<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 10, 1998
REGISTRATION NO. 333-38697
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
AMENDMENT NO. 3
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------
PHYSICAL SPA & FITNESS INC.
(Name of small business issuer in its charter)
---------------------
DELAWARE 13-1026995
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7997
(Primary Standard Industrial
Classification Code Number)
---------------------
12/F - 15/F Lee Theatre Plaza 12/F - 15/F 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.
Law Offices of Iwona J. Alami
120 Newport Center Drive, Suite 200
Newport Beach, CA 92660
Robert P. Abdo, Esq.
Abdo & Abdo, P.A.
710 N. Star West, 625 Marquette
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 SECURITIES TO BE SECURITIES PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AMOUNT OF
REGISTERED TO BE REGISTERED(1)(2) PRICE)PER SHARE (1) AGGREGATE OFFERING REGISTRATION FEE
PRICE(1)(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value 431,250 $4.00 $1,725,000.00 $522.73
Common Stock, $0.001 par value offered by 67,000 $4.00 $268,000.00 81.21
selling shareholders
Representative's Common Stock Purchase 43,125 $0.001 $43.125 $0.01
Warrants (3)
Common Stock, $0.001 par value, 43,125 $4.80 $207,000.00 $62.72
underlying Representative's Common Stock
Purchase Warrants, $4.80 exercise price (4)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $2,200,043.125 666.67
- ------------------------------------------------------------------------------------------------------------------------------------
</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) Represents Common Stock Purchase Warrants issuable to the Representative
("Representative Warrants") 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".
(4) Represents Common Stock issuable upon exercise of the Representative
Warrants. 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.
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 Management's Discussion and Analysis of
Plan of Operation ..............................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 .........................Total 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 __________, 1998
PHYSICAL SPA & FITNESS INC.
442,000 SHARES COMMON STOCK
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 an initial offering price of $4.00 per
share; the 67,000 shares of Common Stock of the Company are being offered by a
certain selling shareholder (the "Selling Shareholder"; see "Principal and
Selling Shareholder") for an offering price of $4.00 per share (collectively,
the "Offering"). See "Plan of Distribution" for a discussion of the factors to
be considered in determining the initial offering price. See "Description of
Securities--Common Stock." The Company will not receive any of the proceeds from
the sale of the shares by Selling Shareholder. Selling Shareholder will be
responsible for his own selling expenses. No shares of Common Stock of Selling
Shareholder will be sold to the public in this Offering until a maximum of
375,000 shares of Common Stock 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 under the
proposed symbol: "PFIT" (Common Stock), 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) Shareholder (1)(2)(3)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share $4.00 $.40 $3.60 $3.60
Total (3) $1,500,000 $150,000 $1,350,000 $241,200
</TABLE>
(FOOTNOTES CONTINUED ON THE FOLLOWING PAGE)
<PAGE>
GLOBAL FINANCIAL GROUP
THE DATE OF THIS PROSPECTUS IS __________, 1998
* The assumed initial public offering price. The Company currently
anticipates that the actual initial public offering price will be
between $4.00 and $7.00 per share. See "Plan of Distribution" for
discussion of the factors to be considered in determining the initial
public offering price.
(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 $45,000 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 ") 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. 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 $326,672 ($355,922) if the
Representative's over- allotment option for the Shares is exercised in
full), for estimated net proceeds to the Company of $1,173,328
($1,369,078 if the Representative's over-allotment option is exercised
in full). Total expenses of the Selling Shareholder in this Offering
should approximate $34,840 for the estimated net proceeds to the Selling
Shareholder of $233,160.
(3) Assumes sale of the maximum offering of 375,000 Shares ("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 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
option for the shares of Common Stock, will not be exercised. If the
over-allotment option is exercised in full, the price of the Common
Stock to the public would be $1,725,000; the Selling Agent's discounts
to the Company would be $172,500; the Proceeds to the Issuer would be
$1,552,500. If the over-allotment option for the shares of Common Stock
is exercised, the Representative shall be entitled to additional
compensation of Representative Warrants. See "Plan of Distribution".
The Shares 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 ("Maximum Offering") are sold herein by August 15, 1998, which period may
be extended for up to an additional 30 days by the Company and the Selling Agent
(the "Offering Period"). All the funds received from the sale of the Shares will
be deposited with Bank Windsor, as the escrow agent, which agreed to hold such
funds in escrow for the subscribers in this Offering, and to transmit all such
funds to the Company (less applicable commissions and fees, if any) when the
Maximum Offering is 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. Selling Shareholder will be responsible for his
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 ..................................................................6
USE OF PROCEEDS ..............................................................15
DILUTION ....................................................................17
PRICE RANGE OF SECURITIES ....................................................18
DIVIDEND POLICY...............................................................18
CAPITALIZATION ...............................................................19
SELECTED FINANCIAL DATA ......................................................20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ............................................22
BUSINESS OF THE COMPANY ......................................................29
GENERAL ..............................................................29
ORGANIZATION .........................................................29
OWNERSHIP STRUCTURES IN CHINA ........................................32
OVERVIEW OF THE COMPANY'S MARKETS ....................................33
HISTORY ..............................................................35
BUSINESS STRATEGY ....................................................37
COMPETITION ..........................................................42
TRADEMARKS AND TRADE NAMES ...........................................44
SEASONALITY ..........................................................44
INSURANCE ............................................................44
RESEARCH AND DEVELOPMENT .............................................44
EMPLOYEES ...........................................................45
PROPERTIES ...........................................................46
GOVERNMENT REGULATIONS ..............................................49
MANAGEMENT ..................................................................52
DIRECTORS AND EXECUTIVE OFFICERS ...................................52
EXECUTIVE COMPENSATION .............................................53
INDEMNIFICATION OF DIRECTORS AND OFFICERS ..........................54
EMPLOYMENT AND RELATED AGREEMENTS ..................................55
1997 STOCK OPTION PLAN .............................................55
CERTAIN TRANSACTIONS .........................................................55
PRINCIPAL AND SELLING STOCKHOLDERS ..........................................57
<PAGE>
DESCRIPTION OF SECURITIES ..................................................59
SHARES ELIGIBLE FOR FUTURE SALE .............................................60
TAXATION ...................................................................61
PLAN OF DISTRIBUTION ........................................................64
LEGAL MATTERS ..............................................................65
EXPERTS .....................................................................65
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS .................................66
<PAGE>
PROSPECTUS SUMMARY
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. Based on the number of the Company's facilities members,
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.
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 strong market presence 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, high quality beauty treatments and professional staff.
1
<PAGE>
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 1999,
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 strong presence 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 in
1998 and in Macau in 1999. The Company signed a 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 begin operations in July
1998, in an approximately 50,000 sq. ft. space. The Company is also currently
negotiating the lease for opening a new center in Central Hong Kong. The Central
Center is planned to have operations in an approximately 70,000 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 Central Center in Hong Kong and to pay
the initial lease deposit for the Central Center. There can be no assurance that
the proposed new centers will be opened as currently planned by the Company or
if opened, that they will operate profitably.
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 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 shares of Common Stock to Goodchild Investments
Limited, a British Virgin Islands corporation ("Goodchild"). Goodchild
subsequently disposed of its shares. 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."
2
<PAGE>
The Company effected a 1.333333-for-1 reverse split of its common stock
in October 1997 and a 1-for-1.333333 forward split of its common stock in June
1998. All references in this Prospectus to shares of Common Stock of the Company
have been adjusted for the effects of the reverse stock split and forward stock
split.
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. In addition, the
Selling Agent has been granted an over-allotment
option for an additional 56,250 shares. See
"Description of Securities--Common Stock."
SECURITIES OFFERED BY SELLING
SHAREHOLDER................. 67,000 shares of Common Stock. The Company will
not receive any proceeds from the sale of Common
Stock by the Selling Shareholder. See "Principal
and Selling Shareholders." Selling Shareholder
will be responsible for his 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
offered hereby by the Company are first sold.
OFFERING PRICE OF COMMON
STOCK....................... 4.00 per share
COMMON STOCK OUTSTANDING
PRIOR TO OFFERING........... 10,000,000 shares as of June 10, 1998. See
"Description of Securities."
COMMON STOCK OUTSTANDING
AFTER THE OFFERING.......... 10,375,000 shares. Excludes (i) 56,250 shares of
Common Stock included in the Representative's
over-allotment option for the Shares; (ii) the
number of shares of Common Stock issuable upon
exercise of the Representative's Warrants to be
issued in connection with this Offering, equal to
10% of the Shares sold by the Representative in
this Offering. See "Description of Securities" and
"Plan of Distribution."
WARRANTS TO BE OUTSTANDING
AFTER THE OFFERING.......... None. Excludes Representative's Warrants. See
"Plan of Distribution".
USE OF PROCEEDS............. The estimated net proceeds of $1,173,328, assuming
that the maximum of 375,000 Shares are sold in
this Offering ("Maximum Offering") at an assumed
offering price of $4.00 per share, are intended to
be used for general corporate purposes, including
(i) contribution towards tenant improvement costs
for the Central center and initial lease deposit
for the Central 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.
RISK FACTORS................ The securities offered hereby involve a high
degree of risk and immediate substantial dilution.
See "Risk Factors."
4
<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
December 31, 1995, December 31, 1996, December 31, 1997 and three month periods
ended March 31, 1997 and 1998. 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 three months ended March 31, 1997 and 1998, 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 December 31, Three months ended March 31,
1995 1996 1997 1997 1997 1998 1998
---- ---- ---- ---- ---- ---- ----
HK$ HK$ HK$ US$ HK$ HK$ US$
(audited) (audited) (audited) (unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues $ 85,262 $111,230 $148,954 $ 19,220 $ 23,940 $ 41,553 $ 5,362
Operating Expenses 60,827 79,553 119,722 15,448 23,185 36,971 4,771
Provision for income taxes 4,434 8,398 6,969 899 423 1,063 137
NET INCOME 17,533 21,111 18,466 2,383 28 2,374 306
-------- -------- -------- -------- -------- -------- --------
Net income per share (2)(3) $ 1.75 $ 2.11 $ 1.85 $ 0.24 $ 0.00 $ 0.24 $ 0.03
======== ======== ======== ======== ======== ======== ========
Weighted average number of shares outstanding (3) 10,000 10,000 10,000 10,000 10,000 10,000 10,000
======== ======== ======== ======== ======== ======== ========
</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 Asian Wall Street Journal on March 31, 1998 of US$1.00 =
HK$7.75. No representation is made that the Hong Kong Dollar amounts could
have been, or could be, converted into United States Dollars, at that rate
on March 31, 1998 or at any other certain rate.
(2) The earnings per share are calculated using the common stock and common
stock equivalents, as if the shares existing as of the date of this
Registration Statement had been outstanding throughout periods presented.
(3) 1995 pro-forma. The results were stated as if Physical Limited were a
holding company.
<TABLE>
<CAPTION>
As Adjusted
As of December 31, As of March 31, 1998 (1)(2)
------------------ ------------------- ------
1996 1996 1997 1997 Actual Actual
---- ---- ---- ---- ------ ------
HK$ US$ HK$ US$ HK$ US$ US$
(audited) (audited) (Unaudited)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets $ 47,880 $ 6,178 $ 46,964 $ 6,059 $ 39,880 $ 5,146 $ 6,319
Total assets 117,693 15,186 173,182 22,347 164,657 21,246 22,419
Current liabilities 64,079 8,268 92,634 11,953 80,302 10,362 10,362
Long-term obligations 27,322 3,525 35,731 4,611 37,170 4,796 4,796
Working capital (16,199) (2,090) (45,670) (5,894) (40,422) (5,216) (4,043)
Obligations under finance leases 3,955 510 12,830 1,655 11,692 1,508 1,508
Deferred income taxes 1,451 187 4,574 590 4,574 590 590
Minority interest 4,857 627 6,689 863 6,945 896 896
Shareholders' equity 26,292 3,393 44,817 5,783 47,185 6,088 7,261
</TABLE>
(1) Assumes receipt of net proceeds from the Offering of $1,173,328.
(2) Excludes (i) 56,250 shares of Common Stock included in the Representative's
over-allotment option; (ii) the shares of Common Stock issuable upon exercise of
the Representative's Warrants to be issued in conjunction with this Offering;
and (iii) 500,000 shares of Common Stock reserved for issuance under the
Company's stock option plans. See "Description of Securities" and "Plan of
Distribution".
5
<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. The annual inflation rate in the PRC was approximately 21.7%,
14.8%, 8.3% and 8% in 1994, 1995, 1996 and 1997, respectively. The Company does
not consider that inflation in the PRC has a material impact on its results of
operations in recent years. No assurance can be given that inflation in the PRC
will not have a material adverse effect on the business, financial condition and
results of operations of the Company in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
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".
6
<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:
7
<PAGE>
<TABLE>
NOON BUYING RATE (1)
<CAPTION>
PERIOD PERIOD END (2) AVERAGE (2)(3) HIGH (2) LOW (2)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 8.3184 8.3225 8.3290 8.2911
</TABLE>
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:
<TABLE>
NOON BUYING RATE
<CAPTION>
PERIOD PERIOD END (1) AVERAGE (1)(2) HIGH (1) LOW (1)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 7.7430 7.7449 7.7550 7.7340
</TABLE>
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.
8
<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's agent for process in the United States is Inc.
Plan (USA), 802 West Street, Wilmington, DE 19801.
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.
9
<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".
10
<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 of
8.75%, together with the accrued interest thereon. The outstanding principal
amount of the Loan and accrued interest was HK$10,775,000 (US$1,391,000) as of
December 31, 1997. The remaining outstanding principal amount of the Loan is
secured by a pledge of 1,500,000 shares of common stock of the Company by Mr.
Luk, as collateral for the Loan. In the first quarter of 1998, Mr. Luk made an
advance to the Company of approximately HK$8,352,000 (US$1,078,000). The
outstanding principal amount of the Loan and accrued interest, net of such
advance, was HK$123,000 (US$16,000) as of March 31, 1998. 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 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. See "Taxation".
11
<PAGE>
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."
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.
12
<PAGE>
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".
RELATIVELY SHORT MEMBERSHIP PERIOD. The Company"s estimated average
membership period for its fitness facilities members is approximately 7 months.
The estimate of the average membership period is based on a statistical sample.
Because it is a relatively short membership period, the Company has to
continually attract new members to join its facilities or past members to
re-join the centers. The Company has proposed an autopay system to promote
regular payment and introduced a low admission fee to attract customers to
re-join the centers. Although the Company does not anticipate that the average
membership period of 7 months would have a negative impact on its operations, if
the Company is not successful in bringing in new members or having past members
re-join its centers on continuous basis, the Company's revenues may decline and
have an adverse effect on the Company's operations.
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' over allotment 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 10,375,000 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 March 31, 1998, the Company's net tangible
book value per share of Common Stock was $0.61 (based on 10,000,000 outstanding
shares). Based on certain assumptions, purchasers of shares of the Company's
Common Stock in the Offering will experience immediate dilution of $3.30 per
share. See "Dilution."
13
<PAGE>
LACK OF FIRM UNDERWRITING. The Shares 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".
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.
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 10,375,000 shares of Common
Stock issued and outstanding. 2,375,000 of such shares will be freely tradeable
in the public market (except by affiliates of the Company) and 8,000,000 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
2,375,000 freely tradable shares, 375,000 are being issued pursuant to this
Offering and 67,000 are being offered hereby by the Selling Shareholder. The
remaining 1,933,000 shares were issued previously by the Company and are held by
approximately 624 beneficial owners.
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.
14
<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 in the most recently completed fiscal
year or in two of the last three most recently completed fiscal years, 500,000
publicly held shares (excluding shares held by any officer, director or
beneficial owner of more than 10% of the total shares outstanding of the
Company), $1,000,000 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.
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 offered hereby, at an exercise price equal to
120% of the price at which the Shares 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 described herein will be
$1,500,000 ($1,725,000, if the over-allotment option for the Shares is
exercised) if the Maximum Offering amount is obtained and at the initial public
offering price of $4.00 per share. The Company will not receive any of the
proceeds from the sale of the shares by the Selling Shareholder. Selling
Shareholder will be responsible for his own selling expenses. The net proceeds
to the Company (at an initial public offering price of $4.00 per share) from the
sale of the Common Stock offered hereby, less the underwriting discount of 10%
($150,000; $172,500 if the over-allotment option is exercised), the
Representative's non-accountable expense allowance of 3% ($45,000; $51,750, if
the over-allotment option is exercised) and expenses of this Offering (estimated
at $131,672) for the total estimated Offering expenses at $326,672, are
estimated to be approximately $1,173,328 ($1,369,078 if the over-allotment
Option for the Shares is 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:
15
<PAGE>
<TABLE>
USE OF PROCEEDS
=====================================================================================================
<CAPTION>
AMOUNT IF AMOUNT IF
OVER- OVER-
ALLOTMENT ALLOTMENT
OPTION IS NOT OPTION IS
EXERCISED % EXERCISED %
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Exercise equipment $ 75,000 6.39% $ 75,000 5.48%
Marketing and investor relations $ 500,000 42.62% $ 500,000 36.52%
Lease deposit $ 100,000 8.52% $ 100,000 7.30%
Hardware and related software $ 50,000 4.26% $ 50,000 3.65%
Contribution toward tenant $ 448,328 38.21% $ 644,078 47.05%
improvement costs for Central ---------- ------ ---------- ------
center
TOTAL USE OF NET PROCEEDS $1,173,328 100% $1,369,078 100%
</TABLE>
The Company plans to open new facilities in Tsuen Wan, Hong Kong and
Central, Hong Kong in July and November, respectively, of fiscal year 1998. The
Company signed a lease agreement with respect to Tsuen Wan center. The lease
terms for Central 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 Central center. The Company expects
that the average tenant improvement costs for each new center will be
approximately HK$21,000,000 (US$2,700,000) 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 Central center, as set forth above. There can be no
assurances given that the lease agreement for the Central center will be signed,
nor that the Company will open the 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 eighteen 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 18
months from the date of this Prospectus.
16
<PAGE>
DILUTION
As of March 31, 1998, the Company had the historical net tangible book
value of $6,088,000 or $0.61 per share of issued and outstanding Common Stock
(based on 10,000,000 post-split shares of Common Stock outstanding). After
giving effect to the sale of the Securities offered hereby at an initial
offering price of $4.00 per share (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 $7,261,328 or
$0.70 per share (based on 10,375,000 shares of Common Stock outstanding). This
represents an immediate increase in net tangible book value of $0.09 per share
to existing stockholders and an immediate dilution of $3.30 per share or 83% 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
March 31, 1998.................................... $0.61
Increase in net tangible book value per share
after the Offering, attributable to the proceeds
of the Offering(1) .............................. $0.09
-----
Pro forma net tangible book value per share after
the Offering (1).................................. $0.70
-----
Dilution per share to new investors............... $3.30
=====
Sales by Selling Stockholder in this Offering will reduce the number of
shares held by the existing stockholders to 9,933,000 or 95.7% of the total
shares of Common Stock to be outstanding after the Offering (based on the total
of 10,375,000 shares of Common Stock to be outstanding after the Offering).
Sales by Selling Stockholder in this Offering will also increase the number of
shares held by new investors to 442,000 or 4.26% of the total shares of Common
Stock to be outstanding after the offering (excluding the shares of Common Stock
issuable upon the exercise of the Representative's Warrants) (4.24% if the
Representative's over-allotment options are exercised in full). See "Principal
and Selling Shareholders."
17
<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. As of August 4, 1998, the 52-week trading
range was between $1.50 to $7.25 per share. 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 3, 1998 at $5.00 per share of Common Stock. As of June 30, 1998, there
were approximately 624 record holders of the Company's Common Stock. The Company
effected a 1.333333-for-1 reverse split of its Common Stock in October 1997 and
a 1-for-1.333333 forward stock split in June 1998.
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.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998 and as adjusted to give effect to the sale by the Company of
375,000 shares at an initial offering price of $4.00 per share, and the
application of the net proceeds of $1,173,328 therefrom.
<TABLE>
(IN THOUSANDS)
<CAPTION>
At March 31, 1998
-----------------
Actual Actual As Adjusted (1)
------ ------ ---------------
HK$ US$ US$
(unaudited)
SHORT-TERM DEBT:
<S> <C> <C> <C>
Short-term bank borrowings $ 5,317 $ 686 $ 686
Current portion of long-term bank loan 1,454 188 188
Short-term loans from third parties 3,092 399 399
Current portion of capital lease obligations 4,512 582 582
--------- --------- ---------
Total short-term debt 14,375 1,855 1,855
--------- --------- ---------
LONG-TERM DEBT:
Long-term bank loans 10,188 1,315 1,315
Loans from minority shareholders of subsidiaries 4,200 542 542
Capital lease obligations - non current portion 7,180 926 926
--------- --------- ---------
Total long-term debt 21,568 2,783 2,783
MINORITY INTEREST: 6,945 896 896
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 1,173
Cumulative currency translation adjustments 125 16 16
Retained earnings 46,982 6,062 6,062
--------- --------- ---------
Total shareholders' equity 47,185 6,088 7,261
--------- --------- ---------
Total capitalization $ 75,698 $ 9,767 $ 10,940
========= ========= =========
</TABLE>
(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); also excludes any shares of Common Stock issuable upon exercise of
the Representative's Warrants. See "Plan of Distribution".
19
<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 December 31, 1995, December 31, 1996, December 31, 1997 and
three months periods ended March 31, 1997 and 1998. 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 three months ended March 31, 1997 and
1998, 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.
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31, Three months ended Three months ended
----------------------- March 31, March 31,
--------- ---------
1995 1996 1997 1997 1997 1997 1998 1998
HK$ HK$ HK$ US$ HK$ US$ HK$ US$
(audited) (audited) (unaudited) (unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Operating Revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fitness services $ 28,075 $ 37,069 $ 82,311 $ 10,621 $ 9,843 $ 1,270 $ 27,893 $ 3,599
Beauty treatments 53,059 72,260 66,496 8,580 14,075 1,816 13,633 1,759
Others 4,128 1,901 147 19 22 3 27 4
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating revenues 85,262 111,230 148,954 19,220 23,940 3,089 41,553 5,362
--------- --------- --------- --------- --------- --------- --------- ---------
Operating Expenses:
Salaries & commissions 18,609 23,797 34,459 4,446 7,549 974 12,416 1,603
Rent & related expenses 18,250 21,185 31,714 4,092 6,214 802 9,164 1,182
Depreciation 8,885 11,393 18,700 2,413 2,889 373 5,923 764
Other selling & administrative
expenses 15,083 23,178 34,849 4,497 6,533 842 9,468 1,222
--------- --------- --------- --------- --------- --------- --------- ---------
Total Operating Expenses 60,827 79,553 119,722 15,448 23,185 2,991 36,971 4,771
--------- --------- --------- --------- --------- --------- --------- ---------
Income (Loss) from operations 24,435 31,677 29,232 3,772 755 98 4,582 591
--------- --------- --------- --------- --------- --------- --------- ---------
Other expenses (income), net (790) (885) (2,186) (282) (202) (26) (238) (31)
Interest expenses 1,158 842 4,151 536 426 55 1,131 146
--------- --------- --------- --------- --------- --------- --------- ---------
Total non-operating (income)
expenses 368 (43) 1,965 254 224 29 893 115
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes
and minority interests 24,067 31,720 27,267 3,518 531 69 3,689 476
Provision for income taxes 4,434 6,947 3,846 496 423 55 1,063 137
Provisions for deferred taxes - 1,451 3,123 403 0 0 0 0
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before minority
interests 19,633 23,322 20,298 2,619 108 14 2,626 339
Minority interests 2,100 2,211 1,832 236 80 10 252 33
--------- --------- --------- --------- --------- --------- --------- ---------
Net Income 17,533 21,111 18,466 2,383 28 4 2,374 306
========= ========= ========= ========= ========= ========= ========= =========
Net income per share (2)(3) $ 1.75 $ 2.11 $ 1.85 $ 0.24 $ 0.00 $ 0.00 $ 0.24 $ 0.03
========= ========= ========= ========= ========= ========= ========= =========
Weighted average number of
shares outstanding 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000
========= ========= ========= ========= ========= ========= ========= =========
</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 Asian Wall Street Journal on March 31, 1998 of US$1.00 =
HK$7.75. No representation is made that the Hong Kong Dollar amounts could
have been, or could be, converted into United States Dollar, at that rate on
March 31, 1998 or at any other certain rate.
(2) The earnings per share is calculated using the common stock and common stock
equivalents, as if the shares existing as of this Registration Statement had
been outstanding throughout periods presented.
(3) 1995 pro-forma. The results were stated as if Physical Limited were a
holding company.
20
<PAGE>
(In thousands, except per share data)
<TABLE>
<CAPTION>
As Adjusted
As of December 31, As of March 31, 1998 (1)(2)
------------------ -------------------- ------
1996 1996 1997 1997 Actual Actual
---- ---- ---- ---- ------ ------
HK$ US$ HK$ US$ HK$ US$ US$
(audited) (audited) (Unaudited)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets $ 47,880 $ 6,178 $ 46,964 $ 6,059 $ 39,880 $ 5,146 $ 6,319
Total assets 117,693 15,186 173,182 22,347 164,657 21,246 22,419
Current liabilities 64,079 8,268 92,634 11,953 80,302 10,362 10,362
Long-term obligations 27,322 3,525 35,731 4,611 37,170 4,796 4,796
Working capital (16,199) (2,090) (45,670) (5,894) (40,422) (5,216) (4,043)
Obligations under finance leases 3,955 510 12,830 1,655 11,692 1,508 1,508
Deferred income taxes 1,451 187 4,574 590 4,574 590 590
Minority interest 4,857 627 6,689 863 6,945 896 896
Shareholders' equity 26,292 3,393 44,817 5,783 47,185 6,088 7,261
</TABLE>
(1) Assumes receipt of net proceeds from the offering of $1,173,328
(2) Excludes (i) 56,250 shares of Common Stock included in the Representative's
over-allotment option for the Shares; (ii) the shares of Common Stock issuable
upon exercise of the Representative's Warrants to be issued in conjunction with
this Offering; and (iii) 500,000 shares of Common Stock reserved for issuance
under the Company's stock option plans. See "Description of Securities" and
"Plan of Distribution".
21
<PAGE>
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. Based on the number of the
members of the Company's facilities, 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.
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 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$37,069,000 (US$4,783,000) in the fiscal year ended December 31, 1996 to
HK$82,311,000 (US$10,621,000) in the fiscal year ended December 31, 1997. The
revenue from beauty treatment decreased slightly from HK$72,260,000
(US$9,324,000) in the fiscal year ended December 31, 1996 to HK$66,496,000
(US$8,580,000), due to the Company's strategic plan to allocate more resources
to promote its fitness business. The increase in total operating revenues in
fiscal 1997 amounted to 34%.
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$1,500(US$194) for one
person. (A current promotion allows two people for joining fee of HK$1,000
(US$129) each). A monthly subscription fee of HK$299 (US$39) 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.
22
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended Three Months Ended
----------- ------------------
December 31 March 31,
----------- ---------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Revenues 100.00% 100.00% 100.00% 100.00% 100.00%
Total operating expenses 71.34% 71.52% 80.37% 96.85% 88.97%
Operating income 28.66% 28.48% 19.62% 3.15% 11.03%
Income before income taxes and minority interests 28.23% 28.52% 18.31% 2.22% 8.88%
Provision for income and deferred taxes 5.20% 7.55% 4.68% 1.77% 2.56%
Minority interests 2.46% 1.99% 1.23% 0.33% 0.61%
Net income 20.56% 18.98% 12.40% 0.12% 5.71%
======== ======= ======== ====== =======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) COMPARED TO THREE MONTHS ENDED
MARCH 31, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
OPERATING REVENUES. The Company' s operating revenues enjoyed strong
growth in the first three months of 1998 as compared to the first three months
of 1997. Operating revenues for the first three months of 1998 totaled
HK$41,553,000 (US$5,362,000) compared to HK$23,940,000 (US$3,089,000) in the
first three months of 1997, representing an increase of 74%. Operating revenues
derived by the Company' s fitness services increased 183% to HK$27,893,000
(US$3,599,000) compared to HK$9,843,000 (US$1,270,000) in the first three months
of 1997. Fitness revenues as a percentage of total revenues were 67% in the
first three months of 1998 as compared to 41% in the first three months of 1997.
Operating revenues for the Company's beauty treatments totaled
HK$13,633,000 (US$1,759,000) compared to HK$14,075,000 (US$1,816,000) in the
first three months of 1997, representing a decrease of 3%. This was mainly due
to the Company' s adherence to its strategic plan to allocate more resources to
promote its fitness. Beauty revenues as a percentage of total revenues were 33%
in the first three months of 1998 as compared to 59% in the first three months
of 1997.
Operating revenues derived from the Company' s Hong Kong locations
remain an important contributor to the Company's business, generating
HK$41,555,000 (US$5,362,000), or 91% of total operating revenues in the first
three months of 1998 as compared to HK$23,940,000 (US$3,089,000) or 81% of total
operating revenues in the first three months of 1997.
Operating revenues derived from the Company's China locations generated
HK$3,601,000 (US$465,000) or 9% of total operating revenues in the first three
months of 1998 as compared to HK$4,489,000 (US$579,0000) or 19% of total
operating revenues in the first three months of 1997.
OPERATING EXPENSES. The Company's operating expenses for the first three
months of 1998 totaled HK$36,971,000 (US$4,771,000) compared to HK$23,185,000
(US$2,991,000) in the first three months of 1997, representing an increase of
59%. The increase in the operating expenses was mainly due to a general increase
in staff salaries as a result of higher revenue generated, and depreciation
charges as well as rental expenses incurred for enhanced facilities. Total
operating expenses, after taking into account all corporate expenses, were
effectively controlled at 89% of total operating revenue as compared to 97% of
last year.
Operating expenses associated with the Company's Hong Kong locations
were HK$32,138,000 (US$4,147,000), representing an increase of 68% as compared
to HK$19,120,000 (US$2,467,000) in the first three months of 1997. Hong Kong
operating expenses represented 87% of total operating expenses in the first
three months of 1998 as compared to 82% of total operating expenses in the first
three months of 1997. The increase in operating expenses was primarily due to
additional rent and related expenses, and depreciation as a result of relocating
two branches in Mid- 1997, and additional salary costs due to increased
revenues.
23
<PAGE>
Operating expenses associated with the Company's China locations were
HK$4,833,000 (US$624,000), representing an increase of 19% as compared to
HK$4,065,000 (US$524,000) in the first three months of 1997. The increase in
operating expenses was primarily due to inflation and additional depreciation
charges provided for new acquired machinery. Operating expenses in China
represented 13% of total operating expenses in the first three months of 1998 as
compared to 18% of total operating expenses in the first three months of 1997.
TOTAL NON-OPERATING EXPENSES. Total non-operating expenses for the first
three months of 1998 totaled HK$893,000 (US$115,000) compared to total
non-operating expenses of HK$224,000 (US$29,000) in the first three months of
1997, representing an increase of HK$669,000 (US$86,000) due to additional
interest expenses incurred for bank loans.
PROVISION FOR INCOME TAXES. Provision for income taxes for the first
three months of 1998 totaled HK$1,063,000 (US$137,000) compared to HK$423,000
(US$55,000) in the first three months of 1997, representing an increase of 151%.
The effective tax rate of operating income was 29% and 80% 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% compared
with the tax rate of 33% for China operations.
NET INCOME. The Company's net income for the first three months of 1998
totaled HK$2,374,000 (US$306,000) compared to HK$28,000 (US$4,000) for the first
three months of 1997, representing an increase of HK$2,346,000 (US$302,000) or
8,379%.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1996
- --------------------------------------------------------------------------------
OPERATING REVENUES. The Company's operating revenues showed the
continuous growth in the fiscal year ended December 31, 1997 as compared to the
fiscal year ended December 31, 1996. Operating revenues for the fiscal year
ended 1997, net of an additional provision for deferred income of HK$8,300,000
(US$1,071,000), totaled HK$148,954,000 (US$19,220,000) compared to
HK$111,230,000 (US$14,352,000) in the fiscal year ended December 31, 1996,
representing an increase of 34%. Operating revenues derived by the Company's
fitness services increased 122% to HK$82,311,000 (US$10,621,000) compared to
HK$37,069,000 (US$4,783,000) in the fiscal year ended December 31, 1996. Fitness
revenues as a percentage of total revenues were 55% in the fiscal year ended
December 31, 1997 as compared to 33% in the fiscal year ended December 31, 1996.
Operating revenues for the Company's beauty treatments totaled
HK$66,496,000 (US$8,580,000) compared to HK$72,260,000 (US$9,324,000) in the
fiscal year ended December 31, 1996, representing a decrease of 8%. This was
mainly due to the Company's strategic plan to allocate more resources to promote
its fitness business which prospered significantly in 1997. Beauty revenues as a
percentage of total revenues were 45% in the fiscal year ended December 31, 1997
as compared to 65% in the fiscal year ended December 31, 1996.
Operating revenues derived from the Company's Hong Kong locations remain
an important contributor to the Company's business, generating HK$126,939,000
(US$16,379,000) or 85% of total operating revenues in the fiscal year ended
December 31, 1997 as compared to HK$81,990,000 (US$10,580,000) or 74% of total
operating revenues in the fiscal year ended December 31, 1996.
Operating revenues derived from the Company's China locations generated
HK$22,015,000 (US$2,841,000) or 15% of total operating revenues in the fiscal
year ended December 31, 1997 as compared to HK$29,240,000 (US$3,772,000) or 26%
of total operating revenues in the fiscal year ended December 31, 1996.
24
<PAGE>
OPERATING EXPENSES. The Company's operating expenses for the fiscal year
ended December 31, 1997 totaled $HK119,722,000 (US$15,448,000) compared to
HK$79,553,000 (US$10,265,000) in the fiscal year ended December 31, 1996,
representing an increase of 50%. The increase in the operating expenses was
primarily due to the following factors: a general increase in staff salaries as
a result of higher revenues generated, depreciation charges and rental expenses
incurred for enhanced facilities. Total operating expenses, after taking into
account all corporate expenses, were 80% of total operating revenue as compared
to 72% of last year.
Operating expenses associated with the Company's Hong Kong locations
were HK$100,263,000 (US$12,937,000), representing an increase of 65% as compared
to HK$60,929,000 (US$7,862,000) in the fiscal year ended December 31, 1996. Hong
Kong operating expenses represented 84% of total operating expenses in the
fiscal year ended December 31, 1997 as compared to 77% of total operating
expenses in fiscal year ended December 31, 1996. The increase in operating
expenses was primarily due to additional rent and related expenses, and
depreciation as a result of relocation of two branches in mid-1997, and
additional salary costs due to increased revenues.
Operating expenses associated with the Company's China locations were
HK$19,459,000 (US$2,511,000) representing a moderate increase of 4% due to
inflation as compared to HK$18,624,000 (US$2,403,000) in the fiscal year ended
December 31, 1996. Operating expenses in China represented 16% of total
operating expenses in the fiscal year ended December 31, 1997 as compared to 23%
of total operating expenses in the fiscal year ended December 31, 1996.
TOTAL NON-OPERATING EXPENSES (INCOME). Total non-operating expenses for
the fiscal year ended December 31, 1997 totaled HK$1,965,000 (US$254,000)
compared to total non-operating income of HK$43,000 (US$6,000) in the fiscal
year ended December 31, 1996, representing a decrease of HK$2,008,000
(US$260,000) due to additional interest expenses incurred for bank loans.
PROVISION FOR INCOME TAXES. Provision for income taxes for the fiscal
year ended December 31, 1997 totaled HK$6,969,000 (US$899,000) as compared to
HK$8,398,000 (US$1,084,000) in the fiscal year ended December 31, 1996,
representing a decrease of 17%. The effective tax rate of operating income
remained at 26%.
NET INCOME. The Company's net income for the fiscal year ended December
31, 1997 totaled HK$18,466,000 (US$2,383,000) compared to HK$21,111,000
(US$2,724,000) for the fiscal year ended December 31, 1996, representing a
decrease of 13%. The decrease in the net income was mainly due to a substantial
portion of expansion overhead being recognized in the fiscal year ended December
31, 1997, however, the joining fee revenues derived in association with such
expansion were not fully recognized in the same time period in accordance with
the Company's accounting policy of recognizing such revenues over the expected
membership life of the new members.
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$111,230,000 (US$14,352,000) compared to
HK$85,262,000 (US$11,002,000) in the fiscal year ended December 31, 1995,
representing an increase of 30%. Operating revenues derived by the Company's
fitness services increased 32% to HK$37,069,000 (US$4,783,000) 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 33% in the fiscal year ended
December 31, 1996, the same as in the fiscal year ended December 31, 1995. The
increased operating 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 65% 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$81,990,000
(US$10,579,000), 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.
25
<PAGE>
Operating revenues derived from the Company's China locations generated
HK$29,240,000 (US$3,773,000) 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 72% 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$43,000 (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$411,000
(US$53,000) or 112%.
PROVISION FOR INCOME TAXES. Provision for income taxes for the fiscal
year ended December 31, 1996 totaled HK$8,398,000 (US$1,084,000) compared to
HK$4,434,000 (US$572,000) in the fiscal year ended December 31, 1995,
representing an increase of 89%. 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$1,451,000 (US$187,000) 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$21,111,000 (US$2,724,000) compared to HK$17,533,000
(US$2,262,000) in the fiscal year ended December 31, 1995, representing an
increase of 20%. The net income margin for the fiscal year ended December 31,
1996 was 19% 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.
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through cash generated
from operations, short-term bank credit, long-term bank loans, loans from third
parties (outside investors ) and minority shareholders of subsidiaries, advances
from customers relating to prepaid fitness and spa income, and leasing
arrangements with financial institutions. See Notes to Financial Statements
(Note 6 "Related Party Transactions"; Note 7 "Short Term Bank Loans"; Note 8
"Long Term Bank Loans"; and Note 10(C) "Obligations and Commitments").
Cash and cash equivalent balances for the three-month period ended March
31, 1998 and the fiscal year ended December 31,1997 were HK$4,275,000
(US$552,000) and HK$1,954,000 (US$252,000). while total indebtedness at March
31, 1998 was HK$35,943,000 (US$4,638,000) and HK$46,382,000 (US$5,985,000) at
December 31, 1997.
Net cash provided by operating activities were HK$30,494,000
(US$3,935,000), HK$31,505,000 (US$4,065,000), HK$61,806,000 (US$7,975,000) and
HK$9,075,000 (US$1,170,000) for fiscal year 1996, fiscal year 1997 and the three
month period ended March 31,1998, respectively. The Company's operating
activities are historically financed by cash flows from operations. Net cash
used in investing activities were HK$14,274,000 (US$1,842,000), HK$24,266,000
(US$3,131,000), HK$68,307,000 (US$8,813,000) and HK$6,961,000 (US$897,000) for
fiscal year 1995, fiscal year 1996, fiscal year 1997 and the three-month period
ended March 31, 1998, primarily as a result of expenditures for property, plant
and equipment. Net cash used in financing activities, which mainly include bank
loan repayments, net of proceeds from new bank loans, were HK$15,993,000
(US$2,064,000) and HK$5,740,000 (US$741,000) in fiscal year 1995 and fiscal year
1996. Net cash provided by financing activities were HK$5,887,000 (US$759,000)
and HK$213,000 (US$28,000) in the fiscal year 1997 and the three-month period
ended March 31,1998 respectively.
The Company obtained a term loan in the amount of HK$1,000,000
(US$129,000) at an interest rate of 10.5% per annum 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. The Company has negotiated with the bank to
replace the loan with a new loan of HK$1,000,000 (US$129,000), at an interest
rate of 12% per annum, which is to be repaid in sixty (60) equal monthly
installment payments commencing November, 1997 and a new term loan of
HK$2,500,000 (US$323,000), at an interest rate of 12.75% per annum, which is to
be repaid within two years from the date of advance. In January, 1997 the
Company obtained an installment loan of HK$5,000,000 (US$645,000) and a term
loan of HK$5,000,000 (US$645,000) from the Kwangtung Provincial Bank. The former
is to be repaid in sixty (60) equal monthly instalment commencing March, 1997 at
an interest rate of 10.5% per annum, and the latter is to be repaid in full in
one lump sum one year from the date of advance, at an interest rate of 10% per
annum. In January, 1998 the Company repaid HK$1,000,000 (US$129,000) and the
balance of the term loan was replaced by a new installment loan of HK$4,000,000
(US$516,000) repayable in ninety-six (96) instalments commencing March, 1998, at
an interest rate of 12.75% per annum. All of these credit facilities have been
secured by the leasehold property in Hong Kong owned by a related company,
Silver Policy Development Limited. See also Note 8 to the Financial Statements.
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 at an interest rate of 6.75% per annum. 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. In March, 1997 the Company entered into a capital
lease agreement with the Hongkong and Shanghai Banking Corporation Limited for
the purchase of exercise equipment in the amount of HK$7,432,320 (US$959,000)
for the centers in Hong Kong. The lease is repayable in sixty (60) monthly
installments, commencing April, 1997 at an interest rate of 11.25% per annum. In
May, 1997 the Company entered into a capital lease agreement with East Asia
Finance Company, Limited for the purchase of exercise equipment in the amount of
HK$7,742,000 (US$999,000) for the Hong Kong centers. The lease is repayable in
thirty six (36) monthly installments, commencing May, 1997 at an interest rate
of 5.75% per annum.
27
<PAGE>
The Company has revolving lines of credit with three banks - The
Kwangtung Provincial Bank (at an interest rate of 13.0%), Dao Heng Bank (at an
interest rate of 12.75%) and Shanghai Commercial Bank Limited (at interest rate
of 12.75%). As of March 31,1998, the Company had utilized HK$5.3 million
(US$684,000) out of the total lines of HK$6.1 million (US$787,000). The Company
draws down from the lines of credit primarily for general working capital
purposes.
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 March 31, 1998 was
HK$6,681,000 (US$862,000). The Company has never experienced any significant
problems with collection of accounts receivable from its customers.
Capital expenditures for fiscal years 1995, 1996, 1997 and the
three-month period ended March 31, 1998, were HK$20,427,000 (US$2,636,000),
HK$25,375,000 (US$3,274,000), HK$68,360,000 (US$8,820,000) and HK$6,961,000
(US$897,000) respectively. The Company believes that cash flow generated from
its operations, the proceeds from this Offering and its existing credit
facilities should be sufficient to satisfy its working capital and capital
expenditure requirements for at least the next 18 months.
YEAR 2000 DISCLOSURE
The Company is undergoing a system redevelopment project to improve the
efficiency of the system with respect to changing its computer programs to
properly identify a year in the year field. The cost of such new system is
estimated to be HK$800,000 (US$103,000) and the implementation time is expected
to be within one year commencing early 1998. The Company has already obtained an
estimate of the cost from the software service company, and in the opinion of
the Management such cost can be controlled as proposed. The Company expects to
incur the following maintenance charges for the new system:
1998 HK$120,000 (US$15,500)
1999 HK$ 96,000 (US$12,400)
2000 and onwards HK$ 64,000 (US$8,300)
The Company believes that the estimated cost of the new system should
not have a significant impact on the cash flow of the Company.
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.
29
<PAGE>
<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 Holdings March 8, 1996 BVI 100% - Investment holding
Limited ("Physical Limited")
Limited")
Physical Health Centre Hong Kong March 2, 1990 Hong Kong 91.4% - Operating 5 Fitness
Limited ("Hong Kong Limited") Centres in Hong Kong
Regent Town Holdings Limited September 20, 1993 BVI 92.5% - Investment holding
("Regent")(1)
Supreme Resources Limited ("Supreme") September 29, 1994 Hong Kong 70% - Operating a beauty treatment center
in Hong Kong
Physical Health Centre (Zhong Shan) September 29, 1994 Hong Kong 100% - Investment holding
Limited ("Zhongshan Physical") (formerly operating a
formally known as Famerich beauty treatment center in
Development Limited) in Hong Kong
Zhongshan Physical Ladies' Club Ltd. October 29, 1996 The PRC - 95% Operating a Fitness Centre in
(owned by Zhongshan Physical) in Zhongshan, the PRC
Ever Growth Limited ("Ever Growth") September 29, 1994 Hong Kong 100% - Property holding
Proline Holdings Limited ("Proline") September 28, 1994 BVI - 92.5% Investment holding
(wholly owned by Regent)
Shanghai Physical Ladies' Club Company September 28, 1994 Hong Kong - 92.5% Investment holding
Limited ("Shanghai Physical")
(wholly owned by Proline)
Shanghai Physical Ladies' Club Co., Ltd. September 28, 1994 The PRC - 92.5% Operating two Fitness Centres in
(owned by Shanghai Physical) in Shanghai, the PRC
Mighty System Limited ("Mighty") December 15, 1994 BVI 100% - Provision of marketing services for
cosmetic sales
Jade Regal Holdings Limited ("Jade March 15, 1994 BVI 100% - Investment holding
Regal")
Physical Health Centre (Dalian) Limited March 15, 1996 Hong Kong - 100% Investment holding
(Dalian Physical") (wholly
owned by "Jade Regal")
Dalian Physical Ladies' Club Co., Ltd. March 15, 1996 The PRC - 90% Operating a Fitness Centre in
(90% owned by Dalian Physical) in Dalian, the PRC
Star Perfection Holdings April 15, 1996 BVI 100% - Investment holding
Limited ("Star Perfection")
Physical Health Centre (Shenzhen) April 15. 1996 Hong Kong - 100% Investment holding
Limited ("Shenzhen Physical")
(wholly owned by Star
Perfection)
Shenzhen Physical Ladies' Club Co. Ltd. August 16, 1996 PRC - 90% Operating a Fitness Centre in
(owned by "Shenzhen Physical") in Shenzhen, PRC
Physical Health Centre March 21, 1997 Hong Kong 100% - Investment holding,
(Macau) Limited* Operating a Macau Centre
Physical Health Centre September 8, 1997 Hong Kong 100% - Operating a Fitness Centre
(Tsuen Wan) Limited* in Hong Kong
___________________
</TABLE>
(1) See Note 17 to the Financial Statements
* Proposed new centers; not shown on the organizational chart.
The Company plans to open new centers in Tsuen Wan and Central, Hong Kong in
mid-1998 and Macau in 1999.
See also "Use of Proceeds" and "Company - Properties". The Company's
organizational chart is set forth below on the next page.
30
<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>
_____________________________________________|____________________________________________________
|92.5% |100% |100% |91.40% |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 Physical Huangpu and Co-operative 92.5%(1) 10 years Originally See Shanghai Joint Venture below
Ladies' Club Co., Hongqiao, (exp. 2003) US$1000 in
Ltd. ("Shanghai Shanghai cash and
Joint Venture") increased to
US$2000 in
cash in 1995
Dalian Physical Dalian Equity Originally 12 years Originally Pro-rata to equity interests
Ladies' Club Co., 55% and (exp. 2007) Rmb10,000 in
Ltd. ("Dalian changed to cash and
Joint Venture") 90% in 1996 changed to
Rmb1,000 in cash
and Rmb9,000 in
form of fixed
assets and
renovation
materials in 1996.
Shenzhen Physical Shenzhen Co-Operative 90% 10 years HK$4,600 in Pro-rata to equity interests
Ladies' Club Co., (exp. 2006) form of cash
Ltd. ("Shenzhen and fixed
Joint Venture")** assets
Zhongshan Physical Zhongsan Equity 95% 10 years US$500 in Pro-rata to equity interests
Ladies Club Co., Ltd. (exp. 2006) form of cash
("Zhongshan and fixed
Joint Venture")** assets
</TABLE>
_______________________________________________________
(1) See Note 17 to the Financial Statements.
* 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.
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.
33
<PAGE>
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")
34
<PAGE>
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.
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 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 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 shares
of Common Stock to Goodchild Investments Limited, a British Virgin Islands
corporation ("Goodchild"). Goodchild subsequently disposed of its shares. 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 Limited 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.
35
<PAGE>
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".
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,
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.
36
<PAGE>
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.
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 (12 years ) and China (over the past 4 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 plans to open its seventh center in Tsuen Wan, Hong Kong in July, 1998.
The Company also expects to open a new center in Central, Hong Kong at the end
of 1998, a new center in Macau in 1999, 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.
37
<PAGE>
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.
- - MAINTAINING A STRONG PRESENCE 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 July, 1998 and the Central center, Hong Kong at the end of 1998.
There can be no assurance given that Tsuen Wan center or Central 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 Central 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 MARKETS
The Company considers its market to be the greater Asia region. The
Company plans to open a new fitness/spa center in Macau in 1999. 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 jet foil 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.
38
<PAGE>
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.
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.
39
<PAGE>
CAPITAL EXPENDITURES
The Company made capital expenditures (including equipment costs) of
HK$68.36 million (US$8.82 million) in 1997, approximately HK$59 million (US$7.6
million) of which related to new centers. In addition to almost HK$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 1998, the Company plans to
invest approximately HK$40 million (US$5.2 million) for 1-2 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 1999, 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.
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$1,500 (US$194), 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$299 (US$39) 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 1998 compared to approximately HK$6.7 million
(US$860,000) in 1997, HK$3.7 million (US$480,000) in 1996, and HK$2.7 million
(US$350,000) in 1995. 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".
40
<PAGE>
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.
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 instalments 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.
41
<PAGE>
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$6.9 million (US$890,000) by three instalments from December 31, 1996 to June
30, 1997. The first instalment 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. The final
installment was settled in cash in November 1997.
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 and New
York Fitness. 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.
42
<PAGE>
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.
FITNESS CENTER. 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.
43
<PAGE>
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.
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, the registration
enables the mark to distinguish the Company's services from similar services of
others, although it gives the 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.
44
<PAGE>
EMPLOYEES
The Company has approximately 640 employees, including approximately 135
part-time employees. Approximately 510 employees are involved in fitness and spa
operations, including sales personnel, instructors, spa and supervisory
personnel. Approximately 130 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.
45
<PAGE>
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$18.3 million (US$2.4
million), HK$21.2 million (US$2.7 million) and $HK$31.7 million (US$4.1 million)
for the year ended December 31, 1995, 1996 and 1997, respectively. The Company's
current aggregate annual rent is HK$44.7 million (US$5.8 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>
FITNESS/SPA CENTERS - HONG KONG AND CHINA
-----------------------------------------
<CAPTION>
Term Current 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$1,226,838
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$649,241
5/F, Room 701A, Prestige
Tower
23-25 Nathan Road
Tsimshatsui, Hong Kong
Shop Nos. 125 and 131-133 10,000 sq. ft. Lease 5/19/2001 (4) 2 Years HK$409,223
Level 1, Grand Central
Plaza
Shatin, Hong Kong
18/F - 21/F City Landmark 50,000 sq. ft. Lease 3/31/2001 5 Years HK$1,039,000
No. 68 Chung On Street
Tsuen Wan, Hong Kong
Unit 605-609, Level 6 3,200 sq. ft. Lease 7/4/1999 (4) None HK$111,915
NewTown Tower, 10-18
Pak Hok Ting Street
Shatin, Hong Kong
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Term Current Monthly
HONG KONG (Continued) Size Own/Lease Expiration Renewal Option Rent (1) (2)
---- --------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
P/F., Stage 8 8,000 sq. ft. Own/lease 4/30/1998 None HK$107,853
122B Broadway Street
Mei Foo Sun Chuen, Hong
Kong
14/F., Coda Plaza 5,000 sq. ft. Lease 6/30/2000 None HK$140,062
51 Garden Road
Central, Hong Kong
G/F., 3,000 sq. ft. Lease 6/30/2000 None HK$59,000
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.
Excludes utilities.
(3) Lease for Room 701A expires on July 31, 1999.
(4) Lease for Unit 901 A and 12/F, New Town Tower, 10-18 Pak Hok Ting Street,
Shatin, Hong Kong expired on April 30, 1998. The landlord extended the
lease for two additional months at HK$590,208 until June 30, 1998. The
Company simultaneously entered with the landlord into an agreement for the
new lease at Shop Nos. 125 and 131- 133, Level 1, Grand Central Plaza,
Shatin, Hong Kong.
<TABLE>
<CAPTION>
Term Current 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$89,835 (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$173,965(4)
808 Hong Qiao Road
Shanghai
- -----------------------
</TABLE>
47
<PAGE>
(1) Monthly rent is paid in Rmb, with the exception of Dalian property, for
which the rent is paid in HK Dollars.
(2) The monthly rent will increase 10% per year after September 6, 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 has signed the lease agreement for the space to be used for
fitness and spa services in Tsuen Wan. 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 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$317,000 (US$41,000) per month.
The management fee is payable to the landlord under the tenancy agreement, and
includes the management fee of HK$84,000 (US$11,000), air-conditioning charge of
HK$ 86,000 (US$11,000) and extra air conditioning charge of HK$147,000
(US$19,000).
The Company is currently negotiating lease terms for opening a new
center in Central Hong Kong. Central is a landmark commercial area in Hong Kong.
The Company's internal research findings show that more than 23% of potential
fitness members in Hong Kong indicated Central District as the most preferred
location for fitness/spa facilities. The Company anticipates that the new center
would include an approximately 70,000 sq. ft. space, however, the other terms of
the lease are still under discussion.
In 1999, the Company plans to open a new center in Macau. 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 Central center and for equipment
purchases for the Tsuen Wan and Central center. 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 Central Hong Kong. Based on its internal research, the
Company expects that Tsuen Wan center should be able to generate a monthly
revenue of HK$3.5 million (US$452,000) and Central center is expected to achieve
a monthly revenue of HK$5 million (US$645,000), 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 Central 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.
48
<PAGE>
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.
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.
49
<PAGE>
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 Consumer
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 antibacterial 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.
The Police Department has strict regulations in China regarding massage
services and requires (although in the management's experience, it seldom checks
for compliance) the Company 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.
50
<PAGE>
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.
51
<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) 42 Chairman of the Board of Directors, Chief Executive
Officer
Jill Bodnar 33 President and Director
Robert Chui 41 Chief Financial Officer and Director
Darrie Lam 35 Executive Vice President, Secretary and Director
Yuk Wah Ho 42 Executive Vice President and Director
Yat Ming Lam 41 Director
Allan Wah Chung
Li 41 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. Ms. Lam received a MBA degree from the
University of Manchester, U.K.
52
<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.
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.
ALLAN WAH CHUNG LI, DIRECTOR. Mr. Li has been a director of the Company
since June, 1998. Mr. Li is a solicitor qualified to practice law in Canada,
England and Hong Kong. For the last ten years, Mr. Li practiced law in
Vancouver, Toronto and Hong Kong and had also worked for the Listing Division of
the Stock Exchange of Hong Kong. Since 1994, Mr. Li has been with Lai Sun
Development Company Limited, a company listed on the Stock Exchange of Hong
Kong, where he is currently serving as a vice-president, and is involved in
hotels and corporate transactions. Mr. Li received B.Comm. and L.L.B degrees
from the University of British Columbia, Canada.
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, SENIOR 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>
Annual
Name and Principal Position Year Salary(1) Awards(2)
---- --------- ---------
Bonus(3) Other compensation(4)
-------- ---------------------
<S> <C> <C> <C>
Ngai Keung Luk, CEO, Chairman 1995 17,000 -- 70,000
1996 15,500 -- 82,000
1997 166,000 -- 84,000
Jill Bodnar, President, COO 1995 47,000 3,900
1996 54,000 4,500
1997 69,700 4,500
- ------------------------------------
</TABLE>
53
<PAGE>
(1) No officers received or will receive any bonus or other annual compensation
other than salaries during fiscal year 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 yearly allowance of US$84,000 for the fiscal year 1997,
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, Williluck International Limited. Mr. Luk and his
wife are the shareholders and directors of both Silver Policy Development
Limited and Williluck International Limited. The current market rent of the
property, which is exclusively used for residential purpose by Mr. Luk and
his family, is US$15,500 per month (increased from $13,700 per month)
effective November, 1997. The Company and Williluck International Limited
each pay US$6,850 per month for the first ten months and US$7,750 per month
thereafter to Silver Policy Development Limited. Yearly allowance to Mr. Luk
is recorded on the Company's books as US$84,000 in 1997. The money is paid
directly to Silver Policy Development Limited. Physical Health Centre Hong
Kong Limited is using the property as security to obtain a full line of
credit from the Kwangtung Provincial Bank. See also "Certain Transactions".
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.
AUDIT COMMITTEE
The Board of Directors established an Audit Committee, composed of the
two outside directors and Robert Chui, Chief Financial Officer. The principal
functions of the Audit Committee will include making recommendations to the
Board regarding the selection of independent public accountants to audit
annually the books and records of the Company , reviewing the proposed scope of
each audit and reviewing the recommendations of the independent public
accountants as a result of their audit of the Company. The Audit Committee will
also periodically review the activities of the Company's accounting staff and
the adequacy of the Company's internal controls.
54
<PAGE>
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.
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 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 made certain advances to Mr. Luk, the Company's Chief
Executive Officer and the Chairman of its Board of Directors, 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 Mr.
Luk to the Company or by off-setting the dividends declared by the Company and
payable to Mr. Luk against the amounts owed to the Company. Dividends declared
during the year ended December 31, 1995 were off-set against amounts owed by Mr.
Luk. The Company ratified and approved on November 27, 1996, certain loans to
Mr. Luk, 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 together
with the accrued interest thereon at the prime banking rate of interest of
8.75%. Mr. Luk repaid HK$2.3 million (US$297,000) of the outstanding amount of
the Loan in the first installment. The second and the third installments in the
total of HK$4,600,000 (US$594,000) due on September 30 and December 31, 1997
were repaid in cash in December, 1997. The outstanding principal amount of the
Loan and accrued interest was HK$10,775,000 (US$1,391,000) as of December 31,
1997. The fourth installment of HK$2,300,000 (US$297,000) due on March 31, 1998
was repaid in cash in March, 1998. The remaining outstanding principal amount of
the Loan is secured by a pledge of 1,500,000 shares of common stock of the
Company by Mr. Luk, as collateral for the Loan. In the first quarter of 1998,
Mr. Luk made an advance of HK$8,352,000 (US$1,078,000) to the Company, which was
applied against the outstanding balance due on the Loan. The outstanding
principal amount of the Loan and accrued interest, net of such advance, was
HK$123,000 (US$16,000) as of March 31, 1998. Mr. Luk does not have any other
outstanding loans from the Company. See also "Risk Factors" and Financial
Statements, Note 6.
55
<PAGE>
In January 1997, the Company approved an advance to Mr. Luk in the
amount of HK$ 6 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 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 shares of Common Stock
of the Company to Goodchild Investments Limited, a British Virgin Islands
corporation ("Goodchild"), whose beneficial owner is Wong Kui Tak Henry, 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.
In February, 1998, Goodchild sold all of its shares of common stock of
the Company in open market public transactions.
Mr. Luk receives a monthly allowance of HK$53,000 (US$84,000 for the
fiscal year 1997) 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 Policy"). Silver Policy is a limited company
incorporated in Hong Kong. Mr. Luk and Mrs. Luk respectively hold 0.01% and
99.99% shares in Silver Policy. They also act as directors of Silver Policy.
Since April 1994, Physical Health Centre Hong Kong Limited ("Hong Kong Limited")
has concluded a tenancy agreement with Silver Policy for the property to be used
exclusively for residential purpose by Mr. Luk and his family. In April 1996,
Silver Policy increased the rent from $11,600 to $13,700 per month and further
increased to $15,500 from November, 1997. Hong Kong Limited and Williluck
International Limited ("Williluck") each paid US$5,80 per month thereafter. The
annual rent allowance costs as recorded by Physical totaled $79,050 in 1996 and
$84,000 in 1997. Pursuant to the lease agreement between Sliver Policy and Hong
Kong Limited, the premises for Mr. Luk and his family are rented by Hong Kong
Limited from Silver Policy for HK$120,000 (US$15,500) per month. Hong Kong
Limited then charges back a related company, Williluck, for a 50% share of the
rent. Mr. Luk is a director of Williluck. Hong Kong Limited is using the
property as security to obtain a full line of credit from the Kwangtung
Provincial Bank. See also "Management - Compensation".
The Company had the following transactions with related companies
(see Financial Statements, Note 6) :
Year Ended Three Months Ended
December 31, March 31,
1995 1996 1997 1997 1998
HK$ HK$ HK$ HK$ HK$
(unaudited)
Rental of a director's quarters 540 636 650 159 120
Purchase of cosmetics and
beauty products 2,246 - - - -
Purchase of beauty and
fitness equipment 898 - 2,677 - 438
Sales of beauty and fitness
equipment 1,367 793 - - -
Prepayment for equipment
related to
Construction-in-progress - 3,961 3,961 3,961 3,961
Purchase rebate received 1,208 - - - -
Management fee received 10 12 12 - -
Certain general and administrative expenses incurred by the Company
during the relevant periods on behalf of the related companies were reimbursed
by the respective related companies at cost.
Mr. Luk had beneficial interests in all the aforementioned related
companies or the shareholders of the related companies were related to Mr. Luk.
Mr. Luk has also undertaken to indemnify the Company against any
contingent liabilities including tax liabilities and claims that may result from
the operating activities of the Company in Hong Kong, the PRC and elsewhere
occurring before December 31, 1997.
56
<PAGE>
In 1996, Hong Kong Limited made an advance to Mr. Luk for the
acquisition of a 5% equity interest in Regent Town Holdings Limited ("Regent")
from a minority shareholder ("the Minority Shareholder") at a consideration of
approximately HK$312,000 (US$40,000). In addition, an advance of approximately
HK$1,200,000 (US$155,000) was made to Mr. Luk to repay a loan from the Minority
Shareholder on behalf of Regent. These advances were included in the balance due
from Mr. Luk as mentioned above. On November 13, 1996, Mr. Luk transferred his
equity interests in Regent acquired from a minority shareholder to Physical
Holdings at cost and repaid the advance of approximately HK$1,200,000
(US$155,000) made from Hong Kong Limited. As a result, the Company increased its
equity interest in Regent from 83.5% to 88.5%.
Pursuant to loan agreements between Regent and Supreme Resources Limited
("Supreme") and their minority shareholders, certain loans were made to Regent
and Supreme by their minority shareholders. As of December 31, 1997 and March
31, 1998, the outstanding loan balances amounted to approximately HK$5,160,000
(US$666,000) and HK$4,200,000 (US$542,000), respectively. 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.
During the year ended December 31, 1996, minority shareholders of Hong
Kong Limited agreed to assign the dividends declared and receivable from Hong
Kong Limited for the year ended December 31, 1995 in the amount of approximately
HK$2,821,000 (US$364,000) to Mr. Luk without any consideration. The dividends so
assigned were offset against the advances made by the Company to Mr. Luk as
mentioned above.
PRINCIPAL STOCKHOLDERS AND SELLING STOCKHOLDER
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock, as of June 10, 1998, 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.
<TABLE>
<CAPTION>
NAME AND AMOUNT AND PERCENTAGE BENEFICIALLY OWNED
ADDRESS OF BENEFICIAL NATURE
OWNER OF BENEFICIAL BEFORE AFTER
- --------------------- OWNERSHIP (1) OFFERING OFFERING (2)
------------- -------- ------------
<S> <C> <C> <C>
DIRECTORS, OFFICERS AND 5% STOCKHOLDERS
NGAI KEUNG LUK (SERLEO)(3) 8,000,000 80.00% 77.11%
JILL BODNAR, PRESIDENT 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 (4) 8,000,000 80.00% 77.11%
ALLAN WAH CHUNG LI, DIRECTOR 0 0.00% 0.00%
ALL OFFICERS AND DIRECTORS 8,000,000 80.00% 77.11%
AS A GROUP (7 PERSONS)(3)
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
OTHER SELLING SHAREHOLDERS
<S> <C> <C> <C>
Robert Alvarez 67,000 * *
2618 Southwest 23 Ter.
Suite 202
Ft. Lauderdale, FL 33312
----------
</TABLE>
* Less than 1%
(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 Representative's over-allotment option.
Based upon 10,375,000 shares of Common Stock outstanding after the Offering.
(3) Mr. Luk pledged 1,500,000 shares of Common Stock for the loans received the
Company under that certain Pledge Agreement dated September 30, 1997.
(4) Ms. Ho is the wife of Ngai Keung Luk (Serleo). Accordingly the number of
common stock owned by Mr. Luk and Ms. Luk overlap.
58
<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, 10 million are
issued and outstanding, following the 1.333333-for-1 reverse split in October,
1997 and 1-for-1.333333 forward stock split in June, 1998, and 10 million shares
of Preferred Stock, par value $0.001, of which no shares are issued or
outstanding. 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
effect.
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.
59
<PAGE>
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 10,375,000 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 10,375,000 shares to be outstanding after the Offering, 8,000,000
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.
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 103,750 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.
60
<PAGE>
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 of the Management of the Company 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.
61
<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 16.0% 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.
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<PAGE>
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.
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.
63
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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
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 ("Maximum Offering") on a "best efforts" and "all or nothing"
basis by August 15, 1998, which period may be extended to up to additional 30
days ("Offering Period"). No Shares of Common Stock of Selling Shareholder will
be sold to the public in this Offering until Maximum Offering is first achieved.
All the funds received from the sale of the Shares will be deposited with Bank
Windsor, as the escrow agent, which agreed to hold such funds in escrow for the
subscribers in this Offering, and to transmit all such funds to the Company
(less applicable commissions and fees, if any) when the Maximum Offering is
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 reserves the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part.
The Selling Agent has advised the Company that it proposes to offer the
shares of Common Stock to the public at the initial 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 $0.20 per
Share of which concessions 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.
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, 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-allotment, if any, made in
connection with the sale of the Shares 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
purchased pursuant to the Representative's Over-Allotment Options), $45,000 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 ") 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 assumed initial
offering price) for a period of five years commencing one year from the date of
this Prospectus. Representative Warrants, as well as the shares underlying such
Warrants are registered hereby in this registration statement. The Selling
Stockholder 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 Stockholder, 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.
64
<PAGE>
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.
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 certain legal matters of this Offering.
EXPERTS
The consolidated financial statements of the Company for the year ended
September 30, 1994, for the years ended December 31, 1995, 1996 and 1997
appearing in this Prospectus and Registration Statement have been audited by
Arthur Andersen & Co., independent certified 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.
65
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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 December 31, 1996 and 1997.................F-2
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995..........................................................F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995.............................................F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995..........................................................F-8
Notes to Consolidated Financial Statements..................................F-11
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 (unaudited)..........................................F-12
Consolidated Statements of Operations for the three months ended
March 31, 1998 and 1997 (unaudited).........................................F-13
Consolidated Statements of Stockholders' Equity for the three months
ended March 31, 1998 and 1997 (unaudited)...................................F-14
Consolidated Statements of Cash Flow for the three months ended
March 31, 1998 and 1997 (unaudited)........................................F-15
66
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PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
===========================================
AUDITED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND DECEMBER 31, 1997
AND
UNAUDITED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
AND
AUDITED CONSOLIDATED STATEMENTS OF INCOME,
CASH FLOWS AND CHANGES IN SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME,
CASH FLOWS AND CHANGES IN SHAREHOLDERS EQUITY
FOR THE THREE MONTHS FROM JANUARY 1, 1997 TO MARCH 31, 1997 AND
JANUARY 1, 1998 TO MARCH 31, 1998
TOGETHER WITH AUDITORS REPORT
<PAGE>
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) (the
"Company") and its subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of income, cash flows and changes in
shareholders' equity for the years ended December 31, 1995, 1996 and 1997
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 our 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, 1996 and 1997, and the
results of their operations and their cash flows for the years ended December
31, 1995, 1996 and 1997 in conformity with generally accepted accounting
principles in the United States of America.
Hong Kong,
June 30, 1998.
1
<PAGE>
<TABLE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
AUDITED CONSOLIDATED STATEMENTS OF INCOME
-----------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
FOR THE THREE MONTHS FROM JANUARY 1, 1997 TO MARCH 31, 1997 AND JANUARY 1, 1998
TO MARCH 31, 1998
(Amounts in thousands)
<CAPTION>
Three Months
Year Ended Year Ended Ended
December 31, December 31, Year Ended March 31, Three Months Ended
1995 1996 December 31, 1997 1997 March 31, 1998
--------- --------- --------------------- --------- ---------------------
HK$ HK$ HK$ US$ HK$ HK$ US$
(Unaudited) (Unaudited)(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues
Fitness service 28,075 37,069 82,311 10,621 9,843 27,893 3,599
Beauty treatments 53,059 72,260 66,496 8,580 14,075 13,633 1,759
Others 4,128 1,901 147 19 22 27 4
--------- --------- --------- --------- --------- --------- ---------
Total operating revenues 85,262 111,230 148,954 19,220 23,940 41,553 5,362
--------- --------- --------- --------- --------- --------- ---------
Operating Expenses
Salaries and commissions 18,609 23,797 34,459 4,446 7,549 12,416 1,603
Rent and related expenses 18,250 21,185 31,714 4,092 6,214 9,164 1,182
Depreciation 8,885 11,393 18,700 2,413 2,889 5,923 764
Other selling and administrative expenses 15,083 23,178 34,849 4,497 6,533 9,468 1,222
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses 60,827 79,553 119,722 15,448 23,185 36,971 4,771
--------- --------- --------- --------- --------- --------- ---------
Income from operations 24,435 31,677 29,232 3,772 755 4,582 591
--------- --------- --------- --------- --------- --------- ---------
Non-operating (income) expenses
Other (income), net (790) (885) (2,186) (282) (202) (238) (31)
Interest expenses 1,158 842 4,151 536 426 1,131 146
--------- --------- --------- --------- --------- --------- ---------
Total non-operating (income) expenses 368 (43) 1,965 254 224 893 115
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and
minority interests 24,067 31,720 27,267 3,518 531 3,689 476
Provision for income taxes 4,434 8,398 6,969 899 423 1,063 137
--------- --------- --------- --------- --------- --------- ---------
Income before minority interests 19,633 23,322 20,298 2,619 108 2,626 339
Minority interests 2,100 2,211 1,832 236 80 252 33
--------- --------- --------- --------- --------- --------- ---------
Net income 17,533 21,111 18,466 2,383 28 2,374 306
========= ========= ========= ========= ========= ========= =========
Earnings per common share 1.75 2.11 1.85 0.24 0.00 0.24 0.03
========= ========= ========= ========= ========= ========= =========
Number of shares outstanding (in 10,000 10,000 10,000 10,000 10,000 10,000 10,000
thousands)
========= ========= ========= ========= ========= ========= =========
</TABLE>
Translation of amounts from Hong Kong Dollars ("HK$") into United States Dollars
("US$") for the convenience of the reader has been made at the exchange rate
quoted by the Asian Wall Street Journal on March 31, 1998 of US$1.00 = HK$7.75.
No representation is made that the Hong Kong Dollar amounts could have been, or
could be, converted into United States Dollars, at that rate on March 31, 1998
or at any other certain rate.
2
<PAGE>
<TABLE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
AUDITED CONSOLIDATED BALANCE SHEETS
-----------------------------------
AS OF DECEMBER 31, 1996 AND 1997
AND
UNAUDITED CONSOLIDATED BALANCE SHEET
------------------------------------
AS OF MARCH 31, 1998
(Amounts in thousands, except number of shares and share data)
<CAPTION>
December 31,
1996 December 31, 1997 March 31, 1998
------------ ----------------------- -----------------------
HK$ HK$ US$ HK$ US$
ASSETS (Unaudited) (Unaudited)
------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents 2,509 1,954 252 4,275 552
Trade receivables 14,820 9,573 1,235 6,681 862
Rental and utility deposits 4,735 7,243 935 7,757 1,001
Prepayments to vendors and suppliers and
other current assets 11,808 10,826 1,396 10,110 1,305
Inventories 6,456 4,022 519 4,064 524
Due from related companies 1,986 4,932 636 6,870 886
Due from a shareholder - current portion 5,566 8,414 1,086 123 16
---------- ---------- ---------- ---------- ----------
TOTAL CURRENT ASSETS 47,880 46,964 6,059 39,880 5,146
---------- ---------- ---------- ---------- ----------
Due from a shareholder - non-current portion 10,885 2,361 305 - -
Prepayments for construction-in-progress 12,011 17,011 2,196 12,111 1,563
Property, plant and equipment, net 46,917 106,846 13,787 112,666 14,537
---------- ---------- ---------- ---------- ----------
TOTAL ASSETS 117,693 173,182 22,347 164,657 21,246
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Short-term bank loans 5,627 5,596 722 5,317 686
Long-term bank loans - current portion 1,827 6,269 809 1,454 188
Accounts payable and accrued expenses 8,317 8,237 1,063 11,074 1,429
Obligations under finance leases- current portion 2,257 4,577 590 4,512 582
Deferred income 22,042 37,696 4,864 34,109 4,401
Deferred liabilities - current portion - 743 96 743 96
Loans from third parties - 9,741 1,257 3,092 399
Income taxes payable 14,752 9,895 1,277 10,099 1,303
Taxes other than income 9,257 9,880 1,275 9,902 1,278
---------- ---------- ---------- ---------- ----------
TOTAL CURRENT LIABILITIES 64,079 92,634 11,953 80,302 10,362
---------- ---------- ---------- ---------- ----------
Long-term bank loans 240 6,786 876 10,188 1,315
Long-term loans from third parties 13,916 - - - -
Loans from minority shareholders of subsidiaries 5,160 5,160 666 4,200 542
Obligations under finance leases - non current 1,698 8,253 1,065 7,180 926
portion
Deferred liabilities - non current portion - 4,269 551 4,083 527
Deferred taxation 1,451 4,574 590 4,574 590
Minority interests 4,857 6,689 863 6,945 896
SHAREHOLDERS' EQUITY:
Common stock, par value US$ 0.001 each, 100
million shares authorized; 10 million
shares outstanding 78 78 10 78 10
Cumulative translation adjustment 72 131 17 125 16
Retained earnings 26,142 44,608 5,756 46,982 6,062
---------- ---------- ---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY 26,292 44,817 5,783 47,185 6,088
---------- ---------- ---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 117,693 173,182 22,347 164,657 21,246
========== ========== ========== ========== ==========
</TABLE>
Translation of amounts from Hong Kong Dollars ("HK$") into United States Dollars
("US$") for the convenience of the reader has been made at the exchange rate
quoted by the Asian Wall Street Journal on March 31, 1998 of US$1.00 = HK$7.75.
No representation is made that the Hong Kong Dollar amounts could have been, or
could be, converted into United States Dollars, at that rate on March 31, 1998
or at any other certain rate.
3
<PAGE>
<TABLE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
AUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
FOR THE THREE MONTHS FROM JANUARY 1, 1997 TO MARCH 31, 1997 AND JANUARY 1, 1998
TO MARCH 31, 1998
(Amounts in thousands)
<CAPTION>
Three Months
Year Ended Year Ended Ended
December 31, December 31, Year Ended March 31, Three Months Ended
1995 1996 December 31, 1997 1997 March 31, 1998
--------- --------- --------------------- --------- ---------------------
HK$ HK$ HK$ US$ HK$ HK$ US$
(Unaudited) (Unaudited)(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 17,533 21,111 18,466 2,383 28 2,374 306
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 2,100 2,211 1,832 236 80 252 33
Depreciation 8,885 11,393 18,700 2,413 2,889 5,923 764
Loss on disposal of fixed assets 230 18 124 16 - 122 16
(Increase) Decrease in assets:
Trade receivables (4,788) (6,192) 5,247 677 2,276 2,892 373
Deposits, prepayments and other current (1,187) (9,232) (1,526) (197) 3,367 202 25
assets
Inventories (1,589) (4,761) 2,434 314 7 (42) (5)
Due from related companies 2,429 (1,986) (2,946) (380) 327 (1,938) (250)
Increase (Decrease) in liabilities:
Accounts payable and accrued expenses (809) 3,281 (80) (10) (3,206) 2,837 366
Deferred income 4,518 2,322 15,654 2,020 6,808 (3,587) (463)
Deferred liabilities - - 5,012 647 - (186) (24)
Income taxes payable 2,510 4,980 (4,857) (627) (1,787) 204 26
Taxes other than income 662 6,909 623 80 (92) 22 3
Deferred taxation - 1,451 3,123 403 - - -
--------- --------- --------- --------- --------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 30,494 31,505 61,806 7,975 10,697 9,075 1,170
--------- --------- --------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Prepayments for construction-in-progress - (7,084) (5,000) (645) (17,039) - -
Acquisition of property, plant and (20,427) (18,291) (63,360) (8,175) (2,206) (6,961) (897)
equipment
Sales proceeds from disposal of property,
plant and equipment 6,153 1,109 53 7 - - -
--------- --------- --------- --------- --------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (14,274) (24,266) (68,307) (8,813) (19,245) (6,961) (897)
--------- --------- --------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
(Settlement) Proceeds of short-term bank (2,198) 3,577 (31) (4) (386) (279) (36)
loans
Decrease (Increase) in due from a 2,707 (3,187) 5,676 732 (6,456) 10,652 1,375
shareholder
Payment of dividends to a shareholders (29,979) - - - - -
Payment of dividend to minority
shareholders - (2,821) - - - - -
Proceeds from long-term bank loans 3,000 1,000 14,500 1,871 10,000 4,000 516
Repayment of long-term bank loans (2,193) (4,027) (3,512) (453) (284) (5,413) (698)
Proceeds from (Settlement of) long-term
loans from third parties 12,757 1,159 (4,175) (539) - (6,649) (858)
Assumption of finance lease obligations - - - - 8,432 - -
Capital element of finance lease rental (87) (1,152) (6,571) (848) (3,024) (1,138) (147)
payments
Capital contribution of the Chinese joint
venture partner into a joint venture - 911 - - - - -
Repayment of loans from minority
shareholders of subsidiaries - (1,200) - - - (960) (124)
--------- --------- --------- --------- --------- --------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (15,993) (5,740) 5,887 759 8,282 213 28
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
AUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
------------------------------------------------------
THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
FOR THE THREE MONTHS FROM JANUARY 1, 1997 TO MARCH 31, 1997 AND JANUARY 1, 1998
TO MARCH 31, 1998
(Amounts in thousands)
<CAPTION>
Three Months
Year Ended Year Ended Ended
December 31, December 31, Year Ended March 31, Three Months Ended
1995 1996 December 31, 1997 1997 March 31, 1998
--------- --------- --------------------- --------- ---------------------
HK$ HK$ HK$ US$ HK$ HK$ US$
(Unaudited) (Unaudited)(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 227 1,499 (614) (79) (266) 2,327 301
Cash and cash equivalents, at beginning of 639 901 2,509 324 2,509 1,954 252
year
Cumulative translation adjustments 35 109 59 7 27 (6) (1)
--------- --------- --------- --------- --------- --------- ---------
Cash and cash equivalents, at end of year 901 2,509 1,954 252 2,270 4,275 552
========= ========= ========= ========= ========= ========= =========
</TABLE>
Translation of amounts from Hong Kong Dollars ("HK$") into United States Dollars
("US$") for the convenience of the reader has been made at the exchange rate
quoted by the Asian Wall Street Journal on March 31, 1998 of US$1.00 = HK$7.75.
No representation is made that the Hong Kong Dollar amounts could have been, or
could be, converted into United States Dollars, at that rate on March 31, 1998
or at any other certain rate.
5
<PAGE>
<TABLE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
AUDITED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND
UNAUDITED CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS FROM JANUARY 1, 1998 TO MARCH 31, 1998
(Amounts in thousands, except number of shares)
<CAPTION>
Cumulative
Common Common Retained Translations
Stock Stock Earnings Adjustments TOTAL
------------- ------------- ------------- ------------- -------------
Number HK$ HK$ HK$ HK$
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1995 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 - - 21,111 - 21,111
Translation adjustment - - - 109 109
------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31,
1996 10,000,000 78 26,142 72 26,292
Net income - - 18,466 - 18,466
Translation adjustment - - - 59 59
------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31,
1997 10,000,000 78 44,608 131 44,817
Net income - - 2,374 - 2,374
Translation adjustment - - - (6) (6)
------------- ------------- ------------- ------------- -------------
BALANCE AT MARCH 31,
1998 10,000,000 78 46,982 125 47,185
============= ============= ============= ============= =============
</TABLE>
6
<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$0.001 each. 10 million common shares
were issued and outstanding as of December 31, 1997 as adjusted for a forward
split in June 1998. The Company is a U.S. public company listed on the National
Association of Securities Dealers Automated Quotations.
Physical Beauty & Fitness Holdings Limited ("Physical Holdings") was
incorporated on 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 centres ("Fitness Centres") and
other related businesses in 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 common shares 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. In
February, 1998, Goodchild sold all its common shares of the Company in a public
transaction to a Japanese institutional investor.
On November 27, 1996, the Company changed its name to Physical Spa & Fitness,
Inc.
The Shareholder's interests in the fitness and beauty centres 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 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.
7
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONT'D)
- --------------------------------------------------------
During the period from 1990 to 1997, 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 seven
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.
The details of Physical Holdings and the Operating Subsidiaries and their
principal activities as of the date of this report are summarized below:
<TABLE>
<CAPTION>
Date of
acquisition/ Place of Equity interest owned
Name of Company formation incorporation by the Company Principal activities
- ----------------------------------------- ----------------------- ------------- ---------------------- -------------------------
Direct Indirect
<S> <C> <C> <C> <C> <C>
Physical Beauty & Fitness Holdings March 8, 1996 BVI 100% - Investment holding
Limited ("Physical Holdings")
Physical Health Centre Hong Kong March 2, 1990 Hong Kong 91.4% - Operating 5 Fitness
Limited ("Physical HK") Centres in Hong Kong
Regent Town Holdings Limited September 20, 1993 BVI 92.5% - Investment holding
("Regent")
Supreme Resources Limited September 29, 1994 Hong Kong 70% - Operating a beauty
("Supreme") treatment centre in
Hong Kong
Physical Health Centre (Zhong Shan) September 29, 1994 Hong Kong 100% - Investment holding
Limited ("Zhongshan Physical") (formerly operating a
(formerly known as Famerich beauty treatment centre
Development Limited ("Famerich")) in Hong Kong)
Zhongshan Physical Ladies' Club October 29, 1996 The PRC - 95% Operating a Fitness
Ltd. (owned by Zhongshan Physical) Centre in Zhongshan,
the PRC
</TABLE>
8
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONT'D)
- --------------------------------------------------------
<TABLE>
<CAPTION>
Date of
acquisition/ Place of Equity interest owned
Name of Company formation incorporation by the Company Principal activities
- ----------------------------------------- ----------------------- ------------- ---------------------- -------------------------
Direct Indirect
<S> <C> <C> <C> <C> <C>
Ever Growth Limited ("Ever Growth" September 29, 1994 Hong Kong 100% - Property holding
Proline Holdings Limited ("Proline") September 28, 1994 BVI - 92.5% Investment holding
(wholly owned by Regent)
Shanghai Physical Ladies' Club September 28, 1994 Hong Kong - 92.5% Investment holding
Company Limited ("Shanghai Physical")
(wholly owned by Proline)
Shanghai Physical Ladies' Club Co., September 28,1994 The PRC - 92.5% Operating two Fitness
Ltd. (owned by Shanghai Physical) Centres in Shanghai,
the PRC
Mighty System Limited ("Mighty") December 15, 1994 BVI 100% - Provision of marketing
services for cosmetics
sales
Jade Regal Holdings Limited ("Jade March 15, 1996 BVI 100% - Investment holding
Regal")
Physical Health Centre (Dalian) Limited March 15, 1996 Hong Kong - 100% Investment holding
("Dalian Physical")
(wholly owned by Jade Regal)
Dalian Physical Ladies' Club Co., Ltd. March 15, 1996 The PRC - 90% Operating a Fitness
(90% owned by Dalian Physical ) Centre in Dalian,
the PRC
Star Perfection Holdings Limited April 15, 1996 BVI 100% - Investment holding
("Star Perfection")
Physical Health Centre (Shenzhen) April 15, 1996 Hong Kong - 100% Investment holding
Limited ("Shenzhen Physical")
(wholly-owned by Star Perfection)
Shenzhen Physical Ladies' Club Co. August 16, 1996 The PRC - 90% Operating a Fitness
Ltd. (owned by "Shenzhen Centre in
Physical") Shenzhen, the PRC
Physical Health Centre (Macau) Limited March 21, 1997 Hong Kong 100% - Investment holding
("Macau Physical")
Physical Health Centre (Tsuen Wan) September 8, 1997 Hong Kong 100% - Operating a Fitness
Limited ("Tsuen Wan Physical") Centre in Hong Kong
</TABLE>
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 interest of Regent owned by a minority shareholder was acquired by the
Shareholder (see Note 6(c)). All the shares owned by Physical HK and the
Shareholder were then transferred to Physical Holdings at the original cost of
their investment to 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.
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.
9
<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>
TERM OF
TYPE OF INTEREST THE
NAME OF THE JOINT OWNED BY JOINT REGISTERED
JOINT VENTURE LOCATION VENTURE THE GROUP VENTURE CAPITAL PROFIT SHARING ARRANGEMENT
- ---------------- ------------- ------------ ----------- --------- ------------ ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Shanghai Huangpu and Co-operative 92.5% 10 years Originally See arrangement on p.11
Physical Hongqiao, US$1,000
Ladies' Shanghai in cash
Club Co., Ltd. and
("Shanghai increased
JV") to US$2,000
in cash in
1995
Dalian Dalian Equity 90% 12 years Originally Pro-rata to equity interests
Physical Rmb10,000
Ladies' in cash and
Club Co., Ltd. changed to
("Dalian JV") Rmb1,000
in cash and
Rmb9,000
in form of
fixed assets
and
renovation
materials
in 1996
Shenzhen Shenzhen Co-operative 90% 10 years HK$4,600 Pro-rata to equity interests
Physical in form
Ladies' Club of cash
Co. Ltd. and fixed
("Shenzhen assets
JV")
Zhongshan Zhongshan Co-operative 95% 10 years US$500 in Pro-rata to equity interests
Physical form of
Ladies' Club cash and
Co. Ltd. fixed
("Zhongshan assets
JV")
</TABLE>
10
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONT'D)
- --------------------------------------------------------
Other special provisions of these joint ventures are summarized 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 to 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.
11
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONT'D)
- --------------------------------------------------------
Zhongshan JV
- ------------
Similar to the Shenzhen JV, both joint venture partners have not contributed the
required capital within the specified time limit according to the requirements
of the contract as of the date of this report. The joint venture partners are in
the process of applying for extension of such time limit 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 investments in the Shanghai and Dalian JVs may
be adversely affected by changes in policies by the Chinese government
including, among others, 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.
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 PRC 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 PRC 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 the economic conditions in the PRC and the economic prospects for the
Company, its subsidiaries and the China joint ventures in which the Company has
invested.
12
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONT'D)
- --------------------------------------------------------
ECONOMIC ENVIRONMENT (CONT'D)
In recent years, the PRC economy has experienced periods of rapid economic
expansion and high rates of inflation. More recently, it has been exposed to the
economic crisis in Asia. The central government has from time to time adopted
various measures designed to stabilize the economy, regulate growth and contain
inflation. All such economic events and measures could adversely affect the
Group's results of operations and expansion plans.
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 Renminbi currency into foreign currencies. As a result, the
Renminbi was not freely convertible into foreign currencies in the past. While
recent changes in foreign exchange regulations permit the Renminbi to be
convertible under the "current account", which includes trade and service
related foreign exchange transactions, it is still not freely convertible under
the "capital account" which includes foreign direct investment.
All foreign exchange transactions involving the Renminbi must take place either
through the People's 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 People's 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.
Payment for imported materials and remittance of earnings outside of the PRC are
subject to the availability of foreign currency which is dependent on the
foreign currency denominated earnings of the entity or must be arranged through
a swap centre or designated foreign exchange bank. Approval for exchange at a
swap centre is granted to joint venture enterprises for valid reasons such as
the purchase of imported materials and remittance of earnings. However, there
can be no assurance that current authorizations for foreign invested enterprises
("FIE") to retain their foreign exchange to satisfy foreign exchange
liabilities or to pay dividends will not be limited or eliminated or that FIEs
such as the Shanghai and Dalian JVs will be able to obtain sufficient foreign
exchange to pay dividends or satisfy their foreign exchange requirements.
Foreign exchange transactions under the capital account continue to require
approvals from the State Administration of Foreign Exchange, which could limit
the ability of the Shanghai and Dalian JVs to obtain foreign exchange through
foreign currency denominated debt or equity financing.
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 income of the Shanghai and Dalian JVs are
predominantly denominated in
13
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONT'D)
- --------------------------------------------------------
FOREIGN CURRENCY EXCHANGE (CONT'D)
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 income and the foreign currency equivalent of such income 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 institutions 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.
2. BASIS OF PRESENTATION
- ------------------------------
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 on consolidation.
14
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- -------------------------------------------------------------
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 as revenue on a pro-rata basis over the
estimated membership term whereas the monthly dues are recognized as
revenue on a monthly basis.
Deferred income represents membership fees, admission fees and service
fees billed but for which the related services, or portion of the
services, have not yet been rendered.
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
The Group recognizes an impairment loss on a fixed asset when evidence,
such as the sum of expected future cash flows (undiscounted and without
interest charges), indicates that future operations will not produce
sufficient revenue to cover the related future costs, including
depreciation, and when the carrying amount of asset cannot be realized
through sale. Measurement of the impairment loss is based on the fair
value of the assets.
15
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- -------------------------------------------------------------
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 Company and
its 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, Macau Physical and
Tsuen Wan Physical were incorporated under the laws of Hong Kong. They
provide for Hong Kong profits tax at a rate of 16% (1997 - 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 PRC enterprise income taxes at the applicable tax rate of 33%.
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 TAX
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 ventures.
BT is recognized on the accrual basis. Sales revenue is recorded in the
financial statements net of BT.
16
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- -------------------------------------------------------------
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. Non-monetary assets and liabilities are
translated at the unified exchange rate prevailing at the time the
assets or liabilities were acquired. The resulting exchange differences
are included in the determination of income.
On consolidation, the financial statements of the PRC Operating
Subsidiaries are translated into HK$ using the closing rate method,
whereby the balance sheet items are translated into HK$ 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. 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.
17
<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.
k. DEFERRED LIABILITIES
--------------------
Deferred liabilities represent the benefit arising from the rent-free
period granted by lessors under operating leases. Deferred liabilities
are used to offset against operating lease rental expenses over the
lease term.
4. PROPERTY, PLANT AND EQUIPMENT
- ---------------------------------------
<TABLE>
<CAPTION>
December 31, March 31,
------------------------------ ------------
1996 1997 1998
-------------- ------------ ------------
HK$ HK$ HK$
(Unaudited)
<S> <C> <C> <C>
Land and buildings 3,137 3,140 3,140
Leasehold improvements 40,143 65,101 64,977
Machinery and equipment 37,995 68,452 64,894
Furniture and fixtures 6,368 12,863 12,898
Computers 1,586 2,283 2,468
Motor vehicles 728 1,090 1,090
Construction-in-progress - - 9,396
Less: Accumulated depreciation (43,040) (46,083) (46,197)
-------------- ------------ ------------
Net book value 46,917 106,846 112,666
============== ============ ============
</TABLE>
As of December 31, 1997, the cost and accumulated depreciation of fixed assets
held under finance leases amounted to approximately HK$17,535 (1996 - HK$4,927)
and HK$2,555 (1996 - HK$132) respectively. As of March 31, 1998, the cost and
accumulated depreciation of fixed assets held under finance leases amounted to
approximately HK$17,535 and HK$3,635 respectively.
18
<PAGE>
5. TRADE RECEIVABLES
- --------------------------
Trade receivables comprised the following items:
<TABLE>
<CAPTION>
December 31, March 31,
------------------------- -------------
1996 1997 1998
---------- ----------- -------------
HK$ HK$ HK$
(Unaudited)
<S> <C> <C> <C>
Balance with a beauty product vendor 9,641 8,380 6,231
Corporate beauty package receivables 4,854 - -
Others 325 1,193 450
---------- ----------- -------------
14,820 9,573 6,681
========== =========== =============
</TABLE>
(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. Marketing fees
were recognised as revenue when the related services were rendered.
The Group also purchases beauty products from the Vendor, and on
September 30, 1996, Mighty entered into an agreement with the Vendor
for the settlement of the then outstanding balances of HK$4,965 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. Of the
beauty products purchased from the Vendor in order to settle the
marketing fee in 1996, approximately HK$3,700 remained as inventory as
of December 31, 1996. Substantially all were subsequently consumed for
beauty treatments or sold to customers in 1997. The second installment
of HK$1,000 was due on March 31, 1997 and was settled in cash by the
Vendor. The final installment due on June 30, 1997 was also satisfied
by offsetting the cost of beauty products purchased by the Group from
the Vendor. Substantially all of these beauty products were consumed
for beauty treatments or sold to customers in 1997.
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$7,544 and HK$8,380 as of December 31, 1996 and 1997 respectively.
The estimated related custom duty and sales tax liabilities have been
included in "Taxes other than income" with a corresponding receivable
from the Vendor being recorded in "Trade Receivable" in the
accompanying balance sheets. The Vendor has agreed to settle the
balances when the corresponding custom duty and sales tax are paid by
the Group.
19
<PAGE>
5. TRADE RECEIVABLES (CONT'D)
- ------------------------------------
(b) CORPORATE BEAUTY PACKAGE 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 31, 1996.
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 31, 1996 to June 30, 1997.
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 and third installments of HK$2,000 and HK$2,900 due on March 31,
1997 and June 30, 1997, respectively were settled in cash.
6. RELATED PARTY TRANSACTIONS
- -----------------------------------
<TABLE>
The Group had the following transactions with related companies:
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
------------------------------ ------------------------------
1995 1996 1997 1997 1998
------ -------- -------- ------------- -------------
HK$ HK$ HK$ HK$ HK$
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Rental of a director's quarters 540 636 650 159 180
Purchase of cosmetics and beauty products 2,246 - - - -
Purchase of beauty and fitness equipment 898 - 2,677 - 438
Sales of beauty and fitness equipment 1,367 793 - - -
Prepayments for equipment related to - 3,961 3,961 3,961 3,961
construction-in-progress
Purchase rebate received 1,208 - - - -
Management fee received 10 12 12 - -
</TABLE>
20
<PAGE>
6. RELATED PARTY TRANSACTIONS (CONT'D)
- --------------------------------------------
Certain general and administrative expenses incurred by the Group companies
during the relevant years on behalf of the related companies were reimbursed by
the respective related companies at cost.
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.
The Group has also undertaken the following transactions with the Shareholder
who was also the director of the Group companies:
(a) The Group made certain advances to the Shareholder during the years
starting from September 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. 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 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
quarterly installments from June 30, 1997 to March 31, 1999.
Accordingly, the Shareholder's Loan 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, 1997.
On September 30, 1997, a supplemental agreement was signed between the
Company and the Shareholder under which the Shareholder pledged
1,500,000 shares of common stock of the Company owned by the
Shareholder as collateral for the Shareholder's Loan.
As of December 31, 1997 and March 31, 1998, the outstanding principal
amount of the Shareholder's Loan and accrued interest is HK$10,775
and HK$123 respectively.
(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 March 31, 1998. Any such liabilities
will be recorded as expenses by the Group.
(c) 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, 1997 and March 31,
1998, the outstanding loan balances amounted to approximately HK$5,160
and HK$4,200 respectively. 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.
21
<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:
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended
March 31,
--------------------------------------------- -------------------
1995 1996 1997 1998
--------------- -------------- -------------- -------------------
(Unaudited)
<S> <C> <C> <C> <C>
Maximum amount outstanding during the
period/year HK$5,156 HK$5,626 HK$7,081 HK$5,577
Average amount outstanding during the
period/year HK$3,911 HK$4,517 HK$4,755 HK$4,015
Weighted average interest rate at the end of 11% 11% 11% 10%
the period/year
Weighted average interest rate during the 11% 9% 10% 13%
period/year
</TABLE>
8. LONG-TERM BANK LOANS
- -----------------------------
Long-term bank loans bear interest at 11% p.a. on the outstanding balances. As
of December 31, 1997 and March 31, 1998, the loans are repayable as follows:
<TABLE>
<CAPTION>
December 31 March 31,
------------------ ------------------
1997 1998
------------------ ------------------
HK$ HK$
Payable during the following period: (Unaudited)
<S> <C> <C>
Within one year 6,269 1,454
Over one year but not exceeding two years 3,643 4,023
Over two years but not exceeding three years 1,270 1,709
Over three years but not exceeding four years 1,412 1,809
Over four years but not exceeding five years 461 2,647
------------------ ------------------
Total 13,055 11,642
================== ==================
</TABLE>
As of December 31, 1997 and March 31, 1998, the Group had various banking
facilities available from financial institutions amounting to approximately
HK$21,953 and HK$20,906 respectively. 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; and
(iv) personal guarantees from the Principal Shareholders and their relatives.
22
<PAGE>
9. PROVISION FOR INCOME TAXES
- -----------------------------------
Hong Kong profits tax was provided at 16% (1997 - 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 years as they did not have any
assessable income.
The combined tax provision for the year ended December 31, 1995 was currently
payable. For the years ended December 31, 1996 and 1997, HK$6,947 and HK$3,846
of the provisions were currently payable and HK$1,451 and HK$3,123 were
deferred. The combined tax provision in the three months ended March 31, 1998
was currently payable.
The reconciliation of the effective income tax rate based on income before
income taxes and minority interests stated in the consolidated statements of
income to the statutory income tax rate in Hong Kong, the PRC and the BVI is as
follows:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------- --------------------------
1995 1996 1997 1997 1998
------- -------- -------- ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Weighted average statutory tax rate 17.0% 17.1% 20.7% 80.2% 28.4%
Permanent differences
-Non-deductible expenses - - (0.7%) - -
Timing differences for which no benefit has
been recognized due to establishment of
valuation allowance
-Restatement of deferred income 0.9% - - - -
Timing differences which give rise to the
provision of deferred taxation
-Accelerated depreciation allowances
on fixed assets - 7.1% 3.3% - -
-Restatement of deferred income - 1.6% 0.4% - -
Others 0.1% - 1.9% (0.5%) 0.4%
------- -------- -------- ------------- ------------
Effective tax rate 18.0% 25.8% 25.6% 79.7% 28.8%
======= ======== ======== ============= ============
</TABLE>
22
<PAGE>
9. PROVISION FOR INCOME TAXES (CONT'D)
- ---------------------------------------------
The tax impact of temporary differences between financial and taxable income
that give rise to deferred tax (assets)liabilities are principally related to
the following:
<TABLE>
<CAPTION>
December 31, March 31,
------------------------ --------------
1996 1997 1998
--------- ----------- --------------
HK$ HK$ HK$
(Unaudited)
<S> <C> <C> <C>
Accelerated depreciation allowances
on fixed assets in Hong Kong 1,753 4,574 4,574
Deferral of fitness and beauty income (302) - -
Valuation allowance for deferred tax assets - - -
--------- ----------- --------------
Total 1,451 4,574 4,574
========= =========== ==============
</TABLE>
10. OBLIGATIONS AND COMMITMENTS
- ------------------------------------
As of December 31, 1997 and March 31, 1998, the Group had the following
obligations and commitments:
a. OPERATING LEASES
- -------------------------
Physical HK, Tsuen Wan Physical and the Shanghai and Dalian JVs lease
the premises of their Fitness Centres. The total amount of lease
commitments as of December 31, 1997 and March 31, 1998 amounted to
HK$151,810 and HK$163,223 respectively payable as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
---------------- ----------------
HK$ HK$
(Unaudited)
<S> <C> <C>
Payable during the following period:
Within one year 32,450 36,420
Over one year but not exceeding two years 34,370 36,791
Over two years but not exceeding three years 26,983 30,139
Over three years but not exceeding four years 19,551 21,367
Over four years but not exceeding five years 17,527 20,646
Thereafter 20,929 17,860
---------------- ----------------
Total lease commitments 151,810 163,223
================ ================
</TABLE>
24
<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, 1997 and
March 31, 1998 were as follows:
<TABLE>
<CAPTION>
December 31, March 31,
----------------- ---------------
1997 1998
----------------- ---------------
HK$ HK$
Payable during the following period: (Unaudited)
<S> <C> <C>
Within one year 5,848 5,716
Over one year but not exceeding two years 5,196 4,584
Over two years but not exceeding three years 2,204 1,943
Over three years but not exceeding four years & thereafter 2,440 1,943
----------------- ---------------
Total minimum lease payments 15,688 14,186
Less : amount representing interest (2,858) (2,494)
----------------- ---------------
Present value of net minimum lease payments 12,830 11,692
================= ===============
</TABLE>
c. LOANS FROM THIRD PARTIES
- ---------------------------------
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 were originally fully repayable in
1997 or 1998, twenty-four months after the drawdown dates ("the Loan
Periods").
During 1997, Physical HK repaid the sum of US$540 (HK$4,175) to two of
the Lenders. In addition, supplemental loan agreements ("Supplemental
Agreements") were signed between Physical HK and two of the remaining
Lenders in November 1997. According to the Supplemental Agreements, the
Lenders agreed to extend the loan periods and to abandon their rights
to certain share purchase options. In return, Physical HK will pay
interest at three percent over the prevailing prime rate during the
extended loan period and a lump sum amount of US$60.
In March 1998, Physical HK repaid the sum of US$860 (HK$6,649) to two
of the remaining Lenders.
25
<PAGE>
d. CAPITAL COMMITMENTS
- ----------------------------
As of December 31, 1997 and March 31, 1998, the Group had outstanding
capital commitments in relation to the purchase of fitness equipment,
vehicles and leasehold improvements of new Fitness Centres of
approximately HK$14,377 and HK$18,167 respectively.
Subsequent to March 31, 1998, the Group entered into several additional
agreements with vendors for the purchase of machinery and equipment and
leasehold improvements totaling approximately HK$6,467.
11. RETIREMENT PLANS
- -------------------------
As stipulated by the regulations of the Chinese government, all of the Chinese
staff of the Shanghai and Dalian JVs are entitled to an annual pension on
retirement, which is equal to their basic salaries at their retirement dates.
The Chinese government is responsible for the pension liability to these retired
staff. The Shanghai and Dalian JVs are only required to make specified
contributions to the state-sponsored retirement plan calculated at 30% of the
basic salary of the staff.
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
-------------------------------------- -------------------------------
1995 1996 1997 1997 1998
----------- ---------- ---------- -------------- -------------
HK$ HK$ HK$ HK$ HK$
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash paid for:
Interest expense 1,158 842 4,151 426 1,131
Income taxes 2,415 3,238 8,862 2,370 1,140
</TABLE>
26
<PAGE>
13. OTHER SUPPLEMENTAL INFORMATION
- ---------------------------------------
The following items are included in the consolidated statements of income:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
------------------------------------ ----------------------------
1995 1996 1997 1997 1998
--------- --------- ---------- ------------ ------------
HK$ HK$ HK$ HK$ HK$
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Foreign exchange gain (loss) 109 1 (59) - (17)
Interest expense on finance leases
20 210 1,265 181 331
Interest expense on
overdrafts and bank loans 1,138 632 1,528 245 490
Interest expense on loans
from third parties - - 1,358 - 310
Interest income 1 2 1,498 - -
Sales taxes 504 1,216 1,040 310 229
Rental expenses under operating
leases 18,250 21,185 31,714 6,214 9,164
</TABLE>
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 its inception,
the Dalian JV has not made any such appropriations as it incurred losses during
these periods. As of December 31, 1997 and March 31, 1998, the Board of
Directors of the Shanghai JV has not yet determined the amount of the annual
appropriations to dedicated capital.
15. DISTRIBUTION OF PROFIT
- -------------------------------
In the opinion of management, any undistributed earnings of Physical Holdings
and the Operating Subsidiaries will be reinvested indefinitely.
27
<PAGE>
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 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 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 under the Plan.
17. SUBSEQUENT EVENT
- -------------------------
Subsequent to year end, Physical Holdings increased its equity interest of
Regent to 92.5% by acquiring additional 8 shares from a minority shareholder at
a consideration of approximately $960.
28
<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 shares of common stock to Ngai Keung Luk (Serleo)
pursuant to the Share Exchange Agreement in October, 1996.
The securities issued to the investors 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 investors. The investors 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 investors 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.
67
<PAGE>
ITEM 27. EXHIBITS
- -------- --------
Exhibit
-------
1.1 Selling Agent Agreement (form)*
1.2 Selected Dealers Agreement (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.*
3.6 Amended By-Laws of Physical Spa & Fitness, Inc.
4.1 Form of Representative's Warrant
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 Limited and Physical
Health Centre Hong Kong Limited (Kowloon 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)*
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*
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) *
- ------------
* Filed with the Commission as exhibit to the Registration Statement or an
amendment to the Registration Statement.
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.
68
<PAGE>
(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.
For determining liability under the Securities, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
69
<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 August 10, 1998.
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 8-10-98
/s/ Jill Bodnar President and Director 8-10-98
______________________ Chief Financial Officer and Director ____________
/s/ Darrie Lam Vice President and Secretary 8-10-98
______________________ Vice President and Director ____________
______________________ Director ____________
70
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME
EFFECTIVE. NO OFFER TO BUY THE SECURITIES CAN BE ACCEPTED AND NO PART OF
THE PURCHASE PRICE CAN BE RECEIVED UNTIL THE REGISTRATION STATEMENT WAS
BECOME EFFECTIVE AND ANY SUCH OFFER MAY BE WITHDRAWN OR REVOKED, WITHOUT
OBLIGATION OR COMMITMENT OF ANY KIND, AT ANY TIME PRIOR TO NOTICE OF ITS
ACCEPTANCE GIVEN AFTER THE EFFECTIVE DATE.
PHYSICAL SPA & FITNESS INC.
SELECTED DEALERS AGREEMENT
___________________, 1998
Dear Sirs:
1. Global Financial Group, Inc., named as the Agent in the
enclosed preliminary prospectus (the "Agent"), propose to offer on a
"best efforts" basis, subject to the terms and conditions and execution
of the Agency Agreement, 375,000 shares (and 67,000 shares of Selling
Shareholders) of the $0.001 par value common stock (the "Shares') of the
Physical Spa & Fitness Inc. (the "Company"). The Shares are more
particularly described in the enclosed preliminary prospectus,
additional copies of which as well as the prospectus (after effective
date) will be supplied in reasonable quantities upon request.
2. The Agent is soliciting other agents to obtain offers to buy,
upon the terms and condition hereof, for a part of the Shares from
Selected Dealers, who are to act as agent, including you, who are (a)
registered with the Securities and Exchange Commission (the
"Commission') as broker/dealers under the Securities Exchange Act of
1934, as amended (the "1934 Act"), and members in good standing with the
National Association of Securities Dealers, Inc. (the "NASD"); or (b)
dealers or institutions with their principal place of business located
outside of the United States, its territories and possessions and not
registered under the 1934 Act who agree to make no sales within the
United States, its territories or possessions or to persons who are
nationals thereof or residents therein and, in making sales, to comply
with the NASD's interpretation with respect to free-riding and
withholding. Shares are to be offered at a price of $__________ share.
Selected Dealers will be allowed a concession of not less than
___________ (__%) percent of the offering price. You will be notified of
the precise amount of such concession prior to the effective date of the
Registration Statement. The offer is solicited subject to the issuance
and delivery of the
<PAGE>
Shares and their acceptance by the Agent, to the approval of legal
matters by counsel and to the terms and conditions as herein set forth.
3. Your offer to sell a designated number of the Shares, if made
prior to the effective date of the Registration Statement may be revoked
in whole or in part without obligation or commitment of any kind by you
any time prior to acceptance and no offer may be accepted by us and no
sale can be made until after the Registration Statement covering the
Shares has become effective with the Commission. Subject to the
foregoing, upon execution by you of the Offer to Sell below and the
return of same to us, you shall be deemed to have offered to sell the
number of Shares set forth in your offer on the basis set forth in
paragraph 2 above. Any oral offer to sell made by you shall be deemed
subject to this Agreement and shall be confirmed by you by the
subsequent execution and return of this Agreement. Any oral notice by us
of acceptance of your offer shall be followed by written or telegraphic
confirmation preceded or accompanied by a copy of the prospectus. If a
contractual commitment arises hereunder, all the terms of this Selected
Dealers Agreement shall be applicable. We may also make available to you
an allotment to sell Shares, but such allotment shall be subject to
modification or termination upon notice from us any time prior to an
exchange of confirmations reflecting completed transactions. All
references hereafter in this Agreement to the purchase and sale of
Shares assume and are applicable only if contractual commitments to sell
are completed in accordance with the foregoing.
4. You agree that, in selling said Shares, if your offer is
accepted after the effective date, you will make a bona fide public
distribution of same. You will advise us upon request of Shares to be
sold by you remaining unsold, and we shall have the right to sell such
Shares upon demand at the public offering price. Any of the Shares sold
by you pursuant to this Agreement are to be offered by you to the public
at the public offering price, subject to the terms hereof. Shares shall
not be offered or sold by you below the public offering price before the
termination of this Agreement.
5. Payment for Shares which you sell hereunder shall be made by
you on or before five (5) business days after the date of each
confirmation by certified or bank cashier's check payable to the Agent.
Certificates for the securities shall be delivered as soon as
practicable after delivery instructions are received by the Agent.
6. A Registration Statement covering the offering has been filed
with the Commission in respect to the Shares. You will be promptly
advised when the Registration Statement becomes effective. Each Selected
Dealer in selling Shares pursuant hereto agrees (which agreement shall
also be for the benefit of the Company) that it will comply with the
applicable requirements of the Securities Act of 1933 (the "1933 Act")
and the 1934 Act and any applicable rules and any applicable rules and
regulations issued under said Acts. No person is authorized by the
Company or by the Agent to give any information or to make any
representations other than those contained in the prospectus in
connection with the sale
2
<PAGE>
of the Shares. Nothing contained herein shall render the Selected
Dealers a member of the Underwriting Group or partners with the Agent or
with one another.
7. You will be informed by us as to the states in which we have
been advised by counsel the Shares have been qualified for sale or are
exempt under the respective securities or blue sky laws of such states,
but we have not assumed and will not assume any obligation or
responsibIlIty as to the right of any Selected Dealer to sell Shares in
any state.
8. The Agent shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the offering
or arising thereunder. The Representative shall not be under any
liability to you, except such as may be incurred under the 1933 Act and
the rules and regulations thereunder, except for lack of good faith and
except for obligation assumed by us in this Agreement, and no obligation
on our part shall be implied or inferred herefrom.
9. Selected Dealers will be governed by the conditions herein
set forth until this Agreement is terminated. This Agreement will
terminate when the offering is completed. Nothing herein contained shall
be deemed a commitment on our part to commit to you any number of Shares
for you to sell; such contractual commitment can only be made in
accordance with the provisions of paragraph 3 hereof.
10. You represent that you are a member in good standing of the
NASD and registered as a broker/dealer with the Securities and Exchange
Commission, or that you are a foreign broker/dealer not eligible for
membership under Section I of the By-Laws of the NASD who agree to make
no sales within the United States, its territories or possessions or to
persons who are nationals thereof or residents therein and in making
sales; to comply with the NASD's interpretation with respect to
free-riding and withholding. Your attention is called to the following:
a) Article III, SectIon 1 of the Rules of Fair Practice
of the NASD and the interpretations of said Section promulgated
by the Board of Governors of the NASD including the
interpretation with respect to "Free-Riding and Withholding";
b) Section 10(b) of the 1934 Act and Rules 10b-6 and
10b-10 of the general rules and regulations promulgated under
said Act
c) Securities Act Release #3907;
d) Securities Act Release #4150; and
e) Securities Act Release #4968 requiring the
distribution of a preliminary prospectus to all persons
reasonably expected to be purchasers of Shares from you at last
forty-eight (48) hours prior to the time you expect to mail
confirmations.
3
<PAGE>
You, if a member of the NASD, by signing this Agreement, acknowledge
that you are familiar with the cited law, rules and releases, and agree
that you will not directly and/or indirectly violate any provisions of
applicable law in connection with your participation in the distribution
of the Shares.
11. In addition to compliance with the provisions of paragraph
10 hereof, you will not, until advised by us in writing or by wire that
the entire offering has been distributed and closed, bid for or purchase
Shares in the open market or otherwise make a market in the Shares or
otherwise attempt to induce others to purchase Shares in the open
market. Nothing contained in this paragraph 11 shall, however, preclude
you from acting as agent in the execution of unsolicited orders of
customers in transactions effectuated for them through a market maker.
12. You understand that the Agent may, in connection with the
offering, engage in stabilizing transactions. If the Agent contact for
or purchase in the open market in section with such stabilization any
Shares sold to you hereunder and not effectively placed by you, the
Agent may charge you the Selected Dealer's concession originally allowed
you on the Shares so purchased, and you agree to pay such amount to us
on demand.
13. By submitting an Offer to Sell, you confirm that your net
capital is such that you may, in accordance with Rules 15c3-1 adopted
under the 1934 Act, agree to purchase the number of Shares you may
become obligated to purchase under the provisions of this Agreement.
14. All communications from you should be directed to us at the
office of Global Financial Group, Inc. 100 Washington Avenue South,
Suite 1319, Minneapolis, Minnesota 55401. All communications from us to
you shall be directed to address to which this letter is mailed.
Very truly yours,
GLOBAL FINANCIAL GROUP, INC.
By__________________________
Kevin S. Miller, President
4
<PAGE>
OFFER TO SELL
The undersigned does hereby offer to sell (subject to the right
to revoke as set forth in paragraph 3) ____________* Shares in
accordance with the terms and conditions set forth above.
*If a number appears here which does not correspond with what you wish to
offer to purchase, you may change the number to a lesser or mutually agreed
upon number by crossing out the number, inserting such different number,
and initialling the change.
5
EXHIBIT "A"
WARRANT CERTIFICATE NO. W1998-__________
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), AND NEITHER THIS WARRANT NOR SUCH SHARES MAY BE OFFERED FOR SALE,
SOLD, ENCUMBERED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT MADE UNDER THE ACT, OR PURSUANT TO AN EXEMPTION FROM SUCH
REGISTRATION.
AGENT'S WARRANT
EXERCISABLE ON OR BEFORE, AND VOID AFTER
5:00 P.M. MINNEAPOLIS TIME _______________, 2003
CERTIFICATE FOR _________ WARRANTS
WARRANTS TO PURCHASE COMMON STOCK OF
PHYSICAL SPA & FITNESS, INC. UNDER
THE LAWS OF THE STATE OF MINNESOTA
THIS CERTIFIES that GLOBAL FINANCIAL GROUP, INC. ("Holder") or assigns,
is the owner of the number of Warrants set forth above, each of which represents
the right to purchase from Physical Spa & Fitness, Inc., a Delaware corporation
(the "Company"), at any time on or before 5:00 p.m. Minneapolis time,
___________________, 2003, upon compliance with and subject to the conditions
set forth herein, one share for each Warrant (subject to adjustments referred to
below) of the Common Stock of the Company, par value $.01 per share (such shares
or other securities or property purchasable upon exercise of the Warrants being
herein called the "Shares").
Upon any exercise of less than all the Warrants evidenced by this
Warrant Certificate, there shall be issued to the Holder a new Warrant
Certificate in respect of the Warrants as to which this Warrant Certificate was
not exercised.
This Warrant is subject to the following provisions, terms and
conditions:
<PAGE>
1. EXERCISE; TRANSFERABILITY. The rights represented by this Warrant may
be exercised by the Holder hereof, in whole or in part (but not as to a
fractional share of Common Stock), by written notice of exercise delivered to
the Company ten (10) days prior to the intended date of exercise and by the
surrender of this Warrant (properly endorsed if required) at the principal
office of the Company and by paying in full, in cash or by certified or official
bank check payable to the order of the Company, the purchase price of $______
per share (subject to adjustments as noted subsequently).
In lieu of payment of cash or cash equivalents, the Holder may exercise
this Warrant as to a portion of the Shares issuable hereunder, by surrender to
the Company for cancellation of that portion of this Warrant which entitles the
Holder to purchase such number of Shares (the "Surrendered Warrants") where the
difference between the Quoted Price (as defined hereafter) and the Purchase
Price, when multiplied by the number of the Surrendered Warrants, equals
(rounding to the next whole number of Warrants) the aggregate Purchase Price of
the Shares being purchased pursuant to the non-surrendered portion of this
Warrant. Solely for the purpose of exercise of this Warrant, by surrender of the
Surrendered Warrants, the Quoted Price shall equal the closing price for the
Common Stock as quoted by a national securities exchange, as defined in the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or if quoted
by more than one such exchange, the highest of such quoted prices; or, if not
quoted on any national securities exchange, the closing price for the Common
Stock as reported on the NASDAQ National Market System; or, if not quoted on any
national securities exchange or on the NASDAQ National Market System, the
highest bid price offered by any market maker (other than the Holder hereof or
an affiliate of the Holder) as reported by NASDAQ, subject to the requirement
that there are at least four market makers; in each case, as of the close of
business on the business day preceding the date that the election to exercise is
tendered or sent to the Company. If the Common Stock is not admitted to trading
on any national securities exchange, is not quoted on NASDAQ National Market
System, and there are not at least four market makers with bid quotations on
NASDAQ, exercise of the Warrants by surrender of a portion of this Warrant shall
not be available.
THIS WARRANT MAY NOT BE TRANSFERRED OR DIVIDED INTO TWO OR MORE WARRANTS
OF SMALLER DENOMINATIONS, NOR MAY ANY COMMON STOCK ISSUED PURSUANT TO EXERCISE
OF THIS WARRANT BE TRANSFERRED UNLESS THIS WARRANT OR SHARES HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("SECURITIES ACT") AND
APPLICABLE STATE LAWS, OR UNLESS THE HOLDER OF THE CERTIFICATE OBTAINS AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT THE PROPOSED
TRANSFER MAY BE EFFECTED WITHOUT REGISTRATION PURSUANT TO EXEMPTIONS UNDER THE
SECURITIES ACT AND APPLICABLE STATE LAWS.
2. ISSUANCE OF SHARES. The Company agrees that the shares purchased
hereby shall be deemed to be issued to the record Holder hereof as of the close
of business on the date on which this Warrant shall have been surrendered and
the payment made for such shares as aforesaid. Subject to the provisions of the
next succeeding paragraph, certificates for the shares of stock so purchased
shall be delivered to the Holder hereof within a reasonable time, not exceeding
ten (10) days after the rights represented by this Warrant shall have been so
exercised, and, unless this Warrant has expired, a new Warrant representing the
number of shares, if any, with respect to which this Warrant shall not then have
been exercised shall also be delivered to the Holder hereof within such time.
2
<PAGE>
Notwithstanding the foregoing, however, the Company shall not be
required to deliver any certificate for shares of stock upon exercise of this
Warrant, except in accordance with the provisions, and subject to the
limitations, of paragraph 7 hereof.
3. COVENANTS OF COMPANY. The Company covenants and agrees that all
shares which may be issued upon the exercise of the rights represented by this
Warrant will, upon issuance, be duly authorized and issued, fully paid,
non-assessable and free from all taxes, liens and charges with respect to the
issue thereof, and without limiting the generality of the foregoing, the Company
covenants and agrees that it will from time to time take all such action as may
be required to assure that the par value per share of the Common Stock is at all
times equal to or less than the then effective purchase price per share of the
Common Stock issuable pursuant to this Warrant. The Company further covenants
and agrees that during the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized, and
reserved for the purpose of issue or transfer upon exercise of the subscription
rights evidenced by this Warrant, a sufficient number of shares of its Common
Stock to provide for the exercise of the rights represented by this Warrant.
4. ADJUSTMENTS. The above provisions are, however, subject to the
following provisions:
a) These Warrants are issued in connection with the Company's
issuance of Common Stock ("Shares") described in the Company's
Prospectus dated _________, 1998 ("Prospectus").
b) In case the Company shall at anytime hereafter subdivide or
combine the outstanding shares of Common Stock or declare a dividend
payable in Common Stock, the exercise price of this Warrant in effect
immediately prior to the subdivision, combination or record date for
such dividend payable in Common Stock shall forthwith be proportionately
increased, in the case of combination, or decreased, in the case of
subdivision or dividend payable in Common Stock, and each share of
Common Stock purchasable upon exercise of the Warrant shall be changed
to the number determined by dividing the then current exercise price by
the exercise price as adjusted after the subdivision, combination, or
dividend payable in Common Stock.
c) No fractional shares of Common Stock are to be issued upon the
exercise of the Warrant, but the Company shall pay a cash adjustment in
respect of any fraction of a share which would otherwise be issuable in
an amount equal to the same fraction of the market price per share of
Common Stock on the date of exercise as determined in good faith by the
Company.
3
<PAGE>
d) If any capital reorganization or reclassification of the
capital stock of the Company, or consolidation or merger of the Company
with another corporation, or the sale of all or substantially all of its
assets to another corporation shall be effected in such a way that
holders of Common Stock shall be entitled to receive stock, securities
or assets with respect to or in exchange for Common Stock, then, as
a condition of such reorganization, reclassification, consolidation,
merger or sale, lawful and adequate provision shall be made whereby the
Holder hereof shall hereafter have the right to purchase and receive
upon the basis and upon the terms and conditions specified in this
Warrant and in lieu of the shares of the Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby, such shares of stock, securities or
assets as may be issued and payable with respect to or in exchange for a
number of outstanding shares of such Common Stock equal to the number of
shares of such stock immediately theretofore purchasable and receivable
upon the exercise of the rights represented hereby had such
reorganization, reclassification, consolidation, merger or sale not
taken place, and in any such case appropriate provisions shall be made
with respect to the rights and interests of the Holder of this Warrant
to the end that the provisions hereof (including without limitation
provisions for adjustments of the Warrant purchase price and of the
number of share purchasable upon the exercise of this Warrant) shall
thereafter be applicable, as nearly as may be, in relation to any shares
of stock, securities or assets thereafter deliverable upon the exercise
hereof. The Company shall not effect any such consolidation, merger or
sale, unless prior to the consummation thereof the successor corporation
(if other than the Company) resulting from such consolidation, merger,
or the corporation purchasing such assets shall assume by written
instrument executed and mailed to the registered Holder hereof at the
last address of such holder appearing on the books of the Company, the
obligation to deliver to such holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such holder may
be entitled to purchase.
e) If the Company shall at any time or from time to time (i)
distribute (otherwise than as a dividend in cash or in Common Stock or
securities convertible into or exchangeable for Common Stock) to the
holders of Common Stock any property or other securities, or (ii)
declare a dividend upon the Common Stock (to the extent payable
otherwise than out of earnings or earned surplus, as indicated by the
accounting treatment of such dividend in the books of the Company, and
otherwise than in Common Stock or securities convertible into or
exchangeable for Common Stock), the Company shall reserve and the Holder
of this Warrant shall thereafter upon exercise hereof be entitled to
receive, with respect to each share of Common Stock purchased hereunder,
without any change in, or payment in addition to, the exercise price,
the amount of any property or other securities which would have been
distributable to such holder had such holder been a holder of one share
of Common Stock on the record date of such distribution or dividend (or
if no record date was established by the Company, the date such
distribution or dividend was paid).
f) In the event the Company spins off a subsidiary by
distributing to the shareholders of the Company as a dividend or
otherwise, the stock of a subsidiary, the Company shall reserve for the
life of this Warrant shares of the subsidiary to be delivered to the
holder of the warrants upon exercise to the same extent as if they were
owners of record of the Warrant Stock on the record date for payment of
the shares of the subsidiary.
4
<PAGE>
g) Upon any adjustment of the Warrant purchase price, then and in
each such case, the Company shall give written notice thereof, by first
class mail, postage prepaid, addressed to the registered hold of this
Warrant at the address of such holder as shown on the books of the
Company, which notice shall state the Warrant purchase price resulting
from such adjustment and the increase or decrease, if any, in the number
of shares purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.
5. COMMON STOCK. As used herein, the term "Common Stock" means the
Company's presently authorized shares of Common Stock and shall also include any
capital stock of any class of the Company hereafter authorized which shall not
be limited to fixed sum or percentage in respect of the rights of the holders
thereof to participate in dividends or in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the Company.
6. NO VOTING RIGHTS. This Warrant shall not entitle the Holder hereof to
any voting rights or other rights as a stockholder of the Company.
7. NOTICE OF TRANSFER OF WARRANT OR RESALE OF SHARES. The Holder of this
Warrant, by acceptance hereof, agrees to give written notice to the Company
before transferring this Warrant, or transferring any Common Stock issued upon
the exercise hereof, of such holder's intention to do so, describing briefly the
manner of any proposed transfer. Promptly upon receiving such written notice,
the Company shall present copies thereof to the Company counsel, and if in the
opinion of such counsel, the proposed transfer complies with federal and state
securities laws and may be effected without registration or qualification (under
any federal or state law), the Company, as promptly as practicable, shall notify
such holder of such opinion, whereupon such holder shall be entitled to transfer
this Warrant or to dispose of shares of Common Stock received upon the previous
exercise of this Warrant, provided that an appropriate legend may be endorsed on
this Warrant or the certificates for such shares respecting restrictions upon
transfer thereof necessary or advisable in the opinion of counsel to the Company
to prevent further transfers which would be in violation of Section 5 of the
Securities Act of 1933.
If, in the opinion of Company's counsel referred to in this paragraph 7,
the proposed transfer or disposition of shares described in the written notice
given pursuant to this paragraph 7 may not be effected without registration or
qualification of this Warrant or the shares of Common Stock issued on the
exercise hereof, the Company shall promptly give written notice thereof to the
Holder hereof, and the Holder will limit its activities in respect to such as,
in the opinion of such counsel, are permitted by law.
8. REGISTRATION RIGHTS.
a) PIGGYBACK RIGHTS. If the Company at any time after the date
hereof proposes to claim an exemption under Section 3(b) for a public
offering of any of its securities or to register under the Securities
Act of 1933 (except by a Form S-8, S-4 or other inappropriate form for
registration) or pursuant to the exemption from such registration
provided by Regulation A any of its securities, or pursuant to a
registration of its shares, it shall, each time the Company determines
to proceed with the actual preparation and filing of a registration
5
<PAGE>
statement, give written notice to all registered holders of Warrants,
and all registered holders of shares of Common Stock acquired upon the
exercise of Warrants, of its intention to do so and, on the written
request of any registered holders given within twenty (20) days after
receipt of any such notice (which request shall specify the Warrants or
shares of Common Stock intended to be sold or disposed of by such
registered holder and describe the nature of any proposed sale or other
disposition thereof), the Company will use its best efforts to cause all
such Warrants and/or shares, the registered holders of which shall have
requested the registration or qualification thereof, to be included in
such notification or registration statement proposed to be filed by the
Company; provided, however, that no such inclusion shall be required (i)
if the Shares may then be sold by the holder thereof without limitation
under Rule 144(k), or comparable successor rule of the Securities and
Exchange Commission, or (ii) if the managing underwriter of such
offering reasonably determines that including such Shares would
unreasonably interfere with such offering. The Company will pay all
expenses of registration. The Warrant holders shall pay all commissions
or discounts applicable to the sale of the included Shares, together
with any expenses of counsel retained by them in connection with their
sale of the Shares. If any such registration shall be underwritten in
whole or in part, the Company may require that the shares requested for
inclusion pursuant to this section be included in the underwriting on
the same terms and conditions as the securities otherwise being sold
through the underwriters.
b) REGISTRATION RIGHTS. At any time beginning one year after the
completion of the Company's initial public offering of the Common Stock,
if Company receives a written request from the record holder or holders
of this Warrant Certificate or any other warrant issued concurrently
with this Warrant (designated with the prefix W1998-) (or Warrant
Certificates issued upon transfer or assignment of any such warrant
certificate) of an aggregate of at least twenty-five (25%) percent of
the aggregate number of Shares of Company common stock that have been or
may be acquired upon the exercise of this Warrant and all other warrants
designated with the prefix W1998- (such shares being hereafter referred
to as the "Purchased Shares") not theretofore registered under the
Securities Act and sold, the Company shall prepare and file a
registration statement under the Securities Act covering the Purchased
Shares which are the subject of such request and shall use its best
efforts to cause such registration statement to become effective. In
addition, upon the receipt of such request, the Company shall promptly
give written notice to all other record holders of Purchased Shares that
such registration is to be effected. The Company shall include in such
registration statement such Purchased Shares for which it has received
written requests to register by such other record holders within 30 days
after the Company's written notice to such other record holders. The
Company shall be obligated to prepare, file and cause to become
effective only one (1) registration statement relating to the Shares of
Company Common Stock underlying this Warrant and all other warrants
designated with the prefix W1998-. In the event that (i) the holders of
a majority of the Purchased Shares for which registration has been
requested pursuant to this section determine for any reason not to
proceed with a registration at any time before the registration
statement has been declared effective by the Securities and Exchange
Commission (the "Commission"), and such holders request the Company to
withdraw such registration statement, if theretofore filed with the
Commission, with respect to the Purchased Shares covered thereby, and
(ii) the holders of such Purchased Shares agree to bear their own
expenses incurred in connection therewith and to reimburse the Company
for the expenses incurred by it attributable to the registration of such
Purchased Shares, then the holders of such Purchased Shares shall not be
deemed to have exercised their right to require the Company to register
Purchased Shares pursuant to this section 8(b). Notwithstanding the
foregoing, the holders of this Warrant Certificate shall not have the
rights provided by this Section 8(b) if the shares may be sold by the
holder thereof without limitation under Rule 144(k), or comparable
successor rule of the Securities and Exchange Commission. The Company
may delay the filing of any registration statement requested pursuant to
this section to a date not more than ninety (90) days following the date
of such request if, in the opinion of the Company's principal investment
banker at the time of such request, such a delay is necessary in order
not to adversely affect financing efforts then underway at the Company
or, if in the opinion of the Company, such a delay is necessary or
advisable to avoid disclosure of material nonpublic information.
6
<PAGE>
c) REGISTRATION PROCEDURES. If and whenever the Company is
required by the provisions of paragraph 8 to effect the registration of
any shares under the Securities Act, the Company shall:
(i) prepare and file with the Commission a registration
statement with respect to such securities, and use its best
efforts to cause such registration statement to become and remain
effective for such period as may be reasonably necessary to
effect the sale of such securities, not to exceed nine (9)
months;
(ii) prepare and file with the Commission such amendments
to such registration statement and supplements to the prospectus
contained therein as may be necessary to keep such registration
statement effective for such period as may be reasonably
necessary to effect the sale of such securities, not to exceed
nine (9) months;
(iii) furnish to the Holder and to the underwriters of the
securities being registered such reasonable number of copies of
the registration statement, preliminary prospectus, final
prospectus and such other documents as the Holder and
underwriters may reasonably request in order to facilitate the
public offering of such securities;
(iv) use its best efforts to register or qualify the
securities covered by such registration statement under the state
securities or blue sky laws of Minnesota and such additional
jurisdictions, not to exceed five in number, as the underwriters
or the holders of a majority of the Purchased Shares for which
registration has been requested may reasonably request within
twenty (20) days following the original filing of such
registration statement, except that the Company shall not for any
purpose be required to execute a general consent to service of
process or to qualify to do business as a foreign corporation in
any jurisdiction wherein it is not so qualified; and
7
<PAGE>
(v) prepare and promptly file with the Commission and
promptly notify the Holder of the filing of such amendment or
supplement to such registration statement or prospectus as may be
necessary to correct any statements or omissions if, at the time
when a prospectus relating to such securities is required to be
delivered under the Securities Act, any event shall have occurred
as the result of which any such prospectus or any other
prospectus as then in effect would include an untrue statement of
a material fact or omit to state any material fact necessary to
make the statements therein, in the light of the circumstances in
which they were made, not misleading.
9. MISCELLANEOUS. This Agreement shall inure to the benefit of, and be
binding upon, the successors of the Agent and of the Company. Nothing expressed
or mentioned in this Agreement is intended or shall be construed to give any
person, company or corporation, other than the parties hereto and their
successors and the controlling persons in paragraph 7 hereof, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision hereof. The term "successors" shall not include any purchaser of the
Securities merely by reason of such purchase. This Agreement shall be governed
by and construed in accordance with the laws of the State of Minnesota.
IN WITNESS WHEREOF, Physical Spa & Fitness, Inc. has caused this Warrant
to be signed by its duly authorized officer and this Warrant to be dated
________________, 1998.
PHYSICAL SPA & FITNESS, INC.
By__________________________________
Its________________________________
8
<PAGE>
LAW OFFICES OF
IWONA J. ALAMI
120 NEWPORT CENTER DR., SUITE 200
NEWPORT BEACH, CALIFORNIA 92660
(714)760-6880
FAX: (714) 760-6815
E-MAIL: [email protected]
August 10, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Physical Spa & Fitness Inc.
---------------------------
Ladies and Gentlemen:
This firm represents Physical Spa & Fitness Inc., a Delaware
corporation (the "Registrant") in connection with the Registrant's Registration
Statement on Form SB-2 under the Securities Act of 1933 (the "Registration
Statement"), which relates to the issuance and sale of (i) 375,000 shares of
common stock, par value $.001 per share ("Common Stock") offered by the
Registrant (the "Shares"); (ii) 67,000 shares of Common Stock, par value $.001
per share offered by the Selling Shareholder (the "Selling Shareholder Shares");
(iii) an option to issue up to 15% additional Shares to cover overallotments
(the "Overallotment Shares"); (iii) 43,125 Warrants issuable to Global Financial
Group (the "Representative's Warrants"); and (iv) 43,125 shares of Common Stock
issuable upon the exercise of the Representative Warrants ("Representative's
Shares"). For purposes hereinafter, the Shares, the Selling Shareholder Shares,
the Overallotment Shares, the Representative's Warrants and the Representative's
Shares are collectively referred to as the "Registered Securities." In
connection with our representation, we have examined such documents and
undertaken such further inquiry as we consider necessary for rendering the
opinion hereinafter set forth.
Based upon the foregoing, it is our opinion that the Registered
Securities, when sold as set forth in the Registration Statement, will be
legally issued, fully paid and nonassessable.
We acknowledge that we are referred to under the heading "Legal
Matters" in the Prospectus which is a part of the Registrant's Form SB-2
Registration Statement relating to the Registered Securities, and we hereby
consent to such use of our name in such Registration Statement and to the filing
of this opinion as Exhibit 5 to the Registration Statement and with such state
regulatory agencies in such states as may require such filing in connection with
the registration of the Registered Securities for offer and sale in such states.
Respectfully submitted,
/s/ Iwona J. Alami
Iwona J. Alami
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 21246
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