Kong operations at the
income tax rate of 16.5% compared with the tax rate of 33% for China
operations.
NET INCOME. The Company's net income for the first six months of 1997
totaled HK$11,790,000 (US$1,522,000) compared to HK$8,726,000
(US$1,125,000) for the first six months of 1996, representing an increase of
35%. The net income margin in the first six months of 1997 was 18% compared
to 16% in the first six months of 1996, representing an increase of 13%.
The increased net income reflects intensified marketing efforts that
resulted in an additional contribution from existing centers in Hong Kong
and China.
24
<PAGE>
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED
--------------------------------------------
TO FISCAL YEAR ENDED DECEMBER 31, 1995
--------------------------------------
OPERATING REVENUES. The Company's operating revenues increased
significantly in the fiscal year ended December 31, 1996 as compared to the
fiscal year ended December 31, 1995. Operating revenues for the fiscal year
ended December 31, 1996 totaled HK$113,215,000 (US$14,608,000) compared to
HK$85,262,000 (US$11,002,000) in the fiscal year ended December 31, 1995,
representing an increase of 33%. Operating revenues derived by the
Company's fitness services increased 39% to HK$39,054,000 (US$5,039,000)
compared to HK$28,075,000 (US$3,623,000) in the fiscal year ended December
31, 1995. Fitness revenues as a percentage of total revenues were 34% in
the fiscal year ended December 31, 1996 as compared to 33% in the fiscal
year ended December 31, 1995. The increased revenue reflects increased
marketing efforts for the Hong Kong locations and the opening of the Dalian,
China center.
Operating revenues from the Company's beauty treatment business totaled
HK$72,260,000 (US$9,324,000) compared to HK$53,059,000 (US$6,846,000) in the
fiscal year ended December 31, 1995, representing an increase of 36%.
Beauty treatment revenues as a percentage of total revenues were 64% in the
fiscal year ended December 31, 1996 as compared to 62% in the fiscal year
ended December 31, 1995.
Operating revenues derived from the Company's Hong Kong locations remain
an important contributor to the Company's business, generating HK$83,822,000
(US$10,816,000), or 74% of total operating revenues in the fiscal year ended
December 31, 1996 as compared to HK$69,243,000 (US$8,935,000) or 81% of
total operating revenues in the fiscal year ended December 31, 1995.
Operating revenues derived from the Company's China locations generated
HK$29,393,000 (US$3,792,000) or 26% of total operating revenues in the
fiscal year ended December 31, 1996 as compared to HK$16,019,000
(US$2,067,000) or 19% of total operating revenues in the fiscal year ended
December 31, 1995.
The number of centers increased to nine at the fiscal year ended December
31, 1996 compared to eight centers at the fiscal year ended December 31,
1995, reflecting the opening of the Dalian, China center in April, 1996.
OPERATING EXPENSES. The Company's operating expenses for the fiscal year
ended December 31, 1996 totaled HK$79,553,000 (US$10,265,000) compared to
HK$60,827,000 (US$7,849,000) in the fiscal year ended December 31, 1995,
representing an increase of 31%. Operating expenses as a percentage of
total revenues were 70% in the fiscal year ended December 31, 1996 as
compared to 71% in the fiscal year ended December 31, 1995.
Operating expenses associated with the Company's Hong Kong locations
were HK$60,929,000 (US$7,862,000), representing an increase of 18% as
compared to HK$51,598,000 (US$6,658,000) in the fiscal year ended December
31, 1995. Hong Kong operating expenses represented 77% of total operating
expenses in the fiscal year ended December 31, 1996 as compared to 85% of
total operating expenses in the fiscal year ended December 31, 1995.
Operating expenses associated with the Company's China locations were
HK$18,624,000 (US$2,403,000), representing an increase of 102% as compared
to HK$9,229,000 (US$1,191,000) in the fiscal year ended December 31, 1995.
Operating expenses in China represented 23% of total operating expenses in
the fiscal year ended December 31, 1996 as compared to 15% of total
operating expenses in the fiscal year ended December 31, 1995. The increase
in operating expenses was primarily due to inflation and additional
marketing, administrative, salary and rental costs incurred by the new
center in Dalian, China.
TOTAL NON-OPERATING EXPENSES (INCOME). Total non-operating expenses
(income) for the fiscal year ended December 31, 1996 totaled net income of
HK$44,000 (US$6,000) compared to a net expense of HK$368,000 (US$47,000) in
the fiscal year ended December 31, 1995, representing an increase of
HK$412,000 (US$53,000) or 112%.
PROVISION FOR INCOME TAXES. Provision for income taxes for the fiscal
year ended December 31, 1996 totaled HK$8,699,000 (US$1,122,000) compared to
HK$4,434,000 (US$572,000) in the fiscal year ended December 31, 1995,
representing an increase of 96%. The effective tax rate of operating income
was 26% and 18% respectively. The increase in the effective tax rate of
operating income was due to the 33% income tax rate in China and a provision
of deferred taxation of HK$1,753,000 (US$226,000) in Hong Kong. As the
contribution from China operations increased, the higher income tax rate
applicable in China therefore made up a larger portion of the tax provision.
NET INCOME. The Company's net income for the fiscal year ended December
31, 1996 totaled HK$22,796,000 (US$2,942,000) compared to HK$17,533,000
(US$2,262,000) in the fiscal year ended December 31, 1995, representing an
increase of 30%. The net income margin for the fiscal year ended December
31, 1996 was 20% and was 21% for the fiscal year ended December 31, 1995.
The increased net income reflects intensified marketing efforts that
resulted in an additional contribution from existing centers in Hong Kong
and China and a contribution from the new center in Dalian, China that
opened in April, 1996.
25
<PAGE>
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1994
- ----------------------------------------------------------------------------
OPERATING REVENUES. The Company's operating revenues increased
significantly in the fiscal year ended December 31, 1995 as compared to the
fiscal year ended September 30, 1994. Operating revenues for the fiscal
year ended December 31, 1995 totaled HK$85,262,000 (US$11,002,000) compared
to HK$69,651,000 (US$8,987,000) in the fiscal year ended September 30, 1994,
representing an increase of 22%. Operating revenues derived by the
Company's fitness services increased 16% to HK$28,075,000 (US$3,623,000)
compared to HK$24,229,000 (US$3,127,000) in the fiscal year ended September
30, 1994. Fitness revenues as a percentage of total revenues were 33% in
the fiscal year ended December 31, 1995 as compared to 35% in the fiscal
year ended September 30, 1994.
Operating revenues for the Company's beauty treatment business totaled
HK$53,059,000 (US$6,846,000) compared to HK$42,463,000 (US$5,478,000) in the
fiscal year ended September 30, 1994, representing an increase of 25%.
Beauty treatment revenues as a percentage of total revenues were 62% in the
fiscal year ended December 31, 1995 as compared to 61% in the fiscal year
ended September 30, 1994.
Operating revenues derived from the Company's Hong Kong locations remain
an important contributor to the Company's business, generating HK$69,243,000
(US$8,935,000), or 81% of total operating revenues in the fiscal year ended
December 31, 1995 as compared to HK$61,316,000 (US$7,912,000) or 88% of
total operating revenues in the fiscal year ended September 30, 1994.
Operating revenues derived from the Company's China locations generated
HK$16,019,000 (US$2,067,000) or 19% of total operating revenues in the
fiscal year ended December 31, 1995 as compared to HK$8,335,000
(US$1,076,000) or 12% of total operating revenues in the fiscal year ended
September 30, 1994.
The number of centers increased to eight at the fiscal year ended
December 31, 1995 compared to seven centers at the fiscal year ended
September 30, 1994, reflecting the opening of the Hongqiao, Shanghai center
in September, 1995.
OPERATING EXPENSES. The Company's operating expenses for the fiscal year
ended December 31, 1995 totaled HK$60,827,000 (US$7,849,000) compared to
HK$55,625,000 (US$7,177,000) in the fiscal year ended September 30, 1994,
representing an increase of 9%.
Operating expenses as a percentage of total revenues were 71% in the
fiscal year ended December 31, 1995 as compared to 80% in the fiscal year
ended September 30, 1994.
Operating expenses associated with the Company's Hong Kong locations were
HK$51,598,000 (US$6,658,000), representing an increase of 3% as compared to
HK$50,232,000 (US$6,481,000) in the fiscal year ended September 30, 1994.
Hong Kong operating expenses represented 85% of total operating expenses in
the fiscal year ended December 31, 1995 as compared to 90% of total
operating expenses in the fiscal year ended September 30, 1994.
Operating expenses associated with the Company's China locations were
HK$9,229,000 (US$1,191,000), representing an increase of 71% as compared to
HK$5,393,000 (US$696,000) in the fiscal year ended September 30, 1994.
Operating expenses in China represented 15% of total operating expenses in
the fiscal year ended December 31, 1995 as compared to 10% of total
operating expenses in the fiscal year ended September 30, 1994. The
increase in operating expenses was primarily due to inflation and additional
marketing, administrative, salary and rental costs incurred by the new
center in Hongqiao, Shanghai center that opened in September, 1995.
26
<PAGE>
TOTAL NON-OPERATING EXPENSES (INCOME). Total non-operating expenses for
the fiscal year ended December 31, 1995 totaled a net expense of HK$368,000
(US$47,000) compared to a net expense of HK$278,000 (US$36,000) in the
fiscal year ended September 30, 1994, representing an increase of HK$90,000
(US$12,000) or 32%.
PROVISION FOR INCOME TAXES. Provision for income taxes for the fiscal
year ended December 31, 1995 totaled HK$4,434,000 (US$572,000) compared to
HK$1,779,000 (US$230,000) in the fiscal year ended September 30, 1994,
representing an increase of 149%. The effective tax rate of operating
income was 18% and 13% respectively. The increase in the effective tax rate
of operating income was due to the 33% income tax rate in China. As the
contribution from China operations increased, the higher income tax rate
applicable in China therefore made up a larger portion of the tax provision.
NET INCOME. The Company's net income for the fiscal year ended December
31, 1995 totaled HK$17,533,000 (US$2,262,000) compared to HK$10,820,000
(US$1,396,000) in the fiscal year ended September 30, 1994, representing an
increase of 62%. The net income margin for the fiscal year ended December
31, 1995 was 21% compared to 16% for the fiscal year ended September 30,
1994. The increased net income reflects ongoing marketing efforts that
resulted in an additional contribution from existing centers in Hong Kong
and China and a contribution from the new Hongqiao, Shanghai center that
opened in September, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through cash generated
from operations, short-term bank credit, long-term bank loans, long term
loans from third parties (outside investors - see Notes to Financial
Statements) and minority shareholders of subsidiaries, advances from
customers relating to prepaid fitness and spa income, and leasing
arrangements with financial institutions.
Short-term bank loans exceeded the cash and bank balances by HK$4,794,000
(US$618,000) and HK$3,118,000 (US$400,000), which gave rise to the negative
cash and cash equivalent balances for the respective periods ended June 30,
1997 and December 31, 1996, while total indebtedness at June 30, 1997 was
HK$52,648,000 (US$6,793,000) and HK$30,725,000 (US$3,966,000) at December
31, 1996.
Net cash provided by operating activities were HK$32,234,000
(US$4,159,000), HK$31,651,000 (US$4,084,000), HK$32,345,000 (US$4,172,000)
and 22,833,000 (US$2,946,000) for Fiscal Year 1994, Fiscal Year 1995, Fiscal
Year 1996, and the six-month period ended June 30, 1997, respectively. The
Company's operating activities are historically financed by cash flows from
operations. Net cash used in investing activities were HK$23,427,000
(US$3,023,000), HK$14,274,000 (US$1,842,000), HK$24,266,000 (US$3,132,000)
and HK$28,765,000 (US$3,711,000) for Fiscal Year 1994, Fiscal Year 1995,
Fiscal Year 1996 and the six-month period ended June 30, 1997, primarily as
a result of expenditures for property, plant and equipment. Net cash used
in financing activities, which mainly include proceeds from bank loans, net
interest and repayment, were HK$2,816,000 (US$363,000), HK$14,952,000
(US$1,929,000), HK$10,156,000 (US$1,308,000) and HK$4,225,000 (US$545,000)
in Fiscal Year 1994, Fiscal Year 1995 and Fiscal Year 1996. Net cash
provided by financing activities was HK$4,225,000 (US$545,000) in the six-
month period ended June 30.1997.
The Company obtained a term loan in the amount of HK$1,000,000
(US$129,000) from Shanghai Commercial Bank Limited in Fiscal Year 1996 in
connection with payment of rental deposits for the new Causeway Bay center
(relocation of an existing center). This loan is secured by leasehold
property in Hong Kong owned by relatives of Mr. Luk and is repayable in one
lump sum on November 6, 1997. No consideration has been paid by the Company
for such security. As of June 30, 1997, the outstanding principal amount of
this loan was HK$1,000,000 (US$129,000). The Company does not anticipate
any difficulty in repaying the loan on a timely basis, regardless of the
success of the Offering.
The Company entered into a capital lease agreement with East Asia Finance
Company Limited in April, 1996 for the purchase of exercise equipment in the
amount of HK$1,759,200 (US$227,000) for the Dalian, China, center. The
lease is repayable in thirty six (36) monthly installments, commencing
April, 1996. In addition, the Company secured a loan of HK$3,168,000
(US$409,000) from Dao Heng Finance in August 1996 for the equipment for a
proposed new center in Zhongshan, China, however, the loan was fully repaid
in February 1997.
The Company has revolving lines of credit with three banks - The
Kwangtung Provincial Bank, Dao Heng Bank, and Shanghai Commercial Bank
Limited. As of June 30, 1997, these lines of credit allow for aggregate
borrowings of up to HK$4,700,000 (US$606,000). As of June 30, 1997, the
Company had HK$4,000,000 (US$520,000) of loans outstanding under these
revolving lines of credit. The Company draws down from the lines of credit
primarily for general working capital purposes. The lines of credit contain
covenants requiring the maintenance of minimum net worth.
27
<PAGE>
Consistent with the general practice of the fitness and spa industry, the
Company receives prepaid memberships to fitness facilities, which are non-
refundable, and spa treatment dues from its customers. This practice
creates working capital that the Company generally utilizes for working
capital purposes. However, the unused portion of the pre-paid membership
and spa treatment dues is characterized as deferred income, a current
liability, for accounting purposes.
The Company's trade receivable balance at June 30, 1997, was HK$6,542,000
(US$844,000). The Company has never experienced any significant problems
with collection of accounts receivable from its customers.
Capital expenditure for Fiscal Years 1994, 1995 and 1996, and the six-
month period ended June 30, 1997, were HK$23,435,000 (US$3,024,000),
HK$20,427,000 (US$2,636,000), HK$25,375,000 (US$3,274,000) and HK$28,768,000
(US$3,712,000) respectively. The Company believes that cash flow generated
from its operations, the proceeds form this Offering and its existing credit
facilities should be sufficient to satisfy its working capital and capital
expenditure requirements for at least the next 12 months.
28
<PAGE>
BUSINESS OF THE COMPANY
GENERAL
The Company's fitness and spa centers are located in or near urban areas
in highly populated areas of Hong Kong and major metropolitan cities in
China and most of them are operated under long-term leases. With the
exception of Mei Foo center, a portion of which is owned by the Company (see
"Business - Properties"), the Company does not own the real property on
which the centers are located, but owns the leasehold improvements and
equipment with respect to each center. Generally, the Company's centers
average 20,000 square feet and include a workout area including a broad
range of fitness equipment, changing room, sauna and steam facilities and a
separate area devoted exclusively to professional spa and beauty treatment
programs. Each center typically includes a laser TV room with lounge,
health drink bar and sells a range of exercise clothing, European beauty
products and cosmetics.
The Company's strategy is to grow through expansion of its fitness and
spa facilities in Hong Kong and China, as well as to explore the
opportunities for its fitness and spa services in other countries of Far
East. The Company intends to build on its 11-year continuous operating
presence in Hong Kong, the relationships in China established by the
Company's executives and senior staff and the Company's policy of offering
what it believes are the state-of-the-art exercise and spa facilities and
beauty treatments at affordable prices in their respective markets. In
order to implement its strategic plan and marketing strategy, the Company
intends to increase its expansion capability in China, Hong Kong and Macau
through the establishment of new fitness and spa locations (see also "Use of
Proceeds"). In addition, the Company is closely monitoring potential
opportunities in the Philippines, Taiwan, Malaysia and Indonesia.
During 1996, the Company and its subsidiaries recognized HK$113.2 million
(US$14.6 million) in revenue as a result of the additional contributions of
its two Shanghai centers and its center in Dalian, China. The Company's
results of operations for the twelve months ended December 31, 1996 were
positively impacted by the opening of the Dalian, China branch.
ORGANIZATION
The Company's operations are conducted through its subsidiaries in Hong
Kong and Sino-foreign joint ventures in China. A number of the Company's
subsidiaries have been incorporated in the British Virgin Islands, primarily
for tax reasons. Such structure provides greater flexibility for the
Company in obtaining tax benefits, especially in case of corporate accounts.
See "Taxation". Set forth below is the description of the Company's
subsidiaries and their respective roles in the organizational structure of
the Company.
<TABLE>
<CAPTION>
Date of Equity Interest
acquisition/ Place of owned by the Principal activities
Name of Company formation incorporation Company ---------------------
- --------------- ---------- -------------- ---------------
Direct Indirect
------ --------
<S> <C> <C> <C> <C> <C>
Physical Beauty & Fitness March 8, 1996 BVI 100% - Investment holding
Holdings Limited ("Physical
Limited")
Physical Health Centre March 2, 1990 Hong Kong 91.4% - Operating 5 Fitness
Hong Kong Limited ("Physical Centres in Hong Kong
Hong Kong Limited")
Regent Town Holdings Limited September 20, BVI 88.5% - Investment holding
("Regent") 1993
Supreme Resources Limited September 29, Hong Kong 70% - Operating a beauty
("Supreme") 1994 treatment center in
Hong Kong
Physical Health Centre September 29, Hong Kong 100% - Investment holding
(Zhong Shan) Limited 1994 (formerly operating a
("Zhongshan Physical") beauty treatment
formally known as Famerich center in Hong Kong
Development Limited)
Zhongshan Physical Ladies' October 29, The PRC - 95% Operating a Fitness
Club Ltd. (owned by 1996 Centre in Zhongshan,
Zhongshan Physical) the PRC
Ever Growth Limited ("Ever September 29, Hong Kong 100% - Property holding
Growth") 1994
Proline Holdings Limited September 28, BVI - 88.5% Investment holding
("Proline") (wholly 1994
owned by Regent)
Shanghai Physical Ladies' September 28, Hong Kong - 88.5% Investment holding
Club Company ("Shanghai 1994
Physical")(wholly owned
by Proline)
Shanghai Physical Ladies' September 28, The PRC - 88.5% Operating two Fitness
Club Co., Ltd. (owned by Centres in Shanghai,
Shanghai Physical) the PRC
Mighty System Limited December 15, BVI 100% - Provision of marketing
("Mighty") 1994 services for cosmetic
sales
Jade Regal Holdings March 15, 1994 BVI 100% - Investment holding
Limited ("Jade Regal")
Physical Health Centre March 15, 1996 Hong Kong - 100% Investment holding
(Dalian Physical") (wholly
owned by "Jade Regal")
Dalian Physical Ladies' March 15, 1996 The PRC - 90% Operating a Fitness
Club Co., Ltd. (90% Centre in Dalian,
owned by Dalian Physical) the PRC
Star Perfection Holdings April 15, 1996 BVI 100% - Investment holding
Limited ("Star Perfection")
Physical Health Centre April 15. 1996 Hong Kong - 100% Investment holding
("Shenzhen Physical")
(wholly owned by Star
Perfection)
Shenzhen Physical Ladies' August 16, 1996 PRC - 90% Operating a Fitness
Club Co. Ltd. (owned by Centre in Shenzhen,
"Shenzhen Physical") PRC
Physical Health Centre March 21, 1997 Hong Kong 100% - Investment holding,
(Macau) Limited* Operating a Macau
Centre
Physical Health Centre September 8, Hong Kong 100% - Operating a Fitness
(Tsuen Wan) Limited* 1997 Centre in Hong Kong
___________________
</TABLE>
* Proposed new centers; not shown on the organizational chart.
The Company plans to open new centers in Tsuen Wan, Hong Kong and Macau
in early 1998. See also "Use of Proceeds" and "Company - Properties". The
Company's organizational chart is set forth below on the next page.
<PAGE>
<TABLE>
ORGANIZATION CHART OF PHYSICAL SPA & FITNESS, INC.
--------------------------------------------------
Physical Spa & Fitness, Inc.
US
|
| 100%
|
Physical Beauty & Fitness
Holdings Limited
BVI
|
|
<S> <C> <C> <C> <C> <C> <C> <C>
_____________________________________________|____________________________________________________
|88.5% |100% |100% |91.4% |70% |100%* |100%* |100%
- ----------- --------- ---------- -------------- ---------- ---------- ------------ -----------
Regent Town Mighty Jade Regal Physical Health Supreme Star Physical Ever Growth
Holdings System Holdings Centre Resources Perfection Health Limited
Limited Limited Limited Hong Kong Limited Holdings Centre
Limited Limited (Zhong Shan)
Limited
BVI BVI BVI HK HK BVI HK HK
- ----------- --------- ---------- -------------- ---------- ---------- ------------ -----------
| | | | | | |
|100% |100%* |100% |100% |100%* |95% |100%
Proline Holdings Physical Health | | Physical Health | |
Limited Centre (Dalian) | | Centre (Shenzhen) | |
Limited | | Limited | |
BVI HK | | HK | |
- ----------- ---------- | | ----------- | |
| | | | | | |
|100%* |90% | | |90% | |
Shanghai | | | | | |
Physical | | | | | |
Ladies' Club | | | | | |
Company | | | | | |
Limited | | | | | |
HK | | | | | |
|100% | Causeway Bay | | | |
| | Tsimshatsui | | | |
Shanghai Dalian Shatin Renaissance Shenzhen Zhongshan Property in
Joint Joint Mei Foo Beauty Joint Joint Mei Foo
Venture Venture Kowloon City Centre Venture Venture
(Central Branch)
Operation
* 50% held by one nominee shareholder. Since the Companies Ordinance of Hong Kong requires a
minimum of 2 shareholders for each limited company, Mr. Luk holds the remaining shares on behalf of
Physical Beauty & Fitness Holdings Ltd.
31
</TABLE>
<PAGE>
<TABLE>
OWNERSHIP STRUCTURES IN CHINA
The organizational structure of the Company's operations in China is set forth below.
<CAPTION>
TYPE OF INTERESTS PROFIT
NAME OF THE JOINT OWNED BY THE TERM OF THE REGISTERED SHARING
JOINT VENTURE LOCATION VENTURE COMPANY JOINT VENTURE CAPITAL* ARRANGEMENT
Foreign Chinese
partner partner
------- -------
<S> <C> <C> <C> <C> <C> <C>
Shanghai Huangpu and Co-operative 88.5% 10 years Originally See Shanghai
Physical Hongqiao, (exp. 2003) US$1000 in Joint Venture
Ladies' Shanghai cash and below
Club Co., Ltd. Increased to
("Shanghai Joint US$2000 in
Venture") cash in 1995
Dalian Dalian Equity Originally 12 years Originally Pro-rata to
Physical Ladies' 55% and (exp. 2007) Rmb10,000 in equity
Club Co., Ltd. Changed to cash and interests
("Dalian Joint Venture") 90% in 1996 changed to
Rmb1,000 cash
and Rmb9,000 in
form of fixed
assets and
renovation
materials in 1996.
Shenzhen Shenzhen Co-Operative 90% 10 years HK$4,600 in Pro-rata to
Physical Ladies' (exp. 2006) form of cash equity
Club Co., Ltd. and fixed interests
("Shenzhen Joint Venture")** assets
Zhongshan Zhongsan Equity 95% 10 years US$500 in Pro-rata to
Physical (exp. 2006) in form of equity
Ladies Club Co., cash and interests
Ltd. ("Zhongshan fixed assets
Joint Venture")**
</TABLE>
_______________________________________________________
* In thousands
** Those joint ventures have not commenced operations yet. See below.
SHANGHAI JOINT VENTURE. The Shanghai Joint Venture is a Sino-foreign
cooperative joint venture established on September 7, 1993 in Shanghai,
China. The Chinese joint venture partner is a state-owned enterprise in the
PRC, Shanghai Ti Yu Guan (SHTYG). Shanghai Physical Ladies' Club Company
Limited, a Hong Kong corporation ("Shanghai Physical") authorized Physical
Health Centre Hong Kong Limited, a Hong Kong corporation, to enter into a
joint venture contract with SHTYG. The joint venture period is 10 years
from the date of issue of the business license on September 7, 1993. SHTYG
is paid rent of RMB950,000 for the first 3 years of the joint venture. Rent
for the fourth to tenth years will be 110% of the preceding year, except where
the inflation rate in the PRC exceeds 16% in which case, the rental increase
would be indexed to the inflation rate.
DALIAN JOINT VENTURE. On April 11, 1995, Physical Health Centre (Dalian)
Limited, a Hong Kong corporation ("Dalian Physical") formed a Sino-foreign
equity joint venture with a Chinese enterprise to operate a fitness/ spa
center in Dalian, China. The joint venture period is 12 years from the
issue of the business license on April 11, 1995. The equity interest of
Dalian Physical is 90% and the Chinese joint venture partner's equity
interest is 10%. The joint venture commenced effective operations in April
1996.
32
<PAGE>
ZHONGSHAN JOINT VENTURE. In June 1996, Physical Health Center (Zhong
Shan) Ltd. ("Zhongshan Physical"), entered into a joint venture contract, as
supplemented in August, 1996, with a Chinese enterprise in Zhongshan, China
to establish a Sino-foreign cooperative joint venture for the provision of
fitness and spa services. The joint venture period is 10 years from issue
date of the business license on October 29, 1996. The Chinese joint venture
partner will be entitled to HK$30,000 per annum in the form of a technology
introduction fee. The Chinese joint venture partner will not be entitled to
share in profits after receipt of the technology introduction fee. All the
benefits and liabilities of the joint venture will be assumed by Zhongshan
Physical. The agreement is subject to approval by relevant PRC authorities
in Zhongshan. The Company anticipates opening of the Zhongshan center in
1998. As of the date of this Prospectus, however, both joint venture
partners have not contributed the required capital according to the
requirements of the contract. Such default in the funding obligations will
require renegotiations between the two partners and may also trigger default
remedies as specified in the joint venture contract. Further, a failure to
meet regulatory time limits set by the State Administration of Industry and
Commerce for capital contributions could result in the cancellation of the
approval of the joint venture's business license. Both joint venture
partners are in the process of applying to the relevant authorities for an
extension of such time limits. The joint venture has not yet commenced
operations as of this date.
SHENZHEN JOINT VENTURE. In 1996, Shenzhen Physical Ladies' Club Co.,
Ltd., entered into a joint venture contract with a Chinese enterprise in
Shenzhen, China to establish a Sino-foreign cooperative joint venture for
the provision of fitness and spa services. According to the laws in the PRC
and the terms of the joint venture contract, both joint venture partners are
obliged to fulfill their capital contribution requirements into the joint
venture within a specified period of time after the issue of the business
license. As of the date of this Prospectus, however, both joint venture
partners have not contributed the required capital according to the
requirements of the contract. Such default in the funding obligations will
require renegotiations between the two partners and may also trigger default
remedies as specified in the joint venture contract. Further, a failure to
meet regulatory time limits set by the State Administration of Industry and
Commerce for capital contributions could result in the cancellation of the
approval of the joint venture's business license. Both joint venture
partners are in the process of applying to the relevant authorities for an
extension of such time limits.
Since Shanghai Joint Venture and Dalian Joint Venture operate in China,
they are subject to special considerations and significant risks not
typically associated with investments in equity securities of the United
States or Western European countries. See "Risks Relating to Operations in
Hong Kong and China".
OVERVIEW OF THE COMPANY'S MARKETS
HONG KONG
- ---------
FITNESS
- -------
The concept of preventive health care and physical fitness, which became
popular in Hong Kong in the early 1980's, was introduced from the United
States and Europe. With the growing affluence of the local population and
improvement in their standard of living, people began to immerse in physical
exercise to maintain a fit and healthy body. The fitness trend grew in Hong
Kong and gained popularity within the high income group initially.
To cater to this new industry, a number of fitness centers were
established in Hong Kong which provided a variety of exercise equipment as
well as aerobic dance classes. Private clubs (dining clubs, marina clubs,
entertainment clubs) targeted towards the upper income group also began to
provide similar services to their members or expanded their existing
facilities.
33
<PAGE>
The majority of these fitness centers targeted the high income group,
were very exclusive, and entrance fees or membership fees were generally
high. Under this marketing strategy, these fitness centers were restricted
to a comparatively small number of potential customers. Additionally, some
of these fitness centers were affected by the migration boom of Hong Kong in
the mid 1980's. At that time, a large number of professionals migrated from
Hong Kong to other countries to pursue educational and economic
opportunities. This migration boom affected the customer base of these
fitness centers and thus decreased the viability of their business. As a
result, fitness centers targeting the high income group in Hong Kong were
vulnerable and underwent a period of consolidation. Later on, as the market
developed, a market niche emerged for fitness centers catering to the middle
income group.
SPA
- ---
The spa industry in Hong Kong, which includes the skin care or beauty
industry, is rather fragmented with a large number of small operations. It
is common that certain spa and beauty treatments are provided by a wide
range of establishments including beauty salons, hair salons, and even
cosmetic counters situated in department stores. The standard of services
for beauty treatments varies widely. Normally, the customer base of these
operations is confined to a relatively limited number of frequent customers.
Exclusive private clubs that cater to a small percentage of wealthy Hong
Kong women and the inconsistent quality and skill level of small operations
have increased the demand for middle market skin care treatments in the
recent years.
CHINA
- -----
FITNESS
- -------
In China, the concept of physical fitness has a long history, but it was
not widely practiced, except by the 50+ generation. Even China's famous
Tai' Chi is seldom practiced by young people. Organized sports for
recreation are more popular, though sports centers are in the Management's
opinion generally ill equipped and out of date. It appears that intensive
training in a particular sport is only available to a minority of people.
Physical fitness centers are usually in the form of gymnasiums run by state-
owned sports authorities.
A handful of small clubs with standard facilities have opened in recent
years, but offer, in the Management's opinion, a limited selection of
locally made, out- of-date equipment (as compared to the equipment used in
the Company's centers). Such facilities are frequented by more men than
women, as they tend to be equipped with barbells and weights.
The Company believes that aerobics is gaining popularity with the recent
influx of follow-along television programs. The Management observed that
the overall improved lifestyle; availability of fast food and convenience
foods, increased spending power, and increasingly sedentary lifestyles of
Chinese people, has led to a widespread concern for weight control. The
Management believes that aerobics especially appeals to women in China, as
large percentages of women seem to be concerned with losing weight.
A number of five-star hotels in China have luxury spas and fitness
centers, well-equipped with the latest brands of Western-styled exercise
machines (as compared to the Company's facilities). However, the
Management believes that the exorbitant fees (in the Company's opinion)
prevent any significant competitive impact on the industry. Private dining
clubs have become increasingly popular throughout China in the recent
years, and usually include small fitness and beauty centers. However, the
Company believes that as the focus of these clubs is usually dining,
drinking, karaoke and entertainment, they have contributed insignificantly
to the industry. (See "Competition")
SPA
- ---
The Company noted that Western-styled spa and beauty treatments has
become increasingly common and popular in China. Home-treatments, using
cosmetics purchased in department stores, have also become very common.
However, in the Management's opinion standards of skill and hygiene tend to
be poor, as is the quality of products used, as compared to those provided
by the Company's centers.
In recent years, several Hong Kong and Japanese companies have entered
the market with small, limited service salons. Several internationally
recognized skin care lines, such as Dior, Channel and Elizabeth Arden have
recently become available in department stores. Those department stores
often hold in-house promotions to demonstrate their products and educate
potential customers. It appears that the desire to own anything imported,
including cosmetics, is considered prestigious and is therefore highly
desired by Chinese women. The Management noticed that the demand for
"foreign" spa treatments and beauty salons, and imported products is high.
The local and international media is introducing fitness and skin care news
to a growing receptive audience. The Company believes that the demand for
affordable, value-driven beauty and skin care has increased.
34
<PAGE>
HISTORY
The Company was incorporated on September 21, 1988 in the state of
Delaware under the name of "Foreclosed Realty Exchange, Inc", a development
stage company seeking acquisitions. Prior to acquisition of Physical
Beauty & Fitness Holdings Limited, a British Virgin Islands corporation
("Physical Limited"), the Company had no revenue producing operations, but
planned to enter into joint ventures and/or acquisitions originally in the
area of real estate, to expand its operations. In early 1991, the Company
was planning to become a public company and issued 750,000 (pre-reverse
split) shares of common stock with certain registration rights to an
unrelated corporation for services in connection with the Company's efforts
to become a public company. That corporation, in turn distributed the
750,000 shares as dividends to its shareholders. The Company has not filed
a registration statement as originally planned and the shares became free
trading pursuant to Rule 144, after the expiration of the applicable
restrictive period. In October, 1996, the Company closed a transaction with
Ngai Keung Luk (Serleo), a 100% shareholder of Physical Limited, whereby the
Company entered into a Share Exchange Agreement with Ngai Keung Luk
(Serleo). Physical Limited was incorporated on March 8, 1996 under the laws
of British Virgin Islands and has interests in various companies operating
fitness and beauty centers and other related businesses in Hong Kong and
China (see "Company- Organization"). Pursuant to the Share Exchange
Agreement, the Company issued 8,000,000 pre-split shares of its Common Stock
to Ngai Keung Luk (Serleo) in exchange for all of the outstanding shares of
Physical Limited (the "Closing"). Subsequently, the Company changed its
name to "Physical Spa & Fitness Inc." in November, 1996, to reflect the new
business operations of the Company. As a part of the above transaction,
certain shareholders of the Company also transferred 990,000 pre-split
shares of Common Stock to Goodchild Investments Limited, a British Virgin
Islands Corporation ("Goodchild") See "Certain transactions". Neither Ngai
Keung Luk (Serleo) nor Goodchild were parties affiliated with the Company
prior to or at the time of the acquisition of Physical Limited. At the
Closing the then current management of the Company resigned and was replaced
by the current management of the Company. See "Management.".
In 1986, the founder and principal shareholder of the Company, Ngai Keung
Luk (Serleo), set up the first fitness center under the name of "Physical
Health Club" with the objective of providing physical fitness and spa
treatment services at prices which could be afforded by a rapidly growing
middle class population in Hong Kong. Two years later in 1988, another
center was founded under the name of "Physical Ladies' Club" in Hong Kong.
The businesses of these centers were operated in a form of a sole
proprietorship and were subsequently transferred to Physical Health Centre
Hong Kong Limited, a Hong Kong corporation established on March 2, 1990
("Hong Kong Limited"). During the period from 1990 to 1996, Hong Kong
Limited and Physical Limited expanded their scope of operations by acquiring
and establishing several subsidiaries and by forming Sino-foreign joint
ventures in China to operate six additional fitness/spa centers in Hong
Kong, three in China and other related businesses (see "Company -
Organization"). The subsidiary companies were all formerly owned by Mr. Luk
and other principal shareholders, or solely by Mr. Luk. The respective
equity interests were transferred by Mr. Luk and other principal
shareholders to Hong Kong Physical or Physical Limited throughout 1993 to
1996 at the original cost of the respective investments. In October, 1996,
91.4% of the equity interests of Hong Kong Limited was transferred by the
principal and other shareholders (including Mr. Luk) to Physical Limited at
the par value of the shares transferred. In addition, all the equity
interests of Hong Kong Limited in various subsidiaries and Sino-foreign
joint-ventures were also transferred to Physical Limited at the recorded
cost of these investments.
HONG KONG
The first facility was opened in the Mei Foo Sun Chuen area of Hong
Kong, which has a population of approximately 680,000. The Company's first
center offered fitness training and spa treatment facilities at a price
thought to be affordable by its target middle-class customers. The Mei Foo
Center operates under a membership basis and is open to both male and female
customers and is the Company's only center that has male members. The Mei
Foo Center proved profitable and within a year, it had enrolled more than
700 members and 1,000 clients for spa treatments. In 1990 the Mei Foo
Center was expanded by acquiring by the Company's subsidiary an additional
700 square feet, immediately above the existing facility, resulting in a
total of 8,000 square feet. The Mei Foo center operates under the name
"Physical Health Club".
35
<PAGE>
The second fitness and spa center under the name "Physical Ladies' Club"
was opened in July 1988 on Nathan Road, Tsimshatsui, Kowloon, which is one
of the busiest commercial and entertainment areas in the Kowloon area of
Hong Kong. The Tsimshatsui Center, consisting at that time of 12,000 sq.
ft. (currently expanded to 25,000 sq. ft) is, to the best of the
Management's knowledge, to be the first fitness and spa center to provide
high quality, Western-styled professional services for fitness training and
spa treatment for middle income women customers in Hong Kong. Tsimshatsui
Center within a year of its opening, it had approximately 2,000 fitness
members and 2,000 patrons for spa treatments.
In March 1990, the business of Physical Health Club and Physical Ladies'
Club was transferred to, and consolidated under, Hong Kong Limited (see
above).
To broaden its geographical diversification, Hong Kong Limited opened
its third fitness and spa center in Causeway Bay Plaza, Causeway Bay in
August, 1990. Located in one of the most popular entertainment areas on
Hong Kong Island, the Causeway Bay Center initially occupied a floor space
of approximately 18,000 square feet. In the first year of operation, the
Causeway Bay Center had approximately 5,000 members and 2,000 patrons for
spa services. The Causeway Bay Center experienced an ongoing strong demand
for its fitness and spa services, and the Company relocated the Causeway Bay
Center to a new 30,000 sq. ft center in June, 1997.
In order to cater to the market demand in the New Territories area of
Hong Kong, Hong Kong Limited opened its fourth fitness and spa center in
New Town Tower, Shatin, in September 1992. The Shatin Center is located in
a commercial complex in the heart of the densely populated residential and
popular entertainment areas in the New Territories. It occupies a floor
space of approximately 15,000 square feet. In March 1993, Hong Kong Limited
opened another fitness and spa center of approximately 3,000 square feet in
Kowloon City to provide facilities to members residing in the south-eastern
area of Kowloon.
As a result of a growing demand for upscale facilities and amenities for
spa services in the upper middle market, the Company opened through a newly
formed subsidiary, Supreme Resources Limited (see "Company - Organization"),
its first upscale market spa treatment center; "Renaissance Beauty Centre".
The Renaissance center is situated in an upper income residential area in
Central, Hong Kong and provides spa treatment services.
CHINA
Commencing in the mid-1980's, China commenced market-oriented reforms
that were designed to open up and improve the economy and the Chinese
standard of living. As economic reforms became successful in China and a
large, middle-class market developed, China was targeted as an expansion
market where the success in Hong Kong could be duplicated.
Shanghai, with a booming economy, an influx of foreign investment, and a
population of 14 million, was the logical choice for the Company to start
its first China location. In January of 1994, the Huang Pu branch was
opened in one of Shanghai's busiest shopping districts, through a joint
venture company formed between a Chinese enterprise and a newly formed
subsidiary of the Company. The center has an area of 15,000 sq. ft. , and
within the first year there were over 2,000 fitness members and spa clients.
Based upon the positive response to the first facility in Shanghai, the
decision was made to open a second Shanghai branch.
September, 1995 marked the opening of the second center in Shanghai -
Hong Qiao branch in Shanghai, situated in the fashionable Hong Qiao Special
Economic Development Zone. This center contains approximately 12,000 sq.
ft. and is easily accessible to a large residential area and busy commercial
district.
In April, 1996, the Company opened its third fitness/spa center in China
in the city of Dalian. Dalian, China, located on the northern peninsula
near Korea, is the third largest seaport in China and has a population of
approximately 5,600,000. Dalian is the fashion capital of China, hosting
the world renowned International Fashion Festival annually, and is also a
major tourist destination. Dalian has seen an influx of foreign investment
in the past several years, and the purchasing power of these citizens ranks
high in the nation. The Company's market research showed a strong existing
interest in fitness and spa services, with few choices available to
potential customers. Within the first six months of opening, Dalian center
had over one thousand fitness members and nearly one thousand spa clients.
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BUSINESS STRATEGY
The Company believes that it has a strong reputation in the Hong Kong and
China markets in which it presently operates. This belief is based on
several factors, including continuous operating presence of the Company in
Hong Kong for the past 11 years, and the relationships in China established
by the Company's executives, management and staff over the last several
years. The Company intends to continue its policy of providing what it
believes are first-quality, comprehensive fitness and spa services in their
respective markets at affordable prices.
The Company seeks to expand its fitness and spa business from the ground
up as opposed to acquiring health and fitness clubs that are poorly managed
and/or financially distressed. The Company believes that the end result
of repositioning an existing center, which typically includes rebuilding a
membership base, renovations, additional equipment leasing, and re-training
existing staff, is less desirable than developing a new center.
The Company intends to build on its momentum, relationships and standard
of quality in several ways. First, the Company intends to expand its
presence in Hong Kong and China through the establishment of new fitness and
spa centers in Hong Kong (see "Business-Organization-Hong Kong" and "Use of
Proceeds") and China (See "Business - Organization - Shenzhen Joint Venture
and Zhongshan Joint Venture"), and through the addition of qualified
personnel, including fitness instructors and spa personnel in the existing
facilities. Second, in conjunction with its expansion, the Company intends
to increase the variety of fitness and spa services provided and products
sold on a retail basis at each location. For example, the Company currently
is developing plans to develop corporate and personal fitness training
services in China.
The Company believes that its experience in and knowledge of the fitness
and spa industry in Hong Kong and China, as well as management's continuous
presence in Hong Kong (11 years ) and China (over the past 3 years),
positions the Company to take advantage of perceived opportunities in this
market. Further, demographic developments in Hong Kong and China, continue
to create increasing demand for certain fitness and spa services. In this
regard, the Company expects to open its seventh center in Tsuen Wan, Hong
Kong and a new center in Macau in early 1998, and new centers in Shenzhen
and Zhongshan, China in 1998, and to establish additional fitness and spa
centers in other major metropolitan centers in China over the next several
years. There is no assurance that such centers will be opened as currently
planned, since they are subject to changing political and economic
conditions, as well as the Company's evaluation of the applicable market
conditions. See "Risk Factors".
- - BECOMING THE MARKET LEADER IN CHINA
In China, the fitness and spa industry is in its formative stage. In
addition there is an image associated with Western luxury consumer goods.
The Company is not aware of any Western-style facilities of comparable size
or competitors in the fitness and spa industry whose market position is more
established than the Company's. Management plans to take advantage of those
circumstances and in doing so, become the first entrant into China market.
The planned expansion into China includes opening facilities in most
major cities and economically developing urban areas throughout the country,
subject to then current market and other conditions (see "Risk Factors").
According to the State Statistic Bureau of China, the population of China is
1.2 billion and there are currently thirty cities with populations in excess
of 1 million. The population of China is becoming increasingly urbanized,
and the tastes of the urban population is becoming increasingly
sophisticated. (Source: Hong Kong Trade Development Council).
Forty percent of the population of China lives in coastal areas, where
retail sales account for 60% of the country's total retail sales.
Population factors and strong spending power have led the Company to target
coastal areas for the spas to be developed (i.e. Dalian). Facilities can be
linked by a reciprocal membership system, allowing members to use another
facility when traveling to other parts of the country. Marketing programs
carried out nationwide, in the management's opinion, will enable the Company
to benefit from economies of scale, similar to what the Company experiences
in Hong Kong.
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- - MAINTAINING DOMINANT POSITION IN HONG KONG
The Company has well-established customer base and pre-dominant market
share in Hong Kong and is planning to open its seventh location in Tsuen
Wan, Hong Kong in early 1998. There can be no assurance given that Tsuen
Wan center will be opened as currently planned by the Company. The Company
plans to use a portion of the proceeds from this Offering to set up the
Tsuen Wan center. See "Use of Proceeds". The Board of Directors estimates
that over 80 percent of the Company's patrons are between the age of 20 to
40. Based on the reports of the Hong Kong Census and Statistics Department,
the number of women within the age group of 25 to 45 rose from 850,000 to
1,200,000 between 1986 and mid-1996, representing an increase of 41%.
Management believes that the strong position held in the Hong Kong market
can be maintained by continuously upgrading facilities and services. The
Company monitors this situation continuously, and upgrades the fitness and
spa areas on a regular basis. The number of members in each location is
also carefully monitored in order to ensure adequate levels of service to
individual customers, particularly during peak work-out periods. Branch
Managers monitor the situation through direct observation, customer feedback
and surveys.
For spa personnel, intensive training is conducted in the in-house
training center and thorough on-the-job instruction. Selected employees are
sent to France and Italy to study the latest techniques and to learn about
new products on the market. The Company seeks to satisfy its spa clients'
needs with the latest technology, expertise and a high level of service.
- - EXPLORING POTENTIAL MARKET
The Company considers its market to be the greater Asia region. The
Company plans to open a new fitness/spa center in Macau in early 1998.
Macau is a Portuguese colony strategically located at the mouth of the
Pearl River on the border of China. Macau is easily accessible by Hong Kong
residents via a 45 minute jetfoil ride and is a popular vacation destination
for both Hong Kong and Chinese residents. Macau has a population of
approximately 500,000 of which 50% is female (Hong Kong Trade Development
Council). The Company plans to target primarily Macau's local residents.
See "Company - Properties" and "Use of Proceeds".
The Company is also closely monitoring the market opportunities in other
South East Asian countries such as the Philippines, Thailand, Malaysia and
Indonesia.
FITNESS
The Centers emphasize the benefits of health, physical fitness and
exercise by providing a wide range of exercise equipment from the United
States and Europe including free-weights, strength systems and
cardiovascular machines from manufacturers such as Life Fitness, Cybex ,
Flex, and Reebok Skywalker. The Company places a particular emphasis on the
quality of its fitness managers and instructors by providing continuous
training both in Hong Kong and overseas.
The centers also conduct daily dance classes which run for approximately
45 minutes and are on a first-come, first-served basis. The Company
believes that the number of dance classes conducted by the Centers per day
is among the highest in Hong Kong. The variety of dance classes include
aerobic dance, step, arms and thighs workout, funk and jazz and are taught
by experience instructors. The dance classes are reviewed on a monthly
basis and new dance classes are introduced approximately every three months
in order to appeal to the interests of members. Since 1995, the Company has
recruited fully qualified and experienced aerobic instructors from
Australia.
The Company believes, based on member survey responses, utilization rates
and the existence of underutilized space in its centers, that it has
sufficient excess capacity at its existing fitness centers to accommodate
new membership growth as well as comfortable usage by present members.
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SPA SERVICES
Spa services are open to both members and non-members. However, members
of the centers have priority for such service facilities. Over 80 types of
spa treatments are offered including facial treatments, various skin care
treatments, relaxation programs, personalized make-up application and
instruction, and weight-management and massage.
All of the centers have designated rooms for spa treatments in order to
ensure privacy. In view of the popularity of the spa treatments, the
centers have a booking system whereby sessions for such treatment are
reserved in advance. The centers offer special discounts to patrons for
beauty treatments during off-peak hours in order to maintain an even level
of customers during the day. In promoting the fitness training services
provided by the centers, patrons for spa treatments, who are not members of
the centers, are eligible to use all facilities of the centers including
fitness training, on the day of their visits for a spa treatment. The
Company believes that this additional service offers an advantage over its
competitors who engage only in beauty treatments.
The Company has a broad scale of fees for its spa services and believes
that these fees are both affordable and competitive in terms of the quality
and variety of services provided at the centers. The centers typically
charge the normal fee on spa treatment per session. However, discounts are
given to those patrons who purchase prepaid coupons. These coupons are
valid without time limit but are usually used within a short time period.
The Company employs professional spa personnel who hold recognized
qualifications and adequate experience. Each center retains a specific
manager for spa treatments that supervises the spa personnel and other staff
members of the center. Each spa employee serves only one patron during the
entire session of spa treatment. The Company places great emphasis on
providing continuous training programs for its spa personnel. In order to
remain informed of the latest international developments in spa treatments,
applications, technology and equipment, the Company arranges both local and
overseas training.
RETAIL
The Company sells a range of products at each center such as leotards,
shorts, T-shirts, training shoes, socks and training suits, including Nike
and several U.S. and Australian brand products. The Company also sells
European skin care products manufactured in Italy and Spain by Frais Monde
and Anibus, respectively. In addition, cosmetics from Frais Monde are
offered. The fitness and beauty related products are available in the
centers to facilitate the needs of their members.
CAPITAL EXPENDITURES
The Company made capital expenditures (including equipment costs) of
HK$25.375 million (US$3.274 million) in 1996, approximately HK$13.95 million
(US$1.8 million) of which related to new centers. In addition to almost
HK$2.2 million (US$0.3 million) expensed annually on repairs and maintenance
for existing facilities and equipment, the Company believes HK$2.5 to 3
million (US$0.3 to $0.4 million) annually, as funds are available, is
necessary to maintain, and in many cases upgrade, its existing facilities.
In 1997, the Company plans to invest approximately HK$55 million (US$7
million) for 2-3 new spas, however, there can be no assurances given that
such plans will not change subject to the decision of the Board of Directors
and their consideration of the market conditions. In 1998, the Company
plans to invest HK$125 million (US$16 million) for five new spas, subject to
the Company's review of the then current market conditions and the Company's
financial position. Although the Company intends to finance its expansion
plans through infusion of cash flow generated by the Company's existing
operations, there can be no assurances given, that there will be funds
available for such planned expenditures or that the Company will be able to
successfully locate and secure new fitness/spa centers, or that the
expenditures will take place as currently planned. See also "Risk Factors".
MEMBERSHIP
The Company currently offers prospective members a membership plan. Fees
for services at each facility depend on the location and demand for such
services at that facility. Marketing of the Company's services is targeted
towards the middle income female population in the 18 to 34 years old range.
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Under the plans, new members are charged a membership fee upon admission
and a monthly fee each month to maintain their membership privileges. The
initial membership fees are non-refundable and range from approximately
HK$1,400 (US$180) to HK$2,000 (US$258), depending on the diversity of
facilities and services available at the club of enrollment, the local
competitive environment, as well as the effects of seasonal price
strategies. Monthly dues for memberships generally range from HK$168
(US$22) to HK$280 (US$36) during the typical membership period. Prepayment
of the monthly fee is encouraged by offering a discount for members who
prepay for six or twelve months. Members are also provided on a monthly
basis 10 aerobic coupons on free-of-charge basis at Hong Kong locations.
Any member who attends additional classes has to purchase coupons at HK$15
(US$2) each. China locations include aerobics classes with monthly dues.
In order to allow greater flexibility to its members, the Company
operates a network system where members may use the facilities provided at
the largest centers of the Company at no extra cost. The Centers have long
opening hours and are open all year round (except for Chinese New Year), in
order to provide continuous service to its members and customers.
Generally, they are open from 7:00 a.m. to 10:30 p.m. As with any consumer
driven market, it is essential that the services provided by the Company are
constantly reviewed, updated and improved. To achieve this, managers from
each of the Centers regularly invite comments from members in relation to
the services provided. Additionally, the Company constantly seeks to
introduce new products and techniques on fitness training and spa treatments
in order to improve its services and thus enhance its competitive position.
SALES AND MARKETING
The Company devotes substantial resources to the marketing and promotion
of its fitness and spa centers and their services because the Company
believes strong marketing support is critical to attracting new members both
at existing and new fitness centers. Since July, 1988, the Company and its
predecessor began to market substantially all of its fitness centers under
the service name "Physical Ladies' Club", thereby eliminating the prior
practice of using different names for individual locations. See "Business -
Trademarks and Trade Names".
A key component of the Company's marketing strategy is to cluster
numerous fitness centers in major media markets in order to increase the
efficiency and cost effectiveness of its marketing and advertising programs.
The Company expects to spend approximately HK$8 million (US$1 million) for
advertising and promotion during 1997 compared to approximately HK$3.7
million (US$480,000) in 1996, HK$2.7 million (US$350,000) in 1995 and HK$2.4
million (US$300,000) in 1994. Advertising consists of (i) television, (ii)
newspapers, telephone directories and other promotional activities and (iii)
radio, which are expected to account for approximately 10%, 80%, and 10%,
respectively, of the Company's total advertising expenses in 1997. The
final decision will be subject to the Board of Directors review of the
appropriate market and financial situation of the Company. See also "Use of
Proceeds".
The Company's sales and marketing programs emphasize the benefits of
health, physical fitness and exercise by appealing to the public's desire to
look and feel better. The success of the Company's marketing efforts are
dependent upon the ability of its sales personnel to make effective personal
presentations of the benefits of membership to prospective members. The
Company believes that these presentations are enhanced by its well-equipped,
attractive centers and its "value pricing" membership programs. The Company
conducts a variety of marketing efforts. The Company's executives and sales
personnel attend trade shows and exhibitions throughout Hong Kong and China.
At these trade shows, the Company usually operates a separate promotional
exhibit. The Company's executives and marketing personnel also attend and
sponsor seminars given to individual end-user organizations or industry
groups.
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RETAIL
CORPORATE SPONSORSHIP
Since 1993, Nike has sponsored the Company's fitness instructors in China
under an annual contract that is renewable each year. Nike supplies each
fitness instructor with several different shoes, track suits, T-shirts and
caps four times a year. In return, the Company sells only Nike footwear in
its China locations. Commencing in 1993, the Company has participated with
Evian Water of France in a variety of promotional activities, both China and
Hong Kong. Typically, Evian will invite the Company to participate in a
variety of promotional events held at trade shows, shopping centers and
entertainment venues. In return, the Company sells only Evian bottled water
in its China locations.
The Company has begun marketing, on a retail basis products to its
members including apparel manufactured by Nike and leading U.S. and
Australian fitness apparel brands. These products are intended to add
value to the memberships and increase the Company's revenues. The Company's
marketing focus also includes corporate membership sales which are designed
to improve productivity. The Company has introduced programs such as
corporate on-site aerobics classes to expand the market for its services.
In addition to its advertising, personal sales presentations and targeted
marketing efforts, the Company is increasingly utilizing in-club marketing
programs, open houses and contests for members and their guests foster
member loyalty and introduce fitness centers to prospective members and
referral incentive programs involve current members in the process of new
member enrollments.
ACCOUNT COLLECTION
All collections of past-due accounts are handled internally by the
Company. Customers who have outstanding unpaid balances are not provided
further services until such balances are paid in full. Corporate accounts
are handled pursuant to the applicable terms of credit agreements. Local
corporate accounts are normally not allowed any special credit.
International corporate accounts, which are much larger than the local
accounts, can be allowed three to six months credit, with a possibility of
extending such period, depending on the account's size and record.
On September 30, 1996, Mighty System Limited ("MSL"), a subsidiary of
the Company engaged in providing marketing services for cosmetics sales (see
"Business - Organization") entered into an agreement with a beauty product
vendor for the payment of the outstanding marketing fees of HK$4.965 million
(US$640,000) by three installments from December 31, 1996 to June 30, 1997.
The outstanding marketing fees were owed to MSL pursuant to a marketing
agreement with a beauty product vendor under which agreement MSL was to
provide certain marketing and promotional services in China for the vendor's
product in return for the marketing fee. The whole amount was satisfied by
offsetting the cost of beauty products purchased.
On September 30, 1996, Regent Town Holdings Limited and Jade Regal
Holdings Limited, subsidiaries of the Company (see "Business -
Organization"), entered into an agreement with a corporate beauty package
subscriber (corporate member) for the payment of the outstanding separate
beauty service fees of HK$6.2 million (US$800,000) by three installments
from December 31, 1996 to June 30, 1997. The first installment of HK$2
million (US$258,000) due on December 31, 1996 was satisfied by the deposit
paid on behalf of the Company for the lease improvement fee of the new
premises in Hong Kong. The second installment of HK$2 million (US$258,000)
due on March 31, 1997 was repaid in cash. According to the original
agreement, the outstanding balance should have been repaid by June 30, 1997,
however, to date HK$2.2 million (US$290,000) is still outstanding and the
management is renegotiating the repayment terms with the corporate beauty
subscriber.
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COMPETITION
HONG KONG
The competition of the Company consists of the following.
UPSCALE MARKET
- --------------
The Hong Kong upscale market consists of exclusive private clubs which
usually provide both fitness services and spa treatments at very high
prices. These private clubs are typically oriented towards women and offer
a great deal of variety to their customers. Annual membership fees average
approximately HK$19,000 (US$2,500) and beauty treatments are charged
separately upon usage. These facilities use expensive, name-brand
equipment, luxurious decoration, large areas of space up to 30,000 sq ft,
and offer a wide range of services to attract customers. The two primary
clubs in this category are Philip-Wain and Body by Deborah International
Health Spa. There are certain upscale market establishments which provide
fitness services only, most are for both male and female, and are
concentrated in one area of Hong Kong. The joining fees range from HK$2,000
(US$258) to HK$7,000 (US$903) with monthly membership fees ranging from
HK$350 (US$45) to HK$800 (US$103). These establishments range in size from
10,000 sq ft to 30,000 sq ft. Examples are Ray Wilson s California Gym, New
York Fitness, and The Gym. Another fitness only company, Tom Turk, was the
earliest entrant into the Hong Kong Market, with the first outlet opening in
the early 1980's. The Tom Turk facilities have fees that target between the
upper and middle market customer, and their two locations are each
approximately 30,000 sq. ft. Tom Turk attracts primarily a male clientele
and emphasizes their extensive line of free weights, workout equipment and
swimming pools. The Company's fitness/spa facilities compete directly
primarily with the middle markets (see below), with the exception of
Renaissance Beauty Center, which targets upscale market.
MIDDLE MARKET
- -------------
There are very few establishments in this class which provide both
fitness services and spa/ beauty treatments in a single facility. The
closest competitor would be a facility called Mid-City, which provides both
services for men and women. This facility has only one location with an
area of approximately 15,000 sq ft. Another competitor of the Company in
the same category is Modern Beauty Salon with six locations of various sizes
up to approximately 15,000 sq. ft. An average down payment joining fee of
HK$2,000 (US$258) is required to become a member of the above centers.
Another establishment which provides only fitness services is The Lift Club.
The Lift Club has three outlets in prime locations, with approximately
10,000 sq ft each. The joining fee is HK$1,600 (US$206) and the monthly fee
is HK$550 (US$71). The operators of spa/beauty services only which are in
direct competition with the Company include Expression, with one location,
and Angel Face Beauty Creations (International) Ltd., with nine locations.
The management believes that, these facilities do not offer as high a level
of fitness equipment and instruction as the Company does and that the
Company offers a more comprehensive level of spa treatments than these
facilities. The Company targets primarily the middle market.
LOW-END MARKET
- --------------
In this category, most establishments only provide either fitness
services or simple beauty treatments. These establishments are usually much
smaller in size and have a limited range of services. Representatives of
the low-end market include Frank & Wit, The Fitness Gym, Paradise Health
Club, Tess Beauty, and Health City. Joining fee to these facilities vary
from HK$600 (US$77) to HK$2,000 (US$258), and monthly fees average
approximately HK$430 (US$55). In addition, there are numerous smaller
facilities operating inside the shopping arcades, and/or associated with
hair salons and department stores. Management believes that the Company
does not directly compete with this market.
In the low-end fitness market, the government operates a small number of
gymnasium facilities. These are public facilities, open to both men and
women for nominal fees.
CHINA
- -----
SPA SERVICES
- ------------
Certain spa services are provided by beauty salons, which are very
popular in China and have been in existence for several years. However,
most are small scale and offer only basic services in the Company's opinion
and as compared to the Company's facilities. Most salons are not modern and
do not possess certain international standards of skill and hygiene as most
facilities in Hong Kong. In the Management's view, these salons only have
access to locally manufactured skin care products, which tend to be low-tech
and chemically- based, since it is too costly for a small salon to use
imported products. The Company, as an exclusive agent for several
professional European skin care lines, maintains the leading edge in skin
care. The closest competitors in the spa industry would be several beauty
salons with Hong Kong and Japanese investors, including Carita in Shanghai,
and Marco, in Dalian. Services in these facilities are somewhat more up to
date, though most do not exceed the Company's facilities in size, nor in
number of services available, in management's opinion. Most of these salons
use common department store skin care products, which prevents them from
differentiating themselves in the market. The Company believes that no
other salons offer a professional line of skin care products for purchase,
except for common, famous-name brands which are also available in
department stores.
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FITNESS CENTERS
- ---------------
There are several fitness centers in China, especially following the
opening of the Company's China facilities in Shanghai and Dalian. The
Company believes that its early entry into the market has helped it to
achieve the leading name in fitness. The Company believes that it was the
first to offer professional, up to date fitness services, up to date group
exercise (aerobics) classes, and a full range of modern exercise equipment.
Though the Company currently has only three facilities operating in China,
the management believes that its name has become already known as the
Company has set the standards for the fitness and spa industry for China.
The closest competitors are as follows:
UPSCALE MARKET
- --------------
There are many upscale recreation clubs in the major cities of China,
including Hong Kong City, Shanghai, and the Friendship Club in Dalian.
These facilities usually offer dining, bars, karaoke, massage, sauna,
exercise, beauty treatments, and occasionally bowling, tennis or golf.
However, the trend for such clubs has proven to be most successful when
utilized as men's clubs. These clubs are used primarily for entertaining
business clients or for high-income business men. Therefore, very little
emphasis is placed on the level of service and amenities within the fitness
areas. Typically, most are staffed only with receptionists as there is no
demand for fitness professionals. Very few women use such facilities.
These clubs charge very high joining fees, usually upwards of several
thousand US dollars.
The majority of four and five star hotels have health clubs for outside
membership as well as for hotel guests. Usually these clubs have expensive,
brand name equipment, and often offer aerobics classes. Most also have
luxury shower and spa facilities. However, the price structure is usually
comparable to an upscale U.S. health club, and therefore is not affordable
to the vast majority of Chinese people. Such clubs cater to the ex-patriate
business community, and some are exclusive to such community. Their
location, being situated on the hotel premises, often limits size, and they
tend to reach full capacity with a low number of members. Since most hotels
do not depend on the health club as a major source of revenue, typically
very little marketing or membership incentives are used.
MIDDLE MARKET
- -------------
There are several middle market fitness centers in some of the larger
cities in China. Many newly built housing complexes (upscale apartment
buildings and "western" style housing villages) have recreation centers.
They typically include swimming pools, tennis courts and gyms. In the
management's opinion, such facilities are luxurious by Chinese standards,
but gyms are commonly unstaffed or only have a receptionist. More and more
such centers are providing exercise classes as well, but lack of qualified
instructors, in the management's opinion, inhibits growth in this area.
Such clubs have recently been opened in Dalian, however, in the management's
opinion, none of them matches the Company in size, nor in the range of
exercise equipment available, and classes offered and the Company does not
see them as the same level competitors. Shanghai has several recently
opened middle market clubs, such as DD's Personal Club and YMCA. DD's
Personal Club caters primarily to the expatriate market and is therefore
limited in growth. YMCA is not situated in a prime location and has not
used, in the management's opinion aggressive marketing, and in the
management's view to date has not made significant impact on the fitness
industry in Shanghai.
LOW-END MARKET
- --------------
Group exercise is an extremely popular activity in China, but mainly done
by elderly people. As more interest is created in the younger market, a
wider variety of classes are now being offered in government facilities such
as gymnasiums, parks and town squares. Such facilities usually are held on
a basketball court in a gym, or a recreation hall with large open space.
Typically there are no shower, locker, or spa facilities available. The
management believes that the popularity of these facilities is due to the
nominal fees charged.
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TRADEMARKS AND TRADE NAMES
In July 1988, the Company and its predecessor began to market
substantially all its fitness centers under the servicemark "Physical
Ladies' Club" thereby eliminating the prior practice of using a different
trade names for each Center. The Company registered a servicemark under its
trade name "Physical Ladies' Club" in Hong Kong and its Chinese equivalent
name in China. In the opinion of the Company's trademark counsel in Hong
Kong, in Hong Kong, the registration enables the mark to distinguish the
Company's services from similar services of others, although it gives
Company no right to the exclusive use of the words. The servicemark gives
the Company a priority over the use of the servicemark by others and the
right to reject others from the use of the same name. In China, the Company
was only able to register the name in Chinese language pursuant to the
Chinese Trademark Law. In the opinion of the Company's trademark counsel,
the name "Physical Ladies' Club" is considered a direct reference to the
contents and features of the services in the servicemark and as such it
cannot be registered as a trademark under the Chinese Trademark Law. The
registration of the Chinese name, however, provides the Company with
protection of its name on a nation-wide basis and precludes others in China
from using the same name as the Company's. See also "Risk Factors".
SEASONALITY
Historically, the Company has experienced greater sales in the third
quarter of each year. In recent years, the Company has lessened this
seasonal effect by the use of sales incentives and awards for its sales
personnel and members, as well as other marketing initiatives.
INSURANCE
The Company maintains liability insurance providing coverage to the
Company with respect to accidental bodily injury and accidental loss of or
damage to property of any customer or employee of the Company, which would
occur in connection with the business of the Company and on the premises of
the Company. The Company does not maintain product liability insurance
with respect to the beauty products used in its spa treatments. See 'Risk
Factors - Lack of Product Liability Insurance".
RESEARCH AND DEVELOPMENT
The Company's business is service-oriented, therefore it does not have a
formal Research & Development department, however, its marketing and
training departments are closely following the evolution of international
fitness and beauty trends.
EMPLOYEES
The Company has approximately 400 employees, including approximately 100
part-time employees. Approximately 350 employees are involved in fitness
and spa operations, including sales personnel, instructors, spa and
supervisory personnel. Approximately 50 are administrative support
personnel, including accounting, marketing, training and other services.
The Company is not a party to any collective bargaining agreement with
its employees. The Company has not experienced a high turnover of non-
management personnel and also has not had difficulty in obtaining adequate
replacement personnel, except with respect to sales personnel, which the
Company believes have become somewhat more difficult to replace due, in
part, to increased competition for skilled retail sales personnel.
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PROPERTIES
The Company's headquarters which include the Company's executive and
administrative offices are located at a 30,000 square feet facility in Hong
Kong pursuant to a lease expiring February 28, 2003. The Company recently
relocated its headquarters and its Causeway Bay location to this location
in order to accommodate additional customers, and more extensive lines of
fitness and spa treatment equipment.
On November 27, 1996, the Company entered into a three year lease of
approximately 25,000 square feet, to accommodate the relocation of the
Tsimshatsui Center, in order to upgrade and accommodate a larger numbers of
customers.
Aggregate rental expense was approximately HK$17.5 million (US$2.3
million) and HK$21.2 million (US$2.7 million) for the year ended December
31, 1995 and 1996, respectively. The Company's current aggregate annual
rent is HK$29.1 million (US$3.8 million).
Mei Foo is the only location indirectly partially owned by the Company.
The Company ( through its subsidiary, Ever Growth Limited), directly owns
700 sq. ft. of the property where the Mei Foo center is located, which space
is used for spa facility. The remaining 7,300 sq. ft., also located in the
same building where the spa is, is leased and is used for fitness
facilities.
Set forth below is the information regarding the Company's centers in
Hong Kong and China.
<TABLE>
<CAPTION>
FITNESS/SPA CENTERS - HONG KONG AND CHINA
-----------------------------------------
Current
Term Monthly
HONG KONG Size Own/Lease Expiration Renewal Option Rent (1)(2)
---- ---------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Shop A on 11-F, 12/F-15/F., 30,000 sq. ft Lease 2/28/2003 None HK$1,208,442
Lee Theatre Plaza
99 Percival Street
Causeway Bay, Hong Kong
10/F-12/F., Storeroom on 25,000 sq. ft Lease 1/31/2000(3) 3 years HK$658,094
5/F, Room 701A, Prestige
Tower
23-25 Nathan Road
Tsimshatsui, Hong Kong
Room 901A, 9F, Unit 605- 15,000 sq. ft Lease 4/30/1998(5) None HK$392,949(4)
609, Level 6
12/F., New Town Tower
10-18 Pak Hok Ting Street
Shatin, Hong Kong
P/F., Stage 8 8,000 sq. ft Own/Lease 4/30/1998 None HK$111,461
122B Broadway Street
Mei Foo Sun Chuen, Hong Kong
14/F., Coda Plaza 5,000 sq. ft Lease 6/30/2000 None HK$143,562
51 Garden Road
Central, Hong Kong
G/F., 3,000 sq. ft Lease 6/30/2000 None HK$61,075
5 Junction Road
Kowloon City, Hong Kong
</TABLE>
_____________________
(1) Monthly rent is paid in HK Dollars
(2) Monthly rent also includes the management fee for property management
and air-conditioning. Excludes utilities.
(3) Lease for Room 701A expires on July 31, 1999.
(4) Monthly rent, including management fee, for Room 901A, 9/F and 12/F is
HK$277,627 (from January 1, 1997); monthly rent, also including the
management fee, for Unit 605-609 is HK$115,312.
(5) Lease for Unit 605-609 expires on July 4, 1999.
46
<PAGE>
<TABLE>
Current
Term Monthly
CHINA Size Own/Lease Expiration Renewal Option Rent (1)
---- --------- ---------- -------------- --------
<S> <C> <C> <C> <C> <C>
6/F., Huangpu Gymnasium 15,000 sq. ft Lease 9/6/2003 None HK$89,525(2)
No. 311 Shandong Road
(Mid)
Shanghai
4/F., China Wanda Bldg 15,000 sq. ft Lease 2/28/2008 None HK$143,333(3)
No. 18 Hongda Road
Zhongshan District, Dalian
2/F, 3/F, 4/F, Block B No. 12,000 sq. ft Lease 12/14/2004 None HK$176,009(4)
808 Hong Qiao Road
Shanghai
__________________________
</TABLE>
(1) Monthly rent is paid in Rmb, with the exception of Dalian property,
for which the rent is paid in HK Dollars. Includes the management fee for
the property and air-conditioning.
(2) The monthly rent will increase 10% per year after January 2, 1998.
(3) The monthly rent increases 5% per year after March 1, 1999.
(4) Combined monthly rent includes management fee. The monthly rent will
increase 6% per year beginning May 1, 2001 for 2/F space and commencing
December 15, 1997 for 3/F and 4/F space.
PROPOSED NEW FACILITIES
The Company is currently negotiating lease agreements for the space to
be used for fitness and spa services in Tsuen Wan and Macau. Tsuen Wan is
a major district of the Western Kowloon province of Hong Kong, which is
densely populated and conveniently accessible. Based upon the Company's
research, no well-known health clubs have ever been set up in that area.
The proposed terms of the Tsuen Wan lease include 50,000 sq. ft., a term of
8 years, and a lease payment of HK$722,000 (US$93,000) for the one month's
rent for the first three years. For the fourth to sixth year, the rent will
be the then prevailing market rent, not lower than the rent for the first
three years, but not exceeding 125% of the rent for the first three years.
For the seventh and eight years, the rent will be the then prevailing market
rate, not lower than the rent for the fourth to sixth year. The lease also
includes a management fee of HK$309,000 (US$40,000) per month.
46
<PAGE>
Macau is strategically located at the mouth of Pearl River on the border
of China. Macau has a population of approximately 500,000 of which 50% is
female and over 98% of residents are Chinese (source: Hong Kong Trade
Development Council). The premises which the Company selected for the new
center are located in a high class commercial building. Based upon the
Company's research, there are no centers in Macau of similar standard as the
Company's existing centers in Hong Kong and China. The proposed terms of
the Macau lease include 36,000 sq. ft., a term of 6 years, and a lease
payment of HK$535,000 (US$69,000) for the one month's rent (which includes
property management fee and air-conditioning) for the first two years, and
increased for the third year to HK 588,500 (US$76,000) per month, and
increased to HK$735,625 (US$95,000) per month, for the last two years.
The Company plans to use a portion of the proceeds of this Offering for
the initial one month lease deposit for the Macau center and for equipment
purchase for the Tsuen Wan and Macau proposed new centers. The Company also
plans to use a portion of the proceeds of this Offering for certain lease
improvements needed to set up a center in Tsuen Wan. Based on its internal
research, the Company expects that Tsuen Wan center should be able to
generate a monthly revenue of HK$2.5 million (US$323,000) and Macau center is
expected to achieve a monthly revenue of HK$3 million (US$387,000), however,
due to various economic, political and other considerations, no assurances
can be given that such revenues will be generated by the proposed new
centers. See "Risk Factors". If the Maximum Offering is not obtained, the
Company may need to seek its alternative sources of financing to provide such
expenditures with respect to the Tsuen Wan and Macau centers, in which event
the Company's plans may be changed or delayed. There is no assurance that
the Tsuen Wan center or Macau center will be opened as currently planned by
the Company. See "Use of Proceeds".
The Company believes that current facilities will be sufficient to
satisfy the Company's existing requirements. In its strategy to expand
operations, however, the Company will open new locations in China. Although
the Company believes that such locations will be available at affordable
prices, no assurance can be given. The Company believes that, in the event
any of the existing leases that expire within five years are not renewed,
adequate alternative space is available in the same areas at comparable
rates. In the Company's experience, most premises used for fitness/spa
services have an optimum life span of about five years, after which time
they need to be improved and/or renovated. The Management believes that the
costs of such renovation are not lesser than the cost of acquiring new
premises, and therefore the Company is not concerned with the fact that most
of its leases do not have renewal options.
GOVERNMENT REGULATION
HONG KONG
The Hong Kong operations and business practices of the Company are
subject to regulation at the local level. General rules and regulations,
including those of the local consumer protection agencies, apply to the
Company's advertising, sales and other trade practices.
Statutes and regulations affecting the fitness, spa and beauty industries
have been enacted or proposed in all of the areas in which the Company
conducts business. Typically, these statutes and regulations prescribe
certain forms and regulate the terms and provisions of membership contracts,
allowing the member the right to cancel the contract within, in most cases,
14 business days after signing, requiring an escrow for funds received from
pre-opening sales or the posting of a bond or proof of financial
responsibility, and, in some cases, establishing maximum prices and terms
for membership contracts and limitations on the term of contracts. In
addition, the Company is subject to several other types of regulations
governing the sale and collection of memberships, as well as laws governing
the collection of debts. These laws and regulations are subject to varying
interpretations by local consumer protection agencies and the courts. The
Company maintains internal review procedures in order to comply with these
requirements and it believes that its activities are in substantial
compliance with all applicable statutes, rules and decisions.
47
<PAGE>
Under typical regulations, members of fitness centers have the right to
cancel their un-used memberships for a period of 30 to 60 days after the
date the contract was entered into (depending on the applicable law) and are
entitled to refunds of any payment made. The specific procedures for
cancellation in these circumstances vary according to differing local laws.
In each instance, the canceling member is entitled to a refund of prepaid
amounts only. Furthermore, where permitted by law, a cancellation fee is
due to the Company upon cancellation and the Company may offset such amount
against any refund owed. The Company's membership contracts provide that a
member's one-time membership fee is non-refundable in case of cancellation.
The Consumer Council of Hong Kong protects the rights of consumers,
including memberships, such as those offered by the Company. The members
have a right to dispute the price or quality of the service, if they find it
unsatisfactory. The Council also assists consumers in cases of false claims
made by the companies with respect to a specific service offered by them.
The Company is cautious in advertising its services, and it never promotes
or guarantees unrealistic results concerning skin care or fitness services,
therefore the Company rarely faces complaints in this respect from its
consumers.
The Company facilities are also subject to building, health and safety
laws. The laws require a normal building inspection at the time of
renovation of the club facilities and/or fire safety inspection. Since the
Company's facilities typically are a part of a large office building for
which a license is granted, if the Company does not comply with all the
regulations, the landlord would not be granted a license. The Board of
Health carries out an inspection of shower and restroom facilities to make
sure that they comply with the standards imposed by the Board. In order to
have massage services, the law requires a special massage license. The
Board of Health and Police Department also hold random inspections of the
facilities providing massage services, since there are strict laws requiring
that massage therapists be of the same sex as the customers. As the Company
is exclusively open to women in all centers, but one, there have been no
concerns with this regulation.
CHINA
In China, the Company's operations and business practices are subject to
regulation from the central government, which is often carried out at local
levels. There is a Consumer Council in China which is now expanded to most
urban areas and whose role is to protect consumers and enforce consumer
rights in cases of dispute regarding quality of the product or service or
misleading claims. The Consumer Council holds considerable power in China
and can impose large fines upon a company it finds in violation of consumer
laws. The Council would often publish a statement against a fined company
in a local newspaper.
China requires a fire safety inspection and license before completion of
renovation of the facility. The safety department performs unannounced
inspections every year to ensure proper compliance with the regulations,
such as maintenance of clear fire exits, extinguishers, smoke detectors and
other safety equipment.
The Board of Health has strict regulations regarding spa facilities and
fitness/beauty equipment that is used by many people per day. The Board
requires an initial license before opening of the facilities and requires
installation of certain anti-bacterial and hygiene equipment. For example,
the beauty treatment area is required to have ultra-violet ("UV")
disinfection lamps installed within every 5 feet of public space. The law
also requires UV disinfection every night for the air, beds and chairs in
the area. The Board also requires "hot cabinet" disinfection units for
small beauty tools and equipment. In the Company's experience, random
inspections of those areas of the spa are often done by the Board of Health.
The Board of Health also requires an inspection and license for each
imported cosmetic or skin care product. The license must be obtained from
the Central Government in Beijing and a substantial fee is charged for the
testing of each imported product.
In China, the Board of Health is responsible for monitoring the operation
of the Company's spas, however, their strict regulations fall in line with
the standards of the Company and therefore, to date, there has been no fine
or restriction of the operation of any fitness or spa facility.
There is a Council for Fair Pricing in China, and every business that
sells products or provides services must register their fees with this
department. The Council has a right to dispute fees if it deems them
unreasonable, however to date, the Council's directives are just a formality
which is limited to collecting a registration fee from each business and
rarely questions the pricing.
48
<PAGE>
The Police Department has strict regulations in China regarding massage
services and requires, although in the management's experience, seldom
checks to ensure that the massage therapist is of the same sex as the
customer. A special license is required for massage services, which is in
the management's opinion, difficult to obtain. The massage therapist must
be certified and licensed by a government affiliation, and must have an
annual health examination. Since all the Company's centers in China are
exclusively for women and include only female staff, the Company has not
been impacted by those regulations.
China has also regulations which are so restricting, that, in fact,
amount to not allowing independently owned fitness and beauty spas by
foreign companies. Instead, the regulations encourage joint ventures with a
foreign company. Fitness and beauty spas fall under the category of
"Entertainment and Recreation", which to date have always been business
entities in a form of joint ventures.
LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Company or
any of its properties is subject, nor to the knowledge of the Company, are
any such legal proceedings threatened.
49
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The officers and directors of the Company, their ages and present
positions held with the Company are as follows:
NAME AGE POSITIONS WITH THE COMPANY
Ngai Keung
Luk (Serleo) 41 Chairman of the Board of Directors, Chief
Executive Officer
Jill Bodnar 32 President and Director
Robert Chui 40 Chief Financial Officer and Director
Darrie Lam 34 Executive Vice President, Secretary and Director
Yuk Wah Ho 41 Executive Vice President and Director
Franco Ho 45 Director
Yat Ming Lam 40 Director
The following is a brief summary of the background of each director,
executive officer and key employees of the Company:
NGAI KEUNG LUK (SERLEO), CHIEF EXECUTIVE OFFICER, CHAIRMAN. Mr. Luk has
been the Chairman of the Board of Directors and Chief Executive Officer of
the Company since October, 1996. He is the founder of Physical Spa &
Fitness and has over twelve years' experience in the physical health service
business. Mr. Luk was previously employed as a trader on the floor of the
Hong Kong gold exchange. Mr. Luk is a controlling shareholder of the
Company and owns beneficially approximately 80% of the Company's Common
Stock (see "Principal Shareholders").
JILL BODNAR, PRESIDENT, DIRECTOR. Ms. Bodnar has been the Company's
President since October, 1996. She received a Bachelor Degree in Exercise
Physiology from the University of Massachusetts, USA in 1987. Prior to
joining the Company in 1993, Ms. Bodnar worked as a fitness professional in
Boston facilities, and was recruited to Asia to open a Hong Kong sports
complex in 1990. On completion of the project, Ms. Bodnar joined the
Company to develop the chain in China in 1993. Ms. Bodnar was honored by
IDEA Association for Fitness Professionals in 1995 for her achievements in
the industry. Ms. Bodnar is fluent in Mandarin.
ROBERT CHUI CHI YUN, CHIEF FINANCIAL OFFICER, DIRECTOR. Mr. Chui has
been Chief Financial Officer of the Company since October, 1996. Mr. Chui
graduated from Concordia University, Canada. He is a practicing Certified
Public Accountant in Hong Kong and a fellow member of the Chartered
Association of Certified Accountants (UK). Mr. Chui has twelve years of
experience with the international accounting firm, Ernst and Young. Mr.
Chui is responsible for corporate planning and financial control.
DARRIE LAM HAU YIN, EXECUTIVE VICE PRESIDENT, SECRETARY, DIRECTOR. Ms.
Lam has been a Vice-President and Secretary of the Company since October,
1996. Ms. Lam is a member of the Hong Kong Society of Accountants and the
Chartered Association of Certified Accountants (UK). She joined the Company
in 1994 and before that she worked with a major Hong Kong listed company,
Wharf Group, as a Financial Analyst. Ms. Lam is responsible for the
Company secretarial affairs, finance and administration functions.
50
<PAGE>
YUK WAH HO, EXECUTIVE VICE PRESIDENT, DIRECTOR. Ms. Ho has over eighteen
years' experience in beauty and skin care and has attended various
international beauty workshops held in Europe. Ms. Ho holds many
certificates in beauty therapy, skin care, and cosmetic applications from
France, England, Taiwan and Hong Kong, including Rene Guinot, Germain de
Cappucini, and Sothy's. Ms. Ho is responsible for the business development
and staff training of the Company's beauty treatment business. Ms. Ho is
the wife of Mr. Luk.
FRANCO HO, DIRECTOR. Mr. Ho has been a Director of the Company since
August, 1997. In the past 20 years, Mr. Ho has been associated as the
senior executive with the following companies: Trenomics Securities Limited,
Shum Loong-Bear Stearns Asia Ltd. and The Best Securities Company. Mr. Ho
is a registered Dealing Director with the Stock Exchange of Hong Kong, Ltd.
He received a MBA degree from Newport University, United States of America,
and is a member of the Canadian Chartered Institute of Business
Administration.
YAT MING LAM, DIRECTOR. Mr. Lam has been a Director of the Company since
August, 1997. In the past four years, Mr. Lam has been employed as a Sales
Manager with Fitness Concept Leisure Supplies Ltd., one of the leading
fitness equipment and product suppliers. Previously, Mr. Lam was employed
as a trader with the Hong Kong gold exchange.
SIU LING CHENG, MARKETING MANAGER. Ms. Cheng holds a Bachelor Degree in
Marketing at the University of Southern Queens land, Australia. Ms. Cheng
joined the Company since 1992 as a marketing executive, and was promoted to
marketing manager the following year. Ms. Cheng is responsible for the
Company's promotional and marketing activities and public relations. Ms.
Cheng also coordinates and assists the marketing teams in China branches.
GILLIAN LOUISE HOLLOWAY, FITNESS MANAGER. Ms. Holloway is a member of
the Association for Fitness Professionals. Ms. Holloway obtained the
qualifications of Certified Aerobics Instructor and Certified Personal
Trainer issued by the American Council on Exercise. Ms. Holloway joined the
Company in 1991 and is responsible for the Company's fitness training
services and membership. Ms. Holloway received a Graduate Certificate in
Recreation and Sports Management issued by the Victoria University,
Australia.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by the Company to Ngai Keung Luk, Chairman and Chief Executive Officer of
the Company and Jill Bodnar, President of the Company for the periods
presented below.
<TABLE>
SUMMARY COMPENSATION TABLE (US$)
<CAPTION>
Awards(2)
Annual
Name and Principal Position Year Salary(1) Bonus(3) Other Compensation(4)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ngai Keung Luk, CEO, Chairman 1994 16,000 ----- 70,000
1995 17,000 ----- 70,000
1996 15,500 ----- 82,000
Jill Bodnar, President, COO 1994 47,000 3,900
1995 47,000 3,900
1996 54,000 4,500
</TABLE>
____________________________________
51
<PAGE>
(1) No officers received or will receive any bonus or other annual
compensation other than salaries during fiscal 1996, other than stated
above. The table does not include any amounts for personal benefits
extended to officers of the Company, such as the cost of automobiles, life
insurance and supplemental medical insurance, because the specific dollar
amounts of such personal benefits cannot be ascertained. Management
believes that the value of non-cash benefits and compensation distributed to
executive officers of the Company individually or as a group during fiscal
year 1995 did not exceed the lesser of US$50,000 or ten percent of such
officers' individual cash compensation or, with respect to the group,
US$50,000 times the number of persons in the group or ten percent of the
group's aggregate cash compensation.
(2) No officers received or will receive any long term incentive plan
(LTIP) payouts or other payouts during fiscal year 1996.
(3) Bonus awarded based on performance.
(4) Other compensation for Mr. Luk included an allowance for Mr. Luk's
living accommodations. The current yearly allowance of US$82,000 for
the fiscal year 1996, represents 50% of the fair market rent of the property
owned by a related company, Silver Policy Development Limited. The
remaining portion is shared by another related company. Physical Health
Centre Hong Kong Limited is using the property as security to obtain a full
line of credit from the Kwangtung Provincial Bank.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The laws of the State of Delaware and the Company's By-laws provide for
indemnification of the Company's directors for liabilities and expenses that
they may incur in such capacities. In general, directors and officers are
indemnified with respect to actions taken in good faith in a manner
reasonably believed to be in, or not opposed to, the best interests of the
Company, and with respect to any criminal action or proceeding, actions that
the indemnitee had no reasonable cause to believe were unlawful.
The Company has been advised that in the opinion of the Securities and
Exchange Commission, indemnification for liabilities arising under the
Securities Act is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
COMPENSATION OF DIRECTORS
The Company reimburses each Director for reasonable expenses (such as
travel and out-of -pocket expenses) in attending meetings of the Board of
Directors. Directors are not separately compensated for their services as
Directors.
EMPLOYMENT AND RELATED AGREEMENTS
There are no employment agreements with the Company's key employees at
this time. The Company anticipates that such agreements will be entered
into after the Offering.
52
<PAGE>
1997 STOCK OPTION PLAN
The Company has a Stock Option Plan which was adopted by the Company's
stockholders and its Board of Directors on April 23, 1997 as "1997 Stock
Option Plan" (the "Plan"). Under the Plan, the Company may issue incentive
stock options, non-qualified options, restricted stock grants, and stock
appreciation rights to selected directors, officers, advisors and employees
of the Company. Under the Plan, a total of 500,000 pre-split (375,000 post-
split) shares of Common Stock are reserved for issuance. The Plan provides
for appropriate adjustments in the number and kind of shares subject to the
Plan and to outstanding options in the event of a stock split, stock
dividend, or certain other types of recapitalization. Stock options may be
granted as non-qualified stock options or incentive stock options, but
incentive stock options may not be granted at a price less than 100% of the
fair market value of the stock as of the date of grant (110% as to any 10%
shareholder at the time of grant); non-qualified stock options may not be
granted at a price less than 85% of the fair market value of the stock as of
the date of grant. The Plan shall be administered by an Option Committee
which is to be composed of two or more members of the Board of Directors who
are disinterested directors. No persons have been named to the Option
Committee as of the date of this Prospectus. Stock options may be exercised
during a period of time fixed by the Option Committee except that no stock
option may be exercised more than ten years after the date of grant or three
years after death or disability, whichever is later. As of the date hereof,
no options have been granted by the Company.
CERTAIN TRANSACTIONS
The Company ratified and approved on November 27, 1996, certain loans to
Mr. Luk, the Company's Chief Executive Officer and the Chairman of its Board
of Directors, in the amount of HK$ 16.5 million (US$2.1 million) (the
"Loan"). Mr. Luk agreed to repay the Loan in eight installments by March
31, 1999, at a prime interest rate, together with the accrued interest
thereon. Mr. Luk has already repaid HK$2.3 million (US$297,000) of the
outstanding amount of the Loan. The current outstanding principal amount of
the Loan and accrued interest, as of September 30, 1997, is HK$14.9 million
(US$1,900,000). The remaining outstanding principal amount of the Loan is
secured by a pledge of 1,500,000 pre-split shares of common stock of the
Company by Mr. Luk, as collateral for the Loan. Mr. Luk does not have any
other outstanding loans from the Company. See also "Risk Factors".
In January 1997, the Company approved an advance to Mr. Luk in the
amount of HK$ 6.0 million (US$780,000), which loan was repaid in full by Mr.
Luk on April 22, 1997.
In October, 1996, the Company closed a transaction with Mr. Luk, a 100%
shareholder of Physical Beauty & Fitness Holdings Limited, a British Virgin
Islands corporation ("Physical Limited"), whereby the Company entered into a
Share Exchange Agreement with Mr. Luk, pursuant to which the Company issued
8,000,000 pre-split shares of its Common Stock to Mr. Luk in exchange for
all of the outstanding shares of Physical Limited (the "Closing"). As a
part of the above transaction certain shareholders of the Company
transferred 990,000 pre-split shares of Common Stock of the Company to
Goodchild Investments Limited, a British Virgin Islands corporation
("Goodchild"), as consideration for Goodchild's beneficial owners' prior
interest in Physical Health Centre Hong Kong Limited, pursuant to an
arrangement between Goodchild and Mr. Luk. Neither Mr. Luk nor Goodchild
were parties affiliated with the Company prior to or at the time of the
acquisition of Physical Limited. At the Closing the then current management
of the Company resigned and was replaced by the current management of the
Company.
Mr. Luk receives a monthly allowance of HK$53,000 (US$82,000 for the
fiscal year 1996) for his living accommodations. Such allowance represents
50% of the fair market rent of the property owned by a related company,
Silver Policy Development Limited ("Silver"). Pursuant to the lease
agreement between Sliver and Physical Health Centre Hong Kong Limited ("Hong
Kong Limited"), the premises for Mr. Luk and his family are rented by Hong
Kong Limited from Silver for HK$106,000 (US$14,000) per month. Hong Kong
Limited then charges back a related company, Williluck International Limited
("Williluck") for a 50% share of the rent. Mr. Luk is a director of
Williluck. Hong Kong Limited is using the property as security to obtain a
full line of credit from the Kwangtung Provincial Bank. See also
"Management - Compensation".
53
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock, as of October 23, 1997, and as
adjusted to reflect the sale of the Shares offered hereby (assuming no
exercise of the Over-allotment Option) by (i) each stockholder known by the
Company to be the beneficial owner of more than five percent of the
outstanding Common Stock, (ii) each director of the Company, (iii) each
officer of the Company, (iv) all directors and officers as a group. Unless
otherwise indicated, the address for each stockholder is 12/F - 15/F Lee
Theatre Plaza, 99 Percival St., Causeway Bay, Hong Kong, and (v) Selling
Stockholders.
Amount and Percentage Beneficially Owned
Name and Nature of
Address of Beneficial Beneficial Before After
Owner Ownership Offering Offering(2)
- -------------------- --------- -------- -----------
DIRECTORS, OFFICERS AND 5% STOCKHOLDERS
Ngai Keung Luk (Serleo) 6,000,000 80.00% 76.19%
Goodchild Investments
Limited 742,500 9.90% ____%
Jill Bodnar, President 0 0.00% 0.00%
Franco Ho, Director 0 0.00% 0.00%
Yat Ming Lam, Director 0 0.00% 0.00%
Robert Chui, CFO 0 0.00% 0.00%
Darrie Lam, Vice President 0 0.00% 0.00%
Yuk Wah Ho,
Vice President (3) 6,000,000 80.00% 76.19%
All officers and
directors as a
group (5 persons) 6,000,000 80.00% 76.19%
54
<PAGE>
OTHER SELLING SHAREHOLDERS
Goodchild Investments Limited
Torotola, British Virgin Islands
Jonathan Mork
9551 Wilshire Boulevard
Beverly Hills, CA 90212
Paul Du Bose
9551 Wilshire Boulevard
Beverly Hills, CA 90212
Robert Alvarez
2618 Southwest 23 Ter.
Suite 202
Ft. Lauderdale, FL 33312
__________
(1) Except as otherwise indicated, the Company believes that the
beneficial owners of Common Stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect
to such shares, subject to community property laws where applicable.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options or warrants currently exercisable, or exercisable within 60 days,
are deemed outstanding for purposes of computing the percentage of the
person holding such options or warrants, but are not deemed outstanding for
purposes of computing the percentage of any other person.
(2) Does not assume exercise of the Underwriter's over-allotment option.
Based upon 7,875,000 post-split (10,500,000 pre-split) shares of Common
Stock outstanding after the Offering.
(3) Ms. Ho is the wife of Ngai Keung Luk (Serleo). Accordingly the number
of common stock owned by Mr. Luk and Ms. Luk overlap.
55
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of 100 million
shares of Common Stock, par value $0.001 per share, of which, 7.5 million
are issued and outstanding, following the 1.33-for-1 reverse split in
October, 1997. The following summary description of the capital stock of
the Company does not purport to be complete and is subject to the detailed
provisions of, and qualified in its entirety by reference to, the
Certificate of Incorporation and By-Laws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part,
and to the applicable provisions of the General Corporation Law of the State
of Delaware (the "DGCL").
COMMON STOCK
Holders of Common Stock have one vote per share on each matter submitted
to a vote of the shareholders and a ratable right to the net assets of the
Company upon liquidation. Holders of the Common Stock do not have
preemptive rights to purchase additional shares of Common Stock or other
subscription rights. The Common Stock carries no conversion rights and is
not subject to redemption or to any sinking fund provisions. All shares of
Common Stock are entitled to share equally in dividends from legally
available sources as determined by the Board of Directors, subject to any
preferential dividend rights of the Preferred Stock (described below). Upon
dissolution or liquidation of the Company, whether voluntary or involuntary,
holders of the Common Stock are entitled to receive assets of the Company
available for distribution to the shareholders. All outstanding shares of
Common Stock are validly authorized and issued, fully paid and non-
assessable.
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock, par value $0.001 per share. No shares of Preferred Stock are issued
or outstanding as of the date of this Prospectus. The Board of Directors is
authorized to establish and designate the classes, series, voting powers,
designations, preferences and relative, participating, optional or other
rights, and such qualifications, limitations and restrictions of the
Preferred Stock as the Board, in its sole discretion, may determine without
further vote or action of the shareholders.
The rights, preferences, privileges, and restrictions or qualifications
or different series of Preferred Stock may differ with respect to dividend
rates, amounts payable on liquidation, voting rights, conversion rights,
redemption provisions, sinking fund provisions, and other matters. The
issuance of Preferred Stock could decrease the amount of earnings and assets
available for distribution to holders of common stock or could adversely
affect the rights and powers, including voting rights, of holders of common
stock.
The existence of the Preferred Stock, and the power of the Board of
Directors of the Company to set its terms and issue a series of Preferred
Stock at any time without shareholder approval, could have certain anti-
takeover effects.
WARRANTS
The Warrants will be issued pursuant to an agreement, dated as of the
date of this Prospectus (the "Warrant Agreement"), between the Company and
____________, as warrant agent (the "Warrant Agent"). None of the Warrants
have been issued prior to this Offering. The following discussion of the
material terms and provisions of the Warrants is qualified in its entirety
by reference to the detailed provisions of the Warrant Agreement, the form
of which has been filed as an exhibit to the Registration Statement on Form
SB-2 of which this Prospectus forms a part.
The Warrants are being offered at $0.33 per Warrant in this Offering.
Each Warrant will entitle the holder to purchase, commencing at any time
after the issuance, one share of Common Stock at an exercise price of $6.00
per share, subject to certain adjustments. Unless exercised, the Warrants
will automatically expire on _______, 2002.
Commencing one year after the date hereof, the Company may redeem the
Warrants, in whole but not in part, at the option of the Company upon not
less than 30 days' notice, at a price of $0.05 per Warrant (the "Redemption
Price"), provided the then current market price of the Company's Common
Stock is at least $8.00 for 30 consecutive business days ending within 15
days of the date of the notice of redemption. If Warrants are not
exercised by the holder(s) thereof within such 30-day period, then they may
be redeemed by the Company at the Redemption Price. In the event the
Company exercises its right to redeem the Warrants, such Warrants will be
exercisable until the close of business on the date fixed for redemption in
such notice. If any Warrant called for redemption is not exercised by such
time, it will cease to be exercisable and the holder thereof will be
entitled only to the Redemption Price.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS
The Company's Certificate of Incorporation provides that no director of
the Company shall be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of laws, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases
pursuant to Section 174 of the DGCL or (iv) for any transaction from which
the director derived an improper personal benefit. The effect of these
provisions is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of fiduciary duty as a
director (including breaches resulting from grossly negligent behavior),
except in the situations described above. These provisions will not limit
the liability of directors under federal securities laws.
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SECTION 203 OF DELAWARE GENERAL CORPORATION LAW
Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation and an "interested stockholder," which is defined as a person
who, together with any affiliates or associates of such person, beneficially
owns, directly or indirectly, 15% or more of the outstanding voting shares
of a Delaware corporation. This provision prohibits certain business
combinations (defined broadly to include mergers, consolidations, sales or
other dispositions of assets having an aggregate value in excess of 10% of
the consolidated assets of the corporation, and certain transactions that
would increase the interested stockholder's proportionate share ownership in
the corporation) between an interested stockholder and a corporation for a
period of three years after the date the interested stockholder becomes an
interested stockholder, unless (i) the business combination is approved by
the corporation's board of directors prior to the date the interested
stockholder becomes an interested stockholder, (ii) the interested
stockholder acquired at least 85% of the voting stock of the corporation
(other than stock held by directors who are also officers or by certain
employee stock plans) in the transaction in which it becomes an interested
stockholder or (iii) the business combination is approved by a majority of
the board of directors and by the affirmative vote of 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
TRANSFER AGENT AND WARRANT AGENT
The Company's transfer and warrant agent for the Common Stock and
Warrants is Signature Stock Transfer, Inc., Dallas, Texas.
SHARES ELIGIBLE FOR FUTURE SALE
Upon successful completion of this Offering, the Company will have
outstanding 7,875,000 shares of Common Stock, without taking into account
shares of Common Stock issuable upon exercise of Warrants offered hereby,
outstanding options, conversion of outstanding preferred and common stock,
the Representative's Warrants and without giving effect to the exercise of
the over-allotment option granted to the Representative. All shares
acquired in this Offering, other than shares that may be acquired by
"affiliates" of the Company as defined by Rule 144 under the Securities Act,
will be freely transferable without restriction or further registration
under the Securities Act.
Out of 7,875,000 shares to be outstanding after the Offering, 6,000,000
post-split shares outstanding prior to this Offering were shares issued by
the Company and sold by the Company in private transactions in reliance on
an exemption from registration. Accordingly, such shares are "restricted
shares" within the meaning of Rule 144 and cannot be resold without
registration, except in reliance on Rule 144 or another applicable exemption
from registration. Representative has obtained lock-up agreements from
certain principal shareholders restricting the sale of their respective free
trading shares. Pursuant to terms of the lock-up agreements, certain
principal shareholders agreed not to sell or transfer any securities of the
Company held by them for a period of 365 days after the effective date of
this Registration Statement.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated), including any affiliate of the
Company, who beneficially owns "restricted shares" for a period of at least
two years is entitled to sell within any three-month period, shares equal in
number to the greater of (i) 1% of the then outstanding shares of Common
Stock (approximately 78,750 shares immediately after this Offering) or (ii)
the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the filing of the required notice of sale with the
Securities and Exchange Commission. The seller also must comply with the
notice and manner of sale requirements of Rule 144, and there must be
current public information available about the Company. In addition, any
person (or persons whose shares are aggregated) who is not, at the time of
the sale, nor during the preceding three months, an affiliate of the
Company, and who has beneficially owned restricted shares for at least three
years, can sell such shares under Rule 144 without regard to notice, manner
of sale, public information or the volume limitations described above.
57
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TAXATION
The following discussion under "United States Federal Income Taxation"
generally summarizes the principal United States federal income tax
consequences of income earned by the company. The discussion under "Hong
Kong Taxation" generally summarizes the material Hong Kong tax applicable to
the Company's operations in Hong Kong. The discussion under "PRC Taxation"
generally summarizes the material PRC taxes applicable to the Company's
investment in the PRC. The discussion does not deal with all possible tax
consequences applicable to the Company. The following discussion is based
upon laws and relevant interpretations thereof in effect as of the date of
this Prospectus, all of which are subject to change.
UNITED STATES FEDERAL INCOME TAXATION
This summary is based on the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations, court decisions and current
administrative rulings and pronouncements of the United States Internal
Revenue Service ("IRS") in effect as of the date of this Prospectus, all of
which are subject to change, possibly with retroactive effect. There can be
no assurance that future changes in applicable law or administrative and
judicial interpretations thereof will not adversely affect the tax
consequences discussed herein. Prospective purchasers are advised to consult
their own tax advisors regarding the tax consequences of acquiring, holding
or disposing of the Shares in light of their particular circumstances.
TAXATION OF THE COMPANY. The Company will be subject to United States
federal income tax only to the extent it has income which has its source in
the United States or is effectively connected with a United States trade or
business. Income derived by the Company from its business in Hong Kong and
the PRC should not constitute United States source income. It is possible
that the Company may invest the net proceeds of this Offering, future
earnings from the business, or proceeds derived from the sale of Shares in
United States securities or cash equivalents. Income derived from United
States securities or cash equivalents will generally constitute United
States source income and may therefore be subject to United States federal
income tax unless a statutory exemption applies.
The Company is predominantly invested in foreign subsidiaries. Those
subsidiaries are subjected to taxes imposed on them in the foreign
jurisdictions in which they operate and in which they are organized.
Further, their income is subject to US federal and state income taxes when
distributed, deemed distributed or otherwise attributed to, the Company,
which is a US corporation. Complex US tax rules apply for purposes of
determining the calculation of those US taxes, the availability of a credit
for any foreign taxes imposed on the foreign subsidiaries or the Company and
the timing of the imposition of US tax. Normally, all foreign income earned
by a US multinational eventually will be subject to US tax. Income earned
by a foreign branch of a US company is taxable currently in the United
States, and income earned by a foreign subsidiary will be subject to US tax
either in the year distributed to the US as a dividend or in the year earned
by means of Subpart F, foreign personal holding company or other federal tax
rules requiring current recognition of certain income earned by foreign
subsidiaries. All of the Company's direct and indirect foreign subsidiaries
constitute "controlled foreign corporations" ("CFCs") for purposes of the
Subpart F rules of the federal Internal Revenue Code. Among other
consequences of CFC states, "Subpart F income," as defined, of the
profitable foreign subsidiaries will be directly taxable to the Company,
whether or not distributed to the Company. In general, Subpart F income is
defined as the income and gains of the foreign subsidiary from its more
passive investment-type activities. Subpart F income extends, in general,
however, to include intercompany payments (e.g., payments of dividends,
interest, royalties, etc.) between related foreign group members.
58
<PAGE>
Thus, for example, dividend distributions from the Company's indirect PRC
and Hong Kong subsidiaries to the Company's British Virgin Island
subsidiary, Regent Town Holdings Limited, would cause that dividend income
of the British Virgin Island subsidiary to be directly taxable to the
Company, notwithstanding that the British Virgin Islands does not tax such
dividend income, and the British Virgin Island subsidiary does not
distribute that dividend income to the Company, but retains it. Income
earned in foreign countries often is subject to Foreign income taxes. In
order to relieve double taxation, the US federal tax law generally allows US
corporations a credit against their US tax liability in the year the foreign
earnings become subject to US tax in the amount of the foreign taxes paid on
those earnings. The credit is limited, however, under complex limitation
rules, to, in general, the US (pre-credit) tax imposed on the US
corporation's foreign source income. Further, complex rules exist for
allocating and apportioning interest, research and development expenses and
certain other expense deductions between US and foreign sources. Limiting
provisions of the source rules decrease the amount of foreign source income
many US multinationals can generate. Reduced foreign source income results
in a smaller foreign tax credit limitation, as the limitation is based on
the ratio of foreign source net income to total net income. Further,
separate income baskets exist for purposes of the foreign tax credit
limitation, which makes it nearly impossible to reduce the effective foreign
tax rate on higher-taxed foreign operating income by diluting income in the
overall basket with relatively low-taxed foreign investment income. These
rules can prevent US multinationals from crediting all of the foreign taxes
they pay. To the extent that foreign taxes are not creditable, foreign
source income bears a tax burden higher than the US tax rate.
HONG KONG TAXATION
PROFITS TAX. The Company is subject to profits tax on all profits
(excluding capital profits) arising in or derived from Hong Kong. The source
of income is therefore the relevant factor, and this is generally regarded
as a question of fact. There are certain situations in which the Hong Kong
tax authorities are prepared to accept apportionment of chargeable profits,
for example when a Hong Kong-based company has manufacturing facilities in
the PRC. The proportion of income originating from the PRC and Hong Kong
respectively in such situations is a question of fact. However, where
apportionment is appropriate, the Hong Kong tax authorities usually adopt a
50:50 allocation unless compelling circumstances dictate otherwise. Profits
tax is levied at the rate of 16.5% for corporations and 15.0% for
unincorporated entities. Generally speaking, business losses may be carried
forward indefinitely to be offset against future profits of the Company.
PRC TAXATION
INCOME TAX. The Company's investment is subject to the Income Tax Law of
the PRC for Enterprises with Foreign Investment (the "Foreign Investment
Enterprise Tax Law"). Pursuant to the Foreign Investment Enterprise Tax Law,
Sino-foreign equity and contractual joint venture enterprises generally are
subject to an income tax at an effective rate of 33%, which is comprised of
a state tax of 30% and a local tax of 3%.
The Shanghai and Dalian JV's, which were incorporated under the laws of
the PRC, provide for enterprise income tax on their assessable income in
accordance with the relevant regulations of the PRC, after considering all
available tax benefits and allowances. They are subject to Chinese
enterprise income taxes at the applicable rate of 33%.
VALUE-ADDED TAX ("VAT"). Effective January 1, 1994, all goods produced
or processed in the PRC, other than real property and goods produced or
processed for export, are subject to a new VAT at each stage or sale in the
process of manufacture, processing and distribution through the sale to the
ultimate consumer of the goods. The new basic VAT rate for the Company is
17% of the sale price of the item. The seller of the goods adds 17% to the
sale price of the item, separately invoiced (except in the case of retail
sales), and collects the applicable amount of VAT through the sale of the
item. The amount of the seller's VAT liability to the Tax Bureau is
calculated as the amount of sales multiplied by the applicable VAT rate.
The amount of the seller's VAT liability may be reduced by deducting the
invoiced amount of VAT included in the materials, parts and other items
purchased by the seller and used in producing the goods.
The Value-Added Tax Provisional Regulations do not permit the seller to
deduct from its VAT liability the amount of VAT included in the purchase
price of fixed assets purchased by the seller. Thus, although the book value
of fixed assets, including plant and equipment purchased by the Company will
be the depreciated cost (ordinarily the purchase price plus VAT) paid at the
time of such purchase, the Company is not permitted to deduct from its VAT
liability in respect of products sold.
BUSINESS TAX. The business tax applies to business activities that are
not subject to the VAT. The business tax is payable by all individuals and
enterprises that engage in taxable business, transfers of intangible
property, or sales of immovable property in the PRC. The business tax is
imposed on a taxpayer when services are provided, intangible assets or real
properties are transferred for consideration. Consideration includes
payments in cash, in property, or in other forms of economic benefits. This
tax is imposed at rates ranging from 3 percent. to 20 per cent. Taxable
businesses include transportation, postal and communications, construction,
banking and finance, insurance, entertainment, cultural and sports
activities and service industries. The Company's operations in China are
subject to 5% business tax rate.
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CONSUMPTION TAX. The consumption tax is an excise tax applicable to
certain taxable activities. It is a tax in addition to the VAT. The tax
applies to Chinese enterprises and foreign investment enterprises engaged in
taxable activities within the PRC. Taxable activities include manufacturing,
and importation of taxable goods. Taxable goods manufactured and used by a
taxpayer for the production of other taxable goods are not subject to the
tax. Exports are exempt from this tax. Taxable goods include tobacco and
liquor products, cosmetics, fireworks, gasoline, motorcycles and
automobiles. These goods are taxed at rates ranging from 3% to 45%.
TAXATION OF DIVIDENDS FROM THE PRC. Dividends distributed to the Company
can be remitted from the PRC without any PRC taxation. Although the Foreign
Investment Enterprise Tax Law provides that certain remittances of foreign
exchange earnings from the PRC are subject to PRC withholding tax, dividends
received by foreign investors from a foreign investment enterprise are
exempt from withholding tax. The Company's PRC subsidiaries are qualified as
foreign investment enterprises, so withholding tax is not applicable to
dividends received by the Company from these subsidiaries.
TAXATION OF DISPOSITION OF INTEREST IN PRC SUBSIDIARIES. In the event
the Company transfers its interest in its PRC subsidiaries, the amount
received in excess of its original capital contribution would be subject to
PRC withholding tax at the rate of 20%.
In the event that the Company's PRC subsidiaries are liquidated, the
portion of the balance of their assets or remaining property, after
deducting undistributed profits, various funds and liquidation expenses,
that exceeds the Company's paid-in capital would be treated as income from
liquidation, which would be subject to income tax at the same rate that
would apply to the Company's income as described under "Income Tax."
BRITISH VIRGIN ISLANDS TAXATION
Under the International Business Companies Act (the "Act") of the British
Virgin Islands ("BVI") as currently are in effect, a holder of common stock
who is not a resident of BVI is exempt from BVI income tax on dividends paid
with respect to the common stock and all holders of common stock are not
liable to BVI income tax on gains realized during that year on sale or
disposal of such shares the BVI does not impose a withholding tax on
dividends paid by the company incorporated under the Act.
There are no capital gains tax, gift or inheritance taxes levied by the
BVI on companies incorporated under the Act. In addition, the common stock
is not subject to transfer taxes, stamp duties or similar charges.
There is no income tax treaty or convention in effect between the United
States and the BVI, nor, as far as the Company is aware, is any such treaty
or convention currently being negotiated.
PLAN OF DISTRIBUTION
Global Financial Group (the "Selling Agent" or "Representative") has
agreed, subject to the terms and conditions of the Selling Agent Agreement,
to act as the exclusive agent for the Company to sell the Common Stock
Shares and the Warrants offered hereby. The Selling Agent has made no
commitment to purchase or take down all or part of the Securities offered
hereby, but agreed to sell a maximum of 375,000 Shares and 375,000 Warrants
("Maximum Offering") on a "best efforts" and "all or nothing" basis within a
period of 30 days following the date of this Prospectus ("Offering Period").
No shares of common stock of Selling Shareholders will be sold to the public
in this Offering until Maximum Offering is first achieved. In the event the
Maximum Offering is not achieved prior to the expiration of the Offering
Period, this Offering will terminate and all funds will be returned promptly
to the subscribers without deduction therefrom or interest thereon.
The Selling Agent has advised the Company that it proposes to offer the
shares of Common Stock and Warrants to the public at the public offering
prices, respectively, set forth on the cover page of this Prospectus, and
that it may allow, to selected dealers who are members of the National
Association of Securities Dealers, Inc. (the "NASD") concessions, not in
excess of $____ per Share ($_____ per Warrant) of which not in excess of
per Share ($____ per Warrant) may be reallowed to other dealers who are
members of the NASD. After the public offering, the public offering price,
concessions and reallowances may be changed by the Selling Agent.
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The Company has granted options to the Selling Agent exercisable during
the 45-day period from the date of this Prospectus, to purchase up to 15% of
additional shares and up to 15% of additional warrants, at the public
offering price set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions. The Selling Agent may exercise
these options, respectively, in whole, or, from time to time, in part,
solely for the purpose of covering over-allotments, if any, made in
connection with the sale of the Shares and Warrants offered hereby.
The Company has agreed to pay to the Selling Agent a non-accountable
expense allowance representing 3% of the aggregate offering price of the
securities offered hereby (plus 3% of the aggregate offering price of any
Shares or Warrants purchased pursuant to the Representative's Over-Allotment
Options), $25,000 of which has been paid to date and to reimburse the
Representative for its legal fees incurred in connection with the offering,
up to $20,000. The Company has also agreed to additionally compensate the
Representative through the sale to the Representative, for nominal
consideration of $0.001 per warrant, of warrants (the "Representative
Warrants I") entitling the holder thereof to purchase certain number of
shares of Common Stock equal to 10% of the Common Stock sold by the
Representative in this Offering (including the over-allotment option, if
applicable), at a price of $4.80 (120% of the $4.00 per share offering
price) for a period of five years commencing one year from the date of this
Prospectus and through the sale to the Representative, for nominal
consideration of $0.001 of a warrant to purchase certain number of warrants
equal to 10% of the Warrants (including the over-allotment option, if
applicable) sold by the Representative in this Offering, at a price of $0.40
per warrant (120% of the $0.33 per warrant offering price) entitling the
holder thereof to purchase certain number of shares of Common Stock at an
exercise price of $6.00 per share for a period of five years commencing one
year from the date of this Prospectus (the "Representative Warrants II").
Warrants I and Warrants II, as well as the shares underlying such Warrants
are registered hereby in this registration statement. The Selling
Stockholders agreed to pay to the Selling Agent a non-accountable expense
allowance representing 3% of the aggregate offering price of the securities
offered hereby by the Selling Stockholders, in addition to any applicable
selling commissions.
The public offering price of Common Stock has been determined by
negotiations between the Company and the Selling Agent and are not
necessarily related to the Company's asset value, net worth, limited public
market or other established criteria of value. Factors considered in
determining the offering price of the securities and the exercise price and
other items of the Warrants include the present state of the Company's
development, the future prospects of the Company, an assessment of
management, the general condition of the securities markets and other
factors deemed relevant.
Prior to this Offering, there was a limited public securities market for
the Company's Common Stock. The Company's Common Stock has been trading
sporadically on the NASD's over-the-counter market on Bulletin Board. The
price of Common Stock and Warrant may be volatile to a degree that might not
occur in securities that are more widely held or more actively traded. The
initial public offering price was negotiated by the Company and the
Representative. In determining the offering price, the Representative
considered, among other things, the business potential and earning prospects
of the Company and prevailing market conditions.
In general, the rules of the Commission will prohibit the Selling Agent
from making a market in the Common Stock during the "cooling off" period
immediately preceding the commencement of sales in the offering. The
Commission has, however, adopted exemptions from these rules that permit
passive market making under certain conditions. These rules permit an
Selling Agent to continue to make a market subject to the conditions, among
others, that its bid not exceed the highest bid by a market maker not
connected with the offering and that its net purchases on any one trading
day not exceed prescribed limits. Pursuant to these exemptions, certain
Selling Agent, selling group members (if any) of their respective affiliates
intend to engage in passive market making in the Common Stock during the
cooling off period.
The Company has agreed to indemnify the Selling Agent, any controlling
person of an Selling Agent, and other persons related to the Selling Agent
and identified in the Selling Agent Agreement, against certain liabilities,
including liabilities arising (i) under the Securities Act, (ii) out of any
untrue statement or material fact contained in the Registration Statement,
this Prospectus, any amendments thereto, and certain other documents, or
(iii) out of any omission of a material fact required to be stated therein
or necessary to make the statements therein not misleading, unless the
statement or omission is made in reliance upon and in conformity with
written information furnished to the Company or on behalf of the Selling
Agent for use in the document in which it was used.
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LEGAL MATTERS
The validity of the Securities offered hereby has been passed upon for
the Company Iwona J. Alami, Esquire, Newport Beach, California. Abdo &
Abdo, P.A., Minneapolis, Minnesota, have served as counsel to the
Representative in connection with this Offering.
EXPERTS
The consolidated financial statements of the Company for the year ended
September 30, 1994, for the three months from October 1, 1994 to December
31, 1994 and for the years ended December 31, 1995 and 1996 appearing in
this Prospectus and Registration Statement have been audited by Arthur
Andersen & Co., independent public accountants, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
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PHYSICAL SPA & FITNESS INC.
FINANCIAL STATEMENTS INDEX
Independent Auditors' Report of Arthur Andersen & Co.....................F-1
Consolidated Balance Sheets as of as of December 31,
1996 and 1995............................................................F-2
Consolidated Statements of Operations for
and the years ended December 31, 1996 and 1995, and
for the year ended September 30, 1994
and for the three months from October 1, 1994
to December 31, 1994.....................................................F-4
Consolidated Statements of Stockholders' Equity
the years ended December 31, 1996 and 1995, and
for the year ended September 30, 1994
and for the three months from October 1, 1994
to December 31, 1994.....................................................F-6
Consolidated Statements of Cash Flows for the
years ended December 31, 1996 and 1995, and for
the year ended September 30, 1994
and for the three months from October 1, 1994
to December 31, 1994.....................................................F-8
Notes to Consolidated Financial Statements..............................F-11
Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996 (unaudited).......................................F-12
Consolidated Statements of Income for the six
months ended June 30, 1997 and 1996 (unaudited).........................F-13
Consolidated Statements of Stockholders' Equity for
the six months ended June 30, 1997 and 1996 (unaudited).................F-14
Consolidated Statements of Cash Flow for the six
months ended June 30, 1997 and 1996 (unaudited).........................F-15
63
<PAGE
ARTHUR
ANDERSEN
Arthur Andersen & Co.
Certified Public Accountants
25/F Wang On Centre
111 Connaught Road Central
Hong Kong
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Physical Spa & Fitness Inc.
We have audited the accompanying consolidated balance sheets of Physical Spa
& Fitness Inc. (a company incorporated in the United States of America) and
its subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of income, cash flows, and changes in shareholders'
equity for the year ended September 30, 1994, the three months from October
1, 1994 to December 31, 1994 and the years ended December 31, 1995 and 1996
expressed in Hong Kong Dollars. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we.
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence. supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Physical
Spa & Fitness Inc. and its subsidiaries as of December 31, 1995 and 1996,
and the results of their operations and their cash flows, for the year ended
September 30, 1994, the three months from October 1, 1994 to December 31,
1994 and the years ended December 31, 1995 and 1996, in conformity with
generally accepted accounting principles in the United States of America.
/s/ Arthur Andersen & Co.
Hong Kong,
April 23,1997.
-1-
<PAGE>
<TABLE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
AUDITED CONSOLIDATED STATEMENTS OF INCOME
-----------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30,1994,
THE THREE MONTHS FROM OCTOBER 1, 1994 TO DECEMBER 31, 1994 AND
THE YEARS ENDED DECEMBER 31,1995 AND 1996
AND
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS FROM OCTOBER 1, 1993 TO DECEMBER 31,1993
(Amounts in thousands)
<CAPTION>
Year ended Three months from October Year ended
September 30, 1 to December 31 December 31, Year ended December 31,
1994 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- ----------
HK$ HK$ HK$ HK$ HK$ US$
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues
Fitness service 24,229 4,297 5,433 28,075 39,054 5,039
Beauty treatments 42,463 7,651 14,343 53,059 72,260 9,324
Others 2,959 263 1,329 4,128 1,901 245
---------- ---------- ---------- ---------- ---------- ----------
Total operating
revenues 69,65l 12,211 21,105 85,262 113,215 14,608
---------- ---------- ---------- ---------- ---------- ----------
Operating Expenses
Salaries and commissions 17,787 4,926 4,727 18,609 23,797 3,071
Rent and related
expenses 16,947 4,003 4,367 18,250 21,185 2,734
Depreciation 6,877 1,963 2,456 8,885 11,393 1,470
Other selling and
administrative expenses 14,014 3,044 4,641 15,083 23,178 2,990
---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses 53,625 13,936 16,191 60,827 79,553 10,265
---------- ---------- ---------- ---------- ---------- ----------
Income (Loss) from
operations 14,026 (1,725) 4,914 24,435 33,662 4,343
---------- ---------- ---------- ---------- ---------- ----------
Other (income), net (879) (152) (189) (790) (885) (114)
Interest expenses 1,157 269 219 1,158 841 108
Loss on shut down of a
beauty center - - 1,332 - - -
---------- ---------- ---------- ---------- ---------- ----------
Total non-operating
(income) expenses 278 117 1,362 368 (44) (6)
---------- ---------- ---------- ---------- ---------- ----------
Income (Loss) before income
taxes and minority
interests 13,748 (1,842) 3,552 24,067 33,706 4,349
Provision for income
taxes 1,779 - 1,169 4,434 8,699 1,122
---------- ---------- ---------- ---------- ---------- ----------
Income (Loss) before
minority interests 11,969 (1,842) 2,383 19,633 25,007 3,227
Minority interests 1,149 (97) 683 2,100 2,211 285
---------- ---------- ---------- ---------- ---------- ----------
Net income(loss) 10,820 (1,745) 1,700 17,533 22,796 2,942
========== ========== ========== ========== ========== ==========
</TABLE>
Translation of amounts from Hong Kong Dollars into United States Dollars
(US$) for the convenience of the reader has been made at the exchange rate
quoted by the South China Morning Post on March 31, 1997 of US$l.00 =
HK$7.75. No representation is made that the Hong Kong Dollar amounts could
have been, or could be, converted into United Stated Dollars, at that rate
on March 31, 1997 or at any other certain rate.
- 2 -
<PAGE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
AUDITED CONSOLIDATED BALANCE SHEETS
-----------------------------------
DECEMBER 31,1995 AND 1996
(Amounts in thousands. except number of shares and share data)
December 31,
1995 December 31, 1996
-------- -------- --------
HK$ HK$ US$
ASSETS
- ------
Current assets
Cash and cash equivalents 901 2,509 324
Trade receivables 7,232 7,276 939
Rental and utility deposits 3,033 4,735 611
Prepayments to vendors and suppliers
and other current assets 4,278 1l,808 1,524
Inventories 1,695 6,456 833
Due from related companies - 1,986 256
Due from a shareholder - current portion 13,264 5,566 718
-------- -------- --------
Total current assets 30,403 40,336 5,205
-------- -------- --------
Due from a shareholder - non-current portion - 10,885 1,405
Prepayments for construction-in-progress - 12,011 1,550
Property, plant and equipment, net 41,131 46,917 6,054
-------- -------- --------
Total assets 71,534 110,149 14,214
======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
- -----------------------------
Current liabilities
Short-term bank loans 2,050 5,627 726
Long-term bank loans - current portion 4,028 1,827 236
Accounts payable and accrued expenses 5,036 8,316 1,073
Obligations under finance leases -
current portion 87 2,257 292
Deferred income 19,720 20,057 2,588
Income taxes payable 9,772 14,752 1,903
Taxes other than income 952 1,713 221
-------- -------- --------
Total current liabilities 41,645 54,549 7,039
-------- -------- --------
Long-term bank loans 1,066 240 31
Long-term loans from third parties 12,757 13,916 1,796
Loans from minority shareholders of
subsidiaries 6,360 5,160 666
Obligations under finance leases - non current
portion 94 1,698 219
Deferred taxation - 1,753 226
Minority interests 4,540 4,857 627
Shareholders' equity:
Common stock, par value US$ 0.001 each 100
million shares authorized; 10 million shares
outstanding 78 78 10
Cumulative translation adjustment (37) 71 9
Retained earnings 5,031 27,827 3,591
-------- -------- --------
Total shareholders' equity 5,072 27,976 3,610
-------- -------- --------
Total liabilities and shareholders' equity 71,534 110,149 14,214
======== ======== ========
Translation of amounts from Hong Kong Dollars into United States Dollars
(US$) for the convenience of the reader has been made at the exchange rate
quoted by the South China Morning Post on March 31, 1997 of US$1.00 =
HK$7.75. No representation is made that the Hong Kong Dollar amounts could
have been, or could be, converted into United States Dollars, at that rate
on March 31, 1997 or at any other certain rate.
-3-
<PAGE>
<TABLE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
----------------------------------------------
AUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1994,
THE THREE MONTHS FROM OCTOBER 1, 1994 TO DECEMBER 31,1994 AND
THE YEARS ENDED DECEMBER 31,1995 AND 1996
(Amounts in thousands)
<CAPTION>
Three months
from October
Year ended 1, 1994 to Year ended
September 30, December 31, December 31, Year ended December 31,
1994 1994 1995 1996
------------ ------------ ------------ ------------ ------------
HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net income 10,820 1,700 17,533 22,796 2,942
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Interest income (114) - (1) (2) (1)
Interest expense for
overdrafts and bank
loans 460 214 1,138 631 81
Interest expense for
finance leases 697 5 20 210 27
Minority interests 1,149 683 2,100 2,211 285
Depreciation 6,877 2,456 8,885 11,393 1,470
(Gain) Loss on disposal
of fixed assets (1) - 230 18 2
Loss on shut down of a
beauty center - 1,332 - - -
(Increase) Decrease in
assets:
Trade receivables,
deposits,
prepayments and
other current assets (4,039) (2,828) (5,975) (9,276) (1,197)
Inventories (106) - (1,589) (4,761) (615)
Due from related
companies 5,652 212 2,429 (1,986) (256)
Increase (Decrease) in
liabilities:
Accounts payable and
accrued expenses 6,726 (4,126) (809) 3,280 424
Due to related
companies 311 (311) - - -
Deferred income 1,752 (1,911) 4,518 337 43
Income taxes payable 1,338 446 2,510 4,980 643
Taxes other than income 712 974 662 761 98
Deferred taxation - - - 1,753 226
------------ ------------ ------------ ------------ ------------
Net cash provided by (used
in) operating activities 32,234 (1,154) 31,651 32,345 4,172
============ ============ ============ ============ ============
</TABLE>
-4-
<PAGE>
<TABLE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
AUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
---------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1994,
THE THREE MONTHS FROM OCTOBER 1, 1994 TO DECEMBER 31, 1994 AND
THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(Amounts in thousands)
<CAPTION>
Three months
from October
Year ended 1, 1994 to Year ended
September 30, December 31, December 31, Year ended December 31,
1994 1994 1995 1996
------------ ------------ ------------ ------------ ------------
HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C>
Cash flows from investing
activities:
Prepayments for
construction-in-progress - - - - (7,O84) (914)
Acquisition of property,
plant and equipment (23,435) (351) (20,427) (18,291) (2,360)
Sales proceeds from
disposal of property,
plant and equipment 8 68 6,153 1,109 142
------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities (23,427) (283) (14,274) (24,266)- (3,132)
------------ ------------ ------------ ------------ ------------
Cash flows from financing
activities
Interest income 114 - 1 2 1
Interest expense from
overdraft and bank
loans (460) (214) (1,138) (631) (81)
Interest expense from
finance leases (697) (5) (20) (210) (27)
Due from a shareholder (1,525) 967 2,707 (3,187) (411)
Payment of dividend to
shareholder - - (29,979) - -
Payment of dividend to
minority shareholders - - - (2,821) (364)
Proceeds of long-term
bank loans 2,500 1,000 3,000 1,000 129
Repayment of long-term
bank loans (474) (1,226) (2,193) (4,027) (519)
Proceeds of long-term
loans from third parties - - 12,757 1,159 150
Capital element of finance
lease rental payments (8,633) (22) (87) (1,152) (149)
Capital contribution of the
Chinese joint venture
partner into a joint
venture - - - 911 118
Proceeds (Repayment) of
loans from minority
shareholders of
subsidiaries 6,359 - - (1,200) (155)
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided
by financing activities (2,816) 500 (14,952) (10,156) (1,308)
------------ ------------ ------------ ------------ ------------
</TABLE>
-5-
<PAGE>
<TABLE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
AUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
FOR THE YEAR ENDED SEPTEMBER 30, 1994,
THE THREE MONTHS FROM OCTOBER 1, 1994 TO DECEMBER 31,1994, AND
THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(Amounts in thousands)
<CAPTION>
Three months
from October
Year ended 1, 1994 to Year ended
September 30, December 31, December 31, Year ended December 31,
1994 1994 1995 1996
------------ ------------ ------------ ------------ ------------
HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C>
Net increase (decrease) in
cash and cash equivalents 5,991 (937) 2,425 (2,077) (268)
Cash and cash equivalents,
at beginning of
period/year (8,591) (2,640) (3,609) (1,149) (148)
Cumulative translation
adjustments (40) (32) 35 108 14
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents,
at end of period/year (2,640) (3,609) (1,149) (3,118) (402)
============ ============ ============ ============ ============
Analysis of cash and cash
equivalents
Cash and bank balances 1,494 639 901 2,509 324
Short-term bank loans (4,134) (4,248) (2,050) (5,627) (726)
------------ ------------ ------------ ------------ ------------
(2,640) (3,609) (1,149) (3,118) (402)
============ ============ ============ ============ ============
</TABLE>
Translation of amounts from Hong Kong Dollars into United States Dollars
(US$) for the convenience of the reader has been made at the exchange rate
quoted by the South China Morning Post on March 31, 1997 of US$1.00 =
HK$7.75. No representation is made that the Hong Kong Dollar amounts could
have been, or could be, converted into United Stated Dollars, at that rate
on March 31, 1997 or at any other certain rate.
-6-
<PAGE>
<TABLE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
AUDITED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1994,
THE THREE MONTHS FROM OCTOBER 1, 1994 TO DECEMBER 31, 1994 AND
THE YEARS ENDED DECEMBER 31, 1995 and 1996
(Amounts in thousands, except number of shares)
<CAPTION>
Cumulative
Common Common Retained Translations
Stock Stock Earnings Adjustments Total
---------- ---------- ---------- ---------- ----------
Number HK$ HK$ HK$ HK$
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1993 10,000,000 78 4,957 - 5,035
Net income - - 10,820 - 10,820
Translation adjustment - - - (40) (40)
---------- ---------- ---------- ---------- ----------
Balance at September 30, 1994 10,000,000 78 15,777 (40) 15,815
Net income - - 1,700 - 1,700
Translation adjustment - - - - (32) (32)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1994 10,000,000 78 17,477 (72) 17,483
Net Income - - 17,533 - 17,533
Dividend paid - - (29,979) - (29,979)
Translation adjustment - - - 35 35
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995 10,000,000 78 5,031 (37) 5,072
Net income - - 22,796 - 22,796
Translation adjustment - - - 108 108
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 10,000,000 78 27,827 71 27,976
========== ========== ========== ========== ==========
-7-
</TABLE>
<PAGE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Amounts in thousands, except number of shares,
per share data and unless otherwise stated)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
- -----------------------------------------
Physical Spa & Fitness Inc. ("the Company") was incorporated on September
21, 1988 under the laws of the United States of America under the name of
Foreclosed Realty Exchange Inc. The Company was incorporated with a share
capital of 100 million common shares with par value of US$O.001 each. 10
million common shares were issued and outstanding as of December 31, 1996.
The Company is a U.S. public company listed on the National Association of
Securities Dealers Bulletin Board.
Physical Beauty & Fitness Holdings Limited ("Physical Holdings") was
incorporated (in March 8, 1996 under the laws of the British Virgin Islands
("BVI") with a capital of one common share being held by a shareholder ("the
Shareholder"), Physical Holdings has interests in various companies
("Operating Subsidiaries") operating fitness and beauty centers ("Fitness
Centres") and other related businesses Hong Kong and the People's Republic
of China ("the PRC").
Pursuant to a Share Exchange Agreement entered into between the Company and
Physical Holdings on August 8, 1996, the Shareholder transferred his
controlling interest, in the outstanding stock, of Physical Holdings in
exchange for 80% of the outstanding stock of the Company. The transaction
was completed on October 21, 1996 when the Company became the ultimate
holding company of Physical Holdings and the Operating Subsidiaries. As
part of the above transaction, certain shareholders of the Company also
transferred 990,000 common shares to Goodchild Investments Limited
("Goodchild"). Accordingly, the Shareholder and Goodchild became the major
shareholders of the Company.
On November 27, 1996, the Company changed its name to Physical Spa &
Fitness, Inc.
The Shareholder's interests in the fitness and beauty centers in Hong Kong
and the PRC and other related businesses were originally conducted through
Physical Health Centre Hong Kong Limited ("Physical HK"), a Hong Kong,
corporation established on March 2, 1990 by two principal shareholders ("the
Principal Shareholders"), one of which is the Shareholder. In 1994, the
share capital was increased and additional shares were issued to the
Principal Shareholders as well as other shareholders.
Physical HK was established to succeed to and continue the operation of two
Fitness Centres and other related businesses previously operated by the
Principal Shareholders in Hong Kong in the form of a sole proprietorship.
-8-
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- -----------------------------------------
During the period from 1990 to 1996, Physical HK and Physical Holdings
expanded their scope of operations by acquiring and establishing, several
subsidiary, companies and by forming Sino-foreign joint ventures in the PRC
to operate six additional Fitness Centres in Hong Kong, two in Shanghai and
one in Dalian, the PRC and other related businesses. These subsidiary
companies were all formerly jointly owned by the Principal Shareholders or
solely by the Shareholder. The respective equity interests were transferred
by the Principal Shareholders to Physical HK or Physical Holdings throughout
1993 to 1996 at the original cost of the respective investments.
On October 19, 1996, 91.4% of the equity interests of Physical HK was
transferred by the Principal Shareholders and other shareholders of Physical
HK to Physical Holdings at the par value of the shares transferred. In
addition, all the equity interests of Physical HK in various subsidiaries
and a Sino-foreign joint venture were also transferred to Physical Holdings
at the recorded cost of these investments. The Company, Physical Holdings
and the Operating Subsidiaries are collectively known as the Group. They
are all distinct legal entities with limited liability.
The transfer of the Shareholder's interests in Physical Holdings and the
Operating Subsidiaries was a reorganization of companies under common
control and has been accounted for effectively as a pooling of interests and
the consolidated financial statements of the Company have been presented as
if the Operating Subsidiaries had been owned by the Company since their date
of incorporation or acquisition by the Shareholder whichever is later.
-9-
<PAGE>
<TABLE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- -----------------------------------------
The details of Physical Holdings and Operating Subsidiaries and their
principal activities as of the date of this report are summarized below:
<CAPTION>
Date of Equity interest
acquisition/ Place of owned by the
Name of Company formation incorporation Company Principal
activities
- -------------------------- ------------- ------------- --------------- --------------------
Direct Indirect
<S> <C> <C> <C> <C> <C>
Physical Beauty & Fitness March 8, 1996 BVI 100% - Investment holding
Holdings Limited ("Physical
Holdings")
Physical Health Centre March 2, 1990 Hong Kong 91.4% - Operating 5 Fitness
Hong Kong Limited ("Physical Centres in Hong
HK") Kong
Regent Town Holdings September 20, BVI 88.5% - Investment holding
Limited ("Regent") 1993
Supreme Resources Limited September 29, Hong Kong 70% - Operating a beauty
("Supreme") 1994 treatment centre in
Hong Kong
Physical health Centre September 29, Hong Kong 100% - Investment holding
(Zhong Shan) Limited 1994 (formerly operating
("Zhongshan Physical") a beauty treatment
(formerly known as Famerich centre in Hong Kong
Development Limited ("Famerich")
Zhongshan Physical Ladies' October 29, the PRC - 95% Operating a Fitness
Club Ltd. (Owned by 1996 Centre in Zhongshan
Zhongshan Physical) the PRC
Ever Growth limited ("Ever September 29, Hong Kong 100% - Property holding
Growth") 1994
Proline Holdings Limited September 28, BVI - 88.5% Investment holding
("Proline") (wholly owned 1994
by Regent)
Shanghai Physical Ladies' September 28, Hong Kong - 88.5% Investment holding
Club Company Limited 1994
("Shanghai Physical")(wholly
owned by Proline)
Shanghai Physical Ladies' September 28, The PRC - 88.5% Operating two
Club Co., Ltd. (owned by 1994 Fitness Centres in
Shanghai Physical) Shanghai, the PRC
Mighty System Limited December 15, BVI 100% - Provision of
("Mighty") 1994 marketing services
for cosmetics sales
Jade Regal Holdings Limited March 15, 1996 BVI 100% - Investment holding
("Jade Regal")
Physical Health Centre March 15, 1996 Hong Kong - 100% Investment holding
(Dalian) Limited ("Dalian
Physical") (wholly owned by
Jade Regal)
Dalian Physical Ladies' Club March 15, 1996 The PRC - 90% Operating a Fitness
Co., Ltd. (90% owned by Centre in Dalian,
Dalian Physical) the PRC
Star Perfection Holdings April 15, 1996 BVI 100% - Investment holding
Limited ("Star Perfection")
Physical Health Centre April 15, 1996 Hong Kong - 100% Investment holding
(Shenzhen) Limited ("Shenzhen
Physical") (wholly owned by
Star Perfection)
Shenzhen Physical August 16, 1996 The PRC - 90% Operating a Fitness
Ladies' Club Co., Ltd. Centre in Shenzhen,
(owned by "Shenzhen Physical") the PRC
-10-
</TABLE>
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- -----------------------------------------
Regent Town Holdings Limited ("Regent") was originally 67% owned by Physical
HK upon its incorporation. In June, 1995, Physical HK increased its equity
interest to 83.5% by acquiring additional shares issued by Regent at the par
value of the shares. In June, 1996, 5% of the equity interests of Regent
owned by a minority shareholder was acquired by the Shareholder (see Note
6(d)). All the shares owned by Physical HK and the Shareholder were then
transferred to Physical Holdings at the original cost of investments to the
Physical HK and the Shareholder.
Famerich was incorporated to operate a beauty treatment centre in Hong Kong.
The business was closed down in late 1994 and the company became dormant
thereafter. The loss of HK$1,332 resulting from the shut down has been
included in the consolidated statement of income for the three-month period
from October 1 to December 31, 1994. In June, 1996, Famerich changed its
name to Zhongshan Physical and it then entered into a joint venture contract
to establish a Sino-foreign co-operative joint venture for the provision of
physical fitness and beauty treatment services through a Fitness Centre in
the PRC. (see details below)
-11-
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- -----------------------------------------
The Group operates Fitness Centres in the PRC through some of its Operating,
Subsidiaries which are Sino-foreign joint ventures established in the PRC.
Detailed information in connection with these joint ventures is as follows:
<TABLE>
<CAPTION>
Interests Term
Type of owned of the
Name of the joint by the joint Registered
Joint Venture Location venture Group venture capital Profit sharing
arrangement
Foreign Chinese
partner partner
------- -------
<S> <C> <C> <C> <C> <C> <C>
Shanghai Huangpu Co- 88.5% 10 years Originally See arrangement of p.13
Physical Ladies' and operating US$1,000 in
Club Co., ltd. Hongqiao, cash and
("Shanghai JV") Shanghai increased
to US$2,000
in cash in
1995
Dalian Physical Dalian Equity originally 12 years Originally Pro-rata to equity
Ladies' Club at 55% Rmb10,000 interests
Co., Ltd. and in cash and
("Dalian JV") changed changed to
to 90% in Rmb1,000
1996 in cash and
Rmb9,000
in form of
fixed assets
and
renovation
materials
in 1996
Shenzhen Shenzhen Co- 90% 10 years HK$4,600 Pro-rata to equity
Physical operative in form of interests
Ladies' Club cash and
Co. Ltd. fixed assets
("Shenzhen JV")
Zhongshan Zhongshan Equity 95% 10 years US$500 in Pro-rata to equity
Physical Ladies form of interests
Club Co. Ltd. cash and
("Zhongshan fixed assets
JV")
-12-
</TABLE>
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- -----------------------------------------
Other special provisions of these joint ventures are summarised as follows:
Shanghai JV
- -----------
Pursuant to an agreement between Physical HK and Shanghai Physical dated
July 20, 1993, Shanghai Physical authorized Physical HK to enter into a
joint venture contract ("the Contract") on its behalf with the Chinese joint
venture partner. Under this agreement, benefits, rights and obligations
arising from the Contract belong to Shanghai Physical. Physical HK
contributed the required capital on behalf of Shanghai Physical.
According to the provisions of the Contract, Shanghai Physical contributed
100% of the registered capital of the joint venture while the Chinese joint
venture partner provided the premises in which the Fitness Centres are
located. Upon dissolution of the joint venture, all fixed assets of the
joint venture will be assumed by the Chinese joint venture partner while
Shanghai Physical will assume all the working capital, debts and outstanding
obligations and commitments. For the first three years of the joint
venture, the Chinese joint venture partner will be entitled only to rent of
Rmb950 per annum. Thereafter, the rental payment will be increased by 10%
per annum unless the inflation rate in the PRC is higher than 16%. The
Chinese joint venture partner has no further entitlement to the profits of
the joint venture.
Shenzhen JV
- -----------
According to the laws in the PRC and the terms of the joint venture
contract, both joint venture partners are obliged to fulfill their capital
contribution requirements into the joint venture within a specified period
of time after the issue of the business license. As of the date of this
report, however, both joint venture partners have not contributed the
required capital according to the requirements of the contract. Such
default in the funding obligations will require renegotiations between the
two partners and may also trigger default remedies as specified in the joint
venture contract. Further, a failure to meet regulatory time limits set by
the State Administration of Industry and Commerce for capital contributions
could result in the cancellation of the approval of the joint venture's
business license. Both joint venture partners are in the process of
applying to the relevant authorities for an extension of such time limits.
The joint venture has not yet commenced operations as of the date of this
report.
-13-
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- -----------------------------------------
Zhongshan JV
- ------------
Similar to the Shenzhen JV, both joint venture partners have not yet
fulfilled their required capital contribution obligations within the
specified time limit. The joint venture partners are in the process of
applying for extension of such time limits from the relevant authorities.
On August 2, 1996, a supplementary agreement was signed between the joint
venture partners to amend the provisions of the contract to the extent that
all the benefits and liabilities of the joint venture will be assumed by
Zhongshan Physical. In return, the Chinese joint venture partner will be
entitled to HK$30 per annum in the form of a technology introduction fee.
The Chinese joint venture partner will not be entitled to share in the
profits of the joint venture after receipt of the technology introduction
fee. The supplementary agreement is subject to the approval of the relevant
PRC authorities.
The joint venture has not yet commenced operations as of the date of this
report.
Since the Shanghai JV and the Dalian JV operate in the PRC, they are subject
to special considerations and significant risks not typically associated
with investments in equity securities of United States and Western European
companies. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange.
These are described further in the following paragraphs:
POLITICAL ENVIRONMENT
The value of the Company's interests in the Shanghai and Dalian JVs may be
adversely affected by significant political, economic and social
uncertainties in the PRC. A change in policies by the Chinese government
could adversely affect the Company's interests in the Shanghai and Dalian
JVs by, among other factors: changes in laws, regulations or the
interpretation thereof; confiscatory taxation; restrictions on foreign
currency conversion, imports or sources of suppliers; or the expropriation
or nationalization of private enterprises.
-14-
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- -----------------------------------------
ECONOMIC ENVIRONMENT
The economy of the PRC differs significantly from the economies of the
United States and Western Europe in such respects as structure, level of
development, gross national product, growth rate, capital reinvestment,
resource allocation, self-sufficiency, rate of inflation and balance of
payments position, among others. Only recently has the Chinese government
encouraged substantial private economic activities.
The Chinese economy has experienced significant growth in the past five
years, but such growth has been uneven among various sectors of the economy
and geographic regions. Actions by the Chinese central government to
control inflation have significantly restrained economic expansion recently.
Similar actions by the central government of the PRC in the future could
have a significant adverse effect on economic conditions in the PRC and the
economic prospects for the Group.
FOREIGN CURRENCY EXCHANGE
The Chinese central government imposes control over its foreign currency
reserves through control over imports and through direct regulation of the
conversion of its national currency into foreign currencies. As a result,
the Renminbi is not freely convertible into foreign currencies.
The Shanghai and Dalian JVs conduct substantially all of their business in
the PRC, and their financial performance and condition are measured in terms
of Renminbi. The revenues and profits of the Shanghai and Dalian JVs are
predominantly denominated in Renminbi, and will have to be converted to pay
dividends to the Company in United States Dollars or Hong Kong Dollars.
Should the Renminbi devalue against these currencies, such devaluation would
have a material adverse effect on the Company's profits and the foreign
currency equivalent of such profits repatriated by the Shanghai and Dalian
JVs to the Company. The Company currently is not able to hedge its exchange
rate exposure in the PRC because neither the banks in the PRC nor any other
financial institution authorized to engage in foreign exchange transactions
offer forward exchange contracts.
LEGAL ENVIRONMENT
Since 1979, many laws and regulations dealing with economic matters in
general and foreign investment in particular have been enacted in the PRC.
However, the PRC still does not have a comprehensive system of laws and
enforcement of existing laws may be uncertain and sporadic.
-15-
<PAGE>
2. BASIS OF PRESENTATION
- -------------------------
The financial year end date of Physical HK and the Operating Subsidiaries
incorporated in Hong Kong and the BVI was September 30 up to September 30,
1994 while the PRC joint ventures' financial year end is December 31.
Pursuant to members' resolutions passed by Physical HK and the Operating
Subsidiaries incorporated in Hong Kong and the BVI, their financial year end
dates were all changed to December 31 in 1995. For presentation purposes,
the consolidated financial statements of the Group for the fifteen month
period from October 1, 1994 to December 31, 1995 have been segregated to
report the results of operations and cash flows for the three-month period
from October 1, 1994 to December 31, 1994 separately from those for the
twelve-month period from January 1, 1995 to December 31, 1995.
Unaudited stub period consolidated income statements of the Group for the
three-month period from October 1, 1993 to December 31, 1993 are presented
for comparison purposes.
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles in the United
States of America ("US GAAP"). This basis of accounting differs from that
used in the statutory financial statements of the BVI and Hong Kong
Operating Subsidiaries and the PRC joint ventures, which were prepared in
accordance with generally accepted accounting principles in Hong Kong ("HK
GAAP") and the accounting principles and the relevant financial regulations
applicable to enterprises with foreign investments as established by the
Ministry of Finance of China ("PRC GAAP") respectively.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------
a. Basis of Consolidation
- -----------------------------
The consolidated financial statements include the financial statements of
the Company, its majority owned and controlled subsidiaries and joint
ventures. All material intercompany balances and transactions have been
eliminated.
b. Revenue & Deferred Income
- --------------------------------
Revenue represents membership fees and service income in connection with the
provision of physical fitness and beauty treatment services and other
related income, net of the related sales tax, if any. Annual membership
fees and service income and other related income are recognized when
services are rendered. During 1996, the Company changed its membership
policy so that the annual membership fee was replaced by a non-refundable
membership admission fee and monthly dues. The admission fee is recognized
in full as revenue upon membership being granted while the monthly dues are
recognized as revenue on a monthly basis.
Deferred income represents membership fees and service fees billed but the
related services, or portion of the services, have not yet been rendered.
-16-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- ----------------------------------------------
c. Cash and Cash Equivalents
- ------------------------------
Cash and cash equivalents include cash on hand, demand deposits with banks
and liquid investments with an original maturity of three months or less.
d. Property Plant and Equipment
- ---------------------------------
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation of property, plant and equipment is computed
using the straight line method over the assets' estimated useful lives. The
estimated useful lives are as follows:
Leasehold land held under long-term lease Over the lease term
Buildings 20 to 50 years
Leasehold improvements Over the lease term
Machinery and equipment 5 to 10 years
Furniture and fixtures 5 years
Computers 4 to 5 years
Motor vehicles 4 to 5 years
e. Taxation: Income Taxes
- ---------------------------
No provision for withholding or U.S. federal income taxes or tax benefits on
the undistributed earnings and/or losses of the Operating Subsidiaries has
been provided as the earnings of the Operating Subsidiaries, in the opinion
of the management, will be reinvested indefinitely.
Physical HK, Supreme, Zhongshan Physical, Ever Growth, Shanghai Physical,
Dalian Physical and Shenzhen Physical were incorporated under the laws of
Hong Kong. They provide for Hong Kong profits tax at a rate of 16.5% on the
basis of their income for financial reporting purposes, adjusted for income
and expense items which are not assessable or deductible for income tax
purposes.
Physical Holdings, Regent, Mighty, Proline, Jade Regal and Star Perfection
were incorporated under the laws of BVI and under these laws, they are not
subject to tax on income or on capital gains.
The Shanghai and Dalian JVs, which were incorporated under the laws of the
PRC, provide for enterprise income tax on their assessable income in
accordance with the relevant regulations of the PRC, after considering all
available tax benefits and allowances. They are subject to Chinese
enterprise income taxes at the applicable tax rate of 33%.
-17-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- -----------------------------------------------
e. Taxation: Income Taxes (Cont'd)
- ---------------------------
The Group provides for deferred income taxes using the liability method, by
which deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities. The tax consequences of those differences are classified as
current or non-current based upon the classification of the related assets
or liabilities in the financial statements. A valuation allowance is
provided for the portion of deferred tax assets that is not currently
realizable, since the realization of these benefits depends upon the ability
of the relevant entity to generate income in future years.
f. Taxation: Sales Taxes
- --------------------------
According to the tax regulations promulgated by the PRC government which
came into effect on January 1, 1994, the Shanghai and Dalian JVs are subject
to Business Tax ("BT") calculated at 5% on the gross service income received
by the joint venture.
BT is recognized on the accrual basis. Sales revenue is recorded in the
financial statements net of BT.
g. Foreign Currency Translation
- ---------------------------------
The Company, Physical Holdings and the Hong Kong and BVI Operating
Subsidiaries maintain their accounting books and records in Hong Kong
dollars ("HK$"). Foreign currency transactions during the year are
translated into HK$ at rates of exchange prevailing at the time of the
transactions. Monetary assets and liabilities denominated in foreign
currencies at year end are translated at the rates of exchange prevailing at
the balance sheet date. Non-monetary assets and liabilities are translated
at the rates of exchange prevailing at the time the asset or liability was
acquired, Exchange gains or losses are recorded in the consolidated
statements of income.
The PRC Operating Subsidiaries maintain their books and records in Renminbi.
Foreign currency transactions are translated into Renminbi at the applicable
exchange rate quoted by the People's Bank of China ("the unified exchange
rate"), prevailing at the dates of the transactions. Monetary assets and
liabilities denominated in foreign currencies are translated into Renminbi
using the applicable unified exchange rates at the balance sheet date. The
resulting exchange differences are included in the determination of income.
-18-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- -----------------------------------------------
g. Foreign Currency Translation (Cont'd)
- ------------------------------------------
Renminbi is not freely convertible into foreign currencies. All foreign
exchange transactions involving Renminbi must take place either through the
Bank of China or other institutions authorized to buy and sell foreign
currencies, or at a swap centre. Before January 1, 1994, the exchange rates
used for transactions through the Bank of China and other authorized
institutions were set by the government (the "official exchange rate") from
time to time whereas the exchange rates available at the swap centres (the
"swap centre rates") were determined largely by supply and demand. The
Chinese government announced the unification of the two-tier exchange rate
systems in December 1993 effective January 1, 1994. The unification brought
the official exchange rate of the Renminbi in line with the swap centre
rate. The unification did not have a major impact on the consolidated
financial statements of the Company under US GAAP.
On consolidation, the financial statements of the PRC Operating Subsidiaries
are translated into Hong Kong Dollars using the closing rate method, whereby
the balance sheet items are translated into Hong Kong Dollars using the
unified exchange rates at the respective balance sheet dates. The share
capital and retained earnings are translated at historical unified exchange
rates prevailing at the time of the transactions while income and expense
items are translated at the average unified exchange rates for the
years/period. The resultant translation differences are recorded in the
consolidated balance sheets as cumulative translation adjustments which are
included as a separate account in shareholders' equity in the accompanying
balance sheets.
h. Finance Leases
- -------------------
Leases that substantially transfer to the Group all the rewards and risks of
ownership of assets, other than legal title, are accounted for as finance
leases.
Fixed assets held under finance leases are initially recorded at the present
value of the minimum lease payments at the inception of the leases, with
equivalent liabilities categorized as appropriate under current or non-
current liabilities.
Finance charges, which represent the difference between the minimum lease
payments at the inception of the leases and the fair value of the assets
acquired, are allocated to accounting periods over the period of the
relevant leases so as to produce a constant periodic rate of charge on the
outstanding balances.
-19-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
- -----------------------------------------------
i. Operating Leases
- --------------------
Leases where substantially all the rewards and risks of ownership of assets
remain with the lessors are accounted for as operating leases. Rental
payments under operating leases are expensed as incurred.
j. Related companies
- ----------------------
A related company is a company in which one or more of the directors or
shareholders of the Company have direct or indirect beneficial interests.
4. PROPERTY, PLANT AND EQUIPMENT
- ----------------------------------
December 31,
-----------------------
1995 1996
---------- ----------
HK$ HK$
Land and buildings 2,550 3,137
Leasehold improvements 32,282 40,143
Machinery and equipment 29,511 37,995
Furniture and fixtures 6,421 6,368
Computers 1,456 1,586
Motor vehicles 725 728
Less: Accumulated depreciation (31,814) (43,040)
---------- ----------
Net book value 41,131 46,917
========== ==========
As of December 31, 1996, the cost and accumulated depreciation of fixed
assets held under finance leases amounted to approximately HK$4,927 and
HK$132 respectively.
-20-
<PAGE>
5. TRADE RECEIVABLES
- ----------------------
Trade receivables comprised the following items:
December 31,
-----------------------
1995 1996
---------- ----------
HK$ HK$
Balances with a beauty product vendor 6,295 2,097
Corporate beauty package receivables - 4,854
Others 937 325
---------- ----------
7,232 7,276
========== ==========
(a) Balance with a beauty product vendor:
Pursuant to a marketing agreement between an Operating Subsidiary, Mighty,
and a beauty product vendor ("the Vendor"), the Vendor agreed to pay
marketing fees calculated at HK$500 per month from June 1994 to November
1994 and HK$250 per month thereafter to Mighty for marketing services
rendered for cosmetic sales up to May, 1996. In addition, the Group also
purchases beauty products from the Vendor. On September 30, 1996, Mighty
entered into an agreement with the Vendor for the settlement of the
outstanding balances by three installments beginning December 31, 1996 to
June 30, 1997. The first installment of HK$2,800 due on December 31, 1996
was settled by offsetting the cost of beauty products purchased by the Group
from the Vendor during the 3 months from October 1 to December 31, 1996.
The second installment of HK$1,000 was due on March 3l, 1997 and was settled
in cash by the Vendor. The outstanding balances with the Vendor are
interest-free and unsecured.
The Vendor has also agreed to bear all custom duty and sales taxes in
connection with beauty products sold to the Group and imported into and sold
in the PRC by the Group which were estimated to be approximately HK$1,396
and HK$7,544 as of December 31, 1995 and 1996 respectively. As a result,
the trade receivables from the Vendor have been offset against the custom
duty and sales tax liabilities included under "Taxes other than income" in
the accompanying consolidated balance sheets, as of December 31, 1995 and
1996.
-21-
<PAGE>
5. TRADE RECEIVABLE (Cont'd)
- ---------------------
(b) Corporate beauty packages receivables:
During 1996, two Operating Subsidiaries, Regent and Jade Regal, entered into
several agreements with a third party company ("the Package Subscriber") for
sales of corporate beauty packages ("the Packages") at a consideration of
approximately HK$6,900. The Packages were given away or resold by the
Package Subscriber to its customers ("the ultimate users") for beauty
treatments performed at the Fitness Centres of the Shanghai and Dalian JVs.
Pursuant to the agreements, non-refundable redemption letters for each
beauty treatment with prescribed expiry dates within one year of the date of
the letters were issued by Regent and Jade Regal to the Package Subscriber
which allowed the ultimate users to redeem the Packages at the Centres. As
of December 31, 1996, approximately HK$6,800 of the Packages had either been
redeemed by the ultimate customers or had expired without being redeemed.
This amount has been included as Beauty Treatment revenue in the
consolidated income statement of the Group for the year ended December 3l,
1996. Similar arrangements have been made between Physical HK and the
Vendor mentioned in (a) above. Please refer to Note 6(a) for details.
On September 30, 1996, Regent and Jade Regal entered into an agreement with
the Package Subscriber for the settlement of the outstanding balances by
three installments from December 3l, 1996 to June 3O, l997. The first
installment of HK$2,000 due on December 31, 1996 was settled by a deposit
paid on behalf of the Group to a contractor for the decoration of the new
premises for a Fitness Centre in Hong Kong. The second installment of
HK$2,000 due on March 31, 1997 was settled in cash.
6. RELATED PARTY TRANSACTIONS
- -------------------------------
The Group had the following transactions with related companies:
<TABLE>
<CAPTION>
Three months ended Year ended
Year ended -------------------------- ---------------------------
September 30, December 31, December 31, December 31, December 31,
1994 1993 1994 1995 1996
------------- ------------ ----------- ------------ ------------
HK$ HK$ HK$ HK$ HK$
(unaudited)
<S> <C> <C> <C> <C> <C>
Rental of a director's
quarters 540 - 135 540 636
Purchase of cosmetics and
beauty products 1,955 - 416 2,246 -
Purchase of beauty and
fitness equipment 9,580 - 273 898 -
Sales of beauty and fitness
equipment 295 - - 1,367 793
Purchase rebate received 542 - - 1,208 -
Management fee received 660 692 2 10 12
</TABLE>
Certain general and administrative expenses incurred by the Group companies
during the relevant periods on behalf of the related companies were
reimbursed by the respective related companies at cost.
-22-
<PAGE>
6. RELATED PARTY TRANSACTIONS (Cont'd)
- -------------------------------
The Principal Shareholders of the Group had beneficial interests in all the
aforementioned related companies or the shareholders of the related
companies were related to the Principal Shareholders.
In 1993, Physical HK extended a loan of HK$6,190 to a related company. The
loan was interest-bearing at 8.5% and was unsecured. It was fully repaid by
the related company in 1994. For the year ended September 30, 1994,
interest income of approximately HK$96 on such loans was included in the
consolidated statements of income.
During the year ended December 31, 1996, Physical HK incurred training
expenses of approximately HK$700 at no cost to other related companies.
The Group has also undertaken the following transactions with the Principal
Shareholders who were also directors of the Group companies:
(a) The Group made certain advances to the Shareholder during the years
ended September 30, 1994, December 31, 1995, December 31, 1996 and the three
months ended December 31, 1994 which were non interest-bearing, unsecured
and repayable on demand. These advances were repaid in cash, by payments
made by the Shareholder on behalf of the Group or by off-setting the
dividends declared by the Group and payable to the Shareholder against the
amounts owed to the Group. Dividends declared during the year ended
December 31, 1995 were off-set against amounts owed by the Shareholder. On
March 26, 1997, the Group entered into a shareholder loan agreement ("the
Agreement") with the Shareholder in respect of the outstanding balance of
approximately $16,500 million owed by the Shareholder to the Group ("the
Shareholder's Loan") as of December 31, 1996. Pursuant to the Agreement,
the Shareholder's Loan is unsecured and interest-bearing at the bank prime
borrowing rate prevailing at the date of the Agreement. The Shareholder
will repay the Loan and the interest thereon in eight installments from June
30, 1997 to March 31, 1999. Accordingly, the amount from a shareholder was
classified into current and non-current portions in line with the repayment
schedule for presentation in the consolidated balance sheet as of December
31, 1996.
During 1996, Physical HK entered into several agreements with the beauty
product vendor ("the Vendor") mentioned in Note 5(a) for sales of corporate
beauty packages at a consideration of approximately HK$7,600. This amount
has been included as Beauty Treatment revenue in the consolidated income
statement of the Group for the year ended December 31, 1996. All payments
made by the Vendor relating to these corporate beauty packages were received
by the Shareholder on behalf of Physical HK and included in the amount due
from the Shareholder. Up to December 31, 1996, approximately HK$2,500 had
been repaid by the Shareholder to Physical HK. The remaining, HK$5,100 due
from the Shareholder in relation to this arrangement was included in the
Shareholder's Loan balance as of December 31, 1996 mentioned above.
-23-
<PAGE>
6. RELATED PARTY TRANSACTIONS (Cont'd)
- -------------------------------
(b) The Shareholder has also undertaken to indemnify the Group against any
contingent liabilities including tax liabilities and claims that may result
from the operating activities of the Group in Hong Kong, the PRC and
elsewhere occurring before December 31, 1996. Any such liabilities will be
recorded as expenses by the Group.
(c) In 1996, Physical HK made an advance to the Shareholder for the
acquisition of a 5% equity interest in Regent from a minority shareholder
("the Minority Shareholder") at a consideration of approximately HK$312. In
addition, an advance of approximately HK$1,200 was made to the Shareholder
to repay a loan from the Minority Shareholder (see (d) below) on behalf of
Regent. These advances were included in the balance due from the
Shareholder as mentioned in (a) above. On November 13, 1996, the
Shareholder transferred his equity interests in Regent acquired from a
minority shareholder to Physical Holdings at cost and repaid the advance of
approximately HK$1,200 made from Physical HK. As a result, the Group
increased its equity interest in Regent from 83.5% to 88.5%.
(d) Pursuant to loan agreements between Regent and Supreme and their
minority shareholders, certain loans were made to Regent and Supreme by
their minority shareholders. As of December 31, 1996, the outstanding loan
balances amounted to approximately HK$5,160. The loan balances are non-
interest bearing and unsecured. The minority shareholders have agreed that
the loans are repayable when Regent and Supreme are financially capable of
doing so.
(e) During the year ended December 31, 1996, minority shareholders of
Physical HK agreed to assign the dividends declared and receivable from
Physical HK for the year ended December 31, 1995 in the amount of
approximately HK$2,821 to the Shareholder without any consideration. The
dividends so assigned were offset against the advances made by the Group to
the Shareholder as mentioned in (a) above.
-24-
<PAGE>
7. SHORT-TERM BANK LOANS
- --------------------------
The short-term bank loans are secured and repayable within one year. Please
refer to Note 8 for details of security for such facilities.
Supplemental information with respect to the short-term bank loans was as
follows:
Year ended December 31,
---------------------------
1995 1996
------------ ------------
Maximum amount outstanding during the year HK$ 5,156 HK$ 5,626
Average amount outstanding during the year HK$ 3,911 HK$ 4,517
Weighted average interest rate at the end
of the year 11% 11%
Weighted average interest rate during the year 11% 9%
8. LONG-TERM BANK LOANS
- -------------------------
Long-term bank loans bear interest at 11.25% p.a. on the outstanding
balances. As of December 31, 1996, the loans are repayable as follows:
HK$
1997 1,827
1998 240
-----------
Total 2,067
===========
As of December 31, 1996, the Group had various banking facilities available
from financial institutions amounting to approximately HK$8,759. These
facilities were secured by:
i. leasehold property in Hong Kong owned by Evergrowth;
ii. leasehold property in Hong Kong owned by relatives of the Principal
Shareholders;
iii. leasehold property in Hong Kong owned by a related company;
iv. personal guarantees from the Principal Shareholders and their
relatives;
v. joint and several guarantees for $5,248 from the Principal
Shareholders; and
vi. foreign currency fixed deposit of AUD47 from relatives of the
Principal Shareholders.
-25-
<PAGE>
9. PROVISION FOR INCOME TAXES
- -------------------------------
Hong Kong profits tax was provided at 16.5% on the assessable profits of
Physical HK.
Enterprise income tax was provided at 33% on the assessable income of the
Shanghai and Dalian JVs in accordance with the relevant tax regulations of
the PRC.
The other BVI and Hong Kong Operating Subsidiaries, except Physical HK, did
not provide for any income taxes during the period/years as they did not
have any assessable income.
The combined tax provision in each period was currently payable, except for
the year ended December 31, 1996, when HK$6,946 of the provision was
currently payable and HK$1,753 was deferred.
The reconciliation of the effective income tax rate based on income before
income taxes and minority interests stated in the consolidated statements of
income to the statutory income tax rate in Hong Kong, the PRC and the BVI is
as follows:
<TABLE>
<CAPTION>
Year ended Three months from October 1, to Year ended
September 30, December 31, December 31,
1994 1993 1994 1995 1996
------------- ------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Weighted average statutory
tax rate 15.9% 17.5% 23.5% 17.0% 17 1%
Permanent Differences
Tax loss incurred - (17.5%) - - -
Loss on shut down of a
beauty centre - - 6.2% - -
Non-deductible
expenses - - - - -
Timing differences for which
no benefit has been
recognized due to
establishment of valuation
allowance
- Excess of accelerated
depreciation allowances
on fixed assets (3.7%) - - - -
- Write-off of pre-
opening expenses 2.9% - 2.3% - -
Restatement of deferred
income (3.0%) - - 0.9% -
Restatement of
purchase returns - - 2.5% - -
Timing differences which
give rise to the provision
of deferred taxation
- Accelerated
depreciation allowances
on fixed assets - - - - 7.1%
- Restatement of deferred
income - - - - 1.6%
Others O.8% - (1.5%) 0.10% -
------------- ------------- ------------- ------------- -------------
Effective tax rate 12.9% 0.0% 33.0% 18.0% 25.8%
============= ============= ============= ============= =============
</TABLE>
-26-
<PAGE>
9. PROVISION FOR INCOME TAXES (Cont'd)
- -------------------------------
The tax impact of temporary differences between financial and taxable income
that give rise to deferred tax (assets)liabilities are principally related
to the following:
December 31,
----------------------
1995 1996
---------- ----------
HK$ HK$
Accelerated depreciation allowances on fixed assets
in Hong Kong 2,180 1,753
Restatement of deferred fitness and beauty income (2,393) -
Valuation allowance for deferred tax assets 213 -
---------- ----------
Total - 1,753
========== ==========
10. OBLIGATIONS AND COMMITMENTS
- ---------------------------------
As of December 31, 1996, the Group had the following obligations and
commitments:
a. Operating leases
- ---------------------
Physical HK and the Shanghai and Dalian JVs lease the premises of their
Fitness Centres. The total amount of lease commitments as of December 31,
1996 amounted to HK$151,209 payable as follows:
HK$
Year ending December 31,
1997 29,701
1998 24,958
1999 23,975
2000 17,747
2001 16,846
Later years 37,982
----------
Total lease commitment 151,209
==========
-27-
<PAGE>
10. OBLIGATION AND COMMITMENTS (Cont'd)
- --------------------------------
b. Obligations under finance leases
- -------------------------------------
Physical HK leases fitness equipment and motor vehicles under several
finance leases with lease terms extending from 1994 to 1999. The scheduled
future minimum lease payments as of December 31, 1996 were as follows:
Year ending December 31, HK$
1997 2,641
1998 1,934
1999 58
----------
Total minimum lease payments 4,633
Less: amount representing interest 678
----------
Present value of net minimum lease payments 3,955
==========
c. Long-term loans payable and Share options to lenders
- ---------------------------------------------------------
Pursuant to five separate loan agreements entered into between Physical HK
and five third party lenders ("the Lenders") in 1995 and 1996, Physical HK
borrowed a sum of approximately US$1,800 (HK$13,916) ("the Loans") from the
Lenders. The Loans will be fully repayable in 1998, twenty-four months
after the drawdown dates ("the Loan Periods"). The Loans bear interest at
three percent over the prevailing prime rate after the first eighteen months
from the respective drawdown dates ("the Interest-free Period").
According to the provisions of the same loan agreements, the Lenders were
granted share purchase options ("the Options") to purchase 0.2% to 2.4% of
the outstanding capital of Physical HK from the Shareholder at a value of
HK$l per share during the Loan Periods. The Lenders also agreed to assign
the Loans owed to them by Physical HK to the Shareholder at a value of HK$l
per share once the options are exercised. There are also provisions in the
agreements that the Lenders can sell the shares to the public or back to the
Shareholder if the Group obtains a flotation during the Loan Periods. Up to
the date of this report, the Lenders have not exercised any of the Options.
d. Capital commitments
- ------------------------
As of December 31, 1996, the Group had outstanding capital commitments in
relation to the purchase of fitness equipment and leasehold improvements of
new Fitness Centres of approximately HK$33,615.
Subsequent to December 31, 1996, the Group entered into two agreements with
a vendor for the purchase of fitness equipment with a total commitment
amount of approximately HK$3,290.
-28-
<PAGE>
11. RETIREMENT PLANS
- ----------------------
As stipulated by the regulations of the Chinese government, all of the
Chinese staff of the Shanghai and Dalian JVs are entitled to an annual
pension on retirement, which is equal to their basic salaries at their
retirement dates. The Chinese government is responsible for the pension
liability to these retired staff. The Shanghai and Dalian JVs are only
required to make specified contributions to the state-sponsored retirement
plan calculated at 30% of the basic salary of the staff.
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- -------------------------------------------------------
Three months
ended
December Year ended December 31,
31, 1994 1995 1996
---------- ---------- ----------
HK$ HK$ HK$
Cash paid for:
Interest expense 219 1,158 841
Income taxes 232 2,415 3,238
13. OTHER SUPPLEMENTAL INFORMATION
- ------------------------------------
The following items are included in the consolidated statements of income.
Three months
Year ended ended
September 30, December Year ended December 31,
1994 31, 1994 1995 1996
------------ ------------ ------------ ------------
HK$ HK$ HK$ HK$
Foreign exchange gain 31 139 109 1
Interest expenses on
finance leases 697 5 20 210
Interest expenses on
overdrafts and bank
loans 460 214 1,138 631
Interest income 114 - 1 2
Sales taxes 460 332 504 1,216
Rental expenses under
operating leases 16,947 4,367 18,250 21,185
-29-
<PAGE>
14. DEDICATED CAPITAL
- -----------------------
In accordance with the relevant laws and regulations for Sino-foreign joint
venture enterprises, the Shanghai and Dalian JVs maintain discretionary
dedicated capital, which includes a general reserve fund, an enterprise
expansion fund and a staff welfare and incentive bonus fund. The Board of
Directors of the Shanghai and Dalian JVS will determine on an annual basis
the amount of the annual appropriations to dedicated capital. Since their
inception, the Shanghai and Dalian JVs have not made any such appropriations
as they incurred losses during these periods.
15. DISTRIBUTION OF PROFIT
- ----------------------------
Dividends from the Shanghai and Dalian JVs will be declared based on the
profits as reported in the statutory financial statements. Such profits
will be different from the amounts reported under US GAAP. Up to December
31, 1996, no distribution had been made by the Shanghai and Dalian JVs as
they incurred losses during these periods.
Physical HK proposed and paid dividends of HK$32,800 for the year ended
December 31, 1995 on the outstanding Common Stock. As mentioned in 6(a) and
(e), dividends payable to the Shareholder in the amount of HK$29,979 were
utilized to offset the balances owed by him to the Group. Dividends payable
to the minority shareholders of Physical HK in the amount of HKS2,821 were
assigned to the Shareholder without any consideration. They were utilized
to offset the advances made by the Group to him as noted in Note 6(a).
In the opinion of management, any undistributed earnings and/or losses of
Physical Holdings and the Operating Subsidiaries will be reinvested
indefinitely.
16. STOCK OPTION PLAN
- -----------------------
The Company has a Stock Option Plan ("the Plan") which was adopted by the
Company's stockholders and its Board of Directors on April 23, 1997. Under
the Plan, the Company may issue incentive stock options, non-qualified
options, restricted stock grants, and stock appreciation rights to selected
directors, officers, advisors and employees of the Company. A total of
500,000 shares of Common Stock of the Company are reserved for issuance
under the Plan, Stock options ("the Options") may be granted as non-
qualified or incentive options. Incentive stock options may not be granted
at a price less than the fair market value of the stock as of the date of
grant while nonqualified stock options may not be granted at a price less
than 85% of the fair market value of the stock as of the date of grant. The
Plan will be administered by an Option Committee ("the Committee") which is
to be composed of two or more disinterested directors of the Board of
Directors. The Option can be exercised during a period of time fixed by the
Committee except that no option may be exercised more than ten years after
the date of grant or three years after death or disability, whichever is
later. As of the date of this report, no stock options have been granted by
the Company.
-30-
<PAGE>
17. SUBSEQUENT EVENTS
- -----------------------
The Group made additional net advances to the Shareholder amounting to
approximately HK$6,000 subsequent to December 31, 1996. The amount was
repaid by the Shareholder in April, 1997.
-31-
<PAGE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1997
--------------------------------------
<PAGE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
UNAUDITED CONSOLIDATED BALANCE SHEETS
-------------------------------------------
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996
-----------------------------------------
(Amounts in thousands)
June 30, 1997 December 31, 1996
-------- -------- -------- --------
HK$ US$ HK$ US$
ASSETS
- ------
Current assets:
Cash and equivalents 2,174 281 2,509 324
Trade receivables 6,542 844 7,276 939
Rental and utility deposits 7,781 1,004 4,735 611
Prepayments to vendors and suppliers
and other current assets 7,577 977 11,808 1,523
Inventories 6,137 792 6,456 833
Due from related companies 341 44 1,986 256
Due from a shareholder 9,538 1,231 5,566 718
-------- -------- -------- --------
Total current assets 40,090 5,173 40,336 5,204
-------- -------- -------- --------
Due from a shareholder - non current
portion 6,712 866 10,885 1,405
Property, plant and equipment, net 68,917 8,892 46,917 6,054
Prepayment for construction-in-progress 28,866 3,725 12,011 1,550
-------- -------- -------- --------
Total assets 144,585 18,656 110,149 14,214
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
- -----------------------------
Current liabilities
Short-term bank loans 6,968 899 5,626 726
Long-term bank loans - current portion 7,468 964 1,828 236
Accounts payable and accrued expenses 6,288 811 8,317 1,073
Obligation under finance lease -
current portion 4,909 633 2,257 291
Deferred income 21,811 2,814 20,057 2,588
Income taxes payable 13,789 1,779 14,752 1,904
Taxes other than income 1,758 227 1,713 221
-------- -------- -------- --------
Total current liabilities 62,990 8,127 54,549 7,039
-------- -------- -------- --------
Long-term bank loans 3,894 502 240 31
Long-term loans from third parties 13,916 1,796 13,916 1,796
Loans from minority shareholders of
subsidiaries 5,160 666 5,160 666
Obligations under finance lease - non
current portion 10,333 1,333 1,698 219
Deferred taxation 2,422 313 1,753 226
Minority interests 6,074 784 4,857 627
Shareholders' equity:
Common stock 78 10 78 10
Cumulative translation adjustment 101 13 71 9
Retained earnings 39,616 5,112 27,827 3,590
-------- -------- -------- --------
Total shareholders' equity 39,796 5,135 27,976 3,610
-------- -------- -------- --------
Total liabilities and shareholders'
equity 144,585 18,656 110,149 14,214
======== ======== ======== ========
<PAGE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
------------------------------------------
FOR THE SIX MONTHS
------------------
ENDED JUNE 30, 1997 AND 1996
----------------------------
(Amounts in thousands)
June 30, 1997 June 30, 1996
-------- -------- -------- --------
HK$ US$ HK$ US$
Operating Revenues
Fitness service 30,849 3,981 16,817 2,170
Beauty treatments 35,033 4,520 35,551 4,587
Others 63 8 1,808 233
-------- -------- -------- --------
Total operating revenues 65,945 8,509 54,176 6,990
-------- -------- -------- --------
Operating Expenses
Salaries and commissions 16,083 2,075 10,914 1,408
Rent and related expenses 13,108 1,691 10,313 1,331
Depreciation 6,091 786 5,499 710
Other selling and administrative
expenses 14,318 1,847 13,828 1,784
-------- -------- -------- --------
Total operating expenses 49,600 6,400 40,554 5,233
-------- -------- -------- --------
Income (Loss) from operations 16,345 2,109 13,622 1,757
Other expenses (income),net (1,254) (162) (389) (50)
Interest expenses 1,249 161 377 49
-------- -------- -------- --------
Total non-operating expenses (5) (1) (12) (1)
-------- -------- -------- --------
Income (Loss) before Income taxes
and minority interests 16,350 2,110 13,634 1,758
Provision for Income taxes (2,677) (345) (3,266) (421)
Provision for deferred taxes (669) (86) (877) (113)
-------- -------- -------- --------
Income (Loss) before minority
interests 13,004 1,679 9,491 1,224
Minority interests (1,214) (157) (765) (99)
-------- -------- -------- --------
Net income (loss) 11,790 1,522 8,726 1,125
======== ======== ======== ========
<PAGE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
FOR THE SIX MONTHS
-----------------------
ENDED JUNE 30, 1997 AND 1996
----------------------------
(Amounts in thousands)
June 30, 1997 June 30, 1996
-------- -------- -------- --------
HK$ US$ KH$ US$
Cash flows from operating activities:
Net Income 11,790 1,522 8,726 1,125
Adjustments to reconcile net income
to net cash provided by
operating activities:
Interest income (867) (112) (2) (1)
Interest expenses for
overdrafts and bank loans 645 83 320 41
finance leases 604 78 57 8
Minority interests 1,214 157 765 99
Depreciation 6,091 786 5,499 710
(Gain) Loss on disposal
of fixed assets (3) (1) 1 1
(Increase) Decrease in assets:
Trade receivable, deposits,
prepayments and other
current assets 1,919 248 1,425 184
Inventories 319 41 (1,137) (147)
Due from related companies 1,645 212 (1,288) (166)
Increase (Decrease) in liabilities:
Accounts payable and
accrued expenses (2,029) (262) (274) (35)
Deferred income 1,754 226 5,040 650
Income taxes payable (963) (124) 2,871 370
Taxes other than Income 45 6 532 69
Deferred taxation 669 86 877 113
-------- -------- -------- --------
net cash provided by (used in)
operating activities 22,833 2,946 23,412 3,021
-------- -------- -------- --------
<PAGE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
Cumulative
Common Common Retained Translations
Stock Stock Earnings Adjustments Total
Number HK$ HK$ HK$ HK$
Balance at September 30,
1993 10,000,000 78 4,957 - 5,035
Net income - - 10,820 - 10,820
Translation adjustment - - - (40) (40)
---------- ------ -------- ----------- --------
Balance at September 30,
1994 10,000,000 78 15,777 (40) 15,815
Net income - - 1,700 - 1,700
Translation adjustment - - - (32) (32)
---------- ------ -------- ----------- --------
Balance at December 31,
1994 10,000,000 78 17,477 (72) 17,483
Net income - - 17,533 - 17,533
Dividend paid - - (29,979) - (29,979)
Translation adjustment - - - 35 35
---------- ------ -------- ----------- --------
Balance at December 31,
1995 10,000,000 78 5,031 (37) 5,072
Net income - - 22,796 - 22,796
Translation adjustment - - - 108 108
---------- ------ -------- ----------- --------
Balance at December 31,
1996 10,000,000 78 27,827 71 27,976
Net income - - 11,790 - 11,790
Translation adjustment - - - 30 30
---------- ------ -------- ----------- --------
Balance at June 30, 1997 10,000,000 78 39,617 101 39,796
========== ====== ======== ============ =======
<PAGE>
============================================================================
No dealer, salesman or other person is authorized to give any information or
to make any representations not contained in this Prospectus in connection
with the offer made hereby, and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Company, any Selling Shareholder or the Selling Agent. This Prospectus does
not constitute an offer to sell or a solicitation to an offer to buy the
securities offered hereby to any person in any state or other jurisdiction
in which such offer or solicitation would be unlawful. Neither the delivery
of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information contained herein
is correct as of any time subsequent to the date hereof.
-------------------------
TABLE OF CONTENTS
Page
Prospectus Summary
Risk Factors
The Company
Use of Proceeds
Dilution
Capitalization
Market Price of Common Stock
Selected Financial Data
Management's Discussion and Analysis
of Financial Condition and Results
of Operations
Business
Management
Certain Relationships and Related
Transactions
Principal and Selling Stockholders
Description of Securities
Plan of Distribution
Legal Matters
Experts
Index to Financial Statements
Independent Auditors' Report
Consolidated Financial Statements
-------------------------
64
<PAGE>
============================================================================
PHYSICAL SPA & FITNESS INC.
562,500 SHARES
375,000 WARRANTS
------------------
PROSPECTUS
------------------
____________, 1997
GLOBAL FINANCIAL GROUP
65
<PAGE>
PHYSICAL SPA & FITNESS INC.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
- ------- -----------------------------------------
The Delaware Corporation Law and the Company's Certificate of
Incorporation and Bylaws authorize indemnification of a director, officer,
employee or agent of the Company against expenses incurred by him or her in
connection with any action, suit, or proceeding to which such person is
named a party by reason of having acted or served in such capacity, except
for liabilities arising from such person's own misconduct or negligence in
performance of duty. In addition, even a director, officer, employee or
agent of the Company who was found liable for misconduct or negligence in
the performance of duty may obtain such indemnification if, in view of all
the circumstances in the case, a court of competent jurisdiction determines
such person is fairly and reasonably entitled to indemnification. Insofar
as indemnification for liabilities arising under the Securities Act of 1933
(the "Act") may be permitted to directors, officers, or persons controlling
the Company pursuant to the foregoing provisions, the Company has been
informed that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
- ------- -------------------------------------------
SEC Registration Fee $ 1,962
NASD Fee $ 5,000
Nasdaq Listing Fee $10,000
Accounting Fees and Expenses $10,000
Legal Fees and Expenses $60,000
Printing Expenses $20,000
Blue Sky Fees and Expenses $15,000
Miscellaneous $ 9,710
-------
Total $131,672
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
- ------- ---------------------------------------
The following sets forth certain information regarding sales of
securities of the Company issued within the past three years, which were not
registered pursuant to the Securities Act of 1933, as amended (the
>Securities Act').
Issuance of 8,000,000 pre-split shares of common stock to Ngai Keung Luk
(Serleo) pursuant to the Share Exchange Agreement in October, 1996.
The securities issued to the inventors were restricted securities as
defined in Rule 144. No general forms of advertising were used in
connection with the issuance of the shares to the inventors. The inventors
were, prior to the sale of the Company's securities to him, fully informed
and advised about such matters concerning the Company, including its
business, financial affairs and other matters. No Selling Agents were used
in connection with the issuance of these shares and no sales commissions
were paid to any person. The issuance of Common Stock to the inventors were
exempt from the registration provisions of the Act by virtue of Section 4(2)
of the Act, as transactions by an issuer not involving any public offering.
66
<PAGE>
ITEM 27. EXHIBITS
- ------- --------
Exhibit
-------
1.1 Selling Agent Agreement (form)*
1.2 Agreement Among Selling Agents (form)*
2.1 Share Exchange Agreement between Foreclosed Realty Exchange, Inc.
and Ngai Keung Luk together with amendments
3.1 Articles of Incorporation of Physical Spa & Fitness, Inc., a Delaware
Corporation
3.2 Certificate of Amendment of Articles of Incorporation changing the
number of directors
3.3 Certificate of Amendment of Articles of Incorporation changing the
Company's name
3.4 Certificate of Amendment of Articles of Incorporation changing the
authorized capital
3.5 By-Laws of Physical Spa & Fitness, Inc.
4.1 Form of Warrant*
4.2 Warrant Agreement*
5 Opinion of Iwona J. Alami, Esq.*
10.1 Lease Agreement by and between Lee Theatre Realty Limited and Physical
Health Centre Hong Kong Limited (Causeway Bay Center)
10.2 Tenancy Agreement between Benefit Plus Company Limited and Physical
Health Centre Hong Kong Limited (Tsimshatsui Center)
10.3 Lease Agreement between East Asia Property Agency Company Limited and
Physical Health Centre Hong Kong Limited (Kowloon City Center)
10.4 Lease Agreement between Broadway-Nassau Investments Limited and Ho Yuk
Wah (Mei Foo Center)
10.5 New Town Tower, S.T.T.L. 183, Confirmation of Tenancy (Shatin Center)
10.6 Tenancy Agreement by and between Kamoton Investments Limited and Supreme
Resources Limited (Renaissance Beauty Centre)
10.7 Repayment Agreement between the Company and Ngai Keung Luk
10.8 Pledge Agreement between the Company and Ngai Keung Luk
10.9 1997 Stock Option Plan and form of Stock Option Agreement
10.10 Lock Up Agreements of Selling Shareholders*
15 Letter on Unaudited Interim Financial Information*
22 Subsidiaries of the Registrant
24.1 Consent of Iwona J. Alami, Esq.* (included in her opinion set forth
in Exhibit 5 hereto)
24.2 Consent of Arthur Andersen & Co.*
25 Power of Attorney (see signature page)
____________
* To be filed by amendment
ITEM 28. UNDERTAKINGS
- ----------------------
The undersigned registrant hereby undertakes to:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the Company pursuant to the foregoing provisions,
or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been
settled by controlling precedent submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(2) File, during any period in which it offers or sells securities, a post
effective amendment to this registration statement to: (I) Include any
prospectus required by section 10(a)(3) of the Securities Act; (ii) reflect
in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration
statement; and (iii) Include any additional or changed material information
on the plan of distribution.
67
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Hong Kong on October 21, 1997.
PHYSICAL SPA & FITNESS INC.
By:/s/ Jill Bodnar
______________________
Jill Bodnar, President
POWER OF ATTORNEY
Each person whose signature appears appoints Jill Bodnar and Darrie Lam,
in the alternative, as his or her agents and attorneys-in-fact, with full
power of substitution to execute for him/her and in his/her name, in any and
all capacities, all amendments (including post-effective amendments) to this
Registration Statement to which this power of attorney is attached.
Signature Title Date
- --------- ----- ----
/s/ Ngai Keung Luk Chief Executive Officer and Director Oct. 21, 1997
/s/ Jill Bodnar President and Director Oct. 21, 1997
/s/ Robert Chui Chief Financial Officer and Director Oct. 21, 1997
/s/ Darrie Lam Vice President and Secretary Oct. 21, 1997
/s/ Yuk Wah Ho Vice President and Director Oct. 21, 1997
/s/ Franco Ho Director Oct. 21, 1997
/s/ Yat Ming Lam Director Oct. 21, 1997
68
<PAGE>
SHARE EXCHANGE AGREEMENT
------------------------
THIS SHARE EXCHANGE AGREEMENT (the "Agreement" ) is dated as of August 8,
1996 by and between Foreclosed Realty Exchange, Inc., their heirs,
designees, or assigns (the "Company") and Luk Ngai Keung,(the
"Shareholder").
RECITALS
--------
WHEREAS, As of the Closing, Shareholder owns 100% of the issued and
outstanding stock of Physical Beauty & Fitness Holdings Limited ("Physical
Limited"), and;
WHEREAS, the Company is a U.S. public company, currently listed on the
NASD Bulletin Board, and;
WHEREAS, the Company desires to acquire one share (100%) of Physical
Limited (the "Physical Shares") and Shareholder desires to exchange all of
the Physical Shares for new shares in the Company.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and in reliance upon the representations and warranties
hereinafter set forth, the parties agree as follows:
I. EXCHANGE OF THE SHARES AND CONSIDERATION
1.01. SHARES BEING EXCHANGED. Effective at the closing of this Agreement
(the "Closing"), and subject to the terms and conditions of this Agreement,
Shareholder shall assign, transfer and deliver to the Company or it's
assigns all of the Physical Shares.
1.02. CONSIDERATION. Subject to the terms and conditions of this
Agreement, and in consideration of the assignment and delivery of the
Physical Shares to the Company, the Company shall at Closing issue to
Shareholder and/or its designee(s), and Shareholder and/or its designee(s)
shall purchase, acquire and accept from the Company 8,000,000 shares in the
Company equal to 80% of all issued and outstanding stock.
1
<PAGE>
1.03. CLOSING. The Closing of the transaction contemplated by this
Agreement (the "Closing") shall take place at the offices of Iwona J. Alami
or other such place as mutually agreed upon, on or before October 15, 1996.
1.04. METHOD OF CLOSING. The method of closing shall require the parties
to satisfy the conditions specified in Section 6.
II. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER AND PHYSICAL LIMITED.
Shareholder and Physical Limited represent and warrant to the Company as
follows, as of the Closing:
2.01. ORGANIZATION. Physical Limited is a corporation duly organized,
validly existing and in good standing under the laws of the British Virgin
Islands. Physical Limited has the corporate power and authority to carry on
its business as presently conducted; to enter into this agreement; and
Physical Limited is qualified to do business in all jurisdictions where the
failure to be so qualified would have a material adverse effect on its
business.
2.02. CAPITALIZATION.
2.02(a) All of the issued and outstanding shares of Physical Limited
are duly authorized, validly issued, issued for value, fully paid and non
assessable.
2.02(b) There are no outstanding options, warrants, or any other rights
to purchase any securities of Physical Limited.
2.03. FINANCIAL STATEMENTS. All financial information provided by
Shareholder is accurate and not misleading, to the best of Shareholder's
knowledge. Shareholder represents that Physical Limited's after tax net
income for the 15 month period ending 12/31/95, will be not less than US$2.5
million according to HK GAAP. In the event that the audited earnings fall
below the represented amount by more than 5%, the number of shares received
by Shareholder will be reduced proportionately to provide the minority
shareholders with the same Earnings per Share that would have existed had
the earnings met the minimum level stated above.
2
<PAGE>
2.04. LITIGATION. There is no litigation, proceeding or investigation
pending or threatened against Physical Limited affecting any of its
properties, subsidiaries, or assets against or any officer, director, or
stockholder or consultant that might result, either in any case or in the
aggregate, in any material adverse change in the business, operations,
affairs or condition of Physical Limited or its properties or assets, or
that might call into question the validity of this Agreement, or any action
taken or to be taken pursuant hereto.
2.05. TITLE TO ASSETS. Physical Limited has good and marketable title to
all of its assets and properties now carried on its books. The assets of
Physical Limited consist solely the joint venture interests names in the
recitals.
2.06. NO CONFLICT. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not conflict with
or result in a breach of any term or provision of, or constitute a default
under, the Memorandum and Articles of Association of Physical Limited or any
agreement, contract or instrument to which Physical Limited is a party or by
which it or any of its assets are bound.
2.07. AUTHORITY. Shareholder have full power and authority to enter into
this Agreement and to carry out the transactions contemplated herein. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby, have been duly authorized and approved by
Shareholder and no other corporate proceedings on the part of Physical
Limited and/or Shareholder are necessary to authorize this Agreement and the
transactions contemplated hereby.
III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Shareholder as follows, as
of the Closing:
3.01. ORGANIZATION.
3.01(a) The Company is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Delaware, has the
corporate power and authority to carry on its business as presently
conducted and is qualified to do business in all jurisdictions where the
failure to be so qualified would have a material adverse effect on the
business of the Company.
3.01(b) The copies of the Certificate of Incorporation of the Company,
as certified by the Secretary of State of Delaware and the Bylaws of the
Company heretofore furnished to Shareholder are complete and correct copies
of the Articles of Incorporation and the Bylaws of the Company as amended
and in effect on the date hereof. All minutes of meetings and actions in
writing without a meeting of the Board of Directors and shareholders of the
Company are contained in the minute book of the Company and no minutes or
actions in writing without a meeting have been excluded in such minute book.
3.02. CAPITALIZATION OF THE COMPANY. The authorized capital stock of the
Company consists of One Hundred Million Shares (100,000,000) of Common
Stock, par value $0.001 per share, of which ten Million Shares (10,000,000)
shall be issued and outstanding at the Closing, after reorganization
issuances, reverse splits, consultant issuances and Consideration. All
outstanding shares are duly authorized, validly issued, fully paid and non-
assessable, and at the Closing the Consideration will be duly authorized,
validly issued, fully paid and non-assessable. Except for such outstanding
Shares, there are no outstanding shares of capital stock or other securities
or other equity interests of the Company or rights of any kind to acquire
such stock, other securities or other equity interests.
3.03. AUTHORITY. The Company has full power and authority to enter into
this Agreement and to carry out the transactions contemplated herein. The
execution and delivery of this Agreement, the consummation of the
transactions contemplated hereby, and the issuance of the Company Shares in
accordance with the terms hereof, have been duly authorized and approved by
the Board of Directors of the Company and no other corporate proceedings on
the part of Company are necessary to authorize this Agreement, the
transactions contemplated hereby and the issuance of the Consideration in
accordance with the terms hereof.
3.04. NO UNDISCLOSED LIABILITIES. The Company is not subject to any
material undisclosed liability or obligation of any nature, whether
absolute, accrued, contingent, or otherwise and whether due or to become
due. In addition, at the closing, the Company will have no liabilities,
existing or contingent.
4
<PAGE>
3.05. LITIGATION. There is no litigation, proceeding or investigation
pending or to the knowledge of the Company, threatened against the Company
affecting any of its properties or assets, or, to the knowledge of the
Company, against any officer, director, or stockholder of the Company that
might result, either in any case or in the aggregate, in any material
adverse change in the business, operations, affairs or condition of the
Company or any of its properties or assets, or that might call into question
the validity of this Agreement, or any action taken or to be taken pursuant
hereto.
3.06. TITLE TO ASSETS. The Company has good and marketable title to all
of its assets and properties now carried on its books including those
reflected in the balance sheet contained in the Company's financial
statements, free and clear of all liens, claims, charges, security interests
or other encumbrances, except as described in the balance sheet included in
the Company's financial statements or on any Exhibits attached hereto.
3.07. CONTRACTS AND UNDERTAKINGS. The Company (including any of its
subsidiaries) has no contracts, agreements, leases, licenses, arrangements,
commitments and other undertakings (collectively "Contracts") to which the
Company or any such subsidiary is a party or by which it or its property is
bound that have not been disclosed to Shareholder. The Company is not in
material default, or alleged to be in material default, under any Contract
and, to the knowledge of the Company, no other party to any Contract to
which the Company is a party is in default thereunder nor, to the knowledge
of the Company, does there exist any condition or event which, after notice
or lapse of time or both, would constitute a default by any party to any
such Contract.
3.08. NO CONFLICT. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not conflict with
or result in a breach of any term or provision of, or constitute a default
under, the Certificate of Incorporation or Bylaws of the Company, or any
agreement, contract or instrument to which the Company is a party or by
which it or any of its assets are bound.
5
<PAGE>
3.9. ACCURACY. Neither this Agreement nor any other agreement, document,
certificate or written or oral statement furnished to Shareholder by or on
behalf of the Company in connection with the transactions contemplated
hereby, contains any untrue statement of a material fact or when taken as a
whole omits to state a material fact necessary in order to make the
statements contained herein or therein not misleading.
3.10. FINANCIAL STATEMENTS. The financial statements of the Company (the
"Financial Statements") set forth in its public filings (a) were prepared
in accordance with the books and records of the Company; (b) were prepared
in accordance with generally accepted accounting principles consistently
applied; (c) are accurate and fairly present the Company's financial
condition and the results of its operations as of the relevant dates thereof
and for the periods covered thereby; (d) contain and reflect all necessary
adjustments and accruals for a fair presentation of the Company's financial
condition and the results of its operations for the periods covered by said
financial statements; and (e) contain and reflect adequate provisions for
all reasonably anticipated liabilities with respect to the period(s) then
ended.
3.11. ABSENCE OF MATERIAL CHANGES. Since June 30, 1996, except as
described in any Exhibit hereto or as required or permitted under this
Agreement, there has not been:
3.11(a) any material change in the condition (financial or otherwise)
of the properties, assets, liabilities or business of Company, except
changes in the ordinary course of business which, individually and in the
aggregate, have not been materially adverse.
3.11(b) any undisclosed redemption, purchase or other acquisition of
any shares of the capital stock of Company, or any issuance of any shares of
capital stock or the granting, issuance or exercise of any rights, warrants,
options or commitments by the Company relating to their authorized or issued
capital stock.
3.12. COMPLIANCE WITH LAW. The Company has in all material respects
complied with and it is now in all material respects in compliance with, all
Federal and State laws applicable to the Company, including that the Company
is current in its SEC filings. The Consideration will be issued in full
compliance with all state and federal securities laws.
6
<PAGE>
IV. COVENANTS AND AGREEMENTS OF THE PARTIES EFFECTIVE PRIOR
TO CLOSING
4.01. CORPORATE EXAMINATIONS AND INVESTIGATIONS Prior to the Closing,
Shareholder shall be entitled, through its employees and representatives, to
make such investigations and examinations of the books, records and
financial condition of the Company as Shareholder may request. In order
that Shareholder may have the full opportunity to do so, the Company shall
furnish Shareholder and its representatives during such period with all such
information concerning the affairs of the Company as Shareholder or its
representatives may reasonably request and cause the Company's officers,
employees, consultants, agents, accountants and attorneys to cooperate fully
with Shareholder or its representatives in connection with such review and
examination and to make full disclosure of all information and documents
requested by Shareholder and/or its representatives. Any such
investigations and examinations shall be conducted at reasonable times and
under reasonable circumstances, it being agreed that any examination of
original documents will be at the Company's premises, with copies thereof to
be provided to Shareholder and/or its representatives upon request.
4.02. COOPERATION; CONSENTS. Prior to the Closing Date, each party shall
cooperate with the other parties to the end that the parties shall (i) in a
timely manner make all necessary filings with, and conduct negotiations
with, all authorities and other persons the consent or approval of which, or
a license or permit from which is required for the consummation of the
transactions contemplated by this Agreement and (ii) provide to each other
party such information as the other party may reasonably request in order to
enable it to prepare such filings and to conduct such negotiations.
4.03. CONDUCT OF BUSINESS. From the date hereof through the Closing, the
Company shall (i) conduct its business in the ordinary course and in such a
manner so that the representations and warranties contained herein shall
continue to be true and correct as of the Closing as if made at and as of
the Closing and (ii) not enter into any transaction not envisioned or
required by this transaction, or incur any liability, without first
obtaining the written consent of Shareholder. Without the prior written
consent of Shareholder, except as expressly set forth herein, the Company
shall not undertake or fail to undertake any action if such action or
failure would render any of said warranties and representations untrue as of
the Closing.
7
<PAGE>
4.04. NOTICE OF DEFAULT. From the date hereof through the Closing, each
party hereto shall give to the other parties prompt written notice of the
occurrence or existence of any event, condition or circumstance occurring
which would constitute a violation or breach of this Agreement by such party
or which would render inaccurate in any material respect any of such party's
representations or warranties contained herein.
V. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
All representations, warranties and covenants of the Company and
Shareholder contained herein shall survive the closing.
VI. CONDITIONS TO CLOSING
6.01. CONDITIONS TO OBLIGATION OF SHAREHOLDER The obligations of
Shareholder under this Agreement shall be subject to each of the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES OF COMPANY TO BE TRUE. The
representations and warranties of Company herein contained shall be true in
all material respects at the Closing with the same effect as though made at
such time. The Company shall have performed in all material respects all
obligations and complied in all material respects, to its actual knowledge,
with all covenants and conditions required by this Agreement to be performed
or complied with by it at or prior to the Closing. Shareholder is not
required to close if the Company has any liability in excess of Two Thousand
Dollars.
(b) NO LEGAL PROCEEDINGS. No injunction or restraining order shall be
in effect prohibiting this Agreement, and no action or proceeding shall have
been instituted and, at what would otherwise have been the Closing, remain
pending before the court to restrain or prohibit the transactions
contemplated by this Agreement.
(c) STATUTORY REQUIREMENTS. All statutory requirements for the valid
consummation by the Company of the transactions contemplated by this
Agreement shall have been fulfilled. All authorizations, consents and
approvals of all governments and other persons required to be obtained in
order to permit consummation by the Company of the transactions contemplated
by this Agreement shall have been obtained.
8
<PAGE>
(d) DIRECTOR RESIGNATION. Prior to the Closing, all of the directors
and officers of the Company shall have submitted their resignations to
Company to be held in escrow and to become effective at the Closing.
(e) NO LIABILITIES As of the closing, the Company shall have no
liabilities. In addition, the Company shall have no material contingent
liabilities.
6.02. CONDITIONS TO OBLIGATIONS OF COMPANY. The obligation of the Company
under this Agreement shall be subject to the following conditions:
(a) REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER TO BE TRUE. The
representations and warranties of Shareholder herein contained shall be true
in all material respects as of the Closing, and shall have the same effect
as though made at the Closing; Shareholder shall have performed in all
material respects all obligations and complied in all material respects,
with all covenants and conditions required by this Agreement to be performed
or complied with by them prior to the Closing.
(b) NO LEGAL PROCEEDINGS. No injunction or restraining order shall be
in effect, and no action or proceeding shall have been instituted and, at
what would otherwise have been the Closing, remain pending before the court
to restrain or prohibit the transactions contemplated by this Agreement.
(c) STATUTORY REQUIREMENTS. All statutory requirements for the valid
consummation by Shareholder of the transactions contemplated by this
Agreement shall have been fulfilled. All authorizations, consents and
approvals of all governments and other persons required to be obtained in
order to permit consummation by Shareholder of the transactions contemplated
by this Agreement shall have been obtained, including, but not limited to,
requirements imposed by the government of Hong Kong.
9
<PAGE>
VII. MISCELLANEOUS
7.01. EXPENSES OF SALE. Except as otherwise provided herein, each party
shall bear its own direct and indirect expenses incurred in connection with
the negotiation and preparation of this Agreement and the consummation and
performance of the transactions contemplated herein. Without limitation,
such expenses shall include the fees and expenses of all attorneys, brokers,
investment bankers, accountants, agents and finders and other professionals
incurred in connection herewith, acting on behalf of such party. The
parties have not entered into any agreement for commissions, finder's fees
or other compensation in connection with the contemplated transactions which
my be asserted by any person based on any agreement or arrangement for
payment by the other party.
7.02. NOTICES. All notices, requests and other communications thereunder
shall be in writing and shall be delivered by courier or other means of
personal service (including by means of a nationally recognized courier
service or professional messenger service), or mailed first class, postage
prepaid, by certified mail, return receipt requested, or by Federal Express
or other reputable overnight delivery service, in all cases, addressed to:
10
<PAGE>
All notices, requests and other communications shall be deemed given on the
date of actual receipt or delivery as evidenced by written receipt,
acknowledgment or other evidence of actual receipt or delivery to the
address. In case of service by telecopy, a copy of such notice shall be
personally delivered or sent by registered or certified mail, in the manner
set forth above, within three (3) business days thereafter. Either party
hereto may from time to time by notice in writing served as set forth above
designate a different address or a different or additional person to which
all such notices or communications thereafter are to be given.
7.03. PARTIES IN INTEREST. Except as otherwise expressly provided herein,
all the terms and provisions of this Agreement shall be binding upon, shall
inure to the benefit of and shall be enforceable by the respective heirs,
beneficiaries, personal and legal representatives, successors, designees and
assigns of the parties hereto.
7.04. ENTIRE AGREEMENT; AMENDMENTS. This Agreement, including any
Schedules, Exhibits and other documents and writings referred to herein or
delivered pursuant hereto, which form a part hereof, contains the entire
understanding of the parties with respect to its subject matter. There are
no restrictions, agreements, promises, warranties, covenants or undertakings
other than those expressly set forth herein or therein. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to its subject matter. This Agreement may be amended only by a
written instrument duly executed by the parties or their respective
successors or assigns.
7.05. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
7.06. TERMINATION In the event that one party's due diligence determines a
material breach or inaccuracy in the other's representation(s) or other
terms of this agreement, the party may terminate its obligations under this
agreement by providing written notice of the breach. If the breach is not
cured within 10 calender days, the agreement is terminated, with no further
obligations of the parties.
11
<PAGE>
7.07. GOVERNING LAW. This Agreement shall be subject to California law
and jurisdiction, except insofar as the laws of the jurisdictions of
domicile of the parties shall control in any conflict of laws dispute.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the parties hereto as of the date first above written.
Company
By: /s/ Robert Alvarez
-------------------------
Name: Robert Alvarez
__________________________
Title: President
_________________________
Physical Limited
By: /s/ Luk Ngai Keung
__________________________
Name: Luk Ngai Keung
__________________________
Title:_________________________
Shareholder
By: /s/ Luk Ngai Keung
_________________________
Name: Luk Ngai Keung
__________________________
Title:_________________________
12
<PAGE>
EXHIBIT A
---------
CERTIFICATE
Reference is made to that certain Share Exchange Agreement (the "Share
Exchange Agreement") between Foreclosed Realty Exchange, Inc. (the
"Company"), on the one hand, and Physical Beauty & Fitness Holdings Ltd.(the
"Shareholder") on the other hand. Defined terms not defined herein shall
have the same meaning as ascribed to them in the Share Exchange Agreement.
In connection with the closing, the Shareholder has requested that Robert
Alvarez ("Alvarez") provide this Certificate to the Shareholder. As the
largest shareholder of the Company, Alvarez will benefit from the
consummation of the transactions contemplated by the Share Exchange
Agreement and has agreed to provide this certificate. Alvarez acknowledges
that the Shareholder is relying on this Certificate and Alvarez may have
personal liability in the event that the matters certified herein shall not
be accurate.
Alvarez hereby certifies that to the best of his knowledge the
representations and warranties of the Company contained in Sections 3.01
through 3.13, inclusive, of the Share Exchange Agreement are true and
correct in all material respects at the date hereof and that the conditions
precedent set forth in Sections 6.01(e) have been satisfied.
Alvarez's liability hereunder shall expire two years from the Date of
closing. In the event that any third party makes a claim against the
Company arising out of or based upon or covered by the representations and
warranties of the Company referred to above, then the Company shall promptly
provide written notice thereof to Alvarez and provide him with a reasonable
opportunity to satisfy such claim.
October 7, 1996
/s/ Robert Alvarez
______________________________
Associated Consulting
Group, Inc. by
Robert Alvarez, President
14
<PAGE>
EXHIBIT 1.02
SHARES ISSUED TO SHAREHOLDER AND/OR ITS DESIGNEE(S)
Name/Designee Number of Foreclosed Number of Physical
Realty Exchange, Inc. Beauty & Fitness
Shares received by Holdings Ltd.
shareholder/designee shares exchanged
by shareholder
/designee
_____________________________________________________________
Luk Ngai Keung, 8,000,000 one
Designee
15
<PAGE>
October 14, 1996
Mr. Robert Alvarez, President
Foreclosed Realty Exchange, Inc.
2618 SW 23rd Terrace
Ft. Lauderdale, Florida 33312
Dear Mr. Alvarez,
We refer to the Share Exchange Agreement dated August 8, 1996, by and
between Foreclosed Realty Exchange, Inc. (the "Company") on the one hand,
and Physical Beauty & Fitness Holdings Ltd. ("Shareholder") on the other
hand.
We hereby extend the closing date to on or before October 21, 1996 at 5pm
Los Angeles time.
Please confirm your consent to this extension by signing and returning the
enclosed copy of this letter in the place as marked.
Company
By: /s/ Robert Alvarez
--------------------
Name: Robert Alvarez
Title: President
Physical Limited
By: /s/ Luk Ngai Keung
--------------------
Name: Luk Ngai Keung
Title: Director
Shareholder
By: /s/ Luk Ngai Keung
--------------------
Name: Luk Ngai Keung
Title: Director
<PAGE>
ARTICLES 0F INCORPORATION
OF
FORECLOSED REALTY EXCHANGE INC.
I, the undersigned, do this day voluntarily acknowledge the forming of a
corporation under and pursuant to the laws of the state of Delaware and I
HEREBY CERTIFY:
ARTICLE ONE. [NAME]. The name of the corporation is:
FORECLOSED REALTY EXCHANGE, INC.
ARTICLE TWO. [LOCATION]. The address of the corporation's principal
office is 850 South Rancho, Suite 335, Las Vegas, Nevada 89106. The initial
agent for services of process at that address in Paula M. Pirtle.
ARTICLE THREE. [PURPOSES]. The nature of the business object and purpose
to be transacted, promoted, or carried on by the corporation are:
a) To Conduct any lawful business., to promote any lawful purpose,
and to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware and to
act in every kind of fiduciary capacity and generally to do all things
necessary or convenient which are incident to or which a natural person
might or cou1d do.
b) To purchase, receive, take by grant, gift, devise, bequest, or
otherwise lease or otherwise acquire own, hold, improve, employ, use and
otherwise deal in and with real or personal property, or any interest
therein, wherever situated, and to sell, convey, lease, exchange, transfer
or to otherwise dispose of, or mortgage or pledge, all or any of its
property and assets, or any interests therein, wherever situated.
c) To engage generally in the real estate business as principal, and
in any lawful capacity, and generally to take, lease, purchase, or otherwise
acquire, and to own, use, hold, sell convey, exchange, lease, mortgage,
work, clear, improve, develop, divide, and otherwise handle, manage,
operate, deal in and dispose of mining claims, oil leases, oil and gas
wells, real estate, real property, lands, multiple-dwelling structures,
houses, buildings and other works and any interest or right therein; to take
lease, purchase or otherwise handle or acquire, and to own, use, hold, sell,
convey, exchange, hire, lease, pledge, mortgage, and otherwise handle, and
deal in and dispose
1
<PAGE>
of, as principal agent or in any lawful capacity, such personal property,
chattels, chattels resales, rights, easements, privileges, choices in
action, notes, bonds, mortgages, and securities as may lawfully be acquired,
held or disposed of and to acquire, purchase, sell, assign, transfer,
dispose of and generally deal in and with as principal, agent, brokers, and
in any lawful capacity, mortgages and other interests in real, personal and
mixed properties; to carry on a general oil exploration, mining exploration
and management business as principal, agent, representative contractor, sub-
contractor, and in any other lawful capacity. To manufacture, purchase or
acquire in any lawful manner and to hold, own, mortgage, pledge, sell
transfer, or in any manner dispose of, and to deal and trade in goods,
wares, merchandise, and property of any and every class and description, and
in any part of the world.
d) To apply for, register, obtain, purchase, take licenses in respect
of or otherwise acquire, and to hold, own, use, operate, develop, enjoy,
turn to account, grant licenses and immunities in respect of, manufacture
under and to introduce, sell, assign, mortgage, pledge or otherwise dispose
of and, in any manner deal with and contract with reference to:
1) Inventions, devices, formulae, processes, improvements and
modifications thereof;
2) Letters. patent, patent rights, patented processed,
copyrights, designs, and similar rights, trade-marks, trade names, trade
symbols and other indications or origin and ownership granted by or
recognized under the laws of the United States of America, any state or
subdivision thereof, and any commonwealth, territory, possession,
dependency, colony, possession agency or instrumentality of the United
States of America, and of any foreign country, and all rights connected
therewith or pertaining thereunto;
3) Franchises, licenses, grant and concessions.
e) To make, enter into, perform and carry out contracts of every kind
and description with any person, firm, association, corporation or
government or agency or instrumentality thereof.
f) To lend money in furtherance of its corporate purposes and to
invest and reinvest its funds from time to time to such extent, to such
persons, firms, associations, corporations, governments or agencies or
instrumentalities thereof, and on such terms and on such security, if any,
as the Board of Directors of the corporation may determine and direct any
officer to complete.
2
<PAGE>
g) To borrow money without limit as to amount and at such rates of
interest as it may determine; from time to time to issue and sell its own
securities, in such amounts on such terms and conditions, for such purposes
and for such prices, now or hereafter permitted by the laws of the State of
Delaware and by the of Directors of the corporation as they may determine;
and to secure any of its obligations by mortgage, pledge or other
encumbrance of any or all of its property, franchises, and income.
h) To be a promoter or manager of other corporations of any type or
kind; and to participate with others in any corporation partnership, limited
partnership, joint venture, or other association of any kind, or in any
transaction, undertaking or arrangement which the corporation would have
power to conduct by itself, whether or not such participation involves
sharing or delegation of control with or to others.
i) To promote and exercise all or any part of the foregoing purposes
and powers in and a11 parts of the world, and to conduct its business in all
or any branches in any lawful capacity.
I
The foregoing enumeration of specific purposes and powers shall not be
held to limit or restrict in any manner the purposes and powers of the
corporation by references to or inference from the terms or provisions of
any other clause, but shall be regarded as independent purposes.
ARTICLE FOUR. (CAPITAL STOCK]. The amount of the total capital stock
of the corporation is ONE HUNDRED MILLION (100,000,000) consisting of one
hundred million (100,000,000) shares designated as common stock, par value
one mil ($.001) per share.
ARTICLE FIVE. [DIRECTORS]. The number of the governing boare, shall be
styled DIRECTORS and the number of such directors shall be not less than
three (3), or more than nine (9). The first board of directors shall be the
three members whose name and post office address is as follows:
NAME AND ADDRESS TITLE
H. Robert Alvarez President
850 South Rancho, Suite 335
Las Vegas, Nevada 89106
Karen Alvarez Secretary
850 South Rancho, Suite 335
Las Vegas, Nevada 89106
Paula M. Pirtle Assistant Secretary
850 South Rancho, Suite 335
Las Vegas, Nevada 89106
3
<PAGE>
ARTICLE SIX. [OFFICERS AND DIRECTORS LIABILITY]. No director or
officer of the corporation shall be personally liable to the corporation or
its stockholders for damages for breach of a fiduciary duty as a director or
officer. Nothing contained herein shall absolve liability of a director or
officer for intentional misconduct, fraud, a known violation or the law, or
the payment of a dividend in violation of the newly amended Delaware law,
Title 8, Section 102(b)(7).
ARTICLE SEVEN. [INCORPORATION]. The name and address of the
incorporator of the corporation is as follows:
NAME ADDRESS
Paula M. Pirtle 850 South Rancho, Suite 335
Las Vegas, Nevada 89106
ARTICLE EIGHT. [ASSESSMENT OF STOCK]. The capital stock of the
corporation, after the amount of the subscription price or par value has
been paid in, shall not be subject to pay debts of the corporation, and no
paid up stock and no stock issued as fully paid up shall ever be assessable
or assessed.
ARTICLE NINE. [PERIOD OF EXISTENCE]. The period of existence of the
corporation shall be perpetual.
ARTICLE TEN. [BY-LAWS]. The initial By-Laws of the corporation shall
be adopted by its Board of Directors. The power to alter, amend, or repeal
the By-Laws, or to adopt new By-Laws, shall be vested in the Board of
Directors, except as otherwise may be specifically provided in the By-Laws.
ARTICLE SEVEN. [STOCKHOLDER MEETINGS]. Meetings of stockholders shall
be held at such places within or without the State of Delaware may be
provided by the By-Laws of the corporation. Special meetings of the
stockholders may be called by the President or any other executive officer
of the corporation, the Board of Directors, or any member thereof, or by the
record holder or holders of at least ten percent (10%) of all shares
entitled to vote at the meeting. Any action otherwise required to be taken
at a meeting of the stockholders, except election of directors, may be taken
without a meeting if a consent in writing, setting forth the action so
taken, shall be signed by stockholders having at least a majority of the
voting power.
ARTICLE TWELVE. [CONTRACTS OF CORPORATION]. No contract or other
transaction between the corporation and any other corporation, whether or
not a majority of the hares of the capital stock of such other corporation
is owned by this corporation, and no act of this corporation shall in any
way be affected or invalidated by the fact that any of the directors of
4
<PAGE>
this corporation are pecuniarily or otherwise interested in, or are
directors or officers of such other corporation. Any director of this
corporation, individually, or any firm of which such director may be a
member, may be a part to, or may be pecuniarily or otherwise interested in
any contract or transaction of the corporation: provided, however, that the
fact that he or such firm is so interested shall be disclosed or shall have
been known to the Board of Directors of this corporation, or a majority
thereof; and any director of this corporation who is also a director or
officer of such other corporation, or who is so interested, may be counted
in determining the existence of a quorum at any meeting of the Board of
Directs of this corporation that shall authorize such contract or
transaction, and may vote thereat to authorize such contract or transaction,
with like force and effect as if he were not such director or officer of
such other corporation or not so interested.
I, the undersigned, being the original incorporator for the purpose of
forming a corporation to do business both within and without the State of
Delaware, and in pursuance of the General Corporation Law of the State of
Delaware, and as subsequently amended do make and file this certificate,
hereby declaring and certifying that the facts herein above stated are true.
This 20th day of October, 1988.
/s/ Paula M. Pirtle
--------------------------
Paula M. Pirtle
State of Nevada )
) ss.
County of Clark )
On the 20th day of October 1988, before me, the undersigned, a Notary
Public, personally appeared Paula M. Pirtle, known to me to be the person
described herein and who executed the foregoing instrument, and who
acknowledged to me that she executed the same freely and voluntarily and for
the uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the 20th day of October 1988.
-----------------------------
Notary Public
Residing in Las Vegas, Nevada
5
<PAGE>
CERTIFICATE AMENDING THE ARTICLES OF INCORPORATION
OF
FORECLOSED REALTY EXCHANGE, INC.
The undersigned, being the President and Secretary of Foreclosed Realty
Exchange, Inc., a Delaware Corporation, hereby certifies that by unanimous
vote of the Board of Directors and majority vote of the stockholders at a
meeting held on August 30, 1996, it was agreed that this CERTIFICATE
AMENDING ARTICLES OF INCORPORATION be filed.
The undersigned further certifies that the original Articles of
Incorporation of Foreclosed Realty Exchange, Inc. were filed with the
Secretary of State of Delaware on the 21st day of September, 1988. the
undersigned further certifies that Article Five of the original Articles of
Incorporation filed on the 21st day of September, 1988, herein are amended
to read as follows:
RESOLVED, that Article Five of the Articles of Incorporation of Foreclosed
Realty Exchange, Inc. is hereby amended to read as follows:
ARTICLE FIVE. (DIRECTORS)
The number of the governing Board shall be styled DIRECTORS and the number
of such directors shall not be less than one (1) nor more than nine (9).
The first board of directors shall be the three members whose names and post
office addresses are as follows:
H. Robert Alvarez, President
850 South Rancho, Suite 335
Las Vegas, Nevada 89106
Karen Alvarez, Secretary
850 South Rancho, Suite 335
Las Vegas, Nevada 89106
Paula M. Pirtle, Assistant Secretary
850 South Rancho, Suite 335
Las Vegas, Nevada 89106
<PAGE>
The undersigned hereby certifies that he has on this 30tb day of August,
1996, executed this certificate Amending the original Articles of
Incorporation heretofore filed with the Secretary of State of Delaware.
/s/ Robert Alvarez
-----------------------------------
Robert Alvarez, President
/s/ Robert Alvarez
-----------------------------------
Robert Alvarez, Secretary
STATE OF FLORIDA
COUNTY OF BROWARD
On this 30th day of August, 1996, before me, the undersigned Notary Public
in and for the State of Florida, personally appeared Robert Alvarez,
personally known to me to be the person and officer whose name is subscribed
to the foregoing Certificate Amending Articles of Incorporation and
acknowledged to me that he executed the same.
"SEAL" Don A. Paradiso /s/ Don A. Paradiso
Commission #CC334690 ---------------------------
Expires Jan 1, 1998 Don A. Paradiso, Notary Public
Atlantic Bonding Co., Inc.
800-732-2245
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
FORECLOSED REALTY EXCHANGE, INC.
(Pursuant to Section 242 of
the Delaware General Corporation Law)
The undersigned, Jill Bodnar and Darrie Lam, being respectively the
President and Secretary of Foreclosed Realty Exchange, Inc., a Delaware
corporation (the "Corporation"), do hereby certify as follows:
1. The Certificate of Incorporation of the Corporation is hereby
amended pursuant to Section 242(a)(1) of the General Corporation Law of the
State of Delaware to provide for the name change by amending Article First
as follows:
FIRST: The name of the corporation is "Physical Spa & Fitness
Inc."
2. The foregoing Amendment to the Certificate of Incorporation was
first authorized by the Board of Directors and subsequently duly adopted by
the consent in writing of the stockholders holding a majority of the
Corporation's outstanding stock entitled to vote thereon in accordance with
Section 228 of the General Corporation Law of the State of Delaware.
3. In accordance with Section 228 of the General Corporation Law of the
State of Delaware, a written notice of the corporate action taken by the
majority of the stockholders has been given to all stockholders of record of
the Corporation who have not consented in writing.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Amendment as of November 5, 1996 and DO HEREBY CERTIFY, that the facts
stated in this Certificate of Amendment are true and correct.
/s/ Jill Bodnar
----------------------
Jill Bodnar
President
/s/ Darrie Lam
----------------------
Darrie Lam
Secretary
2
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION OF PHYSICAL SPA & FITNESS INC.
(Pursuant to Section 242 of
the Delaware General Corporation Law)
============================================================================
The undersigned, Jill Bodnar, being the President and Darrie Lam, being
the Secretary of Physical Spa & Fitness Inc., a Delaware corporation (the
"Corporation"), does hereby certify as follows:
1. The Certificate of Incorporation of the Corporation is hereby
amended pursuant to Section 242(a)(3) of the General Corporation Law of the
State of Delaware by amending Article IV as follows:
ARTICLE IV
CAPITAL STOCK CLASSES
The total number of shares of all classes which the corporation is
authorized to have outstanding is One Hundred and Ten Million (110,000,000)
shares of which stock One Hundred Million (100,000,000) shares in the par
value of $.001 each, amounting in the aggregate to One Hundred Thousand
Dollars ($100,000) shall be common stock and of which Ten Million
(10,000,000) shares in the par value of $.001 each, amounting in the
aggregate to Ten Thousand Dollars ($10,000) shall be preferred stock.
Effective on October 21, 1997, the common stock shall be reconstituted such
that 1 new share of common stock shall be issued in exchange for each
1.33 outstanding shares of common stock. The board of directors is
authorized, subject to limitations prescribed by law, to provide for the
issuance of the authorized shares of preferred stock in one or more series,
and by filing a certificate pursuant to the applicable law of the State of
Delaware, to establish from time to time the number of shares to be included
in each such series, and to fix the designation, powers, preferences and
rights of the shares of each such series and the qualifications, limitations
or restrictions thereof. The authority of the board of directors with
respect to each series shall include, but not be limited to, determination
of the following:
(a) The number of shares constituting that series and the distinctive
designation of that series;
(b) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that
series;
(c) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(d) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the board of directors
shall determine;
(e) Whether or not the shares of that series shall be redeemable, and,
if so, the terms and conditions of such redemption, including the date or
date upon or after which they shall be redeemable, and the amount per
share payable in case of redemption, which amount may vary under different
conditions, and at different redemption rates;
<PAGE>
(f) Whether that series shall have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of such
sinking fund;
(g) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the corporation,
and the relative rights of priority, if any, of payment of shares of that
series;
(h) Any other relative rights, preferences and limitations of that
series, unless otherwise provided by the certificate of determination.
2. The foregoing Amendment to the Certificate of Incorporation was
first authorized by the Board of Directors and subsequently duly adopted by
the consent in writing of the stockholders holding a majority of the
Corporation's outstanding stock entitled to vote thereon in accordance with
Section 228 of the General Corporation Law of the State of Delaware.
3. In accordance with Section 228 of the General Corporation Law of the
State of Delaware, a written notice of the corporate action taken by the
majority of the stockholders has been given to all stockholders of record of
the Corporation who have not consented in writing.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Amendment as of October 10, 1997 and DO HEREBY CERTIFY, that the facts
stated in this Certificate of Amendment are true and correct.
/s/ Jill Bodnar
------------------------------
Jill Bodnar, President
/s/ Darrie Lam
------------------------------
Darrie Lam, Secretary
2
<PAGE>
BYLAWS FOR THE REGULATION, EXCEPT AS
OTHERWISE PROVIDED BY STATUTE OR ITS
CERTIFICATE OF INCORPORATION, OF
PHYSICAL SPA & FITNESS INC.
a Delaware corporation
============================================================================
ARTICLE I
OFFICES
-------
SECTION 1. PRINCIPAL EXECUTIVE OFFICE. The principal executive office
of the corporation shall be located as directed by the board of directors.
SECTION 2. OTHER OFFICES. Other business offices may at any time be
established by the board of directors at any place or places by them or
where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
SECTION 1. PLACE OF MEETINGS. All meetings of stockholders shall be
held at the principal executive office of the corporation, or at any other
place within or without the State of Delaware which may be designated either
by the board of directors or by the written consent of all persons entitled
to vote thereat and not present at the meeting, given either before or after
the meeting and filed with the secretary of the corporation.
SECTION 2. ANNUAL MEETINGS. The annual meetings of stockholders shall
be fixed by the board of directors. At such meetings directors shall be
elected, reports of the affairs of the corporation shall be considered, and
any other business may be transacted which is within the powers of the
stockholders.
SECTION 3. SPECIAL MEETINGS. Special meetings of the stockholders, for
the purpose of taking any action permitted by the stockholders under the
Delaware General Corporation Law and the certificate of incorporation of the
corporation, may be called at any time by the chairman of the board or the
president, or by the board of directors, or by one or more holders of shares
entitled to cast in the aggregate not less than twenty percent (20%) of the
votes at the meeting. Upon request in writing that a special meeting of
stockholders be called for any proper purpose, directed to the chairman of
the board, president, vice president or secretary by any person (other than
the board of directors) entitled to call a special meeting of stockholders,
the officer forthwith shall cause notice to be given to stockholders
entitled to vote that a meeting will be held at a time requested by the
person or persons calling the meeting, not less than thirty-five (35) nor
more than sixty (60) days after receipt of the request.
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SECTION 4. NOTICE OF ANNUAL OR SPECIAL MEETING. Written notice of each
annual or special meeting of stockholders shall be given not less than ten
(10) nor more than sixty (60) days before the date of the meeting to each
stockholder entitled to vote thereat. Such written notice shall be given
either personally or by mail or other means of written communication,
charges prepaid, addressed to such stockholder at his address appearing on
the books of the corporation or given by him to the corporation for the
purpose of notice. If any notice or report addressed to the stockholder at
the address of such stockholder appearing on the books of the corporation is
returned to the corporation by the United States Postal Service as unable to
deliver the notice or report to the stockholder at such address, all future
notices or reports shall be deemed to have been duly given without further
mailing if the same shall be available for the stockholder upon written
demand of the stockholder at the principal executive office of the
corporation for a period of one (1) year from the date of the giving of the
notice or report to all other stockholders. If a stockholder gives no
address, notice shall be deemed to have been given him if sent by mail or
other means of written communication addressed to the place where the
principal executive office of the corporation is situated, or if published
at least once in some newspaper of general circulation in the county in
which said principal executive office is located.
Any such notice shall be deemed to have been given at the time when
delivered personally or deposited in the mail or sent by other means of
written communication. An affidavit of mailing of any such notice in
accordance with the foregoing provisions, executed by the secretary,
assistant secretary or any transfer agent of the corporation, shall be prima
facie evidence of the giving of the notice.
SECTION 5. QUORUM. The presence in person or by proxy of the holders of
a majority of the shares entitled to vote at any meeting shall constitute a
quorum for the transaction of business at any meeting of stockholders. The
stockholders present at a duly called or held meeting at which a quorum is
present may continue to do business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the
shares required to constitute a quorum.
SECTION 6. ADJOURNED MEETING AND NOTICE THEREOF. Any stockholders'
meeting, annual or special, whether or not a quorum is present, may be
adjourned from time to time by the vote of a majority of the shares, the
holders of which are either present in person or represented by proxy
thereat, but in the absence of a quorum at the commencement of the meeting,
no other business may be transacted at such meeting.
When any stockholders' meeting, either annual or special, is adjourned
for thirty (30) days or more, or if after adjournment a new record date is
fixed for the adjourned meeting, notice of the adjourned meeting shall be
given as in the case of an original meeting. Except as provided above, it
shall not be necessary to give any notice of the time and place of the
adjourned meeting or of the business to be transacted thereat, other than by
announcement of the time and place thereof at the meeting at which such
adjournment is taken.
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SECTION 7. VOTING. The stockholders entitled to vote at any meeting of
stockholders shall be determined in accordance with the Delaware General
Corporation Law (relating to voting of shares held by a fiduciary, in the
name of a corporation, or in joint ownership). The stockholders may vote by
voice vote or by ballot; provided, however, that all elections for director
shall be by ballot. If a quorum is present, the affirmative vote of the
majority of the shares represented at the meeting and entitled to vote on any
matter shall be the act of the stockholders, unless the vote of a greater
number of voting by classes is required by the Delaware General Corporation
Law or the certificate of incorporation.
SECTION 8. VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETING. The
transactions of any meeting of stockholders, either annual or special,
however called and noticed, shall be as valid as though had at a meeting
duly held after regular call and notice, if a quorum be present either in
person or by proxy, and if, either before or after the meeting, each of the
persons entitled to vote, not present in person or by proxy, or who, though
present, has, at the beginning of the meeting, properly objected to the
transaction of any business because the meeting was not lawfully called or
convened, or to particular matters of business legally required to be
included in the notice, but not so included, signs a written waiver of
notice, or a consent to the holding of such meeting, or an approval of the
minutes thereof. All such waivers, consents or approvals shall be filed
with the corporate records or made a part of the minutes of the meeting.
Neither the business to be transacted at nor the purpose of any regular or
special meeting of stockholders need be specified in any written waiver of
notice or consent, except that if action is taken or proposed to be taken
for approval of any of those matters specified in paragraph (e) of Section 4
above, the waiver of notice or consent shall state the general nature of the
proposal.
SECTION 9. ACTION WITHOUT MEETING. Directors may be elected without a
meeting by a consent in writing, setting forth the action so taken, signed
by all of the persons who would be entitled to vote for the election of
directors, provided that, without prior notice except as hereinafter set
forth, a director may be elected at any time to fill a vacancy not filled by
the directors by the written consent of persons holding a majority of the
outstanding shares entitled to vote for the election of directors.
Any other action which, under any provision of the Delaware General
Corporation Law, may be taken at a meeting of the stockholders, may be taken
without a meeting, and without prior notice except as hereinafter set forth,
if a consent in writing, setting forth the action so taken, is signed by the
holders of outstanding shares having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting
at which all shares entitled to vote thereon were present and voted, unless
the consents of all stockholders entitled to vote have been solicited in
writing.
Unless, as provided in Section 12 of this Article II, the board of
directors has fixed a record date for the determination of stockholders
entitled to notice of and to give such written consent, the record date for
such determination shall be the day on which the first written consent is
given. All such written consents shall be filed with the secretary of the
corporation.
Any stockholder giving a written consent, or the stockholder's proxy
holders, or a transferee of the shares or a personal representative of the
stockholder or their respective proxy holders, may revoke the consent by a
writing received by the corporation prior to the time that written consents
of the number of shares required to authorize the proposed action have been
filed with the secretary of the corporation, but may not do so thereafter.
Such revocation is effective upon its receipt by the secretary of the
corporation.
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SECTION 10. PROXIES. Every person entitled to vote or execute consents
shall have the right to do so either in person or by one or more agents
authorized by a written proxy executed by such person or his duly authorized
agent and filed with the secretary of the corporation. Subject to the
Delaware General Corporation Law in the case of any proxy which states that
it is irrevocable, any proxy duly executed shall continue in full force and
effect until (i) an instrument revoking it or a duly executed proxy bearing
a later date is filed with the secretary of the corporation prior to the
vote pursuant thereto, (ii) the person executing the proxy attends the
meeting and votes in person, or (iii) written notice of the death or
incapacity of the maker of such proxy is received by the corporation before
the vote pursuant thereto is counted; provided that no such proxy shall be
valid after the expiration of three (3) years from the date of its
execution, unless otherwise provided for in the proxy. The dates contained
on the forms of proxy shall presumptively determine the order of execution
of the proxies, regardless of the postmark dates on the envelopes in which
they are mailed.
Without limiting the manner in which a stockholder may authorize another
person or persons to act for him as proxy, the following shall constitute a
valid means by which a stockholder may grant such authority.
(a) A stockholder may execute a writing authorizing another person or
persons to act for him as proxy. Execution may be accomplished by the
stockholder or his authorized officer, director, employee or agent signing
such writing or causing his or her signature to be affixed to such writing
by any reasonable means including, but not limited to, by facsimile
signature.
(b) A stockholder may authorize another person or persons to act for
him as proxy by transmitting or authorizing the transmission of a telegram,
cablegram, or other means of electronic transmission to the person who will
be the holder of the proxy or to a proxy solicitation firm, proxy support
service organization or like agent duly authorized by the person who will be
the holder of the proxy to receive such transmission, provided that any such
telegram, cablegram or other means of electronic transmission must either
set forth or be submitted with information from which it can be determined
that the telegram, cablegram or other electronic transmission was authorized
by the stockholder. If it is determined that such telegrams, cablegrams or
other electronic transmissions are valid, the inspectors or, if there are no
inspectors, such other persons making that determination shall specify the
information upon which they relied.
(c) Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission described in Paragraphs (a) or
(b) may be substituted or used in lieu of the original writing or
transmission for any and all purposes for which the original writing or
transmission could be used, provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of
the entire original writing or transmission.
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SECTION 11. INSPECTORS OF ELECTION. In advance of any meeting of
stockholders, the board of directors may appoint any person or persons other
than nominees for office as inspectors of election to act at such meeting or
any adjournment thereof. If inspectors of election be not so appointed, the
chairman of any such meeting may, and on the request of any stockholder or
his proxy shall, make such appointment at the meeting. The number of
inspectors shall be either one (1) or three (3). If appointed at a meeting
on the request of one or more stockholders or proxies, the majority of shares
represented in person or by proxy shall determine whether one (1) or three
(3) inspectors are to be appointed. In case any person appointed as
inspector fails to appear or fails or refuses to act, the vacancy may, and
on the request of any stockholder or a stockholder's proxy shall, be filled
by appointment by the board of directors in advance of the meeting, or at
the meeting by the chairman of the meeting.
The duties of such inspectors shall be as prescribed by the Delaware
General Corporation Law and shall include: determining the number of shares
outstanding and the voting power of each, the shares represented at the
meeting, the existence of a quorum, the authenticity, validity and effect of
proxies; receiving votes, ballots or consents; hearing and determining all
challenges and questions in any way arising in connection with the right to
vote; counting and tabulating all votes or consents; determining when the
polls shall close; determining the result; and such acts as may be proper to
conduct the election or vote with fairness to all stockholders.
The inspectors of election shall perform their duties impartially, in
good faith, to the best of their ability and as expeditiously as is
practical. If there are three (3) inspectors of election, the decision, act
or certificate of a majority is effective in all respects as the decision,
act or certificate of all. Any report or certificate made by the inspectors
of election is prima facie evidence of the facts stated therein.
SECTION 12. RECORD DATE FOR STOCKHOLDER NOTICE, VOTING AND GIVING
CONSENTS. For purposes of determining the stockholders entitled to notice
of any meeting or to vote or entitled to give consent to corporate action
without a meeting, the board of directors may fix, in advance, a record
date, which shall not be more than sixty (60) days nor less than ten (10)
days before the date of any such meeting nor more than sixty (60) days
before any such action without a meeting, and in this event only stockholders
of record on the date so fixed are entitled to notice and to vote or to
give consents, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date, except as
otherwise provided in the Delaware General Corporation Law.
If the board of directors does not so fix a record date:
(a) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on
the business day next preceding the day on which notice is given, or if
notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held.
(b) The record date for determining stockholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the board has been taken, shall be the day on which the first
written consent is given, or (ii) when prior action of the board is required
by the Delaware General Corporation Law, shall be at the close of business
on the day on which the board adopts the resolution relating to that action,
or the sixtieth (60th) day before the date of such other action, whichever
is later.
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ARTICLE III
DIRECTORS
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SECTION 1. POWERS. Subject to the provisions of the Delaware General
Corporation Law, and to any limitations in the certificate of incorporation
and these bylaws, relating to action required to be approved by the
stockholders or approved by the outstanding shares, all corporate powers
shall be exercised by or under the authority of, and the business and
affairs of the corporation shall be managed by, the board of directors.
Without prejudice to such general powers, but subject to the same limitations,
it is hereby expressly declared that the board of directors shall have the
following powers, to wit:
(a) To select and remove all the officers, agents and employees of the
corporation, prescribe such powers and duties for them as may not be
inconsistent with law, with the certificate of incorporation or with these
bylaws, fix their compensation and require from them security for faithful
service.
(b) To conduct, manage and control the affairs and business of the
corporation, and to make such rules and regulations therefor not
inconsistent with law, or with the certificate of incorporation or with
these bylaws, as they may deem best.
(c) To change the principal executive office and principal office for
the transaction of the corporation from one location to another; to fix and
locate from time to time one or more subsidiary offices of the corporation
within or without the State of Delaware; to designate any place within or
without the State of Delaware for the holding of any stockholders' meeting
or meetings; and to adopt, make and use a corporate seal, and to prescribe
the forms of certificates of stock, and to alter the form of such seal and
of such certificates from time to time, as in their judgment they may deem
best, provided such seal and such certificates shall at all times comply
with the provisions of law.
(d) To authorize the issuance of shares of stock of the corporation
from time to time, upon such terms as may be lawful.
(e) To borrow money and incur indebtedness for the purposes of the
corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust,
mortgages, pledges, hypothecations or other evidences of debt and securities
therefor.
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SECTION 2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number
of directors shall be no less than one, and shall be such maximum number of
persons as may be determined from time to time by affirmative vote of a
majority of the entire board of directors or by action of the stockholders
of the Corporation. Any decrease in the number of directors shall be
effective at the time of the next succeeding annual meeting of the
stockholders unless there shall be vacancies in the board of directors, in
which case such decrease may become effective at any time prior to the next
succeeding annual meeting to the extent of the number of such vacancies.
The board of directors shall be divided into three classes, as nearly equal
in numbers as the then total number of directors constituting the entire
board permits with the term of office in one class expiring each year.
Directors of the first class shall be elected to hold office for a term
expiring at the next succeeding annual meeting, directors of the second
class shall be elected to hold office for a term expiring at the second
succeeding annual meeting and directors of the third class shall be elected
to hold office for a term expiring at the third succeeding annual meeting.
Each director shall hold office until his successor shall have been elected
and qualified, or until his death, or until he shall have resigned, or have
been removed, as hereinafter provided in these Bylaws.
SECTION 3. ELECTION AND TERM OF OFFICE. The directors shall be elected
at each annual meeting of stockholders but, if any such annual meeting is
not held or the directors are not elected thereat, the directors may be
elected at any special meeting of stockholders held for that purpose. All
directors shall hold office until their respective successors are elected
and qualified, subject to the Delaware General Corporation Law and the
provisions of these bylaws with respect to vacancies on the board of
directors.
SECTION 4. VACANCIES. A vacancy in the board of directors shall be
deemed to exist in case of the death, resignation or removal of any
director, or if the board of directors by resolution declares vacant the
office of a director who has been declared of unsound mind by order of court
or convicted of a felony, or if the authorized number of directors be
increased, or if the stockholders fail, at any annual or special meeting of
stockholders at which any director or directors are elected, to elect the
full authorized number of directors to be voted for at that meeting.
Vacancies in the board of directors, except for a vacancy created by the
removal of a director, may be filled by a majority of the remaining
directors, though less than a quorum, or by a sole remaining director, and
each director so elected shall hold office until his successor is elected at
an annual or a special meeting of the stockholders. A vacancy in the board
of directors created by the removal of a director may only be filled by the
vote of a majority of the shares entitled to vote represented at a duly held
meeting at which a quorum is present, or by the written consent of the
holders of a majority of the outstanding shares entitled to vote.
The stockholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors. Any such election by
written consent shall require the consent of holders of a majority of the
outstanding shares entitled to vote.
Any director may resign effective upon giving written notice to the
chairman of the board, the chief executive officer, the president, the
secretary or the board of directors of the corporation, unless the notice
specifies a later time for the effectiveness of such resignation. If the
board of directors accepts the resignation of a director tendered to take
effect at a future time, the board of directors or the stockholders shall
have power to elect a successor or take office when the resignation is to
become effective.
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No reduction of the authorized number of directors shall have the effect
of removing any director prior to the expiration of his term of office.
SECTION 5. PLACE OF MEETING. Regular meetings of the board of directors
shall be held at any place within or without the State of Delaware which has
been designated from time to time by resolution by the board or by written
consent of all members of the board of directors. In the absence of such
designation, regular meetings shall be held at the principal executive
office of the corporation. Special meetings of the board may be held either
at a place so designated or at the principal executive office.
SECTION 6. ANNUAL MEETING. Immediately following each annual meeting of
stockholders, the board of directors shall hold a regular meeting at the
place of said annual meeting or at such other place as shall be fixed by the
board of directors, for the purpose of organization, election of officers,
and the transaction of other business. Call and notice of such meetings are
hereby dispensed with.
SECTION 7. OTHER REGULAR MEETINGS. Other regular meetings of the board
of directors shall be held without call on the date and at the time which
the board of directors may from time to time designate; provided, however,
that should the day so designated fall upon a Saturday, Sunday or legal
holiday observed by the corporation at its principal executive office, then
said meeting shall be held at the same time on the next day thereafter
ensuing which is a full business day. Notice of all such regular meetings
of the board of directors is hereby dispensed with.
SECTION 8. SPECIAL MEETINGS. Special meetings of the board of directors
for any purpose or purposes shall be called at any time by the chairman of
the board, the president, any vice president, the secretary or by any
director.
Special meetings of the board of directors shall be held upon three (3)
days' written notice or forty-eight (48) hours' notice given personally or
by telephone, telegraph, telex or other similar means of communication. Any
such notice shall be addressed or delivered to each director at such direc-
tor's address as it is shown upon the records of the corporation or as may
have been given to the corporation by the director for purposes of notice
or, if such address is not shown on such records or is not readily ascer-
tainable, at the place in which the meetings of the directors are regularly
held.
Notice by mail shall be deemed to have been given at the time a written
notice is deposited in the United States mail, postage prepaid. Any other
written notice shall be deemed to have been given at the time it is
personally delivered to the recipient or is delivered to a common carrier
for transmission, or actually transmitted by the person giving the notice by
electronic means, to the recipient. Oral notice shall be deemed to have
been given at the time it is communicated to the recipient or to a person at
the office of the recipient who the person giving the notice has reason to
believe will promptly communicate it to the recipient.
Any notice shall state the date, place and hour of the meeting. Notice
given to a director in accordance with this section shall constitute due,
legal and personal notice to such director.
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SECTION 9. ACTION AT A MEETING: QUORUM AND REQUIRED VOTE. The presence
of a majority of the authorized number of directors at a meeting of the
board of directors constitutes a quorum for the transaction of business,
except as hereinafter provided. Every act or decision done or made by a
majority of the directors present at a meeting duly held at which a quorum
is present shall be regarded as the act of the board of directors, unless a
greater number, or the same number, after disqualifying one or more direc-
tors from voting, is required by law, by the certificate of incorporation or
by these bylaws. A meeting at which a quorum is initially present may
continue to transact business notwithstanding the withdrawal of directors,
provided that any action taken is approved by at least a majority of the
required quorum for such meeting.
SECTION 10. VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS. The
transactions of any meeting of the board of directors, however called and
noticed or wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum is present and if, either
before or after the meeting, each of the directors not present or who,
though present, has prior to the meeting or at its commencement, protested
the lack of proper notice to him, signs a written waiver of notice or a
consent to holding such meeting or an approval of the minutes thereof. All
such waivers, consents or approvals shall be filed with the corporate
records or made a part of the minutes or the meeting.
SECTION 11. ADJOURNMENT. A majority of the directors present, whether
or not constituting a quorum, may adjourn any board of directors' meeting to
another time or place.
SECTION 12. NOTICE OF ADJOURNMENT. If a meeting is adjourned for more
than twenty-four (24) hours, notice of any adjournment to another time or
place shall be given prior to the time of the adjourned meeting to the
directors who were not present at the time of adjournment; otherwise, notice
of the time and place of holding an adjourned meeting need not be given to
absent directors if the time and place be fixed at the meeting adjourned.
SECTION 13. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members
of the board of directors may participate in a meeting through use of
conference telephone or similar communications equipment, so long as all
members participating in such meeting can hear one another. Participating
in a meeting as permitted in this Section constitutes presence in person at
such meeting.
SECTION 14. ACTION WITHOUT MEETING. Any action by the board of
directors may be taken without a meeting if all members of the board shall
individually or collectively consent in writing to such action. Such
written consent or consents shall be filed with the minutes of the
proceedings of the board and shall have the same force and effect as a
unanimous vote of such directors.
SECTION 15. FEES AND COMPENSATION. Directors and members of committees
may receive such compensation, if any, for their services, and such
reimbursement for expenses, as may be fixed or determined by resolution of
the board of directors.
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SECTION 16. COMMITTEES. The board of directors may, by resolution
adopted by a majority of the authorized number of directors, designate an
executive and other committees, each consisting of two (2) or more
directors, to serve at the pleasure of the board of directors, and may
prescribe the manner in which proceedings of any such committee meetings of
such committee may be regularly scheduled in advance and may be called at
any time by any two (2) members thereof; otherwise, the provisions of these
bylaws with respect to notice and conduct of meetings of the board of
directors shall govern. Any such committee, to the extent provided in a
resolution of the board of directors, shall have all of the authority of the
board of directors, except as limited by the Delaware General Corporation
Law.
ARTICLE IV
OFFICERS
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SECTION 1. OFFICERS. The officers of the corporation shall be a chief
executive officer, a president, a secretary and a chief financial officer.
The corporation may also have, at the discretion of the board of directors,
a chairman of the board, one or more vice presidents, one or more assistant
secretaries, one or more assistant treasurers, and such other officers as
may be appointed in accordance with the provisions of Section 3 of this
Article. Any number of offices may be held by the same person.
SECTION 2. ELECTION. The officers of the corporation, except such
officers as may be appointed in accordance with the provisions of Section 3
or Section 6 of this Article, shall be chosen annually by, and shall serve
at the pleasure of, the board of directors, and each shall hold his office
until he or she shall resign or shall be removed or otherwise disqualified
to serve, or his or her successor shall be elected and qualified.
SECTION 3. SUBORDINATE OFFICER. The board of directors or the chief
executive officer may appoint such other officers as the business of the
corporation may require, each of whom shall hold office for such period,
have such authority and perform such duties as are provided in these bylaws
or as the board of directors may from time to time determine.
SECTION 4. REMOVAL AND RESIGNATION. Subject to the rights, if any, of
an officer under any contract of employment, any officer may be removed,
either with or without cause, by the board of directors, at any regular or
special meeting thereof, or, except in case of an officer chosen by the
board of directors, by any officer upon whom such power or removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the board
of directors, or to the president or to the secretary of the corporation.
Any resignation is without prejudice to the rights, if any, of the corporation
under any contract to which such officer is a party. Any such
resignation shall take effect at the date of the receipt of such notice or
at any later time specified therein; and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make
it effective.
SECTION 5. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in
the manner prescribed in these bylaws for regular election or appointment to
such office.
SECTION 6. CHAIRMAN OF THE BOARD. The chairman of the board, if there
be such an office, shall preside at all meetings of the board of directors
and exercise and perform such other powers and duties as may be from time to
time assigned to him by the board of directors or prescribed by these
bylaws.
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SECTION 7. CHIEF EXECUTIVE OFFICER. Subject to such supervisory powers,
if any, as may be given by the board of directors to the chairman of the
board, if there be such an officer, the chief executive officer shall be the
chief executive officer of the corporation and shall, subject to the control
of the board of directors, have general supervision, direction and control
of the business and officers of the corporation. He shall preside at all
meetings of the stockholders and at all meetings of the board of directors.
He shall be ex officio a member of all the standing committees, including
the executive committee, if any, and shall have the general power and duties
of management usually vested in the office of president of a corporation,
and shall have such other powers and duties as may be prescribed by the
board of directors or these bylaws.
SECTION 8. PRESIDENT. The president shall be the chief operating
officer of the corporation, and in the event of absence or disability of the
chief executive officer, or if no chief executive officer has been appointed
by the board of directors, shall perform all the duties of the chief
executive officer, and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the chief executive officer.
SECTION 9. VICE PRESIDENTS. In the absence or disability of the
president, the vice presidents in order of their rank as fixed by the board
of directors or, if not ranked, a vice president designated by the board of
directors, if there be such an officer or officers, shall perform all the
duties of the president, and when so acting shall have all the powers of,
and be subject to all the restrictions upon, the president. The vice
presidents, if there be such an officer or officers, shall have such other
powers and perform such other duties as from time to time may be prescribed
for them respectively by the board of directors or these bylaws.
SECTION 10. SECRETARY. The secretary shall record or cause to be
recorded, and shall keep or cause to be kept, at the principal executive
office or such other place as the board of directors may order, a book of
minutes of all meetings and actions, of the stockholders, the board
directors and all committees thereof, with the time and place of holding of
meetings, whether regular or special, and, if special, how authorized, the
notice thereof given, the names of those present at directors' meetings, the
number of shares present or represented at stockholders' meetings, and the
proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the corporation's transfer agent, or registrar,
if one be appointed, a share register, or a duplicate share register,
showing the names of the stockholders and their addresses, the number and
classes of shares held by each, the number and date of certificates issued
for the same, and the number and date of cancellation of every certificate
surrendered for cancellation.
SECTION 11. CHIEF FINANCIAL OFFICER. The chief financial officer shall
keep and maintain, or cause to be kept and maintained, adequate and colored
accounts of the properties and business transactions of the corporation,
including accounts of its assets, liabilities, receipts, disbursements,
gains, losses, capital, retained earnings and shares. The books of account
shall at all reasonable times be open to inspection by any director.
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The chief financial officer shall deposit all moneys and other valuables
in the name and to the credit of the corporation with such depositories as
may be designated by the board of directors. He shall disburse the funds of
the corporation as may be ordered by the board of directors, shall render to
the president and directors, whenever they request it, an account of all of
his transactions as chief financial officer and of the financial condition
of the corporation, and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or these bylaws.
SECTION 12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. In the
absence or disability of the secretary or the chief financial officer, their
duties shall be performed and their powers exercised, respectively, by any
assistant secretary or any assistant treasurer which the board of directors
may have elected or appointed. The assistant secretaries and the assistant
treasurers shall have such other duties and powers as may have been
delegated to them, respectively, by the secretary or the chief financial
officer or by the board of directors.
ARTICLE V
INDEMNIFICATION OF DIRECTORS,
OFFICERS, EMPLOYEES AND OTHER AGENTS
------------------------------------
SECTION 1. DEFINITIONS. For the purpose of this Article V, "agent"
means any person who is or was a director, officer, employee or other agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise, or was a
director, officer, employee or agent of a foreign or domestic corporation -
which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation; "proceeding"
means any threatened, pending or completed action or proceeding, whether
civil, criminal, administrative or investigative; and "expenses" includes,
without limitation, attorneys' fees and any expenses of establishing a right
to indemnification under Section 4 or Section 5(c) of this Article V.
SECTION 2. ACTIONS BY THIRD PARTIES. The corporation shall indemnify
any person who was or is a party, or is threatened to be made a party, to
any proceeding (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was an agent of the
corporation, against expenses, judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with such proceeding
to the fullest extent permitted by the laws of the State of Delaware as they
may exist from time to time.
SECTION 3. ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The
corporation shall indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened, pending or completed
action by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that such person is or was an agent of the
corporation, against expenses actually and reasonably incurred by such
person in connection with the defense or settlement of such action to the
fullest extent permitted by the laws of the State of Delaware as they may
exist from time to time.
SECTION 4. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by the corporation prior to the final disposition
of such proceeding upon receipt of a request therefor and an undertaking by
or on behalf of the agent to repay such amount unless it shall be determined
ultimately that the agent is not entitled to be indemnified as authorized in
this Article V.
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SECTION 5. CONTRACTUAL NATURE. The provision of this Article V shall be
deemed to be a contract between the corporation and each director and
officer who serves in such capacity at any time while this Article is in
effect, and any repeal or modification thereof shall not affect any rights
or obligations then existing with respect to any state of facts then or
theretofore existing or any action, suit or proceeding theretofore existing
or any action, suit or proceeding theretofore or thereafter brought based in
whole or in part upon any such state of facts.
SECTION 6. INSURANCE. Upon and in the event of a determination by the
board of directors to purchase such insurance, the corporation shall
purchase and maintain insurance on behalf of any agent of the corporation
against any liability asserted against or incurred by the agent in such
capacity or arising out of the agent's status as such whether or not the
corporation would have the power to indemnify the agent against such
liability under the provisions of this Article V. All amounts received by
an agent under any such policy of insurance shall be applied against, but
shall not limit, the amounts to which the agent is entitled pursuant to the
foregoing provisions of this Article V.
SECTION 7. ERISA. To assure indemnification under this provision of
all such persons who are or were "fiduciaries" of an employee benefit plan
governed by the Employee Retirement Income Security Act of 1974, as amended
from time to time ("ERISA"), the provisions of this Article V shall, except
as limited by Section 410 of ERISA, be interpreted as follows: an "other
enterprise" shall be deemed to include an employee benefit plan; the
corporation shall be deemed to have requested a person to serve as an
employee of an employee benefit plan where the performance by such person of
his duties to the corporation also imposes duties on, or otherwise involves
services by , such person to the plan or participants or beneficiaries of
the plan; excise taxes assessed on a person with respect to an employee
benefit plan in the performance of such person's duties for a purpose
reasonably believed by such person to be in compliance with ERISA and the
terms of the plan shall be deemed to be for a purpose which is not opposed
to the best interests of the corporation.
ARTICLE VI
GENERAL CORPORATE MATTERS
-------------------------
SECTION 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For
purposes of determining the stockholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any right in respect of any other lawful action (other than as
provided in Section 12 of Article II of these bylaws), the board of
directors may fix, in advance, a record date, which shall not be more than
sixty (60) days before any such action, and in that case only stockholders
of record on the date so fixed are entitled to receive the dividend,
distribution, or allotment of rights or to exercise the rights, as the case
may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date so fixed, except as otherwise provided in
the Delaware General Corporation Law.
If the board of directors does not so fix a record date, the record date
for determining stockholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or
the sixtieth (60th) day before the date of that action, whichever is later.
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SECTION 2. INSPECTION OF CORPORATE RECORDS. The accounting books and
records, the records of stockholders, and minutes of proceedings of the
stockholders and the board and committees of the board of directors of the
corporation and any subsidiary of the corporation shall be open to
inspection upon the written demand on the corporation of any stockholder or
holder of a voting trust certificate at any reasonable time during usual
business hours, for a purpose reasonably related to such holder's interests
as a share- holder or as the holder of such voting trust certificate. Such
inspection by a stockholder or holder of a voting trust certificate may be
made in person or by an agent or attorney, and the right of inspection
includes the right to copy and make extracts.
Every director shall have the absolute right at any reasonable time to
inspect and copy all books, records and documents of every kind and to
inspect the physical properties of the corporation. Such inspection by a
director may be made in person or by agent or attorney, and the right of
inspection includes the right to copy and make extracts.
SECTION 3. INSPECTION OF BYLAWS. The corporation shall keep in its
principal executive office in California, or if its principal executive
office is not in California, then at its principal business office in
California (or otherwise provide upon written request of any stockholder)
the original or a copy of the bylaws as amended or otherwise altered to
date, certified by the secretary, which shall be open to inspection by the
stockholders at all reasonable times during office hours.
SECTION 4. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
payment of money, notes or other evidences of indebtedness, issued in the
name of or payable to the corporation, shall be signed or endorsed by such
person or persons and in such manner as, from time to time, shall be
determined by resolution of the board of directors.
SECTION 5. CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The board of
directors, except as in these bylaws otherwise provided, may authorize any
officer or officers, agent or agents, to enter into any contract or execute
any instrument in the name of and on behalf of the corporation, and such
authority may be general or confined to specific instances; and, unless so
authorized or ratified by the board of directors, no officer, agent or
employee shall have any power or authority to bind the corporation by any
contract or engagement or to pledge its credit or to render it liable for
any purpose or to any amount.
SECTION 6. CERTIFICATE FOR SHARES. Every holder of shares in the
corporation shall be entitled to have a certificate signed in the name of
the corporation by the chairman of the board or the president or a vice
president and by the chief financial officer or an assistant treasurer or
the secretary or any assistant secretary, certifying the number of shares
and the Class or series of shares owned by the stockholder. Any of the
signatures on the certificate may be facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be
issued by the corporation with the same effect as if such person were an
officer, transfer agent or registrar at the date of issue.
Any such certificate shall also contain such legend or other statement as
may be required by applicable state securities laws, the federal securities
laws, and any agreement between the corporation and the stockholders
thereof.
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<PAGE>
Certificates for shares may be issued prior to full payment under such
restrictions and for such purposes as the board of directors or these bylaws
may provide; provided, however, that on any certificate issued to represent
any partly paid shares, the total amount of the consideration to be paid
therefor and the amount paid thereon shall be stated.
Except as provided in this Section 6, no new certificate for shares shall
be issued in lieu of an old one unless the latter is surrendered and
canceled at the same time. The board of directors may, however, in case any
certificate for shares is alleged to have been lost, stolen, or destroyed,
authorize the issuance of a new certificate in lieu thereof, and the
corporation may require that the corporation be given a bond or other
adequate security sufficient to indemnify it against any claim that may be
made against it (including expense or liability) on account of the alleged
loss, theft, or destruction of such certificate of the issuance of such new
certificate.
SECTION 7. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The
president or any other officer or officers authorized by the board of
directors or the president are each authorized to vote, represent and
exercise on behalf of the corporation all rights incident to any and all
shares of any other corporation or corporations standing in the name of the
corporation. The authority herein granted may be exercised either by any
such officer in person or by any other person authorized so to do by proxy
or power of attorney duly executed by said officer.
SECTION 8. CONSTRUCTION AND DEFINITIONS. Unless the context otherwise
requires, the general provisions, rules of construction and definitions
contained in the Delaware General Corporation Law shall govern the
construction of these bylaws. Without limiting the generality of the
foregoing, the masculine gender includes the feminine and neuter, the
singular number includes the plural and the plural number includes the
singular, and the term "person" includes a corporation as well as a natural
person.
ARTICLE VII
AMENDMENTS TO BYLAWS
--------------------
SECTION 1. AMENDMENT BY BOARD OF DIRECTORS. New bylaws may be adopted or
these bylaws may be amended or repealed by the affirmative vote of a
majority of the Directors present at any meeting of the Board of Directors
at which a quorum is present, provided a notice of the proposed alteration,
amendment, or repeal is contained in the notice of such meeting, and
provided further, that if the certificate of incorporation of the
corporation sets forth the number of authorized directors of the
corporation, the authorized number of directors may be changed only by an
amendment of the certificate of incorporation.
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THIS LEASE made this 2nd day of May, One thousand nine hundred and ninety
seven BETWEEN LEE THEATRE REALTY LIMITED whose registered office is situate
at 23rd Floor Caroline Centre, 28 Yun Ping Road, Causeway Bay, Hong Kong
(hereinafter with its successors and assigns where the context so admits
called "the Landlord") of the one part and PHYSICAL HEALTH CENTRE HONG KONG
LIMITED whose registered office is situate at 12th Floor, Causeway Bay Plaza
1, 489 Hennessy Road, Causeway Bay, Hong, Kong (hereinafter called "the
Tenant") of the other part
NOW THIS DEED WITNESSETH as follows:-
1. The Landlord shall let and the Tenant shall take All That portion of
the messuage and premises erected on all that / those piece(s) or parcel(s)
of land registered in the Land Registry as Inland Lot No 1452 and the
Remaining Portion of Inland Lot No 472 & 476 known at the date hereof as LEE
THEATRE PLAZA (hereinafter referred to as "the Building") which said portion
consists of Shop A on 11th Floor, Whole of 12th Floor, 14th Floor and 15th
Floor Lee Theatre Plaza, 99 Percival Street, Causeway Bay, Hong Kong as
shown on the plan annexed hereto and thereon coloured red (hereinafter
referred to as "the Premises"). Together also with the use of the entrances
staircases landings and passages (so far as the same are necessary to the
enjoyment of the Premises) in common with the Landlord and any other tenant
or tenants of the Building And together also with the use in common with
others of the lifts escalators (if any) and central air-
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conditioning services wherever the same shall be operating excepting and
reserving unto the Landlord the rights set out in the Schedule hereto for a
term of six years commencing on the 1st day of March 1997 (hereinafter
referred to as "the Term") paying therefor unto the Landlord
(a)(i) for the first three years of the Term (i.e. from 1st March 1997
to 29th February 2000, both dates inclusive) the calendar monthly rent of
HONG KONG DOLLARS NINE HUNDRED FORTY THREE THOUSAND FIVE HUNDRED AND THIRTY
SIX ONLY (HK$943,536.OO) and;
(ii) for the remaining three years of the Term (i.e. from 1st March
2000 to 28th February 2003, both dates inclusive) the calendar monthly rent
shall be revised to the then prevailing market rent having regarding to
prevailing market rentals of similar promises in the same locality, such
rent to be mutually agreed between the parties or failing agreement shall be
determined by a single surveyor acting as expert and not as all arbitrator
nominated by the chairman for the time being of the Royal Institution of
Chartered Surveyors (Hong Kong Branch) on the application of either party
(and such surveyor shall receive and, if considered desirable, hear the
representations made by or on behalf of either or both parties) and such
surveyor's decision shall be final and binding on the parties. The costs
involved in such determination shall be borne by the parties in equal
shares.
The above rents are all exclusive of rates and operating changes
(hereinafter referred to as "the Rent").
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(b) the calendar monthly charge of HONG KONG DOLLARS TWO HUNDRED SEVEN
THOUSAND TWO HUNDRED AND NINETY TWO ONLY (HK$207,292.00) for the provision
of the maintenance and management of the Building, including the provision
of the central air-conditioning supply but excluding any maintenance which
is the obligation of the Tenant under this Agreement or of any other tenant
or occupier of any other part of the Building under any contract between the
Landlord and such tenant or occupier (hereinafter referred to as "the
Operating Changes") Provided that the Rent shall not be charged by the
Landlord for the purposes of fitting out for the period from 1st March 1997
to 31st May 1997 both dates inclusive. The parties hereto agree that the
Operating Charges shall be subject to increase at any time during the
continuance of the Term hereby created upon the Landlord giving to the
Tenant not less than one (1) calendar month's notice in writing of such
increase and upon the expiration of the said period of one month the
Operating Charges shall be increased by the amount specified in the
Landlord's notice. There shall be no restriction on the number of occasions
upon which the Landlord may call for an increase in the Operating Charges.
2. THE TENANT HEREBY COVENANTS WITH THE LANDLORD as follows:-
(a) To pay the Rent for the Premises and the Operating Charges
monthly in advance to the Landlord in Hong Kong Currency on the first day of
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every calendar month during the Term such payment to be effected in such
manner as shall from time to time be designated by the Landlord. THE TENANT
SHALL PAY TO THE LANDLORD THE RENT THE OPERATING CHARGES and all other sums
due hereunder (if any) upon the Term at the times and in the manner herein
provided without any deduction on account of any set-off or claim which the
Tenant may have against the Landlord or otherwise and if the Tenant shall
fail to pay any of the Rent or the Operating Charges or such other sums due
hereunder within fifteen days from the time when the same become due the
Tenant shall pay interest thereon at the rate of twenty per cent per annum
from the date on which the same became due (not fifteen days thereafter) to
the date of the payment thereof and such interest shall be deemed additional
rent hereunder provided that the demand and/or receipt by the Landlord of
interest pursuant to this clause shall be without prejudice to and shall not
affect the right of the Landlord to exercise any other right or remedy
(including the right of re-entry) exercisable under this Lease. All such
interest due on the Rent unpaid under this Lease shall be deemed to be part
of the Rent for the Premises and shall be recoverable by the Landlord
accordingly by distraint or otherwise.
(b) To pay and discharge all rates building maintenance charges (if
any) taxes assessments duties charges impositions and outgoing whatsoever
now or hereafter to be imposed or charged by the Government of Hong Kong the
Manager The Managing Committee of the Building and/or
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other lawful authority on or in respect of the Premises or upon the owner or
occupier in respect thereof Crown rent and Property Tax alone excepted.
(c) To pay all charges in respect of gas electric light and power
which shall be consumed or supplied on or to the Premises and also to pay a
due proportion of the water rate charged upon the whole of the Building such
proportion to be determined by the Landlord or the surveyor of the Landlord.
(d)(i) The Landlord may from time to time establish such house
rules (hereinafter called the "rules") as it may deem necessary for the
management and control of the Building and may also from time to time alter
amend and/or repeal such rules and this Lease shall be in all respects
subject to such rules which when a copy thereof has been furnished to the
Tenant shall be taken to be part hereof and the Tenant shall obey all such
rules and see that they are faithfully observed by the visitors guests
employees and licensees of the Tenant and such rules shall apply to and be
binding upon all of the tenants of the Building;
(ii) the Landlord shall not be responsible or under any
liability to the Tenant for the non-observance or violation of such rules by
any other tenant of the Building or person.
(e) Not to occupy or use the Premises or permit the same or any
part thereof to be occupied or used for any purpose other than that as a
high
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class fitness centre trading under the shop name of "PHYSICAL
LADIES' CLUB" only.
(f) To comply with all the requirements or the Government of Hong Kong
or other lawful authorities and with all laws ordinances rules and
regulations with respect to the Premises. To do everything necessary to
obtain continue and renew any licence or registration required by any laws
ordinances rules regulations for using the Premises for the use allowed
including paying all fees. The Tenant shall not do or permit to be done
anything whereby the policy or policies of insurance on the Premises or the
contents thereof against damage by fire or other risks for the time being
subsisting may become void or voidable or whereby the rates of premium
thereon may be increased and shall repay to the Landlord all sums paid by
way of increased premium and all expenses incurred by the Landlord in or
about any renewal of such policy or policies rendered necessary by a breach
of this clause and the Landlord shall have the right to collect the same
from the Tenant when charged to the Landlord as additional rent as referred
to in Clause 2(a).
(g) Not to permit any person to remain in the Premises overnight
without prior written permission from the Landlord. Such permission will
not be given unless the Landlord is satisfied that it is necessary to enable
the Tenant to post a watchman to look after the contents of the Premises.
In no circumstances shall the Premises be used as sleeping quarters or as
domestic Premises within the meaning of the Landlord
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and Tenant (Consolidation) Ordinance Chapter 7 or any other enactment or
modification thereof for the time being in force.
(h) Not to do or permit to be done any act matter or thing in
contravention of the terms of the Government Lease or Conditions under which
the Landlord holds the Premises and the Tenant shall indemnify the Landlord
against any breach thereof. The Tenant shall observe and shall be
answerable and responsible for ensuring that the servants employees and
licensees of the Tenant observe all the requirements of the Ordinances
(including Orders in Council) and subsidiary legislation (including rules
regulations made thereunder) of the Government of Hong Kong in relation to
the Premises.
(i) Not to assign underlet or otherwise part with the possession of
the Premises or any part thereof either by way of sub-letting lending
sharing or other means whereby any person or persons not a party to this
Lease obtains the use or possession of the Premises or any part thereof
irrespective of whether any rental or other consideration is given for such
use or possession and in the event of any such transfer sub-letting sharing
assigning or parting with the possession of the Premises (whether for
monetary consideration or not) this Lease may at the discretion of the
Landlord be absolutely determined in which event the Tenant shall forthwith
surrender the Premises to the Landlord. The lease hereby granted shall be
personal to the Tenant named in this Lease and without in any way limiting
the generality of the foregoing
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the following acts and events shall unless previously approved in writing by
the Landlord (which approval the Landlord may give or withhold at its
discretion without assigning any reason therefor) be deemed to be breaches
of this Clause:-
(i) any take-over reconstruction amalgamation merger
voluntary liquidation or change in the person or persons who owns / own a
majority of the Tenant's voting shares or who otherwise has or have
effective control thereof.
(ii) the giving by the Tenant of a Power of Attorney or
similar authority whereby the donee of the Power of Attorney obtains the
right to use possess occupy or enjoy the Premises or any part thereof or
does in fact use possess occupy or enjoy the same.
(iii) the change of the Tenant's business name without the previous
written consent of the Landlord.
(j) To keep all the interior of the Premises including the flooring and
interior plaster or other finishing material or rendering to walls floors
and ceilings and the Landlord's fixtures therein including all doors windows
shopfront glass electrical installations and wiring in good clean tenantable
substantial and proper repair and condition and properly preserved and
painted as may be appropriate when from time to time required and to so
maintain the same at the expense of the Tenant and particularly in the last
year of the Term to paint in a proper and workmanlike manner all the inside
wood iron and other parts
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heretofore or usually painted of the Premises with two coats of good oil
paint of suitable quality and also with such internal painting to wash stop
whiten distemper grain varnish colour paper and otherwise decorate in a
proper and workmanlike manner all such internal parts of the Premises that
have been or ought properly to be so treated and deliver up the same to the
Landlord at the expiration or sooner determination of the Term in the like
condition replacing and reinstating any part of the Premises damaged or
destroyed by or through or in consequence directly or indirectly of any
negligent act or omission of the Tenant. The Tenant particularly agrees:-
(i) To reimburse to the Landlord the cost of replacing all
broken and damaged windows whether the same be broken or damaged by the
negligence of the Tenant or owing to circumstances beyond the control of the
Tenant.
(ii) To repair or replace if so required by the Hong Kong Electric
Company Limited other Authority as the case may be under the terms of any
Electricity Supply Ordinance for the time being in force or any regulations
made thereunder all the electrical wiring installations and fittings within
the Premises and the wiring from the Tenant's meter or meters to and within
the same.
(iii) To take all reasonable precautions to protect the interior of
the Premises from damage threatened by an approaching storm or typhoons.
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(iv) To be responsible for all damage or injury to the Premises
the said fixtures fittings installations equipment and appurtenances or to
the Building its apparatus or services which may be caused by the
carelessness omission neglect improper use or conduct of or any cause
attributable to the Tenant the servants employees agents or invitees of the
Tenant including without in any way limiting the foregoing damage caused by
the Tenant in moving property or equipment in or out of the Building or the
Premises and such damage shall be repaired restored remedied or replaced
promptly on the same being sustained at the sole cost and expense of the
Tenant to the satisfaction of the Landlord by contractors and workmen
employed or approved by the Landlord.
(k)(i) To keep the Premises open for business every day
throughout the year between 10:00 a.m. and 10:00 p.m. daily (hereinafter
referred to as "the normal business hours") and without prejudice to any
other rights which the Landlord may have, any suspension of the Tenant's
business for a period of more than 7 consecutive days within any one
calendar year without the prior consent of the Landlord shall constitute a
material breach of this provision entitling the Landlord to determine this
Lease and to re-enter and regain possession of the Premises.
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<PAGE>
(ii) To provide the shopfront window with lighting during
the normal
business hours throughout the Term without suspension of such even when the
Premises are not open for business.
(l) The Landlord shall not in any circumstances be under any
liability whatsoever to the Tenant or to any other person whomsoever in
respect of any damage sustained by the Tenant or such other person aforesaid
caused by the negligence of any other tenant of the Building or caused by or
through or in any way owing to the leakage or overflow of water or the
escape of fumes smoke or fire or any other substance or thing from any
premises situate in the Building or caused by or through or in any way owing
to any defect in or breakdown of the lifts fire fighting and security
services equipment air-conditioning plant and other facilities of and in the
Building. The Tenant shall fully indemnify the Landlord against all claims
demands actions and legal proceedings whatsoever made upon the Landlord in
respect of any loss damage or injury to any person whomsoever or to any
property whatsoever caused by the act default or negligence of the Tenant or
by or through or in any way owing to the leakage or overflow of water or the
escape of fumes smoke or fire or other substance or thing of whatsoever
origin from the Premises or directly or indirectly through the defective or
damaged condition or operation of any part of the interior of the Premises
or any fixtures fittings wiring or piping or any plant or machinery therein.
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(m) The Landlord shall not in any circumstances be liable for any injury
or damage to persons or property resulting from fire explosion falling
plaster steam gas electricity water rain or leaks from any part of the
Building or from pipes appliances or plumbing works or from the roof street
or subsurface or from any other place or by dampness or by any other cause
of whatsoever nature nor shall the Landlord be liable for any such damage
caused by other tenants or persons in the Building or by Building or other
operations in the neighbourhood.
(n) To be wholly responsible for any loss damage or injury caused
to any person whomsoever or to any property whatsoever directly or
indirectly through the defective or damaged condition of any part of the
interior of the Premises or through the operation of any fixtures fittings
wiring or piping or any plant or machinery therein and to make good the same
by payment or otherwise and to indemnify the Landlord against all claims
demands actions and legal proceedings whatsoever made upon the Landlord by
any person in respect thereof.
(o)(i) The Tenant shall not without first obtaining the written
consent of the Landlord make or permit to be made any alteration in or
addition to the Premises or to the water gas or steam pipes electrical
installations and wiring or plumbing or other Landlord's fixtures or to
install any plant apparatus or machinery in the Premises or cut maim or
injure or suffer to be cut maimed or injured any doors windows walls
structural members or other fabric thereof or except
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as hereinafter authorized remove any additions improvements or fixtures
from the Premises. If any authority of the Government of Hong Kong or other
lawful authorities requires or orders the Premises be altered added to or
modified or that any fixtures or equipment be installed or removed the
Tenant shall
(i.i) give the Landlord promptly a copy of any notification
to that effect;
(i.ii) carry out the work required;
(i.iii) indemnify the Landlord against any claims demands
losses and damages arises from the breach of such request or orders by the
Tenant.
(ii) If the Tenant shall hereafter place in the Premises any
additions improvements or fixtures which can be removed without structural
alterations then the Tenant shall have the right prior to the termination of
this Lease to remove the same at the Tenant's own expense provided:
(ii.i) that the Tenant at the time of such removal shall not
be in default in the payment of the Rent or in the performance of any other
clause provision or condition of this Lease;
(ii.ii) that before any such removal the Tenant shall have
given written notice to the Landlord specifying the additions improvements
or fixtures which the Tenant proposes to remove and specifying in detail the
proposed replacements to be made
13
<PAGE>
by the Tenant and shall have obtained the Landlord's written
approval of the replacement specifications and
(ii.iii) that the Tenant shall at the Tenant's own expense
prior to the termination of this Lease replace all articles and materials
removed with others of a kind and quality customary in this type of high
class commercial building and satisfactory to the Landlord and all such
replacements shall be first-class in workmanship materials and finish and as
specified in the notice provided for in paragraph (ii.ii) hereof.
(p) Notwithstanding clause 2(o) above the Tenant shall if so
required by the Landlord remove all additions improvements or fixtures from
the Premises and reinstate the Premises to their original state and
condition to the satisfaction of the Landlord on the expiration or sooner
determination of the Term hereby granted.
(q) On the expiration of the Term hereby granted or upon an earlier
termination of this Lease the Tenant shall surrender to the Landlord
possession of the Premises with all additions improvements and fixtures then
included therein except as hereinabove provided in a good clean and
tenantable repair and condition to the satisfaction of the Landlord.
(r) The Landlord and its agents shall be permitted to visit and
examine the Premises at any reasonable hour of the day and workmen may enter
at any time when authorized by the Landlord or the Landlord's agents to
14
<PAGE>
make or facilitate repairs or prevent damage in any part of the Building
and to remove such portions of the walls floors and ceilings of the Premises
as may be required for the purpose of making such repairs or preventing such
damage. If the Tenant shall not be personally present to open and permit an
entry into the Premises at any time when for any reason an entry therein
shall be necessary or permissible hereunder the Landlord or the Landlord's
agents may forcibly or otherwise enter the Premises without rendering the
Landlord or such agents liable to any claim or cause of action for damages
by reason thereof if during such entry the Landlord shall accord reasonable
care to the Tenant's property provided that the right and authority hereby
reserved do not impose nor does the Landlord assume by reason thereof any
responsibility or liability whatsoever for the care or supervision of the
Premises or any of the pipes fixtures appliances or appurtenances therein
contained or therewith in any manner connected except as may be herein
specifically provided. The Tenant shall make good all defects and wants of
repair found to be the liability of the Tenant within the period of fifteen
(15) days from the date of receipt of notice written or verbal from the
Landlord to make good or amend the same.
(s) The Tenant shall waive and shall not avail itself of any
protection against ejectment or otherwise which is or may be afforded by the
Landlord and Tenant (Consolidation) Ordinance (Cap. 7) or by any amendments
thereto or by any similar Ordinance for the protection of
15
<PAGE>
tenants in so far as such protection now or at any time may be lawfully
waived and for the purposes of Part III of the said Ordinance rent shall be
deemed to be in arrears if not paid in advance on the due date in accordance
with Clause 2(a) hereof.
(t) To maintain the highest standards of cleanliness and hygiene
and freedom from infection contamination and infestation by any form of pest
which is a health hazard in all parts of the Premises used for the storage
preparation display serving and consumption of food.
(u) To pay on demand to the Landlord all costs incurred by the
Landlord in cleansing and clearing any of the drains choked or stopped up
owing to the negligence of the Tenant or of his visitors guests employees or
licensees.
(v) At all times during the continuance of the Term hereby created
to insure with an insurance company in Hong Kong approved by the Landlord
against fire and claims by third parties in respect of damage or loss to the
Premises however caused or arising out of its use and occupation of the
Premises and to pay all premiums therefor and on demand to produce (and if
so required) deliver up to the Landlord or its agent every such policy of
insurance and the receipt for the last payment of premium AND the Tenant
hereby covenants with the Landlord that the Tenant will fully indemnify the
Landlord and keep the Landlord indemnified against any claims made by third
parties as aforesaid.
16
<PAGE>
(w) The Tenant shall not use the Premises for the storage of goods or
merchandise other than in small quantities consistent with the nature of the
Tenant's trade or business by way of samples and exhibits nor to keep or
store or cause or permit to be kept or stored any extra hazardous or
hazardous goods within the meaning of the Dangerous Goods Ordinance or any
enactment replacing the same and the regulations applicable thereto, and in
so far as such Ordinance or its schedules or regulations may be altered this
Clause shall have reference to any alteration thereof.
(x) For the period of six months prior to the expiration of the
Term to permit the Landlord to display on the exterior of the Premises a
sign indicating that the Premises are available for letting and during such
period to permit the Landlord and its representatives to enter the Premises
with prospective tenants at reasonable hours of the day to view and inspect
the same.
(y) Not to permit or suffer any part of the Premises to be used for
the purpose of gambling or for any illegal immoral or improper purpose.
(z) To be responsible for the removal of garbage and refuse from
the Premises. The Tenant shall not dispose of any garbage or rubbish except
in the manner from time to time prescribed by the Landlord and until such
time as such garbage is removed from the Building to keep the same securely
sealed in containers of a design to be approved by the Landlord. In the
event of the Landlord providing a collection service
17
<PAGE>
for garbage and refuse the same shall be used by the Tenant to the exclusion
of any other similar service and the use of such service provided by the
Landlord shall be at the sole cost of the Tenant.
(aa) To reimburse the Landlord the cost of replacing any broken damaged
defective or burned out light bulbs tubes and globes in the Premises which
may be provided by the Landlord.
(ab) Not to take delivery of furniture or fixtures or bulky items of
goods in and out of the Building during normal office hours and under no
circumstances shall passenger lifts be used for delivery purposes.
(ac) Not to install additional locks bolts or other fittings to the
Premises or in any way to cut or alter the same without the prior written
consent of the Landlord.
(ad) To reimburse the Landlord the cost of repairing or replacing any
air-conditioning fan-coil unit or any other part of the air-conditioning
system or installation which is damaged or rendered defective by the misuse
or negligence of the Tenant or any of the Tenant's visitors employees or
licensees.
(ac) Not to place a load upon any floor of the Premises in excess of
the loading for which the floor is designed. The Landlord reserves the
right to prescribe the weight and position of all safes and heavy machinery
which must be placed so as to ensure an acceptable distribution of weight.
18
<PAGE>
(af) To use only the name designated by the Landlord for the Building,
and shall use such name for its business address and for no other purpose.
(ag) Not to make or permit to be made any music or noise so as to cause
a nuisance or annoyance to the Landlord or any other tenant of the Building
or do or permit anything to be done therein which will interfere with the
rights comfort or convenience of the other tenants.
(ah) To permit the Landlord at all times during the Term to exercise
without interruption or interference any of the rights set out in the
Schedule hereto.
3. THE TENANT HEREBY FURTHER COVENANTS WITH THE LANDLORD AS FOLLOWS:-
To fit out the interior of the said premises in a style and manner
appropriate to a first class shop premises at its own cost; that prior to
and in the course of carrying out such fitting work the Tenant shall comply
with and ensure that his contractors, workmen, employees and agents comply
with the procedures and stipulations set out hereunder subject to such
variations (if any) as the Landlord may approve in writing; that without
affecting the liability of the Tenant to keep and maintain the premises
including the existing furnishings fixtures and fittings therein and all
additions thereto in good tenantable repair and condition, it is hereby
agreed that in decorating (or subsequently in refurbishing or renovating)
the premises, the Tenant shall observe and comply with the following
procedures and stipulations, namely:-
19
<PAGE>
(i) The Tenant shall at its own cost prepare and submit to the
Landlord for approval 2 sets of suitable drawings and specifications of the
works proposed to be carried out by the Tenant (hereinafter called "the
Tenant's Work") together with schematic sketches illustrating the design and
layout proposal of such proposed works (hereinafter collectively called "the
Tenant's Plans").
(ii) The Tenant's Plans shall, without limitation:
(ii.i) Include detailed drawings, plans and specifications
of any changes in the air-conditioning electrical and fire services
installations and plumbing and drainage system;
(ii.ii) Include details of all lighting fixtures;
(ii.iii) Show the position of any heavy equipment, e.g.
safe;
(ii.iv) Show any other relevant information the Landlord
may consider necessary;
(ii.v) Comply with all relevant Ordinances, regulations
and by-laws from time to time issued by the government of Hong Kong and the
management of the building.
(iii) The Landlord will consider the Tenant's Plans and may in
its discretion accept or reject the Tenant's Plans or any part of them and
subject to such reasonable conditions as it thinks fit.
(iv) The Tenant shall have the sole responsibility for compliance
with all applicable statutes, codes, ordinances and other regulations for
all work performed by or on behalf of the Tenant on the premises, and the
20
<PAGE>
Landlord's or the Landlord's agent's or representative's approval of
plans, specifications, calculations or of the Tenant's Work shall not
constitute any implication, representation or certification by the Landlord
that the said improvements are in compliance with the said statutes, codes,
ordinances, and other regulations. In instances where several sets of
requirements must be met, the standard set by the Landlord's insurance
underwriters' and/or the management of the building or the strictest
standard shall apply.
(v) The Tenant shall not commence the Tenant's Work before
receiving notice from the Landlord that such work may be commenced.
(vi) Upon completion of the Tenant's Work, the Tenant shall notify
the Landlord in writing immediately.
(vii) The Tenant shall Submit to the Landlord by hand or via
registered mail at least seven (7) days prior to the commencement of
construction, the proposed commencement date of construction and the
estimated date of completion of construction work, fitting out work, and
date of projected opening.
(viii) The Tenant shall be responsible for a11 reasonable costs and
expenses incurred by the Landlord in considering the Tenant's Plans and
supervising the Tenant's Work hereunder and shall pay the same to the
Landlord upon demand. An estimate of this cost will be given to the Tenant
in advance.
21
<PAGE>
(ix)(ix.i) The Tenant shall be responsible for the removal of
garbage, refuse and construction and decoration waste from the premises to
such location as shall be specified by the Landlord from time to time.
(ix.ii) In the event of non compliance of this provision and
upon due notice, the Landlord may remove such material at the cost of the
Tenant who shall forthwith reimburse all costs and expenses incurred by the
Landlord.
(x) In respect of the works concerning electrical installations or
alteration, air-conditioning units or service, equipment relating to fire
prevention or firefighting service and plumbing works the Tenant shall
engage only those contractors as shall be nominated by the Landlord.
4. THE LANDLORD HEREBY COVENANTS WITH THE TENANT AS FOLLOWS:-
(a) To keep in good repair the Building's main walls roofs main
passages main stairways main electricity cables and main drains and pipes
intended for the general service of the Building and all such repairs shall
be at the expense of the Landlord unless the same shall have been rendered
necessary by the act or neglect or carelessness of the Tenant or any of the
visitors guests employees contractors or licensees of the Tenant in which
case the expense is to be borne by the Tenant Provided that the Landlord's
liability hereunder shall not be deemed to have arisen unless and until
notice in writing of any want of repair shall
22
<PAGE>
have been previously given by the Tenant to the Landlord and the
Landlord shall have failed to repair the same within a reasonable time.
(b) The Landlord shall keep and maintain the lift service for the
convenience of the Tenant subject to the discretionary power of the Landlord
to prescribe the manner of maintaining the said service. The Tenant or any
person using the said lift service shall do so entirely at his own risk.
(c) The Landlord shall provide and maintain for the Premises a
central air-conditioning service during normal business hours namely from
9:00 a.m. to 11:00 p.m. from Mondays to Fridays, 9:00 a.m. to 10:00 p.m. on
Saturdays and 9:00 a.m. to 6:00 p.m. on Sundays. No such central air-
conditioning supply will be provided outside these hours other than as may
be agreed in advance with the Landlord. Notwithstanding any provision to
the contrary the Landlord shall not be liable to pay compensation to the
Tenant in respect of any period during which owing to circumstances beyond
the control of the Landlord the air-conditioning plant shall not be
operating as the result of mechanical or power failure need of repair or
overhaul or for any other reason beyond the control of the Landlord nor
shall the Landlord be liable to grant to the Tenant any abatement of rent in
respect of such interruption.
(d) The Tenant upon duly paying the Rent and observing and
performing the terms and complying with the conditions on the part of the
Tenant to be performed as herein set forth shall at all times during the
Term
23
<PAGE>
hereby granted quietly have hold and enjoy the Premises without any
suit trouble or hindrance from the Landlord or anyone lawfully claiming
under through or in trust for the Landlord.
(e) The Landlord shall during the continuance of this Lease pay the
Crown Rent and Property Tax in respect of the Premises.
5. IT IS HEREBY MUTUALLY AGREED AS FOLLOWS:-
(a)(i) If the Rent and / or the Operating Charges and / or other
moneys hereby reserved or any part thereof shall be unpaid for 15 days after
the same shall become payable whether formally demanded or not; or
(ii) If the Tenant shall default in the performance or observance of
any term or condition hereof, or
(iii) If the Tenant shall become bankrupt or enter into any
composition or arrangement with creditors or shall suffer any execution to
be levied on its goods or being a company shall go into liquidation; then
and in any such case it shall be lawful for the Landlord to re-enter the
Premises or any part thereof in the name of the whole and thereupon this
Lease shall absolutely determine but without prejudice to any right of
action of the Landlord in respect of any antecedent breach of the Tenant's
terms and conditions and a written notice given by the Landlord to the
Tenant to the effect that the Landlord thereby exercises the right of re-
entry hereby conferred shall be a full and sufficient exercise of such power
notwithstanding any statutory or
24
<PAGE>
common law provisions to the contrary. All costs and expenses for and
incidental to any demand for the Rent or the Operating Charges or any other
sum payable under this Lease (if the Landlord elects to so demand) or action
or distraint for the recovery of the same (including any solicitors' or
counsel's fees on solicitor and own client basis) shall be paid by the
Tenant and shall be recoverable from him as a debt on a full indemnity
basis.
(b) Notwithstanding anything hereinbefore contained if the Tenant
shall fail to pay the Rents and / or the Operating Charges and / or other
moneys herein reserved or any part thereof on due dates the Landlord shall
be entitled to:-
(i) recover from the Tenant as a debt the following expenses
incurred by the Landlord in the course of recovering the Rents and / or
Operating Charges and / or other moneys unpaid or any part thereof:-
(i.i) such sum as the Landlord shall reasonably determine
to be collection charges for the additional work incurred by the Landlord's
staff in collecting the Rents and / or the Operating Charges and / or other
moneys unpaid or any part thereof;
(i.ii) all solicitors' and / or counsels' fees (on a
solicitor and own client basis) and court fees incurred by the Landlord for
the purpose of recovering the Rents and / or the Operating
25
<PAGE>
Charges and / or other moneys unpaid or any part thereof; and
(i.iii) any other fees paid to debt-collectors appointed by the
Landlord for the purpose of collecting the Rents and / or the Operating
Charges and / or other moneys unpaid or any part thereof.
(ii) terminate or disconnect the supply of air-conditioning
water electricity and other services and facilities to the Premises and / or
to the Tenant.
(c) This Lease sets out the full agreement between the parties. No
other warranties or representations have been made or given relating to the
tenancy or to the Building or the Premises. If any warranty or
representation has been made the same is hereby waived. The provisions of
this Lease cannot be changed orally.
(d) Acceptance of the Rent by the Landlord shall not be deemed to
operate as a waiver by the Landlord of any right to proceed against the
Tenant in respect of any breach by the Tenant of any of its obligations
hereunder. No condoning excusing or overlooking by the Landlord of any
default breach or non-observance or non-performance by the Tenant at any
time or times of any of the Tenant's obligations herein contained shall
operate as a waiver of the Landlord's rights hereunder in respect of any
continuing or subsequent default breach or non-observance or non-performance
or so as to defeat or affect in any way
26
<PAGE>
the rights of the Landlord herein in respect of any such continuing or
subsequent default or breach and no waiver by the Landlord shall be inferred
from or implied by anything done or permitted by the Landlord unless
expressed in writing and signed by the Landlord.
(e) Any notice by the Landlord to the Tenant shall be deemed to
have been duly served and any demand by the Landlord upon the Tenant shall
be deemed to have been duly made if delivered to or sent by prepaid post or
left at the Premises or at the last known address of the Tenant. Any notice
by the Tenant to the Landlord shall be deemed to have been given if in
writing and delivered or mailed by prepaid registered mail to the registered
office of the Landlord.
(f) For the purposes of this Lease any act default or omission of
the agents servants employees contractors licensees guests invitees or
customers of the Tenant shall be deemed to be the act default or omission of
the Tenant.
(g) The stamp duty registration fee and ratification fee (if any)
payable on this Lease and its counterpart shall be borne by the Landlord and
Tenant in equal shares.
(h) The Tenant shall deposit with the Landlord the sum of HONG KONG
DOLLARS THREE MILLION SIX HUNDRED FIFTY ONE THOUSAND TWO HUNDRED AND EIGHTY
EIGHT ONLY (HK$3,651,288.00) as security for the due payment of the Rent the
Operating Charges and other moneys hereby stipulated (hereinafter
27
<PAGE>
referred to as "the Deposit") and the due observance and performance of the
term and conditions herein contained and on the part of the Tenant to be
observed and performed. The Deposit shall be subject to revision in the
event of adjustment in the Rent and / or Operating Charges and / or other
moneys payable hereunder. The Deposit shall be retained by the Landlord for
its own use and benefit throughout the Term free of any interest to the
Tenant with power for the Landlord without prejudice to any other right or
remedy hereunder to deduct therefrom the amount of any of the Rent the
Operating Charges or other moneys payable hereunder which is in arrears or
any loss or damage sustained by the Landlord as the result of any non-
observance or non-performance by the Tenant of any such agreement
stipulation or condition. In the event of any deduction being made by the
Landlord from the Deposit in accordance herewith the Tenant shall on demand
by the Landlord forthwith further deposit the amount so deducted and failure
by the Tenant so to do shall entitle the Landlord forthwith to re-enter the
Premises and to determine this Lease as hereinbefore provided. Subject as
aforesaid the Deposit shall be refunded to the Tenant by the Landlord
without interest within thirty days after the expiration or sooner
determination of this Lease and the delivery of vacant possession of the
Premises to the Landlord or within thirty days of the settlement of the last
outstanding claim by the Landlord against the Tenant in respect of any
breach non-observance or non-
28
<PAGE>
performance of any of the agreements stipulations or conditions herein
contained and on the part of the Tenant to be observed and performed
whichever is the later.
(i) This Lease and the agreements stipulations and conditions
herein contained shall enure for the benefit of and be binding on the
Landlord its successors and assigns. The obligations of the Tenant
hereunder up to the date of termination of this Lease shall be enforceable
against the Tenant and his successors but unless expressly agreed in writing
by the Landlord the Tenant's successors shall not succeed to or be entitled
to any of the benefits hereof or any interest hereunder.
(j) The Tenant acknowledges that no fine premium key money or other
consideration has been paid by the Tenant to the Landlord for or in
connection with the grant of this lease.
(k) The Landlord hereby reserves the right at any time during the
Term hereby granted to change the name of the Building or any part thereof
and in respect thereof the Landlord shall not be liable in damages to the
Tenant or be made a party to any other proceeding or for costs or expenses
of whatsoever nature incurred by the Tenant as a result of such change.
(l) In the event of the Premises or any part thereof at any time
during the Term being damaged or destroyed by fire water storm wind typhoon
defective construction white-ants earthquake subsidence of the ground or any
other cause (not attributable to the act default or negligence of
29
<PAGE>
the Tenant) so as to be rendered unfit for use and occupation or being
declared unfit for use and occupation or becoming subject to a closure order
then the Rent hereby stipulated or a fair proportion thereof according to
the nature and extent of the damage sustained shall be suspended until the
Premises shall be again rendered fit for occupation and use Provided Always
that the Landlord shall be under no obligation to reinstate the Premises if
by reason of the condition of the Premises or any local regulations or other
circumstances beyond the control of the Landlord it is not practicable or
reasonable so to do. In such event the Landlord may forthwith or within a
reasonable time thereafter determine this Lease but such determination shall
not prejudice the rights and remedies of either party in respect of any
antecedent breach on the part of the other.
(m) It is hereby declared that in the construction of these presents
unless the contrary intention appears words importing the masculine gender
shall include female and neuter genders and vice versa words in the singular
shall include the plural and vice versa and words importing persons shall
include companies or corporations and vice versa.
THE SCHEDULE
------------
(1) The free passage and running of water soil gas electricity and
other services from and to other parts of the Building in and through the
pipes sewers drains conduits gutters watercourses wires cables channels and
other conducting media (collectively "the Conducting Media") which are
30
<PAGE>
now or at any time during the Term laid or made in upon through or under
the Premises and the free and uninterrupted use of all Conducting Media
serving other parts of the Building which are now or at any time during the
Term in upon through or under the Premises.
(2) The right to construct and to maintain in over or under the
Premises any easements or services for the benefit of any part of the
Building or any adjoining property of the Landlord.
(3) The right at any time during the Term at reasonable times during
normal business hours after giving reasonable prior notice to the Tenant to
enter (or in cases of emergency to break and enter) upon the Premises in
order:-
(a) to inspect cleanse repair amend remove or replace with
others the
Conducting Media or any part thereof;
(b) to inspect and to execute works in connection with any of
the easements or services referred to in this Schedule;
(c) to carry out work or do anything whatsoever comprised within
the Landlord's obligations herein contained whether or not the Tenant is
liable hereunder to make a contribution;
(d) to exercise any of the rights possessed by the Landlord
under the terms of this Agreement.
(4) The right to erect scaffolding for the purpose of repairing
refurbishing or cleaning the exterior of the Building notwithstanding that
such scaffolding may temporarily interfere with the access to or enjoyment
and use of the Premises.
31
<PAGE>
(5) (a) The right to use or permit or authorize other persons to
use all or any part of the common areas of the Building (including without
limitation the common entrances, passages, corridors, staircases, lobbies
and halls) whether by granting a tenancy, lease or licence in respect
thereof for any trade business advertising or promotional use or activities;
and
(b) The right to remove, cancel, relocate or otherwise change
the common areas of the Building (including but not limited to common
entrances, passages, corridors, staircases, lobbies and halls) from time to
time and in such manner as the Landlord may reasonably deem fit without the
same constituting an actual or constructive eviction of the Tenant and
without incurring any liability of the Tenant provided that such use or
activities referred to in Paragraph (a) and such removal, cancellation,
relocation or other change of the common areas of the Building referred to
in Paragraph (b) shall not significantly interfere with access to the
Premises.
AS WITNESS WHEREOF the hands of the parties the day and year first above
written.
32
<PAGE>
SIGNED BY )
)
for and on behalf of the )
)
Landlord in the presence of:- )
) /S/ Gilbert Tang
) Gilbert Tang
For and on behalf of
HYSAN PROPERTY MANAGEMENT LTD.
Property Manager of
LEE THEATRE REALTY LTD.
/s/ Elaine Tse
Elaine Tse
SIGNED by )
)
)
for and on behalf of the )
)
Tenant in the presence of:- ) For and on behalf of
) PHYSICAL HEALTH CENTRE HONG KONG
LTD.
/S/ Authorized Signatory ) /S/
) Director/Authorized Signature
RECEIVED the day and year first above )
)
written of and from the Tenant the sum )
)
of DOLLARS THREE MILLION SIX HUNDRED )
FIFTY ONE THOUSAND TWO HUNDRED AND ) HK$ 3,651,288.00
EIGHTY EIGHT ONLY ----- )
Hong Kong Currency being the Deposit
above expressed to be paid by the
Tenant to the Landlord
WITNESS--
/S/
Gilbert Tang
For and on behalf of
HYSAN PROPERTY MANAGEMENT LTD
property Manager of
LEE THEATRE REALTY LTD.
/S/
Elaine Tse
33
<PAGE>
HOUSE RULES
-----------
(1) The public halls entrances passages and stairways of the Building
shall not be obstructed or used for any other purpose than ingress to or
egress from the Premises in the Building.
(2) No public hall of the Building shall be decorated by any tenant in any
manner without the prior consent of the Landlord.
(3) No tenant shall make or permit any noise such as to cause a nuisance
or annoyance to any other tenant in the Building or the Landlord or do or
permit anything to be done therein which will interfere with the rights
comfort or convenience of other tenants.
(4) No tenant shall store arms, ammunition or unlawful goods kerosene or
any explosive or combustible substance in any part of his premises.
(5) Each tenant shall keep such tenant's Premises in a good state of
preservation and cleanliness and shall not sweep or throw or permit to be
swept or thrown therefrom or from the doors windows terraces or balconies
thereof any dirt or other substance.
(6) No article shall be placed in the public halls passages or on the
public staircase landings nor shall anything be hung or shaken from the
doors windows terraces or balconies or placed upon the window sills of the
Building.
(7) No shades awnings or window guards shall be used in or about the
Building except such as shall be approved by the Landlord.
34
<PAGE>
(8) No sign signal advertisement or illumination shall be inscribed or
exposed on or at any window or other part of the Building except such as
shall have been approved in writing by the Landlord nor shall anything
project out of any window of the Building without similar approval. The
Landlord will provide space at the main entrance hall of the Building for a
Directory of such design as may from time to time be determined by the
Landlord. The Landlord will at the expense of a tenant provide a sign or
plate indicating the name of the tenant on the Directory.
(9) The public lifts in the Building unless of automatic type and intended
for operation by a passenger shall be operated only by employees of the
Landlord and there shall be no interference whatsoever with the same by
tenants or their guests licensees or employees.
(10) No velocipedes bicycles scooters or similar vehicles shall be allowed
in the public passenger lifts and no baby carriage or any of the above-
mentioned vehicles shall be allowed in the public halls passage ways areas
or courts of
the Building.
(11) Office equipment and supplies goods baggage and packages of every
kind are to be delivered only at the service entrance of the Building and
through the service lift or service stairways to any premises.
(12) Garbage and refuse from any premises shall be deposited in such
manner as the manager of the Building may direct.
(13) Water-closets and other water apparatus in the Building shall not be
used for any purpose other than those for which they were constructed nor
shall
35
<PAGE>
any sweepings rubbish rags or any other articles be thrown into the same.
Any damage resulting from misuse of any water-closets or apparatus shall be
paid for by the tenant in whose Premises or by any of whose guests licensees
or employees it shall have been caused.
(14) No tenant shall send any employee of the Landlord out of the Building
on any private business of a tenant.
(15) No bird or animal shall be kept harboured or allowed in any premises.
(16) No radio or television aerial shall be attached to or hung from the
exterior of the Building.
(17) Any consent or approval given under these rules by the Landlord shall
be revocable at any time.
(18) Complaints regarding the service or the Building shall be made in
writing to the Landlord or any other person designated by the Landlord.
(19) No tenant shall allow any visitor licensee or employee of the tenant
to stand or queue up outside his promises thereby causing an obstruction to
the passages and entrance halls used in common with the other tenants of the
Building.
(20) The Landlord shall have the right to prohibit any advertising by any
tenant which in the Landlord's opinion tends to impair the reputation of the
Building or its desirability as a building for offices and shopping mall and
upon written notice from the Landlord the tenant shall refrain from or
discontinue such advertising.
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<PAGE>
(21) Windows shall remain closed save in an emergency such as fire or
breakdown of the air-conditioning system.
(22) Canvassing and peddling in the Building is strictly prohibited and
each tenant shall co-operate to prevent the same.
(23) Each tenant must upon the termination of his tenancy return to the
Landlord all keys of stores offices and toilet rooms used by such tenant.
(24) The loading and unloading of goods shall be carried out at such times
in such areas and through such entrances as shall be designated by the
Landlord for this purpose from time to time.
(25) No heating facilities in addition to such facilities as may be
provided by the Landlord (if any) shall be installed without the written
consent of the
Landlord.
(26) It is the responsibility of a tenant to maintain and keep clean and
clear of rubbish the public areas immediately adjacent to his premises to
the satisfaction of the Landlord.
37
<PAGE>
BUSINESS PREMISES
Dated the 2 MAY,1997
============================================================================
LEE THEATRE REALTY LIMITED
LEASE
============================================================================
Description of Business Premises
Shop A on 11th Floor,
Whole of 12th Floor, 14th Floor and 15th Floor,
Lee Theatre Plaza, 99 Percival Street,
Causeway Bay, Hong Kong
Tenant Physical Health Centre Hong Kong Limited
Term Six (6) years
Commencing 1st March 1997
Expiring 28th February 2003
Monthly Rents:-
(A) Basic Rent:
(i) HK$943,536.00 for the period from 1st March 1997 to 29th February 2000;
and
(ii) For the remaining three years of the term, the rental shall be revised
at the then open market rent of the neighbouring premises and to be agreed
between both parties.
All the above monthly rentals are exclusive of rates and operating charges
(B) Operating Charges: HK$207,292.00
<PAGE>
OHA PROPERTY COMPANY LIMITED
----------------------------
BY HAND
7th May 1997
SUBJECT TO CONTRACT
Williluck International Ltd
Rm 1701, 17th Floor
Causeway Bay Plaza 1
489 Hennessy Road
Hong Kong
Attention: Mr Serleo Luk
Dear Sirs
New Letting
Room 1301A on 13th Floor - One Hysan Avenue
Further to our recent discussion with your Miss D Lam, we confirm that we are
prepared to offer you a tenancy of the above premises under the following terms
and conditions-
Premises
Room 1301A on 13th Floor One Hysan Avenue Hong Kong as shown coloured red on
the attached floor plan, for identification purpose only
Term
3 years commencing 19th May 1997 to 18th May 2000, both dates inclusive
Rental
HK$24,948.00 (HONG KONG DOLLARS TWENTY FOUR THOUSAND NINE HUNDRED AND FORTY
EIGHT ONLY) per month, exclusive of rates and operating charges
Operating Charges
The operating charges covering air-conditioning and management services for the
captioned premises shall be HK$3,465.00 (HONG KONG DOLLARS THREE THOUSAND FOUR
HUNDRED AND SIXTY FIVE ONLY) per calendar month, payable monthly in advance.
These charges shall be subject to revision and adjustment according to the
fluctuation of the electricity charges and operation cost at the date of the
commencement of the Tenancy Agreement and at any time during the continuance of
the term hereby created.
The Landlord shall give to the Tenant one month's notice in writing of any
revision or adjustment to be effected in the charges in respect of the
provision of such service and upon the expiration of the said period, the said
charges shall be revised or adjusted to the amount specified.
.../to be cont'd
<PAGE>
OHA PROPERTY COMPANY LIMITED
----------------------------
Page 2
7th May 1997
Williluck International Ltd
Air-conditioning Supplying Hours
Central air-conditioning will be supplied as follows:-
Mondays to Fridays 8:30 a.m. to 5:30 p.m.
Saturdays 8:30 a.m. to 1:30 p.m.
No central air-conditioning will be supplied on Sundays and Public Holidays.
Should air-conditioning be required after normal supply hours, this can be
arranged at the expense of the Tenant after prior application to the Landlord
is made
Rates
HK$4,425.00 (HONG KONG DOLLARS FOUR THOUSAND FOUR HUNDRED AND TWENTY FIVE ONLY)
per quarter, subject to Government's revision
Deposit
Upon acceptance of this offer, a deposit of HK$89,664.00 (HONG KONG DOLLARS
EIGHTY NINE THOUSAND SIX HUNDRED AND SIXTY FOUR ONLY) being the equivalent of
three months' rent, operating charges and provisional rates will be required.
For avoidance of doubt, this deposit will unconditionally become non-refundable
if for any reason whatsoever you do not proceed to execute the tenancy
agreement and that this item only is expressly not subject to contract.
Tenancy
The tenancy shall be in the name of "Williluck International Ltd". Please let
us have copies of the Business Registration Certificate, Memorandum & Articles
of Association and Form "X" in respect of the said company for our record.
Handover of Premises
The premises will be handed over to you in bare shell condition.
Interior Decoration
The Tenant shall be responsible for all costs relating to its own internal
decoration, partitioning, lighting, fixtures, fittings air-conditioning ducts
and wiring, where required.
No structural alteration or cutting into cement concrete shall be permitted
under any circumstances.
After signing the Tenancy Agreement, the Tenant shall be required to submit
detailed plans showing the proposed display layout and the interior decoration,
or additions to Landlord's fixtures and fittings in the Premises including
wiring and other electrical fittings and air-conditioning for the approval of
the Landlord before commencement of work is permitted.
.../to be cont'd
<PAGE>
OHA PROPERTY COMPANY LIMITED
----------------------------
Page 3
7th May 1997
Williluck International Ltd
Grace Period
1 1/2 months' grace period from the commencement date of the tenancy will be
given for interior decoration during which no rent will be charged. The rental
payment commencement date shall, therefore, be 4th July 1997. No central air-
conditioning supply will be provided until the premises are in such an
agreeable condition that the Building Management at its absolute discretion
warrants to do the otherwise. Operating charges and rates are, however,
payable from the commencement of the term.
Maintenance
Public areas and other areas intended for the general service of the building
will be maintained by the Landlord at its expenses and the Landlord reserves
the right of way to gain access into the tenant's area to perform its duties in
respect thereof with prior appointment. Areas for the exclusive use of the
Tenant including exclusively used toilets will be maintained by the Tenant at
its expenses.
Legal Cost
The stamp duty on the Agreement and its counterpart thereof shall be borne by
the parties in equal shares. Each party shall bear its own legal costs of and
incidental to the preparation and completion of this Tenancy Agreement.
General
Upon your acceptance of this offer, both parties shall enter into a standard
tenancy agreement for One Hysan Avenue, a sample of which is enclosed herewith
for your information.
Kindly confirm your acceptance of the above terms by signing and returning to
us the copy of this letter together with your cheque for HK89,664.00 in favour
of "HYSAN DEVELOPMENT COMPANY LIMITED" in settlement of the non-interest
bearing rental deposit on or before 13th May 1997; after which our offer shall
deemed to have automatically lapse.
Yours faithfully
/S/ Lucilla Leung
Lucilla Leung (Ms)
Leasing & Administration Manager
Estate Department
For and on behalf of
HYSAN DEVELOPMENT CO LTD
Property Manager of
OHA PROPERTY CO LTD
Encl
<PAGE>
Dated the 4th day of April 1997
-------------------------------
BENEFIT PLUS COMPANY LIMITED
AND
PHYSICAL HEALTH CENTRE HONG KONG LIMITED
********************************************************
TENANCY AGREEMENT
OF
Whole of 10th Floor, 11th Floor and
Portion of 12th Floor and Storeroom on 6th Floor,
PRESTIGE TOWER, Nos. 23 and 25 Nathan Road, Kowloon
**********************************************************
Term : 3 years
Commencing : 11th Floor: 20th January 1997
10th Floor: 10th April 1997
(with right to postpone to lst June 1997
and further postpone to lst August 1997)
Commencing : 11th Floor, Portion of 12th Floor
Rent and Storeroom on 6th Floor : HK$316,638.00
10th Floor : HK$213,738.00
<PAGE>
THIS LEASE is made the 4th day of April 1997
BETWEEN BENEFIT PLUS COMPANY LIMITED whose registered office is at 21st
Floor, No. 100 Canton Road, Kowloon (hereinafter called "the Landlord" which
expression shall where the context so admits include its successors and
assigns) and the party named in the First Schedule (hereinafter called "the
Tenant").
WHEREBY THIS LEASE NOW WITNESSES as follows:-
1. The Landlord hereby demises unto the Tenant ALL THOSE the premises more
particularly described in the Second Schedule ("the said premises") Together
with the use in common with the Landlord and all others having the like
right of the entrances staircases landings lobbies passages of the building
now known as "PRESTIGE TOWER" ("the said building") in so far as the same
are necessary for the proper use and enjoyment of the said premises And
Together Also with the use in common as aforesaid of the lifts (whenever the
same shall be operating) for such term and at such rent payable in such
manner as are all more particularly described in the Third Schedule.
2. The Landlord shall have the right (without prejudice to any other right
or remedy hereunder) to charge interest at the rate of two per cent per
month in respect of any payment to be made by the Tenant to the Landlord
under this Lease as shall be more than fifteen days in arrears and such
interest shall be payable by the Tenant from the date upon which any such
payment in arrears shall fall due.
3. The Tenant covenants with the Landlord as follows:-
(a) To pay the said rent on the days and in manner provided in the
Third Schedule and in banknotes if so demanded.
(b) To pay and discharge all rates taxes assessments duties charges
impositions and outgoings of an annual or recurring nature now or hereafter
to be assessed imposed or charged by the Government of Hong Kong or other
lawful authority upon the said premises or upon the owner or occupier
thereof (Crown rent and Property Tax only excepted).
(c) To pay all charges for electricity and water consumed in the said
premises and the sewage charges. All such payments shall be made through
the Landlord should the Landlord so require and the Tenant shall produce to
the Landlord the receipt or other evidence of payment whenever required by
the Landlord.
(d) To keep all the interior of the said premises and the Landlord's
fixtures therein
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<PAGE>
(including all doors windows and electric wiring installations and internal
decorations) in good clean tenantable substantial and proper repair and
condition and to maintain the same at the expense of the Tenant and deliver
up the same to the Landlord at the expiration or sooner determination of the
said term in the like condition. The Tenant particularly agrees to replace
all broken or damaged windows whether the same be broken or damaged by the
negligence of the Tenant or owing to circumstances beyond the control of the
Tenant. The Tenant further agrees if any damage is caused to the Landlord
or to any other person directly or indirectly through the defective or
damaged condition of any part of the interior of the said premises
(including doors windows electric wiring installations and other Landlord's
fixtures) the Tenant shall be wholly responsible therefor and shall make
good the same by payment or otherwise and shall fully indemnify the Landlord
against all claims demands actions and legal proceedings whatsoever made
upon the Landlord by any person in respect thereof. The Tenant further
agrees to take all reasonable precautions to protect the interior of the
said premises from damage threatened by an approaching storm or typhoon.
(e) To give notice in writing to the Landlord or its agent of any
damage that may be suffered to the said premises or to persons thereon and
of any accident to or defects in the water pipes gas pipes electrical wiring
or fittings fixtures or other facilities provided by the Landlord.
(f) To pay on demand to the Landlord any cost incurred by the
Landlord in making good any damage or in cleaning and clearing any of the
drains of the said premises or the said building choked or stopped up owing
to carelessness or negligence of the Tenant.
(g) The Landlord shall not be under any liability whatsoever to the
Tenant or to any other person in respect of any damage sustained by the
Tenant or such other person caused by or through or in any way owing to the
overflow of water from any premises in the said building or caused by the
negligence of any tenant of such premises. The Tenant shall fully indemnify
the Landlord against all claims demands actions and legal proceedings
whatsoever made upon the Landlord in respect of any damage to any person
caused by the negligence of the Tenant or by or through or in any way owing
to the overflow of water from the said premises.
(h) To permit the Landlord its architects, surveyors, agents and
workmen and any other persons authorized by the Landlord at all reasonable
time to enter upon and view the
2
<PAGE>
condition of the said premises. The Landlord can give notice to the Tenant
of all defects and want to repair there found for which the Tenant is
responsible and the Tenant shall forthwith upon receipt of any such notice
sufficiently repair and make good such defects and want of repairs. If
within one month after the service of such notice the Tenant should not
proceed with the execution of such repairs, the Landlord may enter upon the
said premises and execute the same and the cost thereof shall be paid by the
Tenant.
(i) Not to make or permit any alterations to the said premises or the
said building NOR to pull down alter or remove any portion of the internal
arrangements or Landlord's fixtures or make any alterations or additions to
the electrical installation thereof without the previous consent in writing
of the Landlord.
(j) Not without the previous written covenant of the Landlord to
install any plant equipment apparatus or machinery including any safe or
other object which improves a weight on any part of the flooring of the said
premises in excess of that for which it was designed.
(k) To use the said premises for commercial/office purpose only under
the Business Name as described in the First Schedule in so far as it is
compatible with the Crown Lease, the occupation permit of the said building
and other relevant ordinances and regulations and for no other purpose
whatsoever.
(1) Not to use the said premises for the storage of goods or
merchandise other than in small quantities consistent with the nature of the
Tenant's trade or business NOR to keep or store or permit or suffer to be
kept or stored on or in the said premises any arms ammunition gunpowder
saltpetre kerosene or other explosive or combustible goods or any hazardous
goods within the meaning of the Dangerous Goods Ordinance and the
Regulations thereunder or any statutory modification or re-enactment
thereof.
(m) Not to do or produce or suffer or permit to be done or produced
any music noise (including sound produced by broadcasting from television
radio and any apparatus or instrument capable or producing or reproducing
music and sound) or other acts or things in or on the said premises which
is/are or may be a nuisance or annoyance to the Landlord or to the tenants
or occupiers of adjacent or neighbouring premises.
(n) Not to install additional locks bolts or other fittings to the
entrance doors of the said premises (without the prior express written
consent of the Landlord) or in any way to
3
<PAGE>
cut or alter the same.
(o) To obey and comply with and to indemnify the Landlord against the
breach of all ordinance regulations bye-laws rules and requirements of any
Governmental of other competent authority relating to the use and occupation
of the said premises AND not to do or permit or suffer to be done any act
deed matter or thing whatsoever which amounts to a breach of any of the
terms and conditions under which the said building is held from the Crown.
The Tenant shall not cause permit or suffer any part of the said premises to
be used for gambling or religious gatherings or for any illegal immoral or
improper purpose or so as to cause nuisance annoyance inconvenience or
damage to the occupiers of adjacent or neighbouring premises.
(p) To be responsible for any act default or negligence of its agents
or employees in respect of the use of the said premises and to indemnify the
Landlord against any claim demands or actions by any third party in
connection therewith.
(q) Not without the previous written consent of the Landlord to
assign underlet or otherwise part with the possession of the said premises
or any part thereof in any way whether by way of sub-letting lending sharing
or other means whereby any person or persons not a party to this Lease
obtains the use or possession of the said premises or any part thereof
irrespective of whether any rental or other consideration is given for such
use or possession. This lease shall be personal to the Tenant named in this
Lease and without in any way limiting the generality of the foregoing the
following acts and events shall, unless previously approved in writing by
the Landlord, be deemed to be breaches of this sub-Clause :-
(i) in the case of a tenant which is a sole proprietorship or
partnership, any change in the sole proprietor thereof or the taking in of
one or more partners or new partners whether on the death or retirement of
an existing partner or other-wise;
(ii) in the case of a tenant who is a corporation, any
reconstruction amalgamation merger voluntary liquidation or change in the
person or persons who owns or own a majority of its voting shares;
(iii) the giving by the Tenant of a Power of Attorney or similar
authority whereby the donee of such Power obtains the right to use possess
occupy or enjoy the said premises or any part thereof or does in fact use
possess occupy or enjoy the same; or
4
<PAGE>
(iv) the change of the Tenant's business name.
(r) Not to allow the preparation of food in nor delivery of food to
the said premises or without the Landlord's prior permission in writing
permit any person to remain therein overnight. Such permission shall only
be given to enable the Tenant to post watchmen to look after the contents of
the said premises which shall not be used as sleeping quarters or as
domestic premises within the meaning of the Landlord & Tenant
(Consolidation) Ordinance for the time being in force.
(s) Not to place or leave at the entrances or any of the staircases
passages or landings of the said building used in common with other tenants
of the Landlord any boxes furniture or rubbish or otherwise encumber the
same.
(t) Not without the prior written approval of the Landlord to exhibit
or display within or on the exterior of the said premises any writing sign
or other device whether illuminated or not which may be visible from outside
the said premises.
(u) Not to exhibit display or affix any writing sign or other device
whether illuminated or not at the entrance of or at any part of the said
premises without the Landlord's prior consent in writing Provided always
that the Tenant may display its company name at the entrance of the said
premises designated by the Landlord in such form, size, position and design
as the Landlord may at its absolute discretion thinks fit.
(v) Not to do or permit to be done any act or thing whereby the
policy or policies of insurance on the said premises against damage by fire
or against claims by third parties for the time being subsisting may become
void or voidable or whereby the rate of premium or premiums thereon may be
increased, and to repay to the Landlord on demand all sums paid by the
Landlord by way of increased premium or premiums thereon and all expenses
incurred by the Landlord in and about any renewal of such policy or policies
rendered necessary by a breach of this term.
(w) Not to take delivery of furniture or fixtures or bulky items of
goods in and out of the said building during normal office hours and under
no circumstances to use passenger lifts for delivery purpose at any time.
(x) Not to use the said premises or any part thereof for retail
business NOR to allow any goods or merchandise to be sold on the said
premises by retail or otherwise.
(y) To keep at the expenses of the Tenant the lavatories and water
apparatus therein when used exclusively by the Tenant in a good clean and
tenantable state and in proper repair
5
<PAGE>
and condition at all times during the said term to the satisfaction of the
Landlord.
(z) Upon the expiration or earlier determination of this lease to
deliver up possession of the said premises forthwith to the Landlord in good
and tenantable repair and condition and to deliver all keys of the said
premises to the Landlord. The Tenant shall also remove (if so required by
the Landlord or its agent) all or any fittings improvements and additions
affixed by the Tenant with or without the written consent of the Landlord
from the said premises or any part thereof or any part of the said building
or reinstate (if so required by the Landlord or its agent) the said premises
or any part thereof or any part of the building to their original state as
they are first handed-over to the Tenant and shall make good any damage thus
caused to the said premises to the satisfaction of the Landlord at the
expenses of the Tenant.
(aa) Not to install any air-conditioning facilities in the said
premises or any part thereof without the prior written consent of the
Landlord.
(ab) To obey and comply with the Deed of Mutual Covenant (if any), any
House Rules or regulations as may from time to time made by the Landlord or
its agent regarding the management of the said building and the services and
facilities and the common area of the said building.
(ac) To effect and maintain during the said term insurance cover in
respect of the following:-
(i) Third Party
In respect of liability for loss injury or damage to any
person or property whatsoever caused through or by any act neglect default
or omission of the Tenant.
The policy of insurance shall be effected with a reputable insurance company
and shall be endorsed to show the Landlord as registered owner of the said
premises and shall be in an amount of not less than HKS1,000,000.00 payable
on each claim and shall contain a clause to the effect that the insurance
cover thereby effected and the terms and conditions thereof shall not be
cancelled modified or restricted without the prior written consent of the
Landlord. The Tenant hereby further undertakes to produce to the Landlord
as and when required by the Landlord such policy of insurance together with
a receipt for the last payment of premium and a certificate from the
insurance company that
6
<PAGE>
the policy is fully paid up and in all respects valid and subsisting.
(ii) Glass
All glass now or hereafter on or in the said premises for
its full replacement value.
(iii) Water Damage
Against damage to stock fixtures and fittings for the full
insurable value occurring in respect of the use or misuse of the toilet
facilities and the fire fighting installation installed within the said
premises or the incursion of water therein.
(iv) Fixtures and Fittings
The fixtures fittings goods personal effects stock and
equipment within the said premises against fire and extraneous perils for
their fail replacement value.
4. The Landlord covenants with the Tenant as follows:-
(a) To pay the Crown rent and Property Tax payable in respect of the
said premises and all expenses of a capital nature other than those caused
by the breach by the Tenant of any of the Tenant's obligations hereunder.
(b) To keep during the said term at its own cost the structure and
main drains of the said premises together with all staircases landings
corridors lifts and all public portions of the said building including
lavatories used in common with other tenants in a clean and tenantable state
and to provide lighting thereto Provided that any repairs required are not
caused by the Tenant.
(c) To display the name in English and Chinese (if any) of the Tenant
in the Tenant's Directory for the whole building and the Tenant's Directory
on the floor landing of the said premises. The cost of lettering shall be
paid by the Tenant.
(d) That the Tenant paying the rent hereby reserved and observing the
terms on the Tenant's part herein contained shall peaceably hold and enjoy
the said premises during the said term without any interruption by the
Landlord or any person rightfully claiming under or in trust for the
Landlord PROVIDED THAT if the Landlord shall carry out any repair,
renovation or refurbishment in relation to any part of the said building,
the Tenant shall let the Landlord or his agents or workmen enter the said
premises for carrying out such work.
(e) To handover the said premises to the tenant in a bare shell
condition upon the lease
7
<PAGE>
commencement date. The wall shall be white wash finished and the floor
shall be finished in cement sand screeding (except for the area marked in
brown as shown on the floor plans annexed hereto which shall be of marble
flooring).
(f) To remove the self-constructed raising platform at the rear
portion of 12th Floor of the said building.
(g) To arrange for electricity supply to the premises at 800 A TPN no
later than 30th February 1997 at the landlord's own cost or if the landlord
provides town gas to the said premises, then the electricity supply to the
premises shall be 700 A TPN.
(h) To construct the followings at the tenant's cost which shall not
exceeding HK$220,000.00.
i) A 400 gallons water tank and two 5-horse power water pumps
at the store room on 6th Floor of the said building.
ii) A 400 gallons water tank and two 5-horse power water pumps
at the area as marked "X" on the attached 12th floor plan.
iii) A set of incoming water pipe of 50 mm width connected to
11th Floor of the said building.
iv) A set of drainage sewage pipe of 100 mm width connected from
the said premises to ground level man hole.
5. It is hereby expressly covenanted and declared as follows:-
(a) If the rent or any part thereof shall be unpaid (whether formally
demanded or not) for more than fifteen days after any of the days on which
the same ought to have been paid or if there shall be any breach or non-
performance of any of the conditions herein contained and on the part of the
Tenant to be observed or performed OR if the Tenant shall become bankrupt or
being a corporation go into liquidation (save for the purpose of
amalgamation or reconstruction) OR if the Tenant shall suffer execution to
be levied upon the said premises or otherwise on the Tenant's goods, THEN in
any such case it shall be lawful for the Landlord at any time thereafter to
re-enter the said premises or any part thereof and thereupon this Lease
shall absolutely determine but without prejudice to any right of action by
the Landlord in respect of any outstanding breach by the Tenant of any of
the terms of this Lease. All costs and expenses incurred by the Landlord in
demanding payment of the rent and other charges arising out of this Clause
shall be paid by the Tenant and shall be recoverable from it as a debt or be
deductible
8
<PAGE>
by the Landlord from any deposit held by the Landlord hereunder.
(b) A written notice served by the Landlord on the Tenant to the
effect that the Landlord exercises the power of re-entry herein contained
shall be a full and sufficient exercise of such power without actual entry
on the part of the Landlord.
(c) Acceptance of rent by the Landlord shall not be deemed to operate
as a waiver by the Landlord of any right to proceed against the Tenant in
respect of any breach non-observance or non-performance by the Tenant of any
of the conditions herein contained and on the Tenant's part to be observed
and performed.
(d) The Landlord shall not be under any liability to the Tenant or to
any other person in respect of any loss or damage to any person or property
sustained by the Tenant or any such other person owing to the overflow of
water or the escape of fumes smoke fire or any other substance or thing from
anywhere within the said building. The Tenant shall fully indemnify the
Landlord from and against all claims and demands made against the Landlord
by any person in respect of any loss damage or injury owing to the overflow
of water or the escape of fumes smoke fire or any other substance or thing
from the said premises OR to the neglect of default of the Tenant OR to the
defective or damaged condition of the interior of the said premises (where
such defective or damaged condition arose from a breach by the Tenant of the
Tenant's obligations hereunder) or any fixtures or fittings for the repair
of which the Tenant is responsible hereunder. The Tenant shall also fully
indemnify the Landlord against all costs and expenses incurred by the
Landlord in respect of any such claim or demand.
(e) For the purposes of this Lease any act default neglect or
omission of any guest visitor contractor servant agent or licensee of the
Tenant shall be deemed to be the act default neglect or omission of the
Tenant.
(f) The Landlord may at such time as it considers appropriate
renovate redecorate and redesignate the common parts of the said building to
promote and maintain its fitness and suitability as a first class commercial
building. The said renovation redecoration and redesignation shall be
carried out discreetly and speedily causing the least inconvenience and
annoyance to the Tenant. To facilitate the said renovation redecoration and
redesignation the Landlord shall be entitled to close any part of the said
building and to prohibit restrict or limit entry thereto by members of the
public at such time or times and for such period or periods as the Landlord
shall at its own
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<PAGE>
absolute discretion deem fit. The Landlord shall not be held liable for any
loss (whether of profit, goodwill or otherwise) howsoever arising to the
Tenant by reason of the said renovation redecoration and redesignation.
(g) For the purpose of Part III of the Landlord and Tenant
(Consolidation) Ordinance relating to distress for rent and of this Lease
the rent payable in respect of the said premises shall be and be deemed to
be in arrear if not paid in advance at the times and in manner hereinbefore
provided for payment thereof.
(h) To the extent that the Tenant can lawfully do so the Tenant
hereby expressly agrees to deprive itself of all rights to protection
against eviction or ejectment afforded by any existing legislation or any
amendments thereof applicable to the said premises or to this lease. The
Tenant agrees to deliver up vacant possession of the said premises to the
Landlord on the expiration or sooner determination of the lease hereby
created notwithstanding any rule of law or equity to the contrary.
(i) To permit the Landlord during 3 months immediately proceeding the
determination of the tenancy to affix and retain without interference upon
any part of the demised premises a notice of letting or selling the same and
during the said 3 months to permit all persons with written authority from
the Landlord or his agent at reasonable times of the day upon appointment
made to view the said premises.
(j) Any notice if required to be served on the Tenant hereunder shall
be sufficiently served if addressed to the Tenant and sent by prepaid post
to or delivered at the said premises or the Tenant's last known place of
business or residence in Hong Kong and if required to be served on the
Landlord shall be sufficiently served if addressed to the Landlord and sent
by prepaid post to or delivered at Landlord's registered Office.
6. If the said premises or any part thereof shall at any time during the
lease be destroyed or damaged by fire so as to be rendered unfit for
habitation and use or if any time during the continuance of this tenancy the
said premises shall be condemned as a dangerous structure or a demolition
order or closing order shall become operative in respect of the said
premises or the said building, the happening of which is not attributable to
the act default neglect or omission of the Tenant, then the rent hereby
reserved or a fair proportion thereof according to the nature and extent of
the damage sustained or order made shall after the expiration of the then
current month be suspended until the said premises shall again be rendered
fit for habitation and use or such order shall be revoked Provided Always
that should the said premises not have been rendered fit for habitation and
use or such order not have been revoked
10
<PAGE>
in the meantime either the Landlord or the Tenant may at any time after the
expiration of three months from the occurrence of such damage or destruction
or condemnation or order (as the case may be) give to the other of them one
month's notice in writing to determine this present lease and thereupon the
same and everything herein contained shall cease and be void as from the
date of the expiration of such notice but without prejudice to the rights
and remedies of either party against the other in respect of any antecedent
claim or breach of covenant or of the Landlord in respect of the rent herein
reserved until the coming into effect of the suspension. In the event of
any disagreement between the parties on the application of this clause, then
the matter shall be referred to a single Chartered Surveyor appointed by
mutual agreement or failing agreement to a single arbitrator for settlement
nominated by the Chairman for the time being of the Royal Institution of
Chartered Surveyors (Hong Kong and China Branch) on the application of
either party in accordance with the provisions of the Arbitration Ordinance
and such arbitrator's decision shall be final and binding.
7. (a) The Tenant shall on the signing hereof deposit with the Landlord
a continuing Bank Guarantee issued by a reputable Bank in a form approved by
the Landlord guaranteeing payment of an aggregated amount HK$1,203,628.80
representing two (2) months' rental, management fee, air-conditioning charge
during the term of this Lease and which shall only expire one month after
the expiry of this Lease.
(b) In addition to the Bank Guarantee mentioned in Clause 7(a)
herein, the Tenant shall on the signing hereof deposit and maintain with the
Landlord the sum of HK$601,814.40 representing 1 month's rental, air-
conditioning charges and management fee to secure the due observance and
performance by the Tenant of the conditions herein contained and on the
Tenant's part to be observed and performed. The said deposit shall be
retained by the Landlord throughout the said term free of any interest to
the Tenant and the Landlord (without prejudice to any other right or remedy
hereunder) is entitled to deduct therefrom the amount of any costs expenses
loss or damage sustained by the Landlord as the result of any non-observance
or non-performance by the Tenant of any such condition. Subject as
aforesaid, the said deposit shall be refunded to the Tenant by the Landlord
within thirty days after the expiration or sooner determination of this
Lease and the delivery of vacant possession to the Landlord OR within thirty
days of the settlement of the last outstanding claim by the Landlord against
the Tenant in respect of any breach non-observance or non-performance of any
of the conditions herein contained and on the part of the Tenant to be
observed and performed,
11
<PAGE>
whichever is the later.
(c) The amount of the deposit and bank guarantee shall be increased
following each and any increase in the said rent, management fee or air-
conditioning charges to an aggregate sum equal to THREE months' rent,
management fee and air-conditioning charges at the rate payable after the
increase in question and the Tenant shall make payment to the Landlord of
such additional sum as shall be required to bring the deposit up to
appropriate amount within fifteen days of each rent increase.
8. (a) The Landlord shall not in any circumstances be liable to the
Tenant or any other person:-
(i) in respect of any loss or damage to person or property
sustained by the Tenant of any such other person caused by or through or in
any way owing to any defect in or breakdown of the lifts fire and security
services equipment air-conditioning plant and other facilities of the said
building;
(ii) in respect of any loss or damage to person or property
sustained by the Tenant or any such other person caused by or through or in
any way owing to any failure malfunction explosion or suspension of the
electricity gas or water supply to the said building or the said premises;
(iii) in respect of any loss or damage to persons or property
sustained by the Tenant or any such other person caused by or through or in
any way owing to fire or the overflow or leakage of water from anywhere
within the said building or the influx or rain water or sea water into the
said building or the said premises or the activity of rats or other vermin
in the said building, or
(iv) for the security or safekeeping of the said premises or any
person or contents therein nor shall the rent or maintenance and air-
conditioning charges or surcharge or any part thereof abate or cease to be
payable on account thereof.
9. The Tenant acknowledges that no fine premium key money or other
consideration has been paid by the Tenant to the Landlord for the grant of
this lease.
10. This Lease sets out the full agreement reached between the parties and
no other representations have been made or warranties given relating to the
Landlord or the Tenant or the said building or the said premises. If any
such representation or warranty has been given or implied the same is hereby
waived.
12
<PAGE>
11. The Landlord reserves the right to name the said building with any
such name or style as it in its sole discretion may determine and at any
time to change alter substitute or abandon any such name and without
compensation to the Tenant PROVIDED THAT the Landlord shall give the Tenant
and the postal and other relevant Government Authorities not less than three
months' notice of its intention so to do.
12. Unless the context otherwise requires, works herein importing the
masculine gender shall include the feminine and neuter and words herein in
the singular shall include the plural and vice versa.
13. The legal costs and disbursements incidental to the preparation this
Lease shall be borne by the parties in equal shares. If the Tenant shall
instruct another firm of solicitors to act on its behalf, then each party
shall bear its own legal costs.
14. The stamp duty and registration fee payable on this Agreement and its
counterpart shall be paid by the Landlord and the Tenant in equal share.
15. (a) The Landlord or its agent shall provide management services for
the said building and air-conditioning services to the said premises.
(b) The Tenant shall pay to the Landlord or its agent the monthly
surcharge of HK$42,649.20 for 11th Floor and 12th Floor of the said
building; and HK$28,789.20 for 10th Floor of the said building during the
said term for the said management services and air-conditioning services to
be paid at the same time as payment of rent is required to be made herein.
(c) The Landlord has the right from time to time to revise the rate
of the surcharge and to increase the surcharge payable by the Tenant in
respect thereof. The Landlord shall give one month's notice in writing to
the Tenant of the amount of the revised surcharge which shall be and become
substituted for the amount hereinbefore referred to and the Tenant shall be
and become liable to make payment in accordance with such written notice.
(d) Subject to mechanical breakdown in the air-conditioning plant;
the air-conditioning services shall operate during the hours from 8:00 a.m.
to -6:00 p.m. from Monday to Friday and from 8:00 a.m. to 2:00 p.m. on
Saturday except public holidays but may be varied at the discretion of the
Landlord. The Tenant shall keep all the windows and doors closed while the
air-conditioning ventilation is in operation and the Landlord shall have the
right to send a representative to close the same for the Tenant should it be
found that the Tenant does not comply with the notice to that effect of the
Landlord.
13
<PAGE>
The persistent breach by the Tenant of this clause is a breach justifying
the Landlord to exercise the rights of re-entry or other remedies hereunder.
PROVIDED ALWAYS that the Landlord shall in no case be held responsible for
the suspension and or breakdown of the air-conditioning service which is due
to causes beyond its control and that the Tenant shall not be entitled to
claim any compensation or damages or an abatement of the said surcharge by
reason of such suspension or breakdown.
(e) If the Tenant shall require air-conditioning services to be
supplied to the said premises outside the hours specified in (d) above, the
same shall whenever possible be provided by the Landlord on the Tenant
giving to the Landlord advance notice of the Tenant's requirement and on
payment of the charges specified from time to time by the Landlord therefor.
(f) If the Tenant commits to use extra air-conditioning continuously
throughout the lease term as per the described hours specified in the First
Column hereunder, the Landlord agrees to charge the Tenant at the
concessionary rate specified in the Second Column hereunder for the first
year of the lease term herein created and further providing that the
increase thereafter (if any) shall not exceed the annual inflation rate:-
Extra Hours Concessionary Rate
----------- ------------------
Every weekdays (except Saturday & Sunday)
from 7:00 a.m. to 8:00 a.m.
from 6:00 p.m. to 11:00 p.m. HK$480.00 per day per floor
Every Saturday
from 7:00 a.m. to 8:00 a.m.
from 2:00 p.m. to 10:00 p.m. HK$720.00 per day per floor
Every Sunday
from 7:00 a.m. to 6:00 p.m. HK$880.00 per day per floor
16. Lift service will be provided between the hours of 8:00 a.m. to 8:00
p.m. on Mondays to Saturdays together with a restricted service at all times
up to 12:00 mid-night daily including Sundays save that the Landlord may
suspend the service at any time if such action is necessary (through
breakdown of machinery power cut or any cause necessitating stoppage.
14
<PAGE>
17. The Tenant shall follow the provisions in the Fourth Schedule in
respect of any fitting-out work.
18. The Tenant hereby declares and confirms that it has duly inspected the
said premises and is satisfied with the current state and condition of the
said premises and the fixtures and finishes therein. The said premises will
be demised unto the Tenant by the Landlord in the state and condition as at
the date of the signing of this Lease and no warranty or representation
whatsoever has been given or is made by the Landlord or its agents regarding
the user of the said premises and the Tenant shall satisfy itself or shall
be deemed to have satisfied itself that they are suitable for the purpose
for which they are to be used. The Tenant hereby agrees that it will at its
own expense apply for any requisite licence or licences permit or permits
from all Government or Public Authorities in respect of the carrying on of
the Tenant's business therein and shall execute and comply with all
ordinances, regulations orders, notices or rules made by all competent
Government or Public Authorities in connection with the conduct of such
business by the Tenant in the said premises. In the event that the
Government and/or the competent authority and/or the management office of
the said building from the opinion that the use of the said premises by the
Tenant infringes the user restriction in the Crown Lease, or occupation
permit or other relevant ordinances or the Deed of Mutual Covenant or the
House Rules of the said building, the Tenant shall discontinue such
infringed user immediately. The Tenant further agrees to indemnify the
Landlord in respect of any breach by the Tenant of the aforesaid. In
particular but without limitation no warranty or representation is made by
the Landlord or its agents regarding :-
(a) the fittings and finishes or the installations and appliances (if
any) in the said premises and/or the Building.
(b) the state and condition of the said premises or the said building
and the user thereof,
or
(c) the composition of the said building.
19. The Tenant hereby declares and confirms that the Landlord's fixtures
and fittings stated in the Fifth Schedule are incorporated into the said
premises and it has duly inspected the same and is satisfied with their
current state and condition.
20. The Landlord and the Tenant agree that the terms set out in Sixth
Schedule (if any) shall apply to this Lease and shall be incorporated as an
integral part of this Lease.
21. (a) This Lease shall be subject to written consent being obtained
from the existing Mortgagee, The Hongkong and Shanghai Banking Corporation
Limited. In the event that such consent is not given within a reasonable
time from the date hereof, this
15
<PAGE>
Agreement shall automatically determine and the deposit paid hereunder shall
be returned to the Tenant but without interest or compensation. The Tenant
shall immediately vacate the said premises and deliver up vacant possession
thereof to the Landlord and shall have no claim or right of action against
the Landlord for damages or otherwise. The Landlord may deduct from the
said deposit any reasonable amount for damage or loss suffered by the
Landlord in connection with any breach by the Tenant of any provisions
hereunder without prejudice to any right of action that the Landlord may
have against the Tenant. In the event that such consent is given, all
expenses and costs, if any, incurred in obtaining the said consent shall be
borne by the Landlord.
(b) The existing Mortgagee, in giving consent to this Lease, may
request that certain provisions be inserted herein or that certain
provisions herein contained by amended (it being understood that such
provisions mainly deal with the exemption of liability on the part of the
Mortgagee for the performance of the Landlord's covenants herein or for the
refund of the deposit paid hereunder at the expiration or sooner
determination of the tenancy). The parties hereto shall agree to any
reasonable provisions or amendments which the Mortgagee may request to be
made hereto. In case the Mortgagee shall request the Tenant to sign any
Undertaking/Acknowledgement exempting the Mortgagee's liability to refund
the said deposit paid hereunder at the expiration or sooner determination of
the lease, the Tenant shall whenever requested sign or give such
Undertaking/Acknowledgement.
22. The marginal note and headings are intended for guidance only and do
not form a part of this Lease nor shall any of the provisions of this Lease
be construed or interpreted by reference thereto or in any way affected or
limited thereby.
16
<PAGE>
FIRST SCHEDULE
--------------
("the Tenant")
Tenant: PHYSICAL HEALTH CENTRE HONG KONG LIMITED whose
registered office is situate at
Business Name: PHYSICAL LADIES CLUB
SECOND SCHEDULE
---------------
("the said premises")
The whole of 10th Floor, 11th Floor and Portion of 12th Floor and Storeroom
on 6th Floor of Prestige Tower ("the said building"), No.23 and 25 Nathan
Road, Kowloon, Hong Kong (as shown and coloured pink on the typical floor
plans annexed hereto for identification purpose) TOGETHER with the right to
use the front and rear staircases as coloured green on the said floor plans
and TOGETHER with the right to upgrade the finishing of the said staircases
subject to Landlord's approval at the Tenant's own costs and subject to
compliance with relevant government regulations.
THIRD SCHEDULE
--------------
("Term & Rental")
(1) 11th Floor & Portion of 12th Floor and Storeroom on 6th Floor of the
said
- -------------------------------------------------------------------------
building (referred to in this Clause as "the First Distinctive Premises")
- -------------------------------------------------------------------------
At a monthly rental of HK$316,638.00 commencing on 20th January 1997 and
expiring on 31st January 2000 exclusive of rates, management fee, air-
conditioning charge and all outgoings.
(2) 10th Floor of the building (referred to in this Clause as "the Second
- ----------------------------------------------------------------------------
Distinctive Premises")
- ---------------------
(a) At a monthly rental of HK$213,738.00 commencing, SUBJECT to
repossession by the
17
<PAGE>
Landlord, on 10th April 1997 and expiring on 31st January 2000 exclusive of
rates, management fee, air-conditioning charge and all outgoings;
(b) In the event that the Landlord fails to repossess the Second
Distinctive Premises and deliver vacant possession thereof to the Tenant on
10th April 1997, the commencement date of the lease in respect of the Second
Distinctive Premises shall be postponed to no later than 1st June 1997 and
the Tenant shall claim no compensation from the Landlord;
(c) In the event that the Landlord is unable to deliver vacant
possession of the Second Distinctive Premises to the Tenant on 1st June
1997, the commencement date of the lease in respect of the Second
Distinctive Premises shall be further postponed to no later than lst August
1997 PROVIDED THAT the Landlord shall grant an additional one month's rent-
free period in respect of the Second Distinctive Premises to the Tenant;
(d) In the event that the Landlord is unable to deliver vacant
possession of Second Distinctive Premises to the Tenant on lst August 1997,
the lease in relation to the Second Distinctive Premises shall become
absolutely null and void. Upon such event the Landlord shall refund to the
Tenant a sum of HK$242,527.20 (being the due proportion of the deposit paid
for the Second Distinctive Premises) but without interests and reduce the
Bank Guarantee to an aggregate amount not exceeding HK$718,574.40. Neither
the Landlord nor the Tenant shall be entitled to claim any compensation and
damages against the other party.
3. For the avoidance of doubt, the Landlord's failure to deliver vacant
possession of the Second Distinctive Premises to the Tenant on or before 1st
August 1997 thus rendering the lease in relation to the Second Distinctive
Premises null and void pursuant to Clause 2(d) above shall not invalidate
the lease in relation to First Distinctive Premises. In the event that the
lease in relation to the Second Distinctive Premises shall become null and
void, this Lease shall be construed as two severable distinctive leases,
namely, the First Distinctive Premises and the Second Distinctive Premises,
and upon such event, the lease in relation to the First Distinctive Premises
shall continue to be valid and subsisting subject to the terms and
conditions as set out in this Lease to the extent that the same are
applicable.
FORTH SCHEDULE
--------------
("Fitting-out")
1. The Tenant shall fit out the interior of the said premises at the
Tenant's expense in accordance
18
<PAGE>
with such plans and specifications as shall have been first submitted by the
Tenant to be approved in writing by the Landlord in a good proper and
workmanlike fashion using good quality materials and in all respects in a
style appropriate to a first class commercial/office building and so to
maintain the same throughout the said term in good and substantial repair
and condition to the satisfaction of the Landlord Provided That no such
approval shall make the Landlord be responsible for any damage or claims
arising from defects in the design or quality of the fitting out or
otherwise. The Tenant will not cause or permit to be made any variation to
the approved fitting out plans and specifications or to the interior design
or layout of the said premises without the previous approval in writing of
the Landlord (such approval shall not be unreasonably withheld or delayed).
2. For the purpose of fitting out or redecorating or renovation the said
premises the Tenant shall observe and comply with the following procedures
and stipulations namely :-
Approval Of Plans (a) The Tenant shall at its own cost prepare and
submit to the Landlord for approval suitable drawings and specifications of
the works proposed to be carried out by the Tenant (the "Tenant Works")
together with schematic drawings illustrating the design and layout proposal
of such proposed works and any equipment (the "Tenant's Plans").
The Tenant's Plans shall :-
Content Of Plans (i) include detailed drawings, plans and
specifications of any changes in the electrical wiring and installations
and/or air-conditioning piping ducting and vents and/or fire services
installation and/or other services;
(ii) include details of all lighting
features; and
(iii) comply with all relevant Ordinances,
regulations and bye-laws from time to time in force in Hong Kong.
Acceptance Of Plans (b) The Landlord will consider the Tenant's Plans
and may accept or reject the Tenant's Plans or require modifications thereof
or any part of them as the Landlord may in its absolute discretion think fit
within 21 days from the date of submission of the Tenant's Plans to the
Landlord.
Fees For Approval (c) The Tenant shall pay a vetting fee in the
amount of HK$21,648.00 in respect of the involvement of the Landlord's
consultants in the review and approval of the Tenant's Plans.
19
<PAGE>
Compliance With Regulations (d) The Tenant shall comply with applicable
statutes codes ordinances licences and other regulations for all work
performed by or on behalf of the Tenant on the said premises. The
Landlord's agents or consultants' approval of plans or of the Tenant's Works
shall not constitute any implication representation or certification by the
Landlord that the Tenant's Works are in compliance with the said statutes
codes ordinances licences or regulations. When several sets of requirements
must be met the standard set by the Landlord's consultants shall also apply.
Permission For Commencement (e) The Tenant will not commence the
Tenant's Works until permitted in writing so to do by the Landlord (such
permission shall not be unreasonably withheld or delayed) and as soon as
possible after the date of such permission the Tenant shall commence such
work and complete it expeditiously.
Approved Contractors for fire Service Work
(f) No fire service works shall be carried
out by any contractor other contractors designated by the Landlord or such
contractors approved by the Landlord in writing Provided always that the
Landlord shall not be responsible or liable in any way for the works carried
out by or the performance of such designated or approved contractors. As
for other fitting out work or decoration work, the Tenant shall employ its
own contractor.
Information On Contractors (g) The Tenant shall submit to the Landlord
by hand or via registered post at least three (3) days prior to the
commencement of construction, the following information:-
(i) the name(s) and address(es) of
the general contractor(s) and other contractors the Tenant intends to engage
in the construction of the Tenant's Works, and
(ii) the actual commencement date of
construction and the estimated date of completion of construction work and
date of projected opening.
Compliance With Landlord's Instructions
(h) In carrying out any approved work, the
Tenant shall cause his servants agents employees contractors licensees and
workmen to cooperate with
20
<PAGE>
the Landlord and/or the Manager and all servants agents and workmen of the
Landlord and/or the Manager and with other tenants or contractors carrying
out any work in the Building. The Tenant shall comply with and cause his
servants agents employees contractors licensees and workmen to obey and
comply with all reasonable instructions and directions which may be given in
connection with the carrying out of such work by the Landlord or its agents
or servants.
Electricity Charges For Fitting Out
(i) The Tenant shall be solely responsible
for all electricity and other charges arising out of fitting out the said
premises. The Landlord however is not responsible for the provision of
electric power for such fitting out works.
Fitting Out Deposit (j) The Tenant shall observe and comply
with the provisions set out herein and the House Rules in the execution of
such fitting out works. As security for the due observance and compliance by
the Tenant and its agent servants and/or contractors of the House Rules in
the fitting out of the Premises, the Tenant shall place a fitting out
deposit of HK$150,000.00 with the Landlord before commencing to fit out the
said premises. The said fitting out deposit shall be returned within 14 days
after the said premises shall have been fitted out in accordance with the
approved plans without interest to the Tenant subject to any deduction
thereform necessary to make good any damage loss or injury to the said
premises or the Building or suffered by the Landlord or the Manager as a
result of any breach by the Tenant of the House Rules in fitting out the
said premises.
FIFTH SCHEDULE
--------------
("the Landlord fixture")
1. Central air-conditioning system (supply and return air ductings
excluded).
2. New emulsion painted wall finishes.
21
<PAGE>
3. Cement sand screed concrete floor.
4. Standard marble floors and walls at the typical lift lobbies on 1O/F
and 11/F.
SIXTH SCHEDULE
--------------
("Special Terms")
1. Rent-Free Period
----------------
(a) 11th Floor Portion of 12th Floor and Storeroom on 6th Floor of
the said building
- ----------------------------------------------------------------------------
The Tenant shall be entitled to a rent-free period from 20th January 1997 to
19th May 1997 (both date inclusive). During the said rent-free period, the
management and air-conditioning charges, rates, utility and all other
charges shall be payable by the Tenant.
(b) 10th Floor of the said buildings
--------------------------------
The Tenant shall be entitled to a rent-free period of four calendar months
from the date on which vacant possession is delivered to the Tenant Provided
that an additional one-month rent-free will be granted if vacant possession
cannot be delivered to the Tenant on or before 1st June 1997.
2. Option for Renewal
------------------
(a) And it is hereby agreed that If the Tenant shall wish to take a
further term of three (3) years from the expiration of the said term and
shall at least six months prior to the expiration of the said term give to
the Landlord written notice to that effect and shall have paid the rent and
other charges hereby reserved and performed and observed the term and
conditions on its part therein contained up to the expiration of the term
then the Landlord will let the said premises to the Tenant for a further
term of three (3) years ("First Extended Period") from such expiration at
the market rent to be determined in Sub-Clause (c) hereunder and so far as
are applicable subject to the same terms conditions as are contained in this
Lease save and except this clause for renewal and the clause for rent-free
period PROVIDED the rent payable for the Final Extended Period shall not in
any event exceed 25% increase of the previous rental but not less than the
previous rental.
(b) Notwithstanding anything to the contrary hereinbefore contained
it is hereby further expressly agreed and declared that the Tenant shall
have the option to renew this Lease for another further term of 3 years upon
the expiration of the First Extended Period
22
<PAGE>
subject to the terms of renewable described herein but otherwise in the same
terms and conditions as provided in this Lease save for this clause for
renewal and rent-free period. If the Tenant shall be desirous of taking a
lease term of the said premises for a further term of 3 years from the
expiration of the First Extended Period it shall not later than 6 months
before the expiration of the First Extended Period give to the Landlord
notice in writing of such desire and if the Tenant shall have paid the rent
hereby reserved and shall have performed and observed the several covenants
hereinbefore contained and on its part to be observed and performed up to
the expiration of the lease term hereby created then the Landlord shall let
the said premises to the Tenant for such further term of 3 years
(hereinafter called "the Second Extended Period") from the expiration of the
First Extended Term at the then open market rent to be determined in
accordance with sub-clause 2(c) hereunder.
(c) The market rent to be paid for the First Extended Period and the
Second Extended Period shall be the market rent determined as follows:-
(i) by agreement between the parties hereto; or
(ii) failing agreement as in (i) above, then by an independent
professional valuer or firm of professional valuers ("valuer") to be jointly
appointed by the parties hereto not later than one month before the
expiration of the Term;
(iii) failing such a joint appointment as in (ii) above, then by
a valuer to be appointed on the application of either party by the chairman
(or in his absence, a Vice-Chairman) for the time being of the Royal
Institution of Chartered Surveyors (Hong Kong Branch);
(iv) in the event that the rent for the further term has not
been determined as hereinbefore provided before the expiration of the Term,
the Tenant shall continue to pay to the Landlord the rent then payable for
the period immediately preceding the further term until the new rent has
been so determined. The rent for the further term shall then be adjusted
retrospectively to the date of the commencement of the further term and the
rent having been so determined shall be paid and accounted for accordingly
within 21 days of such determination;
(v) the valuer shall act as an expert and not as an arbitrator
and shall be required to determine the sum which in his opinion represents
the open market rent for
23
<PAGE>
the Premises as if the same were being let with vacant possession on the
open market for a term equal to the further term without reference to any
other adjustment of rent during the said term but otherwise having regard to
all issues which in the sole opinion of the valuer appear relevant subject
to subclause (vi) immediately following;
(vi) the valuer shall determine the open market rent
disregarding:-
(a) any effect on rent of the fact that the Tenant may
have been in occupation of the said premises;
(b) any goodwill attach to the said premises by reason of
its use by the Tenant;
(c) any effect on rent of any authorized improvement
addition alteration or other work made or carried out by the Tenant at its
own expense otherwise than under any obligation to the Landlord whether
under this "seet" or otherwise;
(d) any abatement of rent under the special terms hereof
but on the following assumptions (if not facts):-
a) that all the terms and conditions herein
contained have been fully observed and performed at all times;
b) that on the commencement date of the further
term the said premises are fit for immediate occupation and use and that no
addition alteration or other work has been made or carried out by the Tenant
during the Term which has diminished the rental value of the said premises;
(vii) the costs and expenses of the valuer shall be borne by the
Landlord and the Tenant in equal shares;
(viii) the decision of the valuer shall be final and binding upon
both parties and shall determine the rent for the first further term as if
it had been expressly provided for and stated herein.
3. Sale and Redevelopment during Second Extended Period
----------------------------------------------------
Notwithstanding anything herein contained, if the Landlord shall enter into
a contract for the sale of the said building or any part thereof of which
the said premises form part during the Second Extended Period mentioned in
Clause 2(b) above to a purchaser other than any
24
<PAGE>
subsidiary or holding company (as respectively defined in the Companies
Ordinance) of the Landlord or if the Landlord shall resolve to redevelop the
said building or any part thereof whether wholly by demolition and
rebuilding or otherwise, or partially by renovation, refurbishment or
otherwise (which intention shall be sufficiently evidenced by a copy of the
Resolution of its Board of Directors certified by its Secretary to be a true
and correct copy), then in any such event the Landlord shall be entitled to
give not less than 6 months' notice in writing at any time to terminate this
lease. Immediately upon the expiration of such notice this lease shall
terminate but without prejudice to the rights and remedies of either party
against each other in respect of any antecedent claim or breach of any of
the conditions herein contained.
4. First Right of Refusal
----------------------
The Tenant shall have the first right of refusal to let whole of the Ninth
Floor of the building in the event that the floor is available for letting
within the term of this Lease.
25
<PAGE>
AS WITNESS the hands of the parties hereto the day and year first above
written.
SEALED with the Common Seal )
and SIGNED by )
for and on behalf of the Landlord ) /S/ Authorized signatory
in the presence of:- )
/S/ Authorized signatory
SEALED with the Common Seal )
and SIGNED by Luk Ngai Kzung ) For and on behalf of
for and on behalf of the Tenant ) PHYSICAL HEALTH CENTRE HONG KONG
LTD.
in the presence of:- ) /S/Ngai Keung Luk
/S/ Darrie Lam Director/Authorized Signatory
RECEIVED the day and year first above )
written of and from the Tenant the sum of )
HK$601,814.40 in form of cheque and ) /S/Authorized signatory
HK$1,203,628.80 in form of Bank Guarantee )
being the security deposit )
26
<PAGE>
TENANCY AGREEMENT
<PAGE>
THIS AGREEMENT made the 30th day of June One thousand nine hundred and
ninety seven BETWEEN East Asia Property Agency (hereinafter called "the
Landlord") of the one Part and Physical Health Centre Hong Kong Limited
(hereinafter called "the Tenant") of the other part.
WHEREBY: IT IS HEREBY AGREED as follows:-
I. The Landlord lets and the Tenant takes ALL THOSE the premises more
particularly set out and described in Part 3 of the Schedule hereto
(hereinafter referred to as "the said premises") together with the use in
common with the co-owners of the building of which the said premises form
part (hereinafter referred to as "the said building") their tenants work-
people and persons authorised by them of the entrance lifts (if any)
passages and staircases leading to the said premises for the term specified
in Part 4 of the Schedule hereto determinable as hereinafter mentioned
YIELDING AND PAYING therefor during the said term monthly and every calendar
month the rent as set out in Part 5 of the Schedule hereto exclusive of rate
and management fees payable in Hong Kong Currency in advance on the day of
each and every calendar month as set out in Part 5 of the Schedule hereto
without deduction whatsoever.
II. THE TENANT TO THE INTENT THAT THE OBLIGATIONS MAY CONTINUE THROUGHOUT
THE TERM OF TENANCY HEREBY CREATED AGREES WITH THE LANDLORD as follows:-
1. (i) To pay the said rent at the times and in manner aforesaid and other
payments in manner as hereinafter mentioned.
(ii) To pay all existing and future rates taxes assessments and
outgoings payable in respect of the said premises either by the owner or
occupier thereof except only Crown rent and property tax.
2. (i) To pay and discharge punctually during the said term all charges
for electricity, water, gas, telephone rental and other outgoings now or at
any time hereafter consumed by the Tenant and chargeable in respect of the
said premises and to pay all necessary deposits for the same.
(ii) To pay and discharge punctually during the said term the monthly
contribution towards the costs charges and expenses for the maintenance and
management of the said building chargeable in respect of the said premises
as provided under the Dead of Mutual Covenants of and relating to the said
building (if any) or as the Management Agent or Manager of the building
shall reasonably require.
3. (i) To constantly maintain and keep the whole of the interior of the
said premises and every part thereof in good clean tenantable repair and
condition including, but not limited to, all doors, windows, skylights,
locks, hinges, bolts, ceilings, floors, water pipes, water closets, gas
pipes, electrical installations and wirings and all the Landlord's fixtures
and fittings therein (fair wear and tear excepted).
(ii) To be wholly responsible for any loss damage or injury caused to
any person whomsoever directly or indirectly through the defective or
damaged condition of any part of the interior of the said premises and to
make good the same by payment or otherwise and to indemnity the Landlord
against all actions proceedings claims and demands made upon the Landlord in
respect of any such loss damage or injury and all costs and expenses
incidental thereto.
4. (i) To permit the Landlord and all person authorized by him at all
reasonable times on giving reasonable prior notice (except in case of
emergency) to enter into the said premises to view the condition thereof and
to give or leave notice in writing upon the said premises for the Tenant of
all defects and wants of repair there found for which the Tenant is
responsible hereunder and within 14 days after every such notice to well and
sufficiently repair and make good such defects and wants of repair of which
notice have been given or left.
(ii) To take all reasonable precautions to protect the interior of the
said premises against damage by storm typhoon or the like threats.
(iii) To replace all broken-or damaged windows, doors and fixtures of
and in the said premises whether the same be broken or damaged due to the
negligence or default of the Tenant or owing to circumstances beyond the
control of the Tenant.
(iv) If any defects or wants of repair shall be found and if the
Landlord shall give or leave a notice in writing at the said premises or at
the business address of the Tenant requiring him to amend the same and if
the Tenant shall not within 14 days after the service of such notice proceed
diligently with the execution of such repairs then to permit the Landlord or
his authorized
<PAGE>
person to enter upon the said premises and execute such repairs and the
costs thereof incurred by the Landlord shall be a debt due from the Tenant
to the Landlord and be forthwith recoverable by action.
5. To permit the Landlord to use and maintain existing pipes and conduits
in and through the said premises. The Landlord or its agents shall have the
right to enter the said premises at all reasonable times on giving
reasonable prior notice (except in case of emergency) to examine the same.
6. In the event of any of the drains and pipes in the said premises or of
the said building becoming choked or stopped up owing to careless use by the
Tenant his staff or his work-people or customers or any persons authorised
by him to pay the cost incurred by the Landlord in cleansing and clearing
the said drains and pipes from obstruction.
7. Not to make or permit to be made any structural alterations in or
additions to the said premises or to the electrical wirings installations or
other Landlord's fixtures or cut maim or injure or suffer to be cut maim or
injured any doors windows walls structural members or other fabric thereof
without having first obtained the written license and consent or the
Landlord thereof. If any such consent shall be granted by the Landlord it
shall-in any event be subject to the condition that the Tenant shall not
cause any damage to the said premises or any part thereof in addition to
such other conditions as the Landlord shall think fit to impose and subject
to the approval of the Public Works Department or other Government authority
(if necessary).
8. Not to assign underlet or otherwise part with the possession of the said
premises or any part thereof either by way of transfer subletting lending
sharing assignment or other means whereby any person or persons not a party
to this Agreement obtains the use or possession of the said premises or any
part thereof irrespective of whether any rental or other consideration is
given for such use or possession and in the event any such transfer
subletting lending sharing assignment or parting with the possession of the
said premises this Agreement shall at the option of the Landlord absolutely
determine and the Tenant shall forthwith surrender the said premises to the
Landlord. This tenancy shall be personal to the Tenant named in this
Agreement and without in any way limiting the generality of the foregoing
the following acts and events shall unless approved in writing by the
Landlord be deemed to be breaches of this Clause:-
(i) In the case of a tenant which is a partnership the taking in of
one or more new partners whether on the death or retirement of an existing
partner or otherwise.
(ii) In the case of a tenant who is an individual (including a sole
surviving partner of a partnership tenant) the death insanity or other
disability of that individual to the intent that no right to use possess
occupy or enjoy the said premises or any part thereof shall vest in the
executors administrators personal representatives next of kin trustee or
committee of any such individual.
(iii) In the case of a tenant which is a corporation any take-over
reconstruction amalgamation merger voluntary liquidation or change in the
person or persons who owns or own a majority of its voting shares or who
otherwise has or have effective control thereof.
(iv) The giving by the tenant of a Power of Attorney or similar
authority whereby the donee of the Power obtains the right to use possess
occupy enjoy the said premises or any part thereof or does in fact use
possess occupy or enjoy the same.
(v) The change of the Tenant's business name.
9 Not to do or cause or permit or suffer to be done an thing in or upon
the said premises or any part thereof which may at any time be or become a
nuisance annoyance damage or disturbance to the Landlord or the tenants or
occupiers of the neighbouring premises or in anywise against the laws or
regulations of Hong Kong.
10. Not to do or cause or permit or suffer to be done any act deed matter
or thing whatsoever in contravention of the negative or restrictive
covenants terms or conditions of the Conditions of Sale or Crown Lease under
which the said premises are held from the Crown or of the relevant Deed of
Mutual Covenant of the said building.
11. Not to keep or store or cause or permit or suffer to be kept or stored
any arms, ammunition, unlawful goods, gun powder, saltpetre, kerosene or
other explosive or combustible substance on or in any part of the said
premises.
12. Not to use the said premises or any part thereof for any illegal or
immoral purpose.
13. To use the said premises for general commercial purpose by the Tenant
only.
14. Not to do or cause or permit or suffer to be done anything whereby the
policy or policies of insurance of the said premises or of the other parts
of the said building against damage may be rendered void or voidable or
whereby the premium for such insurance may be increased and the Tenant shall
indemnity the Landlord against such increased additional premium or damages
as show have been brought about or caused by the Tenants act or default.
<PAGE>
15. Not to put or place any dust-bins, garbage-cans, furniture, chattels,
packing cases, boxes, goods or any other things in the staircases, landings
or other common passages in the said building not in the exclusive
occupation of the Tenant.
16. Not to exhibit or display within or on the exterior of the said
premises any writing sign or other device whether illuminated or not which
may be visible from outside the said premises. The Landlord or his
authorised agents shall have the right to remove at the costs and expenses
of the Tenant any such signboard, sign, decoration, or device which shall be
affixed or put up or displayed.
17. At the Tenant's expense to take all such steps and precautions as
shall be required by the Landlord to prevent the said premises or any part
thereof from becoming infested by termites, rats, mice, roaches or any other
pest or vermin. The Tenant shall employ at the Tenant's costs such pest
extermination contractors as the Landlord may require and at such intervals
as the Landlord at may direct.
18. At the expiration or sooner determination of this Agreement to deliver
up to the Landlord the said premises including the Landlord's fixtures and
fittings therein in good and substantial repair and conditions as aforesaid
(fair wear and tear excepted) together with any additional fixtures
erections alterations or improvements which the Tenant may with the consent
of the Landlord as aforesaid have made upon or in the said premises and
which the Landlord in his absolute discretion may be willing to retain
without payment of any compensation for such additional fixtures erections
alterations or improvements. The Landlord shall have the right to require
the Tenant to reinstate to its original state any part of the said premises
in respect of which the Tenant may have carried out alterations with the
consent of the Landlord.
19. Not to use or allow to be used the said premises or any part thereof
for the preparation of food or cooking nor to cause or permit any odour or
noxious smell which shall in the sole opinion of the Landlord be offensive
or unusual to be produced upon permeated through or emanated from the said
premises.
20. During the three (3) calendar months immediately preceding the
expiration or sooner determination of the term created hereunder to allow at
all reasonable times during the daytime on giving 24 hours prior notice in
writing (which shall include details of the persons requiring access):
(i) the Landlord and its representatives or agents with prospective
tenants or purchaser to inspect the said premises.
(ii) the Landlord to enter the said premises for the purpose of
preparing a schedule of dilapidation (hereinafter referred to as "the
Dilapidation Schedule") in respect of the condition and state of repair of
the said premises and of the fixtures and fittings therein the repair or
maintenance of which is the responsibility of the Tenant hereunder. The
Dilapidation Schedule will be served upon the Tenant and the Tenant shall
either
(a) complete the works set out in the Dilapidation Schedule to the
satisfaction of the Landlord within 14 days of service of the Dilapidation
Schedule, or
(b) pay to the Landlord the costs of the works shown on the
Dilapidation Schedule which payment will operate as a discharge of all of
the Tenant's repairing obligations herein.
2l. To move heavy or bulky equipment, fixtures and other articles and
things only at such times during such hours as specified by or otherwise
agreed with the Landlord and/or the Manager or Management Committee of the
said building and through such entrances and by such lifts and routes as
shall be designated by or otherwise agreed with the Landlord for this
purpose from time to time.
22. To employ in or about the said premises only the cleaners as shall be
nominated by the Landlord and/or the building Manager or Management
Committee of the said building for the cleaning of the said premises and to
remove and dispose of each day from the said premises all garbage or rubbish
to such location as shall reasonable be specified by the Landlord and/or the
Manager or Management Committee of the said building in manner and subject
to such rules and regulations from time to time prescribed by the Landlord
and/or Manager or Management Committee of the said building and until such
time as such garbage or rubbish is removed from the said building to keep
within the said premises the same securely sealed in containers.
23. To observe such house rules as may from time to time be established by
the Management Committee or Manager of the said building for the purpose of
the proper management and control of the said building.
24. To obey and comply with all the requirements of the Hong Kong
Government or other lawful authorities and with all laws ordinances rules
and regulations with respect to the said premises and to be answerable and
responsible for any failure on the part of is employees servants workmen
licensees customers or all other authorised persons to observe such
requirements laws ordinances rules and regulations.
<PAGE>
25. Not to do make or permit or suffer to be done or made any damage,
injury, alterations or additions in or to the lifts.
26. Not to hang, fix or erect any venetian blinds or sun blinds of any
description, shelters or coverings, wire or aerial wiring, or other things
whatsoever on any exterior part of the said building including the roof and
the exterior wall of the said premises.
27. Not to install or use in the said premises any furnace boiler or other
plant equipment apparatus facilities that may produce fumes or smoke or will
contravene any ordinances, bye-laws, rules and regulations for the time
being in force governing the control of any form of pollution and the
protection of environment.
28. Not to install any plant, equipment, apparatus or machinery which
requires any additional main wiring or which consumes electricity not
metered through the Tenant's separate meter from which the Tenant's
consumption of electricity is calculated and not to do anything whereby the
maximum capacity of the electricity supply to the said premises shall be
exceeded.
29. Not to use or cause or permit the use of the entrances, exits, halls,
lobbies, corridors, staircases, landings, passageways, lavatories and other
common parts of the said building for the purpose of drying laundry or
hanging or placing or storing any article or thing thereon or therein and
not to permit the Tenant's servants, employees. agent, invitees licensees
and customers to use the same for loitering or eating.
30. Not to do or suffer to be done anything which is in contravention of
the permitted use in respect of the said building and which shall amount to
a breach or non-observance of the provisions of the Deed of Mutual Covenant
and for Management Agreement in respect of the said building or any of the
terms and conditions of the government grant lease or otherwise under which
the land on which the said building is constructed or erected is held from
the Government so far as they relate to the said building and affect the
said premises.
31. Not to use the said premises or any part thereof for the manufacture
or storage of goods or merchandise other than storage for the purpose of and
in quantities consistent with the use of the said premises by the Tenant for
the purpose or use specified in Part 3 of the Schedule hereto.
32. Not to affix or display or permit or suffer to be affixed or displayed
in the common parts of the said building any signboard, sign, decoration,
poster, flag, notice or advertisement except those provided by the Landlord
in such space as provided by the Landlord and prepared, affixed or installed
at the sole cost and expense of the Tenant and not to affix or display or
permit or suffer to be affixed or displayed on or at the door(s) or
entrance(s) of the said premises any sign-board, sign, decoration, poster,
flag, notice or advertisement except in such form style and manner with
lettering and characters approved by the Landlord and not within the said
premises to display or exhibit any sign poster or advertisements other than
in connection with goods sold or service provided in the course of the
Tenant's business carried on at the said premises and not to display or
exhibit any sign, poster, or decoration or advertisement which, whether
illuminated or not, is visible from outside of the said premises or which in
the opinion of the Landlord (whose opinion shall be conclusive and binding
on the Tenant) is of a lewd, obscene or otherwise offensive nature.
33. Not to use or permit or suffer the said premises or any part thereof
to be used as sleeping quarters or as domestic premises within the meaning
of any landlord and tenant legislation for the time being in force nor any
other legislation for the time being in force nor to allow any person to
remain in the said premises overnight.
34. Not to encumber or obstruct or permit or suffer to be encumbered or
obstructed with any boxes, cartons, packages, rubbish, refuse, dustbins,
garbage cans, furniture, chattels, or store of any goods, or other
obstruction of any kind or nature any of the lifts, entrances. exits, halls,
lobbies, corridors, staircases, landings passageways, lavatories and other
common parts of the said building so that the same are at all times kept
clear and free of any obstructions of any nature and the Landlord shall in
addition to any other remedies which the Landlord may have hereunder be
entitled without notice and at the Tenant's expense to remove and dispose of
as it sees fit any such obstructions aforesaid without incurring any
liability therefor whatsoever whether tortious or otherwise to the Tenant or
any other person whomsoever and the Tenant shall on demand pay or reimburse
to the Landlord all costs and expenses incurred in such removal.
35. Not to use or permit or suffer the lifts to be used in any improper
manner or for any purposes other than those for which they are intended.
36. Not to keep or permit or suffer to be kept any animals birds or pets
inside the said premises.
<PAGE>
III. THE LANDLORD AGREES WITH THE TENANT as follows:-
1. That the Tenant paying the rent hereby reserved and all charges payable
hereunder and performing and observing the agreements by the Tenant
hereinbefore contained may peaceably hold and enjoy the said premises during
the said term without any interruption by the Landlord or any person
lawfully claiming through or under or in trust for him.
2. To pay the Crown rent and property tax which are now or may hereafter
during the said term be imposed by the Government upon the said premises.
IV PROVIDED ALWAYS AND IT IS MUTUALLY AGREED as follows:-
1. That if and whenever any part of the rent hereby reserved or any other
payments payable by the Tenant hereunder shall be in arrear for 15 days
(whether the same shall have been formally demanded or not) or if and
whenever there shall be a breach of any of the agreements by the Tenant
hereinbefore contained or if the Tenant (being an individual of sole
proprietor or partnership) shall commit an act of bankruptcy or shall have
its Business Registration cancelled or (being a corporation) shall go into
liquidation (either voluntary or otherwise) other than for the purpose of
amalgamation or reconstruction or shall have any order made or resolution
passed for winding up or if the Tenant shall enter into any composition or
arrangement with his creditors or shall suffer execution to be levied upon
any of his goods or effects the Landlord shall upon the happening of any
such event be entitled to re-enter upon the said premises or any part
thereof in the name of the whole and thereupon this Agreement shall
absolutely determine but without prejudice to any rights which may have
accrued to the Landlord by reason of any antecedent breach of any of the
obligations on the part of the Tenant hereinbefore contained AND the deposit
paid hereunder shall be forfeited to the Landlord as and for liquidated
damages and not as penalty but without prejudice to the Landlord's right to
claim any further damages which the Landlord shall have sustained or may
sustain AND a written notice served by the Landlord on the Tenant or left at
the said premises to the effect that the Landlord thereby exercises the
power of re-entry shall be a full and sufficient exercise of such power
without actual entry on the part of the Landlord. Notwithstanding the
foregoing, the Landlord may in any such event at its option elect not to
terminate this Agreement but to deduct from the deposit the amount of any
monetary loss incurred by the Landlord in consequence of the breach, non-
observance or non-performance by the Tenant in which event the Tenant shall,
as a condition precedent to the continuation of the tenancy, deposit with
the Landlord the amount so deducted and, if the Tenant shall fail so to do,
the Landlord shall forthwith be entitled to re-enter on the said premises
and to determine this Agreement in which event the deposit may be forfeited
to the Landlord as hereinbefore provided.
2. For the purpose of these presents any act default or omission of the
agents licensees servants visitors and customers of the Tenant shall be
deemed to be the act default or omission of 'he Tenant.
3. To the extent that the Tenant can lawfully do so, the Tenant hereby
expressly declares that at the expiration or sooner determination of this
Agreement the Tenant will not invoke or seek to avail himself of any
protection which may or shall hereafter be afforded by any ordinance or
regulation of Hong Kong protecting tenants or lessees from eviction but will
promptly and punctually quit and deliver up possession of the said premises
at the expiration or sooner determination of this agreement as aforesaid.
4. The Tenant shall on the signing of this Agreement pay to the Landlord
the sum as set out in Part 6 of the Schedule hereto by way of deposit for
the due performance and observance of the agreements on the part of the
Tenant herein contained. At the expiration or sooner determination of this
Agreement subject to prior forfeiture in accordance with Clause IV hereof if
the Tenant shall have paid all rent due hereunder and if there shall be no
breach of any of the agreements on the Tenant's part to be observed and
performed the Landlord will repay to the Tenant the said deposit but without
any interest thereon within 30 days after delivery of vacant possession of
the said premises to the Landlord and after full settlement of all
outstanding payments in respect of the said premises payable by the Tenant.
5. The Tenant hereby expressly declares that he has paid no premium,
construction fee, key money or other sum of money of a similar nature to the
Landlord or other person or persons authorised by him for the possession of
the said premises or for the granting of the tenancy created by this
Agreement.
6. In the event of the said premises or any part thereof at any time
during the said term being damaged or destroyed by fire or by any other
cause (not attributable to the act or default of the Tenant) so as to be
unfit for occupation and use or become subject to a closure order or become
totally inaccessible to the Tenant then the rent hereby reserved or a fair
proportion thereof according to the nature and extent of the damage
sustained shall be suspended until the said premises shall again be rendered
fit for occupation and use or until the said premises cease to be subject to
a closure order or cease to be totally inaccessible and any dispute
concerning this Clause shall be determined by arbitration in accordance with
the Arbitration Ordinance of the Laws of Hong Kong or any statutory
enactment in that behalf for the time being in force Provided Always that
the Landlord shall not be required to reinstate the said premises if by
reason of their condition or any local regulations or other circumstances
beyond the control of the Landlord it is in the opinion of the Landlord
(whose opinion shall be conclusive) not economical or practicable or
reasonable so to do.
<PAGE>
7. Acceptance of rent by the Landlord shall not be deemed to operate as a
waiver by the Landlord of any right to proceed against the Tenant in respect
of any breach non-observance or non-performance by the Tenant of any of the
agreements stipulations and conditions herein contained and on the Tenant's
part to be observed and performed.
8. The Landlord shall not be under any liability to the Tenant or to any
other person whomsoever in respect of any loss, damage or injury to person
or property sustained by the Tenant or any such other person caused by or
through or in any way owing to the failure or malfunctioning of the lifts,
air-conditioning system (if any), water pumps drainage system or electrical
wiring or equipment of and in the said building or the overflow of water or
the escape of fumes smoke fire or any other substance or thing originating
from anywhere within the said building and in any such events the Tenant
sha11 not be entitled to any abatement of rent air-conditioning charges (if
any), management fees or other charges payable by the Tenant hereunder. The
Tenant shall fully and effectually indemnity the Landlord from and against
all claims, demands actions and legal proceedings whatsoever made against
the Landlord by any person in respect of any loss damage or injury caused by
or through or in any way owing to the overflow of water or the escape of
fumes smoke fire or any other substance or thing originating from the said
premises or to the negligence or default of the Tenant his servants agents
or licencees or to the defective or damaged condition of the interior of the
said premises or any fixtures or fittings for the repair of which the Tenant
is responsible hereunder and against all costs and expenses incurred by the
Landlord in respect of any such claim or demands, actions or legal
proceedings.
9. For the purposes of Part III of Landlord and Tenant (Consolidation)
Ordinance and of these presents the rent and other charges payable in
respect of the said premises shall be and be deemed to be in arrear if not
paid in advance at the times and in manner hereinbefore provided for payment
thereof. All costs of and incidental to the demand for rent distraint or
any legal action for the recovery of rent and any other sums due hereunder
shall be recoverable from the Tenant as a debt.
10. Any notice under this Agreement shall be in writing and any notice to
the Tenant shall be sufficiently served if left addressed to him on or at
the said premises or any part thereof or sent to him or its registered
office by registered post or left at his or its last known address in Hong
Kong and any notice to the Landlord shall be sufficiently served if
delivered to him personally or sent to him or its registered office by
registered post or left at his or its last known address in Hong Kong.
11. The Landlord shall be entitled to treat non-payment of management fee
and rates (if any) and any other payment payable by the Tenant hereunder or
any part hereof in all respects as non-payment of rent under this Agreement.
12. If the Management Committee or Manager (if any) of the said building
or any lawful authority shall at any time during the said term hereby
created make any reasonable complaint opposition objection or protest
against the Tenant on the user of the said premises the Tenant shall
forthwith cease to use the said premises in the manner which gave rise to
the said complaint opposition objection or protest.
13. The expression "the Tenant" shall (where the context permits) mean and
include the party or parties specifically named and shall not include the
executors and administrators of any such party or where such party is a
corporation any liquidator thereof.
14. All costs of and incidental to the preparation completion and stamping
of this Agreement in duplicate and the stamp duty payable thereon shall be
borne and paid by the parties hereto in equal shares.
V. The Landlord and the Tenant hereby jointly and severally declare and
confirm that the rent herein reserved is the best rent which can be
reasonably obtained for the grant of this tenancy without a premium.
VI. It is hereby declared that (if the context permits or requires) words
importing the singular shall include the plural and vice versa and words
importing a gender include every gender.
VII. It is hereby further agreed and declared that in the case of two or
more persons, firms or corporations renting the said premises jointly as
tenants, all and each of them shall be jointly and severally liable for the
obligations to be performed and observed on the part of the Tenant and every
agreement and undertaking on their part shall be construed accordingly. A
notice served in accordance with Clause IV 10 of this Agreement on any one
of them shall be deemed to big sufficiently served or all and each of them.
VIII. This Agreement. is executed in English and the Chinese version
annexed hereto is for reference only which shall not affect the
interpretation or construction of this Agreement.
IX. The Tenant shall not without the prior written consent of the Landlord
assign this Agreement or any part thereof to any person.
AS WITNESS the hands of the parties hereto the day and year first above
written.
<PAGE>
THE SCHEDULE ABOVE REFERRED TO
------------------------------
PART 1 The Landlord YEUNG KWOK KIN
c/o East Asia Property Agency Company Limited
of
7th Floor, 314-324 Hennessy Road, Hong Kong.
PART 2 The Tenant PHYSICAL HEALTH CENTRE H.K. LTD.
PART 3 The said premises GROUND FLOOR 5 JUNCTION ROAD KOWLOON
Use SHOP USE ONLY
PART 4 Term of Tenancy (TWO (2)) YEARS from the 1ST day of July 1997
to the 3OTH day of June 1999 (both days
inclusive).
PART 5 The Rent DOLLARS FIFTY NINE THOUSAND ONLY
($59,000.00*****) Hong Kong Currency (exclusive
of rates and exclusive of building management
fees) per month payable in advance on the day of
each and every calendar month without deduction
whatsoever.
PART 6 The Rental Deposit DOLLARS ONE HUNDRED SEVENTY SEVEN THOUSAND ONLY
($177,000.00*****) Hong Kong Currency.
The Water Deposit DOLLARS NIL
($*****) Hong Kong Currency.
The Electricity Deposit:
DOLLARS SEVEN THOUSAND FOUR HUNDRED AND TWENTY
ONLY ($7,420.00****) Hong Kong Currency.
SIGNED by
the Landlord by his attorney
For EAST ASIA PROPERTY AGENCY
COMPANY LIMITED
for and on behalf of East
Asia Property Agency Co., Ltd.
the lawful attorney of the
Landlord whose signatures ------------------------------
are verified by:- Authorized Signature(s)
SIGNED by the Tenant in the
presence of:-
INTERPRETED to the Tenant by:-
RECEIVED the day and the Landlord by his attorney
year first above written of and from the For EAST ASIA PROPERTY AGENCY
Tenant the sum of DOLLARS ONE HUNDRED COMPANY LIMITED.
EIGHTY FOUR THOUSAND FOUR HUNDRED
AND TWENTY ONLY
Hong Kong Currency (including the sum
of HK$ 112,420.00**** carried
forward from the deposit paid by Tenant
to the Landlord under the Precedent ----------------------------
Tenancy Agreement) being the deposit Authorized Signature(s)
money expressed above to be paid by 184,420.00 Hong Kong Dollars
the Tenant to the Landlord.
<PAGE>
L E A S E
---------
1. PARTIES THIS AGREEMENT, made this 12th day of May 1995 by and between
BROADWAY-NASSAU INVESTMENTS LIMITED, whose registered office is situated at
41-47 Broadway, P/F, Mei Foo Sun Chuen, Kowloon (hereinafter called "the
LANDLORD"), of the first part; and Mdm. Ho Yuk Wah (I/D No. E754488(3)) of
33B,.Tower 1, Elegant Terrace, 36 Conduit Road, Hong Kong.
- ----------------------------------------------------------
(hereinafter called "the TENANT") of the second part.
WITNESSETH AS FOLLOWS:
2. DESCRIPTION OF PREMISES The Landlord shall let and the Tenant shall
take All that portion of the following described premises (except and
reserved unto the Landlord the free passage and running of water, soil and
electricity coming from the mains or from any other premises of the Landlord
and his tenants by and through the pipes, drains, cables and wires on, under
or connected with the said premises and land or any part or parts thereof)
situate and being Tower T92/93/94 (120C/122B/122C/126A Broadway)
(hereinafter called "the building") which said portion consists of all that
Shop Space or Spaces numbered 139/140/141/143/144 and situate on the Podium
Floor of the said building as more particularly delineated on the plan
annexed hereto and thereon colored red (hereinafter called "the premises")
together with the use of the entrance staircases, landings, lavatories and
passages of the building (so far as the same are necessary to the enjoyment
of the premises) in common with the Landlord and any other tenant or tenants
of the said building.
3. TERM TO HAVE AND TO HOLD the same unto the Tenant, with the privileges
and appurtenances thereto belonging, for the term of 3 (three) year(s), and
0 month(s), 0 day(s) from and including the 1st day of May 1995.
4. RENT The Tenant shall and hereby agrees to pay in Hong Kong currency
(and in banknotes if demanded) to the Landlord at such place or places as
the Landlord may designate from time to time in writing a rental in the
aggregate sum of.HK$3,438,000.00 (Hong Kong Dollars Three Million Four
Hundred Thirty Eight Thousand Only) exclusive, payable in equal monthly
installments, and/or fractional amounts when applicable, in advance on the
first day of each and every calendar month during the term of this lease
provided, however, that the first monthly installment shall be payable on
the date of execution by the Tenant.
5. DEPOSIT To secure the due performance and observance of the terms and
conditions herein contained the Tenant shall on the signing hereof pay to
the Landlord by way of deposit the sum of Dollars Three Hundred Two Thousand
Two Hundred Fifty Nine Only (HK$302,259.00)
<PAGE>
Hong Kong currency. After the determination of the said tenancy and
provided the said rent hereby stipulated shall have been duly paid on due
date and all other terms and conditions herein contained shall have been
duly performed and observed by the Tenant the Landlord shall return to the
Tenant the said deposit money without interest within the period of 14 days
after the Tenant shall have duly delivered to the Landlord vacant possession
of the said premises.
6. USE The Tenant will use and occupy said premises for a Health Club
dealing in the types of merchandise and services listed below, but not by
way of limitation, and such other merchandise or services as the Landlord
may from time to time authorize in writing, and for no other purposes:
Further, not to use the said premises as a laboratory or workshop nor for
any noisy, noxious or offensive trade, business or occupation nor for the
carrying on of any vocation which may be calculated to attract to the
building or any part thereof persons of an undesirable character.
7. POSSESSION The Landlord shall not be liable for the failure to deliver
possession of the leased premises, other than to the extent of abatement of
rent from the date of the commencement of this lease to the day possession
is delivered to the Tenant on the rental basis hereinbefore set forth.
8. TENANT RESPONSIBILITIES The Tenant agrees with the Landlord as
follows:
(a) To pay the rent hereby stipulated on the date and in the manner
aforesaid without any deduction, and to pay interest on any arrears of rent
in manner provided in Clause 10(a) hereof.
(b) To keep the interior of the said premises including all fixtures
thereto in complete tenantable repair and condition throughout the term of
tenancy or occupation and to yield the same up at the determination of the
tenancy.
(c) To take all precautions to protect the interior of the said premises
against damage by storm or typhoon or the like.
(d) To permit the Landlord and its agents at all reasonable times to enter
and view the state of repair of the said premises and to carry out any
repair therein and to take inventories of the fixtures therein.
(e) To fit out the interior of the said premises in a manner suitable for
a first class shopping center using good quality materials and in a proper
and workmanlike manner and to maintain such interior fittings and fixtures
in a high standard of condition, repainting, repolishing or replacing the
same when worn or damaged.
(f) To forthwith repair and amend any defect in the interior of the said
premises of which notice shall be given to the Tenant or left on the said
premises or any part thereof.
<PAGE>
(g) To obtain written permission from the Landlord before proceeding with
any new installation or alteration affecting the building structure,
architectural elements or finishes, electrical power and lighting systems
and plumbing and drainage systems thereof. Such permission from the
Landlord shall not relieve the Tenant of the responsibility to obtain all
necessary permits and licenses pertaining to the proposed new installation
or alteration work and the Tenant shall give all notices required and shall
comply with all Government ordinances, rules and regulations and all
regulations and by-laws of any public utility company or authority having
jurisdiction over the work.
(h) Not to do or permit to be done in or upon the said premises or any
part thereof anything which may be or become a nuisance, annoyance, damage
or disturbance to the Landlord or to any of the tenants or occupiers of the
other portion of the said building or of other property in the neighborhood
or in anywise against the law or regulations of this Colony.
(i) Not to keep or store or cause or permit or suffer to be kept or stored
any arms, ammunition gun powder, saltpetre, kerosene or other explosive or
combustible substance or hazardous goods in the said premises or do or cause
to be done or suffer or permit any act, deed, matter or thing whatsoever
which will amount to a breach or non-observance of the terms and conditions
under which the said premises are held of the Crown.
(j) Not to use the said premises or allow the same to be used for any
illegal or immoral purpose.
(k) At all times during the tenancy hereby created to observe and perform
the provisions of all Ordinances and Regulations and all by-laws, directions
and orders of the Urban Council or any other authority and to obtain from
the appropriate authority or authorities at his own expense all licenses and
permits that may be required in connection with the business carried on in
the said premises.
(1) To pay and discharge punctually during the said term of tenancy all
water, gas (if any), electricity charges, management and service charges and
rates and taxes with other outgoings now or at any time hereafter chargeable
in respect of the said premises save and except only the Crown Rent and
Property Tax. Rates @ 5.5% of rental (subject to the final assessment by
Hong Kong Government) payable monthly in advance to the Landlord, Landlord
in turn will pay to the Government. To pay Service/Management charges of
HK$9,540 (Nine Thousand Five Hundred & Forty Only) monthly, in advance,
subject to the same percentage of annual change in these charges as may be
applicable to the domestic units within Stage VIII under the Deed of
Covenant for the stage (R.P. of Section A of N.K.I.L. No. 25).
(m) To pay to the Landlord the Landlord's charges and expenses in promptly
replacing all broken or cracked glass in windows or shop front(s) on the
said premises (whether the same be broken by the negligence of the Tenant or
due to circumstances beyond the control of the Tenant) with glass of the
same quality and thickness as presently installed.
<PAGE>
(n) To pay to the Landlord on demand the cost incurred by the Landlord in
cleansing and clearing any of the drains choked or stopped up owing to
careless use by the Tenant.
(o) At all times during the said term to keep such lavatories and water
closets and all the apparatus and equipment in connection therewith as may
be allocated to the exclusive use of the Tenant, in a good clean and
tenantable state and in proper repair and condition to the satisfaction of
the Landlord and Government authorities.
(p) Not to leave or cause or permit to be left any furniture, boxes,
goods, articles or rubbish on the stairways or landings or on any of the
passage ways of the buildings of which the premises form part or to cause
any obstruction whatsoever thereto or to the common areas in the front or on
the side of the premises.
(q) To pay to the Landlord on demand the cost incurred by the Landlord in
replacing any wash basin, sink or water closet within the said premises
which shall have been broken or damaged or in clearing any drains or sewers
that may be or become choked or stopped up through careless use by the
Tenant or members of his family, servants or licensees.
(r) To pay to The Landlord on demand the cost incurred by the Landlord in
the installation of a standard shop front, security grill and typhoon storm
boards if required. A standard type model shop front will be installed by
the Landlord at its on-site management office and an estimate of costs will
be provided to Tenant prior to installation and/or delivery in respective
premises.
(s) The Landlord's prior permission in writing will be required to permit
any person to remain in the premises overnight. Such permission shall only
be given to enable the Tenant to post watchmen to look after the contents of
the premises which shall not be used as sleeping quarters or as domestic
premises within the meaning of any Rent Ordinance for the time being in
force.
(t) Not to keep any animals, birds or livestock of any description on the
said premises.
(u) Not to affix or put up or display any signboard, sign, decoration, or
other thing whatsoever outside the said premises or on any door, wall, pier
or window except with the written approval of the Landlord. The Landlord
shall have absolute discretion in granting or refusing such approval and any
approval to be granted shall be subject to such conditions as the Landlord
may think fit. The Landlord shall not unreasonably refuse such approval.
The Landlord shall have the right to remove at the cost and expense of the
Tenant any signboard, sign, decoration or thing which shall be affixed, put
up or displayed without the prior approval of the Landlord.
<PAGE>
(v) Not to assign, sublet or part with possession of the said premises or
any part thereof without the written consent of the Landlord.
(w) If the Tenant shall be the sole proprietor of the business of the shop
not to admit any partner during the tenancy hereby created without written
consent of the Landlord and if the Tenant shall consist of partners not to
admit any new partner during the said tenancy without written consent of the
Landlord.
(x) To observe and comply with such rules and regulations as may be made
from time to time by the Landlord in respect of the use of the said premises
by the Tenant.
(y) Quietly to yield up the said premises together with the fixtures and
additions thereto at the expiration or sooner determination of the said
tenancy in good clean and tenantable repair and condition.
(z) Not to do or permit to be done any act or thing whereby the policy or
policies of insurance on the premises against damage by fire or against
claims by Third Parties for the time being subsisting may become void or
voidable or whereby the rate of premium or premiums thereon may be
increased, and to repay to the Landlord on demand all sums paid by the
Landlord by way of increased premium or premiums thereon and all expenses
incurred by the Landlord in and about any renewal of such policy or policies
rendered necessary by a breach of this term.
(zz) Not to do anything which constitutes a breach of any of the terms and
conditions contained in the Conditions of Exchange No. 9082 under which the
said Kowloon Inland Lots Numbered 5087, 5086, 5085 are held from the Crown
or which constitutes a breach of the particulars and conditions for the
Grant of New Kowloon Marine Lot Number 25.
9. LANDLORD RESPONSIBILITIES The Landlord hereby agrees with the Tenant:
(a) That the Tenant, upon paying said rent and performing the covenants of
this lease, shall and may quietly have, hold and enjoy the said premises
during the term hereof.
(b) To pay the Crown Rent and Property Tax in respect of the said premises
during the said term of tenancy. To pay rates following receipt of same
from Tenant.
(c) To keep the roof and the main drains and pipes and all the main walls
of the said premises in a proper state of repair provided that the
Landlord's liability hereunder shall not be deemed to have arisen unless and
until written notice of any want of repair of the same shall have been
previously given by the Tenant to the Landlord and the Landlord shall have
failed to take steps to repair the same after the lapse of a reasonable
time.
<PAGE>
(d) To keep the exterior common areas of the shop premises in tenantable
repair.
10. PROVIDED ALWAYS and it is hereby expressly agreed and declared that:
(a) If the rent hereby stipulated or any part thereof shall be unpaid for
15 days after becoming payable (whether legally or formally demanded or not)
or if the Tenant shall fail or neglect to perform or observe any term and
condition herein contained and on the Tenant's part to be performed or
observed or if the Tenant or other the person in whom for the time being the
term of tenancy shall be vested shall become bankrupt or in the case of a
limited company shall go into liquidation or if a petition in bankruptcy
against the Tenant, or a petition for the winding up if the Tenant is a
limited company, shall have been filed or if the Tenant shall enter into any
composition or arrangement with creditors or shall suffer the Tenant's goods
to be levied on execution then and in any of the said cases it shall be
lawful for the Landlord at any time thereafter with or without notice being
given to the Tenant to determine this Agreement and to re-enter upon the
said premises or any part thereof in the name of the whole but without
prejudice to any right of action of the Landlord in respect of any breach of
the Tenant's terms and conditions herein contained. If the Landlord elects
to give notice to the Tenant then a written notice served by the Landlord on
the Tenant or left at the last known registered office or otherwise address
of the Tenant or at the said premises to the effect that the Landlord
thereby exercises the power of determination and/or re-entry hereinbefore
contained shall be a full and sufficient exercise of such power
notwithstanding any statutory or common law provision to the contrary. All
costs and expenses incurred by the Landlord to demand for the payment of the
rent (if the Landlord elects to demand) or with a view to exercising the
said rights or remedies or attempting to do the same shall be repaid by the
Tenant and is recoverable from him as a debt. Provided always that the
Landlord is under no obligation to demand for the payment of the rent or to
serve the said notice before the Landlord exercises the said rights and
remedies. Provided also that without prejudice to the Landlord's said
rights and remedies if the said rent or any part thereof shall be unpaid for
15 days after becoming payable the Tenant will in addition to the unpaid
rent pay to the Landlord interest on so much of the said rent as shall for
the time being be unpaid at the rate of 1.5% per month from the time of such
unpaid rent becoming payable until full payment.
(b) Acceptance of the rent by the Landlord shall not be deemed to operate
as a waiver by the Landlord of any right to proceed against the Tenant in
respect of a breach by the Tenant of any of his obligations hereunder.
(c) The Landlord shall not be under any liability whatsoever to the Tenant
or any other person whomsoever in respect of any damage sustained by the
Tenant or such other persons as aforesaid caused through or in any way owing
to the overflow of water from any part or portion of the said premises. The
Tenant shall fully indemnify the Landlord against all claims, demands,
actions and legal proceedings whatsoever made upon the Landlord in respect
of any damage or injury to any person whomsoever caused by or through or in
any way owing to any such overflow of water as aforesaid from any part or
portion of the said premises or caused by negligence of the Tenant.
<PAGE>
(d) The tenant further agrees that if any damage is caused to the Landlord
or to any person whomsoever directly or indirectly through any defective or
damaged condition of any part of the interior of the said premises
(including doors, windows and Landlord's fixtures) the Tenant shall be
wholly responsible therefore and shall make good the same by payment or
otherwise and shall fully indemnify the Landlord against all claims,
demands, actions and legal proceedings whatsoever made upon the Landlord by
any person in respect thereof.
(e) During the two months immediately preceding the determination of the
said term of tenancy, the Landlord shall be at liberty to affix and retain
without interference upon any external part of the said premises a notice
for re-letting the same and the Tenant shall permit persons with written
authority from the Landlord or its agents at reasonable times of the day to
view the said premises or any part thereof.
(f) If the premises or any part thereof are rendered uninhabitable by
fire, water, storm, wind, typhoon, defective construction, white ants,
earthquake, subsidence of the ground or any calamity beyond the control of
the Landlord and not attributable to any failure by the Tenant to observe
and carry out the terms of this Agreement the rent or a part thereof
proportioned to the extent to which the premises shall have been so rendered
uninhabitable shall abate and cease to be payable until the same shall have
been again rendered fit for occupation Provided always that the Landlord
shall not be required to reinstate the premises if by reason of the
condition of the same or any local Regulations or other circumstances beyond
the control of the Landlord it is not practicable or reasonable to do so.
(g) Should the Tenant with the express or implied consent of the Landlord
continue in occupation of the said premises or any part thereof after the
expiration of the said term of tenancy or any renewal thereof the Tenant
shall be considered to be a calendar monthly Tenant and shall give one
calendar month's notice of his intention to quit and shah be bound to quit
the premises upon receiving one calendar month's notice in that behalf from
the Landlord such notice to expire at the end of any current month of the
tenancy.
(h) For the purpose of these presents any act, default or omission of the
agents or servants of the Tenant or his visitors, licensees and invitees
shall be deemed to be the act, default or omission of the Tenant.
(i) For the purpose of the Distress for Rent Ordinance (Chap. 7) and for
the purpose of these presents the rent in respect of the said premises shall
be deemed to be in arrear if not paid within 15 days from the time
stipulated by Clause (a) hereof. All costs and expenses for and incidental
to the distraint shall be paid by the Tenant and shall be recoverable from
him as a debt.
<PAGE>
(j) The Tenant shall under any circumstances deliver up vacant possession
of the said premises to the Landlord at the expiration or sooner
determination of the said term of tenancy notwithstanding any rule or law or
equity to the contrary.
(k) The Tenant hereby expressly agrees to deprive himself of his right to
protection against ejectment provided by any existing or future legislation,
if any, should such legislation be applicable to the said premises.
(1) The Stamp Duty on this Agreement and its Counterpart shall be home by
Landlord and Tenant in equal share.
(m) It is hereby declared that in the construction of these presents with
reference to the Tenant, unless the contrary intention appears, words
importing the masculine gender shall include feminine and neuter genders and
words in the singular shall include the plural.
(n) At the determination of tenancy, to return to the Landlord in
tenantable repair all the Landlord's fittings and fixtures on the premises
(fair wear and tear excepted) and to replace with similar articles of at
least equal value or if the Landlord so requires pay to the Landlord the
value of any of the said fixtures and fittings which may be destroyed or so
damaged as to be incapable of being restored to its former condition.
(o) EXAMINATION OF PREMISES The Tenant's taking possession of premises
shall be conclusive evidence of receipt of them in satisfactory order and
condition. This lease is subject to the following special covenants by the
Tenant: NONE.
(p) The Tenant acknowledges that no fine, premium, key money or other
consideration has been paid by the Tenant to the Landlord for the grant of
this lease.
(q) This Tenancy Agreement sets out the full agreement between the
parties. No other warranties or representations have been made or given
relating to the Landlord, the Tenant, the said building or the said premises
or if any warranty or representation has been made the same is hereby
waived.
<PAGE>
AS WITNESS the hands of the parties hereto the day and year first above
written.
SIGNED by the Landlord LANDLORD
in the presence of:- By: /s/ Authorized Signatory
/s/ Authorized Signatory BROADWAY - NASSAU INVESTMENTS LIMITED
SIGNED by the Tenant TENANT
in the presence of By /S/ Yuk Wah Ho
/s/ Darrie Lam ---------------------
Yuk Wah Ho
<PAGE>
Our Ref : NTP(II)/T/ 156C
NEW TOWN TOWER, S.T.T.L. 183
CONFIRMATION OF TENANCY
---------------------------------
1. Premises Unit Nos. 605-609 on Level 6as coloured pink on the
attached plan for identification purposes only.
2. Rental Area Approx. 3,127 s.f
3. Term Two (2) years commencing on 16th June 1997 OR the date
of handover of premises which shall be confirmed in
writing by Landlord and which date shall be final.
4. Monthly Rent HK$93,810.00 per calendar month. (exclusive of
management and air-conditioning charges, government
rates and other outgoings)
5. Air-conditioning & HK$17.229.77 per month subject to annual review due on
Management Charges January every year.
6. Use Restricted to use the premises as an office for the
provision of gymnasium and for no other purpose
whatsoever under the name and style of "Physical
Ladies' Club ".
7. Landlord's Agent Sun Hung Kai Real Estate Agency Ltd
45/F, Sun Hung Kai Centre
30 Harbour Road, Hong Kong
8. Intending Tenant Physical Health Centre Hong.Kong Limited
C.I. No. 272511 B.R. No. 13443902-000-03-97-7
Tel. No. 2572 5440
Person-in-charge : Mr. Luk Ngai Keung/ Ms. Darrie
Lam
9. Corresponding 12/F, Causeway Bay Plaza 1,
Address 489 Hennessy Road,
Causeway Bay, Hong Kong.
10. Standard Require- As per Appendices A & B.
ments Provisions
11. Legal Costs and As per Appendix A
Stamp Duty
12. Other Special As per Page 2
Conditions
13. If the Intending Tenant fails (other than due to the default of the
Landlord) to execute the Agreement for Lease/Tenancy Agreement within 10
days from the date of this Confirmation of Tenancy, this Confirmation of
Tenancy shall automatically be cancelled and the deposit paid hereunder
shall be forfeited to the Intending Landlord as and for liquidated damages
and not as a penalty.
It is hereby mutually agreed that unless and until the Agreement for
Lease/Tenancy Agreement is executed, this Confirmation of Tenancy counter-
signed by both parties with the aforesaid deposit(s) duly paid by the
Intending Tenant and received by the Intending Landlord will constitute a
binding contract.
For and on behalf of
SUN HUNG KAI REAL ESTATE AGENCY
LTD.
........................................ /s/ K.M. Chan
------------------------------
K.M. Chan
Agent for Landlord
Rec'd from the Intending Tenant the deposit
of -
HK$333,119.31 (HK$281,430.00+HK$51,689.31)
(3 months' Rent, Air-conditioning and
Management Charges)
of #045224 d.d. 27-5-97 Shanghai Comm'l Bank Ltd Date 29-5-97
For and on behalf of
PHYSICAL HEALTH CENTRE HONG KONG
LTD.
........................................ /s/ Luk Ngai Keung
------------------------------
Luk Ngai Keung
Intending Tenant
Note: Please address all correspondence to Mr. K.M. Chan, the Executive
Director of Sun Hung Kai Real Estate Agency Limited
<PAGE>
Page 2 Our Ref: NTP(II)/T/156C
12. OTHER SPECIAL CONDITIONS:-
(a) The Intending Tenant acknowledged that the existing tenant has not
surrendered Unit Nos.605-609 to the Intending Landlord. It is mutually
agreed that if the Intending Landlord cannot handover the aforesaid unit to
the Intending Tenant after 3 months from the 5th June 1997 either party can
have an option to rescind this Confirmation of Tenancy and/or Agreement for
Tenancy/Lease, which option shall only be exercised within 14 days from the
expiration of the 3 months above mentioned, by serving written notice to the
other party of its intention of rescission. Upon rescission of the
Confirmation and/or Agreement for Tenancy/Lease, the Intending Landlord
shall return to the Intending Tenant the deposit paid hereunder without
interest, costs or compensation and neither party shall have any claim
against each other.
(b) The Intending Tenant shall be solely responsible for obtaining and
complying with all licensing requirements (if any).
(c) No plumbing and drainage work should be allowed inside the premises.
(d) The Intending Tenant shall not place any load upon any floor of the
premises in excess of the loading capacity of that floor. Business machines
and mechanical equipment authorised by the Intending Landlord shall not
cause any vibration noise and annoyance to other tenants of the building.
(e) The Intending Tenant may operate outside normal office hour: -
i.e. Monday to Friday : 7:00 pm to 10:00 pm (3 hrs/day)
Saturday : 2:00 pm to 10:00 pm (8 hrs/day)
Sunday : 8:00 am to 5:00 pm (9 hrs/day)
Such special arrangements are subject to at least 1-week advance notice be
served to the Intending Landlord and also subject to the Intending Tenant
paying an additional air-conditioning and management charges.
(f) The Intending Tenant agrees not to display within or on the exterior
of the said premises any writing sign or other device whether illuminated or
not which may be visible from outside the said premises. Any discrepancies
of this condition shall make the Intending Tenant rectify the situation to
the satisfaction of the Intending Landlord within seven (7) days upon
service of notice by the Intending Landlord. Violation of the provision of
this clause may entitle the Intending Landlord to forfeit the tenancy and
deposit and re-enter upon the premises.
(g) It is mutually agreed that if at any time any Government Authority in
its opinion raise objection that the said premises is not being used as an
office by the Intending Tenant, the Intending Landlord shall have the
absolute and express right to terminate this Tenancy Agreement by serving
one month's prior notice to the Intending Tenant whereupon this Agreement
shall absolutely determine and neither party shall have any claims against
each other but without prejudice to any right of action which may have
accrued to the Intending Landlord in respect of any antecedent breach or
non-observance or non-performance by the Intending Tenant of any of the
terms of this Tenancy Agreement. The deposit paid under this Tenancy
Agreement shall be refunded to the Intending Tenant by the Intending
Landlord without interest within thirty days after the determination of this
Tenancy Agreement as aforesaid and delivery of vacant possession to the
Intending Landlord and after settlement of the last outstanding claim by the
Intending Landlord against the Intending Tenant for any arrears of rent
rates and other charges and for any breach, non-observance or non-
performance of any of the agreements, stipulations terms and conditions
herein contained and on the part of the Intending Tenant to be observed or
performed whichever shall be the later.
<PAGE>
SUN HUNG KAI
REAL ESTATE AGENCY LTD.
Date: 29 MAY 1997 APPENDIX A
Re: S.T.T.L. 183, Shatin, N. T. Page 1 of 3
New Town Tower
- ---------------------------------
Standard Requirements & Provisions
- ----------------------------------
A) Main entrance door, and party or partition walls will be provided by
the landlord.
B) False ceiling with light fittings will be provided by the Landlord.
C) Landlord's M & E Provisions are per Appendix B.
D) Rent free fitting out period will be terminated
(a) 30 days after commencement of Tenancy Agreement;
OR
- --
(b) on date of commencement of business by Tenant whichever comes
earlier.
However, management and air-conditioning charges and government rates are
payable by Tenant commencing from Tenancy Agreement commencement date.
E) a) Deposit will be three months of rent, air-conditioning and
management charges by cash upon signing of Confirmation of Tenancy.
(b) One month's rent to be paid at time of signing of Tenancy
Agreement/Lease.
F) Air-conditioning and management charges will be subject to annual
review due on December every year. Air-conditioning supply hours
Mondays to Fridays : 8:00 a.m. to 7:00 p.m.
Saturdays : 8:00 a.m. to 2:00 p.m.
No air-conditioning supply on Sundays and Public Holidays.
Additional air-conditioning supply outside the hours set out above can
normally be provided on reasonable advance notice to the Landlord at extra
cost.
.../2
<PAGE>
SUN HUNG KAI
REAL ESTATE AGENCY LTD.
Date: 29 MAY 1997 APPENDIX A
Re: S.T.T.L. 183, Shatin, N. T. Page 2 of 3
New Town Tower
- ---------------------------------
Standard Requirements & Provisions (cont'd)
- ----------------------------------
G) Tenant will be responsible to pay Government Rates. Before the
rateable value of the premises is assessed by the Rating & Valuation
Department, the Tenant shall pay to the Landlord an amount equivalent to
rates payable on the annual rent of the first year on monthly basis in
advance. Such payment to be adjusted when assessment is obtained.
H) Tenant will be responsible to effect Public Liability Insurance
endorsing the Landlord as the Principal for an amount of not less than:-
a) for tenancy area of 5,000 s.f. or above HK$2.5 Million
b) for tenancy area of less than 5,000 s.f. HK$1.0 Million
I) All detailed fitting out plans including M & E drawings must be
submitted to 22/F, Sun Hung Kai Centre for Landlord's written approval prior
to commencement of fitting out works. Two weeks will be required for
Landlord to give approval or disapproval.
J) Stamp duty, registration fee and any disbursement to be borne by the
Landlord and the Tenant in equal share.
K) Legal cost to be shared equally between Landlord and Tenant. If the
Tenant shall instruct its own Solicitor, each party shall bear its own legal
costs.
L) Other terms and conditions of the tenancy are as contained in the
standard Tenancy Agreement/Lease form adopted by the Landlord's Solicitor
for letting of New Town Tower. A copy of the standard form will be posted
to the Tenant for perusal upon prior, written request.
.../3
<PAGE>
SUN HUNG KAI
REAL ESTATE AGENCY LTD.
Date: 29 MAY 1997 APPENDIX A
Re: S.T.T.L. 183, Shatin, N. T. Page 3 of 3
New Town Tower
- ---------------------------------
M) Landlord's solicitor:-
Messrs Winston Chu & Co
Unit 3308, One Pacific Place
88 Queensway, Hong Kong
Attn.: Mr. Jeff Tse (2845 8138)
N) Actual final tenancy area to be measured on final approved building
plans by the Buildings & Lands Department. The standard of measurement will
be :-
a) measured to exterior face of office door and/or wall;
b) measured to centre line of any party or partition wall;
c) all interior columns and walls etc. will be included;
d) all landlord or common areas will be excluded.
-END-
<PAGE>
SUN HUNG KAI
REAL ESTATE AGENCY LTD.
Appendix B (Page 1 of 3)
************************
RE S.T.T.L. 183, Shatin, N.T.
Landlord's M E Provisions
--------------------------------
Food outlet for
Shop which requires
Major Small separate Licence by
Office Shop Shop USD/RSD
------ ----- ----- -------------------
Air Conditioning
- ----------------
1. Air side equipment Yes No Yes No
2. Fresh air supply Yes Yes Yes No
to perimeter of
shop/office
3. Chilled/condensate Yes *No Yes *No
water circuit
4. Thermostat & control Yes No Yes No
wiring
5. Supply air duct, Yes No No No
return air chamber,
grille & filter
6. Power supply to No No No No
air side equipment
Fire Services
- -------------
1. Sprinkler head N/A Yes Yes Yes
(upper layer)
2. Sprinkler head Yes No No No
(lower layer)
3. Teed-off from main N/A Yes Yes Yes
pipe for future
lower layer
installation
<PAGE>
SUN HUNG KAI
REAL ESTATE AGENCY LTD.
Appendix B (Page 2 of 3)
************************
RE S.T.T.L. 183, Shatin, N.T.
Landlord's M E Provisions
--------------------------------
Food outlet for
Shop which requires
Major Small separate Licence by
Office Shop Shop USD/RSD
------ ----- ----- -------------------
Electrical Services
- -------------------
1. Meter board at Land- Yes **Yes Yes **Yes
lord's switch/meter
room
2. Lateral main teed off Yes **Yes Yes **Yes
from busbar chamber
inside Landlord's
meter room
3. Communal ceiling Yes **Yes Yes **Yes
trunking from switch/
meter room & run
around Public Arcade/
Corridor
4. Wiring No No No No
5. Lighting panel Yes No No No
Plumbing & Drainage
- -------------------
1. Cold water supply & Generally, no provision is allowed.
drainage provision Consideration can be given to special
requirement, but the tenant have to
2. Grease trap bear all expenses.
<PAGE>
SUN HUNG KAI
REAL ESTATE AGENCY LTD.
Appendix B (Page 3 of 3)
************************
RE S.T.T.L. 183, Shatin, N.T.
Landlord's M E Provisions
--------------------------------
Remarks :
- -------
* Chilled water supply and return shall be terminated to a point at
perimeter of shop/office-premises.
** Landlord's provisions are suitable for electrical installation rated at
normal electrical load as adopted by common design practice and accepted by
CLP. Any extra requirement shall subject to our further assessment, and the
original provisions may not be suitable for this case, the tenant's fitting
out work have to be extended to include all works associated with
installation of individual power feeder from switch room to shop/office
premises.
Note :
- ----
1. Due to site restriction and building services design, some building
services ductworks and/or pipeworks must be run inside rental premises,
although such pipeworks/ductworks are not exclusively for the respective
shop/office/food outlets.
2. Any modification of drainage, air conditioning, plumbing and fire
services installations have to be carried out by the nominated/specialist
subcontractors at Tenant's expenses.
3. Tenant's fitting out drawings must be submitted for approval before
commencement of work.
4. Air conditioning provisions are rated as normal retail shop/ office.
Any extra requirement to-be submitted for approval & all cost incurred to be
borne by Tenant.
<PAGE>
Dated 25th July 1994
KAMOTON INVESTMENTS LIMITED
as Landlord
and
SUPREME RESOURCES LIMITED
as Tenant
-----------------------------------------------
TENANCY AGREEMENT
of
The whole of the 14th Floor
Coda Plaza, 51 Garden Road.
Hong Kong
------------------------------------------------
Term : 6 years from 1 July 1994
with an option to renew
for a further term of 3
years
Rent : 1st-3rd year : HK$91,000.00
4th-6th year : HK$118,300.00
Service Charges : HK$21,762.00
------------------------------------------------
REGISTERED at the Land Registry by
Memorial No.
on 6084763
-3 AUG 1994
p. Land Registrar
Baker & McKenzie
14th Floor, Hutchison House
Hong Kong
<PAGE>
CONTENTS
--------
Number Clause Heading Page
- ------ -------------- ----
1. INTERPRETATION .................................................1
2. AGREEMENT TO LET ...............................................2
Premises .......................................................2
Ancillary Rights ...............................................2
Term ...........................................................2
Payment of Rent ................................................2
3. SERVICE CHARGES ................................................3
4. TENANT'S AGREEMENTS ............................................3
4.1 Rent ...........................................................3
4.2 Rates, Taxes etc ...............................................3
4.3 Autopay Services ...............................................3
4.4 Utilities ......................................................3
4.5 Interest .......................................................4
4.6 Cleansing and Clearing of Drains ...............................4
4.7 Fitting Out ....................................................4
4.8 Repair .........................................................4
4.9 Window Glass ...................................................4
4.10 Electrical Installations .......................................4
4.11 Gas Installations ..............................................5
4.12 Interior Defects ...............................................5
4.13 Drains, Pipes, Cables etc ......................................5
4.14 To Yield Up ....................................................5
4.15 To Protect Interior ............................................6
4.16 Water Apparatus ................................................6
4.17 To Permit Landlord to Enter and View ...........................6
4.18 To Execute Repair on Receipt of Notice .........................6
4.19 To Permit Entry ................................................6
4.20 User ...........................................................6
4.21 Misuse .........................................................6
4.22 Storage of Merchandise and Hazardous
Goods ..........................................................6
4.23 Arms and Ammunition ............................................7
4.24 Nuisance, etc ..................................................7
4.25 Alterations ....................................................7
4.26 Floor Loading ..................................................7
4.27 Air-conditioning ...............................................7
4.28 Partitioning ...................................................7
4.29 Not to Alter Locks, Bolts, etc .................................8
4.30 To Comply with Ordinance etc. and
Crown Lease ....................................................8
4.31 Inform Landlord of Notices .....................................8
4.32 Not to Assign, Part with Possession,
<PAGE>
etc ............................................................8
4.33 Food Restriction ...............................................9
4.34 Overnight Operations, Guards, etc ..............................9
4.35 Not to Block Common Parts ......................................9
4.36 Not to Erect Signs .............................................9
4.37 Not to Vitiate Insurances ......................................9
4.38 Restriction on Deliveries ......................................9
4.39 Indemnity by Tenant ............................................9
4.40 Exclusion of Landlord's Liability .............................10
4.41 Observance of Terms of Deed of
Mutual Covenant ...............................................10
4.42 Building Rules and House Rules ................................10
4.43 Cleaning Contractors ..........................................10
5. LANDLORD'S AGREEMENTS .........................................11
5.1 For Quiet Enjoyment ...........................................11
5.2 To Pay Crown Rent, etc ........................................11
5.3 To Provide Services ...........................................11
5.4 Services Outside Service Hours ................................11
6. DEPOSIT .......................................................11
7. FURTHER PROVISIONS ............................................12
7.1 Re-Entry ......................................................12
7.2 Abatement of Rent .............................................12
7.3 Renaming of Building, etc .....................................13
7.4 Directory Boards ..............................................13
7.5 Condonation Not a Waiver ......................................13
7.6 Costs, Stamp Duties ...........................................13
7.7 Service of Notices ............................................13
7.8 Exclusion of Warranties .......................................14
7.9 Letting Notices ...............................................14
7.10 Exclusion of Representations and Rights
........................14
7.11 Acts of contractors etc .......................................14
7.12 Regulations ...................................................14
7.13 Deeds etc .....................................................14
8. Option ........................................................14
First Schedule Particulars .................................16
Second Schedule The Services ................................17
Signatures .............................................................18
<PAGE>
THIS AGREEMENT is made on the 25 day of July 1994
BETWEEN:
(1) KAMOTON INVESTMENTS LIMITED whose registered office is at 24th Floor,
Coda Plaza, 51 Garden Road, Hong, Kong (the "Landlord"); and
(2) SUPREME RESOURCES LIMITED whose registered office is situate at Room
1701, Causeway Bay Plaza, Phase 1, 489 Hennessy Road, Causeway Bay, Hong
Kong (the "Tenant").
WHEREBY IT IS AGREED as follows:
1. INTERPRETATION
--------------
In this Agreement, unless the context requires otherwise:
1.1 The expression the "Tenant" shall (where context permits) mean and
include the party or parties specifically named and shall not include the
executors and administrators of any such party or where such party is a
corporation its successors in title or any liquidators thereof.
1.2 Where the Tenant comprises more than one individual all covenants
undertakings and agreements made by the Tenant herein shall be deemed to be
made jointly and severally by all the persons comprising the Tenant.
1.3 "Landlord" includes the person entitled for the time being to the
immediate reversion to the term granted hereby.
1.4 "Common Parts" means the pedestrian ways, common entrances,
staircases, lifts, roads, forecourts, loading bays, toilet facilities and
any other areas within the Building from time to time designated by the
Landlord for common use by the tenants and occupiers of the Building and
those expressly or by implication authorized by them.
1.5 "Prescribed Rate" means three per centum per annum above the Prime
Rate from time to time quoted by The Hongkong And Shanghai Banking
Corporation Limited.
1.6 "Services" means the services described in the Second Schedule.
1.7 "Service Media" means the sewers drains gutters pipes ducts wires
cables and other conducting media in the Building including any fixings
louvres cowls and other covers.
1.8 "Service Hours" means eight a.m. to ten p.m. on Monday to Saturday
(inclusive) excluding all public holidays provided that the Landlord may
from time to time vary or extend such hours as it may reasonably think fit.
<PAGE>
1.9 Words importing the masculine feminine or neuter gender shall include
the others of them and words importing the singular number shall include the
plural and vice versa.
1.10 Clause headings are for reference only and shall be ignored in
construing this Agreement.
2. AGREEMENT TO LET
----------------
The Landlord LETS to the Tenant ALL THOSE the premises (the "Premises")
forming part of the building (the "Building") and more particularly
described in the First Schedule hereto SUBJECT TO all rights, easements,
privileges, restrictions, covenants and stipulations of whatever nature
affecting the Premises and TOGETHER WITH the use in common with the Landlord
and others having the like right of the Common Parts EXCEPT AND RESERVED
unto the Landlord and all persons authorized by the Landlord or otherwise
entitled thereto:
2.1 the right of free and uninterrupted passage and running of water,
soil, gas, drainage, electricity and all other services or supplies through
such sewers, watercourses, conduits, pipes, wires, cables and ducts as are
now or may hereafter be in, on or under the Premises and serving or capable
of serving the Building or any adjoining or neighbouring property together
with the right to enter upon the Premises to inspect repair or maintain any
such sewers, watercourses, conduits, pipes, wires, cables and ducts;
2.2 the exclusive right to install in or affix to any part of the Building
such flues, pipes, conduits, chimneys, aerials, plant, machinery and other
apparatus, signs, placards, posters and other advertising structures
whatsoever (whether illuminated or not) as the Landlord shall think fit
together with the right to repair maintain service remove or replace the
same provided that the Landlord shall cause as little interference as
possible to the Tenant and make good any damage caused to the Premises
forthwith;
2.3 the right to carry out or consent to the carrying out by any person of
any erection of a new building or the rebuilding demolition or alteration of
the Building notwithstanding any inconvenience or nuisance caused to the
Tenant;
2.4 the right and liberty to enter upon the Premises in the circumstances
in which the covenants by the Tenant contained in this Agreement permit such
entry;
2.5 the right to subjacent and lateral support from the Premises for the
remainder of the Building; and
2.6 the absolute and unfettered right to use the external walls of the
Building for whatever purpose the Landlord may deem fit and to assign or
delegate such right.
for the term specified in the First Schedule hereto (the "Term")
determinable as
<PAGE>
hereinafter provided PAYING THEREFOR the rent specified in the First
Schedule hereto (the "Rent"). The Rent is exclusive of rates and shall be
paid in advance without any deduction on the first day of each and every
successive calendar month (subject to any rent-free period stated in the
said Schedule) the first of such payments to be made on the signing hereof.
3. SERVICE CHARGES
---------------
3.1 The Tenant shall also pay to the Landlord by way of further or
additional payments for the provision by the Landlord or the Manager of the
Building of the Services the sum specified as service charges in the First
Schedule hereto (the "Service Charges") such sum to be paid monthly in
advance throughout the Term and on the same days and in the same manner as
the payment of Rent hereinbefore mentioned.
3.2 The parties hereto agree that at any time during the Term the Service
Charges shall be subject to increase upon the Landlord giving to the Tenant
one calendar month's notice in writing of such increase. There shall be no
restriction on the amount of increase in the Service Charges or the number
of occasions upon which the Landlord may call for an increase in the Service
Charges.
4. TENANT'S AGREEMENTS
-------------------
The Tenant hereby agrees with the Landlord as follows:
4.1 To pay the Rent and Service Charges in the manner herein stipulated.
4.2 To pay rates charged on the Premises as assessed by the Government
quarterly in advance which shall be or be deemed to be payable and due on
the first day of the months of January April July and October provided that
the first payment thereof shall be paid on the commencement of the tenancy
and in the event of the Premises not having been separately assessed to
rates by the Government to pay quarterly in advance such sum (not exceeding
the amount which would be payable under the Rating Ordinance (Cap.116)) as
shall be required by the Landlord as a deposit by way of security for the
due payment of rates subject to adjustment on actual rating assessment in
respect of the Premises being received from the Government and also to pay
and discharge all taxes, assessments, duties, charges, impositions and
outgoings of an annual or recurring nature now or hereafter to be imposed or
charged on the Premises or upon the owner or occupier in respect thereof by
the Government of Hong Kong or other lawful authority other than Crown Rent,
Property Tax and expenses of a capital or non-recurring nature.
4.3 To pay the Rent, rates and Service Charges by way of the Autopay
Services provided by member banks of The Hong Kong Association of Banks and
to sign and return within the period specified by the Landlord such
documents as may be necessary for the purpose of establishing such
autopayment of Rent, rates and Services Charges, or in such other manner as
the Landlord may prescribe by notice in writing to the Tenant from time to
time.
4.4 To pay all deposits and charges for electricity, gas, water and
telephones at the Premises.
<PAGE>
4.5 Without prejudice to any other remedy of the Landlord to pay to the
Landlord on demand as additional rent interest on any sum payable under this
Agreement at the Prescribed Rate from the due date until payment (as well
after as before any judgment).
4.6 To pay on demand to the Landlord any costs incurred by the Landlord in
cleansing, clearing repairing or replacing any drains choked or stopped up
owing to careless or improper use by the Tenant or its employees customers
invitees or licensees.
4.7 (a) To fit out the Premises at the Tenant's expense in accordance
with such plans and specifications as shall have been first submitted to and
approved in writing by the Landlord in a good and proper workmanlike fashion
and in all respects in a style and manner appropriate to a first class
commercial building and so to maintain the same throughout the Term in good
repair and condition to the satisfaction of the Landlord.
(b) The Tenant shall not commence any fitting out works unless and
until all necessary approvals licences or permits relating thereto have been
obtained from the relevant government departments or authorities and if the
Tenant shall for any reason commence any such works prior to obtaining the
necessary approvals licences or permits from the relevant government
authorities the Tenant shall be solely responsible for the consequences of
such unauthorized works.
(c) The Tenant will not cause or permit to be made any variation to
the approved fitting out plans and specifications or to the interior design
or layout of the Premises without the previous approval in writing of the
Landlord and in the event of such approval being requested it shall be a
condition precedent to the granting thereof that the Tenant shall pay to the
Landlord any fees and/or costs incurred by it in connection with such
request including but not limited to fees of an architect and/or specialist
consultant.
4.8 To keep all the interior of the Premises including the flooring and
interior plaster or other finishing material or rendering to walls, floors
and ceilings and the Landlord's fixtures and fittings therein and all
additions thereto including all doors, windows, electrical installations and
wiring, gas installations and piping, light fittings, suspended ceiling and
fire alarm and fire fighting installations in good clean tenantable
substantial and proper repair and condition and properly preserved and
painted as may be appropriate from time to time and without prejudice to the
generality of the foregoing during the last year of the Term to repaint and
decorate the interior of the Premises.
4.9 To reimburse to the Landlord the cost of replacing all broken or
damaged window glass in or at the Premises irrespective of the cause of such
breakage or damage.
<PAGE>
4.10 To repair or replace any electrical installation or wiring within the
Premises or the wiring from the Tenant's meter to the Premises if the same
becomes dangerous or unsafe or if reasonably so required by the Landlord or
by the relevant utility company and in so doing the Tenant shall use only a
contractor approved by the Landlord in writing for the purpose.
4.11 To repair or replace any gas installation or piping within the
Premises or the piping from the Tenant's meter to the Premises if the same
becomes dangerous or unsafe or if reasonably so required by the Landlord or
by the relevant utility company and in so doing the Tenant shall use only a
contractor approved by the Landlord in writing for the purpose.
4.12 To be wholly responsible for any damage or injury caused to any
person whomsoever or property whatsoever directly or indirectly through the
defective or damaged condition of any part of the interior of the Premises
or of the Landlord's fixtures and fittings therein and to make good the same
by payment or otherwise and to indemnify the Landlord against all costs
claims demands actions liabilities and legal proceedings whatsoever made
upon the Landlord by any person in respect thereof and to effect adequate
insurance cover in respect of such risks with such company as the Landlord
may at its sole discretion nominate. The policy of such insurance shall be
endorsed to show the Landlord as registered owner of the Building or the
Premises (as the case may be) and shall be in such amount as may in the
opinion of the Landlord be required to cover sufficiently all the risks
mentioned above and shall contain a clause to the effect that the insurance
cover thereby effected and the terms and conditions thereof shall not be
cancelled modified or restricted without the prior consent of the Landlord.
The Tenant hereby further undertakes to produce to the Landlord as and when
required by the Landlord such policy of insurance together with a receipt
for the last payment of premium and a certificate from the insurance company
that the policy is fully paid up and in all respects valid and subsisting.
4.13 Insofar as the same may not be part of the interior of the Premises
to keep in good clean substantial and proper repair and condition all
drains, pipes, cables, wires, ducts, and apparatus associated therewith and
any equipment and fittings ancillary thereto which belong to or form part of
or solely serve the Premises and to indemnify the Landlord against all
costs, claims, demands, actions, liabilities and legal proceedings
whatsoever made upon the Landlord by any person in respect of any breach of
this covenant.
4.14 To yield up the Premises with all fixtures fittings and additions
therein and thereto at the expiration or sooner determination of the Term in
good clean substantial and proper repair and condition (fair wear and tear
and damage or destruction due to any cause mentioned in Clause 7.2 hereof
excepted) AND thereupon to surrender to the Landlord all keys leading to all
parts of the Premises and if required by the Landlord to remove at the
Tenant's expense all fixtures, fittings, additions, partitions, floor
coverings, wall finishes, false ceilings, electrical installations and
wirings, erections, and alterations made or installed upon or in the
Premises whether by the Tenant or by a previous occupier of the Premises and
taken over by the Tenant and to re-instate restore and make good any damage
caused by such removal or reinstatement Provided that the Tenant's
obligations relating to removal or reinstatement under this Clause may be
modified or varied by the Landlord notifying the Tenant in writing that the
Landlord proposes without payment of any compensation to retain all or any
of the said fixtures, fittings, additions, partitions, floor coverings,
erections and alterations which the Tenant is otherwise liable hereunder to
remove but subject to this proviso, the Tenant shall re-instate restore and
make good the Premises or any part thereof requiring to be re-instated
restored or made good and in the event of the Tenant failing so to do the
Tenant shall on demand pay to the Landlord the cost of such reinstatement
restoration or making good.
<PAGE>
4.15 To take all reasonable precautions to protect the interior of the
Premises from damage threatened by an approaching storm gale or typhoon.
4.16 At the expense of the Tenant to maintain all toilets and water
apparatus located within the Premises (or elsewhere if used exclusively by
the Tenant and its employees invitees or licensees) in good clean
substantial and proper repair and condition at all times during the Term to
the satisfaction of the Landlord and in accordance with the Regulations of
the Public Health or other Government Authority concerned.
4.17 To permit the Landlord its agents and all persons authorized by it
with or without workmen or others and with or without appliances at all
reasonable times after giving reasonable prior notice to enter upon the
Premises to view the condition thereof, to take inventories of the fixtures
and fittings therein and during the last 3 months of the Term to show the
Premises to prospective tenants or purchasers.
4.18 To make good all defects and wants of repair to the Premises for
which the Tenant may be liable within the period of one month from the
receipt of written notice from the Landlord to make good the same, and if
the Tenant shall fail to execute such works or repairs as aforementioned to
permit the Landlord or its duly authorized agents to enter upon the Premises
and execute the same and the cost thereof shall be a debt due from the
Tenant to the Landlord and be recoverable forthwith by action.
4.19 To permit the Landlord and its duly authorized agents at all
reasonable times after giving reasonable prior notice (but at any time and
without notice in case of emergency) to enter the Premises (and by force if
necessary) for the purposes of security, fire fighting or inspecting or
carrying out repairs, alterations or additions to or maintenance or renewal
of the Building and the services, fixtures and fittings therein.
4.20 Not to use the Premises for any purpose other than such as are
specified in the Schedule hereto.
4.21 Not to permit or suffer any part of the Premises to be used for the
purpose of gambling or for any illegal, immoral or improper purposes or so
as to cause nuisance, annoyance, inconvenience, damage or danger to the
Landlord or the occupiers of adjacent or neighbouring premises.
4.22 Not to use the Premises or any part thereof for the storage of goods
or merchandise other than in small quantities consistent with the nature of
the Tenant's trade or business nor to keep or store or cause or permit to be
kept or stored any dangerous goods within the meaning of the Dangerous Goods
Ordinance and the regulations thereunder or any statutory modification or
re-enactment thereof.
<PAGE>
4.23 Not to keep, store, use, bring into or suffer to be kept, stored,
used or brought into the Premises or the Building or any part thereof any
arms or ammunition (as defined in the Firearms and Ammunition Ordinance).
4.24 Not to make produce or suffer or permit to be made or produced any
noise (including but not limited to music or sound produced by broadcasting
from television radio and any apparatus equipment or instrument capable of
creating producing or reproducing music or sound) or vibration or other acts
or things in or on the Premises which is or are or may be a nuisance or
annoyance to the Landlord or to the tenants or occupiers of adjacent or
neighbouring premises.
4.25 Not to make or permit to be made any alterations in or additions to
the Premises or to the electrical and communications wiring, air-
conditioning ducting (if any) lighting fixtures or other Landlord's fixtures
and fittings or to install any plant equipment apparatus or machinery
therein without having first obtained the written consent of the Landlord
therefor or to cut, maim, or injure or suffer to be cut, maimed or injured
any doors, windows, walls, structural members or other fabric thereof.
4.26 Not to place on any part of the Premises or on the exterior of the
Premises any object of any kind including any safe of a weight in excess of
150 lb. or creating a dead load exceeding 50 lb. per square foot at a
location not previously approved in writing by the Landlord. Before taking
into the Premises any object exceeding such weight or dead load the Tenant
shall apply to the Landlord for a written approval to the positioning of the
said object. Thereafter the Tenant shall not move such object from the
approved location without the written approval of the Landlord first having
been obtained. All fees incurred by the Landlord in the obtaining of the
approval of the Landlord's architects as to the location of such object
shall be borne by the Tenant and payment therefor may be imposed as a pre-
requisite to the Tenant receiving such permission.
4.27 Not to install any air-conditioning plant or equipment (either in the
windows or elsewhere) machinery or other mechanical apparatus of any kind on
or at any part of the Premises without the prior written consent of the
Landlord AND in the event of the Tenant installing private air-conditioning
units in the Premises or any part thereof with the prior written consent of
the Landlord the Tenant shall comply with the directions and instructions of
the Landlord regarding installation and shall at its own expense be
responsible for their periodic inspection maintenance and repair and for the
replacement of defective wiring and the Tenant shall be strictly liable for
any damage caused by the installation operation or removal of such units.
<PAGE>
4.28 Not to erect install or alter any partitioning of any kind in the
Premises or any part thereof without having obtained the Landlord's prior
written approval. Any such partitioning or alteration thereof approved by
the Landlord shall be constructed or made at such position and with such
material and in accordance with such other requirement (if any) as shall be
directed or approved by the Landlord. All fees and expenses incurred by the
Landlord in obtaining the approval of the Landlord's architects or
consultants on the location of such partitioning or alteration shall be
borne by the Tenant, including the costs and expenses of the removal or
alteration of the fixtures and fittings of the Landlord as may be required
by the Landlord and payment therefor to the Landlord as may be imposed as a
pre-requisite of the Tenant receiving such permission.
4.29 Not without the prior written consent of the Landlord to install
additional locks bolts or other fittings to the entrance doors of the
Premises or in any way to cut or alter the same Provided Always that such
consent shall not be unreasonably withheld taking into account the nature of
the Tenant's business.
4.30 To comply with all ordinances, regulations, bye-laws, rules and
requirements of any competent authority in relation to the conduct of the
Tenant's business on the Premises and to be answerable and responsible for
the consequence of any breach of any such ordinances, regulations, bye-laws,
rules and requirements by any occupier of the Premises and not to do
anything which would amount to a breach or non-observance of the provisions
of the Crown Lease under which the Landlord holds the Premises and to
indemnify the Landlord against any breach of the terms of this Clause.
4.31 To notify the Landlord forthwith in writing of the contents of any
notice received by the Tenant from any statutory or public authority
concerning the Premises or any of the Services.
4.32 Not to transfer assign underlet license share or otherwise part with
the possession of the Premises or any part thereof either by way of sub-
letting, lending, sharing, or other means whereby any person not a party to
this Agreement obtains the use or possession of the Premises or any part
thereof for all or any part of the Term and irrespective of whether any
rental or other consideration is given for such use or possession and in the
event of any purported transfer, assignment, underletting, licensing,
sharing or parting with the possession of the Premises (whether for monetary
consideration or not) the Landlord shall be entitled to terminate this
Agreement and the Tenant shall forthwith thereupon surrender vacant
possession of the Premises to the Landlord without prejudice however to the
rights of either party in respect of any antecedent breach of any of the
covenants, terms and conditions contained herein. The tenancy created
pursuant to this Agreement shall be personal to the Tenant named in this
Agreement and without in any way limiting the generality of the foregoing,
the following acts and events shall, unless approved in writing by the
Landlord, be deemed to be breaches of this Clause:
(a) In the case of a tenant which is a partnership, the taking in of
one or more new partners whether on the death or retirement of an existing
partner or otherwise;
(b) In the case of a tenant who is an individual (including a sole
surviving partner of a partnership tenant) the death, insanity or other
disability of that individual, to the intent that no right to use, possess,
occupy or enjoy the
<PAGE>
Premises or any part thereof shall vest in the executors, administrators,
personal representatives, next of kin, trustee or committee of any such
individual;
(c) In the case of a corporation, any reconstruction, amalgamation,
merger or voluntary liquidation;
(d) The giving by the Tenant of a Power of Attorney or similar
authority whereby the donee of the Power obtains the right to use, possess,
occupy or enjoy the Premises or any part thereof or does in fact use,
possess, occupy or enjoy the same;
(e) The change of the Tenant's business name.
4.33 To ensure that all wet garbage and refuse is disposed of by
arrangement with and in containers specified by the management of the
Building.
4.34 Not to permit or suffer any person to remain in the Premises or the
Building overnight without the Landlord's prior written consent. Such
consent shall only be given to enable the Tenant to operate its business or
to post watchmen to guard the contents of the Premises which shall not be
used as sleeping quarters or as domestic premises within the meaning of the
Landlord and Tenant (Consolidation) Ordinance or any other enactment or
modification thereof
for the time being in force.
4.35 Not to place or leave in the Common Parts any boxes, furniture,
chattels, refuse or rubbish or otherwise encumber the same.
4.36 Not to erect exhibit or display within or on the exterior of the
Premises or the Building any writing sign aerial flagpole or other device
whether illuminated or not unless the same and the proposed location thereof
shall have previously been approved in writing by the Landlord.
4.37 Not to do or permit to be done any act or thing whereby the policy or
policies of insurance on the Premises against damage by fire or against
claims by third parties for the time being subsisting may become void or
voidable or whereby the rate of premium thereon may be increased, and (if so
required) to repay to the Landlord on demand all sums paid by the Landlord
by way of increased premium thereon and all expenses incurred by the
Landlord in and about any renewal of such policy or policies rendered
necessary by a breach of this Clause.
4.38 Not to take delivery of furniture equipment fittings or bulky items
in and out of the Building during the hours specified in the Schedule hereto
and only in the lift designated for that purpose by the Landlord.
4.39 To indemnify and keep the Landlord fully indemnified from and against
all actions proceedings demands costs expense liabilities and claims
whatsoever by the tenants and occupiers of any other parts of the Building
and any third party in respect of any act or liability caused by or arising
from the act, neglect or default (irrespective of whether willful or not) of
the Tenant or any invitee or licensee of the Tenant or any workmen servants
or persons who are suffered or permitted by the Tenant to be in the Premises
or any part thereof.
<PAGE>
4.40 Not to hold the Landlord liable in any way to the Tenant or to any
person whomsoever in respect of any injury damage or loss of business or
other liability whatsoever which may be suffered by the Tenant or by any
other person or any property howsoever caused and in particular, but without
limitation, caused by or through or in any way owing to:
(a) any interruption of any of the services hereinbefore mentioned
by reason of necessary repair or maintenance of any installations or
apparatus or damage thereto or destruction thereof by fire water act of God
or other cause beyond the Landlord's control or by reason of mechanical
electrical or other defect or breakdown or other inclement conditions or
unavoidable shortage of fuel materials water or labour or any cause
whatsoever beyond the Landlord's control; or
(b) the act neglect or default of the tenants and occupiers of any
other parts of the Building and their employees agents licensees and
invitees; or
(c) any defect in the supply of electricity or from any surge
reduction variation interruption or termination in the supply of electrical
power; or
(d) any typhoon landslide subsidence of the ground escape of fire
leakage of water or electric current from the water pipes or electric wiring
cables or ducts situate in upon or in any way connected with the Building or
any part thereof or dropping or falling of any article object or material
whatsoever including cigarette ends, glass or tiles, the escape of water,
fire or electricity or vibrations from any floor office or premises forming
part of the Building or in the neighbourhood; or
(e) the defective or damaged condition of the Premises or the
Landlord's fixtures therein or any part thereof
4.41 Not to do anything which would amount to a breach or non-observance
of the terms, conditions, covenants and restrictions contained or referred
to in any Deed of Mutual Covenant relating to the Building and/or the
Premises and to indemnify the Landlord against any such breach or non-
observance.
4.42 To obey and comply with such Building Rules and House Rules as may
from time to time be made or adopted by the Landlord or the Manager of the
Building in accordance with any Deed of Mutual Covenant and/or by the
Management Committee of the Incorporated Owners of the Building and/or any
Management Agreement in relation to the management of the Building.
4.43 To employ for the cleaning of the interior of the Premises only such
cleaning contractors as shall have been previously approved by the Landlord
and to cause such cleaning services to be carried out only between such
hours and on such days as shall have been previously approved by the
Landlord provided that the Landlord shall not unreasonably withhold its
approval for the purposes of this paragraph.
<PAGE>
5. LANDLORD'S AGREEMENTS
---------------------
The Landlord hereby agrees with the Tenant (subject to the Tenant duly
paying the Rent Service Charges rates and other outgoings and charges
hereinbefore referred to and observing and performing the covenants herein
contained) as follows:
5.1 To have quiet possession and enjoyment of the Premises during the Term
without any interruption by the Landlord or anyone lawfully claiming under
through or in trust for the Landlord.
5.2 To pay the Crown Rent and Property Tax in respect of the Premises.
5.3 To use its reasonable endeavours to provide the Services.
5.4 If the Tenant shall so request and subject to the Tenant giving such
notice as the Landlord may reasonably require that the Tenant wishes any of
the Services outside the Service Hours to endeavour to provide such of the
Services requested by the Tenant at the cost of the Tenant during such
period outside the Service Hours as may be reasonably practicable from time
to time.
6. DEPOSIT
-------
6.1 Upon the signing hereof the Tenant shall provide an unconditional and
irrevocable bank guarantee (the "Bank Guarantee") in favour of the Landlord
in the amount specified as Deposit in the Schedule hereto to secure the due
performance and observance of the Tenant's covenants restrictions,
stipulations and conditions herein contained. The Bank Guarantee shall be
held by the Landlord throughout the currency of this Agreement with the
right for the Landlord (without prejudice to any other right or remedy
hereunder) to enforce the Bank Guarantee and claim the amount of any Rent
and other charges payable hereunder and any costs expenses losses or damages
sustained by the Landlord as the result of any non-observance or non-
performance by the Tenant of any of the said covenants, restrictions,
stipulations or conditions.
6.2 At the expiration or sooner determination of the Term if there shall
be no outstanding breach of any of the covenants, restrictions, stipulations
and conditions herein contained and on the Tenant's part to be observed and
performed the Landlord will release the Bank Guarantee within 30 days after
the Tenant shall have surrendered to the Landlord vacant possession of the
Premises but if there shall be any money due to the Landlord, the Landlord
may claim under the Bank Guarantee for payment of such sums due, and if
there shall be any breach of any of the said covenants, restrictions,
stipulations and conditions on the part of the Tenant to be observed and
performed the Landlord shall claim under the Bank Guarantee for such amount
as shall be required towards remedying such breach insofar as this may be
possible without prejudice to any of the Landlord's rights or remedies
hereunder.
<PAGE>
6.3 In the event that the Landlord assigns this Tenancy Agreement during
its currency, the Tenant shall in replacement of the Bank Guarantee provide
a similar bank guarantee in favour of the Landlord's assignee who shall
covenant to hold the replacement bank guarantee on the same term as referred
to in Clause 6 hereof.
7. FURTHER PROVISIONS
------------------
IT IS HEREBY AGREED AND DECLARED as follows:
7.1 If the Rent, Service Charges or any other sums payable hereunder or
any part thereof shall be unpaid for 15 days after the same shall have
become payable (whether formally demanded or not) or if there shall be any
breach non-observance or non-performance of any of the covenants,
restrictions, stipulations and conditions herein contained and on the part
of the Tenant to be observed or performed or if the Tenant shall become
bankrupt or being a corporation go into liquidation (except for the purposes
of amalgamation or reconstruction) it shall be lawful for the Landlord at
any time thereafter to re-enter into and upon the Premises or any part
thereof in the name of the whole and thereupon this Agreement shall
absolutely determine but without prejudice to any right of action of the
Landlord in respect of any breach non-observance or non-performance by the
Tenant of any of the terms of this Agreement. All costs and expenses
incurred by the Landlord in demanding payment of the Rent and other charges
aforesaid (if the Landlord elects to demand) arising out of this Clause
shall be paid by the Tenant and shall be recoverable from the Tenant as a
debt or be deductible by the Landlord from any deposit held by the Landlord
hereunder.
7.2 If the Premises or any part thereof shall be rendered unfit for
commercial use or inaccessible by fire, typhoon, act of God, force majeure
or any other cause beyond the control of the Landlord (other than on account
of the Tenant's act neglect or default) and the policy or policies of
insurance effected by the Landlord shall not have been vitiated or payment
of the policy moneys refused in whole or in part in consequence of any act
or default of the Tenant or if the Premises shall be condemned as a
dangerous structure or a demolition order or closing order shall become
operative in respect of the Premises then the Rent or a fair proportion
thereof according to the nature and extent of the damage sustained or order
made (the determination of which by the Landlord shall be final and
conclusive and be binding on the Tenant) shall forthwith abate and cease to
be payable until the same shall have been again rendered fit for commercial
use and accessible PROVIDED that:
(a) if the Landlord shall consider it uneconomical to repair rebuild
or replace the Premises whether or not in the same form or if any competent
authority shall refuse permission for or otherwise prevent any rebuilding or
replacement or if owners of other premises in the Building shall prevent
rebuilding or replacement the Tenant shall be entitled within one month of
the notification by the Landlord of its decision or such refusal or
prevention as the case may be subject to there having been no breach of its
obligations hereunder forthwith to terminate this Agreement by serving
written notice on the Landlord without prejudice to any antecedent claims or
causes of action which either party hereto may have against the other
hereunder or,
<PAGE>
(b) if the Premises shall not be repaired or reinstated within six
months of their being rendered unfit for commercial use or inaccessible
either party hereto may terminate this Agreement by giving not less than one
month's notice in writing to the other and upon the expiration of such
notice this Agreement shall absolutely determine but without prejudice as
aforesaid.
7.3 The Landlord shall at any time and from time to time during the Term
be entitled to change the name of the Building or any part or parts thereof
and the Landlord shall not be liable for any costs or expenses incurred by
the Tenant as a result of such change.
7.4 The Tenant shall pay the Landlord immediately upon demand the cost of
affixing repairing or replacing as necessary the Tenant's name in lettering
on the directory board at the entrance to the Building and on the directory
board on the floor on which the Premises are situated.
7.5 No condoning, excusing or overlooking by the Landlord of any default,
breach, non-observance or non-performance by the Tenant at any time of any
of the agreements stipulations terms and conditions herein contained shall
operate as a waiver of the Landlord's rights hereunder in respect of any
continuing or subsequent default, breach, non-observance or non-performance
or so as to defeat or affect in any way the rights and remedies of the
Landlord hereunder in respect of any such continuing or subsequent default
or breach and no waiver by the Landlord shall be inferred from or implied by
anything done or omitted by the Landlord, unless expressed in writing and
signed by the Landlord. Any consent given by the Landlord shall operate as
a consent only for the particular matter to which it relates and shall in no
way be considered as a waiver or release of any of the provisions hereof nor
shall it be construed as dispensing with the necessity of obtaining the
specific written consent of the Landlord in future, unless expressly so
provided.
7.6 The stamp duty payable on this Agreement shall be borne by the parties
hereto in equal shares but the land registration fee (if any) shall be paid
by the Tenant. Each party shall bear its own solicitors' costs.
7.7 Any notice required to be served on the Tenant shall be sufficiently
served if delivered to or dispatched by registered post to or left at the
Premises or at the registered office or last known address in Hong Kong of
the Tenant and any notice required to be served on the Landlord shall be
sufficiently served if delivered to or dispatched by registered post to or
left at the registered office of the Landlord in Hong Kong or any other
address which the Landlord may notify to the Tenant from time to time. A
notice sent by registered post shall be deemed to be given at the time when
in due course of post it would be delivered at the address to which it is
sent.
<PAGE>
7.8 The Landlord does not represent or warrant that the Premises are
suitable for the use or purposes specified in the First Schedule hereto and
the Tenant shall satisfy itself or shall be deemed to have satisfied itself
that they are suitable for the purpose for which they are to be used and the
Tenant hereby agrees that it will at its own expense apply for any requisite
licences or permits from all Government or Public Authorities in respect of
the conduct of the Tenant's business in the Premises and shall execute and
comply with all Ordinances, Regulations, Orders, Notices or Rules made by
all competent Government or Public Authorities in connection with such
business as aforesaid AND the Tenant hereby further agrees to indemnify the
Landlord in respect of any breach by the Tenant of this Clause.
7.9 During the three months immediately before the expiration or sooner
determination of the Term the Landlord shall be at liberty to affix and
maintain without interference upon any external part of the Premises a
notice stating that the Premises are to be let or sold and such other
information in connection therewith as the Landlord shall reasonably
require.
7.10 (a) This Agreement sets out the full agreement between the parties
hereto. No other warranties or representations have been made or given
relating to the Landlord, the Tenant, the Building, or the Premises or if
any warranty or representation has been made the same is hereby waived.
(b) Nothing herein contained shall confer on the Tenant any right,
interest, privilege, easement or appurtenance whatsoever mentioned or
referred to in Section 16(l) of the Conveyancing and Property Ordinance
(Cap.219) save those expressly set out herein.
7.11 For the purpose of this Agreement, any act, default, neglect or
omission of any contractor, servant, agent, licensee or visitor of the
Tenant shall be deemed to be the act, default, neglect or omission of the
Tenant.
7.12 (a) The Landlord shall be entitled from time to time and by notice
in writing to the Tenant to make introduce and subsequently amend adopt or
abolish if necessary such Regulations as it may consider necessary for the
proper operation and maintenance of the Building.
(b) Such Regulations shall be supplementary to the terms and
conditions contained in this Agreement and shall not in any way derogate
from such terms and conditions. In the event of conflict between such
Regulations and the terms and conditions of this Agreement the terms and
conditions of this Agreement shall prevail.
7.13 If at any time during the Term, the Landlord shall sell or otherwise
assign a part or parts of the Premises ("a Sold Part"), the Tenant shall
enter such deed or deeds as the Landlord may require for the purpose of (i)
apportioning the rent and other charges payable under this Agreement and
(ii) for the release of the Landlord's covenants hereunder (meaning the
Landlord hereunder and its successors in title and assigns of the Premises
excluding any Sold Part) in respect of a Sold Part and for the assumption by
the Purchaser of such Sold Part of the Landlord's covenants hereunder in
respect of such Sold Part and (iii) the Tenant covenanting directly with the
Purchaser of a Sold Part to observe and perform the Tenant's covenants
hereunder in respect of the Sold Part.
<PAGE>
8. OPTION
------
8.1 If the Tenant wishes to take a tenancy of the Premises for a further
term of three years from the expiration of the Term at the rent and on the
terms and conditions hereinafter mentioned and shall not less than six
months before the expiration of the Term give to the Landlord notice in
writing of such its desire and if it shall have paid the rent hereby
reserved and shall have performed and observed all the terms and conditions
herein contained and on its part to be performed and observed up to the
expiration of the Term then the Landlord will let the Premises to the Tenant
for a further term of three years from the 1 July 2000 at the then current
market rent such rent to be determined in manner hereinafter provided or the
Rent specified in this Agreement which is higher and subject in all other
respects to the same stipulations as are herein contained except this clause
for renewal and any rent-free period allowed to the Tenant.
8.2 The rent payable for the said further term (the "new rent") shall be
notified by the Landlord to the Tenant and shall be agreed between the
parties hereto not less than two months immediately prior to the expiration
of the Term Provided that in the event of a failure by the parties hereto to
agree on the new rent the same shall be determined by an independent
professional valuer or firm of professional valuers (the "valuer") to be
appointed jointly by the parties hereto in writing or in the absence of
agreement on the identity of the valuer not less than one month prior to the
expiration of the Term the valuer shall be appointed (on the application of
either party) by the Chairman for the time being of the Royal Institution of
Chartered Surveyors (Hong Kong Branch). The valuer shall act as an expert
and not as an arbitrator and the valuer's decision shall be conclusive and
binding on the parties hereto.
8.3 In determining the current market rent for the Premises the valuer
shall:
8.3.1 make the following assumptions:
(a) that no work has been carried out on the Premises by the
Tenant its subtenants or their predecessors in title during the Term which
has diminished the rental value of the Premises;
(b) that if the Premises have been destroyed or damaged they have
been fully restored;
(c) that the agreements contained in this Agreement on the part of
the Tenant have been fully performed and observed;
(d) that the Premises are available to let by a willing landlord
to a willing tenant by one Agreement without a premium being paid by either
party and with vacant possession;
(e) that the Premises are ready for and fitted out and equipped
for immediate occupation and use for the purpose or purposes required by the
willing tenant referred to in paragraph (d) and that all the services
required for such occupation and use are connected to the
<PAGE>
Premises;
(f) that the Agreement referred to in paragraph (d) contains the
same terms as this Agreement except the amount of the rent and any rent free
period allowed to the Tenant for fitting out the Premises for its occupation
and use at the commencement of the Term;
8.3.2 and shall disregard the following matters:
(a) any effect on rent of the fact that the Tenant or its
predecessors in title have been in occupation of the Premises;
(b) any goodwill attributable to the Tenant's business;
(c) any increase in rental value of the Premises attributable to
the existence at the expiration of the Term of any improvement to the
Premises carried out by the Tenant with consent where required otherwise
than in pursuance of an obligation to the Landlord or its predecessors in
title.
8.4 Until the new rent shall have been determined in accordance with sub-
clause 8.2 above, the Tenant shall pay to the Landlord on account of the new
rent the existing monthly rent for the Premises and within twenty-one days
of such determination the Tenant shall pay to the Landlord any shortfall
between the new rent and the payments made by the Tenant on account.
8.5 The cost and expenses of the valuer shall be borne by the Tenant.
<PAGE>
THE FIRST SCHEDULE
------------------
Particulars
-----------
BUILDING : ALL THAT building or buildings erected or to
be erected on INLAND LOT NO.8694 Garden
Road, Hong Kong and intended to be known
as CODA PLAZA.
PREMISES : The whole of the 14th Floor of the Building
shown for the purposes of identification
only coloured pink on the plan annexed hereto.
TERM : Commencement Date: 1 July 1994
Expiry Date: 30 June 2000
RENT : 1st-3rd year : HK$91,000.00 per month
exclusive
4th-6th year : HK$118,300.00 per month
exclusive
RENT FEE PERIOD : Two and a half months from 1 July 1994
(Provided that the Tenant shall be liable
for the rates, Service Charges and all other
outgoings m respect of the Premises)
RENT COMMENCEMENT
DATE : 16 September 1994
SERVICE CHARGES : HK$21,762.00 (or as changed pursuant to
Clause 3.2 hereof)
DEPOSIT : HK$338,286.00
USER : As a first class beauty parlour
THE SECOND SCHEDULE
-------------------
The Services
------------
1. Maintaining cleaning repairing replacing and renewing repainting
redecorating or otherwise treating as the Landlord shall consider
appropriate
the Building and the Service Media and any signs on or giving directions to
the
Building (except where any tenant or occupier of the Building is liable for
the
same).
2. Operating inspecting maintaining cleaning repairing replacing and
renewing
the lights in the Common Parts the lifts and lift machinery the boilers and
heating and cooling plant the water and other meters the fire detection
alarm
prevention and fighting equipment and security services and systems and
generators the telephone and communication systems and all plant and
machinery
at the Building.
3. Cooling the Building to reasonably acceptable standards during the
Service
Hours.
4. Procuring the supply of water and sewerage services to the Building.
5. Providing (where appropriate) toilet requisites and hygiene services in
the lavatories in the Common Parts including the supply maintenance repair
and
renewal of associated receptacles plant and equipment.
6. Planting maintaining tending and replanting any landscaped areas at the
Building.
7. Keeping the Building clean and tidy and cleaning the outside of the
windows of the Building.
8. Disposing of refuse from the Building including its collection (and if
deemed appropriate by the Landlord its compaction) and the provision of
associated receptacles plant and equipment.
9. Providing staff and administration and providing replacing and renewing
machinery and equipment in each case required to provide the services
referred
to in this Schedule.
10. Effecting insurance cover in respect of the Building against such
risks
as the Landlord deems appropriate from time to time.
11. Providing any other service which the Landlord shall reasonably think
appropriate for the benefit of the Building its facilities and amenities and
the tenants of the Building or any of them or visitors to it.
AS WITNESS the hands of the parties hereto the day and year first above
written.
SIGNED by Mr. Richard Tong ) KAMOTON INVESTMENTS LIMITED
for and on behalf of )
the Landlord whose signature ) /S/Richard Tong
is verified by: ) Director
/S/Steve S.F. Woo
Steve S.F. WOO
Solicitor
Hong Kong
SIGNED by SERLEO LUK, ) For and on behalf of
NGAI KEUNG ) SUPREME RESOURCES LIMITED
for and on behalf of )
the Tenant in the ) /S/Ngai Keung Luk
presence of: ) Authorized Signature(s)
/S/ Darrie Lam
Darrie Lam
Company Secretary
<PAGE>
PHYSICAL BEAUTY & FITNESS HOLDINGS LIMITED
TrustNet Cahmbers, P.O. box 3444, Road Town, Torotola, British Virgin
Islands
March 27, 1997
Mr. Luk Ngai Keung
Present
- -------
Dear Sir,
Re: Outstanding balances
Physical Beauty & Fitness Holdings Limited and its subsidiary companies as
detailed in the appendix ("the Group") made certain advances to you during
the previous years. As of December 31, 1996, the total outstanding balance
of these advances was amounting to HK$16,451,064.42.
It is now agreed that an interest calculated at the prime rate as at March
27, 1997 over the outstanding balance of these advances will be charged with
effect from January 1, 1997.
It is further agreed that the total amount will be settled by you according
to the following schedule:
<TABLE>
<CAPTION>
No. of Installment Due Date Balance b/f Interest Repayment Balance c/f
- ------------------- ---------- ------------- ---------- ------------ -------------
HK$ HK$ HK$ HK$
<S> <C> <C> <C> <C> <C>
0 - 16,451,064.42 354,937.35 - 16,806,001.77
1 Jun 30, 97 16,806,001.77 366,624.08 2,300,000.00 14,872,625.85
2 Sep 30, 97 14,872,625.55 328,012.71 2,300,000.00 12,900,638.56
3 Dec 31, 97 12,900,638.56 284,520.93 2,300,000.00 10,885,159.49
4 Mar 31, 98 10,885,159.49 234,851.04 2,300,000.00 8,820,010.53
5 Jun 30, 98 8,820,010.53 192,409.13 2,300,000.00 6,712,419.66
6 Sep 30, 98 6,712,419.66 148,041.04 2,300,000.00 4,560,460.70
7 Dec 31, 98 4,560,460.70 100,580.02 2,300,000.00 2,361,040.72
8 Mar 31, 99 2,361,040.72 50,940.26 2,411,980.98 -
</TABLE>
Please confirm your acceptance of the above terms by signing the duplicate
of this letter and returning it to us.
Yours faithfully Accepted and Agreed by:
For and on behalf of
PHYSICAL BEAUTY & FITNESS HOLDINGS LIMITED
/s/ Luk Ngai Keung /s/ Luk Ngai Keung
- ---------------------------------- -----------------------------
Luk Ngai Keung Luk Ngai Keung
Sole Director
Witness by: /s/ authorized signatory
-------------------------------------
<PAGE>
STOCK PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT (this "Pledge" or "Pledge Agreement") dated as of
September 30, 1997, is entered into by and between Ngai Keung Luk (Serleo)
("Pledgor"), and Physical Spa & Fitness, Inc., a Delaware corporation
("Pledgee" or "Company").
RECITALS:
---------
A. Pledgor is the owner of that number of shares of Common Stock ("Pledged
Shares") set forth on Schedule 1 of Physical Spa & Fitness, Inc.
B. Pledgee and Pledgor have entered into a certain agreement dated as of
March 27, 1997 (the "Agreement"), pursuant to which Company agreed to the
repayment schedule with respect to certain loans in the original principal
amount of $2.1 million, of which $1.9 million is outstanding as of the date
hereof (collectively, the "Loan") advanced by the Company to Pledgor (the
Loan and the Agreement shall be collectively referred to as "Loan
Documents").
NOW, THEREFORE, in order to ensure the repayment of the Loans by the
Pledgor to the Agreement, the parties agree as follows:
1. PLEDGE. Pledgor hereby pledges, hypothecates, assigns,
transfers, sets over and delivers to Pledgee, and grants to Pledgee a
security interest in:
(a) the Pledged Shares;
(b) each certificate or other instrument representing any of
the foregoing;
(c) distributions or dividends or other monies of every kind
and nature payable in respect of any or all of the foregoing; and
(d) the proceeds of the foregoing;
(collectively, the "Collateral"), in order to secure all obligations of
Pledgor hereunder and the obligations of Pledgor under the Agreement.
2. POWER OF ATTORNEY, INCOME.
(a) Pledgor hereby irrevocably appoints Pledgee, Iwona J. Alami,
attorney, coupled with an interest, with full power of substitution:
(1) Upon a Default under this Pledge, to arrange for the
transfer of the Pledged Shares or any part thereof into the name of Pledgee
or into the name of Pledgee's nominee, if, at any time, Pledgee shall, in
its sole discretion reasonably exercised, deem such a transfer to be
desirable; and
(2) For the purposes of taking any action and executing
any instrument, in the name of Pledgor or otherwise, which Pledgee may at
any time deem necessary or appropriate in order to (i) perfect its security
interest in the Collateral or any part thereof, and (ii) upon a Default
under this Pledge, foreclose said security interest or otherwise exercise
its rights under this Pledge and in and to the Collateral.
<PAGE>
(b) As long as no Default, as hereinafter defined, shall have
occurred and be continuing, Pledgor shall, unless otherwise prohibited, be
entitled to receive and retain any and all dividends and interests on the
Pledged Shares, but any such dividends in stock or other securities of the
Company shall be and become part of the Pledged Shares.
(c) Upon the occurrence and during the continuance of a Default
hereunder, the right of Pledgor to receive the dividends and interest which
Pledgor is authorized to receive and retain pursuant to (b) hereof shall
cease, and all such rights shall thereupon become vested in Pledgee;
provided, however, that Pledgee, as the sole further condition to the
vesting pursuant to this (c) of such rights and powers of Pledgee, shall
notify Pledgor in writing that Pledgee elects to exercise such rights and
power, and Pledgee shall have the sole and exclusive right and authority to
receive and retain the dividends and interest which Pledgor would otherwise
be authorized to retain pursuant to (b) hereof.
(d) In the Event of Default under the Loan or Agreement, Pledgee
shall have an irrevocable proxy to vote all the Pledged Shares, with full
power of substitution, at all meetings and actions, without meeting and any
action for which shareholders consent is required or given. This proxy
coupled with an interest may not be revoked while the Loan is outstanding.
3. REPRESENTATIONS AND WARRANTIES. Pledgor represents and warrants
that, subject to the representations made by Pledgee in the Agreement:
(a) The Pledged Shares are duly authorized, validly issued and
outstanding, and nonassessable, and Pledgor will warrant and defend
Pledgor's title thereto and sole beneficial ownership thereof against all
persons claiming any interest therein except Pledgee or any person claiming
through Pledgee.
(b) Except for restrictions imposed by the Agreement,
restrictions imposed by this Pledge and restrictions on public offerings, if
any, and sales of securities imposed by applicable securities laws of the
United States of America or any state or commonwealth thereof, there are not
and will not be any restrictions upon the sale or other disposition of any
of the Collateral.
(c) Except as contemplated by 3(b) above, Pledgor now has and
will have, without obtaining the consent of any governmental authority,
stock exchange or any other person except Pledgee, the right to pledge, to
grant a security interest in and otherwise to transfer and to dispose of the
Collateral free of any liens, security interests or other encumbrances, and
free of any rights or equities in favor of any other persons, except those
created by this Pledge.
(d) Pledgor is fully aware of the financial condition of
Company, and Pledgor delivers this Pledge based solely upon its own
independent investigation of Company's financial condition and in no part
upon any representation or statement of Pledgee with respect thereto.
Pledgor further represents and warrants that it is in a position to and
hereby does assume full responsibility for obtaining such additional
information concerning Company's financial condition as Pledgor may deem
material to its obligations hereunder, and Pledgor is not relying upon, nor
expecting Pledgee to furnish it any information in Pledgee's possession
concerning Company's financial condition or concerning any circumstances
bearing on the existence or creation, or the risk of nonpayment or
nonperformance of the obligations set forth in the Agreement.
4. DEFAULTS AND REMEDIES. Any of the following shall constitute a
"Default" under this Pledge:
(a) if any representation or warranty made by Pledgor in this
Pledge or in any instrument, document or certificate furnished hereunder or
in connection herewith shall prove to have been incorrect in any material
respect at the time it was made if a Notice of Default has been given under
this Pledge;
-2-
<PAGE>
(b) if Pledgor fails to observe or perform any of Pledgor's
covenants, agreements, obligations and undertakings contained in this Pledge
after thirty (30) days' written notice by Pledgee; or
(c) if an Event of Default exists under the Loan, or the
Agreement.
In the event of any such Default, Pledgee shall be cumulatively or
alternatively entitled, without further notice to Pledgor, and without
necessity for legal proceedings, to apply any or all cash Collateral to the
debt secured hereby, to sell any or all of the securities serving as
Collateral; and to transfer to the name of, or register in the name of,
Pledgee or its nominee, as owner rather than a secured party, any or all
Collateral. In addition, and not by way of limitation of the foregoing,
Pledgee shall have any or all remedies provided by law, including, but not
limited to, all rights and powers of a secured party after default pursuant
to the California Commercial Code.
5. APPLICATION OF PROCEEDS OF SALE, ETC. The proceeds of any sale
or other disposition of, or any collection of or realization on, any of the
Collateral, and any cash held by Pledgee as part of the Collateral
hereunder, shall be applied by Pledgee from time to time to pay:
(a) First, all costs, fees and expenses paid or incurred by
Pledgee (including all amounts paid by Pledgee for the account of Pledgor or
to Pledgee's agents, broker, counsel and consultants) in connection with the
exercise, protection or enforcement of Pledgee's rights and remedies under
this Pledge and in and to the Collateral, including any and all taxes,
assessments, charges and encumbrances of every kind prior to the security
interest created by this Pledge which Pledgee may consider necessary or
desirable to pay;
(b) Second, to the payment of the entire indebtedness due
Pledgee under the Loan or Agreement; and
(c) Third, the excess, if any, shall be paid to Pledgor or to
whomever is then legally entitled to receive the same.
6. DUTY OF PLEDGEE; EXERCISE OF RIGHTS AND REMEDIES. Pledgee shall
have no duty as to the protection of any of the Collateral or any income
with respect thereto, nor as to the preservation of rights against prior
parties, nor as to the preservation of any rights pertaining to any of the
Collateral beyond reasonable care in its custody. Upon Default, Pledgee may
exercise its rights and remedies with respect to any of the Collateral
without resort or regard to other security or sources of payment for the
Pledgor's obligations.
7. NO LIMITATION OF RIGHTS. Pledgor further agrees that nothing
contained herein shall prevent Pledgee from suing on the Loan or from
exercising any rights available to it thereunder or under any of the Loan
Documents and that the exercise of any of the aforesaid rights shall not
constitute a legal or equitable discharge of Pledgor. Pledgor understands
that the exercise by Pledgee of certain rights and remedies contained in the
Loan Documents may affect or eliminate Pledgor's right of subrogation
against Company and that Pledgor may therefore incur a partially or totally
nonreimbursable liability hereunder; nevertheless, Pledgor hereby authorizes
and empowers Pledgee to exercise, in its sole discretion, any rights and
remedies, or any combination thereof, which may then be available, since it
is the intent and purpose of Pledgor that the obligations hereunder shall be
absolute, independent and unconditional under any and all circumstances as
if the same were direct obligations of the Pledgor.
8. CUMULATIVE REMEDIES. The remedies provided in this Pledge in
favor of Pledgee shall not be deemed exclusive by shall be cumulative and
shall be in addition to all of the remedies in favor of Pledgee existing at
law or in equity.
-3-
<PAGE>
9. TERMS SUBJECT TO APPLICABLE LAW. All rights, powers and remedies
provided herein may be exercised only to the extent that the exercise
thereof does not violate any applicable laws and are further subject to any
subordination and standby agreements, if any, required to be entered into
pursuant to the Agreement, and are intended to be limited to the extent
necessary so that they will not render this Pledge invalid, unenforceable or
entitled to be recorded, registered or filed under any applicable law. If
any term of this Pledge or any application thereof shall be held to be
invalid, illegal or unenforceable, the validity of any other terms of this
Pledge or any other applications of such term shall in no way be affected
thereby.
10. Miscellaneous.
--------------
(a) WAIVERS. No failure to exercise and no delay in exercising
on the part of Pledgee, any right, power or remedy under this Pledge shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right, power or remedy hereunder or thereunder preclude any other or further
exercise thereof or the exercise of any other right, power or remedy. The
failure of Pledgee to insist upon the strict observance or enforcement of
any provision of this Pledge shall not be construed as a waiver or
relinquishment of such provision. Any waiver of any right, power, remedy,
term or condition contained herein shall only be effective if it is in
writing and signed by Pledgee.
(b) SURVIVAL OF AGREEMENTS, ETC. All representations,
warranties, covenants and agreements made by Pledgor in this Pledge or in
any instrument, document or certificate furnished hereunder or in connection
herewith shall be deemed to have been relied upon by Pledgee,
notwithstanding any investigation heretofore or hereafter made by Pledgee,
and shall survive the delivery of this Pledge, the Collateral and the
incurrence of any obligations.
(c) NOTICES. Any notice, demand or other communication required
or permitted under the terms of this Agreement shall be in writing and shall
be made by telegram, telex or electronic transmitter or certified or
registered mail, return receipt requested, and shall be deemed to be
received by the addressee one (1) business day after sending, if sent by
Federal Express, Express Mail, or other similar overnight delivery service,
the date of sending, if sent by telegram, telex, telecopy or electronic
transmitter, and three (3) business days after mailing, if sent by certified
or registered mail, with postage prepaid, and properly addressed. Notices
shall be addressed as provided below:
(1) If to Pledgor, to: Mr. Ngai Keung Luk
12/F - 15/F Lee Theatre Plaza
99 Percival Street, Causeway Bay
Hong Kong
(2) If to Pledgee, to: Ms. Darrie Lam
12/F - 15/F Lee Theatre Plaza
99 Percival Street, Causeway Bay
Hong Kong
with a copy to: Iwona J. Alami, Esq.
120 Newport Center Dr., Suite 200
Newport Beach, CA 92660
or to such other person or address, as to either party hereto, as such party
shall designate in a written notice to the other party hereto.
(d) AMENDMENTS. This Pledge may only be amended by a writing
executed by Pledgor and Pledgee.
-4-
<PAGE>
(e) GOVERNING LAW. This Pledge shall be governed by and
construed in accordance with the laws of the State of California. As part
of the consideration for Pledgee's investment under the Loan Documents,
Pledgor and Pledgee hereby agree that all actions or proceedings arising
directly or indirectly hereunder, whether instituted by Pledgee or Pledgor,
may, at the option of Pledgee be litigated in courts having situs within the
State of California, County of Orange and Pledgor hereby expressly consents
to the jurisdiction of any local, state or federal court located within said
state and county, and consents that any service of process in such action or
proceeding may be made by personal service upon Pledgor wherever Pledgor may
be located, or by certified or registered mail directed to Pledgor at his
last known address. Pledgor and Pledgee waive trial by jury, any objection
based on forum non conveniens, and any objection to venue of any action
instituted hereunder.
(f) SUCCESSORS AND ASSIGNS. This Pledge shall be binding upon
and shall inure to the benefit of Pledgor and Pledgee and their respective
successors and assigns.
(g) SECTION HEADINGS. The headings set forth in this Pledge are
for convenience of reference only and shall not be deemed to define or limit
the provisions hereof or to affect in any way their construction and
application.
(h) TERMINATION. This Pledge shall terminate and the Collateral
returned to Pledgor after payment of the Loan in full.
IN WITNESS WHEREOF, Pledgor and Pledgee have executed and delivered
this Pledge on the date first above written.
PLEDGOR:
Physical Spa & Fitness Inc.
By: /s/ Ngai Keung Luk
---------------------
Ngai Keung Luk
PLEDGEE:
/s/ Ngai Keung Luk
----------------------
Ngai Keung Luk
-5-
<PAGE>
SCHEDULE 1
----------
Certificate No. Shares
- -------------- ------
1,500,000 shares of common stock of
Physical Spa & Fitness Inc.
-6-
<PAGE>
1997 STOCK OPTION PLAN OF
PHYSICAL SPA & FITNESS INC.
Physical Spa & Fitness, Inc., a corporation organized under the laws of
the State of Delaware (the "Company"), hereby adopts this 1997 Stock Option
Plan (the "Plan"). The purposes of this Plan are as follows:
(1) To further the growth, development, and financial success of the
Company by providing additional Incentives to its Directors, Officers,
Employees and advisors, and employees of companies who do business with the
Company by assisting them to become owners of capital stock of the Company
and thus permitting them to benefit directly from its growth, development,
and financial success.
(2) To enable the Company to obtain and retain the services of the type
of directors, officers, employees and advisors considered essential to the
long-range success of the Company by providing and offering them an
opportunity to become owners of capital stock of the Company under options,
Including options that are intended to qualify as "Incentive stock options"
under Section 422 of the Internal Revenue Code of 1986, as amended.
ARTICLE I
DEFINITIONS
Whenever the following terms are used in this Plan, they shall have the
meaning specified below unless the context clearly indicates to the
contrary. The masculine pronoun shall Include the feminine and neuter, and
the singular shall Include the plural, where the context so indicates.
"AO Option" shall mean an Accelerated Ownership Non-Qualified Stock
Option granted in accordance with Section 4.5 hereof.
"Board" shall mean the Board of Directors of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Stock Option Committee of the Board, appointed
as provided in Section 6.1.
"Companion Grant" shall have the definition set forth in Section 4.9
hereof.
"Company" shall mean Physical Spa & Fitness Inc. In addition, "Company"
shall mean any corporation assuming, or issuing new employee stock options
in substitution for, Options outstanding under the Plan, in a transaction to
which Section 425(a) of the Code applies.
"Director" shall mean a member of the Board.
"Employee" shall mean any employee (as defined in accordance with the
Regulations and Revenue Rulings then applicable under Section 3401(c) of the
Code) of the Company, whether such employee is so employed at the time this
Plan is adopted or becomes so employed subsequent to the adoption of this
Plan, and (except for Incentive Stock Options), consultants or employees of
companies who do business with the Company.
"Incentive Stock Option" shall mean an Option which qualifies under
Section 422 of the Code and which is designated as an Incentive Stock Option
by the Committee.
"Non-Qualified Option" shall mean an Option which is not an Incentive
Stock Option and which is designated as a Non-Qualified Option by the
Committee.
<PAGE>
"Officer" shall mean an officer of the Company.
"Option" shall mean an option to purchase capital stock of the Company
granted under the Plan. "Options" Includes both Incentive Stock Options and
Non-Qualified Options.
"Optionee" shall mean a Director, Officer, or Employee to whom an Option
is granted under the Plan.
"Plan" shall mean this 1997 Stock Option Plan of the Company.
"Restricted Stock" shall mean common stock of the Company granted under
the conditions set forth in Section 4.10.
"Secretary" shall mean the Secretary of the Company.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Termination of Employment" shall mean the time when the employee-
employer relationship or directorship between the Optionee and the Company
is terminated for any reason, with or without cause, Including, but not by
way of limitation, a termination by resignation, discharge, death or
retirement, but excluding terminations where there is a simultaneous
reemployment by the Company. The Committee, in its absolute discretion,
shall determine the effect of all other matters and questions relating to
Termination of Employment, Including, but not by way of limitation, the
question of whether a Termination of Employment resulted from a discharge
for good cause, and all questions of whether particular leaves of absence
constitute Terminations of Employment; provided, however, that, with respect
to Incentive Stock Options, a leave of absence shall constitute a
Termination of Employment if, and to the extent that, such leave of absence
interrupts employment for the purposes of Section 422(a)(2) of the Code and
the then applicable Regulations and Revenue Rulings under said Section.
ARTICLE II
SHARES SUBJECT TO PLAN
Section 2.1 - Shares Subject to Plan
- ----------- ----------------------
The shares of stock subject to Options shall be shares of the Company's
par value $.001 Common Stock. The aggregate number of such shares which may
be issued upon exercise of Options or as Restricted Stock shall not exceed
500,000.
Section 2.2 - Limitation on Incentive Stock Option Grants
- ----------- -------------------------------------------
Subject to the overall limitations of Section 2.1, the aggregate fair
market value (determined as of the time the option is granted) of stock with
respect to which "Incentive stock options" (within the meaning of Section
422 of the Code) are exercisable for the first time by any Director, Officer
or Employee in any calendar year (under the Plan and all other Incentive
stock option plans of the Company) shall not exceed $100,000.
Section 2.3 - Unexercised Options
- ----------- -------------------
If any Option expires or is canceled without having been fully exercised,
or is forfeited under the terms of a Restricted Stock grant, the number of
shares subject to such Option or grant but as to which such Option was not
exercised prior to its expiration or cancellation or shares which were
forfeited may again be optioned or granted hereunder, subject to the
limitations of Sections 2.1 and 2.2.
2
<PAGE>
Section 2.4 - Changes in Company's Shares
- ----------- ---------------------------
In the event that the outstanding shares of Common Stock of the Company
are hereafter changed into or exchanged for a different number or kind of
shares or other securities of the Company, or of another corporation, by
reason of reorganization, merger, consolidation, recapitalization,
reclassification, stock split-up, stock dividend or combination of shares,
appropriate adjustments shall be made by the Committee in the number and
kind of shares for the purchase of which Options may be granted, Including
adjustments of the limitations in Sections 2.1 and 2.2 on the maximum number
and kind of shares which may be issued on exercise of Options or Restricted
Stock which may be issued.
ARTICLE III
GRANTING OF OPTIONS
Section 3.1 - Eligibility
- ----------- -----------
Any Director, Officer, advisor or Employee of the Company or employee of
a company that does business with the Company shall be eligible to be
granted Options, except as provided in Sections 3.2 and 6.4(a). However, no
Incentive Stock Option shall be granted to any Director or other person who
is not an Employee of the Company.
Section 3.2 - Qualification of Incentive Stock Options
- ----------- ----------------------------------------
No Incentive Stock Option shall be granted unless such Option, when
granted, qualifies as an "Incentive stock option" under Section 422 of the
Code.
Section 3.3 - Granting of Options
- ----------- -------------------
(a) The Committee shall from time to time, in its absolute
discretion:
(i) Determine which individuals are Directors, Officers, or
Employees or advisors or employees of persons with whom the Company does
business and select from among those persons (Including those to whom
Options have been previously granted under the Plan) such of them as in its
opinion should be granted Options; and
(ii) Determine the number of shares to be subject to such
Options granted to such selected persons, and determine whether such Options
are to be Incentive Stock Options or Non-Qualified Options, whether stock
appreciation rights should be granted for all or part of the Options
granted, and, if Non-Qualified Options, whether such options are AO Options;
and
(iii) Determine the terms and conditions of such Options,
consistent with the Plan.
(b) Upon the selection of a Director, Officer, Employee or other
person to be granted an Option, the Committee shall instruct the Secretary
to issue such Option and may impose such conditions on the grant of such
Option as it deems appropriate. Without limiting the generality of the
preceding sentence, the Committee may, in its discretion and on such terms
as it deems appropriate, require as a condition to the grant of a Non-
Qualified Option that the Optionee surrender for cancellation some or all of
the unexercised Non-Qualified Options which have been previously granted to
him. A Non-Qualified Option the grant of which is conditioned upon such
surrender may have an option price lower (or higher) than the option price
of the surrendered Non-Qualified Option, may cover the same (or a lesser or
greater) number of shares as the surrendered Non-Qualified Option, may
contain such other terms as the Committee deems appropriate and shall be
exercisable in accordance with its terms, without regard to the number of
shares, price, option period, or any other term or condition of the
surrendered Non-Qualified Option.
3
<PAGE>
ARTICLE IV
TERMS OF OPTIONS
Section 4.1 - Option Agreement
- ----------- ----------------
Each Option shall be evidenced by a written Stock Option Agreement, which
shall be executed by the Optionee and an authorized Officer of the Company
and which shall contain such terms and conditions as the Committee shall
determine, consistent with the Plan. Stock Option Agreements evidencing
Incentive Stock Options shall contain such terms and conditions as may be
necessary to qualify such Options as "Incentive stock options" under Section
422 of the Code.
Section 4.2 - Option Price
- ----------- ------------
(a) The price of the shares subject to each Option shall be set by
the Committee; provided, however, that the price per share of shares subject
to an Incentive Stock Option shall be not less than 100% of the fair market
value of such shares on the date such Option is granted, or 110% of the fair
market value of the Optionee holds 10% or more of the Company's Common
Stock, and that the price per share of shares subject to a Non-Qualified
Option shall not be less than 85% of the fair market value of such shares on
the date such Option is granted.
(b) For purposes of the Plan, the fair market value of a share of
the Company's stock as of a given date shall be: (i) the closing price of a
share of the Company's stock on the principal exchange on which shares of
the Company's stock are then trading, if any, on such date, or, if shares
were not traded on such date, then on the next preceding trading day during
which a sale occurred; or (ii) if such stock is not traded on an exchange
but is quoted on NASDAQ or a successor quotation system, (1) the last sales
price (if the stock is then listed as a National Market Issue under the NASD
National Market System) or (2) the mean between the closing representative
bid and asked prices (in all other cases) for the stock on such date as
reported by NASDAQ or such successor quotation system; or (iii) if such
stock is not publicly traded on an exchange and not quoted on NASDAQ or a
successor quotation system, the mean between the closing bid and asked
prices for the stock on such date as determined in good faith by the
Committee; or (iv) if the Company's stock is not publicly traded, the fair
market value established by the Committee acting in good faith.
Section 4.3 - Commencement of Exercisability
- ----------- ------------------------------
(a) Except as the Committee may otherwise provide, or in the case of
death or disability of the Optionee, with respect to Options or common stock
issued to persons which are at the time of such grant subject to Section 16
of the Securities Exchange Act of 1934 with respect to the Company, (i) no
Option may be exercised in whole or in part during the six months after such
Option is granted, and (ii) the Company common stock acquired under this
Plan shall not be sold for at least six months after acquisition.
(b) Subject to the provisions of Sections 4.3(a), 4.3(c) and 7.3,
Options shall become exercisable at such times and in such installments
(which may be cumulative) as the Committee shall provide in the terms of
each individual Option; provided, however, that by a resolution adopted
after an Option is granted the Committee may, on such terms and conditions
as it may determine to be appropriate and subject to Sections 4.3(a), 4.3(c)
and 7.3, accelerate the time at which such Option or any portion thereof may
be exercised, and provided further, that no less than 20% of each Option
shall vest and be exerciseable on each anniversary of the granting thereof.
(c) No portion of an Option which is unexercisable at Termination of
Employment shall thereafter become exercisable.
4
<PAGE>
Section 4.4 - Expiration of Options
- ----------- ---------------------
(a) No Incentive Stock Option may be exercised to any extent by
anyone after the first to occur of the following events:
(i) The later of the expiration of ten years from the date the
Option was granted (five years if the Optionee holds at the time of grant
10% or more of the Company's Common Stock) or the expiration of three years
from the date of the Optionee's death; or
(ii) Except in the case of any Optionee who is disabled (within
the meaning of Section 22(e)(3) of the Code), the expiration of three months
from the date of the Optionee's Termination of Employment for any reason
other than such Optionee's death unless the Optionee dies within said three-
month period; or
(iii) In the case of an Optionee who is disabled (within the
meaning of Section 22(e)(3) of the Code), the expiration of three years from
the date of the Optionee's Termination of Employment for any reason other
than such Optionee's death unless the Optionee dies within said three-year
period.
(b) Subject to the provisions of Section 4.5(a), the Committee shall
provide, in the terms of each individual Option, when such Option expires
and becomes unexercisable; and (without limiting the generality of the
foregoing) the Committee may provide in the terms of individual Options that
said Options expire immediately upon a Termination of Employment for any
reason.
Section 4.5 - Accelerated Ownership Non-Qualified Options
- ----------- -------------------------------------------
The committee may determine at the time of granting any Non-Qualified
Option that such option should be an Accelerated Ownership Non-Qualified
Stock Option ("AO Option). AO Options shall have the same terms as Non-
Qualified Options, except that should an Optionee exercise his or her AO
Option, in whole or part, by delivering shares of the Company's Common Stock
pursuant to Section 5.3 (b)(ii) (provided such shares have been held by
Optionee for more than six months) the Optionee is thereby automatically
granted an additional AO Option or Options, at the fair market value as of
the date of the original AO Option grant, for a number of shares of Company
Common Stock equal to the sum of the whole shares used by Optionee in
payment of the Option price and the number of whole shares, if any, withheld
by the Company pursuant to Section 5.7. The additional AO Option shall be
exercisable at any time from the date of grant to the expiration date of the
Option to which the AO Option is related.
Section 4.6 - Reservation of Rights
- ----------- ---------------------
Nothing in this Plan or in any Stock Option Agreement hereunder shall
confer upon any Employee-Optionee any right to continue in the employ of the
Company or shall interfere with or restrict in any way the rights of the
Company, which are hereby expressly reserved, to discharge any Optionee at
any time for any reason whatsoever, with or without cause.
Section 4.7 - Adjustments in Outstanding Options
- ----------- ----------------------------------
In the event that the outstanding shares of the stock subject to Options
are changed into or exchanged for a different number or kind of shares of
the Company or other securities of the Company by reason of merger,
consolidation, recapitalization, reclassification, stock split-up, stock
dividend, or combination of shares, the Committee shall make an appropriate
and equitable adjustment in the number and kind of shares as to which all
outstanding Options, or portions thereof then unexercised, shall be
exercisable, to the end that after such event the Optionee's proportionate
interest shall be maintained as before the occurrence of such event. Such
adjustment in an outstanding Option shall be made without change in the
total price applicable to the Option or the unexercised portion of the
Option (except for any change in the aggregate price resulting from
rounding-off of share quantities or prices) and with any necessary
corresponding adjustment in Option price per share; provided, however, that,
in the case of Incentive Stock Options, each such adjustment shall be made
in such manner as not to constitute a "modification" within the meaning of
Section 424(h)(3) of the Code. Any such adjustment made by the Committee
shall be final and binding upon all Optionees, the Company and all other
interested persons.
5
<PAGE>
Section 4.8 - Merger, Consolidation, Acquisition, Liquidation or Dissolution
- ----------- --------------------------------------------------------------
The Committee shall provide by the terms of each Option that, upon or in
connection with the merger or consolidation of the Company with or into
another corporation, the acquisition by another corporation or person of all
or substantially all of the Company's assets or 80% or more of the Company's
then outstanding voting stock or the liquidation or dissolution of the
Company, such Option shall be assumed or an equivalent option substituted by
any successor corporation of the Company. The Committee may also, in its
absolute discretion and on such terms and conditions as it deems
appropriate, provide, either by the terms of such Option or by a resolution
adopted prior to the occurrence of such merger, consolidation, acquisition,
liquidation, or dissolution, that, for some period of time prior to such
event, such Option shall be exercisable as to all shares covered thereby,
notwithstanding anything to the contrary in Section 4.3(a), Section 4.3(b),
and/or any installment provisions of such Option.
Section 4.9 - Stock Appreciation Rights
- ----------- -------------------------
Stock appreciation rights may be granted, at the discretion of the
Committee, separately or concurrently with the grant of any option granted
under the Plan ("Companion Grant"). A stock appreciation right shall extend
to all or a portion of the shares covered by the Companion Grant. If a
stock appreciation right extends to less than all the shares covered by the
Companion Grant and if a portion of the option contained in the Companion
Grant is thereafter exercised, the number of shares subject to the
unexercised stock appreciation right shall be reduced only if and to the
extent that the remaining portion of the Option contained in the Companion
Grant covers fewer shares than the unexercised stock appreciation right
would otherwise cover. A stock appreciation right shall entitle the
Optionee (subject to the conditions and limitations set forth below), under
surrender of a then exercisable portion of the Option contained in the
Companion Grant (subject to the maximum number of shares to which the stock
appreciation right extends), to receive payment of an amount determined
pursuant to subparagraph (b) of the following paragraph.
Stock appreciation rights shall be subject to the following terms and to
such other terms and conditions not Inconsistent with the Plan as the
Committee may determine:
(a) A stock appreciation right shall be exercisable by the Optionee
only at such time or times, and to the extent, that the Option contained in
the Companion Grant could have been exercised and only when the fair market
value of the stock subject to the Option contained in the Companion Grant
exceeds the exercise price of such option.
(b) Upon exercise of the stock appreciation right and surrender of
an exercisable portion of the Option contained in the Companion Grant, the
Optionee shall be entitled to receive payment of an amount (subject to (d)
below) determined by multiplying the difference obtained by subtracting the
option exercise price per share of Common Stock subject to the Companion
Grant from the fair market value of a share of Common Stock on the date of
exercise of the stock appreciation right, by the number of shares with
respect to which the stock appreciation right is exercised.
(c) The Committee, at its sole discretion, may settle the amount
determined in subparagraph (b) above solely in cash, solely in shares of
Common Stock (valued as determined in subparagraph (b) above), or partly in
such shares and partly in cash; provided, however, that in any event cash
shall be paid in lieu of fractional shares.
(d) The maximum amount per share which will be payable upon exercise
of a stock appreciation right shall be the option exercise price of the
Option contained in the Companion Grant.
(e) An Optionee may exercise a stock appreciation right only during
the third through twelfth business day following the Company's regular
public release of quarterly or annual financial summary statements of sales
and earnings.
6
<PAGE>
Section 4.10 - Restricted Stock
- ------------ ----------------
Restricted Stock may be granted, at the discretion of the Committee,
separately or concurrently with the grant of any option under the Plan. In
any grant of Restricted Stock, the Committee may determine the time and/or
events which shall cause the Restricted Stock to vest and cease to be
forfeitable. If Restricted Stock is granted on conjunction with any option,
the Restricted Stock shall be canceled, on a share by share basis, upon
exercise of the related option, and the option will likewise terminate upon
vesting of the Restricted Stock. Restricted Stock may not be issued in
connection with Incentive Stock Options.
ARTICLE V
EXERCISE OF OPTIONS
Section 5.1 - Person Eligible to Exercise
- ----------- ---------------------------
During the lifetime of the Optionee, only he or she or a legal
representative thereof may exercise an Option granted to him or her, or any
portion thereof. After the death of the Optionee, any exercisable portion
of an Option may, prior to the time when such portion becomes unexercisable
under Section 4.4 or Section 4.7, be exercised by his or her personal
representative or by any person empowered to do so under the deceased
Optionee's will or under the then applicable laws of descent and
distribution.
Section 5.2 - Partial Exercise
- ----------- ----------------
At any time and from time to time prior to the time when any exercisable
Option or exercisable portion thereof becomes unexercisable under Section
4.4 or Section 4.7, such Option or portion thereof may be exercised in whole
or in part; provided, however that the Company shall not be required to
issue fractional shares and the Committee may, by the terms of the Option,
require any partial exercise to be with respect to a specified minimum
number of shares.
Section 5.3 - Manner of Exercise
- ----------- ------------------
An exercisable Option, or any exercisable portion thereof, may be
exercised solely by delivery to the Secretary or his office of all of the
following prior to the time when such Option or such portion becomes
unexercisable under Section 4.4 or Section 4.7:
(a) Notice in writing signed by the Optionee or other person then
entitled to exercise such Option or portion, stating that such Option or
portion is exercised, such notice complying with all applicable rules
established by the Committee; and
(b) (i) Full payment (in cash or by check) for the shares with
respect to which such Option or portion is thereby exercised; or
(ii) Shares of any class of the Company's stock owned by the
Optionee duly endorsed for transfer to the Company with a fair market value
(as determinable under Section 4.2(b)) on the date of delivery equal to the
aggregate Option price of the shares with respect to which such Option or
portion is thereby exercised; or
(iii) With the consent of the Committee, a full recourse
promissory note bearing interest (at least such rate as shall then preclude
the imputation of interest under the Code or any successor provision) and
payable upon such terms as may be prescribed by the Committee. The
Committee may also prescribe the form of such note and the security to be
given for such note. No Option may, however, be exercised by delivery of a
promissory note or by a loan from the Company when or where such loan or
other extension of credit is prohibited by law; or
7
<PAGE>
(iv) Any combination of the consideration provided in the
foregoing subsections (i), (ii), and (iii); and
(c) Such representations and documents as the Committee, in its
absolute discretion, deems necessary or advisable to effect compliance with
all applicable provisions of the Securities Act and any other federal or
state securities laws or regulations. The Committee may, in its absolute
discretion, also take whatever additional actions it deems appropriate to
effect such compliance Including, without limitation, placing legends on
share certificates and issuing stop-transfer orders to transfer agents and
registrars; and
(d) In the event that the Option or portion thereof shall be
exercised pursuant to Section 5.1 by any person or persons other than the
Optionee, appropriate proof of the right of such person or persons to
exercise the Option or portion thereof.
Section 5.4 - Conditions to Issuance of Stock Certificates
- ----------- --------------------------------------------
The shares of stock issuable and deliverable upon the exercise of an
Option, or any portion thereof, may be either previously authorized but
unissued shares or issued shares which have then been reacquired by the
Company. The Company shall not be required to issue or deliver any
certificate or certificates for shares of stock purchased upon the exercise
of any Option or portion thereof prior to fulfillment of all of the
following conditions:
(a) The completion of any registration or other qualification of
such shares under any state or federal law or under the rulings or
regulations of the Securities and Exchange Commission or any other
governmental regulatory body, which the Committee shall, in its absolute
discretion, deem necessary or advisable; and
(b) The obtaining of any approval or other clearance from any state
or federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable; and
(c) The payment to the Company of all amounts which it is required
to withhold under federal, state, or local law in connection with the
exercise of the Option; and
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee may establish from time to time for
reasons of administrative convenience.
Section 5.5 - Rights as Shareholders
- ----------- ----------------------
The holders of Options shall not be, nor have any of the rights or
privileges of, shareholders of the Company in respect of any shares
purchasable upon the exercise of any part of an Option unless and until
certificates representing such shares have been issued by the Company to
such holders.
Section 5.6 - Transfer Restrictions
- ----------- ---------------------
The Committee, in its absolute discretion, may impose such restrictions
on the transferability of the shares purchasable upon the exercise of an
Option as it deems appropriate. Any such restriction shall be set forth in
the respective Stock Option Agreement and may be referred to on the
certificates evidencing such shares. The Committee may require the
Director, Officer, or Employee to give the Company prompt notice of any
disposition of shares of stock, acquired by exercise of an Incentive Stock
Option, within two years from the date of granting such Option or one year
after the transfer of such shares to such Director, Officer, or Employee.
The Committee may direct that the certificates evidencing shares acquired by
exercise of an Option refer to such requirement to give prompt notice of
disposition.
Section 5.7 - Withholding Tax
- ----------- ---------------
Should any amount be required to be withheld for payment of taxes under
the code from an Optionee with respect to the exercise of any Option,
Optionee in his or her discretion may pay such withholding tax in shares of
the Company's common stock, at the fair market value of such common stock on
the date of payment.
8
<PAGE>
Section 5.8 - Reports
- ----------- -------
The Company shall provide to each Optionee a copy of the Company's annual
report when released to the Company's stockholders.
ARTICLE VI
ADMINISTRATION
Section 6.1 - Stock Option Committee
- ----------- ----------------------
The Stock Option Committee shall consist of at least two Directors,
appointed by and holding office at the pleasure of the Board. Appointment
of Committee members shall be effective upon acceptance of appointment.
Committee members may resign at any time by delivering written notice to the
Board. Vacancies in the Committee shall be filled by the Board.
After the Company's common stock becomes registered under the Securities
Exchange Act of 1934, as amended, unless otherwise provided by the Board of
Directors, no Options, stock appreciation rights or Restricted Stock may be
granted to any member of the Stock Option Committee. No person shall be
eligible to serve on the Stock Option Committee unless he is then a
"disinterested person" within the meaning of Rule 16b-3 which has been
adopted by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, if and as such Rule is then in effect. This paragraph
may be waived for successive six (6) month periods by the Board of
Directors.
Section 6.2 - Duties and Powers of Committee
- ----------- ------------------------------
It shall be the duty of the Committee to conduct the general
administration of the Plan in accordance with its provisions. The Committee
shall have the power to interpret the Plan and the Options and to adopt or
amend such rules for the administration, interpretation and application of
the Plan as are consistent therewith and to interpret, amend or revoke any
such rules. The Committee may accelerate the exercise date of any option
and determine the right of any person to exercise the rights on behalf of
any Optionee. Any such interpretations and rules in regard to Incentive
Stock Options shall be consistent with the basic purpose of the Plan to
grant "Incentive stock options" within the meaning of Section 422 of the
Code. In its absolute discretion, the Board may at any time and from time
to time exercise any and all rights and duties of the Committee under the
Plan.
Section 6.3 - Majority Rule
- ----------- -------------
The Committee shall act by a majority of its members in office. The
Committee may act either by vote at a meeting or by a memorandum or other
written instrument signed by a majority of the Committee.
Section 6.4 - Compensation; Professional Assistance; Good Faith Actions
- ----------- ---------------------------------------------------------
Members of the Committee shall receive such compensation for their
services as members as may be determined by the Board. All expenses and
liabilities Incurred by members of the Committee in connection with the
administration of the Plan shall be borne by the Company. The Committee
may, with the approval of the Board, employ attorneys, consultants,
accountants, appraisers, brokers, or other persons. The Committee, the
Company and its Officers and Directors shall be entitled to rely upon the
advice, opinions, or valuations of any such persons. All actions taken and
all interpretations and determinations made by the Committee in good faith
shall be final and binding upon all Optionees, the Company, and all other
interested persons. No member of the Committee shall be personally liable
for any action, determination, or interpretation made in good faith with
respect to the Plan or the Options, and all members of the Committee shall
be fully protected by the Company in respect to any such action,
determination, or interpretation.
9
<PAGE>
ARTICLE VII
OTHER PROVISIONS
Section 7.1 - Options Not Transferable
- ----------- ------------------------
No Option or interest or right therein or part thereof shall be liable
for the debts, contracts, or engagements of the Optionee or his successors
in interest or shall be subject to disposition by transfer, alienation, or
any other means whether such disposition be voluntary or involuntary or by
operation of law, by judgment, levy, attachment, garnishment, or any other
legal or equitable proceedings (Including bankruptcy), and any attempted
disposition thereof shall be null and void and of no effect; provided,
however, that nothing in this Section 7.1 shall prevent transfers by will or
by the applicable laws of descent and distribution.
Section 7.2 - Amendment, Suspension or Termination of the Plan
- ----------- ------------------------------------------------
The Plan may be wholly or partially amended or otherwise modified,
suspended or terminated at any time or from time to time by the Board or the
Committee. Neither the amendment, suspension, nor termination of the Plan
shall, without the consent of the holder of the Option, alter or impair any
rights or obligations under any Option theretofore granted. No Option may
be granted during any period of suspension nor after termination of the
Plan, and in no event may any Option be granted under this Plan after the
first to occur of the following events:
(a) The expiration of ten years from the date the Plan is adopted;
or
(b) The expiration of ten years from the date the Plan is approved
by the Company's shareholders under Section 7.3.
Section 7.3 - Approval of Plan by Shareholders
- ----------- --------------------------------
This Plan will be submitted for the approval of the Company's
shareholders within 12 months after the date of the Board's initial adoption
of the Plan. Incentive Stock Options may be granted prior to such
shareholder approval; provided, however, that such Incentive Stock Options
shall not be exercisable prior to the time when the Plan is approved by the
shareholders; provided, further, that if such approval has not been obtained
at the end of said 12-month period, all Incentive Stock Options previously
granted under the Plan shall thereupon be canceled and become null and void.
Section 7.4 - Effect of Plan Upon Other Option and Compensation Plans
- ----------- -------------------------------------------------------
The adoption of this Plan shall not affect any other compensation or
Incentive plans in effect for the Company. Nothing in this Plan shall be
construed to limit the right of the Company (a) to establish any other forms
of Incentives or compensation for employees of the Company or (b) to grant
or assume options otherwise than under this Plan in connection with any
proper corporate purpose, Including, but not by way of limitation, the grant
or assumption of options in connection with the acquisition by purchase,
lease, merger, consolidation, or otherwise of the business, stock, or assets
of any corporation, firm, or association.
Section 7.5 - Titles
- ----------- ------
Titles are provided herein for convenience only and are not to serve as a
basis for interpretation or construction of the Plan.
10
<PAGE>
* * * *
I hereby certify that the foregoing Plan was duly adopted by the Board of
Directors and Stockholders of Physical Spa & Fitness Inc. on April 23, 1997.
Darrie Lam
Secretary
Corporate Seal
* * * *
11
<PAGE>
1997 STOCK OPTION PLAN OF PHYSICAL SPA & FITNESS INC.
STOCK OPTION AGREEMENT
This Stock Option Agreement (the "Agreement") is made by and between
Physical Spa & Fitness Inc., a Delaware corporation (the "Company"),
and_____________(the "Optionee") as of the date set forth on the signature
page hereto.
RECITALS
A. The Board of Directors of the Company (the "Board") has
established the 1997 Stock Option Plan of the Company (the "Plan"), for the
purpose of providing to Employees and Directors of the Company and others an
opportunity to acquire shares of the Company's $.001 par value common stock
(the "Shares"); and
B. The Board of Directors or the Stock Option Committee of the
Company's Board of Directors (the "Committee") appointed to administer the
Plan has determined that it would be to the advantage and best interest of
the Company and its shareholders to grant the non-qualified stock option,
Incentive stock option or restricted stock grant provided for herein (the
"Option") to the Optionee as an inducement to remain in the service of the
Company and as an Incentive for Increased efforts during such service, and
has advised the Company thereof and instructed it to issue the Option.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever the following terms are used in this Agreement, they shall have
the meaning specified below unless the context clearly indicates to the
contrary. Capitalized terms used herein and not otherwise defined shall
have the meaning set forth in the Plan. The masculine pronoun shall Include
the feminine and neuter, and the singular the plural, where the context so
indicates.
Section 1.1 - Code
- ----------- ----
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Section 1.2 - Company
- ----------- -------
"Company" shall mean Physical Spa & Fitness Inc. In addition, "Company"
shall mean any corporation assuming, or issuing new employee stock options
in substitution for the Option and Incentive Stock Options (as defined in
Section 1.7 of the Plan), outstanding under the Plan, in a transaction to
which Section 425(a) of the Code applies.
Section 1.3 - Option
- ----------- ------
"Option" shall mean the option to purchase $.001 par value common stock
of the Company granted under this Agreement.
Section 1.4 - Plan
- ----------- ----
"Plan" shall mean the 1997 Stock Option Plan of the Company.
1
<PAGE>
Section 1.5 - Secretary
- ----------- ---------
"Secretary" shall mean the Secretary of the Company.
Section 1.6 - Securities Act
- ----------- --------------
"Securities Act" shall mean the Securities Act of 1933, as amended.
ARTICLE II
GRANT OF OPTION
Section 2.1 - Grant of Option
- ----------- ---------------
In consideration of the Optionee's agreement to render faithful and
efficient services to the Company and for other good and valuable
consideration, on the date set forth on the Signature Page hereof (the "Date
of Grant"), the Company irrevocably grants to the Optionee the option to
purchase any part or all of an aggregate of the number of Shares set forth
on the Signature Page hereof and upon the terms and conditions set forth in
this Agreement.
Section 2.2 - Purchase Price
- ----------- --------------
The purchase price of the Shares covered by the Option shall be the
amount set forth on the Signature Page hereof and shall be without
commission or other charge (the "Purchase Price").
Section 2.3 - Reservation of Rights
- ----------- ---------------------
Nothing in the Plan or in this or any Stock Option Agreement shall confer
upon the Optionee any right to continue in the employ of the Company or any
Subsidiary or shall interfere with or restrict in any way the rights of the
Company and its Subsidiaries, which are hereby expressly reserved, to
discharge the Optionee at any time for any reason whatsoever, with or
without cause.
Section 2.4 - Adjustments in Option
- ----------- ---------------------
In the event that the outstanding Shares subject to the Option are
changed into or exchanged for a different number or kind of shares of the
Company or other securities of the Company by reason of merger,
consolidation, recapitalization, reclassification, stock split up, stock
dividend, or combination of shares, the Committee shall make an appropriate
and equitable adjustment in the number and kind of shares as to which the
Option, or portions thereof then unexercised, shall be exercisable, to the
end that after such event the Optionee's proportionate interest shall be
maintained as before the occurrence of such event. Such adjustment in the
Option shall be made without change in the total price applicable to the
unexercised portion of the Option (except for any change in the aggregate
price resulting from rounding-off of share quantities or prices) and with
any necessary corresponding adjustment in the Purchase Price. Any such
adjustment made by the Committee shall be final and binding upon the
Optionee, the Company, the Subsidiaries and all other interested persons.
2
<PAGE>
ARTICLE III
PERIOD OF EXERCISABILITY
Section 3.1 - Commencement of Exercisability
- ----------- ------------------------------
(a) The Option shall become exercisable in cumulative installments
as set forth on the signature page hereto.
(b) Excluding Saturdays, Sundays, and nationally recognized
holidays, if the Optionee is absent from employment for any reason other
than vacation for an aggregate period exceeding sixty (60) days during the
annual period between the Date of Grant and the First Anniversary Date or
any successive Anniversary Date and the following Anniversary Date, then the
latter Anniversary Date shall be postponed by the number of all such days of
absence. This paragraph (b) shall not apply to Optionees who are Directors
but not Employees of the Company.
Section 3.2 - Duration of Exercisability
- ----------- --------------------------
The installments provided for in Section 3.1 are cumulative. Each such
installment which becomes exercisable pursuant to Section 3.1 shall remain
exercisable until the expiration date set forth on the signature page of
this Agreement or until it becomes unexercisable under the Plan, whichever
is sooner.
Section 3.3 - Assumption of Option; Acceleration of Exercisability
- ----------- ----------------------------------------------------
In the event of the merger or consolidation of the Company with or into
another corporation, or the acquisition by another corporation or person of
all or substantially all of the Company's assets or eighty percent (80%) or
more of the Company's then outstanding voting stock, or the liquidation or
dissolution of the Company, such Option shall be assumed or an equivalent
option substituted by any successor corporation of the Company. The Company
undertakes to make reasonable and adequate provision for such assumption or
substitution of the Option upon or in connection with such merger,
consolidation, acquisition, liquidation, or dissolution. The Committee may
also, in its absolute discretion and upon such terms and conditions as it
deems appropriate, by resolution adopted prior to such event, provide that
at some time prior to the effective date of such event this Option shall be
exercisable as to all of the Shares covered hereby, notwithstanding that
this Option may not yet have become fully exercisable under Section 3.1.
Section 3.4 - Option Not Transferable
- ----------- -----------------------
Neither the Option nor any interest or right therein or part thereof
shall be liable for the debts, contracts, or engagements of the Optionee or
his successors in interest or shall be subject to disposition by transfer,
alienation, anticipation, pledge, encumbrance, assignment, or any other
means whether such disposition be voluntary or involuntary or by operation
of law, by judgment, levy, attachment, garnishment or any other legal or
equitable proceedings (Including bankruptcy), and any attempted disposition
thereof shall be null and void and of no effect; provided, however, that
this Section 3.5 shall not prevent transfers by will or by the applicable
laws of descent and distribution.
3
<PAGE>
ARTICLE IV
EXERCISE OF OPTION
Section 4.1 - Person Eligible to Exercise
- ----------- ---------------------------
During the lifetime of the Optionee, only he or she may exercise the
Option or any portion thereof. After the death of the Optionee, any
exercisable portion of the Option may, prior to the time when the Option
becomes unexercisable, be exercised by his or her personal representative or
by any person empowered to do so under the Optionee's will or under the then
applicable laws of descent and distribution.
Section 4.2 - Partial Exercise
- ----------- ----------------
Any exercisable portion of the Option or the entire Option, if then
wholly exercisable, may be exercised in whole or in part at any time prior
to the time when the Option or portion thereof becomes unexercisable under
the Plan; provided, however, that each partial exercise shall be for not
less than one hundred (100) Shares (or minimum installment set forth in
Section 3.1, if a smaller number of Shares) and shall be for whole Shares
only.
Section 4.3 - Manner of Exercise
- ----------- ------------------
The Option, or any exercisable portion thereof, may be exercised solely
by delivery to the Secretary or the Secretary's office of all of the
following prior to the time when the Option or such portion becomes
unexercisable under the Plan:
(a) Notice in writing signed by the Optionee or the other person
then entitled to exercise the Option or portion thereof, stating that the
Option or portion thereof is thereby exercised, such notice complying with
all applicable rules established by the Committee; and
(b) (i) Full payment (in cash or by check) for the Shares with
respect to which such Option or portion is exercised; or
(ii) Shares of any class of the Company's stock owned by the
Optionee duly endorsed for transfer to the Company with a fair market value
on the date of delivery equal to the aggregate Option price of the Shares
with respect to which such Option or portion is thereby exercised; or
(iii) With the consent of the Committee, a full recourse
promissory note bearing interest (at least such rate as shall then preclude
the imputation of interest under the Code or any successor provision) and
payable upon such terms as may be prescribed by the Committee. The
Committee may also prescribe the form of such note and the security to be
given for such note. No Option may, however, be exercised by delivery of a
promissory note or by a loan from the Company when or where such loan or
other extension of credit is prohibited by law; or
(iv) Any combination of the consideration provided in the
foregoing subsections (i), (ii), and (ii); and
(c) Full payment to the Company of all amounts which, under federal,
state or local law, it is required to withhold upon exercise of the Option;
and
(d) In the event the Option or portion thereof shall be exercised
pursuant to Section 4.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise the
Option.
4
<PAGE>
Section 4.4 - Conditions to Issuance of Stock Certificates
- ----------- --------------------------------------------
The Shares deliverable upon the exercise of the Option, or any portion
thereof, may be either previously authorized but unissued Shares or issued
Shares which have then been reacquired by the Company. Such Shares shall be
fully paid and non-assessable. The Company shall not be required to issue
or deliver any certificate or certificates for Shares purchased upon the
exercise of the Option or portion thereof prior to fulfillment of all of the
following conditions:
(a) The completion of any registration or other qualification of
such Shares under any state or federal law or under rulings or regulations
of the Securities and Exchange Commission or of any other governmental
regulatory body, which the Committee shall, in its absolute discretion, deem
necessary or advisable;
(b) The obtaining of any approval or other clearance from any state
or federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable;
(c) The payment to the Company of all amounts which, under federal,
state, or local law, it is required to withhold upon exercise of the Option;
and
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee may from time to time establish for
reasons of administrative convenience.
It is understood that the Shares deliverable upon exercise of the Option
have been registered under the Securities Act, and the Company shall use its
best efforts to keep such registration current.
Section 4.5 - Rights as Stockholder
- ----------- ---------------------
The holder of the Option shall not be, nor have any of the rights or
privileges of, a stockholder of the Company in respect of any Shares
purchasable upon the exercise of any part of the Option unless and until
certificates representing such Shares shall have been issued by the Company
to such holder.
5
<PAGE>
ARTICLE V
OTHER PROVISIONS
Section 5.1 - Administration
- ----------- --------------
The Committee shall have the power to interpret the Plan and this
Agreement and to adopt such rules for the administration, interpretation and
application of the Plan as are consistent therewith and to interpret or
revoke any such rules. All actions taken and all interpretations and
determinations made by the Committee or the Special Committee in good faith
shall be final and binding upon the Optionee, the Company, the Subsidiaries
and all other interested persons. No member of the Committee or the Special
Committee shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or the Option.
In its absolute discretion, the Board may at any time and from time to time
exercise any and all rights and duties of the Committee under the Plan and
this Agreement.
Section 5.2 - Shares to Be Reserved
- ----------- ---------------------
The Company shall at all times during the term of the Option reserve and
keep available such number of Shares as will be sufficient to satisfy the
requirements of this Agreement.
Section 5.3 - Notices
- ----------- -------
Any notice to be given under the terms of this Agreement to the Company
shall be addressed to the Company in care of its Secretary, and any notice
to be given to the Optionee shall be addressed to him or her at the address
set forth on the Signature Page hereof. By a notice given pursuant to this
Section 5.3, either party may hereafter designate a different address for
delivery of notices. Any notice which is required to be given to the
Optionee shall, if the Optionee is then deceased, be given to the Optionee's
personal representative if such representative has previously informed the
Company of his status and address by written notice under this Section 5.3.
Any notice shall be deemed duly given when enclosed in a properly sealed
envelope or wrapper addressed as aforesaid and deposited (with postage
prepaid) in a post office or branch post office regularly maintained by the
United States Postal Service.
Section 5.4 - Titles
- ----------- ------
Titles are provided herein for convenience only and are not to serve as a
basis for interpretation or construction of this Agreement.
Section 5.5 - Construction
- ----------- ------------
This Agreement shall be administered, interpreted, and enforced under the
laws of the State of Delaware.
6
<PAGE>
SIGNATURE PAGE
1997 STOCK OPTION PLAN OF PHYSICAL SPA & FITNESS INC.
____ Incentive Stock Option
____ In tandem with stock appreciation right
____ No stock appreciation right
____ Non-Qualified Option
____ AO Option
____ In tandem with stock appreciation right
____ No stock appreciation right
____ In tandem with Restricted Stock
____ No Restricted Stock
____ Restricted stock grant without accompanying option
Purchase Price: ____
Number of Shares: ____
Vesting: Immediate as to the entire option.
Expiration: ____
I have read the Stock Option Agreement indicated above which was adopted
for use in connection with the 1997 Stock Option Plan. As Optionee, I
hereby agree to all of the terms of the Agreement.
Date of Grant: ____________ ___________________________________________
Optionee Name
___________________________________________
____________________________________________
Address
Optionee Social Security Number or Taxpayer
Identification Number:
____________________________________________
____________________________________________
Optionee Signature
The Company hereby agrees to all of the terms of the Agreement.
Physical Spa & Fitness Inc.
By:
Its:
<PAGE>
EXHIBIT 22
Subsidiaries of the Registrant
* Physical Beauty & Fitness Holdings Limited
* Physical Health Centre Hong Kong, Ltd.
* Regent Town Holdings Ltd.
* Mighty System Ltd.
* Supreme Resources Ltd.
* Physical Health Centre (Zhong Shan) Ltd.
* Zhongshan Physical Ladies' Club, Ltd.
* Ever Growth Ltd.
* Proline Holdings Ltd.
* Shanghai Physical Ladies' Club Company Ltd.
* Shanghai Physical Ladies' Club Co., Ltd.
* Jade Regal Holdings Ltd.
* Physical Health Centre (Dalian) Ltd.
* Dalian Physical Ladies' Club Co. Ltd.
* Star Perfection Holdings Ltd.
* Physical Health Centre (Shenzhen) Ltd.
* Shenzhen Physical Ladies' Club Company Ltd.
* Physical Health Centre (Tsuen Wan) Limited
* Physical Health Centre (Macau) Limited
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<SECURITIES> 0
<RECEIVABLES> 844
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<NET-INCOME> 1522
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
