<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998.
( ) TRANSITION REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 333-38697
PHYSICAL SPA & FITNESS, INC.
(Exact name of small business as specified in its charter)
Delaware 13-1026995
---------------------- ----------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
12/F - 15/F Lee Theatre Plaza
99 Percival St., Causeway Bay
Hong Kong
(Address of principal executive offices)
(852) (852) 2572-8888
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable dated : June 1, 1999, 10,000,000 shares.
Transitional Small Business Disclosure Format (check one) :
Yes No X
---- ----
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
----
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Statements of Operations
for the three months ended March
31, 1998 and 1997 (Unaudited)
Consolidated Balance Sheets at March 31, 1998
and December 31,1997 (Unaudited)
Consolidated Statements of Cash Flows
for the three months ended March 31, 1998
and 1997 (Unaudited)
Notes to Consolidated Financial Statements
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
ITEM 2 - CHANGE IN SECURITIES
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
ITEM 5 - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
<PAGE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
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)
Three Months
Ended Three Months Ended
March 31, 1997 March 31, 1998
------------ --------------------------
HK$ HK$ US$
(Unaudited) (Unaudited) (Unaudited)
Operating Revenues
Fitness service 9,843 27,893 3,599
Beauty treatments 14,075 13,633 1,759
Others 22 27 4
------------ ------------ ------------
Total operating revenues 23,940 41,553 5,362
------------ ------------ ------------
Operating Expenses
Salaries and commissions 7,549 12,416 1,603
Rent and related expenses 6,214 9,164 1,182
Depreciation 2,889 5,923 764
Other selling and administrative
expenses 6,533 9,468 1,222
------------ ------------ ------------
Total operating expenses 23,185 36,971 4,771
------------ ------------ ------------
Income from operations 755 4,582 591
------------ ------------ ------------
Non-operating (income) expenses
Other (income), net (202) (238) (31)
Interest expenses 426 1,131 146
------------ ------------ ------------
Total non-operating (income) expenses 224 893 115
------------ ------------ ------------
Income before income taxes and
minority interests 531 3,689 476
Provision for income taxes 423 1,063 137
------------ ------------ ------------
Income before minority interests 108 2,626 339
Minority interests 80 252 33
------------ ------------ ------------
Net income 28 2,374 306
============ ============ ============
Earnings per common share 0.00 0.24 0.03
============ ============ ============
Number of shares outstanding (in
thousands) 10,000 10,000 10,000
============ ============ ============
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$7.75.
No representation is made that the Hong Kong Dollar amounts could have been, or
could be, converted into United States Dollars, at that rate on March 31, 1998
or at any other certain rate.
<PAGE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
AUDITED CONSOLIDATED BALANCE SHEETS
-----------------------------------
AS OF DECEMBER 31, 1997
AND
UNAUDITED CONSOLIDATED BALANCE SHEET
------------------------------------
AS OF MARCH 31, 1998
(Amounts in thousands, except number of shares and share data)
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
-------------------------- --------------------------
HK$ US$ HK$ US$
ASSETS (Unaudited) (Unaudited)
- ------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents 1,954 252 4,275 552
Trade receivables 9,573 1,235 6,681 862
Rental and utility deposits 7,243 935 7,757 1,001
Prepayments to vendors and suppliers and
other current assets 10,826 1,396 10,110 1,305
Inventories 4,022 519 4,064 524
Due from related companies 4,932 636 6,870 886
Due from a shareholder - current portion 8,414 1,086 123 16
------------ ------------ ------------ ------------
TOTAL CURRENT ASSETS 46,964 6,059 39,880 5,146
------------ ------------ ------------ ------------
Due from a shareholder - non-current portion 2,361 305 - -
Prepayments for construction-in-progress 17,011 2,196 12,111 1,563
Property, plant and equipment, net 106,846 13,787 112,666 14,537
------------ ------------ ------------ ------------
TOTAL ASSETS 173,182 22,347 164,657 21,246
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank loans 5,596 722 5,317 686
Long-term bank loans - current portion 6,269 809 1,454 188
Accounts payable and accrued expenses 8,237 1,063 11,074 1,429
Obligations under finance leases- current portion 4,577 590 4,512 582
Deferred income 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 9,895 1,277 10,099 1,303
Taxes other than income 9,880 1,275 9,902 1,278
------------ ------------ ------------ ------------
TOTAL CURRENT LIABILITIES 92,634 11,953 80,302 10,362
------------ ------------ ------------ ------------
Long-term bank loans 6,786 876 10,188 1,315
Long-term loans from third parties - - - -
Loans from minority shareholders of subsidiaries 5,160 666 4,200 542
Obligations under finance leases - non current portion 8,253 1,065 7,180 926
Deferred liabilities - non current portion 4,269 551 4,083 527
Deferred taxation 4,574 590 4,574 590
Minority interests 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 10 78 10
Cumulative translation adjustment 131 17 125 16
Retained earnings 44,608 5,756 46,982 6,062
------------ ------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY 44,817 5,783 47,185 6,088
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 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$7.75.
No representation is made that the Hong Kong Dollar amounts could have been, or
could be, converted into United States Dollars, at that rate on March 31, 1998
or at any other certain rate.
<PAGE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
FOR THE THREE MONTHS FROM JANUARY 1, 1997 TO MARCH 31, 1997 AND
JANUARY 1, 1998 TO MARCH 31, 1998
(Amounts in thousands)
Three Months
Ended Three Months Ended
March 31, 1997 March 31, 1998
------------ --------------------------
HK$ HK$ US$
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited) (Unaudited) (Unaudited)
Net income 28 2,374 306
Adjustments to reconcile net
income to net cash provided by
operating activities:
Minority interests 80 252 33
Depreciation 2,889 5,923 764
Loss on disposal of fixed assets - 122 16
(Increase) Decrease in assets:
Trade receivables 2,276 2,892 373
Deposits, prepayments and other current
assets 3,367 202 25
Inventories 7 (42) (5)
Due from related companies 327 (1,938) (250)
Increase (Decrease) in liabilities:
Accounts payable and accrued expenses (3,206) 2,837 366
Deferred income 6,808 (3,587) (463)
Deferred liabilities - (186) (24)
Income taxes payable (1,787) 204 26
Taxes other than income (92) 22 3
Deferred taxation - - -
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 10,697 9,075 1,170
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Prepayments for construction-in-progress (17,039) - -
Acquisition of property, plant and
equipment (2,206) (6,961) (897)
Sales proceeds from disposal of
property, plant and equipment - - -
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (19,245) (6,961) (897)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
(Settlement) Proceeds of short-term bank
loans (386) (279) (36)
Decrease (Increase) in due from a
shareholder (6,456) 10,652 1,375
Payment of dividends to a shareholders - - -
Payment of dividend to minority shareholders - - -
Proceeds from long-term bank loans 10,000 4,000 516
Repayment of long-term bank loans (284) (5,413) (698)
Proceeds from (Settlement of) long-term
loans from third parties - (6,649) (858)
Assumption of finance lease obligations 8,432 - -
Capital element of finance lease rental
payments (3,024) (1,138) (147)
Capital contribution of the Chinese
joint venture partner into a
joint venture - - -
Repayment of loans from minority
shareholders of subsidiaries - (960) (124)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 8,282 213 28
------------ ------------ ------------
<PAGE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
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)
Three Months
Ended Three Months Ended
March 31, 1997 March 31, 1998
------------ --------------------------
HK$ HK$ US$
(Unaudited) (Unaudited) (Unaudited)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (266) 2,327 301
Cash and cash equivalents, at
beginning of year 2,509 1,954 252
Cumulative translation adjustments 27 (6) (1)
------------ ------------ ------------
Cash and cash equivalents, at
end of year 2,270 4,275 552
============ ============ ============
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.
<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 March 31, 1998 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.
<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
Name of Company formation incorporation owned by the Principal activities
Company
- --------------------------------------------- ------------------- ------------- ------------------ ---------------------------------
Direct Indirect
------ --------
<S> <C> <C> <C> <C> <C>
Physical Beauty & Fitness Holdings Limited March 8, 1996 BVI 100% - Investment holding
("Physical Holdings")
Physical Health Centre Hong Kong Limited March 2, 1990 Hong Kong 91.4% - Operating 5 Fitness Centres
("Physical HK") in Hong Kong
Regent Town Holdings Limited ("Regent") September 20, 1993 BVI 92.5% - Investment holding
Supreme Resources Limited ("Supreme") September 29, 1994 Hong Kong 70% - Operating a beauty
treatment centre in Hong
Kong
Physical Health Centre (Zhong Shan) Limited September 29, 1994 Hong Kong 100% - Investment holding
("Zhongshan Physical")(formerly known as (formerly operating a
Famerich Development Limited ("Famerich")) beauty treatment centre
in Hong Kong)
Zhongshan Physical Ladies' Club Ltd. (owned October 29, 1996 The PRC - 95% Operating a Fitness Centre
by Zhongshan Physical) in Zhongshan, the PRC
</TABLE>
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- ----------------------------------------------
<TABLE>
<CAPTION>
Date of
acquisition/ Place of Equity interest
Name of Company formation incorporation owned by the Principal activities
Company
- --------------------------------------------- ------------------- ------------- ------------------ ---------------------------------
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 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
(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 Regal") March 15, 1996 BVI 100% - Investment holding
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) Limited April 15, 1996 Hong Kong - 100% Investment holding
("Shenzhen Physical")
(wholly-owned by Star Perfection)
Shenzhen Physical Ladies' Club Co. Ltd. August 16, 1996 The PRC - 90% Operating a Fitness Centre
Ltd. (owned by "Shenzhen Physical") in Shenzhen, the PRC
Physical Health Centre (Macau) Limited March 21, 1997 Hong Kong 100% - Investment holding
("Macau Physical")
Physical Health Centre (Tsuen Wan) Limited September 8, 1997 Hong Kong 100% - Operating a Fitness Centre
("Tsuen Wan Physical") 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.
<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
Type of Interest of 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 Ladies' Hongqiao, US$1,000 in
Club Co., Ltd. Shanghai cash and
("Shanghai JV") increased
to US$2,000
in cash in
1995
Dalian Physical Dalian Equity 90% 12 years Originally Pro-rata to equity interests
Ladies' Club Rmb10,000
Co., Ltd. in cash and
("Dalian JV") changed to
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 of
Ladies' Club cash and
Co. Ltd. fixed assets
("Shenzhen 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 assets
("Zhongshan JV")
</TABLE>
<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.
<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.
<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
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
- ----------------------------------------------
FOREIGN CURRENCY EXCHANGE (CONT'D)
predominantly denominated in Renminbi, and will have to be converted to pay
dividends to the Company in United States Dollars or Hong Kong Dollars. Should
the Renminbi devalue against these currencies, such devaluation would have a
material adverse effect on the Company's 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.
<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.
<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.
<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.
<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
- --------------------------------------
December 31, March 31,
-------------------------- ------------
1996 1997 1998
------------ ------------ ------------
HK$ HK$ HK$
(Unaudited)
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
============ ============ ============
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$3,635 respectively.
<PAGE>
5. TRADE RECEIVABLES
- --------------------------
Trade receivables comprised the following items:
December 31, March 31,
-------------------------- ------------
1996 1997 1998
------------ ------------ ------------
HK$ HK$ HK$
(Unaudited)
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
============ ============ ============
(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.
<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$2,900 due on March 31,
1997 and June 30, 1997, respectively were settled in cash.
6. RELATED PARTY TRANSACTIONS
- -----------------------------------
The Group had the following transactions with related companies:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
HK$ HK$ HK$ HK$ HK$
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
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>
<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.
<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>
Three Months
Ended
Year Ended December 31, 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$4,015
Weighted average interest rate at the
end of the period/year 11% 11% 11% 10%
Weighted average interest rate during
the period/year 11% 9% 10% 13%
</TABLE>
8. LONG-TERM BANK LOANS
- -----------------------------
Long-term bank loans bear interest at 11% p.a. on the outstanding balances. As
of December 31, 1997 and March 31, 1998, the loans are repayable as follows:
<TABLE>
<CAPTION>
December 31 March 31,
------------ ------------
1997 1998
------------ ------------
HK$ 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.
<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$3,123 were
deferred. The combined tax provision in the three months ended March 31, 1998
was currently payable.
The reconciliation of the effective income tax rate based on income before
income taxes and minority interests stated in the consolidated statements of
income to the statutory income tax rate in Hong Kong, the PRC and the BVI is as
follows:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Weighted average statutory tax rate 17.0% 17.1% 20.7% 80.2% 28.4%
Permanent differences
-Non-deductible expenses - - (0.7%) - -
Timing differences for which no benefit has
been recognized due to establishment of
valuation allowance
-Restatement of deferred income 0.9% - - - -
Timing differences which give rise to the
provision of deferred taxation
-Accelerated depreciation allowances
on fixed assets - 7.1% 3.3% - -
-Restatement of deferred income - 1.6% 0.4% - -
Others 0.1% - 1.9% (0.5%) 0.4%
----------- ----------- ----------- ----------- -----------
Effective tax rate 18.0% 25.8% 25.6% 79.7% 28.8%
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
9. PROVISION FOR INCOME TAXES (Cont'd)
- -----------------------------------
The tax impact of temporary differences between financial and taxable income
that give rise to deferred tax (assets)liabilities are principally related to
the following:
<TABLE>
<CAPTION>
December 31, March 31,
-------------------------- -----------
1996 1997 1998
------------ ------------ -----------
HK$ 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>
<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.
<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$6,467.
11. RETIREMENT PLANS
- -------------------------
As stipulated by the regulations of the Chinese government, all of the Chinese
staff of the Shanghai and Dalian JVs are entitled to an annual pension on
retirement, which is equal to their basic salaries at their retirement dates.
The Chinese government is responsible for the pension liability to these retired
staff. The Shanghai and Dalian JVs are only required to make specified
contributions to the state-sponsored retirement plan calculated at 30% of the
basic salary of the staff.
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- ----------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
HK$ 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>
<PAGE>
13. OTHER SUPPLEMENTAL INFORMATION
- ---------------------------------------
The following items are included in the consolidated statements of income:
<TABLE>
<CAPTION>
Three Months Ended
Year 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.
<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.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY TO BE
COVERED BY AND TO QUALIFY FOR THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 THE 1995 ACT SHAREHOLDERS AND
PROSPECTIVE SHAREHOLDERS SHOULD UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER
ANY FORWARD - LOOKING STATEMENT CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY
ONE OF THOSE FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED HEREIN. THESE FORWARD - LOOKING STATEMENTS INCLUDE PLANS AND
OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, INCLUDING PLANS AND OBJECTIVES
RELATING TO THE PRODUCTS AND THE FUTURE ECONOMIC PERFORMANCE OF THE COMPANY.
ASSUMPTIONS RELATING TO THE FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG
OTHER THINGS, FUTURE ECONOMIC, COMPETITIVE AND MARKET CONDITIONS, FUTURE
BUSINESS DECISIONS, AND THE TIME AND MONEY REQUIRED TO SUCCESSFULLY COMPLETE
DEVELOPMENT PROJECTS, ALL OF WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT
ACCURATELY AND MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY. ALTHOUGH THE
COMPANY BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE FORWARD - LOOKING
STATEMENTS CONTAINED HEREIN ARE REASONABLE, ANY OF THOSE ASSUMPTIONS COULD PROVE
INACCURATE AND, THEREFORE, THERE CAN BE NO ASSURANCE THAT THE RESULTS
CONTEMPLATED IN ANY OF THE FORWARD - LOOKING STATEMENTS CONTAINED HEREIN WILL BE
REALIZED. BASED ON ACTUAL EXPERIENCE AND BUSINESS DEVELOPMENT, THE COMPANY MAY
ALTER ITS MARKETING, CAPITAL EXPENDITURE PLANS OR OTHER BUDGETS, WHICH MAY IN
TURN AFFECT THE COMPANY'S RESULTS OF OPERATIONS. IN LIGHT OF THE SIGNIFICANT
UNCERTAINTIES INHERENT IN THE FORWARD LOOKING STATEMENTS INCLUDED THEREIN, THE
INCLUSION OF ANY SUCH STATEMENT SHOULD NOT BE REGARDED AS A REPRESENTATION BY
THE COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES OR PLANS OF THE COMPANY WILL
BE ACHIEVED.
OVERVIEW OF COMPANY'S BUSINESS:
- -------------------------------
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. As of March 31, 1998, the Company operated nine
facilities: six in Hong Kong and three in China. Management believes that the
Company is one of the top providers of fitness facilities and spa and beauty
treatment services in Hong Kong and China, with approximately 55,000 members.
The Company offers to its customers, at each location, access to a wide range of
U.S.- styled fitness and spa services.
The Company was incorporated on September 21, 1988 in the state of
Delaware under the name of 'Foreclosed Realty Exchange, Inc', a development
stage company seeking acquisitions with no material assets or liabilities. Prior
to acquisition of Physical Beauty & Fitness Holdings Limited, a British Virgin
Islands corporation ('Physical Limited'), the Company had no revenue producing
operations, but planned to enter into joint ventures and/or acquisitions
originally in the area of real estate, to expand its operations. In October,
1996, the Company closed a transaction with Ngai Keung Luk (Serleo), a 100%
shareholder of Physical Limited, whereby the Company entered into a Share
Exchange Agreement with Ngai Keung Luk (Serleo), pursuant to which the Company
issued 8,000,000 pre-split 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%.
<PAGE>
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.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Year 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% 80.38% 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.
<PAGE>
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.
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%.
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.
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 Notes to the Financial Statements.
<PAGE>
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.
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. 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.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
NONE
ITEM 2 - CHANGES IN SECURITIES
NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
NONE
ITEM 5 - OTHER INFORMATION
NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file reports on FORM 8-K during the quarter
ending March 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PHYSICAL SPA & FITNESS, INC.
(Registrant)
Date: June 30, 1999 /S/Ngai Keung Luk
----------------------------------
Ngai Keung Luk, Chairman and
Chief Executive Officer
Date: June 30, 1999 /S/ Robert Chui
----------------------------------
Robert Chui,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 552
<SECURITIES> 0
<RECEIVABLES> 862
<ALLOWANCES> 0
<INVENTORY> 524
<CURRENT-ASSETS> 5146
<PP&E> 14537
<DEPRECIATION> 0
<TOTAL-ASSETS> 21246
<CURRENT-LIABILITIES> 10362
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 6078
<TOTAL-LIABILITY-AND-EQUITY> 21246
<SALES> 5362
<TOTAL-REVENUES> 5362
<CGS> 0
<TOTAL-COSTS> 4771
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 146
<INCOME-PRETAX> 476
<INCOME-TAX> 137
<INCOME-CONTINUING> 339
<DISCONTINUED> 0
<EXTRAORDINARY> (33)
<CHANGES> 0
<NET-INCOME> 306
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
