<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, 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 : March 31, 2000, 10,000,000 shares.
Transitional Small Business Disclosure Format (check one) :
Yes No X
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<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
----
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Statements of Operations 1
for the three months ended March
31, 2000 and 1999 (Unaudited)
Consolidated Balance Sheets at March 31, 2000 2
and December 31,1999 (Unaudited)
Consolidated Statements of Cash Flows 3
for the three months ended March 31,
2000 and 1999 (Unaudited)
Notes to Consolidated Financial Statements 4
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS 11
OR PLAN OF OPERATION
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 15
ITEM 2 - CHANGE IN SECURITIES 15
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE 15
OF SECURITY HOLDERS
ITEM 5 - OTHER INFORMATION 15
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 15
<PAGE>
<TABLE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
FOR THE THREE MONTHS FROM JANUARY 1, 1999 TO MARCH 31, 1999
AND JANUARY 1, 2000 TO MARCH 31, 2000
<CAPTION>
(Amounts in thousands)
Three Months Ended
March 31,
1999 2000
----------- ------------------------
HK$ HK$ US$
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Operating Revenues
Fitness service 36,915 43,600 5,612
Beauty treatments 17,099 23,777 3,060
Others 5 1 1
----------- ----------- -----------
Total operating revenues 54,019 67,378 8,673
----------- ----------- -----------
Operating Expenses
Salaries and commissions 12,849 20,138 2,593
Rent and related expenses 12,527 16,857 2,170
Depreciation 6,902 9,348 1,203
Other selling and administrative expenses 15,323 14,942 1,923
----------- ----------- -----------
Total operating expenses 47,601 61,285 7,889
----------- ----------- -----------
Income from operations 6,418 6,093 784
----------- ----------- -----------
Non-operating (income) expenses
Other (income), net (53) (154) (20)
Interest expenses 735 972 125
----------- ----------- -----------
Total non-operating (income) expenses 682 818 105
----------- ----------- -----------
Income before income taxes and
minority interests 5,736 5,275 679
Provision for income taxes 997 1,059 136
----------- ----------- -----------
Income before minority interests 4,739 4,216 543
Minority interests 266 127 17
----------- ----------- -----------
Net income 4,473 4,089 526
=========== =========== ===========
Earnings per common share 0.45 0.41 0.05
=========== =========== ===========
Number of shares outstanding (in thousands) 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 of
US$1.00 = HK$7.769. No representation is made that the Hong Kong Dollar amounts
could have been, or could be, converted into United States Dollars, at that rate
on March 31, 2000 or at any other certain rate.
-1-
<PAGE>
<TABLE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
AUDITED CONSOLIDATED BALANCE SHEET
-----------------------------------
AS OF DECEMBER 31, 1999
AND
UNAUDITED CONSOLIDATED BALANCE SHEET
------------------------------------
AS OF MARCH 31, 2000
<CAPTION>
(Amounts in thousands, except number of shares and share data)
As of
-------------------------------------------------------
December 31, 1999 March 31, 2000
HK$ HK$ US$
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents 2,896 7,005 902
Trade receivables 3,895 3,808 490
Rental and utility deposits 11,654 11,687 1,504
Prepayments to vendors and suppliers and other current assets 7,727 8,762 1,128
Inventories 2,551 2,541 327
Due from related companies 8,373 6,037 777
Due from a stockholder 4,110 4,730 609
----------------- ----------------- -----------------
Total current assets 41,206 44,570 5,737
----------------- ----------------- -----------------
Bank deposits, collateralized 3,522 3,522 453
Prepayments for construction-in-progress 467 3,651 470
Property, plant and equipment, net 140,936 132,476 17,052
----------------- ----------------- -----------------
Total assets 186,131 184,219 23,712
================= ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term bank loans 8,606 7,044 907
Long-term bank loans - current portion 1,851 1,836 236
Accounts payable and accrued expenses 18,300 13,741 1,769
Obligations under finance leases - current portion 4,747 4,463 574
Deferred income - current portion 22,828 24,981 3,215
Deferred liabilities - current portion 2,304 3,008 387
Income taxes payable 5,991 5,450 702
Taxes other than income 3,182 3,208 413
----------------- ----------------- -----------------
Total current liabilities 67,809 63,731 8,203
----------------- ----------------- -----------------
Deferred income - non-current portion 999 1,235 159
Deferred liabilities - non-current portion 5,533 4,776 615
Long-term bank loans - non-current portion 5,587 5,157 664
Loans from minority stockholders of subsidiaries 4,200 4,200 541
Obligations under finance leases - non-current portion 12,114 11,003 1,416
Deferred taxation 5,661 5,661 729
Minority interests 5,721 5,849 753
Stockholders' equity:
Common stock, par value US$0.001 each,
100 million shares of stock authorized;
10 million shares of stock issued and outstanding 78 78 10
Cumulative translation adjustments 119 130 16
Retained earnings 78,310 82,399 10,606
----------------- ----------------- -----------------
Total stockholders' equity 78,507 82,607 10,632
----------------- ----------------- -----------------
Total liabilities and stockholders' equity 186,131 184,219 23,712
================= ================= =================
</TABLE>
Translation of amounts from Hong Kong Dollars ("HK$") into United States Dollars
("US$") for the convenience of the reader has been made at the exchange rate of
US$1.00 = HK$7.769. No representation is made that the Hong Kong Dollar amounts
could have been, or could be, converted into United States Dollars, at that rate
on March 31, 2000 or at any other certain rate.
-2-
<PAGE>
<TABLE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
FOR THE THREE MONTHS FROM JANUARY 1, 1999 TO MARCH 31, 1999
AND JANUARY 1, 2000 TO MARCH 31, 2000
<CAPTION>
Three Months Ended March 31
----------------------------------------------
1999 2000 2000
HK$ HK$ US$
<S> <C> <C> <C>
Cash flows from operating activities:
Net income 4,473 4,089 526
Adjustments to reconcile net income to net cash provided by operating
activities:
Minority interests 266 127 17
Depreciation 6,902 9,348 1,203
Loss on disposal of property, plant and equipment 18 196 25
-------------- -------------- --------------
Changes in working capital:
Trade receivables 97 87 11
Deposits, prepayments and other current assets 616 (1,068) (137)
Inventories 10 10 1
Due form related companies (1,166) 2,336 301
Due from a stockholder - (620) (80)
Accounts payable and accrued expenses (303) (4,559) (587)
Deferred income 2,835 2,389 308
Deferred liabilities (186) (53) (7)
Income taxes payable (472) (541) (70)
Taxes other than income 9 26 3
Deferred taxation - - -
-------------- -------------- --------------
Net cash provided by operating activities 13,099 11,767 1,514
-------------- -------------- --------------
Cash flows from investing activities:
Prepayments for construction-in-progress (5,223) (3,184) (410)
Acquisition of property, plant and equipment (1,837) (1,906) (245)
Sales proceeds from disposal of property, plant and equipment 401 823 106
-------------- -------------- --------------
Net cash used in investing activities (6,659) (4,267) (549)
-------------- -------------- --------------
Cash flows from financing activities:
Increase in bank deposits - - -
(Settlement) Proceeds of short-term bank loans (36) (1,562) (201)
Decrease (Increase) in due from a stockholder (533) - -
Proceeds form long-term bank loans - - -
Repayment of long-term bank loans (456) (445) (57)
Proceeds form (Settlement of) long-term loans from third parties - - -
Assumption of finance lease obligations - - -
Capital element of finance lease rental payments (1,256) (1,395) (180)
Repayment of loans from minority shareholders of subsidiaries - - -
-------------- -------------- --------------
Net cash provided by (used in) financing activities (2,281) (3,402) (438)
-------------- -------------- --------------
Net (decrease) increase in cash and cash equivalents 4,159 4,098 527
Cash and cash equivalents at beginning of year 1,721 2,896 373
Cumulative translation adjustments (8) 11 2
-------------- -------------- --------------
Cash and cash equivalents at end of year 5,872 7,005 902
============== ============== ==============
</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$7.769. 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, 2000 or at any other certain rate.
-3-
<PAGE>
PHYSICAL SPA & FITNESS INC. AND SUBSIDIARIES
--------------------------------------------
NOTES TO UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
----------------------------------------------------
FOR THE THREE MONTHS FROM JANUARY 1, 1999 TO MARCH 31, 1999
AND JANUARY 1, 2000 TO MARCH 31, 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>
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<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: 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 60,000 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."
-11-
<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 current promotion allows a special fee of
HK$500 (US$64) at a particular booth). 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$13,000 (US$1,673).
The following table sets forth selected income data as a percentage of
total operating revenue for the periods indicated.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 2000
----------- -----------
<S> <C> <C>
Operating Revenues 100.00% 100.00%
Total operating expenses 88.12% 90.96%
Operating income 11.88% 9.04%
Income before income taxes and minority
interests 10.62% 7.83%
Provision for income and deferred taxes 1.85% 1.57%
Minority interests 0.49% 0.19%
Net income 8.28% 6.07%
=========== ===========
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) COMPARED TO THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED).
- ----------------------------------------------------------------------------
OPERATING REVENUES. The Company's operating revenues showed the
continuous growth in the first three months of 2000 as compared to the first
three months of 1999. Operating revenues for the first three months of 2000
totaled HK$67,378,000 (US$8,673,000) compared to HK$54,019,000 (US$6,953,000) in
the first three months of 1999, representing an increase of 25%. Operating
revenues derived by the Company's fitness services increased 18% to
HK$43,600,000 (US$5,612,000) compared to HK$36,915,000 (US$4,752,000) in the
first three months of 1999. Fitness revenues as a percentage of total revenues
were 65% in the first three months of 2000 as compared to 68% in the first three
months of 1999.
Operating revenues from the Company's beauty treatment business totaled
HK$23,777,000 (US$3,060,000) compared to HK$17,099,000 (US$2,201,000) in the
first three months of 1999, representing an increase of 39%. Beauty treatment
revenues as a percentage of total revenues were 35% in the first three months of
2000 as compared to 32% in the first three months of 1999.
-12-
<PAGE>
Operating revenues derived from the Company's Hong Kong locations remain
an important contributor to the Company's business, generating HK$63,492,000
(US$8,172,000), or 94% of total operating revenues in the three months ended
March 31, 2000 as compared to HK$49,332,000 (US$6,350,000) or 91% of total
operating revenues in the three months ended March 31, 1999.
Operating revenues derived from the Company's China locations generated
HK$3,886,000 (US$500,000), or 6% of total operating revenues in the three months
ended March 31, 2000 as compared to HK$4,687,000 (US$603,000) or 9% of total
operating revenues in the three months ended March 31, 1999.
OPERATING EXPENSES. The Company's operating expenses for the first
three months of 2000 totaled HK$61,285,000 (US$7,889,000) compared to
HK$47,601,000 (US$6,127,000) in the first three months of 1999, representing an
increase of 29%. Total operating expenses, after taking into account all
corporate expenses, were 91% of total operating revenue as compared to 88% of
last year. 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$56,057,000 (US$7,216,000) in the three months ended March 31, 2000,
representing an increase of HK$13,548,000 (US$1,744,000) or 32% as compared to
HK$42,529,000 (US$5,474,000) in 1999. Hong Kong operating expenses represented
91% of total operating expenses in the three months ended March 31, 2000 as
compared to 89% in 1999. The increase was primarily due to additional expenses
of HK$12,103,000 (US$1,558,000) 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$5,228,000 (US$673,000) in the three months ended March 31, 2000, representing
a moderate increase of 3% as compared to HK$5,072,000 (US$653,000) in 1999 due
to inflation. Operating expenses in China represented 9% of total operating
expenses in the three months ended March 31, 2000 as compared to 11% in 1999.
TOTAL NON-OPERATING EXPENSES (INCOME). Total non-operating expenses
(income) for the first three months of 2000 totaled a net expense of HK$818,000
(US$105,000) compared to a net expense of HK$682,000 (US$88,000) in the first
three months of 1999, representing an increase of 20%. The increase was mainly
due to higher interest costs incurred during the period.
PROVISION FOR INCOME TAXES. Provision for income taxes for the first
three months of 2000 totaled HK$1,059,000 (US$136,000) compared to HK$997,000
(US$128,000) in the first three months of 1999, representing an increase of 6%.
The effective tax rate of operating income was 20% as compared to 17% of last
year.
NET INCOME. The Company's net income for the first three months of 2000
totaled HK$4,089,000 (US$526,000) compared to HK$4,473,000 (US$576,000) for the
first three months of 1999, representing a decrease of 9%. The net income margin
in the first three months of 2000 was 6% compared to 8% in the first three
months of 1999, representing a decrease of 25%. The major reason for the
decrease is reflects the additional overhead associated with the opening of
Sheraton Hotel center not yet 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
March 31, 2000 and December 31, 1999 were HK$7,005,000 (US$902,000) and
HK$2,896,000 (US$373,000), while total indebtedness at March 31, 2000 was
HK$33,703,000 (US$4,338,000) and HK$37,105,000 (US$4,776,000) at December 31,
1999.
Net cash provided by operating activities were HK$42,618,000
(US$5,486,000) and 11,767,000 (US$1,514,000) for Fiscal Year 1999, and the
three-month period ended March 31, 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$5,742,000) and HK$4,267,000
(US$549,000) for Fiscal Year 1999 and the three-month period ended March 31,
2000, primarily as a result of expenditures for property, plant and equipment.
Net cash provided by (used in) financing activities, which mainly include
proceeds from bank loans, net interest and repayment, were HK$3,166,000
(US$408,000) and HK$(3,402,000) (US$(438,000)) in Fiscal Year 1999 and the
three-month period ended March 31, 2000, respectively.
-13-
<PAGE>
The Company's long-term loans bear interest rates varying from 10% to
12% per annum. The total balance outstanding as of March 31, 2000 on such loans
was HK$6,993,000 (US$900,000). The last repayment on the loans is due in 2006.
The Company also had various banking facilities available from financial
institutions amounting to approximately HK$15,000,000 (US$1,931,000). These
facilities were secured by certain leasehold property in Hong Kong owned by the
Company's subsidiary (Ever Growth Limited), fixed deposits owned by the
Company's subsidiaries (Physical Health Centre (TST) Limited and Physical Health
Centre (Tsuen Wan) Limited), relatives of Mr. Luk, related company and personal
guarantees from Mr. Luk and his relatives, respectively.
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, 2000, was
HK$3,808,000 (US$490,000). The Company has never experienced any significant
problems with collection of accounts receivable from its customers.
Capital expenditure for Fiscal Year 1999, and the three-month period
ended March 31, 2000, were HK$44,863,000 (US$5,775,000) and HK$5,090,000
(US$655,000) 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.
-14-
<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 filed a report on FORM 8-K during the quarter ending
March 31, 2000 with respect to Item 4.
-15-
<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: May 10, 2000 /s/Ngai Keung Luk
------------------------------------
Ngai Keung Luk,
Chairman and Chief Executive Officer
Date: May 10, 2000 /s/ Robert Chui
------------------------------------
Robert Chui,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 902
<SECURITIES> 0
<RECEIVABLES> 490
<ALLOWANCES> 0
<INVENTORY> 327
<CURRENT-ASSETS> 5,737
<PP&E> 17,052
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,712
<CURRENT-LIABILITIES> 8,203
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 10,622
<TOTAL-LIABILITY-AND-EQUITY> 23,712
<SALES> 8,673
<TOTAL-REVENUES> 8,673
<CGS> 0
<TOTAL-COSTS> 7,889
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125
<INCOME-PRETAX> 679
<INCOME-TAX> 136
<INCOME-CONTINUING> 543
<DISCONTINUED> 0
<EXTRAORDINARY> 17
<CHANGES> 0
<NET-INCOME> 526
<EPS-BASIC> .05
<EPS-DILUTED> .05
</TABLE>
