<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 June 30, 2000.
( ) TRANSITION REPORT PURSUANT SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-26573
PHYSICAL SPA & FITNESS, INC.
(Exact name of small business as specified in its charter)
Delaware 98-0203281
---------------------- ----------------
(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)
(011) (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 30, 2000, 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 six months ended June
31, 2000 and 1999 (Unaudited)
Consolidated Balance Sheets at June 30, 2000
and December 31,1999 (Unaudited)
Consolidated Statements of Cash Flows
for the six months ended June 30, 2000
and 1999 (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>
<TABLE>
PHYSICAL SPA & FITNESS, INC., AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
-------------------------------------------------------
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (Amounts in
thousands, except number of shares and per share data )
<CAPTION>
Three months ended June 30 Six months ended June 30
1999 2000 2000 1999 2000 2000
---------- ---------- ---------- ---------- ---------- ----------
HK$ HK$ US$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues
Fitness service 42,482 47,396 6,076 79,397 90,996 11,666
Beauty treatments 18,856 25,344 3,250 35,955 49,121 6,297
Others 10 - - 15 1 1
---------- ---------- ---------- ---------- ---------- ----------
Total operating revenues 61,348 72,740 9,326 115,367 140,118 17,964
---------- ---------- ---------- ---------- ---------- ----------
Operating Expenses
Salaries and commissions 20,434 21,018 2,695 33,283 41,156 5,276
Rent and related expenses 14,364 16,744 2,147 26,891 33,601 4,308
Depreciation 7,875 9,310 1,194 14,777 18,658 2,392
Other selling and administrative
expenses 9,457 17,847 2,288 24,780 32,789 4,204
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses 52,130 64,919 8,323 99,731 126,204 16,180
---------- ---------- ---------- ---------- ---------- ----------
Income from operations 9,218 7,821 1,003 15,636 13,914 1,784
---------- ---------- ---------- ---------- ---------- ----------
Non-operating (income) expenses
Other (income), net (180) (319) (41) (233) (473) (60)
Interest expenses 847 767 98 1,582 1,739 223
---------- ---------- ---------- ---------- ---------- ----------
Total non-operating (income) expenses 667 448 57 1,349 1,266 163
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and
minority interests 8,551 7,373 946 14,287 12,648 1,621
Provision for income taxes 2,297 1,347 173 3,294 2,406 308
---------- ---------- ---------- ---------- ---------- ----------
Income before minority interests 6,254 6,026 773 10,993 10,242 1,313
Minority interests 457 545 70 723 672 86
---------- ---------- ---------- ---------- ---------- ----------
Net income 5,797 5,481 703 10,270 9,570 1,227
========== ========== ========== ========== ========== ==========
Earnings per common share 0.58 0.55 0.07 1.03 0.96 0.12
========== ========== ========== ========== ========== ==========
Number of shares outstanding (in
thousands) 10,000 10,000 10,000 10,000 10,000 10,000
========== ========== ========== ========== ========== ==========
</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 HongKong Bank on June 30, 2000 of US$1.00 = HK$7.8. No representation
is made that the Hong Kong Dollar amounts could have been, or could be,
converted into United States Dollars, at that rate on June 30, 2000 or at any
other certain rate.
<PAGE>
<TABLE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
AUDITED CONSOLIDATED BALANCE SHEET
-----------------------------------
AS OF DECEMBER 31, 1999
AND
UNAUDITED CONSOLIDATED BALANCE SHEET
------------------------------------
AS OF JUNE 30, 2000
<CAPTION>
(Amounts in thousands, except number of shares and share data)
As of
---------------------------------------------
December 31, 1999 June 30, 2000
HK$ HK$ US$
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents 2,896 3,381 433
Trade receivables 3,895 3,857 495
Rental and utility deposits 11,654 11,834 1,517
Prepayments to vendors and suppliers and other current assets 7,727 13,081 1,677
Inventories 2,551 2,558 328
Due from related companies 8,373 3,378 433
Due from a stockholder 4,110 695 89
------------- ---------- ---------
Total current assets 41,206 38,784 4,972
------------- ---------- ---------
Bank deposits, collateralized 3,522 3,522 452
Prepayments for construction-in-progress 467 11,765 1,508
Property, plant and equipment, net 140,936 125,449 16,083
------------- ---------- ---------
Total assets 186,131 179,520 23,015
============= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term bank loans 8,606 1,797 230
Long-term bank loans - current portion 1,851 2,341 300
Accounts payable and accrued expenses 18,300 9,530 1,222
Obligations under finance leases - current portion 4,747 4,408 565
Deferred income - current portion 22,828 26,872 3,445
Deferred liabilities - current portion 2,304 2,841 365
Income taxes payable 5,991 4,998 641
Taxes other than income 3,182 3,191 409
------------- ---------- ---------
Total current liabilities 67,809 55,978 7,177
------------- ---------- ---------
Deferred income - non-current portion 999 2,523 324
Deferred liabilities - non-current portion 5,533 4,184 536
Long-term bank loans - non-current portion 5,587 2,553 327
Loans from minority stockholders of subsidiaries 4,200 4,200 538
Obligations under finance leases - non-current portion 12,114 9,905 1,270
Deferred taxation 5,661 5,661 726
Minority interests 5,721 6,397 820
Stockholders' equity:
Common stock, par value US$0.001 each,
100 million shares of stock authorized;
10 million shares of stock issued and outstanding 78 78 10
Cumulative translation adjustments 119 161 20
Retained earnings 78,310 87,880 11,267
------------- ---------- ---------
Total stockholders' equity 78,507 88,119 11,297
------------- ---------- ---------
Total liabilities and stockholders' equity 186,131 179,520 23,015
============= ========== =========
</TABLE>
Translation of amounts from Hong Kong Dollars ("HK$") into United States Dollars
("US$") for the convenience of the reader has been made at the exchange rate of
US$1.00 = HK$7.8. No representation is made that the Hong Kong Dollar amounts
could have been, or could be, converted into United States Dollars, at that rate
on June 30, 2000 or at any other certain rate.
-2-
<PAGE>
<TABLE>
PHYSICAL SPA & FITNESS, INC., AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(Amounts in thousands)
<CAPTION>
1999 2000
---------- ---------------------
HK$ HK$ US$
<S> <C> <C> <C>
Cash flows from operating activities:
Net income 10,270 9,570 1,227
Adjustments to reconcile net income to net cash provided by operating
activities:
Minority interests 723 672 86
Depreciation 14,777 18,658 2,392
Loss (Gain) on disposal of fixed assets 71 387 50
(Increase) Decrease in assets:
Trade receivables (66) 38 5
Deposits, prepayments and other current assets (3,333) (5,534) (710)
Inventories 9 (7) (1)
Due from related companies (280) 4,995 640
Increase (Decrease) in liabilities:
Accounts payable and accrued expenses (6,592) (8,770) (1,124)
Deferred income 1,340 5,568 714
Deferred liabilities 5,628 (812) (104)
Income taxes payable 1,974 (993) (127)
Taxes other than income (22) 9 1
Deferred taxation - - -
---------- ---------- ----------
Net cash provided by operating activities 24,499 23,781 3,049
---------- ---------- ----------
Cash flows from investing activities:
Prepayments for construction-in-progress (14,551) (11,298) (1,448)
Acquisition of property, plant and
equipment (3,543) (5,133) (658)
Sales proceeds from disposal of property,
plant and equipment 140 1,579 202
---------- ---------- ----------
Net cash used in investing activities (17,954) (14,852) (1,904)
---------- ---------- ----------
Cash flows from financing activities
(Settlement) Proceeds of short-term bank loans (1,647) (6,809) (873)
Decrease (Increase) in due from a shareholder 361 3,415 438
Proceeds from long-term bank loans 3,800 4,500 577
Repayment of long-term bank loans (1,159) (7,044) (903)
Assumption of finance lease obligations 500 - -
Capital element of finance lease rental payments (2,419) (2,548) (327)
---------- ---------- ----------
Net cash provided by (used in) financing
activities (564) (8,486) (1,088)
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 5,981 443 57
Cash and cash equivalents, at beginning of
year 1,721 2,896 371
Cumulative translation adjustments (474) 42 5
---------- ---------- ----------
Cash and cash equivalents, at end of year 7,228 3,381 433
========== ========== ==========
</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 HongKong Bank on June 30, 2000 of US$1.00 = HK$7.8. No representation
is made that the Hong Kong Dollar amounts could have been, or could be,
converted into United States Dollars, at that rate
on June 30, 2000 or at any other certain rate.
<PAGE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
----------------------------------------------------
FOR THE SIX MONTHS FROM JANUARY 1, 1999 TO JUNE 30, 1999
AND JANUARY 1, 2000 TO JUNE 30, 2000
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 stocks with par
value of US$0.001 each. The Company is a U.S. public company listed on
the National Association of Securities Dealers Over-the-Counter
Bulletin Board.
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 stock being held by a
stockholder ("the Stockholder"). Physical Holdings has interests in
various companies ("Operating Subsidiaries") operating fitness and
beauty centres ("Fitness Centres") and other related businesses in Hong
Kong ("HK") and the People's Republic of China ("PRC").
Pursuant to a Share Exchange Agreement entered into between the Company
and Physical Holdings on August 8, 1996, the Stockholder transferred
his controlling interest in the outstanding stock of Physical Holdings
in exchange for 80% of the outstanding common stocks 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 stockholders of the Company
also transferred 990,000 common shares to Goodchild Investments Limited
("Goodchild"). Accordingly, the Stockholder and Goodchild became the
major shareholders of the Company. In February, 1998, Goodchild sold
all its common shares of the Company in a private transaction to a
Japanese institutional investor.
On November 27, 1996, the Company changed its name to Physical Spa &
Fitness Inc.
The transfer of the Stockholder'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
Stockholder 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 EQUITY INTEREST
ACQUISITION / PLACE OF OWNED BY THE PRINCIPAL
NAME OF COMPANY FORMATION INCORPORATION COMPANY ACTIVITIES
Direct Indirect
------ --------
<S> <C> <C> <C> <C> <C>
Physical Holdings March 8, 1996 BVI 100% - Investment
holding
Ever Growth Limited ("Ever September 29, HK - 100% Property holding
Growth") 1994
Global Resources Limited December 1, HK - 100% Inactive
1998
Jade Regal Holdings March 15, 1996 BVI - 100% Investment
Limited holding
Mighty System Limited December 15, BVI - 100% Provision of
1994 marketing
services for
cosmetics sales
</TABLE>
-4-
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
<TABLE>
<CAPTION>
DATE OF EQUITY INTEREST
ACQUISITION / PLACE OF OWNED BY THE PRINCIPAL
NAME OF COMPANY FORMATION INCORPORATION COMPANY ACTIVITIES
Direct Indirect
------ --------
<S> <C> <C> <C> <C> <C>
Physical Health Centre March 15, 1996 HK - 100% Investment
(Dalian) Limited holding
("Physical Dailan")
Physical Health Centre March 21, 1997 HK - 100% Investment
(Macau) Limited holding
Physical Health Centre April 15, 1996 HK - 100% Investment
(Shenzhen) Limited holding
("Physical Shenzhen")
Physical Health Centre November 18, HK - 100% Operating a
(TST) Limited ("Physical 1998 Fitness Centre
TST") in Hong Kong
Physical Health Centre September 8, HK - 100% Operating a
(Tsuen Wan) Limited 1997 Fitness Centre
("Physical Tsuen Wan") in Hong Kong
Physical Health Centre September 29, HK - 100% Will operate a
(Tuen Mun) Limited 1994 Fitness Centre
("Physical Tuen Mun") in Hong Kong
(formerly known as
Physical Health Centre
(Zhong Shan) Limited)
Physical Health Centre March 2, 1990 HK - 91.4% Operating 5
Hong Kong Limited Fitness Centres
in Hong Kong
Proline Holdings Limited September 28, BVI - 92.5% Investment
1994 holding
Regent Town Holdings September 20, BVI - 92.5% Investment
Limited ("Regent Town") 1993 holding
Shanghai Physical Ladies' September 28, HK - 92.5% Investment
Club Company Limited 1994 holding
("Physical Shanghai")
Star Perfection Holdings April 15, 1996 BVI - 100% Investment
Limited holding
Supreme Resources Limited September 29, HK - 70% Operating a
1994 beauty treatment
centre in Hong
Kong
</TABLE>
-5-
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
The Group also operates Fitness Centres in the PRC through some of its
Operating Subsidiaries which are Sino-foreign joint ventures ("JV")
established in the PRC. In the opinion of the directors, the Group is
able to govern and control the financial and operating policies and the
board of directors of the JV. Therefore, the JV have been accounted for
as subsidiaries. Detailed information in connection with these JV is as
follows:
a) Shanghai Physical Ladies' Club Co., Ltd., a Sino-foreign
co-operative JV ("the Shanghai JV"), was established on
September 7, 1993 in Shanghai, the PRC. The original total
investment and registered capital of the Shanghai JV was US$1
million each and was increased to US$2 million each in 1995.
The capital contributions were to be made in cash. The JV
period is for 10 years starting from the date of the business
licence issued on September 7, 1993.
According to the provisions of the JV contract, Physical
Shanghai contributed 100% of the registered capital of the JV
while the Chinese JV partner provided the premises in which the
Fitness Centres are located. Upon dissolution of the JV, all
the property, plant and equipment ("PPE") of Shanghai JV will
be taken over by the Chinese JV partner while the Group will
assume all the working capital, debts and outstanding
obligations and commitments.
For the first three years of the Shanghai JV, the Chinese JV
partner will be entitled only to a rent of RMB950,000 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 JV partner has no further entitlement to the
profits of the Shanghai JV.
b) Dalian Physical Ladies' Club Co., Ltd. is a Sino-foreign equity
JV ("the Dalian JV") established on April 11, 1995 in Dalian,
the PRC. The total registered capital of the Dalian JV was
Reminbi (RMB) 10 million. The JV period is 12 years from the
date of issue of the business license on April 11, 1995.
Physical Dalian held a 90% equity interest in the Dalian JV and
the profits or losses of the Dalian JV are to be shared by the
venturers in proportion to their equity interests in the JV.
Physical Dalian contributed its share of the registered capital
in the form of PPE and renovation materials and the Chinese
venturer contributed in cash. Both venturers had fulfilled
their respective capital contributions as of December 31, 1996.
The JV commenced operation in 1996.
c) Under the JV contract between Physical Shenzhen and a Chinese
enterprise, Physical Shenzhen is required to contribute
HK$4,140,000 in the form of cash and PPE as capital into
Shenzhen Physical Ladies' Club Co. Ltd. within six months from
the issuance of the business licence.
As of the date of this report, both JV 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 JV 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 JV's business license.
According to the directors, the Group is negotiating with the
Chinese enterprise to terminate the JV contract and the default
remedies are unlikely to be imposed on the Group.
d) Under the JV contract between Physical Health Centre (Zhong
Shan) Limited (former name of Physical Tuen Mun) and a Chinese
enterprise, Physical Zhongshan is required to contribute
US$500,000 in the form of cash and PPE as capital into the JV
within six months from the issuance of the business licence.
As of the date of this report, both JV 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 JV 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 JV's business license.
-6-
<PAGE>
According to the directors, the Group is negotiating with the
Chinese enterprise to terminate the joint venture contract and
the default remedies are unlikely to be imposed on the Group.
2. BASIS OF PRESENTATION
The financial statements are presented in Hong Kong dollars and have
been prepared in accordance with generally accepted accounting
principles in the United States of America. This basis of accounting
differs from that used in the statutory financial statements of the BVI
and Hong Kong Operating Subsidiaries and the PRC JV, which were
prepared in accordance with generally accepted accounting principles in
Hong Kong and the accounting principles and the relevant financial
regulations applicable to enterprises with foreign investments as
established by the Ministry of Finance of China respectively.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial
information of the Company, its majority-owned and controlled
subsidiaries and joint ventures. All material intercompany
balances and transactions have been eliminated on
consolidation.
b) CONTRACTUAL JOINT VENTURE
A contractual JV is an entity established between the Group
and one or more other parties with the rights and obligations
of the JV partners governed by a contract. In case the Group
owns more than 50% of the JV and is able to govern and control
its financial and operating policies and its board of
directors, such JV is considered as a de facto subsidiary and
is accounted for as a subsidiary.
c) STATEMENT OF CASH FLOWS
For the purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments with an original
maturity within three months to be cash equivalents.
d) INVENTORIES
Inventories are stated at the lower of cost and net realizable
value. Cost, which comprises all costs of purchase and, where
applicable, costs of conversion and other costs that have been
incurred in bringing the inventories to their present location
and condition, is calculated using the first-in, first-out
method. Net realizable value represents the estimated selling
price in the ordinary course of business less the estimated
costs of completion and the estimated costs necessary to make
the sale.
e) PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
PPE is stated at cost less accumulated depreciation. The cost
of an asset consists of its purchase price and any directly
attributable costs of bringing the asset to its present
working condition and location for its intended use.
Expenditure incurred after the assets have been put into
operation, such as repairs and maintenance, is charged to the
statement of operations in the period in which it is incurred.
In situations where it can be clearly demonstrated that the
expenditure has resulted in an increase in the future economic
benefits expected to be obtained from the use of the assets,
the expenditure is capitalized.
When assets are sold or retired, their costs or valuation and
accumulated depreciation are removed from the accounts and any
gain or loss resulting from their disposal is included in the
statement of operations.
When assets are transferred between PPE and other classes of
assets, the cost of such an asset on transfer is deemed to be
the carrying amount of the asset as stated under its original
classification. Any previous revaluation reserve on the asset
is frozen upon the transfer until the retirement or disposal
of the asset. On the retirement or disposal of the asset, the
frozen revaluation reserve is transferred directly to retained
earnings.
Depreciation is calculated to write off the cost of PPE over
their estimated useful lives from the date on which they
become fully operational using the straight line method at the
following annual rates:
-7-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 PPE 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.
f) REVENUE RECOGNITION
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. The non-refundable admission fee is
recognized as revenue on a pro-rata basis over the estimated
membership term whereas the monthly dues, service income and
other related income are recognized as revenue when services
are rendered.
g) DEFERRED INCOME
Deferred income represents unamortized non-refundable
admission fees, membership fees, and service fees billed but
for which the related services, or portion of the services
have not yet been rendered.
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.
PPE 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.
Depreciation is provided on the cost of the assets on a
straight line basis over their estimated useful lives as set
out in note 3(e) above. Finance charges implicit in the
purchase payments are charged to the statement of operations
over the periods of the contracts so as to produce an
approximately constant periodic rate of charge on the
remaining balances of the obligations for each accounting
period.
i) OPERATING LEASES
Leases where substantially all the rewards and risks of
ownership of assets remain with the leasing company are
accounted for as operating leases. Rentals payable under
operating leases are recorded in the statement of operations
on a straight-line basis over the lease term.
j) DEFERRED LIABILITIES
Deferred liabilities represent the benefit arose from the
rent-free period of the operating leases. The deferred
liabilities are amortized within the lease term, and the
amortization is recorded in the statement of operations.
k) 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.
Provision for income and other related taxes have been
provided in accordance with the tax rates and laws in effect
in the various countries of operations.
-8-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
l) FOREIGN CURRENCY TRANSLATION
The Company and its subsidiaries maintain their accounting
books and records in Hong Kong Dollars ("HK$"), except for the
PRC JV which maintain their accounting books and records in
RMB. Foreign currency transactions during the year are
translated to HK$ at the approximate rates of exchange on the
dates of transactions. Monetary assets and liabilities
denominated in foreign currencies at year end and translated
at the approximate rates of exchange ruling 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 statements of operations.
On consolidation, the financial statements of the PRC JV 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 expenses items are
translated at the average unified exchange rate for the year.
All exchange differences arising on the consolidation are
recorded within equity. Historically, foreign exchange
transactions have not been material to the financial
statements.
For the purpose of these financial statements, the exchange
rate adopted for the presentations of financial information as
of and for the three months ended March 31, 2000 has been made
at HK$7.769 to US$1.00. No representation is made that the HK$
amount could have been, or could be, converted into United
States Dollars at that rate on March 31, 2000 or at any other
rates.
m) RELATED PARTIES
Parties are considered to be related if one party has the
ability, directly or indirectly, to control the other party,
or exercise significant influence over the other party in
making financial and operating decisions. Parties are also
considered to be related if they are subject to common control
or common significant influence.
n) EARNINGS PER SHARE
Earnings per share is based on net income attributable to
stockholders and the weighted average number of common shares
of stock outstanding during the year.
Diluted earnings per share is not shown because the impact of
any dilution is not material.
o) USES OF ESTIMATES
The preparation of the Company's financial statements in
conformity with generally accepted accounting principles
requires the Company's management to make estimates and
assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual amounts
could differ from those estimates.
-9-
<PAGE>
4. SHORT-TERM BANK LOANS
The short-term bank loans are collateralized and repayable within one
year.
5. LONG-TERM BANK LOANS
The Group obtained various lines of credit under banking facilities
from creditworthy commercial banks in HK to finance its operations.
These loans were collateralized by certain of the assets of the Group
and its stockholders. The collateral of the loans include:
(i) leasehold property in Hong Kong owned by Ever Growth;
(ii) fixed deposits owned by Physical TST and Physical Tsuen Wan;
(iii) leasehold property in Hong Kong owned by relatives of the
principal stockholders;
(vi) leasehold property in Hong Kong owned by a related company;
and
(v) personal guarantees from the principal stockholders and their
relatives.
6. OBLIGATIONS UNDER FINANCE LEASES
Physical HK leases fitness equipment and motor vehicles under several
finance leases.
7. DISTRIBUTION OF PROFIT
In the opinion of management, any undistributed earnings of Physical
Holdings and the Operating Subsidiaries will be reinvested
indefinitely.
8. 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. 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 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 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 of 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.
-10-
<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. The Company currently operates eleven facilities:
eight 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 (6,000,000 post-split) shares of its Common Stock to
Ngai Keung Luk (Serleo) in exchange for all of the outstanding shares of
Physical Limited (the "Closing"). At the Closing, the then current management of
the Company resigned and was replaced by the current management of the Company.
See "Management."
The Company derives its revenues from two main lines of business:
fitness and spa services.
<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$800(US$103) for one person. A monthly subscription fee of HK$299 (US$38) 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$400 (US$51) to HK$13,640 (US$1,749).
The following table sets forth selected income data as a percentage of
total operating revenue for the periods indicated.
RESULTS OF OPERATIONS
Six Months Ended
June 30
1999 2000
---- ----
Operating Revenues 100.00% 100.00%
Total operating expenses 86.45% 90.07%
Operating income 13.55% 9.93%
Income before income taxes and minority
interests 12.38% 9.03%
Provision for income and deferred taxes 2.86% 1.72%
Minority interests 0.63% 0.48%
Net income 8.90% 6.83%
======== ========
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED) COMPARED TO SIX MONTHS ENDED
JUNE 30, 1999 (UNAUDITED)
----------------------------------------------------------------------------
OPERATING REVENUES. The Company's operating revenues showed the
continuous growth in the first six months of 2000 as compared to the first six
months of 1999. Operating revenues for the first six months of 2000 totaled
HK$140,118,000 (US$17,964,000) compared to HK$115,367,000 (US$14,791,000) in the
first six months of 1999, representing an increase of 21%. Operating revenues
derived by the Company's fitness services increased 15% to HK$90,996,000
(US$11,666,000) compared to HK$79,397,000(US$10,179,000) in the first six months
of 1999. Fitness revenues as a percentage of total revenues were 65% in the
first six months of 2000 as compared to 69% in the first six months of 1999.
Operating revenues from the Company's beauty treatment business totaled
HK$49,121,000 (US$6,297,000) for the six months period ended June 30, 2000 as
compared to HK$35,955,000 (US$4,610,000) for the six months period ended June
30, 1999, representing an increase of 37%. Beauty treatment revenues as a
percentage of total revenues were 35% in the first six months of 2000 as
compared to 31% in the first six months of 1999.
Operating revenues derived from the Company's Hong Kong locations remain
an important contributor to the Company's business, generating HK$132,082,000
(US$16,934,000), or 94% of total operating revenues in the six months ended June
30, 2000 as compared to HK$107,038,000 (US$13,723,000) or 93% of total operating
revenues in the six months ended June 30, 1999.
Operating revenues derived from the Company's China locations generated
HK$8,036,000 (US$1,030,000), or 6% of total operating revenues in the six months
ended June 30, 2000 as compared to HK$8,329,000 (US$1,068,000) or 7% of total
operating revenues in the six months ended June 30, 1999.
<PAGE>
OPERATING EXPENSES. The Company's operating expenses for the first six
months of 2000 totaled HK$126,204,000 (US$16,180,000) compared to HK$99,731,000
(US$12,786,000) in the first six months of 1999, representing an increase of
27%. Total operating expenses, after taking into account all corporate expenses,
were 90% of total operating revenue, representing an increase of 5% as compared
to 86% in 1999. This reflects the additional costs incurred by the Company in
following its business expansion plan.
Operating expenses associated with the Company's Hong Kong locations
were HK$116,522,000 (US$14,939,000) in the six months ended June 30, 2000,
representing an increase of HK$27,077,000 (US$3,471,000) or 30% as compared to
HK$89,445,000 (US$11,467,000) in 1999. Hong Kong operating expenses represented
92% of total operating expenses in the six months ended June 30, 2000 as
compared to 90% in 1999. The increase was primarily due to additional expenses
of HK$25,706,000 (US$3,296,000) incurred by a new branch in Sheraton Hotel, Hong
Kong which opened in July 1999.
Operating expenses associated with the Company's China locations were
HK$9,682,000 (US$1,241,000) in the six months ended June 30, 2000, representing
a decrease of 6% as compared to HK$10,286,000 (US$1,319,000) in 1999 due to
effective cost control. Operating expenses in China represented 8% of total
operating expenses in the six months ended June 30, 2000 as compared to 10% in
1999.
TOTAL NON-OPERATING EXPENSES (INCOME). Total non-operating expenses
(income) for the first six months of 2000 totaled a net expense of HK$1,266,000
(US$163,000) compared to a net expense of HK$1,349,000 (US$173,000) in the first
six months of 1999, representing a decrease of 6% due to an offset by interests
income earned on fixed deposit.
PROVISION FOR INCOME TAXES. Provision for income taxes for the first
six months of 2000 totaled HK$2,406,000 (US$308,000) compared to HK$3,294,000
(US$422,000) in the first six months of 1999, representing a decrease of 27% as
a result of lower taxable income. The effective tax rate of operating income was
19% as compared to 23% of last year.
NET INCOME. The Company's net income for the first six months of 2000
totaled HK$9,570,000 (US$1,227,000) compared to HK$10,270,000 (US$1,317,000) for
the first six months of 1999, representing a decrease of 7%. The net income
margin in the first six months of 2000 was 7% which was lower than 9% of last
year. The decrease reflected that the additional overhead associated with the
opening of Sheraton Hotel center has not yet been recovered by its additional
contribution.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through cash
generated from operations, short-term bank credit, long-term bank loans, long
term loans from minority shareholders of subsidiaries, advances from customers
relating to prepaid fitness and spa income, and leasing arrangements with
financial institutions.
Cash and cash equivalent balances for the respective periods ended June
30, 2000 and December 31, 1999 were HK$3,381,000 (US$433,000) and HK$2,896,000
(US$371,000), while total indebtedness at June 30, 2000 was HK$25,204,000
(US$3,231,000) and HK$37,105,000 (US$4,757,000) at December 31, 1999.
Net cash provided by operating activities were HK$42,618,000
(US$5,464,000) and 23,781,000 (US$3,049,000) for Fiscal Year 1999, and the
six-month period ended June 30, 2000, respectively. The Company's operating
activities are historically financed by cash flows from operations. Net cash
used in investing activities were HK$44,612,000 (US$5,719,000) and HK$14,852,000
(US$1,904,000) for Fiscal Year 1999 and the six-month period ended June 30,
2000, primarily as a result of expenditures for property, plant and equipment.
Net cash used in financing activities, which mainly include proceeds from bank
loans, net interest and repayment, were HK$3,166,000 (US$406,000) and
HK$8,486,000 (US$1,088,000) in Fiscal Year 1999 and the six-month period ended
June 30, 2000, respectively.
<PAGE>
In the six months ended June 30, 2000, the Company repaid the term loan
of HK$3,900,000 (US$500,000) originally granted by Shanghai Commercial Bank
Limited and the banking facilities in the amount of HK$11,000,000 (US$1,410,000)
granted by the Kwangtung Provincial Bank. The Company replaced the said
facilities with new loans of HK$4,000,000 (US$513,000) and HK$4,500,000
(US$577,000)respectively obtained from the Hongkong and Shanghai Banking
Corporation Limited and East Asia Finance Company Limited.
As of June 30, 2000, the Company has revolving lines of credit with
four banks - The Hongkong and Shanghai Banking Corporation Limited, Dao Heng
Bank, Shanghai Commercial Bank Limited, and the Bank of East Asia, Limited. The
Company has utilized HK$500,000 (US$64,000) of these lines of credit. 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 liability, for accounting
purposes.
The Company's trade receivable balance at June 30, 2000, was
HK$3,857,000 (US$495,000). The Company has never experienced any significant
problems with collection of accounts receivable from its customers.
Capital expenditure for 1999, and the six-month period ended June 30,
2000, were HK$44,863,000 (US$5,752,000) and HK$16,431,000 (US$2,106,000)
respectively. The Company believes that cash flow generated from its operations
and its existing credit facilities should be sufficient to satisfy its working
capital and capital expenditure requirements for at least the next 12 months.
YEAR 2000 DISCLOSURE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. Computer
programs that have sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
The Company underwent 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 new system which is year 2000
compliant was implemented by July 1, 1999.
<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 June 30, 2000.
<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: August 12, 2000 /S/ Ngai Keung Luk
----------------------------------
Ngai Keung Luk,
Chairman and Chief Executive Officer
Date: August 12, 2000 /S/ Robert Chui
----------------------------------
Robert Chui,
Chief Financial Officer
